General Mills: Reports Q2 Fiscal 2020 Results

Minneapolis / MN. (gm) General Mills Inc. reported results for the second quarter ended November 24, 2019. «I’m encouraged by our second-quarter performance, including the broad-based improvement in our organic sales trends and positive results on the bottom line,» said General Mills Chairman and Chief Executive Officer Jeff Harmening. «We will build on our topline momentum in the second half, fueled by increased investment in our brands. Based on our first-half results, and with confidence in our back-half plans, we are reaffirming our full-year fiscal 2020 guidance for sales, profit, and EPS and raising our guidance for free cash flow conversion.»

General Mills is pursuing its Consumer First strategy and executing against its global growth framework: 1) competing effectively through strong innovation, effective consumer marketing, and excellent in-store execution; 2) accelerating growth on its four differential growth platforms including Häagen-Dazs ice cream, snack bars, Old El Paso Mexican food, and its portfolio of natural and organic food brands; and 3) reshaping its portfolio through growth-enhancing acquisitions and divestitures, including the acquisition of Blue Buffalo, the leading brand in the fast-growing wholesome natural pet food category in the U.S. The company expects consistent topline growth generated by this growth framework, combined with margin expansion, disciplined cash conversion, and cash returns, will generate top-tier returns for General Mills shareholders over the long term.

Second Quarter Results Summary

  • Net sales of USD 4.4 billion were flat to last year. Organic net sales increased 1 percent, driven primarily by strong growth for the Pet segment. Organic volume was up 1 percent and organic net price realization and mix was in line with last year.
  • Gross margin increased 130 basis points to 35.5 percent of net sales. Adjusted gross margin of 35.3 percent was 80 basis points above the prior year, driven by Holistic Margin Management (HMM) cost savings and favorable manufacturing leverage, partially offset by input cost inflation.
  • Operating profit totaled USD 811 million, up 48 percent from year-ago results that included higher restructuring, impairment, and other exit costs. Operating profit margin of 18.3 percent increased 590 basis points. Adjusted operating profit of USD 813 million increased 7 percent in constant currency, primarily driven by higher adjusted gross margin and lower consumer promotional expense, partially offset by higher media expense. Adjusted operating profit margin increased 110 basis points to 18.4 percent.
  • Net earnings attributable to General Mills totaled USD 581 million, up 69 percent from a year ago, primarily reflecting higher operating profit and lower net interest expense, partially offset by higher tax expense.
  • Diluted EPS of USD 0.95 increased 67 percent from the prior year. Adjusted diluted EPS also totaled USD 0.95 in the second quarter, up 11 percent from the prior year in constant currency, driven primarily by higher adjusted operating profit, lower net interest expense, a lower adjusted effective tax rate, and higher non-service benefit plan income, partially offset by higher average diluted shares outstanding.

Six Month Results Summary

  • Net sales declined 1 percent to USD 8.4 billion. Organic net sales essentially matched year-ago levels, reflecting positive organic net price realization and mix offset by lower organic volume.
  • Gross margin increased 160 basis points to 35.1 percent of net sales. Adjusted gross margin of 35.3 percent was 120 basis points above the prior year, driven primarily by positive net price realization and mix and last year’s one-time purchase accounting inventory adjustment related to the Blue Buffalo acquisition, partially offset by higher input costs.
  • Operating profit of USD 1.5 billion increased 28 percent from the prior year. Operating profit margin of 17.5 percent was up 400 basis points. Constant-currency adjusted operating profit increased 7 percent. Adjusted operating profit margin increased 130 basis points to 17.8 percent.
  • Net earnings attributable to General Mills totaled USD 1.1 billion.
  • Diluted EPS of USD 1.80 was 48 percent above prior-year levels. Adjusted diluted EPS of USD 1.74 was up 12 percent on a constant-currency basis.

Operating Segment Results

Note: Tables may not foot due to rounding.

Components of Fiscal 2020 Reported Net Sales Growth

Second Quarter Volume Price/Mix Foreign Exchange Reported Net Sales
North America Retail Flat
Pet 13 pts 3 pts 16%
Convenience Stores + Foodservice 2 pts (2) pts Flat
Europe + Australia (1) pt (4) pts (5)%
Asia + Latin America (6) pts 3 pts (2) pts (5)%
Total (1) pt Flat
Six Months
North America Retail (1) pt Flat
Pet 7 pts 5 pts 11%
Convenience Stores + Foodservice (2) pts (2)%
Europe + Australia (5) pts 1 pt (4) pts (7)%
Asia + Latin America (8) pts 3 pts (2) pts (7)%
Total (2) pts 2 pts (1) pt (1)%

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Components of Fiscal 2020 Organic Net Sales Growth

Second Quarter Organic Volume Organic Price/Mix Organic Net Sales Foreign Exchange Acquisitions + Divestitures Reported Net Sales
North America Retail Flat Flat
Pet 13 pts 3 pts 16% 16%
Convenience Stores + Foodservice 2 pts (2) pts Flat Flat
Europe + Australia (1) pt (1)% (4) pts (5)%
Asia + Latin America (1) pt 2 pts 1% (2) pts (4) pts (5)%
Total 1 pt 1% (1) pt Flat
Six Months
North America Retail (1) pt Flat Flat
Pet 7 pts 5 pts 11% 11%
Convenience Stores + Foodservice (2) pts (2)% (2)%
Europe + Australia (5) pts 1 pt (3)% (4) pts (7)%
Asia + Latin America (3) pts 2 pts (1)% (2) pts (4) pts (7)%
Total (1) pt 1 pt Flat (1) pt (1)%

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Fiscal 2020 Segment Operating Profit Growth

Second Quarter Change as Reported Change in Constant Currency
North America Retail 4% 4%
Pet 14% 14%
Convenience Stores + Foodservice 5% 5%
Europe + Australia 40% 45%
Asia + Latin America 36% 42%
Total 6% 7%
Six Months
North America Retail 3% 3%
Pet 90% 90%
Convenience Stores + Foodservice Flat Flat
Europe + Australia 4% 8%
Asia + Latin America 15% 20%
Total 8% 8%

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North America Retail Segment

Second-quarter net sales for General Mills’ North America Retail segment totaled USD 2.68 billion, essentially matching year-ago levels. Organic net sales were also flat to last year. Net sales for the U.S. Cereal operating unit increased 5 percent. Canada operating unit net sales were flat as reported and up 2 percent in constant currency. Net sales were down 1 percent in U.S. Meals + Baking, down 2 percent in U.S. Snacks, and down 4 percent in U.S. Yogurt. Segment operating profit of USD 642 million was up 4 percent as reported and in constant currency, driven primarily by HMM cost savings and favorable manufacturing leverage, partially offset by input cost inflation and higher media expense.

Through six months, North America Retail segment net sales totaled USD 5.05 billion, essentially matching year-ago levels. Organic net sales were also flat to last year. Segment operating profit totaled USD 1.20 billion, up 3 percent from a year ago as reported and in constant currency due primarily to HMM cost savings and favorable manufacturing leverage, partially offset by input cost inflation and higher media expense.

Pet Segment

Second-quarter net sales for the Pet segment increased 16 percent to USD 389 million, driven by positive contributions from volume growth and positive net price realization and mix. Net sales in the quarter also benefited from the timing of shipments in advance of holiday merchandising. Net sales performance was led by strong growth on BLUE’s two largest product lines: Life Protection Formula and Wilderness. Segment operating profit increased 14 percent to USD 81 million, driven primarily by higher net sales, partially offset by higher media expense.

Through six months, Pet segment net sales increased 11 percent to USD 756 million, driven by positive contributions from volume growth and positive net price realization and mix. All-channel retail sales were up double digits in the first half of the year. Segment operating profit totaled USD 162 million compared to USD 85 million in the prior year, driven primarily by a USD 53 million one-time purchase accounting inventory adjustment in the year-ago period as well as higher net sales.

Convenience Stores + Foodservice Segment

Second-quarter net sales for the Convenience Stores + Foodservice segment were in line with last year at USD 514 million, with low-single digit growth for the Focus 6 platforms, including cereal, frozen baked goods, and yogurt, offset by unfavorable index pricing on bakery flour and declines on other non-Focus 6 products. Organic net sales were also flat to last year. Segment operating profit increased 5 percent to USD 115 million, primarily driven by HMM cost savings, partially offset by unfavorable net price realization and mix and input cost inflation.

Through six months, Convenience Stores + Foodservice net sales decreased 2 percent to USD 958 million, due primarily to lower bakery flour volume and unfavorable index pricing, partially offset by low-single digit growth for the Focus 6 platforms. Organic net sales also decreased 2 percent. Segment operating profit of USD 206 million essentially matched year-ago levels, primarily driven by HMM cost savings, offset by input cost inflation and lower net sales.

Europe + Australia Segment

Second-quarter net sales for the Europe + Australia segment declined 5 percent to USD 433 million, driven primarily by 4 points of unfavorable foreign currency exchange. Organic net sales were down 1 percent. Net sales declines in yogurt were partially offset by growth for Old El Paso Mexican food and Nature Valley and Fibre One snack bars. Segment operating profit of USD 31 million was up 40 percent as reported and increased 45 percent in constant currency, driven primarily by a timing difference in brand-building investment.

Through six months, Europe + Australia net sales decreased 7 percent to USD 887 million, including 4 points of unfavorable foreign currency exchange. Organic net sales decreased 3 percent, with lower contributions from organic volume partially offset by positive organic net price realization and mix. Organic net sales declines reflected a continued challenging retail environment in France for yogurt and ice cream. Segment operating profit of USD 59 million increased 4 percent as reported and was up 8 percent in constant currency, reflecting lower selling, general, and administrative (SG+A) expenses, partially offset by lower volume.

Asia + Latin America Segment

Second-quarter net sales for the Asia + Latin America segment declined 5 percent to USD 410 million, driven by a 4-point headwind from divestitures executed in fiscal 2019 and unfavorable foreign currency exchange. Organic net sales increased 1 percent, with growth in Latin America and China partially offset by declines in India. Segment operating profit of USD 24 million was up 36 percent as reported and increased 42 percent in constant currency, driven by lower SG+A expenses, partially offset by lower volume.

Through six months, Asia + Latin America net sales declined 7 percent to USD 769 million, driven by a 4-point headwind from divestitures executed in fiscal 2019, unfavorable foreign currency exchange, and lower volume. Organic net sales were down 1 percent, driven by distribution network changes in India. Segment operating profit of USD 34 million was up 15 percent as reported and increased 20 percent in constant currency, driven by lower SG+A expenses, partially offset by lower volume and higher input costs.

Joint Venture Summary

Second-quarter net sales for Cereal Partners Worldwide (CPW) increased 1 percent in constant currency, and constant-currency net sales for Häagen-Dazs Japan (HDJ) were down 6 percent. Combined after-tax earnings from joint ventures were USD 25 million compared to USD 22 million last year, driven by positive net price realization and mix at CPW. Through six months, after-tax earnings from joint ventures totaled USD 47 million compared to USD 40 million a year ago, driven primarily by our USD 5 million after-tax share of a restructuring charge at CPW in the year-ago period.

Other Income Statement Items

Unallocated corporate items totaled USD 84 million net expense in the second quarter of fiscal 2020, in line with year-ago levels. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totaled USD 81 million net expense this year compared to USD 75 million net expense last year.

Restructuring, impairment, and other exit costs totaled a USD 1 million net recovery in the second quarter compared to USD 209 million net expense in the prior year that primarily reflected brand intangible impairment charges.

Net interest expense totaled USD 119 million in the second quarter compared to USD 133 million a year ago, driven by lower average debt balances. The effective tax rate in the quarter was 21.5 percent compared to 24.5 percent last year (please see Note 5 below for more information on our effective tax rate). The second-quarter adjusted effective tax rate was in line with our full-year expectations at 21.9 percent and was favorable to 23.8 percent a year ago, primarily driven by the timing of discrete tax benefits and more favorable earnings mix.

Cash Flow Generation and Cash Returns

Cash provided by operating activities totaled USD 1.46 billion through six months of fiscal 2020, up 4 percent from the prior year, primarily driven by higher net earnings, partially offset by changes in non-cash restructuring, impairment, and other exit costs and inventory. Capital investments totaled USD 158 million. The company reduced debt by USD 655 million and paid USD 596 million of dividends in the first half of the year. Average diluted shares outstanding through six months increased 1 percent to 612 million.

Fiscal 2020 Outlook

General Mills reaffirmed its full-year fiscal 2020 targets for sales, profit, and EPS, and raised its target for free cash flow conversion:

  • Organic net sales are expected to increase 1 to 2 percent. The combination of currency translation, the impact of divestitures executed in fiscal 2019, and contributions from the 53. week in fiscal 2020 are expected to increase reported net sales by approximately 1 percentage point.
  • Constant-currency adjusted operating profit is expected to increase 2 to 4 percent from the base of USD 2.86 billion reported in fiscal 2019. The benefit of the extra fiscal week is being reinvested in capabilities and brand-building initiatives to drive improvement in the company’s organic sales growth rate in 2020 and beyond.
  • Constant-currency adjusted diluted EPS are expected to increase 3 to 5 percent from the base of USD 3.22 earned in fiscal 2019.
  • The company now expects free cash flow conversion of at least 105 percent of adjusted after-tax earnings.
  • Currency translation is expected to have an immaterial impact on fiscal 2020 adjusted operating profit and adjusted diluted EPS.
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