Minneapolis / MN. (gm) General Mills Inc. reported results for the first quarter ended August 26, 2018.
«Fiscal 2019 is off to a good start,» said General Mills Chairman and Chief Executive Officer Jeff Harmening. «We drove organic net sales growth for the fourth consecutive quarter. The Blue Buffalo transition is progressing well, and we continue to expect double-digit top and bottom-line growth for that business this year, excluding acquisition-related charges. And we’re on track to deliver our financial commitments, with first-quarter adjusted operating profit and adjusted diluted EPS results ahead of our expectations. Based on these results and our outlook for the year, we are reaffirming our full-year fiscal 2019 targets.»
General Mills is pursuing its Consumer First strategy and executing against its three key global growth priorities to drive consistent topline growth: 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 recent acquisition of Blue Buffalo, the leading brand in the fast-growing wholesome natural pet food category in the U.S. By combining consistent topline growth, margin expansion, and disciplined cash conversion and cash returns, General Mills expects to generate top-tier total shareholder returns over the long term.
First Quarter Results Summary
- Net sales increased 9 percent to USD 4.09 billion. Organic net sales increased modestly, reflecting benefits from organic net price realization and mix across all four legacy operating segments, partially offset by lower organic volume in the North America Retail, Convenience Stores + Foodservice, and Europe + Australia segments.
- Gross margin decreased 200 basis points to 32.8 percent of net sales. Adjusted gross margin, which excludes certain items affecting comparability, decreased 160 basis points to 33.6 percent, driven by input cost inflation and a 130 basis point headwind from a one-time purchase accounting charge related to the Blue Buffalo acquisition, partially offset by favorable net price realization and mix and benefits from productivity initiatives.
- Operating profit totalled USD 602 million, down 1 percent from last year. Operating profit margin of 14.7 percent decreased 130 basis points. Constant-currency adjusted operating profit increased 3 percent, including an 8-point headwind driven by the one-time purchase accounting charge. Adjusted operating profit margin decreased 80 basis points to 15.7 percent, including a 130 basis point unfavorable impact from the one-time purchase accounting charge.
- Net earnings attributable to General Mills totalled USD 392 million, down 3 percent from a year ago, reflecting lower after-tax joint venture earnings, lower operating profit, and higher net interest expense, partially offset by a lower effective tax rate. Diluted EPS totalled USD 0.65 compared to USD 0.69 in the prior year.
- Adjusted diluted EPS, which excludes certain items affecting comparability of results, totalled USD 0.71 in the first quarter, in line with the prior year in constant currency, driven by higher adjusted operating profit and a lower effective tax rate, partially offset by a 6-cent headwind from the one-time purchase accounting charge, higher net interest expense, and higher average diluted shares outstanding.
Operating Segment Results
North America Retail Segment: First-quarter net sales for General Mills’ North America Retail segment decreased 2 percent to USD 2.39 billion, with lower contributions from volume partially offset by benefits from net price realization and mix. Net sales were also negatively impacted by the comparison to the year-ago period that included co-packing sales related to the North American Green Giant divestiture. Net sales declined 4 percent in the U.S. Snacks operating unit and 2 percent each in U.S. Meals + Baking and U.S. Yogurt. Net sales in the Canada operating unit were down 2 percent in constant currency, while U.S. Cereal net sales increased 1 percent. Organic net sales were down 1 percent. Retail sales growth outpaced organic net sales trends in the quarter, with U.S. Nielsen-measured retail sales essentially matching year-ago levels and market share increasing in 8 of the segment’s 9 largest U.S. categories. Segment operating profit of USD 548 million increased 3 percent, driven by lower selling, general, + administrative (SG+A) expenses and benefits from productivity initiatives, partially offset by input cost inflation.
Convenience Stores + Foodservice Segment: First-quarter net sales for the Convenience Stores + Foodservice segment increased 4 percent to USD 463 million, with mid single-digit growth for the Focus 6 platforms led by snacks and frozen meals. Organic net sales also increased 4 percent. Segment operating profit of USD 97 million increased 14 percent, reflecting net sales growth on higher-margin Focus 6 platforms and benefits from productivity initiatives, partially offset by input cost inflation.
Europe + Australia Segment: First-quarter net sales for the Europe + Australia segment increased 2 percent to USD 501 million, driven primarily by benefits from net price realization and mix. Organic net sales increased 1 percent. Nature Valley and Fibre One snack bars and Häagen-Dazs ice cream led net sales performance in the quarter. Segment operating profit of USD 34 million was up 13 percent as reported and up 12 percent in constant currency, primarily reflecting benefits from net price realization and mix and lower SG+A expenses, partially offset by higher input costs, including currency-driven inflation on imported products.
Asia + Latin America Segment: First-quarter net sales for the Asia + Latin America segment increased 2 percent to USD 399 million, driven by volume growth and benefits from net price realization and mix, partially offset by unfavorable foreign currency exchange. Organic net sales increased 8 percent. Net sales increased across the segment including in China, Brazil, and India, and across product platforms, led by Häagen-Dazs ice cream, Wanchai Ferry frozen dumplings, Yoki and Kitano meals and snacks, and Pillsbury snack bars. Segment operating profit decreased to USD 12 million from USD 16 million a year ago, driven by input cost inflation and higher SG+A expenses, partially offset by higher net sales.
Pet Segment: First-quarter net sales for the Pet segment totalled USD 343 million. On a pro forma basis, Pet segment net sales increased 14 percent, with positive contributions from volume growth and positive net price realization and mix. Pro forma net sales growth was driven by continued expansion in Food, Drug, and Mass channels and significant growth in E-commerce, partially offset by declines in the Pet Specialty channel. Net sales results also benefited from the inclusion of 7 days of net sales from the month of acquisition. Segment operating profit of USD 14 million was USD 62 million below the prior year on a pro forma basis, driven by purchase accounting charges including a USD 53 million one-time inventory adjustment and USD 3 million of intangible amortization, as well as significant input cost inflation and start-up costs related to two new production facilities.
Joint Venture Summary: Combined after-tax earnings from joint ventures totalled USD 18 million compared to USD 24 million a year ago, primarily driven by our USD 5 million after-tax share of a restructuring charge at CPW, which is excluded from adjusted net earnings. First-quarter net sales declined 2 percent in constant currency for Cereal Partners Worldwide (CPW), driven by declines in Latin America, partially offset by increases in the Asia, Middle East, and Africa region. Constant-currency net sales for Häagen-Dazs Japan (HDJ) declined 14 percent, reflecting a difficult comparison to 14 percent growth in the prior year.
Other Income Statement Items: Unallocated corporate items totalled USD 106 million net expense in the first quarter of fiscal 2019, compared to USD 54 million net expense a year ago. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totalled USD 65 million net expense this year compared to USD 43 million net expense last year.
Restructuring, impairment, and other exit costs totalled a USD 1 million net recovery in restructuring charges in the quarter compared to USD 5 million of expense a year ago. An additional USD 1 million of restructuring and project-related charges were recorded in cost of sales this year compared to USD 14 million a year ago.
Net interest expense totalled USD 134 million in the first quarter compared to USD 72 million a year ago, primarily driven by financing related to the Blue Buffalo acquisition. The effective tax rate in the quarter was 22.6 percent, compared to 30.4 percent last year. Excluding items affecting comparability, the adjusted effective tax rate was 22.7 percent compared to 30.5 percent a year ago, primarily driven by the lower U.S. federal statutory tax rate resulting from the Tax Cuts and Jobs Act.
Cash Flow Generation and Cash Returns
Cash provided by operating activities totalled USD 607 million in the first quarter of fiscal 2019, up 3 percent from the prior year. Capital investments of USD 113 million declined 3 percent from a year ago. Dividends paid totalled USD 294 million. Average diluted shares outstanding for the first quarter increased 3 percent to 603 million.
Fiscal 2019 Outlook
General Mills reaffirmed its key full-year fiscal 2019 targets:
- Organic net sales are expected to be in a range between flat and up 1 percent. Including the impact of the Blue Buffalo acquisition, net sales are expected to increase 9 to 10 percent.
- Constant-currency adjusted operating profit is expected to increase 6 to 9 percent from the base of USD 2.6 billion reported in fiscal 2018. The fiscal 2018 base has been updated to reflect the new presentation of benefit plan non-service income.
- Constant-currency adjusted diluted EPS are expected to range between flat and down 3 percent from the base of USD 3.11 earned in fiscal 2018.
- The company expects free cash flow conversion of at least 95 percent of adjusted after-tax earnings.