General Mills Reports Fiscal 2018 Second-Quarter Results

Minneapolis / MN. (gm) General Mills Inc. reported results for the second quarter ended November 26, 2017. «I’m pleased with the breadth of the topline improvement we delivered this quarter across our geographies, product platforms, and channels», said General Mills Chief Executive Officer Jeff Harmening. «We’re executing better, with stronger innovation, more effective brand building, and better merchandising leading to market share gains in the majority of our key global platforms. I’m also pleased that we delivered topline growth in absolute terms».

Harmening continued, «At the same time, we still have important work to do to achieve our full-year goals. Our profit was down in the first half, but I’m confident we will deliver profit growth in the second half. With two quarters behind us and good visibility to the impact of our strong second-half plans, we’re raising our 2018 organic sales guidance and maintaining our outlook for profit and EPS. I’m encouraged by the step that fiscal 2018 represents in our effort to return our business to consistent top- and bottom-line growth for the long term».

General Mills’ approach to long-term shareholder value creation focuses on generating a balance of topline growth and margin expansion, combined with disciplined focus on cash conversion and cash returns. The company is pursuing its Consumer First strategy by increasing investment in innovation and brand building to drive improved net sales performance. For fiscal 2018, the company has identified four global growth priorities: 1) growing cereal globally, including Cereal Partners Worldwide (CPW); 2) improving U.S. yoghurt through innovation; 3) investing in differential growth opportunities including Häagen-Dazs ice cream, snack bars, Old El Paso Mexican food, and its portfolio of natural and organic food brands; and 4) managing Foundation brands with appropriate investment. By directing resources toward these global priorities, General Mills expects to drive a significant improvement in its organic net sales trends in fiscal 2018, which represents an important step in returning the business to consistent organic net sales growth.

Second Quarter Results Summary

  • Reported net sales increased 2 percent to USD 4.20 billion. Organic net sales increased 1 percent, with growth across all four operating segments.
  • Gross margin decreased 260 basis points to 34.4 percent of net sales. Adjusted gross margin, which excludes certain items affecting comparability, decreased 240 basis points to 34.4 percent, driven by higher input costs including currency-driven inflation on imported products, as well as unfavorable trade expense phasing.
  • Operating profit totalled USD 730 million, down 5 percent from last year due to lower gross margins partially offset by higher net sales. Operating profit margin of 17.4 percent declined 130 basis points. Adjusted operating profit margin decreased 220 basis points to 17.4 percent, primarily reflecting lower adjusted gross margin and a 7 percent increase in advertising and media expense, partially offset by benefits from cost savings initiatives.
  • Total segment operating profit of USD 773 million was down 8 percent in constant currency.
  • The effective tax rate in the quarter was 35.9 percent compared to 32.8 percent last year, driven by a USD 42 millionprior-year adjustment (please see Note 7 below for more information on our effective tax rate). Excluding items affecting comparability, the adjusted effective tax rate was 29.3 percent compared to 32.4 percent a year ago.
  • Net earnings attributable to General Mills totalled USD 430 million, down 11 percent from a year ago. Diluted EPS of USD 0.74 declined 8 percent, with lower net earnings offset by 3 percent fewer average diluted shares outstanding.
  • Adjusted diluted EPS, which excludes certain items affecting comparability of results, totalled USD 0.82 in the second quarter, down 4 percent from the prior year. Constant-currency adjusted diluted EPS declined 5 percent, reflecting lower adjusted operating profit, partially offset by lower taxes and average diluted shares outstanding in the quarter.

Six Month Results Summary

  • Reported net sales declined 1 percent to USD 7.97 billion. Organic net sales were also down 1 percent, primarily reflecting volume declines in the North America Retail and Asia + Latin America segments.
  • Gross margin decreased 210 basis points to 34.5 percent of net sales. Adjusted gross margin was down 240 basis points to 34.7 percent.
  • Operating profit totalled USD 1.36 billion, down 4 percent from the prior year. Operating profit margin of 17.0 percent was down 60 basis points. Adjusted operating profit margin decreased 220 basis points to 17.2 percent.
  • Total segment operating profit of USD 1.44 billion was down 12 percent in constant currency.
  • Net earnings attributable to General Mills totalled USD 835 million. Diluted EPS of USD 1.43 declined 3 percent from the prior year.
  • Adjusted diluted EPS of USD 1.53 was down 6 percent as reported and down 7 percent on a constant-currency basis.

Operating Segment Results

Components of Fiscal 2018 Reported Net Sales Growth
Second Quarter Volume Price/Mix Foreign Exchange Reported Net Sales
North America Retail 1 pt (1) pt 1 pt 1%
Convenience Stores + Foodservice 3 pts 2 pts 5%
Europe + Australia 1 pt 6 pts 7%
Asia + Latin America (7) pts 7 pts 2 pts 2%
Total 1 pt 1 pt 2%
Six Months
North America Retail (1) pt (1) pt (2)%
Convenience Stores + Foodservice 2 pts 1 pt 3%
Europe + Australia 2 pts 3 pts 5%
Asia + Latin America (12) pts 8 pts 1 pt (3)%
Total (1) pt (1)%

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Components of Fiscal 2018 Organic Net Sales Growth
Second Quarter Organic Volume Organic Price/Mix Organic Net Sales Foreign Exchange Acquisitions + Divestitures Reported Net Sales
North America Retail 1 pt (1) pt Flat 1 pt 1%
Convenience Stores + Foodservice 3 pts 2 pts 5% 5%
Europe + Australia 1 pt 1% 6 pts 7%
Asia + Latin America (7) pts 7 pts Flat 2 pts 2%
Total 1 pt 1% 1 pt 2%
Six Months
North America Retail (1) pt (1) pt (2)% (2)%
Convenience Stores + Foodservice 2 pts 1 pt 3% 3%
Europe + Australia 2 pts 2% 3 pts 5%
Asia + Latin America (12) pts 8 pts (4)% 1 pt (3)%
Total (1) pt Flat (1)% (1)%

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Fiscal 2018 Segment Operating Profit Growth
Second Quarter % Change as Reported % Change in Constant Currency
North America Retail (4)% (5)%
Convenience Stores + Foodservice (2)% (2)%
Europe + Australia (35)% (40)%
Asia + Latin America (42)% (46)%
Total (7)% (8)%
Six Months
North America Retail (10)% (10)%
Convenience Stores + Foodservice (5)% (5)%
Europe + Australia (32)% (35)%
Asia + Latin America (37)% (40)%
Total (11)% (12)%

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North America Retail Segment

Second-quarter net sales for General Mills’ North America Retail segment totalled USD 2.77 billion, up 1 percent from the prior year, primarily driven by a 7 percent increase for the U.S. Cereal operating unit and a 5 percent increase for U.S. Snacks. The Canada unit delivered 1 percent net sales growth in constant currency. Net sales for the U.S. Meals + Baking operating unit declined 2 percent, and U.S. Yogurt net sales were down 11 percent. Organic net sales were flat to last year. The increase in U.S. Cereal net sales was due in part to growth in non-measured channels and strong sell-in for new Chocolate Peanut Butter Cheerios. Taste-oriented cereals including Lucky Charms, Cinnamon Toast Crunch, Reese’s Puffs, and Cocoa Puffs led performance in Nielsen-measured outlets. U.S. Snacks net sales growth was driven by Lärabar and Nature Valley snack bars and fruit snacks offsetting declines on Fiber One snack bars. U.S. Yogurt net sales trends in the second quarter improved 11 percentage points over the first quarter, as continued declines for Yoplait Greek and Yoplait Light products were partially offset by increasing benefits from the new Oui by Yoplait and Yoplait Mix-Ins product launches.  Segment operating profit of USD 623 million was down 4 percent due primarily to unfavorable trade expense phasing, higher input costs, and an increase in advertising and media expense, partially offset by favorable product mix and reductions in other selling, general, and administrative (SG+A) expenses, including benefits from cost savings initiatives.

Through six months, North America Retail segment net sales were down 2 percent to USD 5.21 billion. Organic net sales also declined 2 percent. Net sales declines in the U.S. Yogurt and U.S. Meals + Baking operating units were partially offset by an increase in the U.S. Snacks unit. Net sales for the Canada operating unit were down modestly on a constant-currency basis. Year-to-date U.S. Cereal net sales were essentially in line with year-ago levels, as were Nielsen-measured retail sales. Segment operating profit totalled USD 1.16 billion, down 10 percent from a year ago due to lower volume, unfavorable trade expense phasing, higher input costs, and an increase in advertising and media expense, partially offset by reductions in other SG+A expenses, including benefits from cost savings initiatives.

Convenience Stores + Foodservice Segment

Second-quarter net sales for the Convenience Stores + Foodservice segment increased 5 percent to USD 512 million, driven by growth for the Focus 6 platforms, including frozen meals, cereal, and snacks, as well as benefits from market index pricing on bakery flour.  Organic net sales also increased 5 percent. Segment operating profit of USD 106 million was 2 percent below last year, driven by higher input costs.

Through six months, Convenience Stores + Foodservice net sales increased 3 percent to USD 959 million, driven by growth for the Focus 6 platforms and benefits from market index pricing on bakery flour. Organic net sales also increased 3 percent. Segment operating profit totalled USD 191 million, 5 percent below last year due to higher input costs and a comparison to 11 percent profit growth in the year-ago period.

Europe + Australia Segment

Second-quarter net sales for the Europe + Australia segment increased 7 percent to USD 467 million, driven by favorable foreign currency exchange and contributions from volume. Organic net sales increased 1 percent. Innovation, brand-building, and geographic expansion continued to drive sales and share growth for Häagen-Dazs ice cream and Nature Valley and Fiber One snacks. Segment operating profit totalled USD 27 million compared to USD 41 million a year ago, primarily driven by input cost inflation, including currency-driven inflation on products imported into the U.K.

Through six months, Europe + Australia net sales increased 5 percent to USD 959 million, reflecting favorable foreign currency exchange and benefits from net price realization and mix. Organic net sales increased 2 percent. Sales growth for the ice cream and snack bars platforms offset a decline in yoghurt. Segment operating profit totalled USD 58 millioncompared to USD 85 million a year ago, primarily driven by input cost inflation, including currency-driven inflation on products imported into the U.K.

Asia + Latin America Segment

Second-quarter net sales for the Asia + Latin America segment increased 2 percent to USD 448 million, driven by favorable foreign currency exchange and benefits from net price realization and mix more than offsetting unfavorable contributions from volume. Organic net sales essentially matched year-ago levels. Net sales growth across Asia markets was partially offset by lower net sales across Latin America markets. Segment operating profit decreased to USD 17 millionfrom USD 29 million a year ago, reflecting input cost inflation, including currency-driven inflation on imported products, and an increase in advertising and media expense.

Through six months, Asia + Latin America net sales declined 3 percent to USD 840 million, reflecting unfavorable contributions from volume partially offset by benefits from net price realization and mix and favorable foreign currency exchange. Organic net sales declined 4 percent. A net sales increase in Asia markets, including growth on Wanchai Ferry dumplings in China and Pillsbury snack bars in India, was more than offset by declines in Brazil, reflecting a timing shift in reporting calendar in fiscal 2017 and challenges related to an enterprise reporting system implementation. Segment operating profit totalled USD 32 million compared to USD 51 million a year ago, driven by lower sales as well as currency-driven inflation on imported products.

Joint Venture Summary

Second-quarter net sales for CPW declined 2 percent in constant currency, and constant-currency net sales for Häagen-Dazs Japan (HDJ) were down 3 percent. Combined after-tax earnings from joint ventures were USD 24 million compared to USD 30 million a year ago. On a constant-currency basis, after-tax earnings from joint ventures were down 19 percent, reflecting a difficult comparison to 27 percent growth in last year’s second quarter. Through six months, after-tax earnings from joint ventures totalled USD 48 million, down 12 percent as reported and down 11 percent in constant currency.

Other Income Statement Items

Unallocated corporate items totalled USD 42 million net expense in the second quarter of fiscal 2018, compared to USD 19 million net expense a year ago. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totalled USD 41 million net expense this year compared to USD 24 million net expense last year.

Restructuring, impairment, and other exit costs totalled USD 2 million in the quarter compared to USD 29 million a year ago. An additional USD 5 million of restructuring and project-related charges were recorded in cost of sales this year compared to USD 24 million a year ago (please see Note 4 below for more information on these charges).

Net interest expense totalled USD 75 million in the second quarter compared to USD 76 million a year ago. The effective tax rate in the quarter was 35.9 percent compared to 32.8 percent last year, driven by a USD 42 million prior-year adjustment (please see Note 7 below).  Excluding items affecting comparability, the adjusted effective tax rate was 29.3 percent compared to 32.4 percent a year ago.

Cash Flow Generation and Cash Returns

Cash provided by operating activities totalled USD 1.57 billion through six months of fiscal 2018, up 45 percent from the prior year due to further improvements in accounts payable as well as changes in trade and incentive accruals. Capital investments through the first six months totalled USD 260 million.  Dividends paid year-to-date totalled USD 565 million. During the first six months of 2018, General Mills repurchased 10.9 million shares of common stock for a total of USD 600 million. Average diluted shares outstanding through six months declined 4 percent to 584 million.

Outlook

General Mills updated its key full-year fiscal 2018 targets:

  • Organic net sales are expected to range between flat and down 1 percent, above the previous range of a decline of 1 to 2 percent. This updated target represents a 300 to 400 basis point improvement over fiscal 2017 results. In addition, the company now estimates currency translation will increase reported net sales by approximately 1 percentage point in fiscal 2018.
  • Constant-currency total segment operating profit is expected to be in a range between flat and up 1 percent, which is unchanged from previous guidance. After an 11 percent decline in first-half constant-currency total segment operating profit, the company expects to generate double-digit growth in the second half of fiscal 2018, driven by favorable net price realization and mix and increased cost savings, including savings from its new global sourcing initiative.
  • Adjusted operating profit margin is expected to be below year-ago levels, compared to the previous expectation of year-over-year improvement.
  • Constant-currency adjusted diluted EPS is expected to increase 1 to 2 percent from the base of USD 3.08 earned in fiscal 2017, which is unchanged from previous guidance. This outlook excludes any impact from proposed U.S. tax reform legislation. The company continues to estimate currency translation will be a 1 cent benefit to fiscal 2018 adjusted diluted EPS.
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