Minneapolis / MN. (gm) General Mills Inc. reported results for the third quarter ended February 25, 2018. Highlights:
- Net sales increased 2 percent to USD 3.9 billion; organic net sales increased 1 percent
- Operating profit increased 9 percent; total segment operating profit was down 6 percent in constant currency
- Diluted earnings per share (EPS) were USD 1.62 compared to USD 0.61 a year ago; adjusted diluted EPS totalled USD 0.79, up 8 percent in constant currency
- Nine-month operating cash flow increased 29 percent to USD 2.1 billion; free cash flow increased 47 percent to USD 1.7 billion
- Company updates fiscal 2018 full-year outlook to reflect higher supply chain costs
- Blue Buffalo acquisition remains on track to close in fourth quarter of fiscal 2018
«Our primary goal this year has been to strengthen our topline performance while maintaining our efficiency», said General Mills Chairman and Chief Executive Officer Jeff Harmening. «While I’m pleased that we’re delivering on the first part of that goal, with strong consumer marketing, innovation, and in-store execution leading to a second consecutive quarter of organic net sales growth, I’m disappointed in our results on the bottom line. Our third-quarter operating profit fell well short of our expectations, and cost pressures are impacting our full-year outlook. Like the broader industry, we’re seeing sharp increases in input costs, including inflation in freight and commodities. Because of our improved volume performance, we’re also incurring higher operational costs».
Harmening continued, «We are moving urgently to address this increasingly dynamic cost inflation environment. We’ve taken actions to improve profitability in the near term, and we’ve launched initiatives that will reduce our long-term cost structure. While these actions will only partially offset the cost headwinds in fiscal 2018, we are confident they will strengthen our bottom-line results beginning in fiscal 2019».
The company is responding to rising cost pressure with actions that will lower costs and improve profitability in the short and medium term. Initiatives that will have a near-term impact include:
- Various actions to mitigate rising freight costs, including increasing the number of qualified freight carriers and utilizing different modes of transportation.
- Increasingly tight control of all expenditures in the balance of fiscal 2018.
- Targeted Strategic Revenue Management actions to improve net price realization. Specific actions will vary across categories and geographies, with benefits being realized beginning in the fourth quarter of fiscal 2018.
Initiatives that will benefit fiscal 2019 and beyond include:
- Optimizing the distribution network between the factory and the customer to better align with the manufacturing footprint reorganization completed over the last three years.
- Optimizing the global administrative structure through new cost-savings initiatives.
- Delivering ongoing productivity savings via Holistic Margin Management.
- Maximizing the impact of the new global sourcing capability.
- Other Enterprise Process Transformation projects designed to streamline global processes and enhance connectivity across key global functions.
In addition to implementing the initiatives listed above, General Mills will continue to pursue its Consumer First strategy and execute against its three key growth priorities: 1) competing effectively on all brands and across all geographies 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 transactions. The company recently announced the proposed acquisition of Blue Buffalo Pet Products Inc. (Blue Buffalo), which accelerates its portfolio shaping efforts by adding the leading brand in the fast-growing Wholesome Natural pet food category in the U.S. The Blue Buffalo acquisition is expected to close before the end of fiscal 2018. The company will also pursue divestitures of growth-dilutive businesses to further reshape its portfolio. By focusing on these priorities, General Mills expects to generate consistent topline growth, which, when balanced with a disciplined focus on margin expansion, cash conversion, and cash returns, will create significant value for shareholders.
Third Quarter Results Summary
- Reported net sales increased 2 percent to USD 3.88 billion. Organic net sales increased 1 percent.
- Gross margin decreased 220 basis points to 32.3 percent of net sales. Adjusted gross margin, which excludes certain items affecting comparability, decreased 250 basis points to 32.5 percent. This was driven by higher input costs, including increased freight and logistics costs, commodity inflation, and other operational costs, as well as higher merchandising expense.
- Operating profit totalled USD 593 million, up 9 percent from last year due to lower restructuring, impairment, and other exit costs. Operating profit margin of 15.3 percent increased 100 basis points. Adjusted operating profit margin decreased 120 basis points to 15.7 percent, primarily reflecting lower adjusted gross margin, partially offset by lower selling, general, + administrative expense (SG+A), including a 22 percent decrease in advertising and media expense.
- Total segment operating profit of USD 628 million was down 6 percent in constant currency.
- The effective tax rate in the quarter was an 85.9 percent benefit compared to a 23.0 percent charge last year, primarily driven by the provisional net benefit related to the Tax Cuts and Jobs Act (TCJA) (please see Note 6 below for more information on our effective tax rate). Excluding items affecting comparability, the adjusted effective tax rate was 15.2 percent compared to 24.7 percent a year ago, driven by the lower blended U.S. statutory tax rate, including an adjustment for the application of the new rate to earnings from the first half of fiscal 2018.
- Net earnings attributable to General Mills totalled USD 941 million, up 163 percent from a year ago primarily driven by the impact of the TCJA. Diluted EPS totalled USD 1.62 compared to USD 0.61 in the prior year.
- Adjusted diluted EPS, which excludes certain items affecting comparability of results, totalled USD 0.79 in the third quarter, up 10 percent from the prior year. Constant-currency adjusted diluted EPS increased 8 percent, reflecting lower taxes and average diluted shares outstanding in the quarter.
Nine Month Results Summary
- Reported net sales of USD 11.85 billion were in line with year-ago levels. Organic net sales declined 1 percent, primarily reflecting volume declines in the Asia + Latin America and Europe + Australia segments.
- Gross margin decreased 210 basis points to 33.8 percent of net sales. Adjusted gross margin was down 240 basis points to 34.0 percent.
- Operating profit totalled USD 1.95 billion, essentially matching the prior year. Operating profit margin of 16.4 percent was down 20 basis points. Adjusted operating profit margin decreased 190 basis points to 16.7 percent.
- Total segment operating profit of USD 2.06 billion was down 10 percent in constant currency.
- Net earnings attributable to General Mills totalled USD 1.78 billion. Diluted EPS of USD 3.05 increased 47 percent from the prior year.
- Adjusted diluted EPS of USD 2.32 was down 1 percent as reported and down 2 percent on a constant-currency basis.
Operating Segment Results
| Components of Fiscal 2018 Reported Net Sales Growth | ||||
| Third Quarter | Volume | Price/Mix | Foreign Exchange | Reported Net Sales |
| North America Retail | 1 pt | (1) pt | 1 pt | 1% |
| Convenience Stores + Foodservice | 1 pt | 2 pts | – | 3% |
| Europe + Australia | (3) pts | 2 pts | 12 pts | 11% |
| Asia + Latin America | (9) pts | 9 pts | 3 pts | 3% |
| Total | (1) pt | 1 pt | 2 pts | 2% |
| Nine Months | Volume | Price/Mix | Foreign Exchange | Reported Net Sales |
| North America Retail | – | (1) pt | – | (1)% |
| Convenience Stores + Foodservice | 1 pt | 2 pts | – | 3% |
| Europe + Australia | (1) pt | 2 pts | 6 pts | 7% |
| Asia + Latin America | (11) pts | 8 pts | 2 pts | (1)% |
| Total | (1) pt | – | 1 pt | Flat |
.
Components of Fiscal 2018 Organic Net Sales Growth
| Third Quarter | Organic Volume | Organic Price/Mix | Organic Net Sales | Foreign Exchange | Acquisitions + Divestitures | Reported Net Sales |
| North America Retail | 1 pt | – | 1% | 1 pt | (1) pt | 1% |
| Convenience Stores + Foodservice | 1 pt | 2 pts | 3% | – | – | 3% |
| Europe + Australia | (3) pts | 2 pts | (1)% | 12 pts | – | 11% |
| Asia + Latin America | (9) pts | 9 pts | Flat | 3 pts | – | 3% |
| Total | – | 1 pt | 1% | 2 pts | (1) pt | 2% |
| Nine Months | Organic Volume | Organic Price/Mix | Organic Net Sales | Foreign Exchange | Acquisitions + Divestitures | Reported Net Sales |
| North America Retail | – | (1) pt | (1)% | – | – | (1)% |
| Convenience Stores + Foodservice | 1 pt | 2 pts | 3% | – | – | 3% |
| Europe + Australia | (1) pt | 2 pts | 1% | 6 pts | – | 7% |
| Asia + Latin America | (11) pts | 8 pts | (3)% | 2 pts | – | (1)% |
| Total | (1) pt | Flat | (1)% | 1 pt | – | Flat |
.
Fiscal 2018 Segment Operating Profit Growth
| Third Quarter | Change as Reported | Change in Constant Currency |
| North America Retail | Flat | Flat |
| Convenience Stores + Foodservice | (10)% | (10)% |
| Europe + Australia | (35)% | (46)% |
| Asia + Latin America | (121)% | (134)% |
| Total | (5)% | (6)% |
| Nine Months | Change as Reported | Change in Constant Currency |
| North America Retail | (7)% | (7)% |
| Convenience Stores + Foodservice | (7)% | (7)% |
| Europe + Australia | (33)% | (38)% |
| Asia + Latin America | (51)% | (56)% |
| Total | (9)% | (10)% |
.
North America Retail Segment
Third-quarter net sales for General Mills’ North America Retail segment totalled USD 2.52 billion, up 1 percent from the prior year. Net sales increased 6 percent in the Canada operating unit, 3 percent in U.S. Snacks, and 2 percent in U.S. Meals + Baking, and net sales were down 8 percent in U.S. Yogurt and 1 percent in U.S. Cereal. Organic net sales increased 1 percent in the quarter. Segment operating profit of USD 518 million essentially matched prior-year results, with higher net sales and lower SG+A expense offset by higher input costs.
Through nine months, North America Retail segment net sales were down 1 percent to USD 7.73 billion. Net sales declines of 14 percent in the U.S. Yogurt operating unit and 1 percent in U.S. Cereal were partially offset by a 4 percent increase in Canada and a 2 percent increase in U.S. Snacks. U.S. Meals + Baking net sales were essentially in line with year-ago levels. Organic net sales also declined 1 percent. Segment operating profit totalled USD 1.67 billion, down 7 percent from a year ago due to higher input costs, unfavorable trade expense phasing, and higher merchandising activity, partially offset by lower SG+A expenses.
Convenience Stores + Foodservice Segment
Third-quarter net sales for the Convenience Stores + Foodservice segment increased 3 percent to USD 460 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 3 percent. Segment operating profit of USD 84 million was 10 percent below last year, driven by higher input costs.
Through nine months, Convenience Stores + Foodservice net sales increased 3 percent to USD 1.42 billion, 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 276 million, 7 percent below last year due to higher input costs and a comparison to 8 percent operating profit growth in the year-ago period.
Europe + Australia Segment
Third-quarter net sales for the Europe + Australia segment increased 11 percent to USD 470 million, driven by favorable foreign currency exchange. Organic net sales were down 1 percent. Sales growth for the snack bars platform was offset by declines in other platforms. Segment operating profit totalled USD 27 million compared to USD 42 million a year ago, primarily driven by input cost inflation, including currency-driven inflation on products imported into the U.K.
Through nine months, Europe + Australia net sales increased 7 percent to USD 1.43 billion, reflecting favorable foreign currency exchange and benefits from net price realization and mix. Organic net sales increased 1 percent. Sales growth for the ice cream and snack bars platforms offset declines in other platforms. Segment operating profit totalled USD 85 million compared to USD 127 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
Third-quarter net sales for the Asia + Latin America segment increased 3 percent to USD 435 million, driven by favorable foreign currency exchange. Organic net sales essentially matched year-ago levels. Net sales growth across Asia markets was offset by lower net sales across Latin America markets. Segment operating profit decreased to a USD 2 million loss compared to a USD 10 million profit a year ago, driven by lower volume, higher input costs including currency-driven inflation, and higher SG+A expenses.
Through nine months, Asia + Latin America net sales declined 1 percent to USD 1.27 billion, reflecting unfavorable contributions from volume partially offset by benefits from net price realization and mix and favorable foreign currency exchange. Organic net sales declined 3 percent. A net sales increase in Asia markets, including growth on ice cream and snack bars, 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 30 million compared to USD 61 million a year ago, driven by lower volume and input cost inflation, including currency-driven inflation on imported products.
Joint Venture Summary
Third-quarter net sales for CPW increased 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 17 million compared to USD 11 million a year ago. On a constant-currency basis, after-tax earnings from joint ventures were up 30 percent from the year-ago period, driven primarily by higher sales for CPW. Through nine months, after-tax earnings from joint ventures totalled USD 64 million, down 2 percent as reported and down 4 percent in constant currency.
Other Income Statement Items
Unallocated corporate items totalled USD 28 million net expense in the third quarter of fiscal 2018, compared to USD 42 million net expense a year ago. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totalled USD 18 million net expense this year compared to USD 22 million net expense a year ago.
Restructuring, impairment, and other exit costs totalled USD 8 million in the quarter compared to USD 78 million a year ago. An additional USD 3 million of restructuring and project-related charges were recorded in cost of sales this year compared to USD 28 million a year ago (please see Note 3 below for more information on these charges).
Net interest expense totalled USD 89 million in the third quarter compared to USD 76 million a year ago, driven by a charge related to the timing of the proposed acquisition of Blue Buffalo. The effective tax rate in the quarter was an 85.9 percent benefit compared to a 23.0 percent charge last year, primarily driven by the impact of the TCJA (please see Note 6 below). Excluding items affecting comparability, the adjusted effective tax rate was 15.2 percent compared to 24.7 percent a year ago, driven by the lower blended U.S. statutory tax rate, including an adjustment for the application of the new rate to earnings from the first half of fiscal 2018.
Cash Flow Generation and Cash Returns
Cash provided by operating activities totalled USD 2.14 billion through nine months of fiscal 2018, up 29 percent from the prior year due to improvements in accounts payable and inventory balances, as well as changes in incentive accruals and income taxes payable. Capital investments through the first nine months totalled USD 398 million. Dividends paid year-to-date totalled USD 846 million. During the first nine months of 2018, General Mills repurchased 10.9 million shares of common stock for a total of USD 601 million. Average diluted shares outstanding through nine months declined 3 percent to 583 million.
Outlook
General Mills updated its key full-year fiscal 2018 targets. These targets exclude the impact of the proposed Blue Buffalo acquisition.
- Organic net sales are expected to be in line with last year, which is unchanged from previous guidance. This represents a 400 basis point improvement over the fiscal 2017 growth rate. The company continues to estimate currency translation will increase reported net sales by approximately 1 percentage point in fiscal 2018.
- Constant-currency total segment operating profit is now expected to decline 5 to 6 percent, compared to the previous expectation of a range between down 1 percent and flat. The change in outlook was driven by higher-than-expected supply chain costs, including freight and logistics, commodities, and other operational costs. The company expects to generate constant-currency total segment operating profit growth in the fourth quarter, driven by favorable net price realization and mix and increased cost savings. Currency translation is expected to add 1 point to full-year total segment operating profit growth.
- The full-year fiscal 2018 adjusted effective tax rate is now expected to be approximately 26 percent, compared to the previous expectation of a 27 percent rate. We continue to estimate that the TCJA will have a 2 point favorable impact on our fiscal 2018 adjusted effective tax rate.
- Constant-currency adjusted diluted EPS is now expected to range between flat and up 1 percent from the base of USD 3.08 earned in fiscal 2017, compared to the previous guidance of a 3 to 4 percent increase. The company now estimates currency translation will be a 3 cent benefit to fiscal 2018 adjusted diluted EPS.
- The company continues to expect free cash flow to increase at least 15 percent from the prior year, driven by strong discipline on core working capital.
