Minneapolis / MN. (gm) General Mills Inc. reported results for the third quarter of fiscal 2016. General Mills Chairman and Chief Executive Officer Ken Powell said, «Our third-quarter financial results were in line with our expectations. We reported a decline in net sales as anticipated, primarily reflecting the Green Giant divestiture and continued foreign exchange headwinds. Constant-currency segment operating profit was down modestly, as our cost savings efforts more than offset the impact of the Green Giant sale. Our disciplined financial management has enabled us to expand our adjusted operating profit margin for the fifth consecutive quarter while still investing in Consumer First renovation and innovation news».
Third Quarter Results Summary
- Net sales declined 8 percent to 4.0 billion USD, including a 3 point decline from the Green Giant divestiture. On a constant-currency basis, net sales declined 4 percent.
- Total segment operating profit totalled 679 million USD, down 3 percent. In constant currency, total segment operating profit declined 1 percent.
- Diluted earnings per share (EPS) totalled 59 cents compared to 56 cents a year ago.
- Adjusted diluted EPS, which excludes certain items affecting comparability of results, totalled 65 cents in the third quarter of 2016 compared to 70 cents a year ago. On a constant-currency basis, adjusted diluted EPS declined 6 percent.
Net sales for the 13 weeks ended Feb. 28, 2016, declined 8 percent to 4.0 billion USD. Foreign currency exchange reduced net sales growth by 4 percentage points. Pound volume reduced net sales growth by 5 percent, and net price realization and mix contributed 1 point of net sales growth. The divestiture of the Green Giant business in November 2015 reduced net sales growth by 3 points and pound volume by 4 points. Adjusted gross margin, which excludes mark-to-market effects and certain other items affecting comparability, increased 160 basis points due to benefit from cost savings initiatives more than offsetting modest input cost inflation. Selling, general and administrative expenses (SG+A) declined 4 percent, driven by a 6 percent decrease in advertising and media expense and savings from our cost management initiatives. Total segment operating profit declined 3 percent to 679 million USD. On a constant-currency basis, total segment operating profit declined 1 percent. The company posted restructuring and project-related charges totalling 44 million USD pre-tax in the third quarter, including 27 million USD recorded in cost of sales (please see Note 4 below for more information on these charges). Net earnings attributable to General Mills totalled 362 million USD and diluted EPS totalled 59 cents. Adjusted diluted EPS, which excludes certain items affecting comparability, declined 7 percent to 65 cents.On a constant-currency basis, third-quarter adjusted diluted EPS declined 6 percent.
Nine Month Financial Summary
Net sales through the first nine months of fiscal 2016 declined 5 percent to 12.64 billion USD, including a 1 point decline from acquisitions and divestitures.On a constant-currency basis, net sales declined 1 percent.
Nine-month total segment operating profit totalled 2.34 billion USD, up 5 percent from the prior year. Constant-currency total segment operating profit grew 8 percent.
Diluted EPS totalled 2.15 USD compared to 1.67 USD a year ago.
Adjusted diluted EPS totalled 2.26 USD this year to date, up 7 percent versus year-ago levels. On a constant-currency basis, adjusted diluted EPS increased 10 percent.
Through the first nine months, General Mills constant-currency net sales declined 1 percent, reflecting the net impact of the Green Giant divestiture and the acquisition of the Annie’s business in October 2014. Total segment operating profit increased 8 percent and adjusted diluted EPS were up 10 percent in constant currency. Nine-month adjusted gross margin expanded by 170 basis points. U.S. Retail products making particularly strong contributions to nine-month net sales results include gluten-free Cheerios and Cinnamon Toast Crunch cereals, Yoplait Greek Whips! yoghurt, Nature Valley grain snacks, Lärabar nutrition bars, Annie’s natural and organic products, and Totino’s hot snacks. In the Convenience Stores and Foodservice segment, Pillsbury frozen mini-bagels, Bugles and Chex Mix salty snacks, and Yoplait Parfait Pro and Simply Go-GURT yoghurt varieties were strong net sales contributors. International products posting strong nine-month net sales contributions include Häagen-Dazs ice cream and Old El Paso Mexican products in Europe, Nature Valley snacks in Canada, Fiber One snacks in Mexico, and Betty Crocker sweet snacks in the Asia/Pacific region.
U.S. Retail Segment Results
Third-quarter net sales for General Mills’ U.S. Retail segment totalled 2.48 billion USD, down 7 percent from the prior year. Net price realization and mix contributed 1 point of net sales growth, while lower pound volume reduced sales growth by 8 points. The Green Giant divestiture reduced U.S. Retail net sales growth by 5 points and pound volume by 6 points. U.S. Retail segment operating profit of 518 million USD essentially matched year-ago levels, with benefits from cost savings initiatives more than offsetting the divestiture impact.
Through nine months, U.S. Retail net sales declined 2 percent to 7.77 billion USD. Lower pound volume subtracted 4 points of net sales growth, while net price realization and mix added 2 points of growth. Acquisitions and divestitures reduced net sales by 1 point. Segment operating profit totalled 1.75 billion USD, 10 percent above last year.
International Segment Results
Third-quarter net sales for General Mills’ consolidated international businesses declined 13 percent to 1.07 billion USD due to foreign currency exchange effects. On a constant-currency basis, net sales essentially matched year-ago levels. The Green Giant divestiture reduced International segment net sales growth by 2 points. Constant-currency net sales gains of 16 percent in Latin America and 4 percent in the Asia/Pacific region were offset by declines of 2 percent in Europe and 14 percent in Canada. International segment operating profit declined 35 percent to 70 million USD. On a constant-currency basis, segment operating profit was down 24 percent, due to currency-driven inflation on imported products in certain markets, as well as the Green Giant divestiture.
Through the first nine months of fiscal 2016, International segment net sales totalled 3.43 billion USD, down 12 percent from the prior year. Foreign currency exchange reduced net sales growth by 14 points. On a constant-currency basis, net sales grew 2 percent, reflecting positive net price realization and mix. The Green Giant divestiture reduced International segment net sales growth by 1 point. Nine-month segment operating profit declined 17 percent to 324 million USD. Constant-currency segment operating profit was 1 percent below year-ago results that were up 8 percent.
Convenience Stores and Foodservice Segment Results
Third-quarter net sales for the Convenience Stores and Foodservice segment totalled 454 million USD, 2 percent below year-ago levels due to unfavorable net price realization. Cereal, yoghurt, snacks, and frozen meals led sales performance in the quarter, while market index pricing on bakery flour was the primary contributor to the net sales decline. Segment operating profit increased 31 percent to 91 million USD, driven primarily by increased grain merchandising earnings, favorable product mix, and benefits from cost savings initiatives.
Through the first nine months of fiscal 2016, Convenience Stores and Foodservice net sales declined 2 percent to 1.44 billion USD. Pound volume and unfavorable net price realization each reduced net sales growth by 1 point. Nine-month segment operating profit totalled 273 million USD, 8 percent above year-ago results that grew 14 percent.
Joint Venture Summary
Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ) joint ventures totalled 16 million USD in the third quarter, up 24 percent. Constant-currency after-tax earnings from joint ventures increased 19 percent, due primarily to volume growth for HDJ. Constant-currency net sales grew 22 percent for HDJ and declined 1 percent for CPW. the first nine months of 2016, after-tax joint-venture earnings totalled 65 million USD, down 2 percent as reported but up 8 percent in constant currency.
Corporate Items
Unallocated corporate items totalled 78 million USD net expense in the third quarter of fiscal 2016, compared to 112 million USD net expense a year earlier. Excluding mark-to-market valuation effects, restructuring and project-related charges, Annie’s integration expenses, and a 7 million USD foreign exchange loss in last year’s third quarter related to balance sheet re-measurement for our Venezuelan subsidiary, unallocated corporate items totalled 44 million USD net expense this year compared to 32 million USD net expense a year ago.
General Mills recorded restructuring, impairment and other exit costs totalling 17 million USD pre-tax during the third quarter compared to 49 million USD in the year-ago period. An additional 17 million USD of restructuring charges and 10 million USD of project-related charges were recorded in cost of sales, compared to 22 million USD and 3 million USD, respectively, in last year’s third quarter.
Net interest expense totalled 77 million USD in this year’s third quarter, compared to 80 million USD a year ago. The third-quarter effective tax rate was 31.0 percent, 5.5 percentage points higher than the prior year primarily due to less favorable impacts of U.S. federal tax legislation passed in the fiscal third quarter, and changes in earnings mix by country. Excluding items affecting comparability, the adjusted effective tax rate was 30.8 percent for the third quarter and 31.9 percent for the first nine months of 2016.
Cash Flow Items
Cash provided by operating activities totalled 1.86 billion USD through the first nine months of 2016, up 19 percent from the prior year due primarily to changes in working capital. Capital investments through the first nine months totalled 478 million USD. Dividends paid year-to-date increased 6 percent to 795 million USD. During the nine months of 2016, General Mills repurchased 10.6 million shares of common stock at an aggregate price of 602 million USD. Average diluted shares outstanding through the first nine months totalled 612 million, down 1 percent from the average of 620 million in the year-ago period.
Venezuela Divestiture
On March 16, 2016, subsequent to the close of the third quarter, General Mills sold its General Mills de Venezuela CA subsidiary to a third party and exited its business in Venezuela. The company expects to incur a non-cash charge of approximately 35 million USD pre-tax in the fourth quarter related to this sale. The transaction is not expected to have a material impact on the company’s ongoing financial results.
Outlook
Powell said, «We anticipate the impact of the Green Giant sale, continued foreign exchange headwinds, and the comparison to the year-ago period that included an extra week will result in a reported decline in fourth-quarter net sales, total segment operating profit, and adjusted diluted EPS. However, on a comparable basis, we expect our net sales growth to turn positive as our Consumer First efforts continue to take hold. For the full year, we are confident that we will deliver the growth goals we updated in December».
General Mills reaffirmed its 2016 full-year growth outlook, which includes the impact of the Green Giant divestiture. Net sales in constant currency are expected to decline at a low single-digit rate from the 2015 levels that included a 53rd week. Total segment operating profit is expected to essentially match last year’s levels in constant currency. Constant-currency adjusted diluted EPS is expected to grow at a low single-digit rate from the base of 2.86 USD earned in fiscal 2015. The company estimates an 8-cent headwind from currency translation in 2016.
