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General Mills: Reports Q2 Fiscal 2019 Results

Minneapolis / MN. (gm) General Mills Inc. reported results for the second quarter ended November 25, 2018. Financial results for the second quarter and first six months of fiscal 2019 include contributions from Blue Buffalo Pet Products Inc., which was acquired on April 24, 2018.

«I’m pleased that our results through six months keep us on track to deliver our full-year targets,» said General Mills Chairman and Chief Executive Officer Jeff Harmening. «Our cost and capital discipline has driven profit growth ahead of our expectations in the first half. Our job to do in the second half is to accelerate our sales growth while maintaining that same discipline. We’re taking actions to strengthen our second-half topline trends in North America Retail, led by U.S. cereal and snacks. On Blue Buffalo, we’re driving strong in-market results, including year-to-date retail sales up 9 percent, and we’ll fuel additional Blue growth in the second half by doubling distribution in the Food, Drug, and Mass channels. With strong first-half profit performance, good cost visibility, and confidence in our second-half growth plans, we are reaffirming our guidance for Blue Buffalo and for General Mills in total.»

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 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.

Second Quarter Results Summary

  • Net sales increased 5 percent to USD 4.41 billion and were up 7 percent in constant currency, driven by the addition of Blue Buffalo. Organic net sales decreased 1 percent, driven by a decline in the North America Retail segment.
  • Gross margin decreased 20 basis points to 34.2 percent of net sales. Adjusted gross margin, which excludes certain items affecting comparability, increased 10 basis points to 34.5 percent, driven by cost savings and benefits from price realization and mix, partially offset by higher input costs.
  • Operating profit totalled USD 547 million, down 23 percent from last year due to higher restructuring, impairment, and other exit costs. Adjusted operating profit of USD 765 million increased 8 percent in constant currency, primarily driven by higher net sales and adjusted gross margin. Operating profit margin of 12.4 percent declined 450 basis points. Adjusted operating profit margin increased 40 basis points to 17.3 percent.
  • Net earnings attributable to General Mills totalled USD 343 million, down 20 percent from a year ago, driven by lower operating profit and higher net interest expense, partially offset by a lower effective tax rate.
  • Diluted EPS totalled USD 0.57, down 23 percent from the prior year. Adjusted diluted EPS, which excludes certain items affecting comparability of results, totalled USD 0.85 in the second quarter, up 2 percent from the prior year in constant currency, driven by higher adjusted operating profit and a lower effective tax rate, partially offset by higher net interest expense and higher average diluted shares outstanding in the quarter.

Six Month Results Summary

  • Net sales increased 7 percent to USD 8.50 billion and were up 8 percent in constant currency. Organic net sales essentially matched year-ago levels, with growth in the Asia + Latin America, Convenience Stores + Foodservice, and Europe + Australia segments offset by a decline in North America Retail.
  • Gross margin decreased 110 basis points to 33.5 percent of net sales. Adjusted gross margin was down 70 basis points to 34.1 percent, driven by a 60 basis point headwind from a first-quarter purchase accounting adjustment related to the Blue Buffalo acquisition.
  • Operating profit totalled USD 1.15 billion, down 13 percent from the prior year. Constant-currency adjusted operating profit increased 5 percent. Operating profit margin of 13.5 percent was down 300 basis points. Adjusted operating profit margin decreased 20 basis points to 16.5 percent.
  • Net earnings attributable to General Mills totalled USD 736 million.
  • Diluted EPS of USD 1.22 was 15 percent below prior-year levels. Adjusted diluted EPS of USD 1.56 was up 1 percent on a constant-currency basis.

Operating Segment Results

North America Retail Segment: Second-quarter net sales for General Mills’ North America Retail segment totalled USD 2.68 billion, down 3 percent from the prior year, primarily reflecting lower merchandising activity in the U.S. Cereal operating unit and lower volume in U.S. Snacks. Organic net sales also declined 3 percent. Segment operating profit of USD 620 million was flat to last year as reported and in constant currency, driven by lower SG+A expenses and benefits from cost savings initiatives, offset by lower net sales and higher input costs.

Through six months, North America Retail segment net sales were down 3 percent to USD 5.06 billion. Organic net sales declined 2 percent. Segment operating profit totalled USD 1.17 billion, up 1 percent from a year ago as reported and in constant currency due to lower SG+A expenses and benefits from cost savings initiatives, partially offset by lower net sales and higher input costs.

Convenience Stores + Foodservice Segment: Second-quarter net sales for the Convenience Stores + Foodservice segment were in line with last year at USD 514 million, driven by growth for the Focus 6 platforms, including frozen baked goods, cereal, and snacks, partially offset by declines on bakery flour. Organic net sales were also flat to last year. Segment operating profit increased 3 percent to USD 110 million, primarily driven by positive net price realization and mix and benefits from cost savings initiatives, partially offset by input cost inflation.

Through six months, Convenience Stores + Foodservice net sales increased 2 percent to USD 978 million, due primarily to growth for the Focus 6 platforms. Organic net sales also increased 2 percent. Segment operating profit increased 8 percent to USD 207 million, primarily driven by positive net price realization and mix and benefits from cost savings initiatives, partially offset by input cost inflation.

Europe + Australia Segment: Second-quarter net sales for the Europe + Australia segment declined 3 percent to USD 454 million, including 3 points of unfavorable foreign currency exchange. Organic net sales were flat to last year. Positive sales performance for Nature Valley and Fiber One snack bars, Häagen-Dazs ice cream, and Old El Paso Mexican food was offset by a decline in yoghurt. Second-quarter performance was also adversely impacted by a challenging retail environment in France. Segment operating profit totalled USD 22 million compared to USD 27 million a year ago, primarily driven by significant input cost inflation, including currency-driven inflation on products imported into the U.K, partially offset by lower SG+A and favorable product mix.

Through six months, Europe + Australia net sales were flat to last year at USD 954 million, including 1 point of unfavorable foreign currency exchange. Organic net sales increased 1 percent. Sales growth for the snack bars, ice cream, and Mexican food platforms offset a decline in yogurt. Segment operating profit of USD 57 million declined 1 percent as reported and was up 1 percent in constant currency, reflecting lower SG+A and favorable product mix, partially offset by higher input costs, 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 declined 4 percent to USD 431 million, including 9 points of unfavorable foreign currency exchange. Organic net sales increased 5 percent. Net sales growth for Häagen-Dazs ice cream, Pillsbury and Nature Valley snack bars, Wanchai Ferry frozen dumplings, and Yoki meals and snacks drove positive results in both the Asia and Latin America regions. Segment operating profit totalled USD 18 million compared to USD 17 million a year ago.

Through six months, Asia + Latin America net sales declined 1 percent to USD 830 million, including 8 points of unfavorable foreign currency exchange. Organic net sales increased 7 percent. The ice cream and snack bar platforms led net sales growth for the segment. Segment operating profit totalled USD 30 million compared to USD 32 million a year ago.

Pet Segment: Second-quarter net sales for the Pet segment totalled USD 335 million. On a pro forma basis, Pet segment net sales decreased 7 percent, reflecting a difficult comparison to the prior-year period when Blue Buffalo first launched into the U.S. Food, Drug, and Mass (FDM) channels and generated 25 percent pro forma net sales growth. In-market results continued to show solid growth, with retail sales up high-single digits. Segment operating profit of USD 71 million was USD 18 million below the prior year on a pro forma basis, driven by lower volume, significant input cost inflation, and plant start-up costs.

Through six months, Pet net sales of USD 678 million increased 2 percent on a pro forma basis. Segment operating profit totalled USD 85 million, down USD 80 million on a pro forma basis, driven by the impact of purchase accounting, including a USD 53 million one-time inventory adjustment and USD 7 million of intangible asset amortization, as well as significant input cost inflation and plant start-up costs.

General Mills is planning significant expansion of Blue Buffalo in the second half, including doubling distribution and increasing the Blue product assortment in FDM channels. In addition, second-half operating profit margins will benefit from accelerated synergies, cost savings initiatives, and the impact of actions taken in the first half to improve net price realization and mix. The company expects these actions will result in double-digit pro forma growth in net sales and segment operating profit for the full year, excluding acquisition-related charges.

Joint Venture Summary

Second-quarter net sales for Cereal Partners Worldwide (CPW) increased 2 percent in constant currency, and constant-currency net sales for Häagen-Dazs Japan (HDJ) were up 1 percent. Combined after-tax earnings from joint ventures were USD 22 million compared to USD 24 million last year. Through six months, after-tax earnings from joint ventures totalled USD 40 million compared to USD 48 million a year ago, primarily driven by our USD 5 million after-tax share of a restructuring charge at CPW.

Other Income Statement Items

Unallocated corporate items totalled USD 84 million net expense in the second quarter of fiscal 2019, compared to USD 62 million net expense a year ago. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totalled USD 75 million net expense this year compared to USD 62 million net expense last year.

Restructuring, impairment, and other exit costs totalled USD 209 million in the second quarter compared to USD 2 million a year ago. This included USD 193 million of impairment charges recorded in the quarter related to the Progresso, Food Should Taste Good, and Mountain High brand intangible assets, primarily driven by lower future sales projections for those businesses (please see Note 3 below for more information on these charges).

Net interest expense totalled USD 133 million in the second quarter compared to USD 75 million a year ago, primarily driven by financing related to the Blue Buffalo acquisition. The effective tax rate in the quarter was 24.5 percent compared to 35.9 percent last year (please see Note 6 below for more information on our effective tax rate). Excluding items affecting comparability, the adjusted effective tax rate was 23.8 percent compared to 29.3 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 1.40 billion through six months of fiscal 2019. Capital investments through the first six months totalled USD 254 million. First-half free cash flow conversion was 120 percent of adjusted after-tax earnings, ahead of full-year expectations. Dividends paid year-to-date totalled USD 589 million. Average diluted shares outstanding through six months increased 3 percent to 604 million.

Outlook

General Mills reaffirmed its 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 in constant currency.
  • 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.
  • 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.
  • Currency translation is now expected to reduce reported net sales by 1 to 2 percentage points in fiscal 2019 and is not expected to have a material impact on full-year adjusted operating profit or adjusted diluted EPS.