Minneapolis / MN. (gm) General Mills Inc. reported results for the fourth quarter and full fiscal year ended May 27, 2018, that were in line with the company’s most recent fiscal 2018 outlook.
Fourth-quarter Highlights
- Net sales increased 2 percent to USD 3.9 billion; organic net sales increased 1 percent
- Operating profit decreased 8 percent; total segment operating profit increased 7 percent in constant currency
- Diluted earnings per share (EPS) were USD 0.59 compared to USD 0.69 a year ago; adjusted diluted EPS totalled USD 0.79, up 7 percent in constant currency
Full-year Highlights
- Net sales increased 1 percent to USD 15.7 billion; organic net sales were flat to last year
- Operating profit decreased 2 percent; total segment operating profit decreased 6 percent in constant currency
- Diluted EPS were USD 3.64 compared to USD 2.77 a year ago; adjusted diluted EPS of USD 3.11 essentially matched year-ago results in constant currency, including a 2-point headwind related to financing costs for the Blue Buffalo acquisition
- Operating cash flow increased 18 percent to USD 2.8 billion; free cash flow increased 28 percent to USD 2.2 billion
«Fiscal 2018 represented an important first step in returning our business to sustainable topline growth,» said General Mills Chairman and Chief Executive Officer Jeff Harmening. «We made significant progress toward competing more effectively this year, with strong innovation, marketing, and in-store execution driving positive organic sales growth in each of our last three quarters. And we moved to reshape our portfolio for future growth with the acquisition of Blue Buffalo, a fast-growing, highly profitable business that is leading the transformation of the U.S. pet food category. While our full-year profit results fell short of our initial plans, we finished the year delivering growth in sales, margins, profit, and EPS in the fourth quarter. And I’m pleased with the continued progress we’ve made in cash generation, with our free cash flow up nearly 30 percent this year.»
Harmening continued, «As we turn to fiscal 2019, we’ll continue to follow our Consumer First strategy and execute against our global growth priorities to further improve our topline momentum. We are committed to competing effectively across all our brands and geographies, increasing investments to accelerate our differential growth platforms, and maximizing the growth opportunities for Blue Buffalo. We are also keenly focused on maintaining our efficiency in this more inflationary cost environment, and we have initiatives underway to help protect our profitability.»
General Mills continues to pursue its Consumer First strategy and execute against its three key global 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, including the recent acquisition of Blue Buffalo Pet Products, Inc., the leading brand in the fast-growing wholesome natural pet food category in the U.S. The company also intends to 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, should create significant value for shareholders.
Fourth Quarter Results Summary
- Net sales increased 2 percent to USD 3.89 billion. Organic net sales increased 1 percent, primarily reflecting benefits from organic net price realization and mix across all four operating segments, partially offset by lower organic volume in the North America Retail, Europe + Australia, and Asia + Latin America segments.
- Gross margin increased 180 basis points to 36.5 percent of net sales. Adjusted gross margin, which excludes certain items affecting comparability, increased 70 basis points to 35.8 percent. This was driven by favorable net price realization and mix, as well as benefits from productivity initiatives including a newly implemented global sourcing program.
- Operating profit totalled USD 561 million, down 8 percent from last year due to higher restructuring, impairment, and other exit costs. Operating profit margin of 14.4 percent decreased 160 basis points. Adjusted operating profit margin increased 170 basis points to 18.5 percent, reflecting higher adjusted gross margin and lower selling, general, + administrative (SG+A) expenses.
- Total segment operating profit of USD 727 million was up 7 percent in constant currency.
- Net earnings attributable to General Mills totalled USD 354 million, down 13 percent from a year ago, reflecting lower operating profit and higher net interest expense, partially offset by a lower effective tax rate. Diluted EPS totalled USD 0.59 compared to USD 0.69 in the prior year.
- Adjusted diluted EPS, which excludes certain items affecting comparability of results, totalled USD 0.79 in the fourth quarter, up 8 percent from the prior year. Constant-currency adjusted diluted EPS increased 7 percent, driven by higher adjusted operating profit, partially offset by a 7-point headwind related to Blue Buffalo acquisition financing.
Full Year Results Summary
- Net sales increased 1 percent to USD 15.74 billion and organic net sales essentially matched year-ago levels.
- Gross margin decreased 110 basis points to 34.5 percent of net sales. Adjusted gross margin was down 170 basis points to 34.4 percent.
- Operating profit totalled USD 2.51 billion, down 2 percent from the prior year. Operating profit margin of 15.9 percent was down 50 basis points. Adjusted operating profit margin decreased 90 basis points to 17.2 percent.
- Total segment operating profit of USD 2.79 billion was down 6 percent in constant currency.
- Net earnings attributable to General Mills totalled USD 2.13 billion. Diluted EPS of USD 3.64 increased 31 percent from the prior year.
- Adjusted diluted EPS of USD 3.11 was up 1 percent as reported and essentially matched year-ago levels on a constant-currency basis, including a 2-point headwind related to Blue Buffalo acquisition financing.
North America Retail Segment
Fourth-quarter net sales for General Mills’ North America Retail segment totalled USD 2.39 billion, essentially in line with the prior year. Net sales increased 2 percent in the U.S. Snacks and U.S. Cereal operating units and were down 5 percent in U.S. Yogurt and down 2 percent in U.S. Meals + Baking. Net sales for the Canada operating unit essentially matched the prior year. Organic net sales declined 1 percent in the quarter. Segment operating profit of USD 543 million increased 7 percent, driven by benefits from cost savings initiatives and lower SG+A expenses, partially offset by input cost inflation.
For the full year, North America Retail segment net sales were down 1 percent to USD 10.12 billion. A net sales decline of 12 percent in the U.S. Yogurt operating unit was partially offset by a 2 percent increase in U.S. Snacks and a 3 percent increase in Canada. Net sales for the U.S. Cereal and U.S. Meals + Baking operating units essentially matched the prior year. Full-year organic net sales declined 1 percent. Segment operating profit totalled USD 2.22 billion, down 4 percent from a year ago due to higher input costs and increased merchandising, partially offset by lower SG+A expenses.
Convenience Stores + Foodservice Segment
Fourth-quarter net sales for the Convenience Stores + Foodservice segment increased 5 percent to USD 511 million, with mid single-digit growth for the Focus 6 platforms led by frozen meals 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 117 million increased 11 percent, reflecting positive net price realization and mix and benefits from cost savings initiatives, partially offset by input cost inflation.
For the full year, Convenience Stores + Foodservice net sales increased 3 percent to USD 1.93 billion, including low single-digit 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 393 million, 2 percent below last year primarily driven by higher input costs, partially offset by positive net price realization and benefits from cost savings initiatives.
Europe + Australia Segment
Fourth-quarter net sales for the Europe + Australia segment increased 14 percent to USD 556 million, driven by favorable foreign currency exchange and benefits from net price realization and mix. Organic net sales increased 4 percent. Sales growth on the snack bars, ice cream, and Mexican food platforms was partially offset by a decline in yogurt. Segment operating profit of USD 57 million was up 55 percent as reported and up 37 percent in constant currency, primarily reflecting benefits from net price realization and mix and cost savings initiatives.
For the full year, Europe + Australia net sales increased 9 percent to USD 1.98 billion, reflecting favorable foreign currency exchange and benefits from net price realization and mix. Organic net sales increased 2 percent. Sales growth for the snack bars and ice cream platforms offset declines in yogurt. Segment operating profit of USD 142 million was down 14 percent as reported and down 22 percent in constant currency, primarily driven by input cost inflation, including currency-driven inflation on products imported into the U.K.
Asia + Latin America Segment
Fourth-quarter net sales for the Asia + Latin America segment decreased 1 percent to USD 435 million, driven by the comparison to the year-ago period that included an extra month of results reported for Brazil as we aligned the market’s calendar to our fiscal year end, partially offset by underlying volume growth and benefits from net price realization and mix. Organic net sales essentially matched year-ago levels. Excluding the reporting period difference, organic net sales increased double digits. Segment operating profit decreased to USD 10 million from USD 22 million a year ago, driven by higher input costs, higher SG+A expenses, and the impact of the reporting period difference.
For the full year, Asia + Latin America net sales declined 1 percent to USD 1.71 billion, reflecting volume declines and the reporting period difference partially offset by benefits from net price realization and mix and favorable foreign currency exchange. Organic net sales declined 2 percent. Excluding the reporting period difference, organic net sales increased low single digits. Segment operating profit totalled USD 40 million compared to USD 84 million a year ago, driven by lower volume and input cost inflation, including currency-driven inflation on imported products.
Joint Venture Summary
Fourth-quarter net sales for Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ) each were down 2 percent in constant currency. Combined after-tax earnings from joint ventures were USD 21 million compared to USD 20 million a year ago, driven by favorable foreign currency exchange, partially offset by a USD 2 million after-tax restructuring charge at CPW.
For the full year, constant-currency net sales increased 1 percent for HDJ and essentially matched year-ago levels for CPW. After-tax earnings from joint ventures of USD 85 million were in line with a year ago.
Other Income Statement Items
Unallocated corporate items totalled USD 117 million net expense in fiscal 2018, compared to USD 190 million net expense in 2017. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totalled USD 90 million net expense this year compared to USD 118 million net expense a year ago.
Restructuring, impairment, and other exit costs totalled USD 166 million in fiscal 2018 compared to USD 183 million in 2017. This included USD 97 million of impairment charges recorded in the fourth quarter of fiscal 2018 related to the Yoki, Mountain High, and Immaculate Baking brand intangible assets, primarily driven by lower future sales and profitability projections for those businesses. An additional USD 25 million of restructuring and project-related charges were recorded in cost of sales this year compared to USD 85 million a year ago (please see Note 3 below for more information on these charges).
Net interest expense in fiscal 2018 totalled USD 374 million, up 27 percent from a year ago, primarily driven by financing related to the Blue Buffalo acquisition. The effective tax rate for fiscal 2018 was 2.7 percent, compared to 28.8 percent 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 25.7 percent in 2018 compared to 29.2 percent in 2017, driven by the lower U.S. federal blended statutory tax rate resulting from the TCJA.
Cash Flow Generation and Cash Returns
Fiscal 2018 cash provided by operating activities totalled USD 2.84 billion, up 18 percent from the prior year due to improvements in accounts payable and changes in income taxes payable, incentive accruals, and trade and advertising accruals. Capital investments totalled USD 623 million in fiscal 2018 compared to USD 684 million a year ago. Dividends paid essentially matched last year at USD 1.14 billion. General Mills repurchased approximately 11 million shares of common stock in fiscal 2018 for a total of USD 602 million. Average diluted shares outstanding declined 2 percent to 586 million.
Blue Buffalo Acquisition
On April 24, 2018, General Mills acquired Blue Buffalo, the leading brand in the fast-growing wholesome natural pet food category in the U.S., for an aggregate purchase price of USD 8.0 billion. The company financed the transaction with a combination of USD 6.0 billion in long-term debt, USD 1.0 billion in equity, and cash on hand. General Mills executed the equity financing by issuing 22.7 million shares of common stock on March 27, 2018.
The consolidated results of Blue Buffalo will be reported as a new Pet operating segment in future periods on a one-month lag. As a result, our fiscal 2018 financial results do not include Pet segment results.
Fiscal 2019 Outlook
«We expect the operating environment in fiscal 2019 to continue to be dynamic, requiring us to increase our agility while remaining laser-focused on delivering on our consumers’ expectations,» Harmening said. «Our fiscal 2019 targets reflect the investments we’re making to enhance our capabilities and accelerate our growth, as well as the impact of adding Blue Buffalo to our portfolio. These initiatives will drive strong returns over the long term and further advance us toward our goal of consistently delivering profitable growth and top-tier returns for our shareholders.»
General Mills outlined 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 2.7 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. This estimate includes a 4-cent headwind related to the Blue Buffalo acquisition, driven by the impact of purchase accounting.
