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General Mills: Reports Results for Fiscal 2019

Minneapolis / MN. (gm) General Mills Inc. reported results for the fourth quarter and full fiscal year ended May 26, 2019. Financial results for fiscal 2019 include contributions from Blue Buffalo Pet Products, Inc. («Blue Buffalo»), which was acquired on April 24, 2018.

«I’m pleased to say that we executed well, successfully transitioned Blue Buffalo into our portfolio, and delivered our financial commitments in fiscal 2019,» said General Mills Chairman and Chief Executive Officer Jeff Harmening. «We’ll look to improve our performance again in fiscal 2020, and we have plans in place to accelerate our organic sales growth while maintaining our strong margins and cash discipline.»

General Mills is pursuing its Consumer First strategy and executing against its global growth framework 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.

Fourth Quarter Results Summary

  • Net sales increased 7 percent to USD 4.16 billion and were up 9 percent in constant currency, driven primarily by the addition of Blue Buffalo. Organic net sales declined 1 percent, reflecting lower contributions from organic volume. Organic net sales declines in North America Retail and Europe + Australia segments were partially offset by growth in Convenience Stores + Foodservice and Asia + Latin America.
  • Gross margin declined 140 basis points to 35.1 percent of net sales. Adjusted gross margin, which excludes certain items affecting comparability, declined 50 basis points to 35.3 percent, driven by higher input costs.
  • Operating profit totaled USD 716 million, up 34 percent from last year due primarily to lower restructuring, impairment, and other exit costs and the addition of Blue Buffalo, partially offset by lower gross margin. Adjusted operating profit of USD 722 million increased 5 percent in constant currency, primarily driven by the addition of Blue Buffalo, partially offset by lower adjusted gross margin. Operating profit margin of 17.2 percent increased 340 basis points. Adjusted operating profit margin decreased 50 basis points to 17.3 percent.
  • Net earnings attributable to General Mills totaled USD 570 million compared to USD 354 million a year ago, reflecting higher operating profit and lower taxes and interest expense.
  • Diluted EPS of USD 0.94 was up 59 percent from the prior year. Adjusted diluted EPS totaled USD 0.83 in the fourth quarter, up 6 percent from the prior year in constant currency, driven primarily by a lower adjusted effective tax rate and higher adjusted operating profit, partially offset by higher interest expense and higher average diluted shares outstanding in the quarter.

Full Year Results Summary

  • Net sales increased 7 percent to USD 16.86 billion and were up 9 percent in constant currency, driven by the addition of Blue Buffalo. Organic net sales essentially matched year-ago levels, with 2 points of positive net price realization and mix offset by lower contributions from volume. Organic net sales growth in the Asia + Latin America and Convenience Stores + Foodservice segments was offset by declines in North America Retail and Europe + Australia.
  • Gross margin decreased 40 basis points to 34.1 percent of net sales. Adjusted gross margin was down 10 basis points to 34.4 percent.
  • Operating profit totaled USD 2.52 billion, up 4 percent from the prior year. Constant-currency adjusted operating profit increased 10 percent. Operating profit margin of 14.9 percent was down 50 basis points. Adjusted operating profit margin increased 30 basis points to 16.9 percent.
  • Net earnings attributable to General Mills totaled USD 1.75 billion.
  • Diluted EPS of USD 2.90 was 20 percent below prior-year levels, primarily driven by one-time benefits from U.S. tax reform in the prior year. Adjusted diluted EPS of USD 3.22 was up 4 percent on a constant-currency basis.

Operating Segment Results

Components of Fiscal 2019 Reported Net Sales Growth
Fourth Quarter Volume Price/Mix Foreign Exchange Reported Net Sales
North America Retail (2) pts (2 )%
Convenience Stores + Foodservice 2 pts 2 %
Europe + Australia (5) pts 2 pts (7) pts (10 )%
Asia + Latin America (4) pts 1 pt (6) pts (9 )%
Pet
Total 6 pts 3 pts (2) pts 7 %
Full Year
North America Retail (3) pts 2 pts (1) pt (2 )%
Convenience Stores + Foodservice (2) pts 4 pts 2 %
Europe + Australia (3) pts 2 pts (4) pts (5 )%
Asia + Latin America 1 pt 3 pts (7) pts (3 )%
Pet
Total 5 pts 4 pts (2) pts 7 %

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Components of Fiscal 2019 Organic Net Sales Growth
Fourth Quarter Organic Volume Organic Price/Mix Organic Net Sales Foreign Exchange Acquisitions + Divestitures Reported Net Sales
North America Retail (2) pts (2 )% (2 )%
Convenience Stores + Foodservice 2 pts 2 % 2 %
Europe + Australia (5) pts 2 pts (3 )% (7) pts (10 )%
Asia + Latin America 1 pt 1 % (6) pts (4) pts (9 )%
Pet
Total (1) pt (1 )% (2) pts 10 pts 7 %
Full Year
North America Retail (2) pts 1 pt (1 )% (1) pt (2 )%
Convenience Stores + Foodservice (2) pts 4 pts 2 % 2 %
Europe + Australia (3) pts 2 pts (1 )% (4) pts (5 )%
Asia + Latin America 3 pts 3 pts 6 % (7) pts (2) pts (3 )%
Pet
Total (2) pts 2 pts Flat (2) pts 9 pts 7 %

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Fiscal 2019 Segment Operating Profit Growth
Fourth Quarter % Change as Reported % Change in Constant Currency
North America Retail (3 )% (2 )%
Convenience Stores + Foodservice (1 )% (1 )%
Europe + Australia (27 )% (20 )%
Asia + Latin America 141 % 162 %
Pet
Total 13 % 14 %
Full Year
North America Retail 3 % 3 %
Convenience Stores + Foodservice 7 % 7 %
Europe + Australia (13 )% (8 )%
Asia + Latin America 83 % 71 %
Pet
Total 13 % 14 %

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North America Retail Segment

Fourth-quarter net sales for General Mills’ North America Retail segment were down 2 percent to USD 2.34 billion. Net sales were in line with last year for the U.S. Cereal, U.S. Yogurt, and U.S. Meals + Baking operating units and declined in U.S. Snacks and Canada. Organic net sales were also down 2 percent. Segment operating profit of USD 528 million was 3 percent below the prior-year result that grew 7 percent. Constant-currency segment operating profit was down 2 percent, driven primarily by lower net sales.

For the full year, North America Retail segment net sales were down 2 percent to USD 9.92 billion. Organic net sales declined 1 percent. In-market performance outpaced net sales results, as expected, with retail sales flat to last year in U.S. Nielsen-measured outlets and market share flat or growing in 7 of the company’s 10 largest U.S. categories. Full-year segment operating profit totaled USD 2.28 billion, up 3 percent from a year ago as reported and in constant currency due to benefits from cost savings initiatives and lower selling, general, + administrative (SG+A) expenses, partially offset by lower net sales and higher product costs, including input cost inflation.

Convenience Stores + Foodservice Segment

Fourth-quarter net sales for the Convenience Stores + Foodservice segment increased 2 percent to USD 519 million, driven by mid single-digit growth for the Focus 6 platforms, partially offset by declines on bakery flour. Organic net sales were also up 2 percent. Segment operating profit of USD 116 million was 1 percent below the year-ago result that grew 11 percent.

For the full year, Convenience Stores + Foodservice net sales increased 2 percent to USD 1.97 billion, driven by mid single-digit growth for the Focus 6 platforms. Organic net sales also increased 2 percent. Segment operating profit increased 7 percent to USD 420 million, primarily driven by benefits from cost savings initiatives and positive net price realization and mix, partially offset by higher product costs, including input cost inflation.

Europe + Australia Segment

Fourth-quarter net sales for the Europe + Australia segment declined 10 percent to USD 500 million, reflecting a difficult comparison to 14 percent net sales growth in the year-ago period. Organic net sales were down 3 percent. Sales declines reflected the continued challenging operating environment in France and slower trends for ice cream after high single-digit retail sales growth a year ago, partially offset by continued double-digit growth on snack bars. Segment operating profit of USD 42 million was down 27 percent as reported and down 20 percent in constant currency, driven by higher input costs, including currency-driven inflation on products imported into the U.K., and lower net sales, partially offset by lower SG+A expenses.

For the full year, Europe + Australia net sales declined 5 percent to USD 1.89 billion, driven by 4 points of unfavorable foreign currency exchange. Organic net sales were down 1 percent. Sales declines for the yogurt platform were partially offset by growth for snack bars and ice cream. Segment operating profit of USD 123 million declined 13 percent as reported and was down 8 percent in constant currency, reflecting higher input costs, including currency-driven inflation on products imported into the U.K., partially offset by lower SG+A expenses.

Asia + Latin America Segment

Fourth-quarter net sales for the Asia + Latin America segment declined 9 percent to USD 396 million, driven by 6 points of unfavorable foreign currency exchange and a 4-point headwind from the sale of La Salteña in Argentina and the sale of our China yogurt business to a new Yoplait franchisee. Organic net sales increased 1 percent over the prior-year period that saw double-digit growth after adjusting for a calendar reporting period change. Segment operating profit of USD 23 million was USD 13 million above the prior year, driven by lower input costs and lower SG+A expenses.

For the full year, Asia + Latin America net sales declined 3 percent to USD 1.65 billion, driven by 7 points of unfavorable foreign currency exchange and a 2-point headwind from divestitures. Organic net sales increased 6 percent. The snack bar and ice cream platforms led net sales growth for the segment. Segment operating profit of USD 72 million increased 83 percent as reported and 71 percent in constant currency, driven by organic net sales growth and lower SG+A expenses, partially offset by higher input costs.

Pet Segment

Fourth-quarter net sales for the Pet segment totaled USD 406 million. On a pro forma basis, Pet segment net sales increased 38 percent, driven by significant distribution expansion in the Food, Drug, and Mass channels and the difference in shipping days from the month of acquisition. Segment operating profit of USD 110 million increased 82 percent on a pro forma basis, driven by net sales growth and benefits from net price realization and mix.

For the full year, Pet net sales of USD 1.43 billion increased 11 percent on a pro forma basis, consistent with annual guidance of double-digit topline growth. Adjusting for the difference in shipping days from the month of acquisition, pro forma net sales growth increased high single digits, in line with retail sales growth. Segment operating profit totaled USD 268 million, down 11 percent on a pro forma basis, driven by the impact of purchase accounting including a USD 53 million one-time inventory adjustment and USD 13 million of intangible asset amortization. Excluding those charges, pro forma segment operating profit increased 11 percent, in line with annual guidance of double-digit operating profit growth.

Joint Venture Summary

Fourth-quarter net sales for Cereal Partners Worldwide (CPW) increased 1 percent in constant currency, driven by growth in the Asia, Middle East, and Africa and Europe regions, partially offset by declines in Latin America. Constant-currency net sales for Häagen-Dazs Japan (HDJ) declined 13 percent, reflecting seasonal innovation timing and declines on mini cups and crispy sandwich varieties. Combined after-tax earnings from joint ventures of USD 20 million were flat to last year in constant currency. For the full year, after-tax earnings from joint ventures totaled USD 72 million compared to USD 85 million a year ago, driven by our USD 11 million after-tax share of CPW restructuring charges as well as lower net sales and higher input costs for HDJ.

Other Income Statement Items

Full-year unallocated corporate items totaled USD 340 million net expense in fiscal 2019, compared to USD 206 million net expense a year ago. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totaled USD 303 million net expense this year compared to USD 179 million net expense last year, primarily driven by compensation and benefits expenses.

We recorded USD 30 million, net, in pre-tax losses on divestitures in fiscal 2019. Restructuring, impairment, and other exit costs totaled USD 275 million this year compared to USD 166 million a year ago. An additional USD 11 million of restructuring and project-related charges were recorded in cost of sales this year compared to USD 25 million a year ago.

Net interest expense in fiscal 2019 totaled USD 522 million compared to USD 374 million a year ago, primarily driven by financing related to the Blue Buffalo acquisition. The effective tax rate for fiscal 2019 was 17.7 percent compared to 2.7 percent last year. The adjusted effective tax rate was 21.8 percent in 2019 compared to 25.7 percent a year ago, primarily driven by the net benefits associated with the U.S. Tax Cuts and Jobs Act.

Cash Flow Generation and Cash Returns

Fiscal 2019 cash provided by operating activities totaled USD 2.81 billion compared to USD 2.84 billion last year. Capital investments totaled USD 538 million compared to USD 623 million a year ago. Full-year free cash flow conversion was 115 percent of adjusted after-tax earnings. Dividends paid totaled USD 1.18 billion. Average diluted shares outstanding increased 3 percent to 605 million.

Fiscal 2020 Outlook

«In fiscal 2020, our plans include continued strong innovation and investments in capabilities and brand building to accelerate our topline growth, efficiency initiatives to maintain our strong margins, and a disciplined focus on cash to further reduce our leverage,» Harmening said. «We remain confident that executing our Consumer First strategy and our Compete, Accelerate, and Reshape growth framework will drive sustainable, profitable growth and attractive long-term returns for our shareholders.» General Mills outlined its key full-year fiscal 2020 targets:

  • Organic net sales are expected to increase 1 to 2 percent. In addition, currency translation, the impact of divestitures executed in fiscal 2019, and contributions from the 53rd week in fiscal 2020 are collectively expected to increase reported net sales by approximately 1 to 2 percentage points.
  • Constant-currency adjusted operating profit is expected to increase 2 to 4 percent from the base of USD 2.86 billion reported in fiscal 2019. The benefit of the extra fiscal week will be reinvested in capabilities and brand-building initiatives to drive improvement in the company’s organic sales growth rate in 2020 and beyond.
  • Constant-currency adjusted diluted EPS are expected to increase 3 to 5 percent from the base of USD 3.22 earned in fiscal 2019.
  • The company expects free cash flow conversion of at least 95 percent of adjusted after-tax earnings.
  • Currency translation is expected to have an immaterial impact on fiscal 2020 adjusted operating profit and adjusted diluted EPS.