General Mills: reports fiscal 2017 first-quarter results

Minneapolis / MN. (gm) General Mills Inc. reported results for the first quarter ended August 28, 2016. «Our first-quarter profit margin expansion and EPS results reflect continued good progress on our productivity and cost-savings initiatives», said General Mills Chairman and Chief Executive Officer Ken Powell. «However, our net sales performance did not meet our expectations due to the challenging macro environment, a difficult year-over-year comparison, and a slower start to the year on certain businesses. We are taking actions to improve our net sales performance going forward, leveraging our Consumer First focus. At the same time, we have a number of encouraging examples across our global portfolio where our efforts to adapt to evolving consumer interests are driving positive results».

First Quarter Results Summary

• Reported net sales declined 7 percent to 3.9 billion USD due to lower organic net sales, the divestiture of the North American Green Giant business, and the impact of foreign exchange. Organic net sales declined 4 percent, with increases in U.S. natural and organic brands and emerging markets more than offset by declines in Foundation businesses and U.S. Yogurt.
• Gross margin decreased from 36.9 percent to 36.3 percent of net sales. Adjusted gross margin, which excludes mark-to-market effects and certain other items affecting comparability, decreased 30 basis points from last year’s result that was up 290 basis points.
• Operating profit totalled 646 million USD, down 6 percent compared to the prior year. Operating profit margin increased 30 basis points to 16.5 percent of net sales. Adjusted operating profit margin increased 80 basis points to 19.2 percent of net sales.
• Total segment operating profit of 787 million USD was down 5 percent. Total segment operating profit was down 4 percent in constant currency, reflecting lower net sales.
• Net earnings attributable to General Mills totalled 409 million USD and diluted earnings per share (EPS) were 0.67 USD, down 3 percent from 0.69 USD a year ago.
• Adjusted diluted EPS, which excludes certain items affecting comparability of results, totalled 0.78 USD in the first quarter, down 1 percent from the prior year. Constant-currency adjusted diluted EPS were also down 1 percent.

U.S. Retail Segment

First-quarter net sales for General Mills’ U.S. Retail segment totalled 2.33 billion USD, down 8 percent from the prior year with an increase in the Snacks operating unit more than offset by declines in the other units. Organic net sales declined 5 percent. Annie’s and Lärabar natural and organic products, Nature Valley cereals, and Old El Paso Mexican products posted particularly strong results in the quarter, offset by declines in Yoplait yoghurt and Progresso soup. Segment operating profit declined 6 percent from the year-ago period that saw a 38 percent profit increase.

International Segment

First-quarter net sales for General Mills’ International segment totalled 1.13 billion USD, down 6 percent from the prior year driven primarily by foreign exchange headwinds and the divestiture of Green Giant in Canada. On a constant-currency basis, net sales increases in the Latin America and Asia/Pacific regions were offset by declines in Europe and Canada. Organic net sales declined 1 percent from year-ago levels that increased 5 percent. Products contributing particularly strong results in the quarter included Yoplait yoghurt and Wanchai Ferry frozen meals in China, Old El Paso Mexican products in Canada and Yoki snacks in Brazil, offset by declines in Europe on Häagen-Dazs ice cream and Yoplait yoghurt. International segment operating profit declined 14 percent as reported and 11 percent in constant currency, reflecting currency-driven inflation on products imported into Canada and the U.K., as well as the Green Giant divestiture.

Convenience Stores and Foodservice Segment

First-quarter net sales for the Convenience Stores and Foodservice segment declined 7 percent to 446 million USD, primarily due to market index pricing on bakery flour, partially offset by increases for the yoghurt, biscuits, and cereal platforms. Organic net sales were also down 7 percent. Segment operating profit increased 16 percent in the quarter, reflecting lower input costs and higher grain merchandising earnings.

Joint Venture Summary

Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ) joint ventures were 24 million USD compared to 26 million USD a year ago. On a constant-currency basis, after-tax earnings from joint ventures declined 10 percent. Net sales for CPW grew 1 percent in constant currency, and constant-currency net sales for HDJ essentially matched year-ago results that were up 9 percent.

Other Income Statement Items

Unallocated corporate items totalled 82 million USD net expense in the first quarter of fiscal 2017, compared to 83 million USD net expense in 2016. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totalled 37 million USD net expense this year compared to 51 million USD net expense a year ago.

Restructuring, impairment, and other exit costs totalled 59 million USD in 2017 compared to 60 million USD in 2016. An additional 27 million USD of restructuring and project-related charges were recorded in cost of sales this year compared to 35 million USD a year ago (please see Note 3 below for more information on these charges).

Net interest expense totalled 74 million USD in this year’s first quarter, compared to 75 million USD a year ago. The effective tax rate was 30.9 percent in the first quarter, compared to 32.7 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 of 31.4 percent was below the rate of 32.3 percent a year ago, driven by discrete state tax benefits and favorable impacts of U.S. federal legislation passed in fiscal 2016.

Cash Flow Generation and Cash Returns

Cash provided by operating activities totalled 288 million USD, down 33 percent from the prior year primarily due to the timing of accounts payable, changes in trade and advertising accruals, and changes in income taxes payable. Capital investments in the first quarter totalled 154 million USD. General Mills paid 291 million USD in dividends, an increase of 9 percent over last year’s first quarter. The company repurchased 5.6 million shares of common stock for a total of 400 million USD. Average diluted shares outstanding for the first quarter declined 1 percent to 612 million.

Outlook

Powell said, «We expect our organic net sales performance will improve over the remainder of the year as key Consumer First initiatives gain traction and as our prior-year comparisons ease. At the same time, our commitment to our Growth and Foundation portfolio segmentation – and our progress on Holistic Margin Management and our other cost savings initiatives – gives us good visibility to achieving our previously announced profit goals for fiscal 2017 as well as our target of 20 percent adjusted operating profit margin by fiscal 2018». General Mills reiterated its key fiscal 2017 targets, including:

• Organic net sales growth ranging from flat to down 2 percent;
• Constant-currency total segment operating profit increasing 6 to 8 percent;
• Adjusted operating profit margin increasing approximately 150 basis points; and
• Constant-currency adjusted diluted EPS growing 6 to 8 percent from the base of 2.92 USD earned in fiscal 2016. At current exchange rates, the company estimates a 2 cent headwind from currency translation in 2017.