Minneapolis / MN. (gm) General Mills Inc. reported results for the second quarter ended November 27, 2016. «Although we posted disappointing net sales performance in the second quarter, we delivered good growth in adjusted diluted EPS, driven by significant expansion in our adjusted operating profit margin», said General Mills Chairman and Chief Executive Officer Ken Powell. «Our organic sales declines reflect the actions we’ve taken to optimize our spending and prioritize profitable volume, as well as weakening food-industry trends in the U.S. We’re making targeted adjustments to our plans in the second half to improve our topline performance while still delivering our margin expansion and EPS growth commitments. We remain confident that our strategy of investing behind Consumer First ideas – while driving strong margin expansion – will generate long-term sustainable growth, robust cash flow, and top-tier returns for our shareholders».
Second Quarter Results Summary
- Reported net sales declined 7 percent to 4.1 billion USD due to lower organic net sales and the divestiture of the North American Green Giant business. Organic net sales declined 4 percent, with volume reductions in the U.S. Retail and International segments partially offset by benefits from positive net price realization and mix.
- Gross margin increased 220 basis points to 37.0 percent of net sales, reflecting benefits from cost savings initiatives, favorable mark-to-market effects, and lower restructuring expenses. Adjusted gross margin, which excludes certain items affecting comparability, increased 130 basis points to 36.8 percent, driven by cost savings efforts more than offsetting benign input cost inflation.
- Operating profit totalled 769 million USD, down 15 percent from year-ago levels that included a gain from the divestiture of Green Giant in North America. Operating profit margin of 18.7 percent was down 180 basis points. Adjusted operating profit margin increased 160 basis points to 19.6 percent, reflecting higher gross margins and a 20 percent reduction in media and advertising expense.
- Total segment operating profit of 830 million USD was down 1 percent. Total segment operating profit essentially matched year-ago results in constant currency.
- Net earnings attributable to General Mills totalled 482 million USD. Diluted EPS were 0.80 USD, down 8 percent driven by last year’s gain from the divestiture of Green Giant in North America.
- Adjusted diluted EPS, which excludes certain items affecting comparability of results, totalled 0.85 USD in the second quarter, up 4 percent from the prior year. Constant-currency adjusted diluted EPS increased 5 percent.
Six Month Results Summary
- Reported net sales declined 7 percent to 8.0 billion USD and organic net sales declined 4 percent.
- Gross margin increased 70 basis points to 36.6 percent of net sales. Adjusted gross margin increased 50 basis points to 37.1 percent.
- Operating profit totalled 1.4 billion USD, down 11 percent from the prior year. Operating profit margin of 17.6 percent was down 80 basis points. Adjusted operating profit margin increased 120 basis points to 19.4 percent.
- Total segment operating profit of 1.6 billion USD was down 3 percent. On a constant-currency basis, total segment operating profit declined 2 percent.
- Net earnings attributable to General Mills totalled 891 million USD. Diluted EPS were 1.47 USD, down 6 percent from a year ago.
- Adjusted diluted EPS increased 1 percent to 1.63 USD. Constant-currency adjusted diluted EPS were up 2 percent.
Operating Segment Results
Components of Reported Net Sales Growth
| Second Quarter | Volume | Price/Mix | Foreign Exchange | Reported Net Sales |
| U.S. Retail | (14) pts | 5 pts | – | (9)% |
| International | (3) pts | – | (2) pts | (5)% |
| Convenience Stores + Foodservice | – | (4) pts | – | (4)% |
| Total | (10) pts | 3 pts | – | (7)% |
| Six Months | ||||
| U.S. Retail | (13) pts | 5 pts | – | (8)% |
| International | (3) pts | 1 pt | (3) pts | (5)% |
| Convenience Stores + Foodservice | (1) pt | (4) pts | – | (5)% |
| Total | (9) pts | 3 pts | (1) pt | (7)% |
.
Components of Organic Net Sales Growth
| Second Quarter | Organic Volume | Organic Price/Mix | Organic Net Sales | Foreign Exchange | Acquisitions + Divestitures | Reported Net Sales |
| U.S. Retail | (10) pts | 4 pts | (6)% | – | (3) pts | (9)% |
| International | (3) pts | 2 pts | (1)% | (2) pts | (2) pts | (5)% |
| Convenience Stores + Foodservice | – | (4) pts | (4)% | – | – | (4)% |
| Total | (7) pts | 3 pts | (4)% | – | (3) pts | (7)% |
| Six Months | ||||||
| U.S. Retail | (9) pts | 4 pts | (5)% | – | (3) pts | (8)% |
| International | (3) pts | 2 pts | (1)% | (3) pts | (1) pt | (5)% |
| Convenience Stores + Foodservice | (1) pt | (4) pts | (5)% | – | – | (5)% |
| Total | (6) pts | 2 pts | (4)% | (1) pt | (2) pts | (7)% |
.
Segment Operating Profit Growth
| Second Quarter | Change as Reported | Change in Constant Currency |
| U.S. Retail | 2% | |
| International | (22)% | (18)% |
| Convenience Stores + Foodservice | 6% | |
| Total | (1)% | Flat |
| Six Months | ||
| U.S. Retail | (2)% | |
| International | (19)% | (15)% |
| Convenience Stores + Foodservice | 11% | |
| Total | (3)% | (2)% |
.
U.S. Retail Segment
Second-quarter net sales for General Mills’ U.S. Retail segment totalled 2.52 billion USD, down 9 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 6 percent. Increases in Annie’sand Lärabar natural and organic products, Old El Paso Mexican products, and Totino’s frozen hot snacks were offset by declines in Yoplait yoghurt, Pillsbury refrigerated dough, and Progresso soup. Segment operating profit increased 2 percent, primarily driven by benefits from cost savings initiatives and a decrease in media and advertising expense.
International Segment
Second-quarter net sales for General Mills’ International segment totalled 1.10 billion USD, down 5 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 in the Asia/Pacificregion were flat, with remaining regions posting net sales declines. Organic net sales declined 1 percent. Strong performance on Häagen-Dazs ice cream in Europe, Wanchai Ferry frozen meals and Yoplait yoghurt in China, and Old El Paso Mexican products and Nature Valley grain snacks in Canada were offset by declines in Yoplait yoghurt in Europe and the impact of snacks restructuring in China. International segment operating profit declined 22 percent as reported and 18 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
Second-quarter net sales for the Convenience Stores and Foodservice segment declined 4 percent to 488 million USD, with increases for the yoghurt, mixes, and cereal platforms offset by market index pricing on bakery flour. Organic net sales were also down 4 percent. Segment operating profit increased 6 percent in the quarter, reflecting benefit from cost savings initiatives, 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 totalled 30 million USD, up 28 percent from the prior year driven by volume increases for both CPW and HDJ. On a constant-currency basis, after-tax earnings from joint ventures increased 27 percent. Net sales for CPW grew 3 percent in constant currency, and constant-currency net sales for HDJ increased 21 percent.
Other Income Statement Items
Unallocated corporate items totalled 19 million USD net expense in the second quarter of fiscal 2017, compared to 72 million USD net expense in 2016. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totalled 24 million USD net expense in this year’s second quarter compared to 42 million USD net expense a year ago.
Restructuring, impairment, and other exit costs totalled 29 million USD in 2017 compared to 61 million USD in 2016. An additional 24 million USD of restructuring and project-related charges were recorded in cost of sales this year compared to 38 million USD a year ago.
Net interest expense totalled 76 million USD in this year’s second quarter, compared to 74 million USD a year ago. The effective tax rate was 32.8 percent in the second quarter, compared to 37.4 percent last year. Excluding items affecting comparability, the adjusted effective tax rate was 32.4 percent compared to 32.3 percent a year ago.
Cash Flow Generation and Cash Returns
Cash provided by operating activities totalled 988 million USD through six months, down 15 percent from the prior year due to changes in trade and advertising accruals and changes in income taxes payable. Capital investments through the first six months totalled 318 million USD. Dividends paid year-to-date increased 8 percent to 576 million USD. During the first half of 2017, General Mills repurchased 20.5 million shares of common stock for a total of 1.35 billion USD. Average diluted shares outstanding for the first half declined 1 percent to 606 million.
Outlook
General Mills updated its key full-year fiscal 2017 targets as follows:
- Organic net sales growth is now expected to decline between 3 and 4 percent, below the previous range of flat to down 2 percent.
- Constant-currency total segment operating profit is now expected to increase 2 to 4 percent, reduced from previous guidance of 6 to 8 percent growth due to lower sales expectations.
- The company is maintaining its targets for adjusted operating profit margin expansion of approximately 150 basis points and constant-currency adjusted diluted EPS growth of 6 to 8 percent from the base of 2.92 USD earned in fiscal 2016. The adjusted effective tax rate is now expected to finish approximately in line with the year-ago rate of 29.8 percent, and average diluted shares outstanding are now expected to decline 2 percent for the full year; these estimates are changes from previous guidance of a 100 basis point increase and a 1 to 2 percent reduction, respectively.
- Currency translation is now expected to reduce full-year adjusted diluted EPS by 1 cent in 2017.
- The company now expects free cash flow to increase at a high single-digit rate, up from previous guidance of mid single-digit growth driven by accelerated progress on core working capital management.
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