General Mills: Reports Fiscal 2020 First-Quarter Results

Minneapolis / MN. (gm) General Mills Inc. reported results for the first quarter ended August 25, 2019.

«We are making clear progress in becoming a nimbler, more consumer-connected General Mills,» said General Mills Chairman and Chief Executive Officer Jeff Harmening. «Our first-quarter net sales performance included encouraging improvement in North America Retail and strong growth in Pet, driven by good innovation and effective brand-building investment. We got off to a slower start in our other segments, and we’re taking actions to drive topline improvement for those segments and the company starting in the second quarter.

«On the bottom line, we delivered profit and earnings growth ahead of our expectations while continuing to invest in our brands and capabilities. We remain on track to deliver our fiscal 2020 goals, including accelerating our organic sales growth, maintaining our strong margins, and reducing our leverage.»

General Mills is pursuing its Consumer First strategy and executing against its global growth framework: 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. The company expects consistent topline growth generated by this growth framework, combined with margin expansion, disciplined cash conversion, and cash returns, will generate top-tier returns for General Mills shareholders over the long term.

First Quarter Results Summary

• Net sales declined 2 percent to USD 4.0 billion. Organic net sales were down 1 percent, reflecting lower organic volume, partially offset by positive organic net price realization and mix across all operating segments.
• Gross margin increased 190 basis points to 34.7 percent of net sales. Adjusted gross margin of 35.2 percent was 160 basis points above the prior year result that included a one-time purchase accounting inventory adjustment related to the Blue Buffalo acquisition.
• Operating profit totaled USD 662 million, up 10 percent from last year. Operating profit margin of 16.5 percent increased 180 basis points. Constant-currency adjusted operating profit increased 7 percent, driven by the purchase accounting impact in the prior year. Adjusted operating profit margin increased 130 basis points to 17.0 percent.
• Net earnings attributable to General Mills totaled USD 521 million, up 33 percent from a year ago, primarily reflecting higher operating profit, a lower effective tax rate, and lower net interest expense.
• Diluted EPS of USD 0.85 increased 31 percent from the prior year. Adjusted diluted EPS totaled USD 0.79 in the first quarter, up 13 percent from the prior year in constant currency, driven primarily by higher adjusted operating profit, lower net interest expense, a lower adjusted effective tax rate, and higher non-service benefit plan income, partially offset by higher average diluted shares outstanding.

Operating Segment Results

Note: Tables may not foot due to rounding.

Components of Fiscal 2020 Reported Net Sales Growth

First Quarter		Volume		Price/Mix		Foreign Exchange		Reported Net Sales
North America Retail		(1) pt		1 pt		–		Flat
Pet		1 pt		7 pts		–		7%
Convenience Stores + Foodservice		(6) pts		2 pts		–		(4)%
Europe + Australia		(7) pts		2 pts		(4) pts		(9)%
Asia + Latin America		(11) pts		3 pts		(2) pts		(10)%
Total		(4) pts		3 pts		(1) pt		(2)%

.

Components of Fiscal 2020 Organic Net Sales Growth

First Quarter

Organic Volume

Organic Price/Mix

Organic Net Sales

Foreign Exchange

Acquisitions + Divestitures

Reported Net Sales

North America Retail

(1) pt

1 pt

Flat

–

–

Flat

Pet

1 pt

7 pts

7%

–

–

7%

Convenience Stores + Foodservice

(6) pts

2 pts

(4)%

–

–

(4)%

Europe + Australia

(7) pts

2 pts

(5)%

(4) pts

–

(9)%

Asia + Latin America

(5) pts

1 pt

(3)%

(2) pts

(5) pts

(10)%

Total

(4) pts

3 pts

(1)%

(1) pt

–

(2)%

.

Fiscal 2020 Segment Operating Profit Growth

First Quarter		% Change as Reported		% Change in Constant Currency
North America Retail		2%		2%
Pet		NM		NM
Convenience Stores + Foodservice		(6)%		(6)%
Europe + Australia		(20)%		(15)%
Asia + Latin America		(17)%		(11)%
Total		9%		9%

.

North America Retail Segment

First-quarter net sales for General Mills’ North America Retail segment totaled USD 2.38 billion, essentially matching year-ago levels, with benefits from net price realization and mix offset by lower contributions from volume. The segment maintained momentum in the U.S. Cereal operating unit, where net sales were up 1 percent, while improving trends in U.S. Yogurt and U.S. Snacks, where net sales were flat and down 1 percent, respectively. Net sales in the U.S. Meals + Baking unit declined 1 percent, and constant-currency net sales in Canada were also down 1 percent. First-quarter retail sales were flat in U.S. Nielsen-measured outlets. Segment operating profit of USD 560 million increased 2 percent, driven by HMM cost savings and benefits from positive net price realization and mix, partially offset by input cost inflation and higher brand-building investments.

Pet Segment

First-quarter net sales for the Pet segment increased 7 percent to USD 368 million, driven by positive contributions from volume growth and positive net price realization and mix, partially offset by the comparison to an extra week of results in last year’s first quarter related to acquisition timing. Excluding the timing difference, net sales increased in the mid teens. Pet parent takeaway accelerated in the quarter, with all-channel retail sales up low double digits. Segment operating profit totaled USD 81 million compared to USD 14 million in the prior year, driven primarily by a USD 53 million one-time purchase accounting inventory adjustment in the year-ago period as well as higher net sales.

Convenience Stores + Foodservice Segment

First-quarter net sales for the Convenience Stores + Foodservice segment declined 4 percent to USD 445 million, driven by lower bakery flour volume and unfavorable index pricing, partially offset by low single-digit growth for the Focus 6 platforms including strong performance on cereal and frozen baked goods. Segment operating profit of USD 91 million was 6 percent below the year-ago result that grew 14 percent.

Europe + Australia Segment

First-quarter net sales for the Europe + Australia segment declined 9 percent to USD 454 million, driven by lower volume and unfavorable foreign currency exchange, partially offset by benefits from net price realization and mix. Organic net sales were down 5 percent, driven largely by a continued challenging retail environment in France for yogurt and ice cream, as well as differences in merchandising phasing. Segment operating profit totaled USD 28 million compared to USD 34 million a year ago. On a constant-currency basis, segment operating profit was down 15 percent, driven primarily by a timing difference in brand-building investment and lower volume, partially offset by benefits from net price realization and mix.

Asia + Latin America Segment

First-quarter net sales for the Asia + Latin America segment declined 10 percent to USD 360 million, driven by a 5-point headwind from divestitures executed in fiscal 2019, lower volume, and unfavorable foreign currency exchange, partially offset by benefits from net price realization and mix. Organic net sales were down 3 percent, driven by retailer inventory reductions in Brazil, distribution network changes in India, and lower volumes in China. First-quarter net sales results also compared against the strongest quarter of growth last year, when organic net sales were up 8 percent. Segment operating profit totaled USD 10 million compared to USD 12 million a year ago.

Joint Venture Summary

Combined after-tax earnings from joint ventures totaled USD 22 million compared to USD 18 million a year ago, driven primarily by our USD 5 million after-tax share of a restructuring charge at CPW in the year-ago period. First-quarter net sales increased 2 percent in constant currency for Cereal Partners Worldwide (CPW), driven by growth in the UK + Australia, Latin America, and Asia, Middle East, and Africa regions, partially offset by declines in the continental Europe region. Constant-currency net sales for Häagen-Dazs Japan (HDJ) increased 6 percent, driven largely by growth in core mini-cups.

Other Income Statement Items

Unallocated corporate items totaled USD 99 million net expense in the first quarter of fiscal 2020, compared to USD 106 million net expense a year ago. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totaled USD 88 million net expense this year compared to USD 65 million net expense last year.

Restructuring, impairment, and other exit costs totaled USD 8 million in the quarter compared to a USD 1 million net recovery a year ago. An additional USD 6 million of restructuring and project-related charges were recorded in cost of sales this year compared to USD 1 million a year ago.

Net interest expense totaled USD 119 million in the first quarter compared to USD 134 million a year ago, driven by lower average debt balances and rates. The effective tax rate in the quarter was 11.7 percent compared to 22.6 percent last year (please see Note 5 below for more information on our effective tax rate). The adjusted effective tax rate was 20.9 percent compared to 22.7 percent a year ago.

Cash Flow Generation and Cash Returns

Cash provided by operating activities totaled USD 572 million in the first quarter of fiscal 2020, down 6 percent from the prior year, primarily driven by changes in inventory and deferred income taxes, partially offset by higher net earnings. Capital investments totaled USD 70 million compared to USD 113 million a year ago. Dividends paid totaled USD 298 million. Average diluted shares outstanding for the first quarter increased 1 percent to 612 million.

Fiscal 2020 Outlook

General Mills reaffirmed its key full-year fiscal 2020 targets:

• Organic net sales are expected to increase 1 to 2 percent. The combination of currency translation, the impact of divestitures executed in fiscal 2019, and contributions from the 53rd week in fiscal 2020 are now expected to increase reported net sales by approximately 1 percentage point.
• 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.
• 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.