16 July 2024
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General Mills: Reports Q3 Fiscal 2020 Results

Minneapolis / MN. (gm) General Mills Inc. reported results for the third quarter ended February 23, 2020. «We began fiscal 2020 with three key priorities: accelerate our organic sales growth, maintain our strong margins, and reduce our leverage,» said General Mills Chairman and Chief Executive Officer Jeff Harmening. «Our focus and execution in a dynamic environment this year have kept us on track to achieve those goals. Our third-quarter results were broadly in line with our expectations, except for the negative impact in Asia of the Covid-19 virus outbreak.

«During the rapidly evolving situation related to Covid-19, our number one objective continues to be the health and safety of our consumers, employees, and other stakeholders. General Mills plays a critical role in making food to meet the needs of our consumers, and I’m proud of the way we’ve partnered with our retail customers in recent weeks to service consumers’ increased demand for food at home during this unique time. Looking forward, we’ll remain agile to adapt to changing demand patterns around the world as circumstances with Covid-19 continue to develop.»

Third Quarter Results Summary

  • Net sales of USD 4.2 billion were flat to last year. Organic net sales were also flat to last year, with strong growth for the Pet segment largely offset by declines in North America Retail and Convenience Stores + Foodservice. A modest decline in organic volume was offset by favorable organic net price realization and mix. Third-quarter net sales results versus the prior year included a 50 basis-point headwind from lower Häagen-Dazs net sales in Asia in February, driven by the impact of the Covid-19 virus outbreak on consumer traffic in Häagen-Dazs shops and foodservice outlets.
  • Gross margin declined 80 basis points to 33.6 percent of net sales. Adjusted gross margin of 33.9 percent was 30 basis points below the prior year, driven by input cost inflation and higher other supply chain costs, partially offset by Holistic Margin Management (HMM) cost savings and favorable net price realization and mix.
  • Operating profit totaled USD 651 million, essentially in line with the prior year. Operating profit margin of 15.6 percent increased 10 basis points. Adjusted operating profit of USD 675 million was down 8 percent in constant currency, primarily driven by higher selling, general, and administrative (SG+A) expenses, including higher media investment. Lower contributions from ice cream net sales in Asia in February reduced third-quarter adjusted operating profit results versus the prior year by an estimated 150 basis points. Adjusted operating profit margin decreased 130 basis points to 16.1 percent.
  • Net earnings attributable to General Mills totaled USD 454 million, up 2 percent from a year ago.
  • Diluted EPS of USD 0.74 essentially matched prior-year results. Adjusted diluted EPS of USD 0.77 were down 6 percent from the prior year in constant currency, driven primarily by lower adjusted operating profit, a higher adjusted effective tax rate, and higher average diluted shares outstanding, partially offset by lower net interest expense and higher non-service benefit plan income. Lower contributions from ice cream net sales in Asia in February reduced third-quarter adjusted diluted EPS results versus the prior year by an estimated 150 basis points.

Nine Month Results Summary

  • Net sales declined 1 percent to USD 12.6 billion. Organic net sales essentially matched year-ago levels, reflecting positive organic net price realization and mix offset by lower organic volume.
  • Gross margin increased 80 basis points to 34.6 percent of net sales. Adjusted gross margin of 34.8 percent was 70 basis points above the prior year, driven primarily by favorable net price realization and mix and last year’s one-time purchase accounting inventory adjustment related to the Blue Buffalo acquisition, partially offset by higher input costs.
  • Operating profit of USD 2.1 billion increased 18 percent from the prior year.
  • Operating profit margin of 16.9 percent was up 270 basis points. Constant-currency adjusted operating profit increased 2 percent, driven by higher adjusted gross margin, partially offset by higher SG+A expenses including higher media investment. Adjusted operating profit margin increased 40 basis points to 17.2 percent.
  • Net earnings attributable to General Mills totaled USD 1.6 billion.
  • Diluted EPS of USD 2.54 was 30 percent above prior-year levels. Adjusted diluted EPS of USD 2.51 was up 5 percent on a constant-currency basis.

Operating Segment Results

Note: Tables may not foot due to rounding.

Components of Fiscal 2020 Reported Net Sales Growth

Third Quarter Volume Price/Mix Foreign Exchange Reported Net Sales
North America Retail — (1) pt — (1)%
Pet 6 pts 5 pts — 11%
Convenience Stores + Foodservice (2) pts 1 pt — (2)%
Europe + Australia (1) pt — (1) pt (2)%
Asia + Latin America (2) pts — (3) pts (5)%
Total (1) pt 1 pt — Flat
Nine Months
North America Retail — — — Flat
Pet 6 pts 5 pts — 11%
Convenience Stores + Foodservice (2) pts — — (2)%
Europe + Australia (4) pts 1 pt (3) pts (6)%
Asia + Latin America (6) pts 2 pts (2) pts (6)%
Total (1) pt 1 pt (1) pt (1)%

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Components of Fiscal 2020 Organic Net Sales Growth

Third Quarter Organic Volume Organic Price/Mix Organic Net Sales Foreign Exchange Acquisitions + Divestitures Reported Net Sales
North America Retail — (1) pt (1)% — — (1)%
Pet 6 pts 5 pts 11% — — 11%
Convenience Stores + Foodservice (2) pts 1 pt (2)% — — (2)%
Europe + Australia (1) pt — (1)% (1) pt — (2)%
Asia + Latin America 1 pt (1) pt Flat (3) pts (2) pts (5)%
Total — 1 pt Flat — — Flat
Nine Months
North America Retail — — Flat — — Flat
Pet 6 pts 5 pts 11% — — 11%
Convenience Stores + Foodservice (2) pts — (2)% — — (2)%
Europe + Australia (4) pts 1 pt (3)% (3) pts — (6)%
Asia + Latin America (1) pt 1 pt (1)% (2) pts (4) pts (6)%
Total (1) pt 1 pt Flat (1) pt — (1)%

.

Fiscal 2020 Segment Operating Profit Growth

Third Quarter Change as Reported Change in Constant Currency
North America Retail (9)% (9)%
Pet 29% 29%
Convenience Stores + Foodservice (5)% (5)%
Europe + Australia (9)% (11)%
Asia + Latin America (58)% (64)%
Total (6)% (6)%
Nine Months
North America Retail (1)% (1)%
Pet 62% 62%
Convenience Stores + Foodservice (2)% (2)%
Europe + Australia Flat 3%
Asia + Latin America (14)% (13)%
Total 3% 3%

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North America Retail Segment

Third-quarter net sales for General Mills’ North America Retail segment totaled USD 2.50 billion, down 1 percent from the prior year. Net sales were down 2 percent in the U.S. Meals + Baking operating unit and down 1 percent each in U.S. Cereal, U.S. Snacks, and U.S. Yogurt. Canada operating unit net sales were up 6 percent as reported and up 5 percent in constant currency. Segment operating profit of USD 532 million was 9 percent below year-ago results that increased 12 percent, driven primarily by higher media expenses, unfavorable net price realization and mix, and higher input costs.

Through nine months, North America Retail segment net sales totaled USD 7.55 billion, essentially matching year-ago levels. Segment operating profit totaled USD 1.73 billion, down 1 percent from a year ago due primarily to higher SG+A expenses, including higher media expense.

Pet Segment

Third-quarter net sales for the Pet segment increased 11 percent to USD 384 million, driven by positive contributions from volume growth and positive net price realization and mix. Net sales performance was led by double-digit growth on BLUE’s two largest product lines: Life Protection Formula and Wilderness. Segment operating profit increased 29 percent to USD 94 million, driven primarily by higher net sales, partially offset by higher media expense.

Through nine months, Pet segment net sales increased 11 percent to USD 1.14 billion, driven by positive contributions from volume growth and positive net price realization and mix. All-channel retail sales were up double digits in the first nine months of the year. Segment operating profit of USD 256 million was up 62 percent, driven primarily by a USD 53 million one-time purchase accounting inventory adjustment in the year-ago period, as well as favorable net price realization and mix.

Convenience Stores + Foodservice Segment

Third-quarter net sales for the Convenience Stores + Foodservice segment declined 2 percent to USD 465 million, driven by declines on non-Focus 6 products including flour and mixes, partially offset by low-single digit growth for the Focus 6 platforms including cereal, frozen baked goods, and yogurt. Segment operating profit of USD 92 million was down 5 percent, primarily driven by higher input costs.

Through nine months, Convenience Stores + Foodservice net sales decreased 2 percent to USD 1.42 billion, due primarily to lower bakery flour volume and unfavorable index pricing, partially offset by low-single digit growth for the Focus 6 platforms. Segment operating profit of USD 298 million was down 2 percent, primarily driven by lower net sales.

Europe + Australia Segment

Third-quarter net sales for the Europe + Australia segment declined 2 percent to USD 422 million, including 1 point of unfavorable foreign currency exchange. Organic net sales were down 1 percent. Net sales declines in Yoplait yogurt and Häagen-Dazs ice cream were partially offset by growth for Nature Valley and Fibre One snack bars and Old El Paso Mexican food. Segment operating profit of USD 22 million was down 9 percent as reported and down 11 percent in constant currency, driven primarily by higher input costs, partially offset by lower SG+A expenses.

Through nine months, Europe + Australia net sales decreased 6 percent to USD 1.31 billion, including 3 points of unfavorable foreign currency exchange. Organic net sales decreased 3 percent, with lower contributions from organic volume partially offset by positive organic net price realization and mix. Net sales declines in yogurt and ice cream were partially offset by growth for snack bars and Mexican food. Segment operating profit of USD 81 million was flat as reported and was up 3 percent in constant currency, reflecting lower SG+A expenses and favorable net price realization and mix, partially offset by lower volume and higher input costs.

Asia + Latin America Segment

Third-quarter net sales for the Asia + Latin America segment declined 5 percent to USD 408 million, driven by 3 points of unfavorable foreign currency exchange and a 2-point headwind from divestitures executed in fiscal 2019. Organic net sales essentially matched year-ago results, with growth in Latin America offset by declines in Asia. Third-quarter segment net sales growth included a 5-point headwind from lower Häagen-Dazs ice cream net sales in Asia in February, driven by the impact of the Covid-19 virus outbreak on consumer traffic in Häagen-Dazs shops and foodservice outlets. Segment operating profit of USD 8 million was down USD 11 million in the quarter, driven by higher SG+A expenses and lower ice cream net sales in Asia in February, partially offset by higher net sales in Latin America.

Through nine months, Asia + Latin America net sales declined 6 percent to USD 1.18 billion, driven by a 4-point headwind from divestitures executed in fiscal 2019 and 2 points of unfavorable foreign currency exchange. Organic net sales were down 1 percent, with declines in Asia partially offset by growth in Latin America. Nine-month segment net sales growth included a 2-point headwind from lower ice cream net sales in Asia in February. Segment operating profit of USD 43 million was down 14 percent as reported and down 13 percent in constant currency, driven by higher input costs and the impact of lower contributions from ice cream net sales in Asia in February, partially offset by favorable net price realization and mix and lower SG+A expenses.

Joint Venture Summary

Third-quarter net sales for Cereal Partners Worldwide (CPW) increased 1 percent in constant currency, and constant-currency net sales for Häagen-Dazs Japan (HDJ) were down 5 percent. Combined after-tax earnings from joint ventures were USD 11 million compared to USD 12 million last year. Through nine months, after-tax earnings from joint ventures totaled USD 58 million compared to USD 52 million a year ago, driven primarily by General Mills’ share of lower restructuring charges at CPW.

Other Income Statement Items

Unallocated corporate items totaled USD 92 million net expense in the third quarter of fiscal 2020 compared to USD 49 million net expense a year ago. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totaled USD 73 million net expense this year compared to USD 65 million net expense last year.

Restructuring, impairment, and other exit costs totaled USD 6 million in the third quarter compared to USD 60 million in the prior year (please see Note 3 below for more information on these charges).

Net interest expense totaled USD 110 million in the third quarter compared to USD 131 million a year ago, driven by lower average debt balances and lower rates. The effective tax rate in the quarter was 20.7 percent compared to 17.7 percent last year (please see Note 6 below for more information on our effective tax rate). The third-quarter adjusted effective tax rate was 21.0 percent compared to 19.9 percent a year ago, primarily driven by discrete tax benefits in the prior year.

Cash Flow Generation and Cash Returns

Cash provided by operating activities totaled USD 2.16 billion through nine months of fiscal 2020, up 7 percent from the prior year, primarily driven by higher net earnings, partially offset by changes in non-cash restructuring, impairment, and other exit costs and deferred income taxes. Capital investments totaled USD 269 million. The company reduced debt by USD 862 million and paid USD 895 million of dividends in the first nine months of the year. Average diluted shares outstanding through nine months increased 1 percent to 612 million.

Fiscal 2020 Outlook

For the fourth quarter of fiscal 2020, General Mills expects to see a step up in organic net sales growth, driven in part by an extra month of results for the Pet segment as the company aligns that business to the General Mills fiscal year end. Fourth-quarter reported net sales will also benefit from a 53rd week.

The impact of the recent Covid-19 virus outbreak on the company’s full-year fiscal 2020 results is still uncertain. The company’s current outlook incorporates increased orders from retail customers in North America and Europe subsequent to the end of the third quarter in response to increased consumer demand for food at home, as well as headwinds in Häagen-Dazs shops and other foodservice channels resulting from lower consumer traffic. The most significant element of uncertainty in the company’s full-year outlook is the intensity and duration of increased demand for food at home across all its major markets. Additionally, the company’s outlook assumes its supply chain continues to operate with minimal disruption for the remainder of fiscal 2020.

Based on its year-to-date performance and fourth-quarter expectations, General Mills updated its full-year fiscal 2020 targets:

  • Organic net sales are still 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 expected to increase reported net sales by approximately 1 percentage point.
  • Constant-currency adjusted operating profit is now expected to increase 4 to 6 percent from the base of USD 2.86 billion reported in fiscal 2019, which is ahead of the previous range of 2 to 4 percent growth. The primary drivers of the increased outlook for constant-currency adjusted operating profit are increased Holistic Margin Management productivity savings, a modest reduction in the outlook for input cost inflation, and continued tight control over administrative expenses. The benefit of the extra fiscal week is being 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 now expected to increase 6 to 8 percent from the base of USD 3.22 earned in fiscal 2019, which is ahead of the previous range of 3 to 5 percent growth. The primary drivers of the increased outlook for constant-currency adjusted diluted EPS are the increased forecast for constant-currency adjusted operating profit and a reduced expectation for full-year net interest expense.
  • The company continues to expect free cash flow conversion of at least 105 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.

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