16 July 2024
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General Mills: Reports Strong Fiscal Q3-2019 Results

Minneapolis / MN. (gm) General Mills Inc. reported results for the third quarter ended February 24, 2019. Financial results for the third quarter and first nine months of fiscal 2019 include contributions from Blue Buffalo Pet Products, Inc., which was acquired on April 24, 2018.

«We had a strong third quarter, with positive organic sales growth and significant operating margin expansion,» said General Mills Chairman and Chief Executive Officer Jeff Harmening. «Our year-to-date performance and fourth-quarter plans give us confidence that we will meet or exceed all of our key fiscal 2019 targets. For the full year, we now expect adjusted diluted EPS and free cash flow conversion will exceed our initial targets, net sales will finish toward the lower end of our guidance range, and adjusted operating profit will finish toward the higher end of the range. Our improved execution and strengthened performance this year reinforce our view that a balanced approach to top and bottom-line growth, centered on our Consumer First strategy, will drive long-term value for our shareholders.»

General Mills is pursuing its Consumer First strategy and executing against its three key global growth priorities 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.

Third Quarter Results Summary

  • Net sales increased 8 percent to USD 4.20 billion and were up 10 percent in constant currency, driven primarily by the addition of Blue Buffalo. Organic net sales increased 1 percent, with positive net price realization and mix partially offset by lower contributions from volume. Organic net sales growth in the Asia + Latin America, North America Retail, and Convenience Stores + Foodservice segments was partially offset by a decline in Europe + Australia.
  • Gross margin increased 200 basis points to 34.4 percent of net sales. Adjusted gross margin, which excludes certain items affecting comparability, increased 170 basis points to 34.2 percent, driven by cost savings, benefits from net price realization and mix, and the addition of Blue Buffalo, partially offset by higher input costs.
  • Operating profit totalled USD 651 million, up 14 percent from last year due primarily to higher net sales and gross margin, partially offset by higher restructuring, impairment, and other exit costs and a loss on the sale of our La Salteña fresh pasta and refrigerated dough business in Argentina. Adjusted operating profit of USD 730 millionincreased 25 percent in constant currency, primarily driven by higher net sales, including the addition of Blue Buffalo, and higher adjusted gross margin. Operating profit margin of 15.5 percent increased 80 basis points. Adjusted operating profit margin increased 230 basis points to 17.4 percent.
  • Net earnings attributable to General Mills totalled USD 447 million compared to USD 941 million a year ago, primarily reflecting benefits from the Tax Cuts and Jobs Act (TCJA) in last year’s third quarter.
  • Diluted EPS totalled USD 0.74, down 54 percent from the prior year. Adjusted diluted EPS totalled USD 0.83 in the third quarter, up 6 percent from the prior year in constant currency, driven by higher adjusted operating profit, partially offset by higher net interest expense, effective tax rate, and average diluted shares outstanding in the quarter.

Nine Month Results Summary

  • Net sales increased 7 percent to USD 12.70 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 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 a decline in North America Retail.
  • Gross margin decreased 10 basis points to 33.8 percent of net sales. Adjusted gross margin increased 10 basis points to 34.1 percent, despite a 40 basis point headwind from a first-quarter purchase accounting adjustment related to the Blue Buffalo acquisition.
  • Operating profit totalled USD 1.80 billion, down 4 percent from the prior year. Constant-currency adjusted operating profit increased 11 percent. Operating profit margin of 14.2 percent was down 170 basis points. Adjusted operating profit margin increased 60 basis points to 16.8 percent.
  • Net earnings attributable to General Mills totalled USD 1.18 billion.
  • Diluted EPS of USD 1.96 was 36 percent below prior-year levels. Adjusted diluted EPS of USD 2.39 was up 3 percent on a constant-currency basis.

Operating Segment Results

North America Retail Segment

Third-quarter net sales for General Mills’ North America Retail segment totalled USD 2.52 billion, essentially matching the prior year, with growth in the U.S. Cereal and U.S. Meals + Baking operating units offset by declines in Canada, U.S. Snacks, and U.S. Yogurt. Organic net sales were up modestly, rounding to flat versus last year. Segment operating profit of USD 582 million increased 12 percent as reported and in constant currency, driven by benefits from cost savings initiatives, lower selling, general, + administrative (SG+A) expenses, and positive net price realization and mix, partially offset by input cost inflation.

Through nine months, North America Retail segment net sales were down 2 percent to USD 7.58 billion. Organic net sales declined 1 percent. Segment operating profit totalled USD 1.75 billion, up 4 percent from a year ago as reported and up 5 percent in constant currency due to benefits from cost savings initiatives and lower SG+A expenses, partially offset by lower net sales and input cost inflation.

Convenience Stores + Foodservice Segment

Third-quarter net sales for the Convenience Stores + Foodservice segment increased 3 percent to USD 472 million, driven by growth for the Focus 6 platforms, including frozen meals, snacks, frozen baked goods, and yogurt, partially offset by declines on bakery flour. Organic net sales were also up 3 percent. Segment operating profit increased 15 percent to USD 97 million, primarily driven by benefits from cost savings initiatives, positive net price realization and mix, and the comparison to a 10 percent operating profit decline in the year-ago period, partially offset by input cost inflation.

Through nine months, Convenience Stores + Foodservice net sales increased 2 percent to USD 1.45 billion, due primarily to growth for the Focus 6 platforms. Organic net sales also increased 2 percent. Segment operating profit increased 10 percent to USD 303 million, primarily driven by benefits from cost savings initiatives and positive net price realization and mix, partially offset by input cost inflation.

Europe + Australia Segment

Third-quarter net sales for the Europe + Australia segment declined 8 percent to USD 433 million, primarily driven by 6 points of unfavorable foreign currency exchange. Organic net sales were down 2 percent. Sales declines for Yoplaityogurt and the negative impact of a continued challenging retail environment in France were partially offset by continued double-digit growth on snack bars and Häagen-Dazs ice cream. Segment operating profit of USD 24 millionwas down 11 percent as reported and down 1 percent in constant currency, driven by significant input cost inflation, including currency-driven inflation on products imported into the U.K, partially offset by benefits from cost savings initiatives, lower SG+A expenses, and favorable net price realization and mix.

Through nine months, Europe + Australia net sales declined 3 percent to USD 1.39 billion, driven by 3 points of unfavorable foreign currency exchange. Organic net sales were flat to last year. Sales growth for the snack bars, ice cream, and Mexican food platforms offset a decline in yogurt. Segment operating profit of USD 81 million declined 4 percent as reported and was in line with last year in constant currency, with benefits from cost savings initiatives, lower SG+A expenses, and favorable product mix offset by input cost inflation, including currency-driven inflation on products imported into the U.K.

Asia + Latin America Segment

Third-quarter net sales for the Asia + Latin America segment declined 2 percent to USD 428 million, driven by 8 points of unfavorable foreign currency exchange and a 1-point headwind from the divestiture of our La Salteña fresh pasta and refrigerated dough business in Argentina. Organic net sales increased 7 percent. Net sales performance was led by growth for Pillsbury and Nature Valley snack bars, Häagen-Dazs ice cream, and Wanchai Ferry frozen dumplings. Segment operating profit totalled USD 20 million compared to a loss of USD 2 million a year ago, driven by organic net sales growth and lower SG+A expenses, partially offset by higher input costs.

Through nine months, Asia + Latin America net sales declined 1 percent to USD 1.26 billion, driven by 8 points of unfavorable foreign currency exchange. Organic net sales increased 7 percent. The snack bar and ice cream platforms led net sales growth for the segment. Segment operating profit of USD 50 million increased 65 percent as reported and 42 percent in constant currency, driven by organic net sales growth, lower SG+A expenses, and the comparison against operating profit declines in the year-ago period, partially offset by higher input costs.

Pet Segment

Third-quarter net sales for the Pet segment totalled USD 347 million. On a pro forma basis, Pet segment net sales increased 4 percent, with growth in Food, Drug, and Mass (FDM) and E-commerce channels partially offset by declines in the Pet Specialty channel. Segment operating profit of USD 73 million was USD 2 million below the prior year on a pro forma basis, driven by higher input costs, plant start-up costs, and intangible asset amortization, partially offset by benefits from cost savings initiatives and synergies.

Through nine months, Pet net sales of USD 1.02 billion increased 3 percent on a pro forma basis. In-market results continued to show solid growth, with retail sales up high-single digits. Segment operating profit totalled USD 158 million, down USD 83 million on a pro forma basis, driven by the impact of purchase accounting, including a USD 53 million one-time inventory adjustment and USD 10 million of intangible asset amortization, as well as higher input costs and plant start-up costs, partially offset by benefits from cost savings initiatives and synergies.

General Mills expects pro forma Pet segment net sales growth will accelerate rapidly in the fourth quarter as the company doubles distribution and increases the BLUE product assortment in FDM channels. In addition, fourth-quarter Pet segment operating profit margins will benefit from accelerated synergies, cost savings initiatives, favorable product mix, and pricing actions taken earlier in the year. The company continues to expect these actions will result in double-digit pro forma growth in Pet segment net sales and operating profit for the full year, excluding acquisition-related charges.

Joint Venture Summary

Third-quarter net sales for Cereal Partners Worldwide (CPW) increased 2 percent in constant currency, and constant-currency net sales for Häagen-Dazs Japan (HDJ) declined 5 percent. Combined after-tax earnings from joint ventures were USD 12 million compared to USD 17 million last year, driven primarily by our USD 4 million after-tax share of CPW restructuring charges. Through nine months, after-tax earnings from joint ventures totalled USD 52 million compared to USD 64 million a year ago, driven by our USD 9 million after-tax share of CPW restructuring charges as well as lower net sales and higher input costs for HDJ.

Other Income Statement Items

Unallocated corporate items totalled USD 49 million net expense in the third quarter of fiscal 2019, compared to USD 51 millionnet expense a year ago. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totalled USD 65 million net expense this year compared to USD 41 million net expense last year.

We recorded a USD 35 million pre-tax loss on the sale of the La Salteña business in Argentina in the third quarter. Restructuring, impairment, and other exit costs totalled USD 60 million in the quarter compared to USD 8 million a year ago. An additional USD 3 million of project-related charges were recorded in cost of sales a year ago (please see Note 3 below for more information on these charges).

Net interest expense totalled USD 131 million in the third quarter compared to USD 89 million a year ago, primarily driven by financing related to the Blue Buffalo acquisition. The effective tax rate in the quarter was a 17.7 percent charge compared to an 85.9 percent benefit last year (please see Note 6 below for more information on our effective tax rate).  Excluding items affecting comparability, the adjusted effective tax rate was 19.9 percent compared to 15.2 percent a year ago, primarily driven by a year-to-date adjustment to the statutory rate during the third quarter of fiscal 2018.

Cash Flow Generation and Cash Returns

Cash provided by operating activities totalled USD 2.03 billion through nine months of fiscal 2019. Capital investments through the first nine months totalled USD 368 million.  Nine-month free cash flow conversion was 113 percent of adjusted after-tax earnings. Dividends paid year-to-date totalled USD 884 million. Average diluted shares outstanding through nine months increased 4 percent to 604 million.

Outlook

For the fourth quarter of fiscal 2019, General Mills expects Blue Buffalo’s net sales and segment operating profit growth will accelerate meaningfully, driven by significant distribution expansion in the FDM channel. Fourth-quarter results for the base business will be impacted by the comparison against the year-ago period that included the strongest quarterly performance of fiscal 2018.

Based on its year-to-date performance and fourth-quarter expectations, the company updated its full-year fiscal 2019 targets:

  • Organic net sales are expected to finish toward the lower end of the initial guidance range of between flat and up 1 percent. Net sales are also expected to finish toward the lower end of the range of 9 to 10 percent growth in constant currency, including the impact of the Blue Buffalo acquisition.
  • Constant-currency adjusted operating profit is expected to finish toward the upper end of the initial guidance range of 6 to 9 percent growth from the base of USD 2.6 billion reported in fiscal 2018.
  • Constant-currency adjusted diluted EPS are now expected to range between flat and up 1 percent from the base of USD 3.11 earned in fiscal 2018, which is ahead of the previous range of flat to down 3 percent.
  • The company now expects free cash flow conversion of at least 105 percent of adjusted after-tax earnings, which is ahead of the previous guidance of at least 95 percent.
  • Currency translation is expected to reduce reported net sales by 1 to 2 percentage points in fiscal 2019 and is not expected to have a material impact on full-year adjusted operating profit or adjusted diluted EPS.

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