General Mills Reports Fiscal 2015 Third-Quarter Results

MINNEAPOLIS, March 18, 2015 /PRNewswire/ -- General Mills (NYSE: GIS) today reported results for the third quarter of fiscal 2015. 

Third Quarter Results Summary

• Net sales for the 13 weeks ended Feb. 22, 2015, totaled $4.35 billion, down 1 percent from last year's third-quarter results due to foreign currency effects. On a constant-currency basis, quarterly net sales grew 3 percent.
• Segment operating profit totaled $698 million, up 1 percent. In constant currency, segment operating profit rose 3 percent.
• Diluted earnings per share (EPS) totaled 56 cents compared to 64 cents a year ago.
• Adjusted diluted EPS, which excludes certain items affecting comparability of results, totaled 70 cents in the third quarter of 2015, up 13 percent from 62 cents in last year's third quarter. On a constant-currency basis, adjusted diluted EPS grew 15 percent.

Constant-currency net sales, total and constant-currency segment operating profit, adjusted diluted EPS and adjusted diluted EPS growth rate in constant currency are each non-GAAP measures.  Please see Note 9 to the Consolidated Financial Statements below for reconciliation of these measures to the relevant GAAP measures.

General Mills Chairman and Chief Executive Officer Ken Powell said, "Our third-quarter results reflect strengthened operating performance.  Our U.S. Retail segment posted net sales and profit growth including contributions from the Annie's business acquired in October 2014.  Constant-currency net sales and profit growth accelerated for our International segment.  And the Convenience Stores and Foodservice segment led our operating results, with sales up 6 percent and profit up 11 percent."

Third-quarter net sales of $4.35 billion were 1 percent below year-ago results, as foreign currency exchange reduced net sales growth by 4 percentage points.  On a constant-currency basis, net sales grew 3 percent, including 1 point of growth contributed by the Annie's acquisition.  Pound volume was 1 percent below year-ago levels.  Net price realization and mix added 4 points of net sales growth.  Gross margin was below year-ago levels, primarily reflecting negative product mix and restructuring charges.   Selling, general and administrative expenses declined, driven by an 8 percent decrease in advertising and media expense along with cost savings from restructuring actions.  Segment operating profit rose 1 percent to $698 million.  General Mills posted restructuring and project-related charges totaling $74 million pretax in the third quarter, including $25 million recorded in cost of sales.  (Please see the Corporate Items section below for more information on restructuring actions.)  Third-quarter net earnings attributable to General Mills totaled $343 million and diluted EPS totaled 56 cents.  Adjusted diluted EPS, which excludes restructuring charges and certain other items affecting comparability, totaled 70 cents, up 13 percent from 62 cents in last year's third quarter.  Foreign currency exchange reduced 2015 third-quarter adjusted diluted EPS by approximately 1 cent.

Nine-month Results Summary

• Net sales through the first nine months of fiscal 2015 totaled $13.3 billion, down 2 percent from $13.6 billion a year ago. On a constant-currency basis, nine-month net sales essentially matched year-ago results.
• Nine-month segment operating profit totaled $2.24 billion, down 8 percent as reported and down 6 percent in constant currency.
• Diluted EPS totaled $1.67 compared to $2.18 a year ago.
• Adjusted diluted EPS totaled $2.11 this year to date, compared to $2.15 a year ago. Foreign currency exchange reduced fiscal 2015 nine-month adjusted diluted EPS by approximately 4 cents.

Through the first nine months of fiscal 2015, U.S. Retail segment dollar market shares increased in categories representing 68 percent of the company's sales volume in Nielsen-measured outlets.  This included market share gains in RTE cereal, yogurt and snacks.  U.S. Retail products making particularly strong contributions to nine-month net sales results included Yoplait Original Style and Greek yogurt varieties; Cinnamon Toast Crunch, Nature Valley granola and Cheerios Protein cereals; Fiber One snack bar varieties and Cascadian Farm organic grain snacks.  In the Convenience Stores and Foodservice segment, Pillsbury frozen breakfast items, Yoplait yogurt varieties and Big G bowlpack cereals were strong net sales contributors.  International products posting strong nine-month sales contributions included Old El Paso dinner kits in Canada, Europe and Australia; Yoki and La Saltena meal products in Latin America; and Haagen-Dazs superpremium ice cream in the Asia / Pacific region.

U.S. Retail Segment Results
Third-quarter net sales for General Mills' U.S. Retail segment totaled $2.65 billion, up 1 percent from prior-year results.  Net price realization and mix contributed 3 points of net sales growth, while lower pound volume reduced sales growth by 2 points.  The Annie's business acquired in October 2014 contributed 2 points of net sales growth and 1 point of pound volume growth.  The Yogurt and Snacks operating units drove the quarterly net sales increase.  Cereal unit net sales were essentially unchanged from the prior-year level, while the Meals and Baking Products units posted net sales declines for the quarter.  U.S. Retail segment operating profit grew 1 percent to $521 million. 

Through nine months, U.S. Retail net sales totaled $7.96 billion, down 3 percent from year-ago results, with lower volume contributing 2 points of the net sales decline, and negative price realization and mix contributing 1 point of decline. Segment operating profit of $1.59 billion was 12 percent below prior-year results.

International Segment Summary
Third-quarter net sales for General Mills' consolidated international businesses decreased 7 percent to $1.23 billion due to foreign exchange effects.  Pound volume matched year ago levels, and net price realization and mix added 6 points of net sales growth.  This was offset by foreign currency exchange, which reduced net sales growth by 13 points in the third quarter.  On a constant-currency basis, international segment net sales grew 6 percent in the quarter, including gains of 3 percent in the Europe region, 4 percent in both the Canada and the Asia / Pacific regions, and 20 percent in Latin America.  International segment operating profit totaled $108 million, down 2 percent as reported but up 10 percent in constant currency. (Please see Note 9 for reconciliation of non-GAAP measures.)

Through the first nine months of fiscal 2015, International segment net sales totaled $3.91 billion, down 3 percent.  Foreign currency exchange reduced net sales growth by 8 percentage points.  On a constant-currency basis, net sales grew 5 percent reflecting favorable net price realization and mix.  Pound volume essentially matched year ago levels.  Nine-month segment operating profit growth totaled $389 million, essentially matching year-ago levels as reported and up 8 percent on a constant-currency basis. (Please see Note 9).

Convenience Stores and Foodservice
Third-quarter net sales for the Convenience Stores and Foodservice segment grew 6 percent to reach $465 million.  Net price realization and mix contributed 7 points of net sales growth, while pound volume subtracted 1 point of sales growth.  Frozen breakfast items, yogurt, and cereal led sales performance in the quarter.  Segment operating profit grew 11 percent to reach $69 million.

Through nine months, Convenience Stores and Foodservice segment net sales grew 4 percent to reach $1.47 billion.  Net price realization and mix contributed 5 points of net sales growth, while pound volume subtracted 1 point of growth.  Segment operating profit through the first nine months of fiscal 2015 grew 14 percent to $252 million.

Joint Venture Summary
Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Haagen-Dazs Japan (HDJ) joint ventures totaled $13 million, significantly below prior-year results due to foreign exchange effects and a $4 million asset impairment charge for CPW's South Africa business.  Constant-currency after-tax earnings from joint ventures declined 36 percent.  (Please see Note 9 below for reconciliation of this non-GAAP measure.)  Constant-currency net sales declined 3 percent for CPW but grew 7 percent for HDJ.  Through the first nine months of fiscal 2015, after-tax earnings from joint ventures totaled $66 million, down 9 percent as reported and down 5 percent in constant currency.

Corporate Items
Unallocated corporate items totaled $112 million net expense in the third quarter of fiscal 2015, compared to $19 million net expense a year earlier.  Excluding mark-to-market valuation effects, restructuring and project-related charges, Annie's integration expenses and a $7 million foreign exchange loss in this year's third quarter related to balance sheet re-measurement for our Venezuelan subsidiary, unallocated corporate items totaled $32 million net expense this year compared to $42 million net expense a year ago.

General Mills recorded restructuring, impairment and other exit costs totaling $49 million pretax during the third quarter.  An additional $22 million of restructuring charges and $3 million of project-related charges were recorded in cost of sales.

Net interest expense rose 6 percent to $80 million, reflecting a higher debt level partially offset by a lower average interest rate.  The effective tax rate was 25.5 percent in the third quarter.  Excluding items affecting comparability, the adjusted effective tax rate was 27.5 percent for the third quarter and 31.3 percent for the first nine months of 2015. (Please see Note 9 for reconciliation of this non-GAAP measure.)

Cash Flow Items
Cash provided by operating activities totaled $1.56 billion through the first nine months of 2015, down from the prior year primarily due to lower net earnings.  Cash payments related to restructuring and project-related actions totaled $47 million through the first nine months of 2015. Capital investments through the first nine months totaled $491 million.  Dividends paid year-to-date totaled $751 million.

During the first nine months of 2015, General Mills repurchased 22 million shares of common stock for an aggregate purchase price of $1.16 billion.  The average number of diluted shares outstanding decreased by 30 million through the first nine months, reflecting the impact of repurchase activity during both fiscal 2014 and 2015.

Outlook
Ken Powell said, "Our operating results are beginning to show the positive effects of our companywide focus on putting the Consumer First.  Where we have made improvements to established brands, launched new items, and developed marketing messages that respond to consumers' evolving preferences, we are seeing growth in our businesses.  We're developing plans for fiscal 2016 designed to build on this momentum and expand the impact of our Consumer First strategic focus."

General Mills said it continues to expect strong growth in the fourth quarter of fiscal 2015, including incremental contributions from the Annie's acquisition and the benefit of one extra week in the period.  The company also reaffirmed its fiscal 2015 full-year targets.   Net sales in constant currency are expected to grow at a low single-digit rate from the 2014 base of $17.9 billion.  This includes an estimated 2 points of sales growth from the extra week and incremental sales from the Annie's acquisition.  Total segment operating profit in constant currency is expected to decline at a low single-digit rate from prior-year results of $3.15 billion.  Fiscal 2015 adjusted diluted earnings per share are expected to grow at a low-single-digit rate in constant currency from the base of $2.82 earned in fiscal 2014.  At current exchange rates, the company estimates a 7-cent reduction to fiscal 2015 adjusted diluted EPS from currency translation.

General Mills will hold a briefing for investors today, March 18, 2015, beginning at 8:30 a.m. Eastern time.  You may access the web cast from General Mills' internet home page: generalmills.com.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations and assumptions. These forward-looking statements, including the statements under the caption "Outlook," and statements made by Mr. Powell, are subject to certain risks and uncertainties that could cause actual results to differ materially from the potential results discussed in the forward-looking statements. In particular, our predictions about future net sales and earnings could be affected by a variety of factors, including: competitive dynamics in the consumer foods industry and the markets for our products, including new product introductions, advertising activities, pricing actions, and promotional activities of our competitors; economic conditions, including changes in inflation rates, interest rates, tax rates, or the availability of capital; product development and innovation; consumer acceptance of new products and product improvements; consumer reaction to pricing actions and changes in promotion levels; acquisitions or dispositions of businesses or assets; changes in capital structure; changes in the legal and regulatory environment, including labeling and advertising regulations and litigation; impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets, or changes in the useful lives of other intangible assets; changes in accounting standards and the impact of significant accounting estimates; product quality and safety issues, including recalls and product liability; changes in consumer demand for our products; effectiveness of advertising, marketing, and promotional programs; changes in consumer behavior, trends, and preferences, including weight loss trends; consumer perception of health-related issues, including obesity; consolidation in the retail environment; changes in purchasing and inventory levels of significant customers; fluctuations in the cost and availability of supply chain resources, including raw materials, packaging, and energy; disruptions or inefficiencies in the supply chain; volatility in the market value of derivatives used to manage price risk for certain commodities; benefit plan expenses due to changes in plan asset values and discount rates used to determine plan liabilities; failure or breach of our information technology systems; foreign economic conditions, including currency rate fluctuations; and political unrest in foreign markets and economic uncertainty due to terrorism or war. The company undertakes no obligation to publicly revise any forward-looking statement to reflect any future events or circumstances.

During the second quarter of fiscal 2015, we approved Project Catalyst, a restructuring plan to increase organizational effectiveness and reduce overhead expense. In connection with this project, we expect to eliminate approximately 800 positions primarily in the United States. We expect to incur approximately $146 million of net expenses relating to these actions of which approximately $127 million will be cash. We expect these actions to be largely completed by the end of fiscal 2015.

Project Century (Century) is a review of our North American manufacturing and distribution network to streamline operations and identify potential capacity reductions. In addition to the actions taken at certain facilities described below, we incurred $17 million of restructuring charges in the nine-month period ended February 22, 2015 related to Century of which $6 million was cash.

As part of Century, we approved actions in the third quarter of fiscal 2015 to reduce our refrigerated dough capacity and exit our Midland, Ontario, Canada and New Albany, Indiana facilities, which support our U.S. Retail, International and Convenience Stores and Foodservice supply chains. The Midland action will affect approximately 100 positions and we expect to incur approximately $20 million of net expenses relating to this action, of which approximately $12 million will be cash. We recorded $6 million of restructuring charges in the third quarter of fiscal 2015. The New Albany action will affect approximately 400 positions and we expect to incur approximately $88 million of net expense relating to this action of which approximately $44 million will be cash. We recorded $47 million of restructuring charges in the third quarter of fiscal 2015. We anticipate these actions will be completed by the end of fiscal 2018.

During the second quarter of fiscal 2015, we approved a restructuring plan to consolidate yogurt manufacturing capacity and exit our Methuen, Massachusetts facility in our U.S. Retail and Convenience Stores and Foodservice supply chains as part of Century. This action will affect approximately 250 positions. We recorded $9 million of restructuring charges in the third quarter of fiscal 2015 and $35 million in the nine-month period ended February 22, 2015. We expect to incur approximately $70 million of net expenses relating to this action of which approximately $20 million will be cash.  We expect this action to be completed by the end of fiscal 2016.

Also as part of Century, during the second quarter of fiscal 2015, we approved a restructuring plan to eliminate excess cereal and dry mix capacity and exit our Lodi, California facility in our U.S. Retail supply chain. This action will affect approximately 430 positions. We recorded $9 million of restructuring charges in the third quarter of fiscal 2015 and $54 million in the nine month period ended February 22, 2015. We expect to incur approximately $100 million of net expenses relating to this action of which approximately $38 million will be cash. We expect this action to be completed by the end of fiscal 2016.

During the first quarter of fiscal 2015, we approved a plan to combine certain Yoplait and General Mills operational facilities within our International segment to increase efficiencies and reduce costs. This action will affect approximately 240 positions. We recorded $14 million of restructuring charges in the nine month period ended February 22, 2015. We expect to incur approximately $15 million of net expenses relating to this action of which approximately $14 million will be cash. We expect this action to be completed in fiscal 2016.

In addition to restructuring charges, we expect to incur approximately $66 million of additional project-related costs all of which will be cash and will be recorded in cost of sales. We recorded $3 million in the third quarter of fiscal 2015 and $4 million in the nine-month period ended February 22, 2015 for project-related costs.

Restructuring charges and project-related costs are summarized as follows:

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