General Mills Reports Fiscal 2016 Results With EPS Above Previous Guidance; Increases Margin Expansion Target

MINNEAPOLIS, June 29, 2016 /PRNewswire/ -- General Mills (NYSE: GIS) today reported results for the fourth quarter and full fiscal year ended May 29, 2016.  These results reflect the impact of foreign exchange headwinds, the sale of the North American Green Giant business, and one less week compared to fiscal 2015.

Fiscal 2016 Financial Summary

• Net sales declined 6 percent to $16.6 billion.  On a constant-currency basis, net sales decreased 2 percent.
• Operating profit totaled $2.7 billion, up 30 percent compared to the prior year.  Operating profit margin increased 450 basis points to 16.3 percent of net sales.  Adjusted operating profit margin increased 90 basis points to 16.8 percent of net sales.
• Total segment operating profit declined 1 percent to $3.0 billion.  In constant currency, total segment operating profit increased 1 percent.
• Diluted earnings per share (EPS) were $2.77, up 41 percent from $1.97 a year ago.
• Adjusted diluted EPS, which excludes certain items affecting comparability of results, totaled $2.92 in fiscal 2016, up 2 percent from $2.86 a year ago.  On a constant-currency basis, adjusted diluted EPS increased 5 percent.
• Net cash returned to shareholders in fiscal 2016 totaled $1.5 billion, including a 7 percent increase in dividends paid per share and share repurchases that reduced average diluted shares outstanding by 1 percent.

Please see Note 8 to the Consolidated Financial Statements below for reconciliation of non-GAAP measures used in this release.

"We made important progress strengthening our business model and bringing our Consumer First strategy to life in our brands in fiscal 2016," said General Mills Chairman and Chief Executive Officer Ken Powell.  "Most importantly, we returned the business to organic sales and operating profit growth, while continuing to drive improvement in free cash flow.  Our renovation and innovation efforts helped improve topline momentum on many businesses, and our productivity and cost-savings initiatives drove strong margin expansion, delivering profit and EPS ahead of our expectations.  We also took important strategic actions to reshape our portfolio for growth, including the divestiture of the Green Giant vegetable business in North America, the expansion of our recently acquired Annie's brand into new categories, the launch of Yoplait yogurt in China, and the acquisitions of EPIC Provisions meat snacks in the U.S. and Carolina yogurt in Brazil.

"We're now going to build on our 2016 successes by investing to grow where we have positive net sales momentum, taking clear Consumer First actions to establish a solid base for long-term growth on certain other businesses, accelerating our margin expansion efforts already in progress, and taking additional actions to optimize spending, reduce complexity, and prioritize profitable volume."

Update on Cost Savings and Adjusted Operating Profit Margin Targets

With strong savings in fiscal 2016, and visibility to further savings over the next two years, General Mills now expects its previously announced cost-reduction and organizational efficiency initiatives – including Projects Century, Catalyst, and Compass, as well as administrative cost reductions delivered through zero-based budgeting – to generate total annual savings of $600 million by fiscal 2018, up from the previous target of $500 million (please see Note 4 below for more information on our restructuring actions).

The company also announced it is undertaking further efforts to prioritize investments, reduce complexity, and streamline its operations to drive profitable sales growth.  As a result, General Mills is increasing and accelerating its previous margin expansion target.  The company now expects to achieve an adjusted operating profit margin of 20 percent by fiscal 2018, an increase of 400 basis points over fiscal 2015 levels.

Key drivers of margin expansion over the next two years will include: 

• Strong levels of Holistic Margin Management productivity gains;
• Continuing savings from previously announced cost-reduction initiatives;
• Increased efficiency and prioritization of commercial investments, including trade and consumer spending;
• Continuing focus on complexity reduction through SKU optimization;
• Further supply chain optimization; and,
• Continued expansion of zero-based budgeting across the business.

Full Year Results

Fiscal 2016 net sales decreased 6 percent to $16.6 billion.  Pound volume reduced net sales growth by 3 percentage points, and net price realization and mix contributed 1 point of net sales growth.  Foreign currency exchange effects reduced net sales growth by 4 points.  On a constant-currency basis, net sales decreased 2 percent.  The impact of one less week compared to fiscal 2015 and the net impact of acquisitions and divestitures subtracted 2 points of growth.  Gross margin increased 150 basis points, reflecting the benefit of cost savings initiatives more than offsetting 2 percent input cost inflation.  Adjusted gross margin, which excludes mark-to-market effects and certain other items affecting comparability, increased 90 basis points.  Selling, general, and administrative expenses decreased 6 percent due to an 8 percent decrease in advertising and media expense and savings from our cost-reduction initiatives.  Total segment operating profit declined 1 percent to $3.0 billion.  On a constant-currency basis, total segment operating profit increased 1 percent.  Adjusted operating profit margin increased 90 basis points to 16.8 percent of net sales.  Restructuring and project-related charges totaled $287 million, including $136 million recorded in cost of sales (please see Note 4 below for more information on these charges).  The company recorded a gain of $148 million from divestitures, reflecting the divestiture of the Green Giant business in November 2015.  Fiscal 2016 net earnings attributable to General Mills totaled $1.7 billion and diluted EPS totaled $2.77.  Adjusted diluted EPS totaled $2.92 in fiscal 2016, up 2 percent from $2.86 earned last year.  On a constant-currency basis, adjusted diluted EPS increased 5 percent. 

Fourth Quarter Results

Fourth-quarter net sales declined 9 percent to $3.9 billion.  Pound volume reduced net sales growth by 7 percentage points, and net price realization and mix reduced net sales growth by 1 point.  Foreign currency exchange effects reduced net sales growth by 1 point.  On a constant-currency basis, net sales decreased 8 percent.  The impact of one less week and the net impact of acquisitions and divestitures subtracted 9 points of growth.  Gross margin declined 20 basis points, reflecting higher input cost inflation in the quarter.  Adjusted gross margin declined 130 basis points.  Operating profit increased 26 percent to $532 million.  Total segment operating profit decreased 18 percent to $654 million.  Net earnings attributable to General Mills totaled $380 million and diluted EPS totaled 62 cents compared to 30 cents a year ago.  Adjusted diluted EPS totaled 66 cents for the fourth quarter, down 12 percent from 75 cents a year ago.  On a constant-currency basis, fourth-quarter adjusted diluted EPS declined 11 percent.

U.S. Retail Segment Results

Fiscal 2016 net sales for General Mills' U.S. Retail segment declined 5 percent to $10.0 billion.  Pound volume reduced net sales growth by 7 percentage points, and net price realization and mix contributed 2 points of net sales growth.  The impact of one less week and the net impact of acquisitions and divestitures subtracted 3 points of growth.  U.S. Retail segment operating profit increased 1 percent to $2.2 billion.

Fourth-quarter net sales for the U.S. Retail segment declined 12 percent to $2.2 billion.   Pound volume reduced net sales growth by 15 percentage points, and net price realization and mix contributed 3 points of net sales growth.  The impact of one less week and the net impact of acquisitions and divestitures subtracted 10 points of growth.  Segment operating profit totaled $430 million, 24 percent below year-ago results.

International Segment Results

Fiscal 2016 net sales for General Mills' consolidated international businesses declined 10 percent to $4.6 billion, as foreign currency exchange effects reduced net sales growth by 13 points.  On a constant-currency basis, net sales increased 3 percent.  Pound volume added 3 points of net sales growth.  The impact of one less week and the net impact of acquisitions and divestitures subtracted 2 points of growth.  International segment operating profit totaled $442 million, down 15 percent as reported and down 3 percent in constant currency.

In the fourth quarter, International segment net sales totaled $1.2 billion, down 1 percent compared to the prior year, as foreign currency exchange effects reduced net sales growth by 4 points.  On a constant-currency basis, net sales increased 3 percent.  Pound volume increased net sales growth by 9 percentage points, and net price realization and mix reduced net sales growth by 6 points.  The impact of one less week and the net impact of acquisitions and divestitures subtracted 7 points of growth.  Fourth-quarter International segment operating profit totaled $118 million, down 12 percent as reported and down 7 percent on a constant-currency basis.

Convenience Stores and Foodservice Segment Results

Fiscal 2016 net sales for the Convenience Stores and Foodservice segment totaled $1.9 billion, 4 percent below prior-year results.  Pound volume reduced net sales growth by 3 percentage points, and net price realization and mix reduced net sales growth by 1 point, reflecting index pricing on bakery flour.  The impact of one less week subtracted 2 points of growth.  Segment operating profit totaled $379 million, an increase of 7 percent.

In the fourth quarter, Convenience Stores and Foodservice net sales declined 8 percent to $487 million, reflecting lower pound volume.  The impact of one less week subtracted 6 points of growth.  Segment operating profit rose 5 percent to $106 million.

Joint Venture Summary

Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ) joint ventures in fiscal 2016 increased 5 percent to $88 million, reflecting favorable input costs for both businesses, volume growth for HDJ, and comparison to the year-ago period that included an asset impairment charge at CPW.  Constant-currency after-tax earnings from joint ventures increased 12 percent.  Constant-currency net sales for CPW essentially matched year-ago results, and for HDJ constant-currency net sales grew 5 percent.  In the fourth quarter, after-tax earnings from joint ventures totaled $23 million, up 29 percent as reported and up 28 percent in constant currency.

Other Income Statement Items

Unallocated corporate items totaled $289 million net expense in 2016, compared to $414 million net expense in 2015.  Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totaled $216 million net expense this year compared to $227 million net expense a year ago.

Restructuring, impairment, and other exit costs totaled $151 million in 2016 compared to $544 million in 2015.  An additional $136 million of restructuring and project-related charges were recorded in cost of sales this year compared to $73 million a year ago.

Net interest expense in 2016 totaled $304 million, a decrease of 4 percent from the prior-year level reflecting lower average debt balances partially offset by changes in the mix of debt.  The effective tax rate for 2016 was 31.4 percent, compared to 33.3 percent last year (please see Note 7 below for more information on our effective tax rate).  Excluding items affecting comparability, the effective tax rate was 29.8 percent in 2016, compared to 30.5 percent in fiscal 2015.  For the fourth quarter, the effective tax rate was 19.2 percent, compared to 47.8 percent a year ago.  The fourth-quarter effective tax rate excluding items affecting comparability was 21.6 percent in 2016 compared to 28.4 percent last year, primarily driven by additional tax credits recorded in 2016.

Cash Flow Items

Fiscal 2016 cash provided by operating activities increased 3 percent to $2.6 billion.  Capital investments totaled $729 million in fiscal 2016.  Dividends paid increased to $1.1 billion.  General Mills repurchased approximately 11 million shares of common stock in fiscal 2016 for a total of $607 million.  Average diluted shares outstanding declined 1 percent in fiscal 2016 to 612 million.   

Portfolio Segmentation

General Mills said it will focus its fiscal 2017 and fiscal 2018 growth investments on its brands and platforms with the strongest profitable growth potential, including:

• In the U.S. Retail segment – Cereal, snack bars, the natural and organic portfolio, Totino's hot snacks, Old El Paso Mexican products, and yogurt;
• Our International segment;
• In the Convenience Stores and Foodservice segment – Cereal, yogurt, snacks, frozen meals, biscuits, and baking mixes – the segment's current Focus 6 platforms. 

Net sales for these "Growth" businesses – which comprise approximately 75 percent of total company net sales and a similar proportion of operating profit – are expected to grow at a low single-digit organic rate in fiscal 2017.  In its "Foundation" businesses – which comprise the remainder of the portfolio and include Pillsbury refrigerated dough, Betty Crocker baking mixes, and Progresso soup, among others – the company said it will focus on reducing SKU complexity, optimizing commercial spending, and prioritizing profitable volume while making selective Consumer First investments.  Organic net sales are expected to decline mid single digits for these businesses in fiscal 2017.

Fiscal 2017 and 2018 Outlook

Overall, the company expects this focused approach will result in fiscal 2017 organic net sales growth ranging from flat to down 2 percent compared to 2016, but deliver a 6 to 8 percent increase in constant-currency total segment operating profit.  Fiscal 2017 adjusted operating profit margin is expected to increase by approximately 150 basis points, with constant-currency adjusted diluted EPS growing 6 to 8 percent from the base of $2.92 earned in fiscal 2016.  The company estimates a 1-2 cent headwind to fiscal 2017 adjusted diluted EPS from currency translation, though this figure does not reflect recent fluctuations in the British pound.

Looking ahead to fiscal 2018, General Mills expects modest organic net sales growth and the full benefit of its margin expansion efforts will drive adjusted operating profit margin to 20 percent, resulting in a low double-digit constant-currency increase in adjusted diluted EPS. 

Dividend Increase

The company's strong earnings growth and cash generation performance was cited by the General Mills Board of Directors in declaring a quarterly dividend of $0.48 per share, payable August 1, 2016, to shareholders of record July 11, 2016.  This represents a 4 percent increase from the previous quarterly rate of $0.46 per share.  The new annualized dividend rate of $1.92 per share represents an increase of 8 percent over the annual dividend of $1.78 paid in fiscal 2016.  This marks the eighth increase in General Mills' quarterly dividend rate since 2010.

Long-term Outlook

"Beyond 2018, we expect our focused, more profitable portfolio – aligned with our Consumer First strategy – to return to sustainable topline growth and to drive profit growth consistent with our long-term earnings model," Powell continued.  "We also plan to extend our excellent track record of cash generation and cash return to shareholders, which should put General Mills in a strong position to continue to deliver on our goal of consistent top-tier returns for our shareholders."

General Mills will hold a briefing for investors today, June 29, 2016, beginning at 8:30 a.m. Eastern time.  You may access the webcast from General Mills' internet home page:  generalmills.com.

Organic net sales growth is defined as net sales growth adjusted for foreign currency translation, as well as acquisitions, divestitures, and a 53^rd week impact, when applicable.

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; effectiveness of restructuring and cost savings initiatives; 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.

In the first quarter of fiscal 2016, we approved Project Compass, a restructuring plan designed to enable our International segment to accelerate long-term growth through increased organizational effectiveness and reduced administrative expense. In connection with this project, we expect to eliminate approximately 725 to 775 positions. We expect to incur approximately $60 million of net expenses relating to this action, all of which will be cash. We recorded $54.7 million of restructuring charges relating to this action in fiscal 2016. We expect this action to be completed by the end of fiscal 2017.

Project Century (Century) began in fiscal 2015 as a review of our North American manufacturing and distribution network to streamline operations and identify potential capacity reductions. In the second quarter of fiscal 2016, we broadened the scope of Project Century to identify opportunities to streamline our supply chain outside of North America. As part of the expanded project, we approved a restructuring plan to close manufacturing facilities in our International segment supply chain located in Berwick, United Kingdom and East Tamaki, New Zealand. These actions affected approximately 285 positions. We expect to incur total restructuring charges of approximately $41 million relating to these actions, of which approximately $20 million will be cash. We recorded $30.0 million of restructuring charges relating to these actions in fiscal 2016. We expect these actions to be completed by the end of fiscal 2018.

As part of Century, in the first quarter of fiscal 2016, we approved a restructuring plan to close our West Chicago, Illinois cereal and dry dinner manufacturing plant in our U.S. Retail segment supply chain. This action will affect approximately 500 positions, and we expect to incur approximately $117 million of net expenses relating to this action, of which approximately $53 million will be cash. We recorded $79.2 million of restructuring charges relating to this action in fiscal 2016. We expect this action to be completed by the end of fiscal 2019.

As part of Century, in the first quarter of fiscal 2016, we approved a restructuring plan to close our Joplin, Missouri snacks plant in our U.S. Retail segment supply chain. This action affected approximately 120 positions, and we incurred $6.3 million of net restructuring charges in fiscal 2016 relating to this action, of which less than $1 million was cash. This action was completed in fiscal 2016.

In addition to the actions taken at certain facilities described above, we incurred $67.1 million of restructuring charges in fiscal 2016, relating to Century actions previously announced.

We made cash payments totaling $122.0 million in fiscal 2016 and $63.6 million in fiscal 2015 relating to restructuring initiatives.

In addition to restructuring charges, we expect to incur approximately $109 million of additional project-related costs, which will be recorded in cost of sales, all of which will be cash. We recorded project-related costs in cost of sales of $57.5 million in fiscal 2016 and $13.2 million in fiscal 2015.

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

Constant-currency consolidated net sales growth rates follow:

Diluted EPS excluding certain items affecting comparability and the related constant-currency growth rates follow:

A reconciliation of total segment operating profit to the relevant GAAP measure, operating profit, is included in the Statements of Operating Segment Results.

Constant-currency total segment operating profit growth rates follow:

Constant-currency International segment operating profit growth rates follow:

Constant-currency International net sales growth rates follow:

Constant-currency after-tax earnings from joint ventures growth rates follow:

Earnings comparisons as a percent of net sales excluding certain items affecting comparability follow:

Effective income tax rate as reported to the effective income tax rate excluding certain items affecting comparability follows:

The calculation of free cash flow conversion rate and net cash provided by operating activities conversion rate, its equivalent GAAP measure follows:

 

The non-GAAP forward-looking financial measures included in this release are not reconcilable to the equivalent GAAP measure because we cannot accurately predict the excluded variables that may impact these measures.

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