General Mills Reports Fiscal 2016 Second-Quarter Results

MINNEAPOLIS, Dec. 17, 2015 /PRNewswire/ -- General Mills (NYSE: GIS) today reported results for the second quarter of fiscal 2016. 

Second Quarter Results Summary

• Net sales declined 6 percent to $4.42 billion, including a 1 point decline from acquisitions and divestitures.  On a constant-currency basis, net sales declined 2 percent. 
• Total segment operating profit totaled $839 million, down 1 percent.  In constant currency, total segment operating profit increased 2 percent.
• Diluted earnings per share (EPS) totaled 87 cents compared to 56 cents a year ago.
• Adjusted diluted EPS, which excludes certain items affecting comparability of results, totaled 82 cents in the second quarter of 2016, up 2 percent.  On a constant-currency basis, adjusted diluted EPS increased 5 percent.

Please see Note 7 to the Consolidated Financial Statements below for reconciliation of non-GAAP measures used in this release.

General Mills Chairman and Chief Executive Officer Ken Powell said, "Our second-quarter results put us in line with our expectations at the midway point in our fiscal year.  Constant-currency net sales declined modestly in the quarter, due in part to the divestiture of our North American Green Giant business.  Our adjusted gross margin increased for the third consecutive quarter, which, combined with our continued cost savings efforts, helped drive mid single-digit constant-currency growth in adjusted diluted EPS.  Through six months, we've posted 1 percent growth in net sales and double-digit growth in segment operating profit and adjusted diluted EPS, each in constant currency."

Net sales for the 13 weeks ended November 29, 2015, declined 6 percent to $4.42 billion.  Foreign currency exchange reduced net sales growth by 4 percentage points.  Pound volume reduced net sales growth by 3 percent, and net price realization and mix contributed 1 point of net sales growth.  The divestiture of the Green Giant business in November 2015 and the acquisition of the Annie's business in October 2014 combined to reduce net sales by 1 point.  Adjusted gross margin, which excludes mark-to-market effects and certain other items affecting comparability, increased 60 basis points due to favorable price realization and mix.   Selling, general and administrative expenses (SG&A) declined 9 percent, driven by savings from Project Catalyst and other cost management initiatives, and a 15 percent decrease in advertising and media expense (please see Note 3 below for more information on our restructuring actions).  Total segment operating profit declined 1 percent to $839 million.  On a constant-currency basis, total segment operating profit increased 2 percent.  The company recorded a $199 million gain in the second quarter from the sale of the Green Giant business (please see Note 2 below for more information on the Green Giant divestiture). Restructuring and project-related charges totaled $99 million pretax in the second quarter, including $38 million recorded in cost of sales (please see Note 3 below for more information on these charges).  Net earnings attributable to General Mills totaled $530 million and diluted EPS totaled 87 cents.  Adjusted diluted EPS, which excludes certain items affecting comparability, increased 2 percent to 82 cents.  On a constant-currency basis, second-quarter adjusted diluted EPS increased 5 percent.

Six Month Financial Summary

• Net sales through the first six months of fiscal 2016 declined 4 percent to $8.63 billion.  On a constant-currency basis, net sales increased 1 percent.
• First-half total segment operating profit totaled $1.67 billion, up 8 percent from the prior year.  Constant-currency total segment operating profit grew 12 percent.
• Diluted EPS totaled $1.56 compared to $1.11 in last year's first half.
• First-half adjusted diluted EPS totaled $1.61, up 14 percent versus year-ago levels.  On a constant-currency basis, adjusted diluted EPS increased 18 percent.

Through the first six months, General Mills returned to constant-currency growth in net sales and posted double-digit growth in total segment operating profit and adjusted diluted EPS on a constant-currency basis.  Acquisitions and divestitures did not have a material impact on first-half net sales growth.  First-half adjusted gross margins expanded by 170 basis points.  U.S. Retail products making particularly strong contributions to first-half net sales results included Cinnamon Toast Crunch and Lucky Charms cereals, Yoplait Greek yogurt, Nature Valley grain snacks, Annie's soup and other natural and organic products, Totino's hot snacks, and Progresso soup.  In the Convenience Stores and Foodservice segment, Pillsbury frozen mini-bagels, Bugles and Chex Mix salty snacks, and Yoplait Greek and Parfait Pro yogurt varieties were strong net sales contributors.  International products posting strong first-half net sales contributions included Häagen-Dazs ice cream and Old El Paso Mexican products in Europe, Nature Valley snacks in Canada, and Betty Crocker sweet snacks in the Asia-Pacific region.

U.S. Retail Segment Results

Second-quarter net sales for General Mills' U.S. Retail segment totaled $2.76 billion, down 4 percent from the prior year due to lower pound volume.  Acquisitions and divestitures combined to reduce U.S. Retail net sales growth by 1 percent.  Net sales for the U.S. Retail segment included 1 percent declines for the Snacks and Baking Products operating units, while net sales for each of the remaining operating units declined mid single-digits.  U.S. Retail segment operating profit totaled $600 million, down 3 percent due to lower net sales, including the net impact of the Green Giant divestiture and the Annie's acquisition.  This was partially offset by benefit from our cost savings initiatives and lower media expense.

Through the first six months, U.S. Retail net sales totaled $5.29 billion, essentially unchanged from the prior year.  Acquisitions and divestitures contributed 1 point of net sales growth.  Lower pound volume subtracted 2 points of net sales growth, while net price realization and mix added 2 points of growth.  Segment operating profit totaled $1.23 billion, 15 percent above last year. 

International Segment Results

Second-quarter net sales for General Mills' consolidated international businesses declined 12 percent to $1.16 billion, as foreign currency exchange reduced net sales growth by 15 percentage points.  On a constant-currency basis, net sales increased 3 percent.  Pound volume reduced net sales growth by 2 points, and net price realization and mix added 5 points of growth.  Constant-currency net sales rose 17 percent in Latin America, 3 percent in Canada, and 2 percent in the Asia/Pacific region, and declined 2 percent in Europe.  International segment operating profit increased 1 percent to $136 million.  On a constant-currency basis, segment operating profit was up 19 percent, driven by favorable net price realization and lower input costs. 

Through the first six months of fiscal 2016, International segment net sales totaled $2.36 billion, down 12 percent from the prior year.  Foreign currency exchange reduced net sales growth by 16 percentage points.  On a constant-currency basis, net sales grew 4 percent.  Pound volume added 1 point of net sales growth, while net price realization and mix added 3 points of growth.  Six-month segment operating profit totaled $253 million, down 10 percent as reported but up 8 percent in constant currency. 

Convenience Stores and Foodservice Segment Results

Second-quarter net sales for the Convenience Stores and Foodservice segment totaled $506 million, 4 percent below year-ago levels.  Pound volume reduced net sales growth by 3 points, and unfavorable net price realization and mix reduced net sales growth by 1 point. Frozen meals, yogurt, biscuits, and mixes led sales performance in the quarter.  Segment operating profit increased 7 percent to $103 million, driven by benefit from our administrative cost savings initiatives.

Through the first six months of fiscal 2016, Convenience Stores and Foodservice net sales declined 2 percent to $984 million, driven by lower pound volume.  Six-month segment operating profit of $183 million essentially matched year-ago results that were up 15 percent.

Joint Venture Summary

Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ) joint ventures totaled $23 million in the second quarter, down 15 percent.  Constant-currency after-tax earnings from joint ventures declined 6 percent due to lower volume for HDJ.  Constant-currency net sales grew 1 percent for CPW and declined 10 percent for HDJ.  Through the first six months of 2016, after-tax joint-venture earnings totaled $49 million, down 8 percent as reported but up 5 percent in constant currency.

Corporate Items

Unallocated corporate items totaled $72 million net expense in the second quarter of fiscal 2016, compared to $73 million net expense a year earlier.  Excluding mark-to-market valuation effects and restructuring and project-related charges, unallocated corporate items totaled $42 million net expense this year compared to $48 million net expense a year ago. 

Net interest expense totaled $74 million in this year's second quarter, compared to $77 million a year ago.  The second-quarter effective tax rate was 37.4 percent, 5.6 percentage points higher than prior year levels driven primarily by the tax impacts of the sale of Green Giant.  Excluding items affecting comparability, the adjusted effective tax rate was 32.3 percent for both the second quarter and the first half of 2016.

Cash Flow Items

Cash provided by operating activities totaled $1.16 billion in the second quarter, up 34 percent from the prior year due primarily to changes in working capital and higher earnings.  Capital investments through the first six months totaled $294 million.  Dividends paid year-to-date increased 6 percent to $531 million.  During the first half of 2016, General Mills repurchased 9.5 million shares of common stock at an aggregate price of $549 million.  Average diluted shares outstanding for the first half totaled 614 million, down 2 percent from last year's first-half average of 624 million.

Green Giant Divestiture

On November 2, 2015, General Mills completed the sale of the North American Green Giant and Le Sueur vegetable businesses to B&G Foods, Inc., (NYSE: BGS) for $823 million in cash.  General Mills will continue to operate the Green Giant business in Europe and select other export markets under license from B&G Foods.  The company expects to use the net proceeds for share repurchases and debt reduction.  The transaction generated a one-time, pre-tax gain on sale of $199 million which was recorded in the second quarter of 2016.  General Mills expects the transaction will reduce fiscal 2016 net sales growth and total segment operating profit growth by approximately 2 percentage points each, and will be dilutive to fiscal 2016 earnings per share by approximately 7 cents, excluding the gain on sale. 

Updated Cost Savings Targets

In the first half of fiscal 2016, General Mills announced incremental actions related to Project Century in North America and in our Europe region.  The company now is targeting $450 million in cumulative cost savings by fiscal 2017 and $500 million by fiscal 2018 from the combination of Project Century, Project Catalyst, Project Compass, and our policies and practices update, including zero-based budgeting. 

Outlook

Powell said, "Our first-half results keep us on track to deliver the targets we outlined at the beginning of the year, adjusting for the Green Giant sale.  Our emphasis on Consumer First drove positive results in a number of categories and markets, and we plan to expand the impact more broadly in the second half in order to strengthen our retail sales performance.  At the same time, we are committed to driving efficiency in our businesses and expanding our margins.  The incremental actions we took in the first half of the year have enabled us to increase our overall cost savings target to $500 million by 2018."

General Mills revised its 2016 full-year growth targets to reflect the impact of the Green Giant divestiture:

• Net sales in constant currency are now expected to decline at a low single-digit rate from the 2015 levels that included a 53rd week. 
• Total segment operating profit is expected to essentially match last year's levels in constant currency.
• Constant-currency adjusted diluted EPS is expected to grow at a low single-digit rate from the base of $2.86 earned in fiscal 2015.  At current exchange rates, the company estimates a 9-cent headwind from currency translation in 2016.

General Mills will hold a briefing for investors today, December 17, 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; 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 $62 to $65 million of net expenses relating to this action of which approximately $61 million will be cash. We recorded $2.1 million of restructuring charges in the second quarter of fiscal 2016 and $53.6 million in the six-month period ended November 29, 2015 related to this action. 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 notified employees and their representatives of the proposal, pending consultation, to close the manufacturing facility in our International segment supply chain located in Berwick, United Kingdom. If implemented, this action would affect approximately 265 positions. We would expect, subject to the proposal proceeding, to incur total restructuring charges of approximately $46 to $51 million, including approximately $10 million of severance expense and $36 million to $41 million of other charges, primarily fixed asset write-offs. These expenses include cash charges of approximately $21 million. We would expect to record approximately $24 to $29 million pre-tax of restructuring charges in the third quarter of fiscal 2016 and we would expect these actions to be completed by the end of fiscal 2017.

As part of Century, in the second quarter of fiscal 2016, we notified the employees and their representatives of our decision to close our manufacturing facility in East Tamaki, New Zealand in our International segment supply chain. This action will affect approximately 20 positions, and we expect to incur less than $1 million of net expenses relating to this action, most of which will be cash. We recorded $0.4 million of restructuring charges in the second quarter of fiscal 2016 relating to this action. We expect these actions to be completed by the end of fiscal 2017.

As part of Century, in the first quarter of fiscal 2016, we notified the union member employees and union representatives at our West Chicago, Illinois facility of our decision to close this plant in our U.S. Retail segment supply chain. This action will affect approximately 500 positions, and we expect to incur approximately $123 million of net expenses relating to this action, of which approximately $55 million will be cash. We recorded $64 million of restructuring charges in the second quarter of fiscal 2016 and the six-month period ended November 29, 2015 relating to this action. 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 notified the employees at our snacks manufacturing facility in Joplin, Missouri of our decision to close this plant in our U.S. Retail segment supply chain. This action will affect approximately 120 positions, and we expect to incur approximately $12 million of net expenses relating to this action, of which approximately $5 million will be cash. We recorded $2.9 million of restructuring charges in the second quarter of fiscal 2016 and $7.8 million in the six-month period ended November 29, 2015 relating to this action. We expect this action to be completed by the end of fiscal 2018.

Also, we recorded $13.7 million in the second quarter of fiscal 2016 and $39.2 million in the six-month period ended November 29, 2015, of restructuring charges related to Century actions previously announced.

During the six-month period ended November 29, 2015, we paid $75.2 million in cash related to restructuring initiatives.

In addition to restructuring charges, we expect to incur approximately $105 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 $16.2 million in the second quarter of fiscal 2016 and $29.3 million in the six-month period ended November 29, 2015.

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 follows:

Constant-currency International segment operating profit growth rates follows:

Constant-currency International segment region net sales growth rates follow:

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

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

A reconciliation of the effective income tax rate as reported to the effective income tax rate excluding certain items affecting comparability follows:

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SOURCE General Mills