General Mills Reports Fiscal 2017 Third-Quarter Results

MINNEAPOLIS, March 21, 2017 /PRNewswire/ -- General Mills (NYSE: GIS) today reported results for the third quarter ended February 26, 2017.

"Our third-quarter results finished in line with our expectations and keep us on track to deliver the guidance we updated last month," said General Mills Chairman and Chief Executive Officer Ken Powell.  "Our net sales declined due primarily to gaps in pricing and promotional activity in key U.S. businesses.  Our cost savings efforts helped us expand our adjusted operating profit margin and drive growth in adjusted diluted EPS.  Looking ahead, we are highly focused on improving our topline performance while continuing to expand our margins.  We've added support in the fourth quarter to strengthen key business lines, and we're pursuing global growth priorities that will further improve our sales trends beyond fiscal 2017."

General Mills is committed to pursuing its strategy of Consumer First and leveraging its five global platforms – cereal, snacks, yogurt, convenient meals, and super-premium ice cream – along with its new global organizational structure to create market-leading growth.    The company believes that generating a balance of topline growth and margin expansion, while maintaining disciplined focus on cash conversion and cash returns, is critical to delivering top-tier shareholder returns.

¹ Please see Note 7 to the Consolidated Financial Statements below for reconciliation of this and other non-GAAP measures used in this release.

Third Quarter Results Summary

• Reported net sales declined 5 percent to $3.79 billion. Organic net sales also declined 5 percent, primarily reflecting volume reductions in the North America Retail segment partially offset by benefits from positive net price realization and mix.

• Gross margin increased 60 basis points to 34.5 percent of net sales, reflecting benefits from cost-savings initiatives and favorable mark-to-market effects. Adjusted gross margin, which excludes certain items affecting comparability, increased 20 basis points to 35.0 percent, driven by cost-savings efforts more than offsetting the impact of volume deleverage and modest input cost inflation.

• Operating profit totaled $542 million, down 7 percent from year-ago levels due to higher restructuring charges related to the recent global reorganization. Operating profit margin of 14.3 percent was down 30 basis points. Adjusted operating profit margin increased 100 basis points to 16.9 percent, reflecting higher gross margins, lower administrative expense, and an 8 percent reduction in media and advertising expense.

• Total segment operating profit of $662 million was down 2 percent in constant currency.

• Net earnings attributable to General Mills totaled $358 million. Diluted EPS of $0.61 increased 3 percent, driven by a lower tax rate and 3 percent fewer average diluted shares outstanding.

• Adjusted diluted EPS, which excludes certain items affecting comparability of results, totaled $0.72 in the third quarter, up 11 percent from the prior year. Constant-currency adjusted diluted EPS increased 8 percent.

Nine Month Results Summary

• Reported net sales declined 7 percent to $11.81 billion and organic net sales declined 5 percent.

• Gross margin increased 70 basis points to 35.9 percent of net sales. Adjusted gross margin increased 40 basis points to 36.4 percent.

• Operating profit totaled $1.96 billion, down 10 percent from the prior year. Operating profit margin of 16.6 percent was down 60 basis points. Adjusted operating profit margin increased 110 basis points to 18.6 percent.

• Total segment operating profit of $2.28 billion was down 2 percent in constant currency.

• Net earnings attributable to General Mills totaled $1.25 billion. Diluted EPS were $2.08, down 3 percent from a year ago.

• Adjusted diluted EPS increased 4 percent to $2.35. Constant-currency adjusted diluted EPS were also up 4 percent.

Operating Segment Results

In the third quarter of fiscal 2017, General Mills announced a new global organization structure to streamline its leadership, enhance global scale, and drive improved operational agility to maximize its growth capabilities.  As a result of this global reorganization, beginning in the third quarter of fiscal 2017, the company is reporting results for its four operating segments as follows:  North America Retail; Convenience Stores & Foodservice; Europe & Australia; and Asia & Latin America.  Net sales by segment and segment operating profit amounts have been restated to reflect the new operating segments (please see Note 1 below for more information on our operating segments).  

North America Retail Segment

Third-quarter net sales for General Mills' North America Retail segment totaled $2.50 billion, down 7 percent from the prior year, driven primarily by double-digit declines in the U.S. Meals & Baking and U.S. Yogurt operating units.  Organic net sales declined 8 percent.  Segment operating profit of $517 million was down 7 percent due to lower volumes partially offset by benefits from cost savings initiatives.

Through nine months, North America Retail segment net sales were down 8 percent to $7.80 billion, with declines in the U.S. Meals & Baking, U.S. Yogurt, U.S. Cereal, and Canada operating units.  Organic net sales declined 6 percent.  Segment operating profit totaled $1.80 billion, down 5 percent from a year ago due to lower volumes, currency-driven inflation on products imported into Canada, and the impact of the Green Giant divestiture in fiscal 2016, partially offset by benefits from cost savings initiatives.

Convenience Stores & Foodservice Segment

Third-quarter net sales for General Mills' Convenience Stores & Foodservice segment were down 1 percent to $448 million, with declines on certain frozen dough products partially offset by growth for the Focus 6 platforms, including cereal, biscuits, and yogurt.  Organic net sales were also down 1 percent.  Segment operating profit increased 3 percent to $94 million in the quarter, reflecting benefits from cost savings initiatives and lower input costs.

Through nine months, Convenience Stores & Foodservice segment net sales declined 4 percent to $1.38 billion, primarily driven by market index pricing on bakery flour, partially offset by growth for the Focus 6 platforms, including cereal, yogurt, and biscuits.  Organic net sales also declined 4 percent.  Segment operating profit of $295 million was up 8 percent from the prior year due to benefits from cost savings initiatives, lower input costs, and higher grain merchandising earnings.

Europe & Australia Segment

Third-quarter net sales for General Mills' Europe & Australia segment totaled $424 million, down 3 percent from the prior year driven by unfavorable foreign currency exchange offsetting growth in Häagen-Dazs ice cream, Old El Paso Mexican products, and Nature Valley snacks.  Organic net sales increased 2 percent.  Segment operating profit of $42 million increased 25 percent as reported and 39 percent in constant currency, reflecting favorable mix and benefits from cost savings initiatives, partially offset by input cost inflation.

Through nine months, Europe & Australia segment net sales declined 7 percent to $1.34 billion, reflecting unfavorable foreign currency exchange and declines on Yoplait yogurt, partially offset by growth in Häagen-Dazs ice cream, Old El Paso Mexican products, and Nature Valley snacks.  Organic net sales declined 2 percent.  Segment operating profit of $127 million was down 12 percent due to unfavorable foreign currency exchange and input cost inflation, including currency-driven inflation on products imported into the U.K., partially offset by benefits from cost savings initiatives.  On a constant-currency basis, segment operating profit declined 3 percent.

Asia & Latin America Segment

Third-quarter net sales for General Mills' Asia & Latin America segment totaled $421 million, essentially matching year-ago results.  Favorable foreign currency exchange and growth in Häagen-Dazs ice cream were offset by the restructuring of the snacks business in China, the net impact of divestitures and acquisitions in fiscal 2016, and declines in Latin America driven by macro-economic challenges.  Organic net sales declined 2 percent.  Segment operating profit increased to $10 million from $2.5 million a year ago, reflecting benefits from currency-driven deflation on raw materials imported into certain markets, as well as the impact of divestitures in fiscal 2016.

Through nine months, Asia & Latin America segment net sales declined 1 percent to $1.29 billion, due to unfavorable foreign currency exchange and the net impact of divestitures and acquisitions in fiscal 2016.  Organic net sales increased 1 percent.  Segment operating profit totaled $61 million, up 45 percent as reported and up 48 percent in constant currency.

Joint Venture Summary

Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ) joint ventures totaled $11 million in the third quarter, down 32 percent due primarily to an asset write-off for CPW and lower volume for HDJ.  On a constant-currency basis, after-tax earnings from joint ventures declined 35 percent.  Third-quarter net sales for CPW grew 4 percent in constant currency, and constant-currency net sales for HDJ declined 5 percent.  Through the first nine months of 2017, after-tax joint-venture earnings totaled $65 million, flat to last year as reported and down 3 percent in constant currency.

Other Income Statement Items

Unallocated corporate items totaled $42 million net expense in the third quarter of fiscal 2017, compared to $78 million net expense in 2016.  Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totaled $22 million net expense in this year's third quarter compared to $44 million net expense a year ago.

Restructuring, impairment, and other exit costs totaled $78 million in the quarter compared to $17 million a year ago.  An additional $28 million of restructuring and project-related charges were recorded in cost of sales during the quarter compared to $27 million a year ago (please see Note 3 below for more information on these charges).  

Net interest expense totaled $76 million in this year's third quarter, compared to $77 million a year ago.  The effective tax rate was 23.0 percent in the third quarter, compared to 31.0 percent 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 24.7 percent compared to 30.8 percent a year ago.

Cash Flow Generation and Cash Returns

Cash provided by operating activities totaled $1.56 billion through nine months, down 16 percent from the prior year due to changes in trade and advertising accruals driven by reduced spending and changes in income taxes payable related to the North American Green Giant divestiture in fiscal 2016.  Capital investments through the first nine months totaled $475 million.  Dividends paid year-to-date increased 8 percent to $856 million.  During the first nine months of 2017, General Mills repurchased 25.4 million shares of common stock for a total of $1.65 billion.  Average diluted shares outstanding through nine months declined 2 percent to 601 million.   

Outlook

General Mills reaffirmed its key full-year fiscal 2017 targets:

• Organic net sales are expected to decline approximately 4 percent.

• Constant-currency total segment operating profit growth is expected to be in a range of down 1 percent to up 1 percent.

• Adjusted operating profit margin is targeted at 18 percent of net sales or higher, which translates to at least 120 basis points of expansion versus year-ago levels.

• Constant-currency adjusted diluted EPS is expected to increase 5 to 7 percent from the base of $2.92 earned in fiscal 2016. The company estimates currency translation will have an immaterial impact on full-year fiscal 2017 adjusted diluted EPS.

General Mills will hold a briefing for investors today, March 21, 2017, beginning at 8:30 a.m. Eastern time.  You may access the webcast 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 third quarter of fiscal 2017, we approved restructuring actions designed to better align our organizational structure with our strategic initiatives.  In connection with these actions, we expect to eliminate approximately 400 to 600 positions. We expect to incur approximately $80 million of net expenses relating to these actions, all of which will be cash. We recorded $73.1 million of restructuring charges in the third quarter of fiscal 2017 relating to these actions. We expect these actions to be completed by the end of fiscal 2018. 

In the second quarter of fiscal 2017, we notified the employees and their representatives of our decision to close our pasta manufacturing facility in Melbourne, Australia in our Europe & Australia segment to improve our margin structure.  This action will affect approximately 350 positions, and we expect to incur approximately $34 million of net expenses relating to this action, most of which will be non-cash.  We recorded $5.7 million of restructuring charges in the third quarter of fiscal 2017 and $17.7 million in the nine-month period ended February 26, 2017 relating to this action.  We expect these actions to be completed by the end of fiscal 2019.

In the first quarter of fiscal 2017, we announced a plan to restructure certain product lines in our Asia & Latin America segment.  To eliminate excess capacity, we closed our snacks manufacturing facility in Marília, Brazil and ceased production operations for meals and snacks at our facility in São Bernardo do Campo, Brazil. We ceased production of certain underperforming snack products at our facility in Nanjing, China. These and other actions will affect approximately 420 positions in our Brazilian operations and approximately 440 positions in our Greater China operations.  We expect to incur approximately $38 million of net expenses of which approximately $4 million will be cash.  We recorded $2.3 million of restructuring charges in the third quarter of fiscal 2017 and $45.6 million in the nine-month period ended February 26, 2017 relating to this action.  We expect these actions to be completed by the end of fiscal 2018.

In the first quarter of fiscal 2017, we approved a plan to close our Vineland, New Jersey facility to eliminate excess soup capacity in our North America Retail segment. This action will affect approximately 370 positions, and we expect to incur approximately $65 million of net expenses, of which approximately $18 million will be cash.  We recorded $7.7 million of restructuring charges in the third quarter of fiscal 2017 and $35.6 million in the nine-month period ended February 26, 2017 relating to this action. We expect this action to be completed by the end of fiscal 2019.

In addition, we recorded restructuring charges of $5.2 million in the third quarter of fiscal 2017, $34.2 million in the third quarter of fiscal 2016, $36.3 million in the nine-month period ended February 26, 2017, and $199.2 million in the nine-month period ended February 28, 2016 relating to other restructuring actions previously announced.  

During the nine-month period ended February 26, 2017, we paid $67.1 million in cash relating to restructuring initiatives. 

In addition to restructuring charges, we recorded $11.5 million of project-related costs in cost of sales in the third quarter of fiscal 2017 and $36.4 million in the nine-month period ended February 26, 2017.  We expect to incur approximately $17.1 million of project-related costs in future periods related to our restructuring initiatives.

Details of our current restructuring initiatives were as follows:

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 follows:

Constant-currency operating profit growth rates by segment follows:

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:

SOURCE General Mills

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