General Mills’ Revenue Tumbles on Green Giant Divesture

Organic net sales fell 4%, with volume reductions in US Retail and International segments

g1Food giant General Mills Inc. (NYSE: GIS) announced its Q2 FY17 financial results on December 20th, 2016.

The Minneapolis, Minnesota-based company manufactures and markets branded consumer foods in the US and international markets such as Cheerios, Annie’s, Yoplait, Nature Valley, Fiber One, Häagen-Dazs, Betty Crocker, Pillsbury, Old El Paso, Wanchai Ferry, and Yoki. It also supplies branded and unbranded food products to the foodservice and commercial baking industries. The Company operates in three segments: US Retail, International, and Convenience Stores and Foodservice. Read more about the General Mills’ financial results below.

Q2 FY17 financial highlights

General Mills’ Q2 FY17 net sales fell 7% to $4.1 billion as its yogurt sales plunged in the US, with consumers instead opting for higher protein brands such as Chobani. Sales also fell due to lower organic net sales and the divestiture of the North American Green Giant business. Organic net sales declined 4%, with volume reductions in the US Retail and International segments partially offset by benefits from positive net price realization and mix.g2

During Q2 FY17, the Company’s US yogurt sales, which include the Yoplait Light and Yoplait Greek 100 varieties, fell 18%. The company hopes that combining Greek yogurt with dippable pretzels and oat bites, and making more organic yogurt will turn around the business. To spruce up sales, General Mills is adding more varieties of organic yogurt under the Annie’s Homegrown brand and plans to launch new products such as yogurt drinks and snacks that come in different containers other than the traditional yogurt cup. General Mills has also reformulated its line of Yoplait Greek 100 products, which contains up to 40% more protein, but still has only 100 calories and just 9 grams of sugar. During the reporting quarter, General Mills’ comparable US retail sales fell 6% versus a 0.6% fall seen industry-wide.g3

General Mills and rival ConAgra Foods Inc. (NYSE: CAG) have also eliminated synthetic dyes and artificial flavors from their packaged foods. General Mills in particular has improved its cereals such as Trix and Cheerios, to keep pace with consumers who have shunned processed packaged food for fresher, more natural alternatives. US sales of cereal, the biggest business of General Mills, dropped 3% during the reporting quarter.g4

During Q2 FY17, gross margins expanded 220 basis points to 37% of net sales, due to benefits from cost savings initiatives, favorable mark-to-market effects, and lower restructuring expenses. Adjusted gross margin, which excludes certain items affecting comparability, rose 130 basis points to 36.8%, driven by cost saving efforts which more than offset benign input cost inflation.g5

However, operating profit during Q2 FY17 fell 15% to $769 million from the year-ago same period, which included a gain from the divestiture of Green Giant in North America. Operating profit margin fell 180 basis points to 18.7%, while adjusted operating profit margin expanded 160 basis points to 19.6%, reflecting higher gross margins and a 20% reduction in media and advertising expenses. Total segment operating profit declined 1% to $830 million during the reporting quarter and remained flat versus the year-ago period in terms of constant currency.

In all, net earnings fell 9% to $482 million, or $0.80 per diluted share, from $529.5 million, or $0.87 per diluted share, in Q2 FY16, which included a gain from the divestiture of Green Giant in North America. Adjusted diluted EPS grew 4% to $0.85 during Q2 FY17, while constant-currency adjusted diluted EPS rose 5%.

Segmental highlights

US Retail segment: General Mills’ Q2 FY17 net sales for the US Retail segment fell 9% to $2.52 billion, as an increase in the Snacks operating unit was more than offset by declines in the other units. Organic net sales fell 6% during the reporting quarter. Annie’s and Lärabar natural and organic products, Nature Valley cereals, and Old El Paso Mexican products posted strong results in the reporting quarter, offset by declines in Yoplait yogurt, Pillsbury refrigerated dough, and Progresso soup. Segment operating profit grew 2% driven by benefits from cost savings initiatives and a decrease in media and advertising expense.

International segment: General Mills’ Q2 FY17 net sales for the International segment declined 5% to $1.10 billion, primarily due to foreign exchange headwinds and the divestiture of Green Giant in Canada. On a constant-currency basis, net sales increases in the Asia/Pacific region remained flat, with remaining regions posting net sales declines. Organic net sales declined 1% during the reporting quarter. Strong performance in Häagen-Dazs ice cream in Europe, Wanchai Ferry frozen meals and Yoplait yogurt in China, and Old El Paso Mexican products and Nature Valley grain snacks in Canada were offset by declines in Yoplait yogurt in Europe and the impact of snacks restructuring in China. Segment operating profit nosedived 22% as reported and 18% in constant currency, reflecting currency-driven inflation on products imported into Canada and the UK, as well as the Green Giant divestiture.

Convenience Stores and Foodservice segment: General Mills’ Q2 FY17 net sales for the Convenience Stores and Foodservice segment declined 4% to $488 million, with increases for the yogurt, mixes, and cereal platforms offset by market index pricing on bakery flour. Organic net sales were also down 4%. Segment operating profit rose 6% due to benefits from cost savings initiatives, lower input costs, and higher grain merchandising earnings.

Earnings from joint ventures

Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ) joint ventures jumped 28% to $30 million, driven by volume increases for both CPW and HDJ. On a constant-currency basis, after-tax earnings from joint ventures surged 27%. Net sales for CPW grew 3% in constant currency, and constant-currency net sales for HDJ jumped 21% during the reporting quarter.

Other highlights

Cash flow generation and cash returns: During Q2 FY17, cash provided by operating activities in H1 FY17 fell 15% to $988 million due to changes in trade and advertising accruals and changes in income taxes payable. Capital investments through H1 FY17 totaled $318 million.

g6Dividends and share repurchases: General Mills’ year-to-date dividends rose 8% to $576 million. During H1 FY17, General Mills repurchased 20.5 million shares of common stock for a total of $1.35 billion. Average diluted shares outstanding for H1 FY17 fell 1% to 606 million.

General Mills to cut 1,400 jobs: On September 13th, 2016, General Mills announced the closure of its Vineland, New Jersey, Progresso soup plant. The plant will officially close by Q1 FY18, after being in operation since 2001. The company also plans to sell or close five plants in the US, Brazil and China, slashing 1,400 jobs worldwide. The cuts would represent a 3.6% decrease in the workforce, which stood at roughly 39,000 employees at the end of May 2016.

The plant closures are part of a massive restructuring undertaken by the company to better align its production and investments. In addition, the company has also decided to sell a facility that makes dry baking mix products in Martel, Ohio, to Mennel Milling Company. Mennel would act as a supplier to General Mills once the $18-million sale closes in Q2 FY17. The sale would result in cuts of roughly 180 positions. General Mills will also close snack-manufacturing facilities in Brazil and China, eliminating a total of about 860 positions across the two countries.

Rejig of top brass: General Mills announced that Chief Operating Officer Jeff Harmening, who is being groomed for the role of CEO, was taking over the COO role for the entire company. Four business groups will report directly to Mr. Harmening. General Mills also said it is scouting for expertise in the areas of strategic revenue management, e-commerce and marketing. It also said it is looking for a new chief marketing officer.

FY17 outlook

General Mills forecasts FY17 organic net sales growth is expected to decline 3% to 4% as compared to FY16. However, the Company expects to deliver a 2% to 4% growth in constant-currency total segment operating profit. FY17 adjusted operating profit margin is expected to increase by approximately 150 basis points, with constant-currency adjusted diluted EPS growing 6% to 8% from earnings of $2.92 in FY16. At current exchange rates, the company estimates a 1-cent headwind from currency translation in FY17.

Stock Performance

g7General Mills’ stock closed at $62.46, gaining 0.11%, at the close on Thursday, December 22nd, 2016, having vacillated between an intraday high of $62.52 and a low of $62.02 during the session. The stock’s trading volume was at 2,645,314 for the day. The Company’s market cap was at $37.48 billion as of Thursday’s close.

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