Yogurt Sales Sour General Mills’ Q1 FY17 Results

Results also reflect unfavorable impact of foreign exchange fluctuations

g1Food giant General Mills Inc. (NYSE: GIS) announced its Q1 FY17 financial results on September 21st, 2016.

General Mills manufactures and markets branded consumer foods in the U.S. 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: U.S. Retail, International, and Convenience Stores and Foodservice. The Minneapolis, Minnesota-based company sells its products directly as well as through supermarket chains, foodservice distributors, and convenience stores. Read more about the General Mills’ financial results below.

g2Q1 FY17 financial highlights

General Mills’ Q1 FY17 net sales fell 7% to $3.9 billion as its yogurt sales plunged in the U.S., with consumers instead opting for higher protein brands such as Chobani. Sales also fell due to lower organic net sales, the divestiture of the North American Green Giant business, and the impact of foreign exchange. Organic net sales fell 4%, with gains in U.S. natural and organic brands and emerging markets, which were more than offset by declines in the Foundation businesses and U.S. yogurt sales.

During Q1 FY17, the Company’s U.S. yogurt sales, which include the Yoplait Light and Yoplait Greek 100 varieties, fell 15%. Yoplait Light sales plunged almost 30%; and 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. Reacting quickly, 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 nine grams of sugar.

g3General Mills, which has struggled in the organic yogurt market, hopes to improve sales with its premium yogurt line Liberte, which is made with whole milk and organic ingredients, and its new Annie’s yogurt. Both these products were launched in the U.S. over the past few months.g4 Moreover, the rapidly changing eating habits of customers have hurt brands such as Cheerios cereal and Betty Crocker cake mix. The Company has revamped its U.S. cereal business recently, eliminating artificial colors or gluten and adding protein to boost sales. U.S. sales of cereal, the biggest business of General Mills, dropped 4% during the reporting quarter.

On the other hand, organic and natural products saw immense growth; Larabar, a line of snack bars made entirely out of fruits and nuts, grew a staggering 48% and Annie’s Homegrown organic products were up 28%. In fact, the company’s snacking business, which includes other brands like Nature Valley, was the only U.S. segment that saw positive Y-o-Y growth in this category.

General Mills’ Q1 FY17 gross margin decreased from 36.9% to 36.3% of net sales, while adjusted gross margin decreased 30 basis points versus the year-ago period. Operating profit fell 6% to $646 million, while operating profit margin expanded 30 basis points to 16.5% of net sales. Adjusted operating profit margin widened 80 basis points to 19.2% of net sales.

Total segment operating profit declined 5% to $787 million during the reporting quarter and fell 4% on a constant currency basis, reflecting lower net sales. In all, General Mills’ profit fell to $409 million, or $0.67 per share, in Q1 FY17, down from $426.6 million, or $0.69 per share, in the year-ago period. Adjusted for certain restructuring costs and other one-time items, EPS declined to $0.78 from $0.79 in the year-ago period.

Segmental highlights

U.S. Retail segment: General Mills’ Q1 FY17 net sales for the U.S. Retail segment declined 8% to $2.33 billion, as an increase in the Snacks operating unit was more than offset by declines in the other units. Organic net sales fell 5% 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. However, declines in Yoplait yogurt and Progresso soup pulled down segment operating profit by 6% from the year-ago period that saw a 38% profit surge.

International segment: General Mills’ Q1 FY17 net sales for the International segment declined 6% to $1.13 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 Latin America and Asia/Pacific regions were offset by declines in Europe and Canada. Organic net sales declined 1% during the reporting quarter. Products that reported strong results included Wanchai Ferry frozen meals in China, Old El Paso Mexican products in Canada and Yoki snacks in Brazil, offset by declines in Europe on Häagen-Dazs ice cream and Yoplait yogurt. International segment operating profit declined 14% as reported and 11% in constant currency, reflecting currency-driven inflation on products imported into Canada and the U.K., as well as the Green Giant divestiture.

g5Convenience Stores and Foodservice segment: The Company’s Q1 FY17 net sales for the Convenience Stores and Foodservice segment declined 7% to $446 million, primarily due to market index pricing on bakery flour, partially offset by increases for the yogurt, biscuits, and cereal platforms. Organic net sales were also down 7%. Segment operating profit jumped 16%, due to lower input costs and higher grain merchandising earnings during the reporting quarter.

Earnings from joint ventures

After-tax earnings from both Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ) joint ventures fell to $24 million compared to $26 million a year ago. On a constant-currency basis, after-tax earnings from joint ventures declined 10%. Net sales for CPW grew 1% in constant currency and 9% for HDJ versus the prior-year period.

Cash flow generation and cash returns

During Q1 FY17, cash provided by operating activities nosedived 33% to $288 million due to the timing of accounts payable, changes in trade and advertising accruals, and changes in income taxes payable. Capital investments in Q1 FY17 totaled $154 million.

Other highlights

Dividends and share repurchases: General Mills paid $291 million in dividends, an increase of 9% over the prior year period. The company repurchased 5.6 million shares of common stock for a total of $400 million. Average diluted shares outstanding in Q1 FY17 declined 1% to 612 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 U.S., Brazil and China, slashing 1,400 jobs worldwide. The cuts would represent about a 3.6% decrease in General Mills’ 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.

New appointments: General Mills has appointed company veteran, Jeffrey L. Harmening, as the President and Chief Operating Officer responsible for global operations, as per a company release on June 23rd, 2016. Harmening will continue to report to Chairman and CEO Ken Powell.

g6Product recalls: General Mills has suffered a dent to its image after it had to recall 10 million pounds of its Gold Medal, Signature Kitchens, and Wondra flour brands on June 1st, 2016, in response to an ongoing outbreak of E. coli bacteria-related illnesses. The Company is assisting federal health officials ascertain the likely source of dozens of illnesses in 20 states. The different brands of flour recalled are produced at the company’s Kansas City, Missouri, plant.

FY17 outlook

General Mills forecasts FY17 organic net sales growth to range between flat to down 2% as compared to FY16. However, the Company expects to deliver a 6% to 8% 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 2-cent headwind from currency translation in FY17.

Stock Performance

g7General Mills’ stock remained flat at $63.88 at the close on Monday, October 3rd, 2016, having vacillated between an intraday high of $64.02 and a low of $63.38 during the session. The stock’s trading volume was at 2,758,782 for the day. The Company’s market cap was at $38.33 billion as of Monday’s close.

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