General Mills Sales Decline in Q2, Reaffirms 2015 Full-Year Outlook

18 Dec 2014 --- General Mills has reported results for the second quarter of fiscal 2015. Net sales for the 13 weeks ended Nov. 23, 2014, totaled $4.71 billion, down 3 percent from last year's second quarter results. On a constant-currency basis, quarterly net sales declined 1 percent.

General Mills Chairman and Chief Executive Officer Ken Powell said, "Second-quarter results were broadly in line with the updated outlook we provided in early November. Net sales declined for the quarter as anticipated, reflecting continued weak food-industry trends in the U.S. and slowing growth in key emerging markets. Adjusted diluted EPS came in slightly better than our estimate, primarily due to differences in expense timing. These quarterly results keep us on track to achieve the full-year fiscal 2015 targets announced last month."

Second-quarter net sales of $4.71 billion were 3 percent below year-ago results. Foreign currency exchange reduced net sales growth by 2 percentage points. Pound volume subtracted 2 points of net sales growth, and net price realization and mix contributed 1 point of growth. Gross margin was below year-ago levels reflecting the lower net sales and product mix. Advertising and media expense declined 9 percent. Segment operating profit totaled $847 million, down 8 percent from year-ago results. General Mills recorded restructuring charges totaling $233 million pretax in the second quarter, including $19 million recorded in cost of sales. (Please see the Corporate Items section below for more information on restructuring actions.) Second-quarter net earnings attributable to General Mills totaled $346 million and diluted earnings per share (EPS) totaled 56 cents. Adjusted diluted EPS, which excludes restructuring expenses and certain other items affecting comparability, totaled 80 cents this year compared to 83 cents a year ago. Foreign currency exchange reduced 2015 second-quarter earnings per share by 3 cents.

Following a first quarter where year-to-year differences in merchandising expense depressed reported net sales and gross margin, results improved in the second quarter. Through the first six months, U.S. Retail segment dollar market shares increased in categories representing 68 percent of the company's sales volume. U.S. Retail products making particularly strong contributions to first-half net sales results included Yoplait Original Style and Greek yogurt varieties, Fiber One cookies and Fiber One Streusel snack bars, Nature Valley breakfast biscuits, Cinnamon Toast Crunch and Cheerios Protein cereals; and Chex gluten-free oatmeal. In the Convenience Stores and Foodservice segment, Yoplait GoGurt and Parfait Pro yogurt varieties, Nature Valley snacks, and bowlpack cereals were strong net sales contributors. International products posting strong first-half sales contributions included Old El Paso taco shells and dinner kits in Europe and Australia, Haagen Dazs Triple Sensations ice cream varieties in Europe and Asia, and Nature Valley snacks in Canada.

Second-quarter net sales for General Mills' U.S. Retail segment totaled $2.86 billion, down 4 percent from prior-year results. Lower pound volume subtracted 3 points of net sales growth, and unfavorable net price realization and mix subtracted 1 point of growth. During the quarter, the U.S. Retail businesses were realigned into five operating units. The Snacks and Yogurt operating units posted net sales gains for the quarter, while sales for the Cereal, Baking Products and Meals units declined. Advertising and media expense was 10 percent below year-ago levels. Segment operating profit totaled $616 million, down 10 percent primarily due to the net sales decline.

Through the first six months, U.S. Retail net sales totaled $5.31 billion, 4 percent below prior-year results. Lower pound volume subtracted 3 points of net sales growth and unfavorable net price realization and mix subtracted 1 point of growth. Segment operating profit totaled $1.07 billion, 17 percent below last year.

Second-quarter net sales for General Mills' consolidated international businesses decreased 6 percent to $1.32 billion. Pound volume matched year-ago levels, and favorable net price realization and mix contributed 3 points of net sales growth. Foreign currency exchange reduced net sales growth by 9 percentage points. On a constant-currency basis, International segment net sales grew 3 percent overall, with gains of 4 percent in Europe, 2 percent in the Asia / Pacific region and 14 percent in Latin America. These gains were partially offset by a 7 percent net sales decline in Canada that reflected business disruption caused by a fire at a co-packer.  Advertising and media expense declined 5 percent. Segment operating profit totaled $134 million, down 12 percent as reported and down 2 percent in constant currency. (Please see Note 8 for reconciliation of non-GAAP measures.)

Through the first six months of fiscal 2015, International segment net sales totaled $2.67 billion, down 2 percent. Foreign currency exchange reduced net sales growth by 7 percentage points. On a constant-currency basis, net sales grew 5 percent reflecting favorable net price realization and mix. Pound volume essentially matched prior-year levels. Six-month segment operating profit totaled $280 million, up 1 percent as reported and up 7 percent in constant-currency. (Please see Note 8.)

Second-quarter net sales for the Convenience Stores and Foodservice segment grew 4 percent to reach $530 million. Net price realization and mix contributed 5 points of net sales growth. Pound volume was 1 percent below year-ago levels. Yogurt, snacks, cereal and frozen breakfast items led sales performance in the quarter. Segment operating profit grew 13 percent to $96 million.

Through the first half of 2015, Convenience Stores and Foodservice net sales grew 3 percent to $1.00 billion. Net price realization and mix contributed 4 points of net sales growth, while pound volume reduced sales growth by 1 point. Six-month segment operating profit increased 15 percent to $184 million.

Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Haagen-Dazs Japan (HDJ) joint ventures totaled $27 million, up 4 percent. Constant-currency after-tax earnings from joint ventures grew 13 percent. (Please see Note 8 below for reconciliation of this non-GAAP measure). Constant-currency net sales grew 5 percent for HDJ and declined 3 percent for CPW. Through the first six months of 2015, after-tax joint-venture earnings totaled $53 million, up 6 percent as reported and up 9 percent in constant currency.

Powell said, "The operating environment remains challenging but, as we move into the second half of our fiscal year, we expect to renew sales and profit growth." The company's second-half marketing plans include a strong line-up of new product introductions worldwide, along with product news on many key established brands. Savings from the company's ongoing Holistic Margin Management (HMM) program are targeted to exceed $400 million in fiscal 2015, and several incremental cost-reduction actions launched this year are expected to contribute to margin improvement in the second half. The company said these initiatives to streamline its North American supply chain network and reduce overhead costs are on track to generate $40 million in cost savings in the second half of fiscal 2015.  Cumulative annual savings from these efforts are expected to total between $260 and $280 million in fiscal 2016, and exceed $350 million in fiscal 2017.

General Mills reaffirmed its fiscal 2015 full-year targets. Net sales in constant currency are expected to grow at a low single-digit rate from the 2014 base of $17.9 billion. This includes an estimated 2 points of sales growth from the 53rd week in fiscal 2015 and approximately $120 million of incremental sales from the Annie's acquisition. Total segment operating profit in constant currency is expected to decline at a low single-digit rate from prior-year results of $3.15 billion. Fiscal 2015 adjusted diluted earnings per share (which excludes mark-to-market valuation effects, currency devaluation and restructuring costs) are expected to grow at a low-single-digit rate in constant currency from the base of $2.82 earned in fiscal 2014. At current exchange rates the company estimates a 5-cent EPS headwind from currency translation in 2015.