General Mills (NYSE: GIS) reported results for the first quarter of fiscal 2015, and provided an update on new cost-reduction initiatives designed to sharpen the company's efficiency and growth focus in 2015 and longer term.
First quarter results summary:
- Net sales declined 2 percent to $4.27 billion. On a constant-currency basis, net sales declined 1 percent.
- Segment operating profit totaled $690 million, down 15 percent from year-ago results as reported and in constant currency
- Diluted earnings per share (EPS) totaled 55 cents compared to 70 cents in last year's first quarter.
- Adjusted diluted EPS totaled 61 cents, down 13 percent from 70 cents in last year's first quarter. Foreign currency translation did not have a material effect on adjusted diluted EPS.
General Mills Chairman and Chief Executive Officer Ken Powell said, "Back in June, we said our 2015 plans anticipated first-quarter EPS below year-ago levels. Our results were driven by sales and profit declines in the U.S., where industry trends were weak in the quarter. In addition, higher merchandising expense for our U.S. Retail businesses in this period depressed reported net sales and gross margin."
General Mills said year-to-year differences in merchandising expense phasing are expected to have less impact on subsequent quarters in 2015. Product innovation and consumer-directed marketing plans, holistic margin management (HMM) cost savings and several incremental cost-reduction actions are expected to drive improved sales and margin performance across the remainder of the year. The company reaffirmed its constant-currency growth targets for the full 2015 fiscal year, but acknowledged conditions in the U.S. market are more challenging than expected.
"We made some important progress in the first quarter," Powell added. "In U.S. Retail, our Yoplait yogurt business returned to growth, with volume, sales, and market share gains. Several other key product lines including Big G cereals, grain bars, and fruit snacks achieved market share increases. Our Convenience Stores and Foodservice segment generated sales growth and an 18 percent operating profit increase. And our International business segment posted 17 percent constant-currency profit growth with good constant-currency sales gains, notably in Latin America and Europe."
Net sales for the 13 weeks ended Aug. 24, 2014, declined 2 percent to $4.27 billion. Pound volume subtracted 2 points of growth. Price realization and mix contributed 1 point of net sales growth, and foreign exchange subtracted 1 point of growth. Gross margin was below year-ago levels reflecting the lower net sales and product mix. Advertising and media expense grew 1 percent from strong year-ago levels. Segment operating profit totaled $690 million, down 15 percent from last year's results. Net earnings attributable to General Mills totaled $345 million and diluted earnings per share totaled 55 cents. Adjusted diluted EPS, which excludes certain items affecting comparability, totaled 61 cents compared to 70 cents a year ago. Foreign exchange translation did not have a material impact on adjusted diluted EPS results.
General Mills introduced more than 250 new items worldwide during the first quarter. Significant U.S. Retail launches included: Cheerios Protein cereal; Chex gluten-free oatmeal varieties; new flavor varieties of Yoplait Greek and Greek 100 yogurt; Fiber One Streusel snack bars, and Old El Paso Bold stand and stuff taco kits. International product launches included Haagen-Dazs Triple Sensations ice cream varieties in Europe, Betty Crocker dessert mixes in Brazil and new seasonal varieties of Wanchai Ferry frozen dumplings in China.
U.S. Retail segment results
First-quarter net sales for General Mills' U.S. Retail segment totaled $2.44 billion, down 5 percent from the prior year. Price realization and mix subtracted 3 points of net sales growth, primarily reflecting higher merchandising expense. Pound volume was 2 percent below year-ago levels. The Snacks, Yoplait and Small Planet Foods divisions achieved net sales gains in the quarter. Advertising and media expense essentially matched year-ago levels. Segment operating profit totaled $457 million compared to $612 million a year ago, reflecting the unfavorable price realization, mix, and lower volume.
International segment results
First-quarter net sales for General Mills' consolidated international businesses grew 2 percent to $1.35 billion. Pound volume subtracted 1 point of net sales growth. Price realization and mix added 7 points of net sales growth and foreign exchange subtracted 4 points of growth. On a constant-currency basis, International segment net sales rose 6 percent overall, including gains of 20 percent in Latin America, 4 percent in the Asia-Pacific region, and 4 percent in Europe. Sales in Canada declined 2 percent on a constant-currency basis, primarily reflecting the exit of select business lines. International segment operating profit grew 16 percent to $146 million, despite higher input costs and a 2 percent increase in advertising and media expense. Segment operating profit grew 17 percent on a constant-currency basis. (Please see Note 7 below for reconciliation of constant-currency sales and operating profit, which are non-GAAP measures.)
Convenience Stores and Foodservice segment results
First-quarter net sales for the Convenience Stores and Foodservice segment totaled $473 million, up 1 percent from year-ago results. Pound volume subtracted 1 point of net sales growth, while price realization and mix contributed 2 points of growth. Yogurt, frozen breakfast, and snacks led sales performance in the quarter. Segment operating profit grew 18 percent to $87 million.
Joint venture summary
Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Haagen-Dazs Japan (HDJ) joint ventures totaled $26 million, up 7 percent from prior-year results. Constant-currency after tax earnings from joint ventures grew 5 percent. (Please see Note 7 below for reconciliation of this non-GAAP measure.) Constant-currency net sales grew 3 percent for HDJ, and were down 1 percent for CPW.
Unallocated corporate items totaled $119 million net expense in the first quarter of fiscal 2015, compared to $74 million net expense a year earlier. Excluding mark-to-market valuation effects in both years, unallocated corporate items totaled $70 million net expense this year compared to $73 million net expense a year ago.
Net interest expense totaled $78 million in this year's first quarter, compared to $79 million a year ago. The first-quarter adjusted effective tax rate was 32.3 percent, essentially comparable to last year's 32.2 percent rate. (Please see Note 7 below for reconciliation of this non-GAAP measure.)
Cash flow items
Cash provided by operating activities totaled $329 million in the first quarter. Capital investments in the period totaled $149 million. Dividends paid increased to $254 million. During the quarter, General Mills repurchased nearly 9 million shares of common stock at an aggregate price of $462 million. Average diluted shares outstanding for the first quarter of 2015 totaled 629 million, down 5 percent from last year's first-quarter average of 660 million.
New cost-reduction initiatives
In June of this year, General Mills announced it had initiated several new cost-reduction projects designed to boost organizational efficiency and sharpen business focus behind the company's key growth strategies. These initiatives are incremental to the company's ongoing Holistic Margin Management (HMM) program, under which the company expects to generate supply chain cost savings exceeding $400 million in fiscal 2015.
Project Century is a formal review of General Mills' North American manufacturing and distribution network, with the goals of streamlining operations and identifying potential capacity reductions. Today, General Mills said that this initiative is expected to generate $100 millionin annualized savings by fiscal 2017. Actions associated with this project are expected to commence in the second quarter of fiscal 2015. General Mills also has initiated efforts to further reduce overhead costs. These efforts are targeted to generate savings of $40 million pre-tax in fiscal 2015, with additional savings expected in 2016. Charges associated with the North American supply chain review and overhead reduction projects (primarily asset write-downs and severance costs) will be excluded from General Mills adjusted diluted EPS.
In addition, General Mills recently announced a restructuring plan to combine certain Yoplait and General Mills operational facilities in our International segment. Restructuring expense of $14 million associated with this project was recorded in the first quarter of fiscal 2015 and is being excluded from adjusted diluted EPS. The project is expected to generate cost savings of approximately $3 million in fiscal 2015 and a cumulative $12 million by fiscal 2017.
Powell said, "Our number one objective in fiscal 2015 continues to be accelerating our topline growth. At the same time, we know we must always be working to reduce costs, streamline operations and improve efficiency across our worldwide business. We've got strong plans for both of these efforts."
General Mills reiterated its full-year growth targets for 2015. Net sales are expected to grow at a mid-single-digit rate in constant currency, including contribution of a 53rd week in this fiscal year. Segment operating profit also is targeted to grow at a mid-single-digit rate in constant currency. Benefit of the extra fiscal week will be reinvested to support increased advertising and digital media initiatives, along with project expenses related to several key fiscal 2016 product launches. Adjusted diluted EPS (which excludes mark-to-market valuation effects, currency devaluation, and restructuring, exit and other project-related costs) is expected to grow at a high single-digit rate in constant currency. At current exchange rates the company estimates a 2-cent headwind from currency translation in 2015.