Volume still under pressure at General Mills

by Josh Sosland
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MINNEAPOLIS – Operating profit of the U.S. Retail segment of General Mills, Inc. edged upward in the third quarter ended Feb. 22 from the same quarter in fiscal 2014, but volume fell 2%.

Operating profit of U.S. Retail was $520.8 million, up 0.8% from $516.6 million in the third quarter last year. Sales were $2,651.9 million, up 1.3%. In attribution of the sales increase, General Mills said net price realization and mix contributed 3 points, mostly offset by the 2 point volume decline.

Overall net income at General Mills in the third quarter was $343.2 million, equal to 57c per share on the common stock, down 16% from $410.6 million, or 66c per share in the third quarter last year. Net sales were $4,350.9 million, down 0.6% from $4,337.4 million. Company-wide, sales volume was down by 1%.

Cutting into net income were $112 million in special charges and unallocated corporate expense, versus $19 million the year before. Special charges included mark-to-market valuation expenses, restructuring and project-related charges, Annie’s integration expenses and a $7 million foreign currency loss. Excluding the special items, earnings per share in the quarter were up 13% from the same period last year.

Despite the lower earnings and sales, General Mills reaffirmed earnings guidance for the full fiscal year, and the company’s top executive was positive on emerging trends in the quarter.

“Our third-quarter results reflect strengthened operating performance,” said Kendall J. Powell, chairman and chief executive officer. “Our U.S. Retail segment posted net sales and profit growth including contributions from the Annie's business acquired in October 2014. Constant-currency net sales and profit growth accelerated for our International segment.  And the Convenience Stores and Foodservice segment led our operating results, with sales up 6% and profit up 11%.”

Drilling deeper into the U.S. Retail results, General Mills said sales of yogurt and snacks rose during the quarter, ready-to-eat cereal sales were flat while the meals and baking products business sustained sales declines during the quarter. Annie’s, acquired in October 2014, accounted for 2% of sales and 1% of volume.

Year-to-date, General Mills said the company gained market share at retail in its largest categories of ready-to-eat cereal, yogurt and snacks.

Operating profit of the International segment of General Mills in the third quarter was $108.4 million, down 1.9% from $110.5 million in the same period a year earlier. Sales were $1,233.9 million, down 7%.

Sales in the segment were slammed by foreign currency exchange, which reduced sales by 13%. Volume was flat while price/mix made a 6% positive contribution.

Operating profit of the Convenience Stores and Foodservice segment was $69 million, up 11% from $62.4 million. Sales were $465.1 million, up 7%. Even in this segment, with its strong sales and profit growth, volume declined 1%. Net price realization/mix contributed 7%.

The after-tax profits from the Cereal Partners Worldwide and Haagen Dazs Japan joint ventures totaled $13 million in the third quarter, down 36% from the third quarter last year, reflecting foreign currency effects and the impact of a $4 million impairment charge for the CPW South African business. CPW net sales for the quarter fell 3% while H.D.J. grew by 7%.

For the nine months ended Feb. 22, General Mills net income was $1,034.5 million, or $1.71 per share, down 27% from $1,419.8 million, or $2.24. Sales were $13,331.5 million, down 2.2%. Adjusted for special charges, earnings per share were almost flat at $2.11 per share year to date, versus $2.15 during the same period of fiscal 2014.

“Our operating results are beginning to show the positive effects of our companywide focus on putting the Consumer First,” Mr. Powell said. “Where we have made improvements to established brands, launched new items, and developed marketing messages that respond to consumers’ evolving preferences, we are seeing growth in our businesses. We’re developing plans for fiscal 2016 designed to build on this momentum and expand the impact of our consumer first strategic focus.”

To achieve its earnings targets, General Mills said it is expecting strong growth in the fourth quarter of fiscal 2015, bolstered by incremental contributions from Annie’s and the benefit of one extra week in the period.  Fiscal 2015 adjusted diluted earnings per share are expected to grow at a low-single-digit rate in constant currency from the $2.82 earned in fiscal 2014. With no further exchange rate moves, the company estimated a 7c reduction to fiscal 2015 adjusted diluted E.P.S. from currency translation
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