General Mills reports fiscal Q3 net earnings of US$410.6M, up 3.1% from year-ago period; net sales fall 1.2% to US$4.38B

Nevin Barich

MINNEAPOLIS , March 19, 2014 (press release) – General Mills (NYSE: GIS) today reported results for the third quarter of fiscal 2014. Sales and operating profit for the 13 weeks ended Feb. 23, 2014, reflect lower volumes, consistent with generally weak food industry trends during this period; the impact of increased consumer marketing and merchandising investment in the company's U.S. yogurt business; and negative foreign currency effects.

Fiscal 2014 Third Quarter Financial Summary

Net sales of $4.38 billion were 1 percent below year ago levels.

Adjusted segment operating profit was $690 million, down 10 percent from year-ago results that grew 13 percent. (Please see Note 9 below for reconciliation of this non-GAAP measure)

Diluted earnings per share (EPS) totaled 64 cents, up 7 percent from 60 cents a year ago.

Adjusted diluted EPS, which excludes certain items affecting comparability, totaled 62 cents this year compared to 66 cents in last year's third quarter. (Please see Note 9 below)

Net sales for the third quarter of fiscal 2014 totaled $4.38 billion, down 1 percent from year-ago levels. Foreign exchange translation reduced net sales growth by 1 percentage point.
Net price realization and mix contributed 1 point of net sales growth, while lower pound volume reduced sales growth by 1 point. Third-quarter gross margin was above year-ago levels including changes in mark-to-market valuation of certain commodities and grain inventories. Excluding mark-to-market effects, gross margin declined for the quarter (please see Note 9 below for reconciliation of this non-GAAP measure). Advertising and media expense was 3 percent below year-ago levels, while other consumer marketing spending was up 5 percent in the period. Adjusted segment operating profit was $690 million, 10 percent below prior-year results excluding the impact of Venezuela devaluation (please see Note 9 below). Third-quarter net earnings attributable to General Mills totaled $411 million and diluted earnings per share totaled 64 cents per share. Adjusted diluted EPS, which excludes certain items affecting comparability, totaled 62 cents per share in the third quarter of fiscal 2014 compared to 66 cents a year ago (please see Note 9 below).

Chairman and Chief Executive Officer Ken Powell said, "This year's severe winter weather dampened sales performance across the food industry, and third-quarter results for our U.S. Retail and Convenience Stores and Foodservice segments reflect that disruption. International segment results were stronger, with constant-currency sales gains in every region including double-digit growth in both Asia-Pacific and Latin America."

Nine-month Financial Summary

Net sales through the first nine months of fiscal 2014 grew 2 percent to $13.63 billion.

Adjusted segment operating profit was $2.42 billion, 3 percent below prior year results. (Please see Note 9 below)

Diluted EPS totaled $2.18 compared to $2.24 a year ago.

Adjusted diluted EPS totaled $2.15 for the first nine months of 2014 compared to $2.18 a year ago. (Please see Note 9 below)

U.S. Retail products contributing to year-to-date net sales growth include Honey Nut Cheerios, Cinnamon Toast Crunch and Cascadian Farm organic cereals; Yoplait Greek yogurt; Fiber One protein bars, Nature Valley oatmeal squares and Larabar snacks; Old El Paso shelf-stable and frozen Mexican food items; Pillsbury refrigerated biscuits, sweet rolls and gluten-free dough products; and Totino's frozen pizza and snacks. International net sales growth included strong contributions from Haagen-Dazs ice cream and Wanchai Ferry frozen dim sum products in China, and Yoki popcorn varieties and Kit Facil dinner kits in Brazil.

U.S. Retail Segment Results

Third-quarter net sales for General Mills' U.S. Retail segment declined 2 percent to $2.62 billion. Lower pound volume reduced net sales growth by 1 percentage point, and net price realization and mix also subtracted 1 point of net sales growth. Advertising and media expense declined 1 percent in the period. Segment operating profit totaled $517 million, 11 percent below strong year-ago results. This primarily reflects the impact of higher dairy input costs and increased marketing and merchandising investment for the U.S. yogurt business.

Through the first nine months of fiscal 2014, U.S. Retail segment net sales totaled $8.17 billion. This essentially matched prior-year levels, as a 1 percent decline in pound volume was offset by higher net price realization and mix. Advertising and media expense was up 1 percent through the first nine months, and segment operating profit of $1.81 billion was 3 percent below year-ago results.

International Segment Summary

Third-quarter net sales for General Mills' consolidated International businesses grew 2 percent to $1.32 billion. Lower pound volume reduced net sales growth by 1 percentage point, while net price realization and mix contributed 8 points of growth. Foreign currency exchange reduced net sales growth by 5 percentage points. On a constant-currency basis, International net sales increased 7 percent overall. Constant-currency net sales grew 17 percent in Latin America, led by Brazil, and rose 14 percent in Asia-Pacific, led by China. The Canada and Europe regions each achieved a 2 percent gain in constant-currency net sales. (Please see Note 9 below for reconciliation of these non-GAAP measures) International segment operating profit grew 15 percent to $111 million. Excluding the impact of the Venezuela devaluation in fiscal 2013, adjusted International segment operating profit grew 1 percent. (Please see Note 9 below)

Through the first nine months of fiscal 2014, International segment net sales grew 8 percent to $4.05 billion. Pound volume grew 9 percent, primarily reflecting incremental contributions during the first quarter from businesses added during 2013. Net price realization and mix added 3 points of sales growth, while foreign currency exchange reduced net sales growth by 4 points. Segment operating profit grew 8 percent to $389 million. Excluding the impact of the Venezuela devaluation in fiscal 2013, adjusted International segment operating profit grew 4 percent. (Please see Note 9 below) Advertising and media expense was 1 percent below year-ago levels.

Convenience Stores and Foodservice

Third-quarter net sales for the Convenience Stores and Foodservice segment totaled $437 million, down 7 percent from year-ago levels. Pound volume was 3 percent lower in the quarter, as severe weather hampered foodservice industry performance. Net price realization and mix subtracted 4 points of net sales growth, including lower indexed prices on certain product lines. Segment operating profit totaled $62 million, down 17 percent.

Through the first nine months of fiscal 2014, Convenience Stores and Foodservice segment net sales totaled $1.41 billion, down 3 percent from the previous year primarily due to lower pound volume. Segment operating profit of $222 million was 7 percent below year-ago results.

Joint Venture Summary

Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Haagen-Dazs Japan (HDJ) joint ventures totaled $23 million in the third quarter, up 7 percent. Constant-currency net sales grew 1 percent for CPW and increased 13 percent for HDJ. Through the first nine months of fiscal 2014, combined after-tax earnings from joint ventures totaled $73 million, 6 percent below year-ago results due to unfavorable foreign currency exchange and increased CPW consumer marketing expense.

Corporate Items

Unallocated corporate items totaled $19 million of net expense in the third quarter of fiscal 2014, compared to $101 million of net expense a year earlier. Excluding the effects of mark-to-market valuation for certain commodity positions and grain inventories in both years, unallocated corporate items totaled $42 million of expense in this year's third quarter compared to $76 million of expense a year earlier. Through the first nine months of 2014, unallocated corporate items excluding mark-to-market effects totaled $185 million of expense this year compared to $216 million of expense a year earlier.

Net interest expense totaled $76 million in the third quarter of fiscal 2014, down $1 million from year-ago levels. The effective tax rate was 33.8 percent in this year's third quarter. Excluding items affecting comparability, the adjusted effective tax rate was 33.6 percent for the third quarter and 33.0 percent for the first nine months of 2014 (Please see Note 9 below for reconciliation of this non-GAAP measure).

Cash Flow Items

Cash provided by operating activities totaled $1.72 billion through the first nine months of fiscal 2014. Capital investments totaled $416 million year-to-date. Dividends paid rose to $729 million. During the first nine months, General Mills repurchased 29 million shares of common stock for a total of $1.40 billion. Average diluted shares outstanding totaled 650 million through the first nine months of fiscal 2014, down 2 percent from the prior-year level. Third-quarter average diluted shares outstanding were 4 percent below the year-ago level.

Outlook

Powell said, "We anticipate strong double-digit growth in adjusted diluted EPS for the final quarter of fiscal 2014. Our quarterly input cost inflation is expected to be well below year-ago levels. We also expect the quarterly tax rate and the average number of shares outstanding to be well the below the prior-year."

General Mills expects fiscal 2014 adjusted diluted EPS of between $2.87 and $2.90 per share. Adjusted diluted EPS excludes mark-to-market valuation effects for certain commodities and grain inventories; restructuring and other exit costs; and the impact of changes in Venezuelan foreign currency policy.

General Mills will hold a briefing for investors today, March 19, 2014, beginning at 8:30 a.m. Eastern time. You may access the web cast from General Mills' internet home page: generalmills.com.

Adjusted diluted EPS, adjusted segment operating profit, adjusted International segment operating profit, gross margin excluding mark-to-market effects, International sales excluding foreign currency translation effects, and adjusted effective tax rate are each non-GAAP measures. Reconciliations of these measures to their relevant GAAP measures appear in Note 9 to the attached Consolidated Financial Statements.

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