General Mills earnings, sales fall on challenging U.S. market

by Eric Schroeder
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General Mills reported volume, sales, and market share gains for its Yoplait business during the quarter.

MINNEAPOLIS — Weak industry trends in the United States led sales and earnings lower at General Mills, Inc. in the first quarter of fiscal 2015.

Net income in the quarter ended Aug. 24 was $345.2 million, equal to 56c per share on the common stock, down 25% from $459.3 million, or 71c per share, during the same quarter of the previous year. Sales for the quarter were $4,268.4 million, down 2.4% from $4,372.7 million during the same quarter of the previous year.

The sluggish first-quarter results were not unexpected, as General Mills previously had announced that first-quarter earnings per share would be 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,” said Ken Powell, chairman and chief executive officer. “In addition, higher merchandising expense for our U.S. Retail businesses in this period depressed reported net sales and gross margin.”

Going forward, General Mills said year-to-year differences in merchandising expense phasing are expected to have less impact on subsequent quarters in 2015. Additionally, product innovation and consumer-directed marketing plans, holistic margin management (H.M.M.) 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,” Mr. 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% operating profit increase. And our International business segment posted 17% constant-currency profit growth with good constant-currency sales gains, notably in Latin America and Europe.”

Operating profit for the U.S. Retail Segment was $457.2 million, down 25% from $611.9 million during the same quarter of the previous year. Sales for the segment were $2,444.3 million, down 5% from $2,584.1 million.

General Mills said net price realization and mix subtracted 3 percentage points of net sales growth, while volume was a negative 2 points.

Operating profit within the International segment increased 16% to $146 million from $125.6 million, while sales increased 2% to $1,351.1 million from $1,320.8 million. General Mills pointed to strong sales in Latin America, as well as gains in the Asia-Pacific region and Europe as drivers of the sales growth during the period. Sales in Canada fell 2% during the quarter, the company said.

Within the company’s Convenience Stores and Foodservice segment operating profit rose nearly 18% to $87.3 million from $74.1 million. Sales in the division were $473 million, up 1% from $467.8 million. General Mills said yogurt, frozen breakfast and snacks led sales performance in the quarter.

In line with the earnings release, General Mills detailed several new cost-reduction initiatives. Project Century is a formal review of the company’s North American manufacturing and distribution network, with the goals of streamlining operations and identifying potential capacity reductions. General Mills said the initiative is expected to generate $100 million in annualized savings by fiscal 2017, with actions associated with the project expected to commence in the second quarter of fiscal 2015.

General Mills also said it 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 e.p.s.

In addition, General Mills announced a restructuring plan to combine certain Yoplait and General Mills operational facilities in its 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 e.p.s.,” the company said. “The project is expected to generate cost savings of approximately $3 million in fiscal 2015 and a cumulative $12 million by fiscal 2017.”

The company reaffirmed its full-year fiscal 2015 guidance of mid-single-digit growth in net sales, mid-single-digit growth in segment operating profit, and high-single-digit growth in adjusted diluted e.p.s.

“Our No. 1 objective in fiscal 2015 continues to be accelerating our top-line growth,” Mr. Powell said. “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.”
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