Milling & Baking News - March 27, 2018 - 20

Financial Results

General Mills profits fall short;
grain-based shares tumble
Continued from Page 1

industry, we're seeing sharp increases in
input costs, including inflation in freight
and commodities. Because of our improved volume performance, we're also
incurring higher operational costs."
Mr. Harmening's disappointment
was echoed in the stock market response to the financial results. In trading March 21 on the New York Stock
Exchange, General Mills shares fell
$4.42, or 9%, to $45.51.
The General Mills results sent investors fleeing from large consumer packaged foods companies (see related
story on Page 10).
"We are moving urgently to address
this increasingly dynamic cost inflation environment," Mr. Harmening
continued. "We've taken actions to
improve profitability in the near term,
and we've launched initiatives that
will reduce our long-term cost structure. While these actions will only
partially offset the cost headwinds in
fiscal 2018, we are confident they will
strengthen our bottom-line results beginning in fiscal 2019."
General Mills net income in the third
quarter was $941.4 million, equal to
$1.64 per share on the common stock,
up 163% from $357.8 million, or 61c
per share, in the third quarter last year.
Sales were $3,882.3 million, up 2.3%
from $3,793.2 million the year before.
In a March 21 conference call with
investment analysts, Mr. Harmening
said fiscal 2018 input cost inflation will
be 4%, 1 point higher than its previous
estimate. He said freight cost inflationary pressure is even greater than was
the case when he made his last presentation a month ago.
"We're now having to go out to the
spot market for close to 20% of our
shipments versus the historic average
of about 5%, and those spot market
prices can be 30% to 60% higher than
our contracted rates," he said. "In fact,
North American freight spot prices
were near 20-year highs in February."
To mitigate escalating freight costs,
General Mills is widening the number
of qualified freight carriers it uses and
is also looking into different modes of
transportation when possible.
Also pressuring margins was supply chain cost pressure attributed to
overall higher volumes, particularly
when it comes to new products, requiring the utilization of more external manufacturing.
20 / March 27, 2018

Milling & Baking News

Mr. Harmening said actions the
company is taking will help the company deliver profit growth in the
fourth quarter with a greater bottom
line impact in fiscal 2019.
Total segment operating profit in the
third quarter was $628 million, down
6% in constant currency from the same
quarter a year earlier. Adjusted operating profit margin tightened by 120 basis points to 15.7%. Accounting for the
weaker profitability was a 250-point
decrease in gross margins, resulting from higher freight and logistics
costs, commodity inflation, other operational costs and higher merchandising expense. These pressures were

'Like the
broader
industry,
we're seeing
sharp increase
in input
costs, including
inflation in freight and
commodities.'
- Jeff Harmening, General Mills, Inc.

partially offset during the quarter by
lower selling, general and administrative expenses, including a 22% cut in
advertising and media spending.
Third-quarter operating profit of the
North America Retail segment was
$518.3 million, up 0.3% from $516.7
million in the third quarter last year.
Sales were $2,517.4 million, up 0.7%.
Results were boosted by a 6% sales
increase in Canada, 3% in U.S. snacks
and 2% in U.S. meals and baking.
Drags on results were sales declines of
8% in U.S. yogurt and 1% in U.S. cereal. Accounting for the flat operating
profits, higher sales and lower sales,
general and administrative expenses
were offset by higher input costs.
Mr. Harmening said General Mills
gained market share in seven of its top
nine categories.
"Our average new product (is) turning nearly 50% better on shelf compared to last year," he said. "This includes Chocolate Peanut Butter Cheerios, which is the biggest launch in the
cereal category this year, and Oui by
Yoplait, which is the largest launch in
the yogurt category this year."

The company's snack bar business
did well in the quarter, with Nature
Valley posting double-digit retail sales
growth. Mr. Harmening attributed the
results to innovation, including layered bars and filled soft-baked bars.
Convenience Stores and Foodservice segment operating profit in the
third quarter was $84.3 million, down
10% from $93.6 million in the same period the year before. Sales were $460.3
million, up 2.6%.
General Mills attributed the sales
gains to its Focus 6 platforms, which
encompass cereal, yogurt, biscuits,
mixes, frozen meals and baking mixes.
The company said it benefited from
"market index pricing on bakery flour."
Higher input costs accounted for
the pressure on operating profits.
Joint venture after-tax earnings in the
third quarter were $17 million, up 55%
from $11 million in the third quarter
last year. Cereal Partners Worldwide
net sales were up 2% in the quarter. The
earnings improvement was attributed
to higher sales for C.P.W., the company's global cereal j.v. with Nestle S.A.
Quarterly operating profits fell even
more sharply in the company's international business with Europe and Australia down 35% and Asia and Latin America sustaining a loss. In the case of Europe
and Australia, higher input cost inflation
was blamed for the weaker profits. For
Asia and Latin America, lower volume,
higher input costs, and higher sales,
general and administrative expenses
pushed the segment into the red.
The results darkened the company's
prospects for the full year. General
Mills revised its operating profit forecast for fiscal 2018 to down 5% to 6%,
versus its previous guidance of flat to
down 1%.
"The change in outlook was driven
by higher-than-expected supply chain
costs, including freight and logistics,
commodities, and other operational
costs," the company said. "The company expects to generate constant-currency total segment operating profit
growth in the fourth quarter, driven
by favorable net price realization and
mix and increased cost savings. Currency translation is expected to add 1
point to full-year total segment operating profit growth."
The company's sales guidance for
the year was left unchanged at levels
in line with fiscal 2018.
In the nine months ended Feb. 25,
net income was $1,776.6 million, or
$3.10 per share, up 42% from $1,248.6
million, or $2.12 per share. Sales were
$11,850.2 million, up 0.3%. MBN
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Milling & Baking News - March 27, 2018

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