General Mills Lags, Affirms Outlook - Analyst Blog

General Mills Inc ( GIS ) has reported adjusted earnings, excluding the effects of mark-to-market valuation of certain commodity positions, Yoplait integration costs in 2012, and a net benefit from certain tax matters in 2011, of 76 cents in the second quarter of fiscal 2012, in-line with the prior-year quarter. The quarterly earnings however, lagged the Zacks Consensus Estimate of 79 cents.

Management affirms its fiscal 2012 earnings to be in the range of $2.59 - $2.61 a share, excluding mark-to-market effects and integration costs for the Yoplait acquisition. General Mills also expects adjusted earnings to progress in the high single-digit to low double-digit growth in the second half of 2012.

Revenues and Margins

Total revenue for the reported quarter grew by 14% year over year to $4.62 billion, and the Yoplait acquisition contributed 8 percentage points to the net sales growth. In addition, foreign exchange contributed 1 percentage point of net sales growth, while price realization and mix contributed 3 percentage points of growth.

Volumes (measured in pounds) also contributed 10 percentage points to net sales volume. Revenues marginally exceeded the Zacks Consensus Estimate of $4.59 billion.

However, higher input costs and the change in business mix due to the Yoplait acquisition led to the decline in gross margin by 570 basis points (bps) in the quarter to 34.5%. Operating margin also plummeted 470 bps to 15.5% in the quarter. Advertising and media expense increased 8% in the quarter.

Management expects net sales to increase in double-digits for the second half of 2012, and also expects continuous additions from international Yoplait revenues.

The company also expects its second-half 2012 gross margin to be below year-ago levels, reflecting the shift in business mix to include the Yoplait acquisition as well as the continued pressure of higher input costs year-over-year. However, second-half segment operating profit is expected to be above year-ago levels, including a planned increase in advertising and media investment.


Revenues from the U.S. Retail segment inched up 3% year over year to $2.94 billion in the quarter, which was contributed by 10 percentage points of price and mix. Volume reduced net sales growth by 7 points, reflecting lower shipments of flour and dessert mixes, canned and frozen vegetables, and yogurt.

Revenue at the International segment grew 55% year over year in the quarter to $1.16 billion, including a 43 percentage-point contribution from the Yoplait acquisition. However, net price realization and mix dented sales growth by 27 percentage points. Pound volumes contributed a-80 percentage point to the net sales volume.

On a constant-currency basis, net sales at the International segment jumped 53% year over year, with gains of 16% in the Asia / Pacific region, 20% in Latin America and 37% in Canada. Sales however more than doubled in Europe.

Compared with the year-ago period, the Bakeries and Foodservice segment 's revenue improved by 12% to $522 million in second quarter 2012, demonstrating a strong contribution of 9 percentage points from net price realization and mix, and 3 percentage points from volumes.

In the quarter, only the International segment reported an operating profit growth of 50% to $134 million. Operating profit at U.S. Retail segment fell 4% to $661 million, while operating profit at the Bakeries and Foodservice was consistent with year-ago levels at $78 million due to higher input costs, increase in advertising and media expense and lower grain merchandising earnings year-over-year.

Other Financial Update

During the quarter, General Mills completed the acquisition of a 51% controlling interest in the international Yoplait yogurt business and a 50% interest in a related entity that holds the Yoplait brands worldwide on July 1. The agreement was formed in May, 2011 with PAI Partners and Sodiaal.

Further, the acquisition was completed for approximately €810 million. Sodiaal will now hold the remaining ownership stakes in both entities, as per the agreement. Yoplait is headquartered in France and happens to be the second largest brand in the global yogurt market.

The second-quarter 2012 earnings reflected $4 million of integration expense for the Yoplait acquisition.

Balance Sheet and Share Repurchase

During the quarter, the company had operating cash flow of $509.1 million, a decrease from last year's second-quarter results. However, cash provided by operating activities totaled $1.15 billion in the first half of 2012, an increase from last year's first-half results primarily due to reduced working capital needs in the period.

Capital expenditure totaled $265 million in the first half of 2012, while dividends totaled $400 million in the first half due to a hike in the dividend rate year-over-year.

During the quarter, the company's Board declared a quarterly dividend of 305 cents per share, payable on February 1, 2012, to shareholders of record January 10, 2012, reflecting an increase of 9% in the annualized dividend rate to $1.22 per share from $1.12 per share paid in fiscal 2011.

During the first half of 2012, General Mills repurchased approximately 6 million shares of common stock, while it repurchased 3 million in the second quarter of 2012.

General Mills, which faces stiff competition from Kellogg Company ( K ) currently, holds a Zacks #3 Rank. On a long-term basis, the company retains a Neutral rating on the stock, with a short-term Hold rating.

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KELLOGG CO ( K ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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