GIS | Flat Performance Persists, But Moving in the Right Direction

General Mills is on the Hedgeye Best Ideas list, and after this quarter we remain confident in our position on GIS. Robust performance was seen in the core growth businesses, while management has a keen eye on improving struggling businesses. 

Today, GIS reported Q4 FY15 and it was basically what we were expecting, not awe inspiring but not a disappointment either. Below is a look at the numbers for the quarter and the year:

FOURTH QUARTER SUMMARY:

• Net sales: Reported net sales were $4,299mm missing consensus estimates of $4,547mm by ~5.5%.  Versus the same period last year, top line was up 6% on a constant-currency basis. The 53^rd week in this year contributed 6 points of net sales growth in the fourth quarter.
• Segment operating profit: Increased 13% on a constant-currency basis to $800mm, beating consensus estimates of $704mm by 12%.
• Adjusted diluted EPS: Beat consensus of $0.71 by $0.04 and increased 12% versus the same period last year to $0.75 on a constant-currency basis. The 53^rd week contributed roughly the difference between consensus and actual adjusted diluted EPS.

FISCAL 2015 SUMMARY:

• Net sales: Net sales increased 1% on a constant-currency basis to $17,630mm, coming in just shy of consensus at $17,635. The 53 week contributed roughly 1 point of net sales growth and the addition of the Annie’s business provided another 1 point lift. So backing those out sales were down roughly 1%. This year started off rough, but gained traction in the 2H, and we expect this momentum to continue into FY16.
• Segment operating profit: Declined 2% on constant-currency basis to $3,035mm coming in above consensus estimates of $2,899mm.
• Adjusted diluted EPS: Totaled $2.86 for the full year, up 4% from a year ago levels on a constant-currency basis. The 53^rd week drove much of the improvement versus last year, contributing $0.04 of EPS for the full year.

LET’S TALK ABOUT THE COMPANY BY SEGMENT

 

U.S. Retail ― For the year the segment declined 1% to $10.5bn, reflecting lower pound volume. U.S. operating profit declined 7% to $2.2bn. Although the year in total was a disappointment, one must look at the quarter by quarter progression. In the 2H GIS showed signs of improvement. Q4 net sales increased 5% to $2.5bn; pound volume contributed 3 points, while net price realization and mix added another 2 points. Segment operating profit totaled $565mm, a 13% increase versus the same period last year.

In the 2H of the year Snacks grew at HSD to MDD rates, Yogurt up LDD to HSD, and Cereal returned to growth albeit against a week comp, sales were up 3%. They are still struggling in some areas such as baking products, where we have suggested a divestiture, but management seems adamant that their turnaround efforts will be effective.

Gaining Share in Key Categories: General Mills improved their share in key growth categories for the company. Increasing Grain Snacks share by 168 basis points (bps), Frozen Hot Snacks by 97bps, Yogurt by 88bps, RTE Cereal by 26 bps and Frozen Pizza by 23bps. Now, not all the performance was positive they lost substantial share in underperforming categories; Frozen vegetables lost 168bps, Dessert Mixes down 144bps and Dry Packaged Dinners down 72bps, all categories that we believe need to be divested.

Natural & Organic is at the forefront of every food discussion, and GIS is adapting. Their portfolio has grown to $700mm in sales, well on their way to $1bn by 2020. And they are innovating, Annie’s brand will be launching a soup this summer just in time for the core soup season (Fall/Winter), Food Should Taste Good has a bar now and Larabar is gaining distribution with sampling and media backing its growth.

International ― In FY15 sales on a constant currency basis increased 6% to $5.1bn. Pound volume was basically flat versus last year, and net price realization and mix contributed 6 points of net sales growth. International operating profit totaled $523mm, up 9% on constant-currency basis. In Q4, international segment net sales totaled $1.2bn, up 9% on a constant-currency basis; pound volume added 2 points, while net price realization and mix added 7 points. Segment operating profit totaled $134 mm up 12% on constant-currency basis.

Robust growth seen across the segment, on a constant-currency basis, Latin America increased 17%, Asia / Pacific up 5%, Europe up 5% and Canada was about flat. This robust growth was driven by innovation in key markets like Brazil with Yoki and China’s dumpling and ice cream businesses.

Yoplait in China is on shelf in Shanghai and the business is seeing a positive initial reaction. It remains unclear on when this business will provide meaningful earnings for the company.

Convenience & Foodservice (C&F) ― In FY15 sales for the segment totaled $2.0bn, an increase of 4% versus last year. Pound volume added 1 point of growth, while net price realization and mix added 3 points. Segment operating profit totaled $353mm, an increase of 15%. In Q4 net sales grew 4% to $527mm driven mainly by pound volume. Segment operating income in the quarter rose 17% to $101mm reflecting the extra week and favorable business mix.

C&F continues to improve the product portfolio by pruning lower performing SKUs, freeing the business to focus on the key priority platform. These platforms (cereal, snacks, yogurt, mixes, biscuits and frozen breakfast) are providing all the growth for the division, collectively up 9% this year.

FY16 Management Summary ―

1. Expanding our consumer-first focus to generate growth
2. Investing in core renovation and incremental innovation
3. Disciplined cost management
4. Continued emphasis on shareholder returns

FY16 Hedgeye Guidance ―

Looking into FY16 we are excited about the possibilities. Management is working hard on their “Consumer First” initiative and making great changes to current product while also introducing new products.  Below is not a comprehensive list but some of the biggest things that we are looking forward to this year:

1. Yoplait in China
2. Gluten-Free Cheerios
3. No artificial colors or flavors in the cereal
4. Granola innovation / Muesli
5. Greek Plenti / Whips
6. Original Yoplait yogurt sugar reduction
7. Renovation on Grain Snacks
8. Strong push on Natural & Organic products
9. Delivering Value to consumer on brands like Totino’s and Hamburger Helper
10. Bringing U.S. innovation International

Bottom line is they are still struggling; we don’t want to shy away from that. But the core of the portfolio is growing and management seems to be working tirelessly on implementing changes to grow the rest of the portfolio, especially cereal.  We also still believe that to have continued growth into the future a sizeable acquisition or divestiture would be beneficial to the business.

We will be attending the General Mills analyst day on July 14 in Boston. Coming out of that we will dive deeper into what we think GIS can do this year.

Please reach out with any questions.