General Mills reports fiscal 2022 Q3 results and raises full-year outlook

General Mills reported results for the third quarter ended February 27, 2022.

Summary:

Net sales essentially matched year-ago results at $4.5 billion; organic net sales were up 4%.
Operating profit declined 1& to $815 million; adjusted operating profit was down 6% in constant currency.
Diluted earnings per share (EPS) of $1.08 increased 13% from the prior year; adjusted diluted EPS of $0.84 increased 2% in constant currency.
Company raises full-year fiscal 2022 outlook.

“Our solid execution in a highly volatile environment enabled us to close the third quarter with improved momentum,” said General Mills Chairman and CEO Jeff Harmening. “Demand for our brands remains robust, and our team has shown great agility to overcome disruptions throughout the supply chain and deliver for our customers and consumers. We expect to drive strong growth in the fourth quarter, fueled by accelerating net price realization. With confidence in our plans and positive momentum on our business, we’re raising our guidance for fiscal 2022.”

Third-quarter results summary

Net sales were essentially flat to last year at $4.5 billion, including a 3-point net headwind from divestiture and acquisition activity. Organic net sales increased 4%, reflecting 7 points of positive organic net price realization and mix, partially offset by a 4-point headwind from lower organic pound volume.
Gross margin was down 350 basis points to 30.9% of net sales, driven by higher input costs and unfavorable mark-to-market effects, partially offset by favorable net price realization and mix. Adjusted gross margin was down 160 basis points to 31.4% of net sales, driven by input cost inflation, supply chain deleverage, and higher other cost of goods sold, partially offset by favorable net price realization and mix and Holistic Margin Management (HMM) cost savings.
Operating profit of $815 million was down 1%, driven primarily by lower gross profit dollars and less favorable investment activity, partially offset by a gain on divestitures. Operating profit margin of 18.0% was down 30 basis points. Constant-currency adjusted operating profit declined 6%, driven by lower adjusted gross profit dollars. Adjusted operating profit margin decreased 90 basis points to 14.9%.
Net earnings attributable to General Mills were up 11% to $660 million and diluted EPS was up 13% to $1.08, driven primarily by a lower adjusted tax rate and lower net interest expense. Adjusted diluted EPS of $0.84 increased 2% in constant currency, driven primarily by lower net interest expense, higher after-tax earnings from joint ventures, and lower net earnings attributable to redeemable and noncontrolling interests, partially offset by lower adjusted operating profit.
On a 2-year compound growth basis, relative to pre-pandemic levels, third-quarter results included: net sales up 4% and organic net sales up 5%; operating profit up 12% and adjusted operating profit down 1% in constant currency; and diluted EPS up 21% and constant-currency adjusted diluted EPS up 4%.

Nine-month results summary

Net sales increased 4% to $14.1 billion, including 1 point of favorable foreign currency exchange and a 1-point net headwind from divestiture and acquisition activity. Organic net sales increased 4%, reflecting 5 points of positive organic net price realization and mix, partially offset by a 1-point headwind from lower organic pound volume.
Gross margin was down 300 basis points to 32.8% of net sales, driven by higher input costs and unfavorable mark-to-market effects, partially offset by favorable net price realization and mix. Adjusted gross margin was down 210 basis points to 32.8% of net sales, driven by input cost inflation, supply chain deleverage, and higher other cost of goods sold, partially offset by favorable net price realization and mix and HMM cost savings.
Operating profit of $2.5 billion was down 5%, driven primarily by lower gross profit dollars, partially offset by lower selling, general, and administrative (SG&A) expenses. Operating profit margin of 17.4% was down 170 basis points. Constant-currency adjusted operating profit declined 5% driven by lower adjusted gross profit dollars, partially offset by lower adjusted SG&A expenses. Adjusted operating profit margin decreased 130 basis points to 16.4%.
Net earnings attributable to General Mills were down 2% to $1.9 billion and diluted EPS was down 1% to $3.07, primarily reflecting lower operating profit, partially offset by lower net interest expense and an effective tax rate. Adjusted diluted EPS of $2.82 was down 2% in constant currency, driven primarily by lower adjusted operating profit, partially offset by lower net interest expense.
On a 2-year compound growth basis, relative to pre-pandemic levels, nine-month results included: net sales and organic net sales each up 6%; operating profit up 8% and adjusted operating profit up 3% in constant currency; diluted EPS up 10% and adjusted diluted EPS up 6% in constant currency.

North America retail segment

Third-quarter net sales for General Mills’ North America Retail segment increased 1% to $2.81 billion, driven by favorable net price realization and mix, partially offset by lower pound volume. Organic net sales were 1% above year-ago results that grew 11%. On a 2-year compound growth basis, relative to pre-pandemic levels, third-quarter organic net sales were up 6%. Net sales were up 4% in U.S. Morning Foods, which represents the combination of the previous U.S. Cereal and U.S. Yogurt units, and up 3% in U.S. Snacks. Net sales for the U.S. Meals & Baking Solutions and Canada units were each down 2%. Net sales performance lagged Nielsen-measured retail sales growth by approximately 3 points in the quarter, driven by supply shortages on the refrigerated dough, pizza, and hot snacks categories. Segment operating profit of $612 million was down 3% as reported and in constant currency, driven primarily by higher input costs and lower volume, partially offset by favorable net price realization and mix and lower SG&A expenses. On a 2-year compound growth basis, segment operating profit was up 5% in constant currency.

Through nine months, North America Retail segment net sales were essentially in line with last year at $8.57 billion. Organic net sales were flat to last year. On a 2-year compound growth basis, nine-month organic net sales were up 6%. Segment operating profit of $1.94 billion was down 7% as reported and in constant currency, driven primarily by higher input costs and lower volume, partially offset by favorable net price realization and mix and lower SG&A expenses. On a 2-year compound growth basis, nine-month segment operating profit was up 3% in constant currency.

North America foodservice segment

Third-quarter net sales for the North America Foodservice segment increased 22% to $437 million, driven by favorable net price realization and mix, including market index pricing on bakery flour, and positive contributions from volume growth. On a 2-year compound growth basis, relative to pre-pandemic levels, third-quarter net sales were down 3%. Segment operating profit decreased 13% to $35 million, driven by higher input costs, partially offset by favorable net price realization and mix. On a 2-year compound growth basis, segment operating profit was down 29%.

Through nine months, North America foodservice net sales increased 24% to $1.32 billion. On a 2-year compound growth basis, nine-month net sales were down 4%. Segment operating profit increased 27% to $175 million, driven by favorable net price realization and mix and higher volume, partially offset by higher input costs. On a 2-year compound growth basis, nine-month segment operating profit was down 13%.

International segment

Third-quarter net sales for the international segment were down 23% to $721 million, including a 20-point headwind from the divestitures of the European yogurt and dough businesses and 2 points of unfavorable foreign currency exchange. Organic net sales were down 1%, reflecting a difficult comparison to year-ago results that were up 10%. On a 2-year compound growth basis, third-quarter organic net sales were up 4%. Segment operating profit of $36 million was down 13% as reported and down 16% in constant currency, driven primarily by lower volume, including the impact of the European yogurt and dough divestitures, and higher input costs, partially offset by favorable net price realization and mix and lower SG&A expenses. On a 2-year compound growth basis, segment operating profit was up 1% in constant currency.

Through nine months, international net sales declined 5% to $2.57 billion, including an 8-point headwind from the divestitures of the European yogurt and dough businesses and 1 point of favorable foreign currency exchange. Organic net sales were up 1%. On a 2-year compound growth basis, nine-month organic net sales were up 5%. Segment operating profit of $156 million was down 14% as reported and down 18% in constant currency, driven primarily by higher input costs and lower volume, including the impact of the European yogurt and dough divestitures, partially offset by favorable net price realization and mix and lower SG&A expenses. On a 2-year compound growth basis, nine-month segment operating profit was up 5% in constant currency.

Fiscal 2022 outlook

General Mills raised its guidance for fiscal 2022 to reflect year-to-date performance and an outlook for strong top- and bottom-line growth in the fourth quarter. The company’s updated full-year fiscal 2022 financial targets are summarized below:

Organic net sales are now expected to increase approximately 5%, including an expectation for organic net price realization and mix to increase sequentially from the third quarter to the fourth quarter. Full-year organic net sales were previously expected to increase 4 to 5%.
Constant-currency adjusted operating profit is now expected to range between down 2% and flat, reflecting the increased guidance on organic net sales. For the full year, the company continues to expect input cost inflation of 8 to 9% and significant costs related to supply chain disruptions. Adjusted operating profit was previously expected to decline 4 to 1%.
Constant-currency adjusted diluted EPS are now expected to range between flat and up 2%, driven by the higher outlook on adjusted operating profit. Adjusted diluted EPS were previously expected to range between down 2% and up 1%.
Free cash flow conversion is expected to be at least 95% of adjusted after-tax earnings.
The net impact of divestitures, acquisitions, and foreign currency exchange is expected to reduce full-year reported net sales growth by approximately 1%, and foreign currency exchange is not expected to have a material impact on adjusted operating profit growth or adjusted diluted EPS growth.