MINNEAPOLIS — Progress toward resolving supply chain disruptions helped General Mills, Inc. generate better-than-expected financial results in the company’s fiscal third quarter and prompted an upward adjustment in its guidance for the full year.
Net income in the third quarter was $660.3 million, equal to $1.09 per share on the common stock, up 11% from $595.7 million, or 97¢ per share, in the third quarter of fiscal 2021. Net sales were $4.54 billion, versus $4.52 billion a year earlier.
Adjusted earnings per share were up 2%. Unadjusted results were boosted by a pre-tax gain of $149 million from the sale of numerous businesses, including Yoplait Marques SNC, and Liberté Marques Sàrl to Sodiaal International in exchange for Sodiaal’s interest in the General Mills Canadian yogurt business, a modified agreement for the use of Yoplait and Liberté brands in the United States and Canada.
While sales in the third quarter were essentially flat, the fiscal 2022 figure was depressed by divestiture and acquisition activity, which netted to a 3-point headwind for sales. Organic net sales rose by 4%, driven by higher prices and product mix. Organic pound volume was down 4%.
Investors reacted favorably to the results. General Mills shares climbed as high as $66.30 in early trading March 23, up $3.62, or 5.8%, from the March 22 close and just 65¢ a share beneath the stock’s 52-week high of $66.95. Shares closed March 23 at $64.28.
“We are executing well in an operating environment that remains as volatile as ever,” Jeffrey L. Harmening, chairman and chief executive officer, said in prepared remarks released after the earnings announcement. “Input cost inflation is at historic levels with increasing variability, and disruptions continue to impact our supply chain, including some acute supply shortages that constrained a few of our US platforms in the third quarter. We worked quickly to address those disruptions, driving a faster-than-expected rebound in service the final weeks of the quarter, which translated into Q3 results that were ahead of our latest guidance.”
Operating profit of the North America Retail business in the third quarter was $611.5 million, down 3% from $628.8 million a year earlier. Sales were $2.81 billion, up 1% from $2.79 billion in the third quarter of fiscal 2021. Sales were up 6% relative to third-quarter fiscal 2020 results, pre-pandemic.
“Net sales were up 4% in US Morning Foods, which represents the combination of the previous US Cereal and US Yogurt units, and up 3% in US Snacks,” the company said.
“Net sales performance lagged Nielsen-measured retail sales growth by approximately three points in the quarter, driven by supply shortages on the refrigerated dough, pizza, and hot snacks categories,” General Mills continued. “The company took actions to address the shortages and drove notable improvement in customer service levels on those platforms in the final weeks of the quarter.”
In part because of the improved results, General Mills said its adjusted diluted earnings per share for the full year now is expected to be flat to up 2%. Previous guidance was down 2% to up 1%. Organic net sales were forecast by the company to grow about 5%, versus previous guidance of up 4% to 5%. The incremental improvement was projected based on expectations for organic net price realization and improved mix in the fourth quarter relative to the third quarter.
In the analyst call, the shortages of refrigerated dough, pizza and hot snacks were topics for comment by both Mr. Harmening and Jonathan J. Nudi, group president of North America Retail.
“The biggest issue we’re seeing is really around material disruptions, ingredients coming into our plants to run our products,” Mr. Nudi said. “In Q3, it was particularly challenging, particularly in RBG (ready-to-bake goods), pizza and hot snacks — so things like fats and oils and starch and packaging. So we spent a lot of time really working as a team to improve on those platforms. We’ve seen an improvement in our case fill and on-shelf availability, but our service levels are still quite a bit below historical levels. We target 98% to 99%. We were in the 70s overall for Q3. We expect to get better, but not near historical levels. We expect to be in the 80s as we go into Q4.”
Asked by an investment analyst whether General Mills was increasing its refrigerated dough production capacity this year, Mr. Harmening declined to respond, but he did answer a question about whether the company’s flour milling and grain merchandising businesses would benefit from dislocations associated with extreme volatility in grain markets recently.
“In terms of the question about flour milling and dislocations, I mean, I don't know that we’re going to see any of the benefits,” he said. “Having said that, I think we’ll have full supply on our grain milling businesses. We’re world-class in that. We’ve been milling flour since 1866, so we have a pretty long history of being able to do that effectively.”
The two executives also commented on price increases and at least limited signs of consumer resistance to the higher prices.
“We know how pricing is never an easy discussion,” Mr. Nudi said. “Everyone is facing inflation, though. So again, we can lock in and provide a good rationale for why we’re taking the pricing, and more importantly, a coherent plan for what pricing will look like in market. We’ve been able to find good acceptance, and more importantly, good reflection in the market…. In terms of elasticity, I mean, Jeff touched on this earlier, I mean, we are seeing elasticity. So it's not like we're not. This is not at historical levels.”
Mr. Harmening said the company is mostly hedged on commodities through the 2022 calendar year.
In the wake of the divestitures, General Mills announced it is now reporting results in four operating segments — North America Retail, Pet, North America Foodservice and International. Previously, the company’s segments were North America Retail, Pet, Convenience Stores and Foodservice, Europe and Australia and Asia and Latin America.
“Our North America Retail operating segment includes convenience store businesses from our former Convenience Stores and Foodservice segment,” General Mills said in a note to the company’s financial results. “Within our North America Retail operating segment, our former US Cereal operating unit and US Yogurt operating unit have been combined into the US Morning Foods operating unit. Additionally, the US Meals and Baking Solutions operating unit combines the former US Meals and Baking operating unit with certain businesses from the US Snacks operating unit. The Canada operating unit excludes Canada foodservice businesses, which are now included in our North America Foodservice operating segment. The resulting North America Foodservice operating segment exclusively includes our foodservice businesses. Our International operating segment combines our former Europe and Australia and Asia and Latin America operating segments. Our Pet operating segment is unchanged.”
Through the first three quarters of fiscal 2022, General Mills net income was $1.909 billion, down 2% from $1.946 billion. Sales were $14.10 billion, up 4%.