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From ready-to-eat cereal to convenient meals to wholesome snacks, General Mills is one of the biggest food products manufacturers and competes in growing food categories that are on-trend with consumer tastes around the world. The company markets many well-known brands, such as Haagen Daazs, Yoplait, Betty Crocker, Totinos, and Cheerios, among others. Main rivals include Kellogg, Kraft, Conagra Foods, and Sara Lee. General Mills sells its products in three segments: U.S. retail (63% of net sales), International (25% of net sales), and Bakeries and Foodservices (12% of net sales).
In addition, General Mills sells cereals and ice cream through its Cereal Partners Worldwide and Haagen Daazs Japan joint ventures. General Mills continues building its presence in developed markets and increasing presence in emerging markets worldwide by investing in established brands while also developing new products. The company’s goal is to generate balanced, long term growth. Profitable performance through the past years
General Mills has shown a strong profitable performance during the past years.
The company has achieved during the last 3 years an average RoE of 28% supported by strong efficiency, financial leverage, and a moderate profitability ratio given the nature of the business. This has resulted in a positive trend of the share price that delivered 3 year returns of 44% from 2009. The upward trend in RoE that peaked in 2011 reaching 30.6% reversed in 2012 that closed with a RoE of 24.5%. The RoE drop of c. 600 bps in 2012 compared to 2011 is explained by a reduction in profitability that was affected by high input-cost inflation primarily in food ingredients and energy that was not fully transferred to customers (370 bps Gross Profit Margin drop).
Performance was also affected by restructuring actions (60 bps impact on profitability) taken to improve organizational effectiveness to drive future growth. General Mills managed to continue improving efficiency as the increase in sales (3 Years CAGR of 6.7%) outpaced the average assets growth (3 Years CAGR of 5.8%), reaching in 2012 the highest efficiency ratio (83.8%) of the past 3 years.
Efficiency improvement was primarily supported by inventory reduction efforts that, coupled with increase in accounts payable derived from shifts in timing of payments, reduced the cash conversion cycle to 43 days. It is worth noting that during fiscal 2012 the balance sheet had an important growth as a result of the acquisition of the international Yoplait business, including goodwill and other intangible assets of $2.3 bn USD. Sales growth also benefited from the acquisition and will be discussed in the next section. General Mills runs a leveraged operation where, in average, the total assets are 3 times shareholders equity. Leverage ratio has decreased since 2010 as retained earnings have increased at a faster pace than assets driven by strong business performance.
A slight revamp in the leverage ratio during fiscal 2012 was mainly driven by an increase in other comprehensive losses related to pensions and postemployment activity, and foreign currency translation that offset retained earnings for the same period. Sustainable growth while generating strong levels of cash flows General Mills has shown a strong, sustainable growth throughout the last years. Net sales increase has been driven by a moderate average growth in the US Retail segment (3.8%), coupled with the expansion in the International business (13.4%).
The big year on year increase of 12% in fiscal 2012 is driven by the acquisition of the international Yoplait yogurt business that contributed 7 points of sales growth, while underlying business grew 5%. It is important to note that sales growth has been mainly driven by volume growth with a slight component of net price increase and a favorable mix. Segment Operating Profit has also maintained a sustainable growth. The slowdown during fiscal 2012 and drop of Gross Profit Margin is driven by high input-cost inflation as previously mentioned. Despite high costs, the company managed to increase segment operating profit to exceed $3bn for the first time in the company’s history.
General Mills has managed to generate strong levels of cash flowacross the years. Over the most recent 5 years, the company operations have generated almost $10bn USD in cash. A significant portion of this cash has been returned to stockholders through dividends and shares repurchase. In addition, this cash is used to fund Capital expenditure. In the most recent year, the company operations generated $2.4bn of cash compared to $1.5bn in the prior year. The major increase is driven by a favorable change in working capital supported by inventory reduction efforts, prepaid expenses, and other current assets. Cash used by investing activities had a significant increase in fiscal 2012 that is mainly explained by the acquisition of international Yoplait ($1bn USD).
General Mills invested in fiscal 2012 c. $700m USD in land, buildings and equipment, similar to previous years. Cash used by financing activities includes a constant payment of dividends and purchase of treasury stock in the last years. In addition, General Mills has been actively managing their cost of funds by issuing / pre-paying long term debt and commercial paper as convenient. General Mills performance has outpaced main competitors in the recent years General Mills strong performance is accentuated when benchmarked against Kellog Co, another of the key food producers.
Both companies present similar profitability with General Mills having a lower gross profit margin compensated by lower marketing investment and general expenses. Nevertheless, General Mills has managed to grow sales and has delivered higher returns at a faster pace than Kellog. In addition, General Mills produces higher levels of free cash flow and has grown dividends per share faster. Finally, Kellog has a heavy debt load while General Mills has lower leverage ratio. Solid position to face a challenging, uncertain future
In a nutshell, General Mills has shown a strong performance in the recent years and has outperformed his competitors mainly in compound growth rates and value creation. A challenging future lies ahead with uncertain economic environment and increase in commodity costs. Pricing strategy to maintain margin while not impacting market share will play a key variable in the company’s performance. Strong brands, innovations, expansion in diversified markets, and solid cash position and moderate leverage should support General Mills to face these challenges and continue creating value in the following years.
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