"Were continuously evaluating strategic activity"  - CFO Don Mulligan

"We're continuously evaluating strategic activity" - CFO Don Mulligan

Almost a year after General Mills ventured into the pet-care arena, the US consumer goods giant has seemingly ruled out further major acquisitions but suggested some assets are still up for disposal. Simon Harvey listened in to the company's presentation at the Consumer Analyst Group of New York conference (CAGNY).

As General Mills' chief executive Jeff Harmening approaches his second anniversary in the hot seat at one of the largest food corporations in the US, his focus appears to be more on trying to get the US group's still sluggish organic growth going and business disposals, rather than looking for major acquisitions.

Addressing the annual Consumer Analyst Group of New York (CAGNY) conference on Tuesday (19 February), Harmening said divestments and acquisitions would add a full percentage point to General Mills' organic net sales growth, which is already muted at best. 

However, one of the slides from CFO Don Mulligan's presentation clearly stated "large-scale M&A on hold", along with further share repurchases, as the company seeks to pay down debt. 

"We're continuously evaluating strategic activity and will deploy capital when we see a clear path to value creation for shareholders," Mulligan told the conference. 

General Mills snapped up the pet-care brand Blue Buffalo for US$8bn in April of last year, its first major acquisition outside of its legacy food business, which saw the departure of the Green Giant brand in 2015.

And to add weight to the theory for further disposals, Harmening also reiterated comments he made at the same event last year, saying divestments would target around 5% of General Mills' sales.

"I can assure you that divestitures remain an important component of our reshaping plans," he told the conference. "However, for fiscal 2019, we still believe that the most important things we can do to create value for our shareholders are to improve our organic growth trends, successfully transition Blue Buffalo and deliver on our financial commitments."

The growth in General Mills FY net sales on organic basis - 2011/12 to H1 2018/19

Source: General Mills IR

General Mills operations are split into four business divisions, with the largest being its North America Retail segment. That business has been in the doldrums for some time and was still struggling in the first six months of the current financial year, with sales down 3% at US$5.06bn. Organic growth was also negative at minus 2%.

Convenience Stores and Foodservice, the second-largest business division, fared better, with net sales up 2% at $978m, and were up by the same magnitude on an organic basis.

Europe and Australia is next, posting flat sales of $954m and organic growth of 1%.

The smallest business area – Asia and Latin America – saw sales down 1% at $830m but with organic growth rising 7%.

And Harmening once again reiterated on Tuesday that there is "still work to do" for General Mills as a group as he kept to his guidance for mid-single-digit net sales growth, a key metric of his business strategy, along with a focus on margins, cash conversion and cash returns.

General Mills is putting emphasis behind what Harmening called the four "accelerator platforms" of Häagen-Dazs ice cream, natural and organic, snack bars and the Old El Paso Mexican-style food range.

"Our accelerate platforms collectively generate more than $4bn in net sales or roughly 25% of our global portfolio," Harmening noted, adding General Mills will "reshape our portfolio for growth by adding businesses that enhance our growth profile, while divesting businesses that are growth dilutive." 

In Tuesday's presentation, General Mills said both Häagen-Dazs and snack bars were mid-single-digit categories, while natural and organic fell into the region of high-single digits. Old El Paso is regarded as a low-single digit business.

Harmening claims General Mills is now the second-largest organic and natural foods manufacturer in the US, with plans in place for new products under the Annie's protein bar range and the launch of its Nature Valley healthy snacks in China via e-commerce portal Alibaba. 

The company is also investing in Old El Paso, he said, while Jon Nudi, the president of General Mills' North American retail business, noted how the company's cereals joint venture with Switzerland's Nestlé – Cereal Partners Worldwide – is "strengthening" amid recent new product launches under the Cheerios brand. Nudi also highlighted how the yogurt brand Yoplait has gained market share this year after a "number of years of decline".

CFO Mulligan also talked up the progress made in bolstering General Mills' finances, albeit replete with what he said was a 12% reduction in the global headcount. He said $700m in project savings had been realised from restructuring the global supply chain and realigning its business structure.

And more savings are planned for the current fiscal year, with Mulligan seeking to reap $450m on the cost of goods sold, building on the $396m in 2018 and $391m the previous year. 

Nevertheless, CEO Harmening still has his work cut out if he's to succeed in boosting organic net sales growth. The guidance for that metric is flat to up 1%, suggesting General Mills expects scant improvement from the flat print recorded in the first half.

On a reported basis, General Mills' net sales rose 7% in the first six months to $8.5bn and 8% in constant-currency terms, helped by some growth from from the combined convenience and foodservice unit but also by the Blue Buffalo deal. But operating profit was down 12.6% at $1.15bn, while net profit slumped almost 12% to $736m.

Margins are taking a hit, with the acquisition of Blue Buffalo accounting for 60 basis points of "headwind" of the 70 basis point first-half drop in the adjusted gross margin to 34.1%. The business contributed $678m in pro-forma sales during the reporting period.

But it seems General Mills' debt stands in the way of any further acquisitions as Mulligan said he is aiming to cut the net-debt-to-EBITDA ratio from 4.2 times to 3.5 times by fiscal 2020. According to the latest earnings statement, the company has $12.2bn of long-term net debt.

"Having increased our leverage last year to help on the Blue Buffalo acquisition, we've adjusted our near-term capital allocation plans to prioritise de-leverage," Mulligan told the conference.

But for Harmening "the primary focus we have as an organisation is to return General Mills to consistent, profitable sales growth. Second, we're making progress on our compete, accelerate, reshape growth framework that I laid out for the first time at CAGNY last year. And while we're pleased with our progress, we know that there is still work to do to achieve our long-term goals."