Monday, January 27, 2014

General Mills Starts Making Some Cheerios Without GMO- 01/07/2014


  1. Financial highlights
    In fiscal year 2013, General Mills has 17.8B revenue, up 7% from last year; 3.2B operating profit, up 6% from last year; NI 1.9B, up 18%. has 3 segments:
    - U.S Retail: 60% sales with 75% of operating profit: Big G cereals 22%, Baking products, snacks, frozen foods combined 50%, Meals, Yoplait USA, and Small planet foods 30%.
    - International: 29% sales with 15% of operating profit: Europe 43%, 23% from Canada.
    - Bakeries and Food service 11% of sales with 10 % of operating profit
    Summary: Revenue and Operating profit from the US. Retail segment both declined , revenue and operating profit from the International segment both increased, 24% sales growth mostly from volume growth.
    Five global categories:
    Ready meals, 21% of revenue
    Snacks, 16%
    Yogurt, 15%
    Convenient meals, 15%
    Ice cream, 5%

    Gross margin: 2011 40%, 2012&2013 is about 36%, decline due to changes in input costs& inflation
    Cash flow from operations
    2011 1.5B, 2012 2.4B, 2013 2.9B, steady growth

    Grow in international markets, No.2 cereal manufacturers in 130 countries combined markets.
    Strategic acquisition: in Convenient Old el paso (Mexican entrees), Wonchai Ferry (Chinese frozen foods), expanded food category and emerging markets.

    - Strong growth: according to Euromonitor all GM's five global categories will grow, with a 5 CAGR ranged from 4-8%. - GM was the first of leading manufacturers to offer gluten-free products, and it now offers more than 300 gluten-free products. The global demand for gluten free products is expected to reach 6.2B by 2018.
    - GM replaces GMO components in Cheerios: appeal to health-conscious customers.

    GM in in a stable business with few disruptions, Risks
    - Commodity input price& inflation- directly impact gross margin
    - ForEx risks: global operations
    Haohan Xu
    GM has well-diversified product lines, steady revenue growth and steadily growing cash flows from operations. In addition, GM made strategic acquisitions, catered its products to customers' preferences and focused on emerging markets; therefore, GM is an attractive investment in the consumer goods industry.

  2. General Mills has $16.7 Billion sales revenue and about 3 billion operating profits:
    • US Retail division, they are $10.5 Billion revenue, 63% of total revenue; $2.3 billion in profit, 77% of total operating profit
    • International division, they are $4.2 billion revenue, 25% of total revenue; $430 million in profit, 14% of total operating profit
    • Bakeries and Foodservice division, they are $2 billion revenue, 12% of total revenue; $287 million in profit, 9.5% of total operating profit
    • Rest lays in the joint venture division.

    Key growth of the company:
    1, Net sales of their priorities platforms including snacks, cereal, yogurt, and frozen breakfast are up 6% in the first half, which is consistent with the expectation.
    2, In Latin America, sales grew nearly 75%, including three incremental months from Yoki in the first quarter, which show the strong growth momentum of the Yoki brand.

    Free Cash Flow-
    General Mills 483 M
    ConAgra Foods 238.5 M
    Campbell Soup -14 M
    Kellogg 559 M

    Nov. 30, 2013 483 M
    Aug. 31, 2013 257 M
    May 31, 2013 579 M
    Feb. 28, 2013 680.5 M

    Pretty decent FCF except for Aug. 31, 2013:
    1, input cost inflation
    2, supply chain cost increase
    3, increase costs in advertising and media investment

    Impact on the GMO producers: seed-technology company like Monsanto.

  3. The company has 3 segments:
    • U.S Retail: 60% sales with 75% of operating profit
    • International: 29% sales with 15% of operating profit
    • Bakeries and Food service 11% of sales with 10 % of operating profit

    U.S Retail has 7 product categories:
    • Big G: 22%
    • Baking Products: 17%
    • Snacks: 16%
    • Frozen Foods: 15%
    • Meals: 14%
    • Yoplait: 13%
    • Small Planet Foods and other: 3%

    Compared to 2012, 2013 has 1 percent increase in the U.S segment sales.
    • Yoplait: 5% decrease
    • Big G: 2% decrease
    • Frozen Foods: 3% decrease
    • Snacks 9% increase
    • Small Planet Foods 35% increase.

    International segments:
    • Europe: 43% 11%
    • Canada: 23% 22%
    • Asia 17% 11%
    • Latin America 17% 116%
    Total with 24% increase

    Free Cash Flow: (Thomson One)
    2013: 1444.5 155% increase
    2012: 931.2 627% increase
    2011: 148.6

    Strength & Opportunity:
    • Strong Brand: company holds the No.1 position in the grain snacks
    • Global Operation: sells products across 130 countries
    • Growing organic foods market : The demand for organic food is set to rise by 20% in the US.
    • Strategic acquisitions

    • High dependence on the U.S market

  4. Based on data of Fiscal 2013 (ended May 2013):
    Total net sales: 17.8 billion, 9% CAGR; operating profit: 2.9 billion, 11% growth rate compared to 2012 fiscal,
    -US retail: 60% of total sales, 75% of segment operating profit
    -International: 30%, 15%
    -Bakeries and foodservice: 11%, 10%

    Net sales by product: well diversified
    -Snacks: 17% of total net sales, 13% CAGR
    -Yogurt: 16%, 34% CAGR
    -Cereal: 16%, stable net sales
    -Convenient meals: 16%, 7% CAGR

    Operating profit margin:16% in 2013, 15% in 2012, 19% in 2013
    Kellogg: 11% in 2012
    Post holdings: 8.2%
    Pepsi: 16%

    Free cash flow:
    General Mills: 483 M
    Kellogg: 559M
    Post holdings: 38M
    Pepsi: 3B

    Q2 2014 fiscal: flat compared to Q2 2013.
    US retail sales: decreased 1% YOY. Volume growth: 2%. International sales increased 2%. Competitors are flat or negative.

    -200+ new products in 2014 fiscal year
    -gluten-free products leader
    -focus on international market growth
    -organic food segment: 32% of total sales with increase trend while packaged food will decline in US market

    -Little pricing power
    -Increasing trend of commodity price

  5. Business segment
    • Total sales in FY2013 is 17.8 billion; 16.7 billion (2012); 14.9 billion (2011)
    • U.S. Retail 60%, operating profit margin 23%
    • International 29%, operating profit margin 9%
    • Bakeries and Foodservice 11%, operating profit margin 16%
    • Total sales increase was 7%
    • Weight changed; International expansion.
    Free Cash Flow
    • 2.3 billion (2013), 13% of total revenue
    • 1.7 billion (2012), 10% of total revenue
    • 0.9 billion (2011), 6% of total revenue
    • Dividend and shares repurchase; consistently repurchased 1.87% of outstanding shares
    • Aggressive cash return. $680M FCF ; $1.35B dividends and share repurchases; debt/asset ratio 50%
    Favorable cases
    • The brand and client base; Cheerios, 13% share of the market; Leading positions in ready-to-eat cereal, yogurt, and canned soup, 40% of annual sales
    • R&D focus; mini-meals, convenient meals and organic food
    o R&D, 1.5% of sales ($240 million)
    • International expansion; Demand for packaged goods in China, India, Brazil
    Unfavorable Cases
    • Competitive pressures
    • Higher input costs for raw materials
    • Rely on giant customers

  6. In terms of revenue, General Mills is 60% Retail Foods in the United States, 29% Retail Foods internationally, and 11% Bakeries and Food Service. In terms of operating income, Retail foods in the U.S. has three quarters of the share, and Retail foods international has 15%, Bakeries and Food Service has 10%. Combined, global Retail foods has approximately 90% of the revenue and operating income, although its U.S. operations is more profitable.
    Retail Foods itself contains several product groups, including Big G (Cereals) 13% of the total revenue, baking products and snacks 10% each, frozen foods 9%, meals and yogurt 8% each, and organic small planet foods 2%.
    General Mills’ second-quarter profit was behind analysts’ estimates because of a combination of three factors. 1) Higher commodity costs; 2) slowing food and beverage industry sales; and 3) unfavorable currency fluctuations. The adoption of non-GMO ingredients in Cheerios will probably add to the higher ingredient prices in the short-term. Gross margin was reduced by 1 percentage point to 35.7 percent. It is higher than most of its competitors except Kellogg. The company’s free cash flow has been increasing since 2011 YoY. And the 5 Year Dividend Growth rate is 11.5%. One thing about GIS is that the stock has a low volatility. It has a historical volatility of 13%. In comparison, Pfizer has 16%, CampBell 20%, and Microsoft 25%.
    I think General Mills’ action was balancing consumer’s demand for non-GMO products and company’s production costs. By removing GMO additives from its popular breakfast cereal, the company apparently hopes to retain customer loyalty. There has been an increasing opposition to GMO additives or products globally. In 2013, China has refused over 600 thousand tons of GMO corn starch, mostly from the United States, despite the fact that there is no evidence of any health problems resulting from GMOs despite decades of use. I do not believe that General Mills consider GMO ingredients harmful, the company simply wish to create competitive advantage so that sales increased for its Cheerios products.


    3 Business Segments (Revenue %, Operating profit margin) Fiscal year 2013

    US Retail 60% of net sales 23% of operating profit margin
    International 29%, 9%
    Bakery and Foodservice 11%, 16%

    U.S Retail (Core Business) 7 product categories % of net sales 2013
    - Big G: 21%
    - Baking Products: 17%
    - Snacks: 16%
    - Frozen Foods: 16%
    - Meals: 14%
    - Yoplait: 13%
    - Small Planet Foods and other: 3%

    - Net Sales increase 1% in 2013. The increase was primarily driven by a 5 percent reduction in advertising and media expense favorable net price realization and mix, and higher volume, partially offset by an increase in input costs.

    - Fiscal 2013 net sales grew 7 percent to $17,774 million.
    - The company’s gross margin is higher than industry average in each of the past five years.
    - The company’s debt to capital ratio is lower than industry average in each of the past five years.
    - In FY 2012 Wal-Mart accounted for 22% of GIS's net sales.
    - FCF in FY 2013 is 271 million. A substantial portion of this FCF has been returned to stockholders through share repurchases and dividends.
    - During FY 13, GIS repurchased about 24 million shares of its common stock for an aggregate purchase price of $1.0 billion.
    - FCF used to fund capital expenditures and acquisitions.

    S&P Packaged Foods & Meats sub-industry is neutral.
    - The U.S. and Western European food markets as relatively mature, but see opportunities for faster longer-term growth from places such as China and LaA
    - Prospects and realization of a better harvest should help ingredient costs for some food manufacturers.

    - Diversified Product
    - Cost Saving
    - International Expansion
    - Enhancing Shareholders Value
    - High Commodity Inflation Impacting Margins
    - Core Yoplait/Cereal Businesses are Challenging