General Mills, Inc. (GIS)

GIS 
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General Mills, Inc. (GIS)

F2Q10 Earnings Call

December 17, 2009 8:30 am ET

Executives

Kris Wenker - Vice President Investor Relations

Ken Powell – CEO

Don Mulligan – CFO

Jeff Rotsch - Executive Vice President and Head of Worldwide Sales Organization

Analysts

Ed Aaron – RBC Capital Markets

David Palmer – UBS

Vincent Andrews – Morgan Stanley

Chris Growe – Stifel Nicolaus

Eric Katzman – Deutsche Bank

Alexia Howard - Sanford Bernstein

Ken Zaslow – BMO Capital Markets

Todd Gravett – Bank of America

Terry Bivens – JP Morgan

Presentation

Operator

(Operator Instructions) Welcome to the General Mills Second Quarter Fiscal 2010 Results Conference Call. I would like now to turn the conference over to Kris Wenker, Vice President Investor Relations.

Kris Wenker

I’m here with Ken Powell our CEO, Don Mulligan our CFO, and Jeff Rotsch who is the Executive Vice President and Head of our Worldwide Sales Organization. I’m going to turn the microphone over to them in just a minute. Before I dive into my usual housekeeping items let me first thank you very much for joining us on this call and for your interest in General Mills, we do appreciate it. I also wish all of your a wonderful holiday season.

Our press release on second quarter results was issued over the wire services earlier this morning. It’s also posted on our website if you still need a copy. We posted slides on the website too; they support the prepared remarks we’re going to make this morning. Those remarks will include forward looking statements based on management’s current views and assumptions. The second slide in today’s presentation lists the factors that could cause our future results to be different than our current estimates.

With all that I’ll turn you over to my colleagues, beginning with Don.

Don Mulligan

As you’ve seen from our financial results we released this morning, General Mills resilient portfolio of leading brands continues to deliver strong growth. I’d summarize today’s key points this way. First, our sales continued to grow, even as we lapped robust par year increases. Sales growth in the first half was ahead of our plan, led by good gains in our US Retail segment. Our margins improved in the second quarter driven by a number of factors including lower input costs, good performance at our plants, and continued holistic margin management or HMM benefits.

We’re adding $0.12 to our EPS guidance bringing the range to $4.52 to $4.57 per share before any mark to market effects. This represents growth of 14% to 15% from comparable earnings of $3.98 per share in fiscal 2009. As we move into the second half of fiscal 2010 we’re making additional investments in marketing and merchandising programs to fuel continued growth of our brand this year and into fiscal 2011. We’ve announced a second increase to our 2010 dividend. The new quarterly rate of $0.49 per share brings our 2010 expected dividend per share to $1.92, a 12% increase from last year.

Slide five summarizes our second quarter results. Net sales grew 2% on top of 8% sales growth last year. Segment operating profit grew 13% including a double digit increase in media spending. Net earnings totaled $566 million and diluted earnings per share increased to $1.66. These results include a net gain related to mark to market valuation of certain commodity positions in grain inventories. That non-cash gain totaled $0.12 per share this quarter; significantly better then the $0.49 reduction of EPS recorded in the year ago period. Excluding the mark to market impact from both years, as well as the gain on the sale of Pop Secret in last year’s second quarter, diluted earnings per share grew 13% to $1.54.

Our top line performance was a key driver of this growth. Slide six summarizes net sales by segment on an as reported basis. US Retail sales rose 4% on top of 10% growth in the same period last year. International sales grew 7% as reported. Growth here was helped by favorable foreign exchange, the price realization mix also contributed to this sales increase. Our Foodservice segment reported a 16% decline in net sales but that includes the impact of divestitures and nix pricing tied to wheat markets that are currently below year ago levels. Underlying performance in this business segment was actually quite strong, well ahead of industry trends. Ken will talk more about that in a few minutes.

Slide seven shows Pound Volume contribution to net sales growth with the impact of divested product lines noted below the chart. On a reported basis, pound volume contribution to net sales was flat with divested products reducing growth by two points. Pound volume for the US Retail segment was up 2%. Pound volume for international was flat but that includes a two point reduction from divested businesses. Divested businesses significantly reduced volume in our Bakeries & Foodservice segment. Pound volume was down just a few points on a comparable basis, again, ahead of overall industry trends.

Gross margin recovery contributed significantly to our second quarter results. Our gross margin as reported was 42.8%. As you see on slide eight, that’s up sharply from last year. When input cost inflation and mark to market effect significantly depressed our margin. Excluding mark to market effects, our gross margin was 41.2% for the quarter compared to just over 37% a year ago. Several factors are contributing to this underlying margin improvement. Our commodity and fuel costs were below year ago levels in the quarter.

We started this fiscal year with an assumption of very low inflation in our supply chain input costs. However, we’ve been able to hold costs below our plan levels through the first half. We no longer expect to see input cost inflation for the fiscal year in total. We’re running more cases through our plants which creates volume leverage benefits. Our mix continues to be favorable and our HMM efforts are generating a cumulating benefit with good productivity savings from logistics in particular during the second quarter.

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