General Mills, Inc. (GIS)

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General Mills, Inc. (GIS)

Q3 2010 Earnings Call

March 24, 2010 8:30 am ET

Executives

Kris Wenker – VP IR

Ken Powell – CEO

Don Mulligan – CFO

Jeff Harmening – President Big G Cereals

Analysts

Terry Bivens – JPMorgan

Ed Aaron – RBC Capital Markets

David Palmer – UBS

Eric Katzman – Deutsche Bank

Andrew Lazar – Barclays Capital

Vincent Andrews – Morgan Stanley

Ken Zaslow – BMO Capital Markets

Chris Growe – Stifel Nicolaus

Presentation

Operator

Welcome to the General Mills third quarter fiscal 2010 results conference call. (Operator Instructions) I would like now to turn the conference over to Kris Wenker, Vice President Investor Relations at General Mills.

Kris Wenker

Good morning everybody. I’m here with Ken Powell our CEO, Don Mulligan our CFO, and Jeff Harmening, who leads our Big G Cereals division. I’ll cover my usual housekeeping items quickly and then turn the microphone over to them.

Our press release on third quarter results was issued over the wires earlier this morning. It’s also posted on our website if you still need a copy. We’ve posted slides on the website also. They supplement our prepared remarks for this morning and these 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, starting with Don.

Don Mulligan

Thanks Kris, and good morning everyone. Thanks for joining the call and for your interest in our company. At General Mills we’re now nine months through the fiscal year and our portfolio of leading brands continues to perform very well.

The results we released this morning reflect another quarter of high quality performance. Our sales are growing even as we lapped robust prior year increases. Our margins improved reflecting lower input costs, favorable mix, and continued benefits from holistic margin management, or HMM.

We continue to reinvest in marketing and merchandising programs to fuel momentum for our brands in the fourth quarter and into fiscal 2011. And our earnings per share increased at a strong double-digit rate.

Slide five summarizes our third quarter results. Net sales grew 3%, that’s on top of 4% sales growth last year. Price and mix contributed two points of growth and favorable foreign exchange added one point. Segment operating profit rose 8% including a double-digit increase in media spending.

Net earnings totaled $332 million, and diluted earnings per share increased $0.96. Our reported results include several items effecting comparability. Third quarter 2010 earnings included net reduction related to mark-to-market valuation of certain commodity positions in grain inventories.

That reduction totaled $0.01 per share this quarter bringing our adjusted earnings to $0.97 per share. In last year’s third quarter we recorded a $0.13 gain from mark-to-market valuation. Our year ago results also included $0.08 gain for insurance proceeds related to a plant fire in Argentina, and a $0.15 reduction due to the impact of a court decision on an uncertain tax matter.

Excluding these items effecting comparability in 2009 and the mark-to-market effect in both years, diluted earnings per share grew 23% in the third quarter. Top line growth continues to be an important driver of our results. US Retail sales rose 3% on top of 8% growth in the same period last year.

International sales grew 11% as reported. This includes favorable foreign exchange with volume growth, net price realization, and mix drove a 3% increase in sales on a constant currency basis. Our Foodservice segment reported a 10% decline in net sales. But this includes the impact of divestitures and index pricing tied to wheat markets that are below year ago levels. Underlying performance in this business segment remains quite good.

Slide eight shows the 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 unchanged versus last year with divested products reducing growth by one point.

Pound volume for US Retail segment was comparable to last year despite declines in heavier products like soup, flour, and canned vegetables. Unit volume measured in equivalent cases was up 4% for the quarter. Pound volume for International was up 2% despite a two-point reduction from divested businesses.

And divestitures significantly reduced volume in our Bakeries and Foodservice segment. Excluding divested businesses pound volume would have increased in the quarter, well ahead of overall industry trends.

Our margins recovered from year ago levels in the third quarter. As reported, gross margin increased from 36% to 38% for the period. Excluding mark-to-market effects, the expansion was stronger reflecting lower commodity and fuel costs, favorable mix, and HMM benefits. These more than offset the $48 million pre-tax charge from a change in our capitalization threshold for spare parts.

We expect this change will help us further improve our capital management going forward. We continue to invest funds generated by gross margin improvement to drive top line growth. Our media spending was up 33% in the third quarter. As we’ve discussed with you before we’re increasing our digital and multicultural marketing.

We’re also bringing growing brands, like Old El Paso Mexican products and Green Giant frozen vegetables back on air with TV advertising. And we continue to invest to grow our global brands in markets around the world. We do pay close attention to the returns on our media spending and still see plenty of good opportunities to invest to fuel future growth.

Read the rest of this transcript for free on seekingalpha.com