General Mills, Inc. (GIS)

GIS 
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General Mills (GIS)

F1Q11 Earnings Call

September 22, 2010 8:30 a.m. ET

Executives

Kris Wenker - VP, IR

Ken Powell - CEO

Don Mulligan - CFO

Analysts

Terry Bivens - JP Morgan

Chris Growe - Stifel Nicolaus

Eric Katzman - Deutsche Bank

David Driscoll - Citi

Vincent Andrews - Morgan Stanley Smith Barney

Kenneth Zaslow - BMO Capital Markets

Robert Moskow - Credit Suisse

Judy Hong - Goldman Sachs

Robert Dickerson - Consumer Edge Research

Presentation

Operator

Welcome to the General Mills first quarter fiscal '11 results conference call. [Operator instructions.] It's now my pleasure to turn the conference over to Ms. Kris Wenker, vice president, investor relations at General Mills. Please go ahead.

Kris Wenker

Thanks operator. Good morning everybody. While we were waiting for the call to start we decided we should say that the sun is shining, the Twins have clinched, and Joe Mauer's MRI has come back good, so it's good here in Minneapolis today.

I'm here with Ken Powell, our CEO, and Don Mulligan, our CFO. I'm going to turn the microphone over to them in just a minute, but first I've got to cover my usual housekeeping.

Our press release on first-quarter results was issues over the wire services earlier this morning. It's also posted on our website if you still need a copy. We've posted slides on the website too. 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 factors that could cause our future results to be different than our current estimates.

And with that, I'll turn you over to my colleagues, starting with Don.

Don Mulligan

Thanks Kris. Let me add my congratulations to the Twins, and thanks everyone for joining us this morning.

You've seen from our financial results release this morning General Mills is off to a good start in fiscal 2011. Despite a very difficult comparison with our strong quarter a year ago, we delivered solid results in line with our expectations. We recorded another quarter of net sales growth, with volume gains across all three operating segments.

We continued to invest in our brands, with an 8% increase in advertising and ongoing product innovation. In total, these results have us on track to deliver our full-year sales and earnings targets for 2011.

Slide 5 summarizes our first quarter results. Net sales increased 1% on a reported basis. Segment operating profit declined 2% in the quarter, reflecting the increased advertising investment and higher input costs. Net earnings totaled $472 million, and diluted earnings per share increased to $0.70.

These results include a net increase related to mark-to-market valuation of certain commodity positions in grain inventories. That added $0.06 per shared earnings this quarter, compared to a $0.02 reduction in our earnings last year. Excluding mark-to-market impact from both years, diluted EPS was $0.64, matching strong year-ago performance.

Slide 6 details our net sales performance by segment. U.S. retail posted another quarter of top-line growth. Net sales increased 2% on top of 6% growth in last year's first quarter. International sales were up slightly - less than 1% as reported - but excluding the impact of unfavorable foreign exchange, net sales increased 4%. Net sales in our bakeries and food service segment also grew slightly, despite continued weak industry trends. Ken will be discussing the performance drivers for each segment in more detail.

Slide 7 shows the components of our total sales growth. Pound-volume contributed 2 points of sales growth in the quarter. Sales mix and net price realization were flat, and foreign exchange reduced the sales growth rate by 1 percentage point.

We generated solid volume trends in each of our business segments. U.S. retail volume increased 1% for the quarter, with growth in multiple businesses. Pound-volume for international was up 4%, with particularly strong performance in Europe and Asia. And in our bakeries and food service segment pound-volume increased 3%. That includes the loss of 2 points of growth from a divested product line.

Slide 9 outlines our first quarter gross margin performance over the last 3 years, which reflects the large swings in commodity markets over that time. You'll recall that on a reported basis our gross margin includes the changes in the market value of grain inventories and commodity hedges we will use in future periods. So we also provide our gross margin excluding these mark-to-market valuation changes to give you a sightline on cost of goods sold for the current quarter.

In the first quarter, reported gross margin was up, as rising input costs increased the market value of our commodity positions. Excluding these mark-to-market effects, our gross margin was 41.1%, down slightly from our strong performance a year ago, when we benefitted from lower input costs and particularly strong plant operating leverage. Note that our underlying gross margin is still well above the level from 2 years ago, and we still estimate full-year gross margin, excluding mark-to-market, will be comparable to last year's 39.7%.

We continue to invest in our strong brands to drive top line growth. As I mentioned earlier, our investment in media and advertising increased 8% in this year's first quarter, and that's on top of double-digit increases in each of the last 2 years.

Slide 11 shows our segment operating profit for the quarter. Total segment profits declined slightly from strong year-ago levels. U.S. retail profit declined 3%, reflecting a 6% increase in media investment and higher input costs. International profits declined 1%, reflecting a 17% increase in media investment, and bakeries and food service profit increased 11% for the quarter, primarily due to good volume growth.

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