General Mills, Inc. (GIS)

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General Mills (GIS)

Q2 2013 Earnings Call

December 19, 2012 8:30 am ET


Kristen Smith Wenker - Vice President of Investor Relations

Donal Leo Mulligan - Chief Financial Officer and Executive Vice President

Ian R. Friendly - Executive Vice President and Chief Operating officer of Us Retail

Kendall J. Powell - Chairman and Chief Executive Officer


Andrew Lazar - Barclays Capital, Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

David Driscoll - Citigroup Inc, Research Division

Matthew C. Grainger - Morgan Stanley, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

Rachel Nabatian

Kenneth B. Zaslow - BMO Capital Markets U.S.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division



Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, December 19, 2012.

I would now like to turn the conference over to Kris Wenker, Vice President, Investor Relations. Please go ahead.

Kristen Smith Wenker

Thanks, operator. Good morning, everybody. So it's a week before Christmas, and our numbers are good. More on that in a moment. But first, if I could, I want to make sure you've gone to our website. We put slides there that shed some additional light on the progress we've made through the 6 months to date. Our release is there, too. If you found them, that's great.

We do plan to make comments on the future today. Slide 2 lists risk factors that could get in our way. Let me now turn you over to Don, Ian and Ken. I wish the happiest of holidays to you, your family and friends.

Donal Leo Mulligan

Thanks, Kris. Good morning, everybody. I'll second those holiday greetings, but I will keep my remarks to prose today. Thank you for joining us.

As you see on Slide 4, our second quarter results are summarized there. Net sales grew 6% to nearly $4.9 billion. New businesses, particularly Yoki in Brazil and Yoplait Canada, contributed 4 points of net sales growth in the quarter. Segment operating profit grew faster than sales, up 10%, reflecting a higher gross margin and a 3% decrease in advertising and media expense in the period.

All 3 of our business segments posted operating profit gains. Net earnings totaled $542 million, and diluted earnings per share were $0.82 as reported. Excluding certain items affecting comparability, our adjusted diluted EPS would be $0.86, up 13% from last year's second quarter.

Slide 5 shows the components of our net sales growth. Pound volume contributed 7 percentage points of growth in the quarter. That's primarily the addition of Yoki and Yoplait Canada. Sales mix and net price realizations subtracted 1 point of sales growth. Foreign exchange had no impact on sales growth for the company in total.

Slide 6 shows net sales growth by segment. For U.S. retail, pound volume and net sales grew 2% in the quarter. This performance was led by our Snacks, Small Planet Foods and Meals divisions. Net sales of our Bakeries and Foodservice business declined 1% with pound volume down 2% due to lower bakery flour sales. These sales declines on index-priced items offset gains on cereal, snacks and frozen breakfast items.

International segment net sales rose 19% as reported and 22% on a constant currency basis with good growth across all 4 geographic regions. While these results do include contributions from Yoki and Yoplait Canada, our established businesses also performed well. Excluding new businesses and foreign exchange, international sales increased 4% in the quarter.

Our gross margin improved 120 basis points in the second quarter as reported. This includes the impact of mark-to-market valuation for certain grain inventories and commodity hedges we'll use in future periods. Slide 7 also shows that excluding these effects, underlying gross margin improved 20 basis points, primarily due to lower levels of input cost inflation, HMM and good plant operating performance.

We expect our input cost inflation rate to tick up in the second half, reflecting the impact of this summer's drought. So we expect to be at the high end of our 2% to 3% inflation estimate for the full year, and we're now roughly 90% covered on our commodity needs for fiscal 2013.

Slide 8 shows second quarter profit growth by operating segment. U.S. retail posted a 9% increase, driven primarily by lower input cost inflation and consumer marketing expenses below year-ago levels. International profit increased 4% in the quarter. This includes an expense of $17 million associated with the transition of the Yoplait yogurt license in Canada. Remember that this investment was built into our fiscal 2013 guidance. Excluding this expense, international operating profit would have increased 17% in the quarter. And Bakeries and Foodservice profit grew 24%, reflecting lower wheat costs year-over-year, favorable mix and increased grain merchandising earnings.

Earnings from joint ventures increased 14% in the second quarter to $33 million after tax. On a constant-currency basis, CPW sales increased 3%, with strong performance in the emerging markets partially offset by category softness in southwestern Europe. Constant currency sales for Häagen-Dazs Japan grew 5%, led by new products.

Completing our review of the income statement, corporate unallocated expenses excluding mark-to-market effects were $79 million. That's above last year's second quarter, primarily due to increased pension expense. The effective tax rate for the quarter was 32.6% as reported. Excluding items affecting comparability, the effective tax rate was 32.8% compared to 33.7% a year ago. This primarily reflects the timing of expense -- of tax expense for the year. We're still estimating our full year underlying tax rate at about 33%.

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