General Mills, Inc. (GIS)

GIS 
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General Mills (GIS)

Q3 2013 Earnings Call

March 20, 2013 8:30 am ET

Executives

Kristen Smith Wenker - Vice President of Investor Relations

Donal Leo Mulligan - Chief Financial Officer and Executive Vice President

David E. Dudick - Senior Vice President and President of Bakeries & Foodservice

Kendall J. Powell - Chairman and Chief Executive Officer

Analysts

Andrew Lazar - Barclays Capital, Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Matthew C. Grainger - Morgan Stanley, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

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

Robert Moskow - Crédit Suisse AG, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the General Mills Third Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, March 20, 2013.

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

Kristen Smith Wenker

Thanks, operator. Good morning, everybody. I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Dave Dudick, Senior Vice President and Head of our Bakeries and Foodservice business, and I'll turn the call over to them in just a minute. First, I'm going to cover my usual housekeeping items.

Our press release on third quarter results was issued over the wire services earlier this morning, it's also posted on our website, if you need a copy. We've put slides on the website, too, they supplement today's prepared remarks. Our remarks will include forward-looking statements that are based on management's current views and assumptions. And the second slide in today's presentation lists factors that could cause future results to be different than our current estimates.

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

Donal Leo Mulligan

Thanks, Kris, and good morning, everybody. Thank you for joining us today. Our third quarter results are summarized on Slide 4. Net sales grew 8% to more than $4.4 billion. Sales for our base business grew 2%. New businesses, primarily Yoki in Brazil and Yoplait Canada, contributed 6 points of net sales growth in the quarter. Segment operating profit grew 11%, led by double-digit gains for our U.S. Retail and Bakeries and Foodservice segments. Net earnings totaled $398 million, and diluted earnings per share were $0.60, as reported. Excluding certain items affecting comparability, our adjusted diluted EPS would be $0.64, up 16% from last year's third quarter.

Slide 5 shows the components of our net sales growth. Pound volume contributed 9 points of growth in the quarter, that's primarily the addition of Yoki and Yoplait Canada, which together contributed 8 points of volume growth. Volume growth excluding new businesses contributed 1 percentage point of growth. Sales mix and net price realizations subtracted 1 point of sales growth, and foreign exchange had no impact on total company sales growth in the quarter.

Slide 6 shows net sales growth by segment. The U.S. Retail net sales grew 2%, as our Snacks, Small Planet Foods, Baking and Meals divisions all posted gains. U.S. Retail pound volume matched year ago levels.

International net sales rose 24%, as reported, and 25% on a constant currency basis, with good growth across all geographic regions. These results do include 20 points of growth, primarily, from Yoki and Yoplait Canada. Excluding new businesses and foreign exchange, International sales grew 5% in the quarter. And net sales for our Bakeries and Foodservice business matched year-ago levels.

Gross margin declined in the third quarter, as reported results include the impact of the mark-to-market valuation for certain grain inventories and commodity hedges we'll use in future periods.

Slide 7 also shows that excluding mark-to-market effects, underlying gross margin declined 60 basis points, primarily due to change in our business mix. We expect our underlying gross margin will be down again in the fourth quarter and down 60 to 80 basis points for the full year.

Slide 8 shows third quarter profit growth by operating segment. U.S. Retail posted a 13% increase, reflecting lower inflation year-over-year, lower advertising expense and continued discipline around administrative costs. International profit was flat for the quarter, reflecting the impact of the bolivar devaluation in Venezuela. For us, this will total around $23 million in fiscal 2013, with $15 million hitting in the third quarter. For the year in total, this represents a roughly $0.02 impact on EPS, that's consistent with the estimate we gave you in December. Excluding the bolivar devaluation, International operating profit would've increased 16% in the quarter. In Bakeries and Foodservice, profit grew 13%, driven by favorable net price realization mix, grain merchandising earnings and lower manufacturing costs. Dave will talk more about this business segment in a moment.

After-tax earnings from joint ventures increased 37% in the quarter to $21 million, led by Häagen-Dazs Japan. On a constant currency basis, CPW sales increased 1%, with continued good performance in emerging markets, partially offset by market softness in southwestern Europe. Constant currency sales for Häagen-Dazs Japan grew 5%, led by new products and strong brand building support. Through 9 months, after-tax earnings from joint ventures are up 6% to $77 million.

Corporate unallocated expenses, excluding mark-to-market effects, were $76 million this quarter, that's above last year's third quarter, primarily due to increased pension expense.

Third quarter interest expense declined $19 million, primarily due to favorable rates and mix of debt. We now expect full year interest expense to show a low double-digit decline from 2012 levels.

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