General Mills, Inc. (GIS)

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General Mills Inc. (GIS)

F2Q11 (Qtr End 11/28/2010) Earnings Call

December 16, 2010 08:30 am ET

Executives

Kris Wenker - VP, IR

Ken Powell - CEO

Don Mulligan - CFO

John Church - SVP, Supply Chain

Analysts

Eric Serotta - Wells Fargo Securities

Alexia Howard - Sanford Bernstein

Andrew Lazar - Barclays Capital

Chris Growe - Stifel Nicolaus

Eric Katzman - Deutsche Bank

Jonathan Feeney - Janney

Ken Zaslow - BMO Capital Markets

Presentation

Operator

Welcome to the FY '11 Q2 results conference call. (Operator Instructions) Now, I'd like to turn the conference over to Kris Wenker, Vice President, Investor Relations.

Kris Wenker

Thank you very much operator. Good morning everybody. I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and John Church, who leads our Supply Chain Organization. And I'll turn the microphone over to them in just a minute. First I'm going to do my usual housekeeping item.

Our press release is out on the wire services and it's also posted on our website. We've posted slides on the website too. They supplement our prepared remarks for this morning, and the remarks will include forward-looking statements that are 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 so with that, I'll turn you over to my colleagues, starting with Don.

Don Mulligan

Thanks, Kris, and hello everyone. Thanks for joining us on this call. As you know, we faced difficult comparisons in the first two quarters of this year. So we're pleased with the results we released this morning, which were essentially in line with our strong year ago performance. We have plans in place for another robust growth in the second half of our year and are on track to achieve our full year sales and earnings targets.

This morning, I'll review our financial results for the latest quarter and year-to-date, and then John and Ken will talk about plans for the back half of the year.

Slide 5 summarizes our second quarter performance. Net sales grew 1%, driven by pound volume increases. Segment operating profit declined 3% in the quarter, primarily due to higher input cost and increased promotional spending. Net earnings totaled $614 million and diluted EPS increased to $0.92.

These results include a net increase related to mark-to-market valuation of certain commodity positions, as well as the net benefit from certain tax matters that we announced last month. These items contributed $0.16 to our second quarter earnings this year. Excluding these items, second quarter diluted earnings per share was $0.76, within a penny, a very strong year ago result.

Starting with the topline, Slide 6 shows the components of total company sales growth. Pound volume contributed 3 points of growth for the quarter. Net price realization and mix subtracted 2 points of growth. And foreign exchange did not materially impact total company's sales growth in the quarter.

Slide 7 details our net sales performances by segment. U.S. retail sales essentially matched last year's strong levels. As we told you in July, our plans anticipated higher promotional levels across the U.S. retail food industry through our first half and that's what we've seen. For the second quarter, net price realization and mix subtracted 3 points of sales growth, which offset a 3% increase in pound volume.

International sales were up 4% as reported and up 7%, excluding the impact of foreign exchange. Pound volume growth was even stronger, up 8%. In our bakeries and food service segments, net sales were up 3%, including the loss of 2 points of growth from a divested product line. Our results in this segment continue to run ahead of industry trend. Ken will talk more about segment performance a bit later.

Slide 8 outlines our second quarter gross margin performance for the past three years. On a reported basis, this year's gross margin was 40.2%, but that includes changes in the market value, grain inventories and commodity hedges we'll use in future periods.

Excluding mark-to-market effects, our gross margin in the second quarter was 39.5%, that's well above our margin for the same period two years ago. But as we expected, it's below the very strong margin we delivered in the second quarter last year. That primarily due to higher input cost and expenses related to capital projects just more heavily into the first half of this year.

We expect second half margins excluding mark-to-market effects to be above last year's levels. And we still expect full year gross margins before any mark-to-market effects to be comparable for last year. Some factors give us confidence to this outlook. Our plans continue to perform very well. We expect to see improving price realization in the second half, as price increases take effect and promotional levels ease.

In the third quarter, we'll lap $48 million charge taken last year for a change in the capitalization threshold for spare parts. And we have strong holistic margin management activities in place. John will talk more about these efforts in just a minute. We continue to invest at strong levels in advertising and media. In 2011, we're seeing efficiency improvements in our spending through HMM efforts and use of very targeted vehicles like digital.

Our total media expense in the second quarter was below last year's very strong levels, due impart to these efficiencies. The change in media spending versus last year also reflects the fact that we added spending in the second quarter of last year, while this year's second quarter reflects reductions in media expenses versus our plan. However, the expense reduction doesn't signal reduced consumer pressure.

U.S. TV impressions which are the largest part of our media budget and are measured by GRPs, were up at a double-digit rate in the quarter. For 2011, in total, we're projecting a double-digit increase in TV GRPs, along with spending growth in targeted areas like multicultural media and digital. Our in-market consumer pressure will range strong in 2011, but we're expecting overall media expense will be somewhat below year-ago levels.

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