General Mills, Inc. (GIS)

GIS 
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General Mills (GIS)

Q2 2012 Earnings Call

December 20, 2011 8:30 am ET

Executives

Donal Leo Mulligan - Chief Financial Officer and Executive Vice President

Kristen Smith Wenker - Vice President of Investor Relations

Christopher D. O'Leary - Executive Vice President and Chief Operating officer of International

Kendall J. Powell - Chairman and Chief Executive Officer

Analysts

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

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

Andrew Lazar - Barclays Capital, Research Division

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

David Palmer - UBS Investment Bank, Research Division

David Driscoll - Citigroup Inc, Research Division

Eric Serotta - Wells Fargo Securities, LLC, Research Division

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

Edward Aaron - RBC Capital Markets, LLC, Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the General Mills Second Quarter F '12 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, December 20, 2011. I would now like to turn the conference over to Ms. Kris Wenker, VP Investor Relations with General Mills. Please go ahead, ma'am.

Kristen Smith Wenker

Thanks, operator. Good morning, everybody. I'm here with Don Mulligan, our CFO; and Chris O'Leary, Executive Vice President and Head of our international operation. Ken Powell, our CEO, is traveling, but he's participating by phone. I'm going to turn the call over to the 3 of them in just a minute, but first, I'll cover my usual housekeeping item.

Our press release and second quarter results was issued over the wire services earlier this morning. It's also posted on our website. We've posted slides on the website too that supplement today's prepared remarks. These remarks will include forward-looking statements that are based on management's current views and assumptions. The second slide in today's packet lists factors that could cause our future results to be different than our current estimates. Let me also observe here that we're going to conclude this call promptly on time, because I know a number of you want to listen to ConAgra. So let's do one question per person, please. No voice.

With that, I'll turn you over to my colleagues, beginning with Don.

Donal Leo Mulligan

Thanks, Kris. Hello, everyone. Thanks for joining us this morning. As you've seen from our financial results release this morning, General Mills continues to deliver stellar performance in a tough operating environment. We posted broad-based net sales growth, reflecting our international Yoplait acquisition and strong levels of price realization and new product activity across our base business. Despite significant input cost pressure and a high single-digit increase in media investment, our earnings were generally in line with year ago levels. We expect to deliver strong sales earnings growth in the second half of the year. So in total, General Mills is on track to deliver our full year sales and earning targets for 2012.

Slide 5 summarizes our results for the quarter. Sales totaled $4.6 billion, up 14%. Segment operating profit grew 2%. Net earnings attributable to General Mills totaled $445 million, and diluted earnings per share were $0.67 as reported. These results include changes in the mark-to-market valuations of certain commodity positions as well as integration expenses from the international Yoplait acquisition. We're also lapping a net benefit from certain tax matters in the year ago period. Excluding these items, adjusted diluted EPS would be $0.76, in line with our year ago performance.

Slide 6 shows the components of our net sales growth on an as-reported basis, which includes a full 3 months results from Yoplait International. Pound volume contributed 10 percentage points of growth in the quarter. Sales mix and net price realization added 3 points of sales growth, and foreign exchange added one percentage point to our sales growth rate. So on an as-reported basis, net sales increased 14%.

Excluding the impact of Yoplait International, net sales grew 6%. Price mix drove this underlying performance, contributing 10 points of sales growth. As expected, pound volume was lower in the quarter, down 4 percentage points, and foreign exchange did not have a material impact on sales growth this quarter.

Slide 7 details our net sales performance by segment. U.S. Retail net sales grew 3%. International had a great quarter, whether you look at it with or without Yoplait. Sales, as reported, were up 55%. Excluding Yoplait, our sales still increased at a double-digit rate. And net sales in our Bakeries and Foodservice segment also increased strongly at 12%.

Slide 8 outlines our second quarter gross margin performance. On a reported basis, gross margin declined to 34.5%. Remember that this includes the mark-to-market changes in value for grain inventories and commodity hedges we'll use in future periods. Excluding these mark-to-market effects, our gross margin was 36.5%, down 300 basis points. The addition of Yoplait International accounts for about 35% to 40% of that decline. The remainder reflects higher input costs year-over-year for our base business. As a reminder, our estimate for fiscal 2012 input cost inflation continues to be 10% to 11%.

Slide 9 focuses on our media spending. We invested strong levels in brand building activities to drive sales growth. Our second quarter advertising and media expense increased 8%. This includes media investment for Yoplait International and a 3% increase in media expense for our base business. Our in-market consumer pressure continues to grow as measured by GRPs. In the second quarter, our U.S. GRPs increased at a mid-single-digit rate on top of a double-digit increase in the second quarter of 2011.

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