General Mills (GIS)

Q3 2011 Earnings Call

March 23, 2011 8:30 am ET


Kristen Wenker - Vice President of Investor Relations

Donal Mulligan - Chief Financial Officer and Executive Vice President

Christopher O'Leary - Executive Vice President and Chief Operating Officer of International

Kendall Powell - Chairman and Chief Executive Officer


Alexia Howard - Sanford C. Bernstein & Co., Inc.

Andrew Lazar - Barclays Capital

Jonathan Feeney - Janney Montgomery Scott LLC

Terry Bivens - JP Morgan Chase & Co

Eric Serotta - Wells Fargo Securities, LLC

Eric Katzman - Deutsche Bank AG

Todd Duvick - Bank of America Corporation

Kenneth Zaslow - BMO Capital Markets U.S.

Edward Aaron - RBC Capital Markets, LLC

David Driscoll - Citigroup Inc

David Palmer - UBS Investment Bank



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Ladies and gentlemen, thank you very much for standing by, and welcome to the General Mill's F11 Q3 Results Conference Call. [Operator Instructions] It's now my pleasure to turn the conference over to Kris Wenker, Vice President, Investor Relations at General Mills. Please proceed.

Kristen Wenker

Thanks very much, operator. Good morning, everybody. I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Chris O'Leary, Executive Vice President and Head of our International Operation. And I'm going to turn the call over to them in just a minute. First, I need 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 still need a copy. We’ve posted slides on the website, too. They supplement our prepared remarks this morning. And these 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 with that, I'll turn you over to my colleagues, beginning with Don Mulligan.

Donal Mulligan

Thanks, Kris, and hello, everyone. Thanks for joining us on today's call. After a first quarter that ran largely aligned with year-ago results, we expected to see faster sales and earnings growth in the back half of the year. Our third quarter results live up to those expectations.

Net sales for the quarter increased 2%, with pound volume contributing two points of growth. Segment operating profit grew 10%, earnings after tax grew 18% and diluted earnings per share increased to $0.59. These results include a net increase related to mark-to-market valuation of certain commodity positions.

Excluding mark-to-market effects in both years, adjusted diluted earnings per share would total $0.56. That's a 14% increase over last year's third quarter results.

Slide 5 details our net sales growth by segment. U.S. Retail sales were down slightly from last year's third quarter, with pound volume essentially matching year-ago levels.

Sales for our International business grew 8% on an as-reported basis, and they were up 7% excluding the impact of foreign exchange. Pound volume contributed six points of sales growth for International and pricing and mix added a point.

In our Bakeries & Foodservice segment, net sales increased 9%, with pound volume contributing two points and price and mix accounting for seven points of growth.

Our gross margin expanded 130 basis points in the quarter on an as-reported basis, but that includes a mark-to-market valuation increase. Excluding mark-to-market effects, gross margin was up modestly, as higher input costs essentially offset the benefit from lapping a spare parts charge in last year's third quarter.

We still expect to strongly exceed year-ago gross margin levels in the fourth quarter, as we should see increased contribution from price realization, particularly in our U.S. Retail segment. For the year in total, we expect gross margin, excluding mark-to-market effects, to be comparable to last year's strong levels.

Segment operating profit grew 10% in the quarter, led by our International segment. Part of International's strong increase was due to lapping of last year's currency devaluation in Venezuela and transaction foreign exchange effects. But this gain also reflected solid business performance. Chris O'Leary will tell you more about that in a moment.

Operating profit for U.S. Retail declined 1%, as price realization lagged input cost inflation in the period. We're also lapping 10% profit growth for U.S. Retail in last year's third quarter.

And for our Bakeries & Foodservice business, segment operating profit grew 34% on sales gains and higher earnings from grain merchandising activities.

I suspect the results on the joint venture line were below what most of you have modeled. Three factors held CPW's [Cereal Partners Worldwide] after-tax earnings down in the period. First, media investment was up over 20% in the quarter. Second, CPW incurred a tax charge related to a change in corporate structure in its subsidiary in Greece. Our proportional share of that charge was $6 million. And the third factor was a step-up in CPW's service cost allocation that we told you about in July.

On a constant-currency basis, net sales for CPW increased 4%. Net sales for Häagen-Dazs Japan remained soft in the third quarter, and the devastating earthquake and tsunami that hit Japan on March 11 will certainly have an impact on this business in the weeks ahead. It's too early to determine the level of business disruption we'll see. We have confirmed that all the people who work for the joint venture in Japan and their families are okay.

And last week, we announced that the General Mills Foundation will donate $650,000 to the Red Cross International Disaster Response Fund to aid relief efforts in Japan.

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