Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Kristen Wenker - Senior Vice President, Investor Relations

Kendall Powell - Chairman and Chief Executive Officer

Donal Mulligan - Executive Vice President and Chief Financial Officer

James Murphy - Senior Vice President and President, Big G Cereals

Analysts

Matthew Grainger - Morgan Stanley

Bryan Spillane - Bank of America Merrill Lynch

Eric Katzman - Deutsche Bank

Ken Zaslow - BMO

Chris Growe - Stifel

Robert Moskow - Credit Suisse

Ken Goldman - JPMorgan

David Driscoll - Citigroup

Diane Geissler - CLSA

Andrew Lazar - Barclays

General Mills, Inc. (GIS) F1Q 2014 (Qtr End 08/25/2013) Earnings Call September 18, 2013 8:30 AM ET

Operator

Welcome to the first quarter fiscal 2014 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Kris Wenker, Senior Vice President, Investor Relations. Please go ahead.

Kristen Wenker

Thanks, operator. Good morning, everybody. I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Jim Murphy, President of our Big G Cereals Division. And I'll turn the call over to them in just a minute, but first, I'm going to cover my usual housekeeping items.

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

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

Donal Mulligan

Thanks, Kris, and hello, everyone. Thank you for joining us today. As you've seen from our press release this morning, General Mills is off to a good start in fiscal 2014.

Slide 4 summarizes our results for the first quarter. Sales totaled $4.4 billion, up 8%. Segment operating profit increased 6% to $812 million that includes a 7% increase in advertising investment. Net earnings totaled $459 million and diluted earnings per share were $0.70 as reported.

These results are below year ago levels that include an $82 million increase in the mark-to-market valuations of certain commodity positions and a one-time tax benefit. Excluding items affecting comparability, our adjusted diluted EPS would be $0.70, a 6% increase versus last year.

Slide 5 shows the components of our net sales growth. On an as reported basis net sales increased 8%, including strong contributions from new businesses and three months of incremental contribution from new businesses -- from new products and three months of incremental contribution from new businesses, primarily Yoplait Canada and Yoki in Brazil.

Pound volume contributed 8 percentage points of growth in the quarter. Sales mix and net price realization added 1 point of sales growth and foreign exchange reduced that sales by 1 percentage point. Excluding 5 points of growth from new businesses, net sales were 3% above year ago levels.

Slide 6 details net sales performance for our U.S. retail business. In total, net sales increased 4%, led by our snacks, natural and organic, baking and cereal businesses. Introductory shipments of new products help drive these sales increases. Jim and Ken will talk more about this innovation in a few minutes.

Sales for our Convenience Stores and Foodservice segment declined 1% in the first quarter. That's consistent with our expectations. Remember, we're focusing -- we continue to focus our product mix. Priority platforms, including banking mixes, cereal, yogurt, snacks and frozen breakfast posted solid sales growth in the quarter.

Slide 8 summarizes first quarter international net sales on a constant currency basis. Sales grew 25% overall, led by Latin America, where sales increased nearly 200%. This includes strong contributions from Yoki and double-digit growth in our base business. In Canada, sales increased 21%, led by incremental contributions from Yoplait. Sales for the Europe region declined 3%, reflecting the difficult operating environment there. And sales in the Asia-Pacific region increased 13%, led by double-digit growth in China.

Slide 9 shows our gross margin was 36.9% on both a reported and underlying basis in the first quarter. Excluding mark-to-market effects, our gross margin declined 130 basis points. The addition of Yoplait Canada and Yoki account for roughly half of that decline and the other half reflects higher input cost.

We are now 60% covered on our commodity needs for fiscal 2014 and we're still estimating 3% supply chain inflation for the year in total, with first half inflation rate expected to be higher than the second half. We continue to invest in consumer marketing to drive topline growth. As shown on Slide 10, our investment in media and advertising increased 7% in the first quarter, led by double-digit increases in media spending for U.S. yogurt and our international segment.

Slide 11 outlines our segment operating profit results for the quarter. Total segment operating profit increased 6% to $812 million, despite higher input costs and foreign exchange headwind and the increased advertising investment. U.S. retail profit increased 6%. International profit met strong year ago levels, which increased 56%. And Convenience Stores and Foodservice profit increased 10%.

After-tax earnings from joint ventures grew 4% to $24 million in the quarter, reflecting sales gains and strong levels of holistic margin management for cereal partners worldwide. On a constant currency basis, CPW sales increased 1% with growth in the U.K. and Asia largely offset by category weakness in Southwest Europe. Constant currency sales for Häagen-Dazs Japan matched strong year ago levels.

Completing our review of the income statement, corporate unallocated expenses excluding mark-to-market effects were up $12 million in the quarter. The effective tax rate for the quarter was 32.3% as reported. Excluding items affecting comparability, the tax rate was 32.2% this year, compared to 31.4% a year ago, and average diluted shares outstanding declined 1% in the quarter. For the full year, we continue to target a 2% net reduction at average diluted shares outstanding.

Turning to the balance sheet. Slide 14 shows that our core working capital declined 2% despite the addition of new businesses driven by our focus on inventory reduction. Accounts payable and accounts receivable were largely offsetting in the quarter. So the first quarter completed, we remain on track to achieve our 2014 targets.

We expect to deliver low-single digit growth in net sales, fueled by product news and innovation across our base business and incremental contributions from new businesses. We expect operating profit to grow faster than sales, reflecting a robust pipeline of productivity issues and stronger profit contributions from new businesses. And we expect operating profit margin expansion in each of our three business segments. And we expect to deliver high single digit growth and adjusted diluted earnings per share to a range of $2.87 to $2.90.

With that I'll turn the microphone over to Jim Murphy.

James Murphy

Thanks, Don, and hello everybody. It's great to be with you on the call this morning and talk about the strong growth opportunities we see for our U.S. cereal business. Let me begin by reminding everyone why over 90% of U.S. households buy cereal. First and foremost it taste terrific and offers consumers of all ages a wide variety of flavor and texture choices. It's obviously quick and easy to make and it's affordable.

In fact, at around $0.50 a serving, that's the including the milk cereal beats most other breakfast choices on price. Cereal is lower in calories in most breakfast options and it's a very nutrient-dense food choice. In fact, fortified cereal provide more iron, folic acid, zinc and B vitamins than any other conventional breakfast food, plus there is all that whole grain and fiber.

The fact is ready-to-eat breakfast cereal, even your favorite presweetened variety, more than hold the zone in a side-by-side comparison with other nutritious foods. Slide 18 shows the nutrition side panel for a bowl of Cocoa Puffs with Skim Milk. This great taste in breakfast is just 150 calories. Those of you who count calories no, that's a tough number to beat. It's got no trans-fat, no cholesterol and very little sodium.

On sugar, well, take a look at your favorite brand of regular fruit flavored Greek yogurt and I'll bet you the number on that label is higher. Protein is one gram for Cocoa Puffs alone, but five grams including the milk. And when you get the listing of vitamins and minerals, cereal beats most breakfast food competition hands down.

With credentials like these it's no wonder that consumers love cereal and buy a lot of it. As I mentioned earlier, over 90% of the U.S. household purchase cereal each year, and on average they buy a box nearly every other week. That's one of the highest purchase rates across categories in the center store. Cereal household penetration and buyer rate is even higher in Hispanic households, one of the fastest growing segments of the U.S. population. Over the last three decades cereal retail sales have nearly tripled reaching $9.4 billion today.

One of the consumer behaviors following this long-term growth is the fact that many more people eat breakfast and skip it. Breakfast is truly a growth market. The number of breakfast occasions increases as the U.S. population expands. Breakfast at home is growing and today represents over 80% of all breakfast occasions. And cereal is the most popular breakfast food at home by far, featured in a commanding 32% of these morning meals.

General Mills has led U.S. cereal category growth over the past five years and we've added a full point of market share. We're off to a solid start in 2014 with sales in market share growth in the first quarter. So we like the growth at the breakfast occasion. Demographics trends favor cereal consumption as we look ahead and General Mills has performed well, yet I have seen some analysts' reports question the future prospects for the U.S. cereal category and I understand why.

Category unit volume has declined over the last three years, but we see three primary factors behind this recent trend: first; we believe that any food categories growth is the result of the collective innovation that branded players bring to that category, and frankly there hasn't been enough new product innovation from the branded manufacturers; second, there hasn't been enough product news behind the big category established brands; and finally, there hasn't been enough consumer-directed advertisings supporting this big category. These are not structural issues. These are issues of innovation and execution.

In Big G, we are taking specific steps to drive growth for our cereal business in fiscal '14 and beyond. Our plans include core brand renovation that is relevant to consumers. We're launching a strong slate of differential new product innovation and we're investing to develop innovative marketing ideas that bring increased consumer excitement to cereal. It's really a simple formula, but it works where we are bringing relevant product news and innovation to market, we are seeing the sales growth.

There is perhaps no better example of the power of product news in renovation than in our Chex business. In 2010, we repositioned this brand as gluten-free. Retail sales have increased at a double-digit rate since. And Chex grew another 7% in the first quarter, including contributions from the new vanilla variety.

Cereals is the biggest franchise in the U.S. cereal category by far. Today, one out of every eight boxes of cereals sold in the U.S. is a variety of Cheerios. And Honey Nut Cheerios is Americas' top-selling cereal brand. We're supporting Honey Nut with increased levels of advertising, including a new campaign with the Rapper Nelly called Must Be The Honey. Early response to this ad has been just fantastic with over 10,000 mentions on social media in just the first week. First quarter retail sales of our Honey Nut Cheerios franchise increased 4%.

We've also launched new advertising on the original yellow box Cheerios. This advertising reminds consumers about the heart health benefits and their emotional connection to this great brand. Baseline sales trends are responding with an improved run rate of 260 basis points in the last six months.

We're supporting this momentum in the second quarter with our Send Cheer to Teachers promotion. You can thank your favorite teacher with a clip postcard from specially marked boxes. There is more opportunity across this iconic Cheerios franchise and our news and innovation pipeline is full. I am extremely confident that this franchise will see broad-based growth going forward.

Lucky Charms another consumer favorite, turns 50 years old this year, but the brand isn't showing its age. Retail sales in the first quarter grew 11%. Part of this growth reflect success of new advertising directed to adults, who as it turns out account for nearly half the consumption of Lucky Charms. We have big plans for Lucky's birthday. We'll be celebrating with 50 days of surprises culminating on St. Patrick's Day.

Let's talk about the Breakfast of Champions. For those of you who weren't able to draft Adrian Peterson on your fantasy football team, now you can have them on your breakfast table in three ways. And we are partnering with Blippar to bring AP to life. Just download the Blippar app, point your smartphone at the Wheaties box and see what happens.

And just inside for Halloween, our monsters cereals are back. This year the count Boo Berry and Franken Berry are joined by two friends not seen in over 20 years, Yummy Mummy and Frute Brute. Initial shipments for the monster cereals are well-ahead of last year's pace and this just illustrates the power of cereal in pop culture.

Now, I've been talking a lot about established brands, but our 2014 plans also include great taste and new product innovation. Honey Nut Cheerios Medley Crunch continues to be the single biggest launch in the category this calendar year. Our new Hershey's Cookies and cream cereals are off to a great start. It's turning in the top-third of the total categories and outperforming other new items in the chocolate segment. This great taste comes with solid health credentials too, including a 100% whole grain and no trans fats.

I also believe it will be important to bring new benefits to the category to drive growth. Our Nature Valley Protein Granola delivers 10 grams of protein per serving. That's more than twice the cereal category average. The two varieties, oats and honey and oats and dark chocolate, this products taste terrific. After only three months in the market, it's already among the top-turning granola items.

And our new BFAST breakfast shake provides busy consumers with the balanced nutrition of a bowl of cereal and milk in a convenient shelf-stable drink. Distribution on this product is just getting started and we are leveraging both in store and grass root sampling events to drive product trial and awareness. In total, we're very excited about our new product lineup this year. We have additional new cereals scheduled for the launch in the second half.

New products certainly play an important role in driving category growth, but so does advertising. In recent years, measured media spending for total food and beverage is up modestly. Cereal category advertising has declined during that same period, so cereal has lost some share of voice.

However we've maintained strong levels of ad support in our cereal brands. Over the last two years, our cereal spending in measured media has increased 6% and today represents 41% of total category measured spending. So our share of voice is up and well above our 31% share of category dollar sales. Meanwhile, our share of the cereal shelf is well below our share of category sales. So we're working with retailers to expand our cereal distribution. In the first quarter, our share of distribution grew 80 basis points.

At the same time, we're staying very disciplined about the sizes and flavors we're launching in the category. As a result, our velocities or turns on the shelf have outpaced the category average in our brand of competitors. That trend continued in the first quarter of 2014. So our products play a very important role in driving sales growth in the cereal category.

To wrap up my remarks this morning, we are very bullish on the U.S. cereal category. Consumers love cereals for all the good reasons that I outlined for you today. In recent years the collective product news and innovation from branded cereal manufactures has not been sufficient to driver category growth. We've got plans to drive sales and profit growth for our cereal business in 2014 with product news and established brands, a strong new product lineup and effective marketing and merchandising initiatives.

Thank you for your time this morning. And now I'll turn the call over to Ken Powell.

Kendall Powell

Thank you, Jim, and good morning to one and all. You just heard about the terrific innovation plans we have in our U.S. cereal business. So I'll give you a quick summary of the innovation we're seeing elsewhere in the company. But first, let me offer a few observation on input cost trend and then general pricing and promotional environment.

We've noted that year-over-year declines in spot prices for certain commodities, notably corn and wheat, have prompted some questions about the potential for broad-based deflation in input costs. At General Mills, we buy and manage a very broad basket of commodities. So while some spot prices like grains are down others like dairy are up.

All-in, we still expect inflation of roughly 3% across our supply chain costs for the fiscal year that will end next May. In longer-term, we continue to believe that the trend on food industry input costs will be inflationary, driven by rising global demand for food and energy.

In terms of industry volume and pricing trends, we are seeing balanced growth across the 25 categories where we compete. That's true for the most recent quarter as well. This growth is modest, but it's nonetheless growth. We're working to fuel sales increases in our categories with higher levels of product marketing and innovation, and Jim shared several cereal examples with you in just a few minutes ago.

I'll cover the other key categories starting with yogurt. In the U.S. sales for our Greek yogurt business continue to significantly outpace the segment. Our momentum started with the highly successful launch of Yoplait Greek 100 last summer. Year one retail sales for this reduced calorie line reached $150 million, making this the single largest new product launch in Yoplait in the last two decades.

We're building on this momentum with the first quarter launch of Yoplait Greek blended yogurt. Advertising for this new line focuses on its winning taste profile. And we're continuing the regional expansion of Liberté Greek. In total, our first quarter Greek yogurt sales grew nearly 100% more than double the growth rate of this segment. And we're innovating beyond Greek too, including new advertising and marketing initiatives behind our Core Cup business.

Over the last two quarters our U.S. yogurt net sales are up slightly with faster growth in unit sales. We're continuing to make steady progress on this key business and we expect to report further progress in the coming quarters.

Our U.S. Snack businesses are off to a terrific start this year, led by strong sales of Nature Valley Soft-Baked Oatmeal Squares and Fiber One protein bars. First quarter retail sales for our grain snacks business increased 8%. And we added over 3 points of market share. Layer bar sales increased at a double-digit pace in the quarter, led by strong sales of our new ALT protein bars. And our hot snacks sales were up 4% in the quarter, led by the new line of Totino's BOLD Rolls.

In Dry Dinners, we're seeing steady improvement in baseline trends as we ramp up distribution of new items and begin to activate our marketing plans. We've launched new flavors of Progresso Soup and continue to focus our advertising on the great taste of these ready-to-serve varieties.

First quarter retail sales increased 3% above strong year ago levels. And in refrigerated dough, new gluten-free batters and strong sales of Grands biscuits drove first quarter retail sales up 5%. In total, we're launching over 100 new U.S. retail products in the first half of 2014, with more to come later in the year.

This increased level of innovation reflects the benefits of the new organization structure we put in place last year. Our level of new product activity is up across our portfolio, including a significant increase in our newly created baking products and frozen foods divisions.

As our new items reach good store level distribution, we'll be activating the media and marketing campaigns for these businesses. We're ramping up activity behind our seasonal items such as soup, baking products and frozen vegetables. And we continue to improve the efficiency and impact of our advertising dollars with increased investments in targeted digital and multicultural media.

We also have a variety of second quarter merchandising events planned to drive customer and consumer excitement. We are expanding our Save Lids to Save Lives program, which benefits breast cancer research. Starting this month more than 25 General Mills brands will carry pink lids on over 340 million packages.

In total, General Mills will donate $0.10 for every lid redeemed up to a maximum total donation of $1.5 million. We also continue to expand our successful Boxtops for Education program. Since the inception of this program, we've raised over $525 million for schools across the country.

Turning to our U.S. Business in a way from home channels, total net sales declined slightly in the quarter as Don showed you. But we delivered net sales growth across our key product platforms in the first quarter. Operating profit for this segment grew 10%, reflecting this branded product strength as well as good grain merchandising performance.

Let me turn to our international business with a few comments on each region. I'll begin with Canada, where yogurt is our newest business. We are a leading player in the Greek yogurt segment. In just last month we added new Yoplait Yopa to our lineup.

Yopa offers the high protein, no fat benefits of traditional Greek yogurt in great tasting flavors like strawberry cheesecake and mango tango. We're supporting this product with a comprehensive marketing campaign that features Canadian-Greek actress, Nia Vardalos. Today our Yoplait and Liberté brands account for 30% of Canadian yogurt category sales.

In Europe, first quarter sales in constant currency declined 3%, reflecting the tough operating environment in the region. Our results did include strong performance from new products, including Häagen-Dazs Secret Sensations and Old El Paso Mexican Rice kits. In yogurt, our U.K. launch of Liberté Greek is off to a solid start and we're expanding our Calin line of yogurts into drinkable varieties in both the U.K. and France.

Our largest business in the Asia-Pacific region is Greater China, where we continue to see robust growth. First quarter sales in constant currency grew at a strong double-digit rate, led by Häagen-Dazs and our line of Wanchai Ferry frozen dim sum item. The overall Chinese economy maybe slowing a bit, but the demand for branded consumer food products continues to expand, as increasing number of Chinese consumers want foods that offer quality, convenience, nutrition and taste all at a good value.

And in Latin America, the Yoki business has just completed its first year with General Mills. New Yoki Kit Fácil dinner kits are off to a very strong start in Brazil. We're also introducing new flavors of popcorn, soups and beverages, and we're prioritizing the top 100 Yoki products that should be in every grocery store across Brazil. In total, we are very pleased with Yoki's performance. Retail sales in Brazil increased nearly 20% during the first year.

With that, let me summarize today's General Mills update. We're off to a solid start in 2014. We delivered net sales and profit growth on our base business with incremental contributions from new businesses. Our first quarter results have us on track to achieve our annual sales and profit targets.

We continue to be excited about the year. We have more impactful advertising and increased levels of innovation in market right now with additional efforts planned for the remainder of the year. We see a manageable level of input cost inflation this year and our categories are showing modest balanced growth.

Ultimately, we believe our categories and the strength of our brands are a source of competitive advantage for General Mills. We like our prospects for increasing sales and earnings in 2014 and longer term. So thank you for your time this morning and for your interest in General Mills.

With that, I would like to open the call for questions. Operator, please get us going.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Matthew Grainger of Morgan Stanley.

Matthew Grainger - Morgan Stanley

Just to dive into the U.S. retail sales growth a bit more. I think it's clear that you made some progress here in the first quarter and we did see some sequential improvement. But 4% growth does seem like it benefited from a few factors like new product shipments and mix. So as we're thinking about modeling out that segment over the coming quarters and just how the sort of operating environment is evolving.

Just wanted to get your thoughts on whether there was an inventory benefit here in the first quarter that we should take into account and expect to normalize over the next quarter or two? And how should we think about the balance between price mix and volume across the coming quarters? Should we expect to see -- I'd assume this type of mix benefit persisting beyond the first quarter.

Kendall Powell

You partly answered it. It is in fact, we did ship lots of new products over the course of the quarter. And as all of you know, it takes a while for those to move through the channel and start to get counted at retail, so that's part of the gap that you mentioned. You talked about mix, you also mentioned inventory, and I do want to remind all of you that first quarter, a year ago, our merchandising pressure was a quite a bit below average in our inventories, as a result our retail inventories were low. So as we've normalized merchandising, we've seen the inventories normalize behind that. So you kind of identified some factors in the first quarter. You also as you note, we're quite pleased generally with the overall effort in the first quarter.

We like the new products. We're seeing some good trends across some important categories and we're encouraged by that. And going forward, I think we're looking for growth in low-single digits and it's always a little bit of all three. It's a little bit of volume and maybe a bit of price and a bit of mix and we do expect that Matthew to normalize here versus kind of a -- some of the year-over-year comps. In Q1 we expect to see that normalized as we go forward.

Don, I don't know if you'd want to add anything to that.

Donal Mulligan

I think you captured well. I mean as low-single digits is still our guidance for U.S. cereal sales and there is going to be a bit of volume, some mix. We saw that in the first quarter with cereal grain, our national organic products driving that sales growth and they have a positive mix benefit for us and we expect that it continues as the year unfolds.

Matthew Grainger - Morgan Stanley

And then just with respect to quantifying to the extent we can the impact of those headwinds in the -- or those dynamics -- sorry not headwinds in the second quarter. With the inventory benefit that you may have seen here in the first quarter, would you expect second quarter sales to be generally in line with your full year targets or sort of towards the lower end of that range.

Donal Mulligan

Well, Matt, we're not going to give quarterly guidance. We'll just reaffirm that we expect our low-single digit sales growth with the mix of all those items to play out for the balance of the year.

Operator

Our next question comes from Bryan Spillane of Bank of America Merrill Lynch.

Bryan Spillane - Bank of America Merrill Lynch

Quick question on the U.S. cereal business. I guess, two things, relative to the -- I guess, the debate that's going on into market about the health of the category and I guess some of the current concerns that we hear about. Can you talk a little bit about the effectiveness or the efficacy of merchandising, especially investing in price to drive list.

And I think there is some concern that maybe we started volumes -- category volumes have been so soft the last few years that we get into the temptation to begin to try to invest in price in order to drive some lift. So just your thoughts on where consumers are in terms of price if that's going to be a motivating factor.

And then second, just in terms of maybe demographic cohort, if you could just talk a little bit about how you think your brands are doing and maybe the category is with kids, with families, with low-income consumers, so just trying to get a sense of whether there is maybe a demographic cohort in the market that may need to addressed more definitively than maybe others.

James Murphy

So in commenting on the merchandizing, I said it in my prepared remarks, but product news and innovation and investment on the consumer side is what's going to drive this category. The temptation to increase merchandizing in order to do that is not an effective and not an efficient to grow the category long-term. And so we believe that the product news, innovation and investment from the branded players need to increase in order to make this category grow healthily in the future.

Your second question on demographics, we see that the families, the mainstream families who are after taste and branded value and fun in the breakfast occasion are strongest consumers right now. And it manifest itself through the strength of our all-family brands and I mentioned that in my remarks things like Lucky Charms and Honey Nut Cheerios that appeal to everybody in the family are very, very strong right now.

And so we don't see a weak spot really across the demographics. In fact, Hispanics, as I said consume more cereal than anybody and that's a growth driver for us in the future. So demographically cereal has got a lot of tailwinds actually going forward.

Bryan Spillane - Bank of America Merrill Lynch

And just following up on that, just ageing boomers, is there are anything difference that's any different in terms of the category dynamic with maybe people 50 plus?

James Murphy

That's a way over index as well, so the two groups of consumers at over index are the families with the young kids and the 55-plus crowd and so as we look at that that is the demographic tailwind as I mentioned for the cereal category going forward.

Bryan Spillane - Bank of America Merrill Lynch

And from your perspective there is no change to that?

James Murphy

No.

Operator

Our next question comes from Eric Katzman of Deutsche Bank.

Eric Katzman - Deutsche Bank

I am glad Bryan included the 50-plus in the ageing boomers, I'm almost there. I guess I want to talk about the deflation comments you made, Ken, it seems like with emerging markets slowing down, less ethanol inputs from grain and stocks to use, ratio is going up that we could be in for a period of time where there are lower inputs. So I want to push back against that a bit, obviously inflations are tough one to predict overall, but I want to push back against that a little bit.

And then related to that we've heard that Wal-Mart went to 200 suppliers asking for 2% price cuts across the board and that dollar general was already lining up behind them on the back of this kind of deflation thesis, and so maybe react to that. And then I think I have a follow-up question for Jim on cereal.

Kendall Powell

For your first question, our premise on how the global economy is going to evolve is that we're going to continue to see globalization, economic growth and particularly in emerging markets, and by the way, while many of you have commented on the softening in emerging market economies overall. I mean I do want to point out that our business continues to be very strong in emerging markets.

We had a very strong quarter in China and we're seeing terrific growth in Brazil. And I think the reason is that we are selling Center of Plate, very basic everyday food items to these consumers, I mean we're selling dim sum and egg rolls in China that are being consumed every night. When you think of our product line in Brazil, it's a very middleclass product line.

Think of equivalent of helpers in the U.S. I mean that kind of captures I think the positioning of our brands in Brazil. So I'm very well targeted. These consumers continue to have growing disposable income and we're seeing tremendous growth in emerging markets and we think that's going to continue. And we think we're going to continue to see growing global demand for these basic commodities.

Now, in terms of your comment on stocks, I mean every year is a new year. And when it comes to the harvest, and so you won't see us predicting anything there other than every year is a new year. This year it looks like it's going to be a better harvest and we may see stocks improve, but its one year at a time on that one. And I think as we all know volatility is what we should expect there.

In terms of your comments on Wal-Mart, we haven't heard anything about that that would be new to us. In fact, I was visiting at Wal-Mart within the past several weeks and I will tell you that we had a very good conversation about innovation and what we can do to make sure that we've got high levels because of the belief that innovation drives traffic and it drives excitement in our categories. So we haven't heard anything about your comment on 200 suppliers and all that stuff.

And so anyway -- so thank you for the question. I think you've got a follow up for Don or Jim.

Eric Katzman - Deutsche Bank

Jim actually, on Slide 34, I'm just trying to understand -- so I know that your share of category has been in the low-30s for a period of time. But I'm just trying to understand the share of distribution points is kind of call it a third lower or fourth lower. So is that because the other competitors are just whatever, throwing allowance money or merchandising money at the retailer to keep their distribution, kind of how long has this relationship between share of dollars versus share of distribution points been so skewed for you. And what are you doing to change that?

James Murphy

Well, it's really, the key factors is that are skews are just much bigger and more efficient and productive in the category. And so we are constantly reminding our retail partners of this fact and this really been the case for quite sometimes. If you think about it we have some of the biggest, most productive skews on Honey Nut Cheerios and Yellow Box Cheerios and the like, in the category.

And the challenge is to get the proper phasing on those big skews in the category, so that they don't run out of stock on them. But there is always the temptation to take a new skew in the category and put it on the shelf it's a constant battle with the retailers and reminder of the retailers to go back to more productive shelf sets.

Having said that, we have made a lot of progress here just in Q1, we're up 80 basis points as I mentioned in my remarks and so I think our story and the facts that we bring to our partners is starting to resonate at an increasing rate and you probably could expect that this gap starts to narrow over the course of time.

Operator

And our next question comes from the line of Ken Zaslow of BMO.

Ken Zaslow - BMO

Ken, I have got just two questions as I look through your presentation. One is it seems like General Mills is broadening the efforts across your cereal brands like including Wheaties, which may have not been as focused as well as the Monster cereals. . So is there a chain in what you're doing across the portfolio, you look kind of like pulling levers on products that you not normally have done before. And my second question is how you reacted and can you just talk about the new entrants into the categories, the competitors like a kind or something that. Can you talk about those two issues?

Kendall Powell

Sure, first on the pulling levers on some brands that we haven't supported as much over the recent past. That's absolutely true. We see a lot of up of upside for supporting brands like Wheaties and Total and the like and we're doing it and we're doing it with different marketing vehicles. So it's not the standard TV plan. You're going to see a lot more in this social space as an example. So yes, that is upside for us. We have a lot of brands that are between half a share point and point that we can continue to increase the spending behind good marketing ideas. So that's the answer to your first question.

And on the second question, I think that there is an emerging segment within the category where Cascadian Farms and our new Nature Valley Protein Granola fit, and we call it the nature space. That is growing at quite a nice cliff. It's still small relatively and it's still relatively less productive than the mainstream. But nonetheless, we think we have two terrific brands to capitalize on that trend, Cascadian Farm in the organic side and now Natural Valley, which I think is going to be a really strong brand in the cereal category operating in that type of a space of natural ingredients you can see.

Ken Zaslow - BMO

Just going back to the first question, what drove the change though? Like what happened that all of a sudden you say, look we can now focus on these brands. It's just, to me these brands have been around for a long time, like what created that change?

Kendall Powell

We've been experimenting with marketing ideas, and we finally have likely pressed on it; and Wheaties is a good example, Monsters is another great example and we've got more in the pipeline on these smaller brands. This new era of marketing you can try a lot of ideas for very little money and really experiment with them and we're doing that quite effectively now. We're finding -- we're unlocking growth on some of these brands we haven't marketed for a while.

Ken Zaslow - BMO

So one general comment, Ken, and I am looking at Jim here to see if he would agree, but I think that the whole digital and social space opens up some opportunities to innovate that maybe we didn't have five years ago. We can really micro target and with the Monsters thing in way as Jim said in his presentation capitalizing on pop culture. So those kinds of media, I think create some opportunities and we're trying to get better muscles in those areas and we are and it seems to be working for us.

Operator

Our next question comes from Chris Growe of Stifel.

Chris Growe - Stifel

Just I had two questions for you if I could. The first one in relation to U.S. retail, the price mix contribution was strong in the quarter. It sounds like mix was a major driver of that. I want to also understand the degree to which promotion was a bit of drag against that or just understand the scope of how you're increasing promotions here early in the year, something that that they're being very surgical if it's the right term to use?

Kendall Powell

Well, I am not sure I fully understand your question. Let me repeat there was a difference in the level of promotion year-over-year. So first quarter last year I don't know if you recalled this, Chris, but we came out a little bit light and really over the course of our year we were, our self criticism was that our promotional plan was not really balanced the right way. And so this year we have a very balanced plan, a very steady pressure across over the course of the year. And the comparison in the first quarter is that there is more pressure in comparison to that quarter than a year ago.

Chris Growe - Stifel

And so that would have been a bit of a drag against the overall price mix contribution in U.S. retail, meaning that mix was maybe even little stronger in the quarter. Do you follow that?

Donal Mulligan

Yes. That is correct. And to your point it was, if you remember the promotion timing, particularly centered in cereal and grain snacks where we thought we were light a year ago and more normalized this year. And as I mentioned earlier those are two of our highest revenue per pound categories. So as we're seeing those sales grow this year, higher than the -- the volume grow higher than the U.S. cereal average. That is a highly favorable to our revenue mix.

Chris Growe - Stifel

And then the final question there for you was just on the international division. I had booked in a little stronger increase in profit this quarter. So I just wanted to understand, obviously you had a big increase in marketing, that would be one factor, any other factors that we should be aware of, whether it'd be European a little softer that would have weight on the growth this quarter and just understand kind of how we look for the rest of the year in that division?

James Murphy

Yes, Chris, our international profit actually came in right where we expected. It matched year ago levels, which were up 56% over the year before. The higher net sales obviously drove some profit growth. We had three items that offset that, you mentioned one, which is the 15% increase in our media support. We did have higher input cost inflation particularly dairy in Europe. And we had a foreign exchange drag. Importantly, our new businesses did contribute as expected and we continue to expect internationals full year, constant currency sales growth to be high-single digits and operating profit to grow faster. So we haven't had any change to our full year expectations for that segment.

Chris Growe - Stifel

And is there any of that your FX assumptions for the year, is that any worse or better as a result for the first quarter?

Kendall Powell

Yeah, they are a little worse, probably penny or two worse, that's factored into our reaffirm guidance.

Operator

And our next question comes from Robert Moskow of Credit Suisse.

Robert Moskow - Credit Suisse

This is more of a technical question on the Nielsen data that you're presenting. The volume or I guess the unit volume that you showed is very consistent with the Nielsen data we're getting. But the unit pricing, that you're showing, which is positive versus a year ago for the company on a Nielsen basis is very different from the Nielsen data that we get. And I want to know as you saw all these monthly reports from the sell side showing your unit pricing down. What do you think the discrepancy was? We saw unit pricing down in just about every category and I guess it was not reflective?

Donal Mulligan

Well, I mean first of all, I think your comment on units is we are -- Rob, the numbers we show are category numbers not General Mills' numbers. If you're referring to, I think at Slide, maybe 39 in the deck the one that Ken showed. We showed volume and pricing for F '13 annual and F '14 first quarter. Those are category numbers.

Robert Moskow - Credit Suisse

So your unit pricing is -- you're pricing below those categories then or your pricing is below the category pricing?

Donal Mulligan

Yes, and that's the merchandising phase that we talked about a minute ago.

Robert Moskow - Credit Suisse

Okay, I see. Can you give us a sense of the duration of the merchandising then. Is that something to expect throughout the year or is this kind of like a comparison issue versus year ago?

Donal Mulligan

It is primarily a comparison issue versus a year ago in the quarter.

Operator

And our next question comes from Ken Goldman of JPMorgan.

Ken Goldman - JPMorgan

As I look at our RTE cereal as a whole, velocities at least in Nielsen do seem to be coming down across the board and I realize you've highlighted some of the issues behind this, but I wanted to ask whether velocities are off enough where retailers, especially maybe some that you recently visited, Ken, might start thinking about maybe some accelerated SKU rationalization in the category. That does seem to be a large number of tail brands in cereal that may or may not be doing well. So just curious if you're hearing anything about the potential for I guess trade incented rationalization if you will when shelves reset next year or are we just not at that point at all?

James Murphy

Couple of things I would say. One is retailers know how important this category is to driving traffic to their store. It is still nearly $10 billion category and as you know a lot of retailers there trying to figure out how to drive traffic to their center stores and cereals still remain strategically incredibly important for them. The second thing I would say is even the tail of cereals on a SKU basis generates a lot of more productivity than a number of different categories within the center stores. So we haven't heard a lot of noise about retailers questioning the space that they allocate to cereal or questioning the strategic importance of it.

Ken Goldman - JPMorgan

Can I ask you a very quick follow-up? Just, Jim, what are you hearing on not just your brands, but across the category the current levels of inventory among some of your larger retailers? We have seen a higher level of de-loading across all packaged food lately. I am just curious how that's affecting things for the category as a whole?

James Murphy

Well, I think we're following the general trend of the entire food complex. I think you've heard that the retailers are reducing inventory modestly across the entire store and we're just serious part of that.

Operator

Our next question comes from David Driscoll of Citigroup.

David Driscoll - Citigroup

Jim, just wanted to continue on some of the cereal questions. I'd like you to maybe respond to or give me your thoughts on when we look at overall food we see that volumes are down in the aggregate of more than 100-plus categories that we track. You've pointed towards some specific factors category, marketing spending being below the 11 levels, new product introductions being down. But I don't believe you made any mentioned of just simply overall volume softness across the United States, maybe is that absent for a particular reason? Do you not believe that that has an effect here and that these isolated, this category marketing spending in new products are really the lion's share drivers of these issues, so maybe if you could just respond to that please?

Kendall Powell

David, let me -- this is Ken, let me jump in first and then I think Jim wants to make some comments because I think you do raised an important point. I mean Jim I think is very properly focused on the cereal category and what we know drives it, which is innovation and brand building and we're seeing that to be effective. As you go back the last couple of years though, there are some larger macro factors that did have an impact across categories.

And that of course was going back two years ago the pricing that all of us took in response to exceptionally high levels of inflation. For us it was over 10%, which really knocked a lot of categories off the rails going back several years ago. And really last -- it took us last year to see those categories strengthen as we got price points right and we saw consumers stabilizing comeback to the category.

So I think you're right, there was a larger macro factor. We believe primarily triggered by inflation and the pricing that went along with that. However, we see that sort of starting to recede, here in the rearview mirror we're seeing consumers a little healthier. And so we're very focused on the innovation and renovation that we know will continue to propel those categories.

James Murphy

Well, I think Ken said it well and I think I've said that everything in my prepared remarks that what I think is going to drive this category back to growth again. I have unwavering faith that cereal is an adaptable category and we'll meet the changing needs of consumer at breakfast and that's going to be done through product news and innovation and investing behind those great ideas.

David Driscoll - Citigroup

I appreciate those comments and Ken I really appreciate your follow-up on that because it seems to me that it's just impossible to explain this gigantic category in the absence of the context of the environment. A follow-up on SG&A if I can, impressive performance here of SG&A as a percent of sales, down about 70 basis points I think. Can you guys just comment on this was not marketing related. Marketing was up nicely. What drove this and what's the sustainability of it throughout this year and maybe beyond that?

Kendall Powell

Yes, David, you're right, the media spending was up. That actually we drove up SG&A. The balance of our SG&A was benefited from -- can you reply our HMM prices against our admin expenses. And we're also seeing the benefit of the restructuring actions that we took in the fourth quarter of fiscal '12 played out through this quarter as well. So we're at a sustainable level of spend in our SG&A.

David Driscoll - Citigroup

This is a good run rate as a percent of sales more or less?

Kendall Powell

Yes, that's a fair run rate.

Operator

Our next question comes from Diane Geissler of CLSA.

Diane Geissler - CLSA

I wanted to ask, Jim, a couple of questions about the cereal category. Can you tell me what does your research about actual consumption of cereals by consumers? Is it -- what I'm trying to get at here is how much of it is consumed at breakfast as breakfast. What's consumed sort of outside that day part? And then what do you make up the increased competition from away from home channels. It's become a big focus for a lot of other restaurant chains because it's one of the day parts that they are under indexed on and so everybody is rolling out breakfast and I guess I am just curious about how you see that as a competitive threat?

James Murphy

Let me just address the day part issue first. Over 90% of cereals consumed at breakfast currently. We see it as actually had growth opportunity for us, because we know that there is behavior out there that consumers eat cereals beyond breakfast as well, but it's still the fact is that most of it is consumed during that day part and we think it's a growth opportunity frankly to start marketing against that.

So the second part of your question is really the quick serve restaurants in the advent of breakfast and they spent a lot of money on it as you know and many of the big QSRs have picked up breakfast as a growth platform. Having said that breakfast at home is growing, and so it's not really in our view taking a lot of occasions away. It's basically, I think and our research suggests that it's really going after those who have skipped breakfast in the past predominantly and we're picking up as many of those skippers as they are. And so I think there both actually growing.

Kristen Wenker

Operator, let's sneak one more in here before we're done with the hour.

Operator

Our next question comes from Andrew Lazar of Barclays.

Andrew Lazar - Barclays

Just a quick one, Don, and then just quick one for Jim. Don, I think you had said that you still expected or maybe this is a week or so ago, gross margins to be up maybe a little bit for the year as a whole even though you started off with them being down in the first quarter of about 130 basis points. So is that still the case and just your sense on what gives you the confidence around the visibility there?

Donal Mulligan

Our expectations for gross margins are unchanged from the guidance we gave in July that we reaffirmed at your conference couple of weeks ago, Andrew. As I've mentioned in my comments we expect and have seen inflation is going to be higher in the first half of the year and then we'll also begin to lap the comparisons on Yoplait Canada and Yoki starting next quarter. So that combined with increased savings from HMM as the year unfolds gives us confidence we're going to see improving margins as F '14 plays out.

Andrew Lazar - Barclays

And then, Jim, you guys obviously have a long and rich history of data and kind of a knowledge base around the overall cereal category over a long, long sort of period of time. And I am just curious as you look at all the data I assume you come up with periods of time where there maybe several years in a row where the category overall in cereal isn't kind of behaving the way you wanted to for various reasons.

But as you look back, I mean can you come up with similar timeframes where you had these sorts of category issues that have been typically invariably been solved through the things you're talking about whether it's brand building, innovation what not from all the category players. What I was trying to get at, is there anything really different here structurally now than maybe what you've seen in past periods like this?

James Murphy

Thanks for the question, Andrew, and in fact the answer is no to that. And if you look at the long history of cereal, let's just go back, say 30 years as I mentioned in my remarks cereals put on over 6 billion in sales over that time period, growing at about an average rate of dollar sales at about 3% compound annually over that time period, but it hasn't been 3% every year as you mentioned.

In my 21 years at General Mills, I've seen growth in the cereal category written-off a couple different times. I will just bring up a couple of examples. The first one is when bagels become phenomenon in the U.S. And everyone has got to move to bagels and no one was going to eat cereal anymore. And then low and behold we innovated on cereal and brought some new taste varieties and new textures into the category and the category rebounded.

The second time is when Atkins diet craze came a long and again everyone was going to move away from carbohydrates at that point. And then we brought whole grain news to the category. We brought fiber news to the category. We tend to be able to innovate our way out of this. And so the short answer is no, I don't see anything different about this time period than I saw the first two time periods around, but it's been comment on the branded manufacturers to bring the news and adapt in this highly adaptable category.

Kristen Wenker

All right, we are to the end of the hour here and so I've got to let my speakers go. I am sure there are some folks, maybe still in queue. Give us a shout if we can be of help.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: General Mills' CEO Discusses F1Q 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts