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General Mills (NYSE:GIS)

Q3 2011 Earnings Call

March 23, 2011 8:30 am ET

Executives

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

Analysts

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

Operator

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.

Turning to other income statement items, we divested a small frozen baked goods line in the third quarter, resulting in a gain of $14 million pretax or $10 million after-tax. Corporate unallocated expenses were higher in the quarter when you exclude mark-to-market effects. That's primarily due to higher pension expense and the $11 million charge to increase an environmental liability related to an active cleanup site in New Jersey.

The effective tax rate for the quarter was 31.9% as reported, or 31.6%, excluding mark-to-market effects. That's down from last year's third quarter rate, primarily due to the timing of recent federal legislation that extended tax credits for research and development expenditures.

We expect the full year rate to be down from last year on an as-reported basis but comparable to last year's rate of 33.4%, excluding certain items affecting comparability.

Third quarter interest expense was lower due to rates and debt mix, and our average diluted shares outstanding were down 4% from last year's third quarter. For the year-to-date, average shares are down a bit more than 2%.

Core working capital increased 3% in the quarter, driven by higher inventory levels, which reflect the rise in input costs. So for the year-to-date, results show good growth on top of very strong increase in the same period last year.

Net sales were up 1%, segment operating profit increased 1% on top of 14% growth last year. Earnings after tax totaled nearly $1.5 billion, and diluted earnings per share were $2.22. Excluding certain items affecting comparability, our adjusted diluted earnings per share totaled $1.96, 4% ahead of last year's nine-month results.

As I mentioned earlier, our International segment led results for the quarter and the year-to-date. So I'd like to turn the call over to Chris O'Leary to give you more details about that performance. Chris?

Christopher O'Leary

Thanks, Don, and good morning, everybody. I'm glad to have an opportunity to update you on our International performance. Before I talk about our results, I want to add my condolences to the people of Japan following the devastating earthquake and tsunami earlier this month.

As Don mentioned, we are very grateful that all of our employees, business partners and their families are okay. We have a great team in Japan, and our thoughts are with them as they manage through the challenges in the weeks ahead.

We have a good business in Japan. Our proportionate share of annual net sales reached $175 million last year. Our facilities made it through the earthquake largely unscathed. Only one warehouse was destroyed, and we are open for business. However, the situation there is dynamic. We will update you as we know more.

At our Investor Day last July, we outlined the fiscal 2011 plans for our International segment. We said that we expected global economies and consumer momentum would slowly improve, but we thought operating conditions would remain challenging in some markets.

For our International business, we expect it to deliver good sales and earnings growth this year because our four global platforms of ready-to-eat cereal, super premium ice cream, convenience meals and wholesome snacking are in growing categories and on trend with consumers around the globe. We planned a full lineup of product news and innovation, with marketing plans designed to increase household penetration and sales. And we continue to deploy best practices in holistic margin management to drive margin expansion and fund additional consumer investment in markets around the world.

As a result, we set 2011 targets of mid-single digit growth in net sales and double-digit growth in operating profit for the International segment. I'm happy to report that we are delivering strong results against these targets. Let me tell you about our performance in more detail.

Again, as Don mentioned, third quarter net sales for International grew 8%, including one point of benefit from foreign exchange. Operating profit was up significantly, with both net sales growth and favorable foreign exchange effects contributing to the increase.

Through the first nine months, net sales are up 4%, including a two percentage point headwind from foreign exchange. Pound volume trends remained strong, up 6% year-to-date. Operating profits have grown at a double-digit rate both as reported and excluding currency effects.

Slide 15 shows you that we are achieving sales growth in many of our markets through the first nine months of this year. For example, in Europe, sales are up 6% in constant currency, led by Häagen-Dazs in France and Nature Valley in the U.K. In Canada, year-to-date constant currency sales are flat. That reflects strong performance in the year-ago period in a highly competitive retail environment. Sales in the Asia-Pacific region are growing at a 10% rate, led by continued business gains in China. And in Latin America, sales increased 10%, reflecting good performance in Argentina, as well as pricing across the region.

We are also seeing sales growth for each of our four global product platforms, as shown in Slide 16. These businesses account for over 50% of our wholly-owned International sales, and they carry attractive operating margins. I should note that Cereal Partners Worldwide, our joint venture with Nestlé, accounts for the largest share of our global cereal business. Since Ken provided a detailed update on CPW last month at CAGNY, my comments today are focused on our wholly-owned International businesses.

We are seeing another good year of cereal growth in Canada, with year-to-date sales up 3% in constant currency. Banana Nut Cheerios, as the latest addition to our Canadian product lineup, is off to a great start in just nine months. On Cinnamon Toast Crunch, we've expanded our advertising to new consumer targets and geographies, doubling or driving double-digit sales growth. And the health benefits of Multigrain Cheerios and Fiber One continue to resonate with Canadian consumers. Sales for both brands are up high-single digits this year. Year-to-date, we've added a full point of dollar market share and are leading category growth.

Let's turn to Häagen-Dazs super premium ice cream, where we are seeing terrific growth in markets around the world. In Europe, France is leading our strong performance. Through a combination of new products, strong merchandising support and distribution gains, we have increased household penetration to record levels, up 2.7 points over the last year. Year-to-date sales in France have increased at a double-digit rate.

Our businesses in the U.K. and Germany are doing well, too. In Greater China, continued expansion of Häagen-Dazs shops and strong growth in Mooncake sales are driving double-digit growth. And we continue to bring Häagen-Dazs to new markets. We now have two Häagen-Dazs shops in India, with plans to add more locations next year. And we just opened a shop in Cairo.

New products play a key role in our growth, too. One example is Häagen-Dazs Secret Sensations, which is launching in France and Spain this spring. With ice cream on the outside and a liquid crème brûlée or chocolate fondant center, this new product platform will deliver rich indulgence to Häagen-Dazs consumers. We expect new product innovation to help keep our Häagen-Dazs momentum going in 2012.

Our convenience meals are great-tasting dinner solutions for consumers in more than 60 countries. Sales have been growing at a double-digit rate the past three years and are up 12% year-to-date in 2011. Old El Paso was leading double-digit growth for the Mexican category in France and Spain, with new products, great in-store execution and strong advertising. A combination of new products and effective merchandising is driving Old El Paso growth in Canada. And in each of these markets, we've added at least one full point of household penetration in the last year.

In China, we are helping retailers grow the frozen entrée category. We are bringing Wanchai Ferry dumplings to additional cities and expanding our product lineup to include other dim sum items and noodles. Over the latest 52-week period, frozen category sales in China are up over 20%, and we continue to gain share in this very important market. And in Australia, we are expanding our lineup of Italian products, with the acquisition of Pasta Master. This will add refrigerated lasagna capabilities to our current line of fresh pastas and sauces. The transaction is expected to be completed during the fourth quarter of fiscal 2011.

Wholesome snacking is another great category for us. Our International sales have increased at a 16% compound rate in recent years. Sales are growing again in 2011, but in the first half of this year, we were not able to keep up with consumer demand for our grain snacks in Canada. We now have additional snack bar capacity, and we are seeing improving sales trends.

In the U.K., we are driving double-digit sales growth and leading the growth of the grain bar category. That's thanks to a strong new product launches like Nature Valley Crunchy and more, combined with effective advertising and in-store merchandising.

We continue to add great new varieties to our Fiber One product line in Canada, that's driving strong sales growth and an all-time high in dollar share. In a recent nationwide survey, Fiber One 100 Calorie Bars were voted the best new Canadian snack bar product in 2011.

And we are bringing Nature Valley to new markets, with recent launches in Australia and South Korea. Across our consolidated International businesses, we've driven consistent top line growth. Slide 21 shows that over the past five years, constant currency net sales have increased at an 8% compound rate. And we are on track to meet our goals of mid-single digit sales growth in 2011.

Along with that sales growth, we have had good margin performance over time as well. As our International businesses grow larger, we gain benefits of scale, lowering manufacturing costs and improving leverage on consumer and administrative spending. Our global platforms carry attractive margins, so as we focus on these businesses, we benefit from improved product mix.

We are sharing cost savings ideas across our markets and leveraging U.S. best practices to drive holistic margin management initiatives around the world. And we are investing in systems and capabilities, too. Our global SAP implementation is well underway and will provide us with one integrated data platform for decision-making on our current businesses and integration support for future acquisitions as well.

We have already implemented SAP in markets representing nearly 90% of our sales, without disrupting the needs of employees, customers or consumers. Through our global business solutions organization, we are bringing improved process efficiency and new capabilities to our markets.

At the heart of this strong performance is a deep and talented leadership team. Each one of our Region Presidents has worked in multiple countries, and most of them have operated in both developed and emerging markets. Combined with local leadership teams in key markets such as China, India and Brazil, we benefit from both global experience and local market expertise.

My team and I feel great about the talent, the capabilities and business results of the International division in 2011. The product news and innovation we have brought to market are driving increased sales. We are expanding our global product platforms into new markets. Margin expansion is providing the fuel we need for both current and future growth. And we remain on track to deliver our 2011 constant-currency targets of mid-single digit growth in net sales and double-digit growth in segment operating profits.

We think growth prospects are excellent for our global categories and brands. I look forward to seeing many of you in Boston in July, where I will outline our plans for continuing growth in 2012. With that, I will turn today's call over to Ken Powell.

Kendall Powell

Okay. Well, good morning to all of you. As you can see, Chris and his team are generating strong performance across our International business this year, and I'm confident that our International operations will be increasingly important contributors to General Mills' growth in the years ahead.

And in fact, as you know, we have plans to expand our International operations. Last week, we announced that we have entered into exclusive negotiations to purchase a 51% controlling interest in the Yoplait operating company headquartered in France, along with a 50% interest in an affiliated entity that holds the Yoplait trademarks.

Under the proposed transaction, we will partner with Sodiaal, who retains the remaining stake, to build the Yoplait brand and business in France, Europe and around the world. As many of you know, we have been a successful business partner with Sodiaal for decades through our agreement in 1977 to license the Yoplait brand in the U.S. market.

Completion of the transaction is subject to final approval by the sellers, consultation with the respective workers' councils and regulatory approval. So it's really too soon to offer additional deals -- details on this business today. We look forward to sharing more information on Yoplait and the growth opportunities we see when the transaction is completed. We think that will be sometime during the first quarter of fiscal 2012.

Now the worldwide operating environment certainly continues to be challenging. Consumers remain cautious during this slow economic recovery, and food manufacturers are managing through a period of rising and volatile costs for food ingredients and energy. Productivity savings and mix management will offset some of this inflation, but pricing actions are also being taken to offset a portion of the cost increases.

In recent months, we have announced a variety of pricing actions across our businesses. And as you can see on Slide 26, our third quarter results show some contribution from price realization in our Foodservice and International results. Additional pricing will become effective in the fourth quarter, and is expected to begin contributing to net sales results for all of our business segments, including our U.S. Retail business.

Looking at our U.S. Retail net sales performance for the latest quarter, you see a comparison against some very tough comps a year ago. However, our consumer takeaway performance over this same time period shows good momentum across a number of key product lines.

Slide 27 shows our Retail sales growth rates for the latest quarter and year-to-date, combining measured and non-measured channels. For the majority of our product lines, our Retail sales growth was solid year-to-date and accelerated in the third quarter.

Let me say a quick word about the cereal category in particular. Reported net sales for Big G cereals were down 6% in the quarter against a tough comparison. Last year, we launched Chocolate Cheerios and Wheaties Fuel in this period. Those launches drove strong sales growth on top of a double-digit increase the year before that. So that's for the quarter.

Through nine months of this year, Big G net sales are running just a touch below last year, and Retail sales for the ready-to-eat cereal category are strengthening as promotion levels moderate. We’ve led category sales performance year-to-date, and our share is up a half a point in measured channels alone. We expect continued improvement in cereal category sales as we go forward, reflecting pricing and increased news and innovation.

As we wrap up another soup season, Progresso continues to post improving results. Our Retail sales grew 4% in the quarter, and sales for the ready-to-serve soup category overall were down just 1%. We increased our household penetration and our distribution was up as well. In total, we gained more than two points of dollar share this quarter.

Retail sales for Pillsbury Refrigerated Dough increased 5% in the quarter, with good growth on both baseline and incremental sales during the key baking season. While Retail sales for Betty Crocker dessert mixes were flat in the quarter, our performance during this September through December baking season exceeded our expectations, with our strongest sales growth coming in non-measured channels.

We've got more consumer news coming in the fourth quarter. If your brackets are already shot in this year's March Madness basketball tournament, all is not lost. You can still play the Betty Bracket. Head to bettycrocker.com to vote for your favorite recipe selections out of the 64-snack lineup. This Easter, Pillsbury and Betty Crocker are bringing new recipes and baking ideas to stores and to their websites.

Our Cascadian Farm brand is launching a year-round sustainability initiative, starting with an effort to preserve our rivers. We're currently promoting this initiative on packages and in-store displays. And we're enhancing our digital media efforts for multicultural consumers, with bilingual recipes on our Qué Rica Vida website and a new app for your Smart phone. So we're seeing some good trends on our U.S. Retail businesses, and we expect this momentum to continue in the fourth quarter and into the new year.

Turning to the Bakeries & Foodservice segment. Our performance has been outpacing the industry as we've focused on customer segments with the best growth prospects. Net sales with Foodservice distributors grew 2% in the quarter, led by our hot breakfast products like Pillsbury Heat n' Eat Mini Pancakes that are very popular in K-12 schools. Sales in convenience stores grew 10%, as we gained distribution on new snack offerings such as Wheaties Fuel Bites and Betty Crocker dessert bars. And we saw good sales growth in restaurants and in-store bakeries, up 13% in the quarter.

Our branded product lines have been the drivers of our sales growth, with cereal up 2%, snacks increasing 9%, and yogurt sales up 10% through the first nine months of the year. This sales growth is translating into good operating profit performance. By focusing on higher-margin products and channels, the Bakeries & Foodservice segment achieved double-digit operating profit margin last year, a significant improvement over previous years. Our focused business approach is working again this year.

In addition, we are benefiting a bit from volatility in the grain markets, which adds profits in our grain merchandising activities. As a result, we'll be a bit closer to matching last year's strong profit performance than we had anticipated at the start of this fiscal year.

So in summary, the global operating environment and heightened commodity market volatility are certainly challenging, yet our businesses are performing in line with our long-term model. We expect to generate good sales and earnings growth in the final quarter of this year, and meet the targets we set for fiscal 2011 in total. Those targets call for low-single digit net sales growth, mid-single digit segment operating profit growth and diluted EPS of $2.46 to $2.48 per share. That guidance represents 7% to 8% growth from last year's adjusted diluted EPS of $2.30.

So with that, I think we will now open up the call for questions. Operator, would you go ahead and get us started?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of David Palmer of UBS.

David Palmer - UBS Investment Bank

Just a general sort of open question here. You know how sticky and non-changing consumer behavior is, particularly in the morning day part. But recently, it really appears that consumer behavior, particularly among the high-income consumers is changing rapidly. As you're thinking about that single-serve coffee, Greek yogurt brands, you're seeing this momentum picking up among what many of us would consider the best types of customers, those high-income, often female, are changing. As you're thinking about the next round of innovation, fiscal '12, do you have to maybe, get a little bolder about that type of innovation, not just think about extensions of trademarks but thinking about cross-aisle cannibalization and thinking bigger and bolder with the new ideas?

Kendall Powell

Hi, David. This is Ken, and thank you for the question. I guess, the way we would look at it is probably, I would describe it as a third, a third, a third as we look across the consumer base. I think a third of consumers probably didn't see much of a recession, and those may be the consumers that you're referring to, and their shopping trips and their activities I think have been in line with what we've seen historically. A third of consumers are doing okay, and they may have changed behavior a little bit. And then a third of consumers have been more stressed in the recession, with unemployment and all of the concerns that we know about. So I guess, I would say there's a spectrum out there. We've got a broad portfolio where we have products that are very appealing to the value consumer and that have done very well for us, and all the way up to servings for two, frozen meals, like Wanchai Ferry and Macaroni Grill, and those have done well also. And so I guess, I would say going forward, there is quite a diversity of consumer circumstances and behavior out there. We think that our broad portfolio and wide range of price points and brands really gives us a lot of flexibility and opportunity to appeal to all of them. And as you said, they are great brands, so we can build on all of them. And as we unfold our innovation in June of next year and show you what we've got, I think you're going to be pleased with the spectrum of innovation that we have.

Operator

Continuing on, our next question comes from the line of Eric Katzman of Deutsche Bank.

Eric Katzman - Deutsche Bank AG

I guess, we were a little bit surprised that there wasn't a bit more price realization in the Retail segment. And I guess, Ken, you mentioned that, that should start to come on as we're into the fourth quarter, and then I suppose, flowing through into 2012. Could you talk a little bit about why that is? I think you had initially signaled pricing something like six months ago.

Kendall Powell

Well, I think we began taking some of the pricing, remind me of the dates here, in December, and then...

Donal Mulligan

October and December.

Kendall Powell

So kind of November, December, then more in January, more in February. So it's been, Eric, a little bit feathered by category over the last three months, and we've – and still taken some more here recently. So it has been feathered. We did see sequentially, over the course of the quarter, our prices strengthened, and so they finished quite a bit stronger than they started. And so that trend is clear, and I think you can see that in your own data. And we very much expect that price realization here to accelerate as we go into March, April and May, the last quarter. I think that's very clear that, that's going to happen.

Eric Katzman - Deutsche Bank AG

Okay. And then if I could follow up, when you talk about your first, I guess, more specific comment about fiscal 2012, when you talk about good business growth, I assume that you're forecasting that price realization to come through despite the inflation. You're also thinking that the cereal category is going to grow, or at least perform better than it has. And then does that also -- not to kind of pin you on this, but does that also assume whatever impact Yoplait is going to have on the -- the Yoplait acquisition is going to have? Or are these comments kind of pre-Yoplait?

Kendall Powell

Yes, these comments are pre-Yoplait now, Eric, because we don't really exactly know when it's going to close. And therefore, the precise nature of when the impacts will start to hit. So we want to give you very good information when we have it, and that's going to be later in the year. But for the -- generally, for next year, we'll get into far more detail, of course, here in June. But our starting point is always our long-term model, which we're very committed to. I think you've made a comment on pricing and clearly, the pricing that we're taking is being reflected now, and our expectation is it would be fully or close to fully reflected as we go into Q1. The cereal category, as you said, we believe is going to strengthen in value here as we go forward, and we're quite optimistic about those category dynamics going forward. Obviously, we know what our innovation is going to be, and some of the things we already have in markets. So we think we're going to have good baseline building initiatives in the cereal category that will allow us to play our game there, which is sort of steady incremental share increases driven by baseline. So anyway, I'm trying to touch on some of the points that you made, but our starting point is always our model. Pricing realization is going to come through. Cereal category is going to get stronger. And as soon as we have good, solid information on Yoplait, we'll share that with you in detail.

Operator

And our next question comes from the line of Terry Bivens of JPMorgan.

Terry Bivens - JP Morgan Chase & Co

I just want to ask a little -- push you a little bit more on the cereal category. I mean, our data shows indeed that things are picking up there both in terms of volume and pricing. But your negative 6%, frankly surprised me a little bit. It was more than the syndicated data might lead us to conclude. Can you kind of parse that a little bit for us? For example, how much volume do you think you've lost just strictly on a comparison with the launch of Chocolate Cheerios and Wheaties Fuel? Just help us out there a little bit.

Kendall Powell

The bulk of it, Terry, was the very difficult new product comparison. The Chocolate Cheerios, in particular, was -- we love all our children, but that one was extraordinarily successful. I think nearly a full share point in the early days and has continued to perform very well, and so that's better. But Wheaties Fuel also got off to a strong start. So we really had a very strong new product story there in that third quarter of last year. Cinnamon Burst Cheerios that we've launched now is a good product. That's going to be a 0.6% or a 0.7% share, which is just fine, but it's not Chocolate Cheerios. So really, that's the bulk of it, Terry. As I said, as we look at the other elements in our cereal business, we are positive about the category dynamics now, as you mentioned, and we've got good baseline initiatives out there, whole grain news, which is very relevant to consumers. A Chex major step-up in advertising, kind of a relaunch that's proving to be very, very good. And as we get to the first quarter, you're going to see some new products that you like. So we feel very good about the fundamentals of the cereal business. We had this tough comp because of Chocolate Cheerios, but that's behind us now.

Terry Bivens - JP Morgan Chase & Co

And just one quick follow-up, just on the Yoplait thing, I know we'll get the details in the first quarter. But I was looking at a story with one of my clients, said that they were trying to figure out whether at this point in time, do you expect any serious pushback from the French government in terms of the deal?

Kendall Powell

Well, we expect the deal to be completed, and I think there's a little bit of commentary in the press. But we think it's a very good transaction for General Mills, very good for Sodiaal, and we expect that it's going to be completed here over the next period of time.

Operator

Continuing on, our next question comes from the line of David Driscoll of Citi.

David Driscoll - Citigroup Inc

Walmart has announced a significant number of rollbacks in Canada on pricing, and I'm starting to have visions of second calendar quarter of 2010. Can you talk about just broadly speaking, the retail environment in the acceptance of the price increases? And then as a companion part to that question, do you expect negative volumes going forward because of price volume elasticity in U.S. Retail?

Kendall Powell

Yes, David. I think because of the magnitude of the inflation that we're seeing across our commodity baskets and across energy and because of the fact, as you know, that all of our retail partners, or most of them, have a very high level of visibility on all of this through their own retail brands, I would say that they’re not at all surprised by the conversations that we've been having over the last three or four months on our need to have some list price increases to offset inflation. Now always, as you know, pricing is the last thing we want to do. The first thing we do is the -- our focus on productivity and mix to offset as much of it as we can. But given what we're seeing, we need some list pricing. And I think that our retail partners understand that. And so those are proceeding apace.

David Driscoll - Citigroup Inc

And then what about price volume elasticity? Price and volume elasticity, are you expecting...

Kendall Powell

Yes. We do expect some elasticity. But I have to say, David, given that the inflation is -- I mean, everyone is seeing it, whether it's retail, food or food-away-from-home, I mean, obviously, everyone is having a -- looks at a similar basket of inputs. They're all seeing inflation. And so we'll see, we believe we're going to see generalized food inflation across all segments, which means that the relative value of food purchased from retail outlets and grocery stores, we think, is going to continue to be very compelling for consumers.

David Driscoll - Citigroup Inc

If I could sneak in one last question on this Yoplait transaction, just the strategy of it, can you just address one point that I've heard now several times from clients? There was a question regarding whether or not you were kind of forced into this transaction because the royalty rates that you paid to Sodiaal were going to go up dramatically that, that was the principal catalyst in terms of wanting to do the deal. Can you just talk about that one so that we have some real information in front of us as to the strategy here?

Kendall Powell

Yes, sure. No, I'll tell you. The core strategy and opportunity here is really a unique opportunity to gain the access to a terrific global brand. These kind of things don't come around that often, and really, the core of it for us is this is a very significant opportunity to create very consistent, long-term growth by participating in one of the best global categories there is. I mean, this is, David, it’s a $40 billion category globally, with very favorable growth characteristics. It works in developed markets, it works in developing markets. It's just really a terrific category. And that is the core of the strategy that we're now able to participate in that category fully and globally and with, I might add, a partner who has been very successful at building the brand and developing the brand in their markets. Sodiaal are -- they're very, very good at this, and so we think the combination of General Mills and Sodiaal in the global yogurt category is very exciting news and very good for the company, very good for our shareholders.

Operator

Continuing on, our next question comes from the line of Andrew Lazar from Barclays Capital.

Andrew Lazar - Barclays Capital

Ken, you talked about, obviously, the expectation to see some improved net price realization in the U.S. Retail segment in the fiscal fourth quarter. I remember last year, I think that in that fourth quarter in that segment, volume was up something like 8%?

Kendall Powell

What was up 8%, sorry?

Andrew Lazar - Barclays Capital

Volume in the U.S. Retail in the fourth quarter last year. So I just wanted to get a sense of, perhaps how we should think about the sales growth drivers for U.S. Retail in the fiscal fourth quarter, just given that pretty tough volume comp? I assume we'll see, obviously, improving net price realization. But with volume in Retail having been flat in this third quarter, and obviously part of that was the cereal comp as you spoke of, is your expectation that you'll see positive volume for U.S. Retail in the fourth quarter as well?

Kendall Powell

I don't know. No, that's not our expectation. Our expectation is that our sales growth will be driven by pricing realization in the fourth quarter, Andrew.

Andrew Lazar - Barclays Capital

Got it. And then when you referenced kind of the cereal category and how you see that shaping up going forward, you talked about -- you expect the category to strengthen from a value perspective. And again, thinking out broadly into a fiscal '12 time frame, more for the cereal category as a whole, clearly, you expect some incremental pricing. But would you also expect volume, given the category has been sort of a negative territory year-over-year, to improve as well, given the innovation and things that you're seeing? Or do you think volume could remain somewhat weak for the category as well?

Kendall Powell

Well, I'll let my colleagues jump in here if they want. I would say, in general, the cereal category historically, Andrew, is kind of a 1% volume category, 1% or 2% unit. So with some pricing on top of that and because of the huge size of the category, if it unfolds that way, that's all we need in order to have a very productive year in the category. And our expectation, I think for the year would be that it'll roll out something like that. Now there was in the first quarter of last year, and maybe rolling a little bit over into the second quarter, I mean, there was a significant recall and some things that I think depressed the category below normal levels. And obviously, we think everyone will be back kind of firing on all cylinders as we go into the first half of the year. And so we might see category growth a little bit stronger in the first half, and that'd be great.

Operator

Continuing on, our next question comes from Ed Aaron from RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC

Just on the Q4 implied earnings guidance, I think some people have a hard time with that guidance, given the implied growth rate year-over-year, and I understand there are some comparison issues involved. But the guidance does imply for Q4 to have flat to up earnings sequentially. And more often than not, historically, your earnings go down sequentially from Q3 to Q4. So just hoping you could maybe bridge that for me.

Donal Mulligan

Yes, Ed, this is Don. The guidance obviously implies mid-20% EPS growth, a couple of things to keep in mind for that. First is that we will see price realization that Ken alluded to, we'll see it both in list price and changing our trade strategy as well. So we'll see a much more significant benefit from that in the fourth quarter. And this is also -- fourth quarter will be our easiest comp of the year. In F10 through Q3, our EPS growth was 21%, Q4 was minus 5%. Part of that minus 5% was the fact that we did do the debt tender last year, which was about $0.04 charge in the quarter. And so we'll be lapping that in the fourth quarter this year. So the combination of the price realization and the comp gives us a great deal of confidence in delivering that fourth quarter EPS guidance.

Edward Aaron - RBC Capital Markets, LLC

Okay. And then just a follow-up on cereal, the shipment growth was obviously quite a bit below consumption in the quarter. Could you maybe talk about where inventories stand now in the channel? And then if I'm reading you right, you have some products that you're excited about, presumably in cereal, coming up in the summer time frame. Would you expect maybe a reversal of what you had this last quarter, a quarter or two down the road when you get some of your new products out into the channel?

Kendall Powell

Yes, you're correct in observing that our retail takeaway has been -- was quite a bit ahead of deliveries in the third quarter, and so there was some reduction in pipeline. And it's hard to predict when that will change. And we usually -- I mean, there's pipeline adjustments up and down in our businesses, and we don't really like to really dwell on them as reasons for one thing or another. But the pipeline did shrink in Q3. At some point, they'll stabilize, and we don't know whether that's going to happen in the fourth quarter or the first quarter. But it doesn't really affect how we approach the business planning or our expectations for the overall business for the year.

Operator

And continuing on, our next question comes from the line of Ken Zaslow, BMO Capital Markets.

Kenneth Zaslow - BMO Capital Markets U.S.

I just want to understand when you say good business growth, and I think, Ken, you said that it was the starting point with your long-term growth model, is that a fair -- did I interpret that correctly?

Kendall Powell

Yes, that's always our starting point. Now obviously, we'll give you all the detail here that you're, I know, eager for in June. But of course, we're committed to our long-term growth model.

Kenneth Zaslow - BMO Capital Markets U.S.

So there would be nothing unusual in 2012 -- obviously the commodity prices, but -- that would take you off your long-term growth rate, I guess, is what I'm trying to get at?

Kendall Powell

Our starting point is our long-term growth model.

Kenneth Zaslow - BMO Capital Markets U.S.

Okay. And then my other question is, and I know we've asked this in a lot of different ways, but can you compare and contrast 2008 to today in terms of ability to pass along prices and the price elasticity? Do you think you're better positioned? Do you think the categories are better positioned? Do you think they're worse positioned? Just give us some context to kind of think of it relative to 2008 to now and relative to the consumer, your new products, things like that.

Kendall Powell

Well, I think there are a number of similarities in that the level of inflation, I mean, is even -- if you look at what's being predicted by the calendar companies, I mean, the sort of, I’d say the, sort of, general level is maybe even a little bit higher than what we saw in 2008. But the level of inflation is such that I think that there's a -- it's commonly seen, I mean, I think there's agreement that we're going to need some pricing to offset that inflation. And so in that respect, I think the two periods of time are very similar. Now of course, we've come through a very significant recession, and we're still pulling out of it. And so the consumer is a little bit more stressed. But having said that, there's no question that our products and the products that consumers find in grocery stores continue to be a great value for consumers, and they find a lot of value. And so we think that from that standpoint, in terms of the channels that we compete in, we'll continue to be advantaged, and consumers will continue to seek out our products.

Kenneth Zaslow - BMO Capital Markets U.S.

Just on that, the relative premium relative to private label has come down since '08, is that a fair point?

Kendall Powell

Yes.

Kenneth Zaslow - BMO Capital Markets U.S.

So private label share markings may not be as great?

Kendall Powell

Yes. I think the pricing gap in aggregate across our categories is a little bit lower than what it was. And over the last nine months, I think our fiscal year-to-date, we've seen retail brands, private label share decline some, as we work our way out of the recession. So both of those comments that you made are true.

Operator

Continuing on, our next question comes from the line of Alexia Howard from Sanford Bernstein.

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

Just wanted to ask about the sampling activity and promotions that you've been conducting on the soup category over the last several months. I would be curious to know, I mean, you came out at the beginning of the year with the intention of doing these bursts of [indiscernible] in-store samplings. What have you learned from those events? Do you think further events like that are going to be needed in the future? Just a little bit of color on that would be great.

Kendall Powell

So thanks for the question. And really, as you said, Alexia, we did what we said we would do, really beginning back in May, which was -- we wanted to have good levels of baseline building, category building, advertising. We've had that. We've had these kind of combined sampling and merchandising events. And those, that sort of spectrum of activities did a couple of things for us, helped us increase our distribution nicely. It gave us a very nice penetration gain, starting to rebuild that penetration in the soup category. So we're very pleased with that, and gave us sales gains and share gains. So we feel quite good about that plan. It did what we wanted it to do. And in June here, we'll tell you more about how we're going to drive the soup category in F12. But you will see good levels of baseline building advertising. We have some very good innovation that we think is going to really appeal to our core consumers. So we'll keep playing our game, which is fundamentals and focused on building the consumer franchise.

Operator

Continuing on, our next question comes from the line of Todd Duvick of Merrill Lynch.

Todd Duvick - Bank of America Corporation

Quick question for you, if the Yoplait transaction proceeds as you expect it to and then in February you’ve got another $1 billion note that's maturing, I'm just wanting to know how you're thinking about your financing plans going forward. Obviously, you have access to commercial paper, but do you think about tapping the debt capital markets opportunistically, given the attractive rates right now? Or how are you thinking about that?

Kendall Powell

Todd, you're right on both fronts. Obviously, as we fund the Yoplait acquisition, we are going to maintain our credit rating and our leverage ratios. We obviously have cash offshore, much of which we'll be able to re-purpose to this acquisition which will help that funding. We will be back in the debt capital market as you alluded to, we have a $1 billion bond that's maturing in February of 2012. So you can expect to see us, certainly in our fiscal '12, be coming to the market, certainly probably in the first half of the year.

Operator

Continuing on, our next question comes from the line of Eric Serotta of Wells Fargo.

Eric Serotta - Wells Fargo Securities, LLC

Wondering first whether you could quantify the impact of the favorable grain merchandising results in Bakeries & Foodservice in the quarter.

Donal Mulligan

Yes, it was about roughly a third of the profit gained year-over-year.

Eric Serotta - Wells Fargo Securities, LLC

Okay. Then moving on to the yogurt category and the Yoplait acquisition, or the proposed Yoplait acquisition, in particular, could you give us an idea as to which markets you view as most attractive to get ownership of? And which markets are already licensed out by the licensing company versus potentially -- versus wholly-owned by the operating company?

Kendall Powell

Eric, we're going to share our plans for how we expect to grow Yoplait in concert with Sodiaal when the deal closes, and as we said, we expect that to be in the early part of our fiscal, first quarter of fiscal 2012. What we can say today is they have two very strong businesses in France and the U.K. that they have run very effectively, and we're proud to partner with them in those markets. Other expansion opportunities would be in emerging markets, we believe, and we'll share those, some of our initial thoughts there in the summer.

Eric Serotta - Wells Fargo Securities, LLC

Okay. And then in terms of the yogurt category in the U.S., how is Yoplait Greek performing? Because when you look at the syndicated data, it looks like the traditional yogurts overall are losing share to the Greek brands or the Greek style brands. And is focusing on dessert yogurts, like the parfaits, really on track with the trend that you're seeing with people moving towards Greek?

Kendall Powell

Yes, Eric, so thank you for the question. And I think that the Greek segment is a growth driver now in the category. And I will say that our core businesses in Yoplait, Yoplait Light, for instance, had very good growth in the quarter. Our kids segment is doing good. We have good growth in channels. So our core business is doing what we want it to do. But the real incremental growth in the category, as you've said now is coming from Greek. We've just shipped the Yoplait Greek with the new formulas and the new flavors, and so we don't really -- we don't have data to share with you. If we did, we would. What we do know is that the reception to the product from our customers has been very positive. We think the product is very good, and so we're very optimistic. We obviously want to participate in that segment, and we'll tell you more as we know more. And then I think I would also add, so we like the opportunity that we have with the Greek yogurt. But I would also just remind you, we also like the opportunity that we're going to have with Mountain High Yoghurt. We've completed that deal. That product, we believe, is very on trend. It's an all-natural product. It really appeals to heavy users of yogurt who are using it in cooking and as an ingredient among other things, it's primarily a large-size business. And so it's going to be -- it's on trend, it's growing and it's going to be very incremental for our Yoplait business. And so we like the opportunities we see both in our Greek business and also in driving growth in that Mountain High business, which we're very excited to have.

Operator

Our final question for today comes from the line of Jon Feeney from Janney.

Jonathan Feeney - Janney Montgomery Scott LLC

Just one question on the advertising spending reduction, how much of that was just the timing? And I know you increased spending a lot last year, but that certainly helped a lot last year. And how much of that -- I'm wondering how much of that reduction is sort of just the timing of sort of programs that you have planned this year and how much of that year-over-year reduction is maybe a tactical response to some of the realities in the marketplace. Like maybe that return isn't so great as it had been before. That's really it.

Kendall Powell

Okay, well, no. I mean, the advertising that we buy and the investment that we make is very much guided by improvements by return and by baseline. So obviously, we're very -- we believe very strongly in that investment and committed to it. This year, as you point out, it was a very difficult inflation and pricing environment, and so we wanted to manage that and we basically have done exactly what we said we would do going back to the beginning of the year, which is our media spend was up 24% a year ago. This year, we think, all-in, it's going to be down maybe mid-single digits in terms of the spend. But I guess, I'd hasten to add that the way we've spent the money and the mix of the spend is -- our GRPs will actually be up double digit, 10% or 15%. So we've done a -- I think we've done this really well. I mean, it's been a challenging environment from a cost standpoint and you need to manage and make adjustments, and so we've had a slight reduction in advertising but a very good increase in advertising rates. And I think the teams did that really well, and we've managed that whole situation very appropriately.

Donal Mulligan

And the only thing I’d add to that, Jonathan, is that you have to also put it in context that we have essentially doubled our advertising spend over the last five years. We're building it.

Operator

I'll turn the conference back to Ms. Wenker now for your concluding remarks.

Kristen Wenker

The only conclusion is if there are questions remaining out there, please give a call and we'll try and help. Thanks so much.

Operator

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again. Have a wonderful day.

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