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

General Mills, Inc. (NYSE:GIS)

F1Q09 Earnings Call

September 17, 2008 8:30 am ET

Executives

Kris Wenker - Vice President Investor Relations

Ken Powell – Chief Executive Officer

Don Mulligan – Chief Financial Officer

Jeff Harmening – President, Big G Cereal Division

Analysts

Andrew Lazar – Lehman Brothers

Eric Serotta – Merrill Lynch

Chris Growe – Stifel Nicolaus

Eric Katzman – Deutsche Bank

Terry Bivens – JP Morgan

Jonathan Feeney – Wachovia Securities

Vincent Andrews – Morgan Stanley

David Palmer – UBS

Robert Moskow – Credit Suisse

Ed Roesch – Soleil Securities

Alexia Howard - Stanford Bernstein

Operator

Welcome to the first quarter fiscal 2009 results. (Operator Instructions) I would like now to turn the call over to Ms. Wenker, Vice President Investor Relations.

Kris Wenker

I’m here with Ken Powell our CEO, Don Mulligan our CFO, and Jeff Harmening who heads up our Big G Cereal division. I’ll turn you over to them in a minute. First I’ve got to cover my usual housekeeping items.

The press release on first quarter results was issued over the wire services earlier this morning. It’s also posted on our website if you still need a copy. In addition we’ve posted slides on our website that supplement the remarks we’ll make on this call. The call 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.

With that I’ll turn you over to Don.

Don Mulligan

As you’ve seen from our financial results released this morning General Mills is off to a strong start in fiscal 2009. Slide four summarizes our first quarter results. Net sales grew 14% to $3.5 billion. Segment operating profit grew 9% despite significantly higher input costs and a 17% in consumer marketing investment. Earnings after tax were $279 million and diluted earnings per share were $0.79.

Our earnings results include a net reduction related to mark to market valuation of certain commodity positions and grain inventories. That non-cash impact totaled $91 million pre-tax or $0.17 a share. Excluding this mark to market impact our diluted EPS would have been $0.96 up 19% for the quarter.

The key driver of our growth was strong worldwide sales of our products. Sales grew 14% with four points of that growth from increased pound volume. Price realization and positive sales mix drove 9 points in growth and foreign exchange added one point of sales growth for the quarter.

Top line results were strong across all business segments as shown on slide six. US Retail sales were up 13%, International segment posted 15% growth and sales for Bakeries and Foodservice grew 17%. Our gross margin as reported for the first quarter was 34.1% down from 37.6% last year due to two factors. First, higher costs for inputs used during the quarter and second, mark to market valuation for commodity hedge positions.

We adopted mark to market accounting for the first quarter last year when it resulted in the net reduction of less than $1 million pre-tax. This year our first quarter margin includes the $91 million net reduction I just mentioned. Excluding that mark to market impact our gross margin would have been 36.7% down 100 basis points from last year. This decline was primarily in our Bakeries and Foodservice division. We have taken strong pricing off that the inflation effect on a dollar basis but margin is still pressured.

As we told you in June we expect the strongest year over year increases in our 2009 commodity costs to fall in the early part of the fiscal year. Our plans included a decline in the first quarter margins but we expect to protect our margins for the year end total. Protecting gross margins allows us to continue supporting our brands of strong levels of consumer directed marketing. Our consumer marketing spending was up 17% for the first quarter that was on top of the 11% marketing increase in last years first quarter.

Slide nine shows our segment operating margin results for Q1. Despite higher input costs and strong increases in our consumer spending margins were reasonably steady in US Retail and International. Bakeries and Foodservice margins were down more significantly as I mentioned earlier. Overall the operating margin for our combined segments was 18.1% for the quarter.

Segment operating profit dollars grew at a very high single digit rate, up 9% as shown on slide 10. US Retail profits increased 11%, International posted another quarter of double digit growth. Bakeries and Foodservice profits totaled $17 million but that was below strong prior year results.

Let me comment briefly on our Bakeries and Foodservice segment which is operating in a challenging environment right now. We saw double digit top line growth in the first quarter driven by continued pricing to offset higher commodity costs. With industry volumes a challenge as consumers cut down on meals they eat away from home and buy more at home meals. This trend benefits General Mills as a whole but it’s not a positive one for our Bakeries and Foodservice segment.

We’ll continue to prioritize our higher margins, branded product lines and the more resilient foodservice channels. As we told you back in June our plans for 2009 call for modest sales growth in this business. We expect earnings to be flat to 2008 since strong grain merchandising profit contributed significantly to our results.

Moving down the income statement after tax earnings from Joint Ventures totaled $31 million in the quarter. Last years JV results included a $2 million after tax charge associated with the CPW restructuring in the United Kingdom. Excluding restructuring items joint venture earnings were up almost 30% in the first quarter. That gross reflects good sales gains with CPW sales up 21% for the quarter and sales for Häagen Dazs joint venture in Japan up 7%.

Let’s shift now to the cash flow statement, slide 13 summarizes our core working capital items. In total core working capital grew 9% in the quarter, below our growth in net sales. Inventories were up due to higher input costs but the total grew only modestly because last years first quarter included some high finished goods inventory to support our packaging change in Big G.

We purchased eight million shares in the first quarter down significantly from the 21 million shares we purchased in the first quarter last year. Our purchase activity will be spread more evenly this year and our goal is still to reduce our net shares outstanding by 1% in 2009.

Let me wrap up this financial summary, our year is off to a solid start. Top line momentum remains strong across our businesses. Our focus on holistic margin management is helping us counter significant increases in input costs. We’re continuing to invest at strong levels behind our brands. On the bottom line earnings per share earnings per share in the first quarter came in above our plan.

As a result we’re raising our earnings guidance for fiscal 2009. We’ve updated our guidance to range of $3.81 to $3.85 per share. That’s excluding any impact of mark to market valuation and excluding the gain we will record on the sale of our Pop Secret microwave popcorn business.

What are the key drivers of our strong growth in the recent quarter has been the Big G Cereal business. I’d now like to introduce Jeff Harmening the President of our Big G Cereal Division to talk more about what’s driving growth in that business.

Jeff Harmening

I’m glad to have an opportunity to update you today on our US Cereal business. Big G had a good first quarter delivering 10% net sales growth and mid single unit pound volume gain. I’d like to share some of our key drivers of our growth.

Let’s start with the category, it’s healthy and it’s growing. Sales in AC Nielsen measured channels were up 2% in fiscal 2008 and that has accelerated to 3% growth so far in our new fiscal year. Sales in non-measured channels are growing even faster. We estimate the category sales growth through all outlets was about 5% in the first quarter.

The drivers of this growth are things that I think will continue. Cereal is a great value. A bowl of cereal with milk is less than $0.50 per serving. It’s a healthy choice and a low calorie meal option. As Don mentioned earlier people are eating more meals at home today and cereal is a quick convenient option for them. Demographics are working in our favor as well. We know the consumers eat more cereal as they reach their 50s so cereal is very much on trend with our aging baby boomer population. These trends are being supported by strong brand building efforts and innovation by industry players.

Big G is currently leading the growth in the category. Our share in measured channels is up almost half a point in the latest 12 months. Our growth has accelerated with retail sales of Big G Cereals up 8% for the first quarter and AC Nielsen measured channels alone.

Growth in base lines or non-promoted sales is a key part of Big G’s momentum. Our base line performance has improved significantly over the past few years. For the first quarter our base lines were up 2%. That is a trend that drives category growth and profitability.

Our Right Size, Right Price initiative one year ago provided an important foundation for our growth making our everyday prices per box more competitive. We’ve built on this with broad based business innovation. When I say innovation I don’t just mean new products. Innovation on our core businesses with strong brand building efforts and improved merchandising efficiency is a big contributor to our growth. These efforts would not be possible without our innovative approach to protecting and growing our margins through holistic margin management or HMM.

Let’s look first at our marketing innovation. We plan to increase our media spending for Big G at a double digit rate this year. It’s not only how much you spend it’s where and on what that counts. Let me share a few examples of our current marking initiatives. MultiGrain Cheerios is a great product with strong health credentials. The new advertising for this brand is driving tremendous growth. The message focuses on weight management benefits and results so far have been terrific.

The commercial has been on air since last January, the beginning of our second half last year and as you can see on slide 24 our baseline for non-promoted sales have responded strongly. In addition, it’s rare you hear an update from General Mills these days that doesn’t include Fiber One.

Let’s talk about our favorite high fiber cereal. Most people know that fiber is good for you but not many people think it tastes very good. We’ve introduced some great tasting Fiber One Cereal varieties and started telling consumers about them. This is the message that is driving our strong baseline growth.

Honey Nut Cheerios is another cereal that tastes good and is good for you and that’s why it’s now the second best cereal in the US according to AC Nielsen Dollar Share data right behind original Cheerios. Honey Nut Cheerios appeals to multiple consumer targets. Baby boomers, kids and Hispanic consumers all love this product. Recently we’ve increased our advertising spending to reach more consumers and the brand has responded nicely. Baseline, our non-promoted sales are up 21% in the first quarter.

We also have some terrific kid focused brands in our cereal portfolio. The fastest growing one is Lucky Charms. This brand has been around for more than 40 years and we reenergized it with product innovation and marketing. We’ve added a new marshmallow, an hourglass charm that gives Lucky the power to control time. Now I know this doesn’t sound very exciting to many of you but if you’re a nine year old this is really cool stuff. First quarter baseline sales were up more than 20% behind this initiative.

We’re always working to improve the health benefits of our products. Big G kids cereals are made with whole grain and are now a good source of calcium and vitamin D, and we’re the only cereal manufacturer that can say that.

Along with our brand building we support our products in store with merchandising and point of purchase marketing. This in store promotion provides good visibility for our brands and is good for our customers as well. Last year during our first half we were focused on a lot of things because we implemented Right Size, Right Price but merchandising wasn’t one of them. As a result, our merchandising was down in the first half and down double digits in the second quarter. We were also merchandising more minor brands as we worked through our inventory.

We want our merchandising to be competitive but we do not aspire to be the discount leader. We do aspire to continue improving the effectiveness of our merchandising and we did that in the first quarter this year. For the quarter our trade cost per case was down and the percent of our volume sold at merchandise price points was down as well.

The effectiveness of our merchandising improved with a better mix of brands, event tie ins like the recent Batman movie and an increased use of displays. That better mix drove an improvement in the net dollar volume gains we get from merchandising activities, or the percent of our merchandise volume that’s incremental to our business.

In the second quarter I expect that our volume sold with merchandising will be up. That’s because of the low year ago levels I just told you about. Overall, we’re planning for a more even flow of merchandising over the year and for our fiscal year end total we are not planning significant changes in the depths of discounts we offer or the number of times we merchandise our products. We’re planning for trade cost per case to be flat for the year.

We will also continue to bring new ideas to the cereal aisle. During the first quarter we launched Total Cinnamon Crunch and Cocoa Puffs Combos and our Small Planet Foods Division introduced two new organic cereals under the Cascadian Farm brand. These products are performing well. We have additional new products coming in the second half of the year and we’ll tell you more about those at our mid year meeting in January.

The product and marketing innovation we just discussed needs fuel so our goal is to protect our margins not only in terms of absolute dollars but on a percentage basis as well. Big G grew its margin in fiscal 2008 and we’re using holistic margin management approach a combination of productivity, pricing and mix improvement to improve our business performance and protect margins again this year.

Let me wrap up my comments this morning. Big G is off to a great start this year and it’s a continuous momentum that we created in 2008. We’re generating good baseline growth through broad based innovation and keeping our business healthy by protecting our margins. This is our approach to driving growth for Big G in the US Cereal category as a whole.

With that I’ll turn you over to Ken for some operating highlights on the rest of our businesses.

Ken Powell

As you can see Big G is a good example of the growth we’re seeing across our portfolio. In fact, sales growth accelerated across our divisions and business segments during our latest quarter. Fiscal 2008 sales were up 10% and in the first quarter we saw double digit gains in almost all our divisions and reporting segments and 14% growth overall.

Let’s take a quick look at what’s ahead. We’re moving into soup season and I think it will be another great year for the ready to serve category and our Progresso brand. We’ll build the Light segment we created last year with four new varieties of our zero point soups; these are the ones that have just 60 calories per serving. We’re introducing five new SKUs of one point soups; these are the ones that contain meat.

We’re also entering the $500 million broth segment with three all natural varieties in aseptic packages. We’ll continue to support Progresso with strong marketing. We have two new television ads that began airing just this week. Progresso’s retail sales were up 9% for our first quarter in channels where we have data. I feel good about our plans to keep this momentum going.

We’re also coming up to the winter holiday season which is an important time of year for our refrigerated dough and baking businesses. As we mentioned earlier consumers are eating more meals at home right now and Pillsbury and Better Crocker products are well positioned to capitalize on this trend. This year we’re introducing some great products for our consumers to use every day not just over the holidays. This includes our new Savorings line of frozen appetizers which we think will be a great addition to our portfolio.

In October we’ll kick off Pink Together, our proprietary national breast cancer awareness campaign. Pink Together builds on a decade long relationship between our Yoplait brand and the Susan G. Komen for the Cure organization. Pink Together leverages our broad portfolio featuring leading General Mills brands across 13 categories in the grocery store.

It will include promotion on our packages, in store displays, and advertising efforts focused during October and November as well as an online social networking site that extends throughout the year. This campaign to fight breast cancer is something that our consumers and our retailers care about and so do we.

To summarize the outlook for our US Retail business first our categories are on-trend with consumers and are showing strong growth in the current economic environment. Our brands hold leading positions in these attractive categories and our brands are growing due to effective innovation and increased consumer marketing investment.

For 2009 we’re continuing to target mid single digit sales growth for our US Retail segment. We expect a combination of strong productivity, pricing and mix will enable us to hold or grow our operating profit margin for the year in total.

Looking outside the US sales momentum on our international business remained good as well, up 15% overall. Volume measured in pounds was flat in the quarter. If you exclude Argentina where we lost our major pasta plant in January due to a fire, volume would have been up 3%. Slide 40 shows sales growth by region.

Excluding the impact of foreign currency Europe’s net sales were up 5%. Sales were up 5% in Canada. Our Latin America and South Africa business grew 10% and sales in Asia/Pacific increased more than 20%. Foreign exchange contributed an additional six points of growth bringing the reported total to 15%. This is on top of 19% growth in the comparable period last year. This growth was driven by good performance on core brands across our three growth platforms of super premium ice cream, world cuisine and healthy snacking.

In Europe Häagen Dazs is performing well particularly in the UK. In Canada our Cereal business is strong. In Latin America sales increased 10% with good gains on Diablitos meat spread in Venezuela and continued growth on Häagen Dazs and Nature Valley. In the Asia/Pacific region sales of Häagen Dazs and Wanchai Ferry frozen dumplings in China along with sales of Old El Paso Mexican foods in Australia drove strong double digit increases.

Looking ahead to the rest of 2009 we expect to see continued strong top line growth with effective marketing and strong innovation like the introduction of new flavors to our successful Häagen Dazs dolce product line and the expansion of the Nature Valley product line outside the US with the introduction of chewy bars.

We’ll continue to take our brands to new cities and markets including expanding our Wanchai Ferry brand to new cities in China and opening new Häagen Dazs shops in Eastern Europe and Turkey. Finally, we’ll remain focused on improving our margins with HMM, the benefits of scale and pricing actions where needed.

Cereal Partners Worldwide, our 50/50 joint venture with Nestle continues to achieve sales and profit growth in cereal markets outside North America. Volume grew in our latest quarter with our continued focus on core brands such as those pictured in slide 43 and expansion of our Oak Crisp franchise. Price increases taken across all regions to offset significant input costs inflation also contributed to sales growth. The outlook for CPW is very positive and we see continued category growth ahead has per capita cereal consumption expands in markets around the globe.

To wrap up our comments this morning, we’re on track to generate another year of good sales and earnings growth in 2009. We expect mid single digit growth in net sales and segment operating profit. As Don shared with you earlier we have raised our earnings per share guidance for the year. We’re sticking to the fundamentals of our game plan and intense focus on productivity to protect margins and strong investment in brand building. We think this balanced approach will lead to quality top line growth which we plan to convert into quality growth in operating profit and earnings per share.

That concludes our prepared remarks this morning and I’ll ask the operator to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Andrew Lazar – Lehman Brothers.

Andrew Lazar – Lehman Brothers

There was a story yesterday regarding ASDA in Europe, talking about cutting some pricing on some of their food items across the board. I don’t know that this changes perspective on pricing really at all I just didn’t know where you thought that was coming from or more broadly is there something different going on in certain parts of Europe maybe even just the UK specifically that might be a lot different from what we’re seeing here where it would seem like pricing is really going to be a part of the landscape for a while.

Ken Powell

I saw that article just as I was getting ready to head off yesterday so I am familiar with what was said there. I don’t know enough about the specific situation in the UK to comment. I will tell you that our view is pretty much what it has been for the last several quarters which is that we anticipated that we would have 9% inflation this year obviously we just said that we still expect that to be the case and have a pretty good line of sight on that.

We expect inflation to begin to moderate in the out years and hopefully we’re beginning to see the signs of that moderate inflation in our minds would be inflation along the lines of 4% to 5% a year, still significant but not 9%. Our view is that it is going to moderate and we’ll be able to offset more of it with productivity but we are in an environment we believe of continuing global growth and continuing pressure on commodities.

Andrew Lazar – Lehman Brothers

As we think ahead to the fiscal second quarter I remember last year, particularly in US Retail there was a bit more of a skew in terms of the top line growth towards volume. I think you had a pretty successful quarter with some of the products that were heavier from a tonnage standpoint. Is there any reason to think we’d see that skew back one way or the other based on your marketing plans or perhaps might that be more balanced in the way we see US Retails top line as we go into next quarter.

Ken Powell

I do remember that there was some of the heavier products drive that second quarter last year. I think we were a little heavy on vegetables and soup and that sort of thing. We’re just entering the quarter and my expectation is that we’ll probably see a bit more balance in the quarter. Its early days.

Don Mulligan

As Jeff mentioned on our merchandising, our merchandising will be more balance in Big G so it will have more merchandising in this second quarter than we did in last years second quarter and given that Big G is some of our lighter products that will probably gear more toward balancing it as Ken alluded to.

Operator

Your next question comes from Eric Serotta – Merrill Lynch.

Eric Serotta – Merrill Lynch

Very nice results this quarter, pretty much across the board. I had a couple questions on Big G; you highlighted several brands where you’re really seeing tremendous baseline and overall sales growth. In order to reconcile that with 2% baseline growth and 10% overall sales growth there had to be some brands that aren’t performing at quite that level.

Could you talk a bit about the opportunity to further broaden the performance across the Big G portfolio and would that be a priority in the second half of this year and have some initial efforts like you have a new product in Total this year on the Total brand this year, are they showing much traction?

Jeff Harmening

I didn’t want to bore all of you with all the examples we have of some of our big brands that are growing but Total is doing a lot better than what it was before, it’s now up this year versus being down a year ago. Reese’s has seen growth, Cinnamon Toast Crunch is seeing growth, and yellow box Cheerios is seeing growth. What we see is growth among our big core brands. The places where we’re losing volume are the places where we gained a year ago on Right Size, Right Price.

Remember we were moving out a lot of inventory of lesser brands and they saw a lot more growth than we would have thought. What we see this year is really the reverse of that and better momentum on our core businesses and not a strong business on our lesser businesses. That’s a great mix for us and that’s frankly the goal we’re trying to accomplish.

Ken Powell

I would echo what Jeff Harmening just said. One of the most exciting things about Big G now is the breadth of brand strength and we still see they have very strong marketing ideas in that division. We like the quality of the advertising that we’ve seen. We see a number of good places where we could invest in additional advertising and expect to get a very good ROI on that advertising. We’re feeling quite confident about the direction that division is heading in.

Eric Serotta – Merrill Lynch

In terms of consolidated I believe you talked about 9% or high single digit increase in consumer marketing for fiscal ’09 you obviously started this year well ahead of that. Should current performance continue or anything close to the current rate of performance continue, are there opportunities out there for you to further put dollars to work to continue the sustainable growth or should we expect perhaps a greater amount than last year to fall through to the bottom line?

Ken Powell

I think balance is always the key. You know that over the last two years, at least, as we’ve seen our momentum accelerate and our sales accelerate. We’re responded appropriately by increasing marketing investment where we thought there was the opportunity to get a good return and where we thought it would really help to accelerate or sustain our momentum.

That’s pretty much the approach that we’ll be taking this year as well. As we see how the year unfolds, if we see opportunities to sustain or strengthen our moment with good high ROI incremental investments that’s something that we’ll be looking very closely to do.

Operator

Your next question comes from Chris Growe – Stifel Nicolaus.

Chris Growe – Stifel Nicolaus

I wanted to ask a question first relative to the gross margin and obviously the percentage for gross margin was down in the quarter you talked about some gross margin stabilization for the year. Does that, just by the math, require more price realization around your cost inflation to keep that gross margin flat or what changes in the next three quarters can overcome this 100 basis point underlying decline in the gross margin?

Don Mulligan

There are a couple factors to take into account. First as we highlighted in June and indicated again this morning is we do see our inflation more front loaded this year. Inflation while still remaining elevated in historical terms will moderate some as the year unfolds. Second is that we’ve taken most of our pricing actions that were in the plan but they still are taking full effect in the second quarter versus what would come through during the first quarter.

Third is on Bakeries and Foodservice which again is where we see the crux of the shortfall in the first quarter. We see that business as the year unfolds stabilizing some in terms of getting the price through as inflation stays high but moderates a bit. A fourth factor would also be our productivity which we’ll continue to see benefit as the year unfolds.

Chris Growe – Stifel Nicolaus

On the Bakery and Foodservice side you’ve gotten your price increases it sounds like in relation to the cost inflation, you made that comment in your opening remarks. You got the pricing through in relation to the cost inflation for the year is the question.

Don Mulligan

The pricing that we’re getting through in Bakeries and Foodservice is really matching our dollar inflation. That’s really where we’re trying to balance the volume and the pricing. As you understand a very challenged segment. That’s one that’s going to continue throughout the year as one that we’re going to have to most closely monitor in terms of its gross margins. If we look at the total company we still remain confident, certain remain targeted to holding our overall consolidated gross margin to last year.

Chris Growe – Stifel Nicolaus

Relative to your hedging I didn’t hear an update and perhaps you gave one and I missed it. I didn’t hear an update in terms of how hedged you are for the year in your costs.

Don Mulligan

We’re approximately 70% hedged for the year we can into the year 60% so we’ve extended some of that coverage. It varies by category in terms of our actual coverage.

Operator

Your next question comes from Eric Katzman – Deutsche Bank.

Eric Katzman – Deutsche Bank

My first question has to do with your forecast. Based on your answers to Chris’ question and the fact that if you keep your interest expense at the same run rate that’s a $0.10 positive swing year over year. I’m surprised with the cost of goods being pressured in the first quarter plus the pricing coming through Bakery and Foodservice doing a bit better and the interest expense swing why your earnings estimate outlook isn’t better.

Don Mulligan

Let me talk about interest expense then I’ll back up a little bit to talk about the total. Interest expense in the first quarter was benefited versus last year for a couple of reasons. First we exited F08 with a little better debt position than we had anticipated because the cash flow was much stronger at the end of the year because of strong earnings. In the first quarter as you’ll see in the cash flow statement we did not buy as many shares back in the first quarter so our debt balance in the first quarter was further benefited from that.

That was because last year we were buying early in the year in anticipation of closing the share forward contract with Lehman in October which we did. This year what you’re going to see is a smoothing out of that share repurchase which will mean an increase of our debt year over year versus what you saw in the first quarter.

The other factor is with that interest we are seeing some pressure on interest rates now. While they were down year over year in the first quarter the current environment certainly is putting some pressure on those rates as well.

On the interest expense I wouldn’t annualize the Q1 savings versus last year as you think about your model. Overall as we said when we gave our initial guidance we are looking to ensure that we continue to deliver consistent results, strong top line and strong bottom line. As Ken alluded to we want to make sure that we’re supporting those through the adequate consumer spending. As the year unfolds as we see opportunities to reinvest in the business we’ll do so as we have in the last two years.

In the last two years with incremental spending through on the right brands to continue to drive that growth as we’ve seen the earnings improve. We’ve also flowed some of those earnings positive through. As we’ve exceeded our original guidance in both the last two years what we’re indicating today is that we see some of that positive momentum already coming through in the first quarter. As we look at the full year we already see that more positive picture than we saw two months ago when we met with you in Chicago.

Eric Katzman – Deutsche Bank

It still sounds to me like you’re being awfully conservative but so be it.

Don Mulligan

We’re only one quarter into the year.

Ken Powell

We have 80% of the year in front of us.

Eric Katzman – Deutsche Bank

My follow up question has to do more strategically in terms of your approach to M&A so far you got rid of Pop Secret. I think it was under your watch with Lloyds Barbeque or some of those other businesses you bought LaraBars, can you talk a little bit more about how you view that given that cash flow is accelerating, your yield is competitive, you’re buying back stock, your debt balances are okay. How do you think about M&A and explain the strategy so far.

Ken Powell

Let me answer that in two parts. First of all I want you to know, we’ll repeat what we said in the past which is that we continuously are looking at all of our business and business segments to make sure that for each business we can see a very clear vision for the future and ways to drive value for shareholders with those businesses within our portfolio.

If we don’t see that and don’t really see a way to make that happen for us then we’re willing to see if those businesses would be better off in someone else’s hands. You gave a couple of recent examples of that Lloyds and just in the last few days Pop Secret. We are continuously going through that process across our portfolio.

On the acquisition side, as we’ve said in the past we love the categories that we’re in both in the US and around the world. We’re looking for good ways to add to those categories to build on them possibly through tuck in acquisition. That is something we’re very much looking at. We think that could be a way to accelerate our momentum in certain categories.

Eric Katzman – Deutsche Bank

Would you have a bias to do it more international than domestic or you really don’t care.

Ken Powell

There are opportunities in both places and there probably are a few more internationally but there are many, we’re in such great categories in the US, and they’re on trend and growing. We see opportunities here as well. We really are looking in both places.

Operator

Your next question comes from Terry Bivens – JP Morgan.

Terry Bivens – JP Morgan

There was mention by Kroger, they released their results yesterday, it had a much proportion of private label food sales than I was expecting. The question would be I think Ken you guys at the Lehman conference noted that the market share I think for all food, you were giving us somewhere around 20% only 14% for your categories I think this data was as of nearing the end of July. Have you noticed any change?

Ken Powell

Those numbers sound right generally right that you’re quoting. There really hasn’t been much of a change in our category. I think that our aggregate share is 25%, our category, something in that neighborhood and private label is at 13% or 14% so you’re roughly right. As you know, in aggregate we gain share in the first quarter and we’re gaining share in most of our categories.

We’re doing well. We’re doing well at Kroger and the trade down phenomenon that we believe is most significant in this environment is the shift that we’re seeing of food away from home to food purchased at the grocery store. I think that that is really a very significant factor here.

Terry Bivens – JP Morgan

No real acceleration as far as you’re concerned with the private label.

Ken Powell

Not really no.

Terry Bivens – JP Morgan

If you look at the Nielsen data it looks as though there’s less pricing in ready to serve soup than you see in most of the other food categories. It makes me wonder going into this soup season has there been any tendency to revert to a lot of the promotional spend that we’ve seen in earlier years. The concern there would be maybe RTS is looking at a slightly less rational year than we’ve seen in the past.

Ken Powell

No, if anything I would say I’m very encouraged by the pricing environment in soup. As you know the appropriate and needed list price increases have gone through over the last several months in the category. We don’t see any signs of irrational behavior on the merchandising side. This is the category I think that is being driven increasingly by brand building on the part of both competitors and new product innovation.

There are very good messages in the soup category. Our messages are around light soup as a low calorie option and great tasting option. With zero and one point we’ve added to that messaging. Our competitors have theirs. We see it as a very positive environment for innovation and brand building right now.

Operator

Your next question comes from Jonathan Feeney – Wachovia Securities.

Jonathan Feeney – Wachovia Securities

I wanted to maybe ask a little bit more specifically, I think a lot of us are wondering if this juncture now that commodities are declining with the same sort of headlines and vigor which they went up. Is there a building expectation at the retail trade that you’re detecting right now that continued commodity declines, I realize they’re still up year over year right now, probably at the levels where you’ve had a lot of pricing conversations.

As commodities come down if they continue their slide is there an expectation that there will be some substantial price give backs to consumers and to retailers before that. What do you think about that?

Ken Powell

Any sort of significant commodity deflation is not really the scenario that we’re counting on. The reason for that is that we believe that the key driver of the last decade and particularly the last five years, which is huge increases in demand globally and outside the US and Asia and Eastern Europe and South Asia. We think that that fundamental aspect of the economy is going to continue and it’s going to continue to put demand on all sorts of commodities.

It’s everything, its grain; dairy, metals, meats, packaging and we don’t really see that going away. We do see it moderating as I said. We think we’re beginning to see the signs of that. That is really the scenario that we’re counting on.

Don Mulligan

The only thing I would add to it is that our approach over the last number of years, particularly in the past year we’ve seen the spike in the inflation is to work our holistic margin management lever first and our pricing across all of our categories we have taken typically less than the input inflation that we’ve experienced. I think that will serve us well as this does moderate, hopefully it moderates.

Jonathan Feeney – Wachovia Securities

If commodities keep going up it’s a moot point, or if they stay where they are it’s a moot point. I realize you have absorbed some of this cost increase to your profit line up until now. I’m wondering is there an understanding from retailers that that’s the case to the extent do you know what their expectations are?

Ken Powell

They certainly understand the effort that we’ve undergone to take costs out of the system. We work with many of them to work jointly to take the costs out of the system so they’re very aware of it. As you recall from before they feel it in their own businesses they manage their private label business so there’s a very good sensitivity from a retailer standpoint on the input inflation factors that we’re all seeing. I think there is an appreciation of the efforts that we make to take costs out before we have to come to them to talk about pricing.

Operator

Your next question comes from Vincent Andrews – Morgan Stanley.

Vincent Andrews – Morgan Stanley

I’m wondering if you could help us understand the trade down that you mentioned a few minutes ago related to eating less outside of the home. Is what you’re seeing, is this consistent with prior economic downturns or is there something different about it this time. Ultimately, when the economy recovers or gas prices go down further and the consumer eats out more often again, how do you think about that, how do you plan for that? Do you model forward, is there some sort of historical way that you’re looking at it that you can share with us.

Ken Powell

The last time we would have seen this kind of inflation is a long time ago 25 or 30 years ago. At that point in time the amount of money spent on food outside the home was and a proportion of the consumer’s food budget spent away from home was less than it is today. In the world we live in today half of all food dollars are spent outside the home, about half a trillion. We’re not talking about a huge shift in the recent year. Restaurant counts are down 2% to 3% but that’s very significant and meaningful in terms of grocery trips and our categories.

I think that is a tail wind for us. I think our business momentum over the last three or four years has been fundamentally driven by our investment in innovation, our increased investment in brand building and advertising. That’s been primarily responsible for the acceleration in baselines that you heard us talk about over the last several years. In the current environment with consumers oriented a little bit more of the grocery store that’s just I think a little bit of icing on top of the cake helps our categories a little bit more.

What we’re trying to do is use this opportunity for however long it may last that people are trading more in the grocery store to ensure that we’re capturing more than our fair share we’re doing that by having the right offerings from a health and wellness standpoint, from a convenience standpoint. As economic times stabilize or improve maybe we’ll change some buying habits and have people buy more in the grocery store.

At the same time we’re working to make sure that we’re in the right Bakeries and Foodservice segments that can drive growth and sustain the kind of margins that we do.

Vincent Andrews – Morgan Stanley

If we think back to the difficult economic times of ’01 and ’02 and I guess most of ’03. There’s nothing comparable to that or to how that cycled out in ’04 and ’05 that we should be thinking about?

Ken Powell

I don’t think so.

Operator

Your next question comes from David Palmer – UBS.

David Palmer – UBS

Realizing that holistic margin management is more than just cost cutting could you provide some numbers or some direction on the productivity savings that you’re generating this year versus fiscal ’08? Perhaps just a perspective on the productivity pipeline today versus say a year ago.

Ken Powell

When we talk about our holistic margin management as you mentioned it is more than just the productivity side it’s mix as well, it involves our trade, it even really talks about our administrative expenses. What we try to provide guidance on rather than the components of it is what it is going to result in. We’ve given guidance that [inaudible] percent inflation; we’ve given guidance that we are committed to holding on to our gross margins flat. That’s really the result of what we’re doing with the holistic margin management standpoint. That’s what we want to really remain focused on.

That said given the inflation we do expect more savings direct productivity from holistic margin management efforts this year than last year. We have semi-annual meetings with our business units to talk about what is their HMM project and savings pipeline and as we’ve had those meetings over the last number of years the depth of the pipeline and the dollar value of the projects that are being put forward have continued to increase. That’s what gives us the confidence to not only talk about this year in terms of our gross margin but also reaffirm our long term growth model from a margin standpoint.

David Palmer – UBS

A big picture question as you know dinner has been shifting rapidly back home. I was just looking at some data yesterday it now appears that starting just in the last quarter or so that breakfast has stopped moving away from home and may actually be shifting back home very recently. Do you see evidence of that invisible hand perhaps of breakfast starting to shift a little bit, if you take a category perspective of all channels, the breakfast categories such as cereal and yogurt beginning to pick up in terms of volume recently?

Ken Powell

I think you might be one data point ahead of us in what you’re reading about breakfast. As I said earlier generally we are reading and seeing a shift to dinner. Frankly we’re seeing the percentage of consumers who brown bag and bring their own lunch. That’s also going up a little bit. What we are seeing is very healthy growth in the yogurt category and we’re seeing the cereal category as Jeff Harmening outlined in his presentation we’re seeing the cereal category also accelerate.

We are seeing both of those categories which cereal obviously is mostly breakfast and yogurt has a big breakfast component. Both of those categories are doing very, very well. That would be consistent with your hypothesis.

Operator

Your next question comes from Robert Moskow – Credit Suisse.

Robert Moskow – Credit Suisse

I have a question about how to think about second quarter sales growth for US Retail. The sales growth was so robust, double digit in cereal and then something like 25% in the baked goods. I think the comment was that merchandising will look a lot more robust for cereal in second quarter because it was down 11% last year. Can I take that to mean that you will have another quarter of close to double digit growth in breakfast cereal in second quarter or is there any chance that some of the volume got pulled forward into first.

Also on baked goods it’s such a big increase in first how should we think about second quarter and whether anything got pulled forward there.

Ken Powell

To my knowledge we didn’t have any significant shifting into Q1 across any of our businesses. Our success there was driven primarily by good baselines and good brand building as you heard. As for the second quarter we don’t talk in detail about what we think we’re going to do next quarter. I will tell you that we have a lot of confidence in our business model right now and our momentum and we’re anticipating a solid second quarter.

Robert Moskow – Credit Suisse

As far as the merchandising comparison, will your merchandising just look optically whether it would be just a lot more growth in second quarter but it won’t necessarily mean that sales growth is going to be accelerating as well? Is it just going be a comparison issue.

Ken Powell

The only call out that we have on merchandising was we wanted you to be aware of that a weak year ago comparison in cereal when we were preoccupied with Right Size, Right Price. When the merchandising was down quite significantly and we wanted you to be aware of that because as Jeff said we intend to have a very consistent level of merchandising in cereal over the course of the year and that means the second quarter will be up year over year.

Looking at our other businesses there are no noteworthy exceptions that we would want to highlight in terms of the merchandising. It should be consistent and appropriate throughout the year.

Robert Moskow – Credit Suisse

Are your merchandising price points, the price that you do merchandise are those higher than they were a year go as well?

Ken Powell

Are you talking cereal?

Robert Moskow – Credit Suisse

Cereal.

Jeff Harmening

In cereal the price points are really about the same as they were a year ago. What has improved is the mix of what we’ve done, the quality of our merchandising is much better behind events like that and the mix of brands is better because again as the result of Right Size, Right Price inventory we had and worked through. Our effectiveness is really built on increased efficiency based on the brands and the merchandising mix and our price points are virtually the same as they were a year ago.

Ken Powell

As a general comment our trade costs per case I think as you may remember has been declining a little bit but declines are good over the last couple of years and our focus really is on improving the efficiency of that trade spend sometimes by lifting price points as opposed to dropping them down and by eliminating deals that aren’t efficient. I would say that if anything we’re very, very focused on improving the efficiency of that trade spend so that we can get cost per case down.

Robert Moskow – Credit Suisse

Also some list prices are up in your cereal portfolio as well right?

Ken Powell

That’s right. Those are the two ways, the list price increases are obviously a way to get price increases but adjustments in trade strategy and a real focus on trade efficiency is another quite important way to improve net sales.

Operator

Your next question comes from Ed Roesch – Soleil Securities.

Ed Roesch – Soleil Securities

I want to touch base on snacks, last year that division grew 16%, you had a big contribution from grain snacks which were up I think 40%. Once upon a time that was a tough number to comp against and this year you’re up 14%. Could you break down some of the contributions to this years growth between volume and price and then new versus existing products.

Ken Powell

You correctly identified grain as a powerful driver in that division right now. Our momentum in that division is primarily driven by baseline momentum on our core franchises. The Nature Valley franchise, the crunchy bars, the granola bars you’re familiar with and chewy bars that is a terrific franchise for us well supported. That continues to have good baseline development.

On top of that we’ve had a very, very successful launch with Fiber One bars which is now one of the largest products and brands in the category and growing very rapidly. What you’re seeing us do in the first quarter of this year is extend that Fiber One range with a number of new flavors, frankly so we can keep that product on the shelf. We just need to have more visibility at shelf and more variety for consumers.

We’ve also launched a new product here in the first quarter, a new new product Chex Bars. As you know Chex is a very good franchise in the snacking area Chex Snack Mix. We do have very good momentum in that division. We have a terrific grain snack franchise and we’re just continuing to build on that momentum with good new products and solid advertising.

Ed Roesch – Soleil Securities

Would you say that new products were a bigger driver this year or last year?

Ken Powell

It’s hard to say, if I had to guess I’d say it will be about the same. The extensions to the Fiber One business that I mentioned to you, the new flavors I think are going to be very highly incremental and will add a lot to that business. We’re very excited about Chex Bars which is a new product. We think we’re going to have this year again a good combination of baseline development on that business and incremental volume from new products.

I should also mention, we just launched in the Snack Mix area where are Gardetto’s products and Chex Mix reside we very successfully launched Cheerios Snack Mix last year and now we’re extending that product line with a Honey Nut Cheerios Snack Mix. Those have also been very successful and very incremental. We have new products in places other than the bar area as well and that’s helping us.

Ed Roesch – Soleil Securities

One follow up on this trade in phenomenon. Is there any sense that health and wellness is a little less an emphasis for these incremental dollars is moving in home from out of home? Doesn’t seem the consumer was going to Applebee’s really looking for health and wellness before. Is there anything in the trends maybe where you’re baking products and snacks and Pillsbury USA are seeing a disproportionate benefit from that trade in.

Ken Powell

No, if anything I would say that consumer awareness around health is as strong as it’s ever been. In the research that we do and the consumer insight that we have they would rank health values and health benefits as among the top two or three attributes that they look for in products. I think that’s why for instance the Fiber One bars that we were just discussing. Here’s a product that combines great taste with a very nice health benefit.

It explains why that product was so wildly successful. It explains why zero point soup has been such a great success. These are products that really taste good and they only have 60 calories a serving. We’re finding that there’s high interest in health values and when you get it right, when you combine a health value with great taste that is a really winning combination. We’re spending a lot of work looking for other new products that do that.

Operator

Your last question comes from Alexia Howard - Stanford Bernstein.

Alexia Howard - Stanford Bernstein

A quick question on Bakery and Foodservice just coming back to that, I know it was touch on a couple of times today. It seems as though a number of other package food companies have been really falling on hard times in that sector and obviously the results this quarter for you guys actually bucks the trend. Could you talk a little bit about what’s enabling you to be more successful there particularly on the top line? Is it the Bakeries are doing particularly well and maybe the Foodservice sector is a little weaker, just some color on that would be really helpful?

Don Mulligan

It’s a combination of the efforts we undertake more or less several years to make sure that we are focused on the customer segment for growing products margins that allowed us to reinvest in the business. Part of that certainly is also been the fact that an increasing percentage of our sales are in branded products which again provide that margin, provide that support and get a halo from the investments that we’re making in our retail side of the business as well.

Whether its in c-stores, whether its in health service facilities, universities, also through more broader food service channel where we have reinvested a year ago we went from a broker network to an in house sales force across that channel we’re undergoing the same on the c-stores. I think that extra weight in the marketplace has allowed us to gain account, gain distribution where some of our competitive set has been.

It’s a combination of all those efforts that have allowed us to maintain a stronger position in most of our peer companies have in that segment.

Alexia Howard - Stanford Bernstein

The joint ventures income or the minority interest income seems to becoming an increasingly large proportion of your earnings growth drivers. Is that mainly because we’re now seeing the benefits of the restructuring program that was put in place in cereal partners worldwide a year and a half or two years ago at this point or are there other factors in there that are really allowing the profits to come through more forcefully in that area.

Ken Powell

There was that significant restructuring in the UK that had an impact on that line for a couple years as you reflect. We’re past that now. We’ve completed that restructuring so that’s a one time factor. I would say clearly in the case of both of these joint ventures CPW and Häagen Dazs Japan both of these are stories of continuous sales growth, continuous improvement in profitability. They’re doing the same things we’re talking about here. They’re very focused on brand building.

The cereal category just as an example outside the US [inaudible] it’s still a very low penetration and has huge upside opportunity for General Mills and Nestle. That’s going to be a story of continuing category development, good top line, we’re just starting to look for the HMM opportunities in that business as we extend that program into those businesses. We expect continuous good development of those JVs.

Kris Wenker

Thank you everybody and for those that we didn’t catch up to apologies. Give me a shout afterwards anybody with follow up please give me a call. I appreciate your time today.

Operator

This does conclude the conference call for today.

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, Inc. F1Q09 (Qtr End 08/24/08) Earnings Call Transcript
This Transcript
All Transcripts