General Mills (NYSE:GIS), a leading manufacturer and marketer of branded consumer foods such as cereal, soup, yogurt, vegetables, and ice cream, reported first quarter 2012 earnings on Wednesday. By now, everybody knows the story of commodity cost inflation and a weak consumer, so I’ll just dive into the notes from the 10-Q and the conference call:
Net sales for quarter grew 9% to $3.85 billion, and 6% after adjusting for the affects of the Yoplait acquisition (GIS acquired a 51% interest in July for $1.2 billion). Excluding Yoplait, the 6% increase was broken down into a 7% increase in price/mix, a 2% increase from foreign exchange, and a 3% decline in volume (as expected).
Net sales for the U.S. retail segment grew 3% to $2.51 billion, with a 4% decline in volumes cancelling out a portion of 7% price and mix growth. Segment operating profit (23.3% of sales, down 180 basis points YOY) declined 5% to $585 million due to higher input costs and a 6% increase in advertising/media expense.
Net sales for the International segment increased more than 30% to $856 million, the significantly majority of which is due to the Yoplait acquisition (up 14% excluding Yoplait). On a constant-currency basis, International segment net sales grew 20%, with double digit growth in Europe (36%), Asia/Pacific (15%), and Latin America (12%). Operating profit increased 30% to $81 million.
Net sales for the Bakeries and Foodservice segment increased 13% to $481 million, driven by 15 points of price and mix (-2 on volume). As with U.S. retail, year over year operating profits (12.8% of sales, down 420 basis points YOY) declined ($61 million, compared to $81 in 2011) due to higher input costs.
While the increase in commodity costs weighed on gross margin, management talked about the positive changes that are being made at retail: “Branded and private label manufacturers have taken pricing actions to offset a portion of the input cost inflation. Across our categories, average unit prices have increased sequentially and were up nearly 5% for the first quarter of our fiscal 2012… This improvement in category trends is quite broad based; category net sale trends across all channels improved in 11 of our top 12 categories this quarter [frozen pizza decreased 1%]… In aggregate, net sales for our major categories grew over 4% across all channels in the first quarter after flat performance in fiscal 2011.”
The important thing to remember is at the end of the day, even private label must adjust for higher commodity costs; in cereal, for example, the average unit price per serving increase at GIS was in line with private label at $0.09-$0.10, while still substantially below competitors Quaker, Post, and Malt-O-Meal (while slightly above Kellogg at $0.06).
As management noted, market share performance across these categories was a mixed bag, suggesting that some categories may still be a bit more sensitive to price than others: “some of this decline reflects our actions to reduce trade spending and take pricing” – such is the cost of building brand equity (driven by advertising and innovation) and returning to a more normal pricing environment.
Global media spend increased 7% in the quarter, on top of an 8% increase in the first quarter of 2011 (6% lapping 6% in the U.S.), with no signs of slowing down – “in the second quarter, we expect our growth in media spending to accelerate a bit, with advertising expense expected to grow faster than sales again in this period.”
On the innovation front, the company has a slew of new products, with more than 100 new products expected to be launched in the first half of the year; along with advertising, innovative new products drive less elastic demand, and will help GIS to move towards a normalized environment where they are not forced to compete on price alone.
After adjusting for mark-to-market effects (which resulted in a negative impact to earnings this quarter by nearly $38 million, or $0.03, compared to a positive impact in Q1 2011 of $72 million, or $0.06), EPS was in line with last year ($0.64), and beat consensus estimates by $0.02.
The company reaffirmed its full-year adjusted EPS guidance of $2.59-$2.61, which excludes any mark-to-market effects and integration costs from the Yoplait acquisition.
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As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.