General Mills Q3 Performance Hit by Higher Costs

Gross margin for the quarter declined, reflecting unusually strong grain-merchandising profits last year and higher input costs this year. Consumer marketing expense grew 6 percent as the company invested in brand-building initiatives in markets worldwide.

19/03/09 General Mills has reported results for the third quarter of fiscal 2009. Net sales for the 13 weeks ended Feb. 22, 2009, grew 4 percent to $3.54 billion. Foreign currency translation reduced sales growth by 3 percentage points.  Pound volume was 1 percent below prior-year levels that grew 6 percent.  Gross margin for the quarter declined, reflecting unusually strong grain-merchandising profits last year and higher input costs this year.  Consumer marketing expense grew 6 percent as the company invested in brand-building initiatives in markets worldwide.  Segment operating profits totaled $560 million, below prior-year levels due to higher input costs, lower grain-merchandising profits, and the negative impact of foreign currency exchange.  Net earnings for the third quarter include gains from mark-to-market valuation of certain commodity positions in both years, a gain from an insurance settlement in 2009, and the impact of a discrete tax item that represented a gain in 2008 and an expense in 2009. Diluted earnings per share (EPS) totaled $0.85 in the third quarter of 2009 compared to $1.23 in last year’s third quarter including these items.  Excluding the items, EPS would have totaled $0.79 in this year’s third quarter compared to $0.87 a year ago.

Chairman and Chief Executive Officer Ken Powell said, “Our results this quarter reflect a difficult comparison against strong prior-year results, as well as significantly higher input costs in the current period.  We’re pleased to see continued growth in consumer demand for our products in markets around the world, as third-quarter net sales for our U.S. retail operations rose 8 percent, and international segment net sales increased 10 percent on a constant-currency basis.

“In the fourth quarter, we expect our input cost inflation will be well below our estimated full-year inflation rate of 9 percent,”  Powell said.  “The benefits of this lower input cost inflation and an extra selling week this year will contribute to strong segment operating profit growth for the final quarter.  The operating environment is very challenging; however, our good performance through the first nine months of fiscal 2009 has enabled us to modestly increase our full-year earnings guidance.”

Through the first nine months of fiscal 2009, General Mills’ net sales increased 8 percent to $11.05 billion.  Pound volume contributed one point of sales growth, and foreign currency exchange reduced sales growth by 1 point.  Segment operating profits grew 4 percent to $1.97 billion despite higher input costs, negative foreign exchange effects, and a 15 percent increase in consumer marketing expense for the year to date.  Diluted EPS through nine months totaled $2.73 in 2009 compared to $3.19 in 2008.  Excluding mark-to-market effects and the discrete tax item from both years, and excluding gains from the insurance recovery and the sale of Pop Secret popcorn in 2009, nine-month EPS would total $3.12, up 11 percent from $2.80 in 2008.

Third-quarter net sales for General Mills’ U.S Retail operations grew 8 percent to $2.50 billion.  Pound volume increased 1 percent from prior-year levels, which grew 8 percent.  Operating profits grew 1 percent despite higher input costs and an 11 percent increase in consumer marketing investment. 

Big G cereal sales grew 13 percent, including particularly strong increases by Honey Nut Cheerios and Multi-Grain Cheerios, Cinnamon Toast Crunch, and the Fiber One cereal franchise.  Baking Division net sales rose 16 percent, including gains from Betty Crocker dessert mixes, Bisquick baking mix and Gold Medal flour.  Pillsbury Division net sales grew 15 percent with contributions from Pillsbury refrigerated dough products, Totino’s pizza and pizza rolls, and new Pillsbury Savorings frozen appetizers.  Yoplait Division sales grew 7 percent, including continued good growth for the Yoplait Light line of reduced-calorie yogurts.  Meals Division net sales grew 5 percent led by increases from Helper dinner mixes and the new Macaroni Grill dinner mix line, Green Giant frozen vegetables and Progresso ready-to-serve soups.   Snacks Division net sales were 4 percent below last year’s levels, which included contributions from the Pop Secret microwave popcorn business that was sold in this year’s second quarter.  Net sales for the Small Planet Foods Division matched prior-year levels.

Through nine months, U.S. Retail net sales increased 10 percent to $7.57 billion.  Pound volume grew 4 percent.  Operating profits rose 7 percent to $1.65 billion despite significant input cost increases and 17 percent growth in consumer marketing investment for the year-to-date. 

Third-quarter net sales for General Mills consolidated international businesses declined 5 percent to $580 million, as foreign currency exchange reduced sales growth by 15 percentage points.  Sales on a constant-currency basis grew 10 percent with pound volume contributing 1 point of growth, and pricing and mix contributing 9 points.  International segment operating profits totaled $49 million, down from prior-year levels due to foreign exchange impacts and higher input costs.  Through nine months, International net sales grew 4 percent as reported to $1.95 billion.  Foreign currency exchange reduced sales growth by 6 points.  Sales on a constant-currency basis grew 10 percent, as pound volume declined 1 percent, and pricing and mix contributed 11 points of growth.  Operating profits totaled $207 million, essentially matching prior-year levels despite unfavorable foreign exchange and increased consumer marketing investment. 

Third-quarter net sales for the Bakeries and Foodservice segment declined 6 percent to $462 million.  Pound volume declined 12 percent, reflecting difficult industry conditions.  Operating profits were significantly below prior-year results that included unusually strong gains from grain-merchandising activities.
 
Through nine months, Bakeries and Foodservice net sales grew 5 percent to $1.53 billion and operating profits totaled $113 million.  Subsequent to the end of the quarter, the company announced an agreement to sell a portion of its frozen unbaked bread dough business to Pennant Foods.  The company expects to close the transaction and record a loss on the asset sale during the fourth quarter of 2009.

After-tax earnings from joint ventures totaled $16 million in the third quarter of 2009 compared to $30 million in the same period last year.  Prior-year results included a net gain of $11 million from restructuring activities at Cereal Partners Worldwide (CPW), as well as a $2 million gain on the sale of our 50-percent share of the 8th Continent soy milk business.

Through nine months, after-tax earnings from joint ventures totaled $80 million in 2009, matching prior-year levels.  Nine-month net sales for CPW grew 5 percent, with pound volume up 3 percent and favorable foreign exchange.  Net sales for the Häagen-Dazs ice cream venture in Japan also grew 5 percent, as favorable foreign exchange offset a volume decline.

The company’s updated guidance for fiscal 2009 diluted earnings per share is a range of $3.87 to $3.89 before any impact from mark-to-market valuation.  This guidance range also excludes the Pop Secret gain, the insurance recovery, the loss anticipated on the sale of the foodservice frozen bread dough business, and the discrete tax item.  Previously, 2009 earnings guidance was a range of $3.83 to $3.87, excluding items.

“We expect to finish the year on a strong note,”   Powell said. “We intend to continue investing substantial levels of consumer marketing support behind our brands in order to help position our businesses for continuing growth in fiscal 2010.”