Business divestitures boost General Mills' fiscal '05 earnings

by Eric Schroeder
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MINNEAPOLIS — Net income of General Mills, Inc. in the fiscal year ended May 29 rose 18% to $1,240 million, equal to $3.34 per share on the common stock, up from $1,055 million, or $2.82 per share, in fiscal 2004. Full-year results for 2005 included an after-tax gain of $284 million related to businesses divested during the year, partially offset by $87 million in after-tax expenses associated with the redemption of $760 million principal amount of General Mills’ notes due in 2012.

Net sales for the full year were $11,244 million, up 2% from $11,070 in fiscal 2004.

"On a comparable 52-week basis, our net sales grew 3%, outpacing 2% growth in unit volume," said Stephen W. Sanger, chairman and chief executive officer. "Operating profit results in total reflected the significant input cost inflation we experienced in 2005; however, the Bakeries and Foodservice division met its goal of matching last year’s profits and our International division posted strong profit growth. In addition, after-tax earnings from joint ventures grew 20% to reach $89 million. And the strong cash flows that we generated enabled us to pay increased shareholder dividends and invest $430 million in capital to support future growth, while we paid down $2 billion of our debt balance."

Net income in the fourth quarter totaled $460 million, equal to $1.25 per share on the common stock, up 65% from $278 million, or 74c, in the year-earlier period. The quarterly earnings improvement included a gain recorded from dispositions of the company’s 40.5% interest in Snack Ventures Europe and the Lloyd’s barbeque entrees business, as well as debt repurchase expenses.

Net sales for the fourth quarter of 2005 totaled $2,719 million, down 3% from the fourth quarter of 2004.

Operating profit in General Mills’ U.S. Retail business eased 5% during the year, falling to $1,719 million from $1,809 million in fiscal 2004, as volume growth and productivity savings failed to offset the impact of unfavorable sales mix, higher promotional expense and higher input costs. Unit volume grew 1%, with five of the company’s six major product divisions recording gains.

"Yoplait yogurt volume grew 11% in 2005, led by Yoplait Light and other 6-oz cup varieties," General Mills said. "Unit volume increases for Nature Valley snack bars and Pop Secret microwave popcorn fueled 2% overall volume growth for Snacks. Pillsbury USA, Baking Products and the Meals Division each posted unit volume gains of 1%.

"Big G cereal shipments declined 5%, as pricing and promotional shifts underway in the U.S. ready-to-eat cereal category impacted merchandised volume levels in the second half of the year. Excluding the extra week from prior-year results, total U.S. Retail unit volume would have increased 3% in 2005."

For the fourth quarter, operating profit in the U.S. Retail business slipped 19% to $377 million on a 5% drop in sales.

Operating profit in the Bakeries & Foodservice business was $134 million, virtually unchanged from $132 million in fiscal 2004. Net sales in the year totaled $1,740 million, which compared with $1,757 million in 2004. Unit volume declined 5% overall.

"While shipments to convenience store and vending customers rose 17%, that strong growth was more than offset by volume declines with food service distributors, restaurants and bakery accounts," the company said. "Excluding last year’s extra week, total Bakeries and Foodservice unit volume would have been down 3% in 2005."

For the fourth quarter, operating profit in Bakeries & Foodservice totaled $40 million on sales of $450 million, which compared with $38 million and $465 million, respectively, in the fourth quarter of 2004.

General Mills recorded certain costs in 2005 and 2004. These costs include: the restructuring and other exit costs segregated on the consolidated statement of earnings; associated costs (primarily accelerated depreciation) included in cost of sales; and merger-related costs included in selling, general and administrative expense.

Mr. Sanger said that 2005 marked the end of a transitional period for General Mills that followed the $10 billion acquisition of Pillsbury in fiscal 2002. Earnings results during that transition period included significant restructuring charges and costs related to the merger, which General Mills separately identified in its earnings guidance and reported results.

Beginning in fiscal 2006, General Mills said it will no longer forecast identified expenses separately in its earnings guidance. The company intends to renew share repurchase activity in 2006, and expects share repurchases to be a source of EPS growth in 2006 and beyond.

"We think General Mills is well-positioned to deliver low single-digit growth in net sales, mid single-digit growth in operating profits, and high single-digit growth in earnings per share," Mr. Sanger said. "Over the next three to five years, our goal is to deliver good growth while improving our return on capital by an average of 50 basis points a year. We believe this financial performance, together with dividend yield, should result in consistent, double-digit returns to General Mills shareholders."

General Mills is targeting low single-digit growth in net sales for fiscal 2006, and mid single-digit growth in operating profits driven by margin recovery in the U.S. Retail segment.

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