General Mills Q3 earnings swelled by commodity gain

by Eric Schroeder
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MINNEAPOLIS — Third-quarter profit at General Mills, Inc. soared 61%, girded by continued strong demand and higher prices for its products and billowed by a sensational commodity gain.

Net income in the third quarter ended Feb. 24 was $430.1 million, equal to $1.28 per share on the common stock, up from $267.5 million, or 77c per share, in the third quarter of fiscal 2007. The most recent quarterly results included non-cash gains from mark-to-market valuation of commodity positions and a favorable ruling related to a tax contingency.

Special unallocated corporate items represented a net gain of $106 million in the quarter, versus a charge of $36 million in the same quarter in fiscal 2007. Factoring largest in this swing was a $151 million net mark-to-market gain on hedges on open commodity positions and current grain inventories. Additionally, the company benefited from a $30 million gain related to a favorable court decision on a tax issue.

Excluding the non-cash items, which added 41c per share to quarterly net income, earnings would have been up 18%, the company said.

General Mills posted net sales of $3,405.6 million, up 12% from $3,053.6 million in the previous year’s third quarter. Poundage during the quarter was up 6%.

Total segment operating profits of $695.4 million were up 43% from $486.1 million a year ago.

"This was a terrific quarter for General Mills, fueled by continued strong demand for our products in markets all around the world," said Ken Powell, chief executive officer. "Our product innovation and consumer marketing investments are driving strong growth on the top line, and cost-savings efforts, together with pricing actions, are offsetting significantly higher input costs and protecting our margins."

General Mills’ said each of its business segments reported net sales and operating profit growth for the quarter. The gains followed good growth in last year’s third quarter, when the company’s net sales grew 6% and earnings per share rose 9%.

In the U.S. Retail segment, net sales rose 9% to $2,300.8 million from the third quarter of fiscal 2007, driven by 8% unit volume growth. Operating profit in the retail segment totaled $486.2 million, up 9% from $447 million in the third quarter of fiscal 2007.

The strong growth was driven by the Snacks division, where sales surged 16%, reflecting strong consumer demand for Nature Valley grain snacks, Fiber One bars and fruit snacks. The company’s Baking Products division also rose 16%, fueled by double-digit volume growth.

Net sales for Big G cereals grew 3%, led by Cheerios varieties and the Fiber One cereal franchise. Mr. Powell expanded on the success of Big G during a March 19 conference call with analysts.

"Our consumer movement has been accelerated, with consumer take-away up 5% in the latest month, non-promoted or base-line sales are accelerating as well, and were up 4% in February," he said. "We are prioritizing our core brands, and driving growth through increased investment and focus. A great example of this focus is our Cheerios label. Yellow box, Honey Nut and Multigrain Cheerios are all seeing strong sales increases, and our newest Oat Cluster Cheerios Crunch is off to a great start. Combined retail dollar sales for all Cheerios varieties are up 5% year-to-date, in channels where we have data."

Mr. Powell said the company also has experienced growth in Cinnamon Toast Crunch, up 16%, Lucky Charms, up 10%, and in the Fiber One franchise, up 40%.

Strong growth also was noted in the company’s Yoplait business, which grew 14% during the quarter behind Yoplait Light yogurt, Yo-Plus yogurt with probiotic cultures and fiber, and introductory shipments of new Fiber One yogurt. Meals division sales climbed 8%, reflecting growth in Progresso ready-to-serve soups and Green Giant frozen vegetables.

Pillsbury USA sales rose 8% during the quarter, reflecting gains by Pillsbury refrigerated dough products and Totino’s pizza rolls.

In International, net sales were $612.8 million, up 20% from $509.8 million a year ago. Unit volume was up 4%, led by 5 points of growth coming from pricing and mix and 10 points of growth from foreign exchange. Operating profit grew 24% to $52.2 million.

Sales in the Bakeries and Foodservice segment were $492 million, up 13% from a year ago. Segment operating profit rose 68% to $56.1 million, reflecting gains associated with grain merchandising activities.

Mr. Powell said the division’s results were adversely affected by higher input costs, resulting in "modest volume declines."

Mr. Powell said the company’s grain merchandising operations played a key role in the company’s ability to generate strong growth within its Bakeries and Foodservice unit.

"We buy grains, store it and process it," he said. "We have assets and we have expertise in acquiring and taking positions in grain, and we manage our costs that way."

Cash flow from operations totaled $914 million through February, which compared with $1.15 billion in the same period last year. During the quarter, General Mills said it repurchased approximately 3 million shares of stock at an average price of $55 per share.

General Mills said earnings after tax from joint ventures totaled $30 million in the third quarter, which compared with $16 million in the same period last year. This year’s results included a net gain of $11 million after-tax primarily from the sale of property associated with the previously announced restructuring of Cereal Partners Worldwide manufacturing plants in the United Kingdom.

Looking ahead to the fourth quarter, General Mills said it expects input costs, which include ingredients and fuel, to be higher than current year-to-date and year-ago levels. The company also noted it would spend more on marketing.

"Our businesses are healthy and growing, and financial results through the first nine months have exceeded our plans," Mr. Powell said. "We have updated our earnings per share guidance for the full year, including an estimated 30c on non-cash commodity and tax items, to a range of $3.75 to $3.77 per share. Excluding the tax and commodity gains, our earnings guidance would be $3.45 to $3.47 per share." In fiscal 2007, General Mills earned $3.18 per share.

The projection of 30c in special items for the year suggests that the company does note expect the commodity gains to be fully sustained until the end of the crop year.

"Some of that will reverse in the fourth quarter," said Don Mulligan, chief financial officer.

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