Milling & Baking News - December 23, 2003 - 12

F I N A N C I A L

R E S U L T S

General Mills earnings rise but
cuts guidance for second half
MINNEAPOLIS - Net income of General Mills, Inc. in the 13 weeks ended
Nov. 23 was $308 million, equal to 82c
per share on the common stock, up 9%
from $276 million, or 75c, in the second
quarter last year. Sales were $3,060 million, up 3.6%.
Excluding special charges of $28 million in the fiscal 2004 second quarter
and $24 million in the fiscal 2003 second
quarter, earnings were up 10%. "Our
earnings are growing at a double-digit
pace through the first half, fueled by
2% growth in worldwide unit volume,
operating margin improvement, and
increasing profits from joint ventures,"
said Stephen W. Sanger, chairman and
chief executive officer.
While positive about second-quarter
results, Mr. Sanger sounded a cautious
note about the company's outlook because of weakening volume trends during the period. "Because of that, we see
some risk to fully achieving our volume
targets for the year, although we do believe the product innovation and marketing programs we have planned will
result in stronger volume growth in the
second half," he said. "In addition, we
see supply chain costs coming in above
our original plans, due in large part to
higher prices on key commodities such
as wheat, oil, eggs and vanilla."
As a result, the company lowered its
full-year earnings guidance to a diluted
per share range of $2.75 to $2.80, down
from $2.85 to $2.90. The new figures
equate to a 13% to 17% profit increase
from the $2.43 earned in fiscal 2003.
In a Dec. 17 conference call, James
Lawrence, General Mills executive vicepresident and chief financial officer,
elaborated on the negative impact commodity costs exerted on second-quarter
results. He noted that the company
spends about $3 billion on raw material
annually, a figure that includes both ingredients and packaging. "Of that total,
about one-third are ingredients where
we can hedge our costs through market
transactions," he said. "Roughly another
third of those annual purchases are raw
materials where we can enter into 12month supply contracts if we choose to
do so. Finally, the remaining one-third
include ingredients such as eggs, meat
and dairy, which are purchased on 30to 90-day pricing terms. That would
include the purchasing of ingredients for
Bakeries and Foodservice, which tends
to be done at current market prices."
While the company had planned for
commodity costs in 2003-04 to be higher
12 / Milling & Baking News, December 23, 2003

than in 2002-03, the company also had
anticipated that a number of ingredients
that had seen price strength in the spring
of 2003 would fall back toward normal
levels in the fall. "That has not been the
case for several items that are important to us," Mr. Lawrence said. "That
includes wheat, oil, eggs and vanilla."
He explained that the latter item is an
important ingredient in the company's
Haagen-Dazs ice cream.
Higher energy costs also were a factor
curbing earnings growth. In addition,
the company saw higher supply chain
fixed costs per case related to products
in which volumes were soft.
Longer term, Mr. Sanger remained

New products slated for the second half of fiscal 2003 include a strawberry banana variety
of Berry Burst Cheerios and Total Protein, a
product the company said caters to consumers
seeking to lower their intake of carbohydrates.
hopeful. "We've said we expect compound E.P.S. growth of at least 11% for
the three-year period through fiscal
2006," he said. "With the revision we've
made to this year's earnings forecast,
our three-year compound growth may
be lower when restructuring and merger-related costs are excluded. But we'd
still expect our reported E.P.S. to meet
that 11% compound growth target over
the three-year period."
In a breakdown of results by principal business unit, U.S. Retail operating
profit in the second quarter was $541
million, up 10% from $494 million. Sales
were $2,203 million, up 2.7%. Unit volume was up 1% overall despite declines
of 3% for Big G cereals and 2% for Pillsbury USA. Gainers in the quarter were
Progresso soup, Betty Crocker dinner
mixes and Old El Paso Mexican dinner
kits. Yoplait yogurt volume increased
6% and Snacks volume rose 5%. Baking
Products division sales were flat.
In the conference call, Mr. Sanger devoted considerable attention to efforts
to invigorate the Big G breakfast cereal

business. He predicted improvement
in the second half of the fiscal year but
said most of the gains probably would
be achieved in the fourth quarter rather
than the third. The slowdown in breakfast cereal sales partly was attributable
to flat category-wide demand, but he
said Big G surrendered market share
during the period. "We didn't have a lot
of product news in that part of the year,"
he said. "Merchandise volume was
down 9% compared with the same six
months last year. So, through November
our dollar share is just under 32%, and
that's down 40 basis points compared to
the same point last year."
More recently, the company's share
has stabilized, Mr. Sanger said. The
company's core brands, which collectively account for 22% of cereal category
sales, have performed well, Mr. Sanger
said. Secondary brands have lost share,
he said.
"That has largely been offset by the
share gain from Berry Burst Cheerios,
which will celebrate its first birthday
next month," Mr. Sanger said. "At this
point Berry Burst Cheerios has generated more than $90 million in retail sales
in its first 11 months. Next month, we'll
begin shipping a new, strawberry banana variety of Berry Burst Cheerios. It
scored very well in consumer testing."
Reasons for optimism that refrigerated dough business would improve
also were cited by Mr. Sanger. He noted
that second-quarter weakness related in
part to a production shift that prevented the company from offering seasonal
Halloween cookies. "However, the big
season for refrigerated dough is right
now," he said. "During that period so
far we're looking a bit better. There is
lots of merchandising, so we're back in
the game for holiday cookies. Shipments
have been strong.
"Our challenge on refrigerated dough
continues to be to bring enough innovation to that category to stimulate growth,
just like in many other categories."
In organic/natural product lines, Cascadian Farm ready-to-eat breakfast cereals have performed well, Mr. Sanger said.
"We'll be extending the Cascadian Farm
brand into a new category next month
with the introduction of a new line of organic granola bars. These bars have zero
trans fats. They come in multi-grain, fruit
and nut and harvest berry flavors."
Aggressive merchandising plans
for the third quarter and beyond were
detailed by Mr. Sanger. In addition to
the annual Pillsbury Bake-Off competition, he provided preliminary details of
pending promotions in connection with
the release of Shrek 2. The promotion is
part of a General Mills partnership with
bakingbusiness.com/world-grain.com

http://www.bakingbusiness.com/world-grain.com

Milling & Baking News - December 23, 2003

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