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Mar 21, 2012 • By

General Mills reports third-quarter earnings

General Mills announced third-quarter fiscal 2012 earnings bright and early today. On the earnings conference call was Ken Powell, chairman and CEO; Don Mulligan, chief financial officer, and John Machuzick, president, Bakeries & Foodservice. John gave an overview of our food away-from-home business and industry trends.

Our third-quarter performance was consistent with the guidance we provided on Feb. 17. The numbers are outlined in our press release issued this morning.

General Mills saw sales growth across all three business segments (U.S. Retail, Bakeries & Foodservice, and International) in the third quarter. We also sustained a high level of new product innovation across all three of our business segments, and increased our brand building investment.

However, high levels of commodity inflation and volume softness impacted our earnings this quarter. Don said today that for fiscal 2012, we are tracking somewhat behind our original profit target, as we announced on Feb. 17. But he said that the year is unfolding largely as we outlined at the beginning of our fiscal year last June.

Fiscal 2012 has presented a particularly challenging operating environment for our company, with input cost inflation the highest we’ve seen in 30 years – and more than double the average annual rate we expect to see going forward. In addition, slow economic recovery has kept many consumer budgets under pressure.

Ken told analysts today, “Our third-quarter results reflect strong worldwide sales growth for our business, but the 10 to 11 percent input cost inflation we’re experiencing this year pressured our margins. In the fourth quarter, we expect to generate continued good sales momentum, and we anticipate that gross margin contraction will ease somewhat. This should result in renewed earnings growth as we wrap up 2012 and move into the new fiscal year.”

New products

New product innovation continues to be a key growth driver for our business. In fiscal 2012, we’ve had a high level of quality new product innovation and will launch more than 150 new products in the company’s U.S. Retail business alone, such as MultiGrain Cheerios Peanut Butter, Fiber One Brownies, Nature Valley Protein Bars, Yoplait Greek Yogurt Parfaits, Lactose-Free Yoplait and Pillsbury Egg Scrambles.

International

Our International segment continues to perform quite well this year. Sales in Canada grew 37 percent in the third quarter, led by cereal, Old El Paso Mexican products and the addition of Liberte yogurt.

In Latin America, sales were up 12 percent. Net sales more than doubled in Europe, reflecting the addition of Yoplait yogurt and high single digit sales growth on our base business.

And in the Asia-Pacific region, sales grew 15 percent with good contributions from China and Australia.

U.S. Foodservice

John said on the earnings call this morning that while there are some bright spots in the U.S. foodservice industry, the overall environment remains challenging, as we continue to deal with a cautious consumer. General Mills has been outperforming the industry in recent years, building stronger share positions for our brands. John said we’re driving this good performance by focusing on the channels that show the most promising growth, and by innovating on many of our branded product lines.

For example, he said breakfast programs in K-12 schools have been growing at a 5 percent compound rate over the past three calendar years. And our business in this channel is outpacing that growth.

Recent legislation for the K-12 School Nutrition program recommends more whole grains at breakfast. All of our Big G cereals contain more whole grain than any other single ingredient. John said college students like cereal as well, and four out of the top five cereals in college and university cafeterias are General Mills products.

Summary

Ken closed the call by highlighting the strategic choices the company has made in this environment to increase our worldwide sales base and strengthen our portfolio:

•We made acquisitions that expanded our participation in two fast-growing food categories: yogurt, and natural and organic foods.

•We sustained a high level of new product activity across all three of our business segments.

•And we increased advertising and media investment along with sales.

Ken told analysts, “We believe our actions have positioned the company well for continued growth in 2013 and beyond.”

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