General Mills reports results for fiscal 2011 Q2

General Mills reported results for the second quarter and first half of fiscal 2011. As previously announced, the company's financial performance was generally in line with very strong year-ago sales and profit results.

General Mills (GIS 36.59, +0.21, +0.58%) reported results for the second quarter and first half of fiscal 2011. As previously announced, the company's financial performance was generally in line with very strong year-ago sales and profit results.

Fiscal 2011 Second-Quarter Financial Summary

Net sales grew 1 percent to $4.07 billion Segment operating profit totaled $853 million, 3 percent below year-ago profit that grew 12 percent. Diluted earnings per share grew 11 percent to reach 92 cents, including a net benefit from certain tax matters. Excluding the 2011 net tax benefit and the effects of mark-to-market valuation of certain commodity positions in both years, adjusted diluted earnings per share totaled 76 cents for the second quarter of fiscal 2011, compared to 77 cents in the second quarter of fiscal 2010.

Net sales for the 13 weeks ended Nov. 28, 2010, grew 1 percent to $4.07 billion. Pound volume contributed 3 points of net sales growth in the quarter, while reduced price realization and mix subtracted 2 points of growth. Gross margin was below strong year-ago levels, reflecting higher commodity costs. Advertising and media expense was also below last year's second-quarter level, when the company reinvested at a high rate and media expense rose 37 percent. Segment operating profit totaled $853 million compared to $877 million in last year's second quarter. Taxes for the quarter included an $89 million net reduction in expense resulting from two separate tax matters (please see Note 7 to the Consolidated Financial Statements below for discussion of these items). Second-quarter net earnings grew 9 percent to $614 million including the net tax benefit. Diluted earnings per share grew 11 percent to $0.92. Adjusted diluted earnings per share, excluding the net tax benefit in 2011 and the effects of mark-to-market valuation of certain commodity positions in both years, totaled $0.76 for this year's second quarter, compared to $0.77 in the period a year ago. (See Note 8 to the Consolidated Financial Statements below for discussion of this non-GAAP measure).

Six-month Financial Summary Through the first six months of fiscal 2011, General Mills net sales grew 1 percent to $7.60 billion. Pound volume contributed 3 points of net sales growth. Net price realization and mix reduced net sales growth by 1 point. Foreign exchange also subtracted 1 point of growth. Net earnings grew 10 percent to reach $1.09 billion, including the net tax benefit and a net increase in the mark-to-market valuation of certain commodity positions. Diluted earnings per share totaled $1.63, up 12 percent including the net tax benefit and mark-to-market effects. Adjusted diluted earnings per share, excluding the 2011 tax benefit and mark-to-market effects in both years, totaled $1.40 in the first half of fiscal 2011, compared to $1.41 in last year's first half.

Chairman and Chief Executive Officer Ken Powell said, "We expected the first half of this fiscal year to be particularly challenging, and it was. We were lapping very strong growth by our company in the same period a year ago, including 16 percent segment operating profit growth and a 22 percent increase in our adjusted diluted earnings per share. In addition, the operating environment in the first half of 2011 included high levels of price promotion by food manufacturers and retailers. So we were pleased to see all three of our operating segments post net sales and volume increases through the first half.

"In the second half of our fiscal year, we expect to deliver good sales and profit growth, fueled by ongoing product news and innovation, productivity savings from our holistic margin management (HMM) initiatives, and some contributions from pricing and mix," Powell said. "We see ourselves solidly on track to achieve our full-year sales and earnings growth targets."

U.S. Retail Segment Results Second-quarter net sales for General Mills' U.S. Retail segment totaled $2.85 billion, essentially matching strong year-ago results. Pound volume contributed 3 points of net sales growth, which was offset by reduced net price realization and mix. Operating profits for the second quarter declined 4 percent to $687 million, reflecting higher input costs year-over-year. Advertising and media expense was down 17 percent from a prior-year level that grew 29 percent.

Net sales for the Big G cereal division were 2 percent below last year's second-quarter sales, which grew 10 percent. Yoplait division net sales grew 4 percent, led by good performance from the Original Style Yoplait, Yoplait Light and Go-Gurt product lines. Meals division net sales grew 1 percent, including gains by Green Giant vegetables, Old El Paso Mexican foods, and Wanchai Ferry and Macaroni Grill frozen entrees. Baking Products net sales declined 1 percent from strong year-ago levels. Net sales for the Pillsbury division declined 3 percent. Snacks division net sales were also 3 percent below year-ago levels. Net sales for the Small Planet Foods natural and organic business were up 15 percent, led by Cascadian Farm cereals and frozen vegetables, and Larabar fruit and nut energy bars.

Through six months, U.S. Retail segment net sales grew 1 percent to $5.30 billion. Pound volume grew 2 percent in the period, and net price realization and mix declined 1 point. Segment operating profits of $1.30 billion declined 4 percent in the first half of 2011, compared to 16 percent growth in segment operating profit a year ago.

International Segment Results Second-quarter net sales for General Mills' consolidated international businesses grew 4 percent to $749 million. Pound volume contributed 8 points of net sales growth, foreign currency translation reduced reported net sales by 3 points, and net price realization and mix reduced net sales growth by 1 point. Net sales excluding foreign currency translation effects grew 7 percent, including gains of 17 percent in Latin America, 10 percent in the Asia / Pacific region, 7 percent in Europe, and a 1 percent decline in Canada (please see Note 8 of the Consolidated Financial Statements below for discussion of this non-GAAP measure). International segment operating profits increased 25 percent, reflecting the volume and net sales gains, along with favorable transactional foreign-currency comparisons.

Through the first half, International segment net sales grew 2 percent to $1.41 billion. Pound volume contributed 6 points of net sales growth, and foreign currency translation reduced growth by 4 points. Price realization and mix were flat in the period. International segment operating profit grew 13 percent in the first half to reach $151 million.

Bakeries and Foodservice Segment Results Second-quarter net sales for the Bakeries and Foodservice segment grew 3 percent to $468 million. Pound volume reduced the net sales growth rate by 1 percentage point, and net price realization and mix contributed 4 points of growth. Sales to convenience stores increased by 10 percent in the quarter. Bakeries and national restaurant account channel sales were up 3 percent, and sales to the foodservice channel were comparable to last year's levels. Bakeries and Foodservice segment operating profit totaled $77 million, down 13 percent from strong year-ago results due to lower grain merchandising earnings and timing of administrative costs.

Through the first half of fiscal 2011, Bakeries and Foodservice net sales grew 1 percent to $894 million, reflecting pound volume growth. First-half segment operating profits declined 3 percent to $150 million.

Joint Venture Summary After-tax earnings from joint ventures declined 9 percent to $35 million in the second quarter of 2011, as higher advertising and media spending, along with this year's increased service cost allocation to CPW, offset volume gains. Net sales for Cereal Partners Worldwide (CPW) grew 1 percent in the quarter reflecting volume growth. Net sales for Haagen-Dazs Japan (HDJ) increased 9 percent, primarily due to favorable foreign exchange. Through the first six months of fiscal 2011, after-tax earnings from joint ventures declined slightly, to $61 million in fiscal 2011 versus $62 million in the year-ago period.

Corporate Items Corporate unallocated items totaled $29 million of expense in the second quarter compared to $27 million of income in the period a year ago. This primarily reflects differences in the mark-to-market valuation of certain commodity positions, which increased $28 million in the second quarter of 2011 compared to a net increase of $67 million in the second quarter last year. Excluding mark-to-market effects, unallocated corporate items totaled $57 million of expense in the second quarter of fiscal 2011 compared to $40 million of expense in the period a year ago, driven by an increase in noncash pension expense. Restructuring, impairment and other exit costs totaled $1 million in the second quarter of fiscal 2011 compared to $25 million in the same period last year.

Net interest expense of $82 million was 8 percent below year-ago levels, reflecting lower average interest rates due to a shift to short-term debt from long-term debt versus the same period last year. The effective tax rate for the second quarter was 21.7 percent compared to 33.1 percent for the second quarter of fiscal 2010. The 11.4 percentage point decrease was due to the net benefit related to two separate tax matters (please see Note 7 to the Consolidated Financial Statements below for discussion of these items). Excluding the net tax benefit, our effective tax rate for the second quarter was 33.5 percent compared to an effective tax rate of 32.7 percent in the second quarter last year.

Cash Flow Items Cash provided by operating activities totaled $600 million in the first half of 2011, below year-ago levels due to increased use of working capital in the period. Capital investments totaled $284 million in the first half of the year, up from $258 million in last year's first half. Dividends paid increased to $366 million, reflecting growth in the dividend rate year over year. During the first half, General Mills repurchased 26 million shares of common stock, including 5 million shares repurchased in the second quarter. Average diluted shares outstanding for the second quarter were down 2 percent from the year-ago level.

Full-year Outlook Powell said, "Sales for our leading food brands continue to grow in markets around the world, because these products meet consumers' demand for high-quality, affordable foods that are great-tasting, nutritious, and easy to prepare. Our second-half plans include strong levels of product news and consumer marketing support, and we expect to deliver good growth across our businesses in this period."

The company reaffirmed its fiscal 2011 full-year EPS guidance of $2.46 to $2.48 per share, excluding the net tax benefit recorded in the second quarter and any mark-to-market effects. This EPS guidance represents growth of 7 to 8 percent from 2010 adjusted diluted earnings per share of $2.30.

General Mills will hold a briefing for investors today, December 16, 2010, beginning at 8:30 a.m. Eastern time. You may access the web cast from General Mills' internet home page: generalmills.com.

Earnings per share excluding certain items, total company segment operating profit, international sales excluding foreign currency translation effect, and effective tax rate excluding certain items are each non-GAAP measures.

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