US cereal giant General Mills has indicated year-end earnings will be higher than previously expected, but admits next year's outlook may be gloomy as rising commodity costs and interest repayments eat profits.
America's number two grain manufacturer said Wednesday it anticipates earnings per share to reach $2.90 for the fiscal year ending 28 May - slightly ahead of previous predictions of $2.80-2.85 per share.
This is mainly due to "modestly above target" operating performance, along with a favourable fourth quarter tax adjustment that added an extra 3 cents value per share.
But the firm acknowledges 2007 will be tough, and will set low single-digit targets for growth in net sales and mid single-digit growth in operating profits.
General Mills, famous for the Cheerios and Yoplait brands, said next year's earnings per share will be restrained by an estimated $40m increase in interest repayments, while a rising US business tax rate will also eat into profits.
Like many other food producers General Mills is suffering from rising costs, which are holding back profits, despite increasing sales.
Net sales for last quarter, ended 26 February, were $2.86bn, up three per cent on the previous year.
However, operating profit from its three segments increased by only $1m to $479m.
"Results for the third quarter met our expectations," said the firm's chairman and chief executive officer Steve Sanger.
"All three of our business segments posted net sales increases in the quarter. But as we anticipated, profit growth was restrained by higher input costs - primarily commodities and fuel - higher employee benefits expense and increased advertising investment," he said.
General Mills markets over 100 brands worldwide including Häagen-Dazs, Pillsbury, Green Giant, Old El Paso, and Wheaties. But the firm is dominant in the US cereals market, where it is second only to Kellogg's.
However, according to the FAO, world cereal demand is forecast to surpass supply in the coming 2006/07 marketing year, pushing down stocks to an uncomfortably low level and continuing the steady upward trend in prices. This is expected to affect grain producers around the world, not least General Mills.
The company's year-end results for 2006 are expected on 27 June.