General Mills fears effect of fuel prices

By Anthony Fletcher

- Last updated on GMT

Related tags: Net sales, General mills

General Mills' net sales increase of three percent to $2.66 billion
for fiscal 2006 first quarter has been dampened by fears that
higher fuel prices will put pressure on earnings for the rest of
the year.

The nation's second largest cereal maker reported that unit volume grew one percent worldwide for the 13 weeks ended 28 August 2005.

The solid results reported by General Mills, maker of cereals such as Cheerios and Wheaties, underline the fact that the company is back on track after a poor performance last year. Then the company raised prices faster than its competitors, forcing customers to defect to cereals made by rival Kellogg and own-brand cereals from retailers.

"Our problem was we got our [prices] a little high and we had to bring them back in line,"​ chairman Steve Sanger told the UK's Financial Times​. "We had a decline in cereal shipments that was offset by price realisation on cereals, so our overall cereal sales were flat."

Sanger now believes that the cereals division is back on track, and points to other sectors that have performed very well. Yoplait led net sales growth, with a 19 percent increase driven by Yoplait Light, with new items including Chocolate Whips and Yoplait and Go-Gurt Smoothies proving popular.

Meals division net sales grew 4 percent, led by Progresso soup and Green Giant frozen vegetables. Snacks net sales grew 3 percent, with good performance by the Nature Valley and Chex Mix businesses.

In all, segment operating profits increased 21 percent to $500 million, while earnings after tax totaled $252 million, up 38 percent from $183 million last year. Net sales for General Mills' consolidated international businesses grew 11 percent to $446 million while init volume increased 7 percent, and foreign exchange contributed 3 points of growth.

"Our year is off to a strong start,"​ said Sanger. "We are achieving our planned price realization and margin growth across all three of our operating segments."

However the company now faces a difficult challenge if it is to assert its dominance in the cereals sector. Its share price fall 10 per cent this year, compared with only 1.7 per cent for Kellogg.

In addition, the company has also acknowledged that the second-quarter is likely to prove tricky because of higher energy costs. "We expect to feel increasing margin pressure from rising fuel prices,"​ said Sanger.

This situation has of course been compounded by recent events. About 95 percent of oil output in the Gulf of Mexico was disrupted during and immediately after Hurricane Katrina hit, and the ensuing 30- to 40-cent per gallon jump in gasoline and diesel prices represents another significant challenge to the food industry, reliant on vital transport networks.

And with Hurricane Rita now threatening vital oil refineries in Texas, every industry reliant on competitive oil prices is jittery. However as went to press, oil prices were being scaled back from recent highs.

In any event, Sanger remains confident that the company will continue to target low single-digit net sales growth and mid single-digit operating profit growth for fiscal 2006. "We believe we can weather the challenges and achieve our earnings goals for the year,"​ he said.

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