General Mills has indicated that it anticipates a “meaningful improvement” in earnings during the final quarter of its financial year, with management insisting that it remains “on-track” to hit annual targets.
Announcing its third-quarter results today (23 March), General Mills reaffirmed its fiscal 2011 guidance of low single-digit growth in net sales and mid single-digit growth in segment operating profit. The group said that it expects to generate earnings per share of US$2.46-2.48, excluding a tax benefit and any mark-to-market effects – representing EPS growth of 7-8% from 2010.
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However, in order to hit these targets, management conceded that the group would need to increase the pace of growth in the final quarter of the year. During the first nine months of the fiscal year, sales and segment operating profit increased just 1%. Earnings totalled $1.48bn, up 12% on the back of a net increase in the mark-to-market valuation of certain commodity positions and a net tax benefit. Excluding these exceptional items, adjusted diluted earnings per share would have totalled $1.96 through the first nine months of fiscal 2011, up 4%.
Speaking during a conference call with analysts, chairman and CEO Ken Powell insisted that earnings are expected to increase at a quicker pace in the fourth quarter of the year. Management said that profitability would be driven by improvements on a number of fronts, including its Holistic Margin Management (HMM) programme, pricing actions and lower marketing and promotional levels.
General Mills has targeted long-term savings of $4bn from its HMM initiatives. In terms of earnings growth, Powell said that “productivity is the largest piece of the pie” but added that HMM was about more than cost-cutting.
“As we look at our HMM programme and our track record of being able to capture those savings and reinvest… the nature of our savings may be different from what people expect. There is an expectation that all these savings are through rationalisation and closures. We have looked at how we define value… and this is largely through innovation. We are not cutting so that our well goes dry and as we find a more stable platform we are able to see further innovations.”
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By GlobalDataLooking to the group’s ability to drive sales, management indicated that pricing would have an impact on dollar sales in the remainder of the year. However, the company added that pricing is just “one component” of its aim to deliver sales gains.
“When we think about pricing it is a proportion, but a low proportion, of that low single-digit sales gains target,” Powell revealed. “We are always looking at that being composed of some volume growth, some list price increases and some mix improvements. Pricing is a part of that – but it is not the main focus.”
Moreover, Powell added, the current “difficult” consumer environment moderates General Mills’ ability to push through price hikes without damaging volumes.
“The consumer does continue to be careful and you can see that in different behaviours – how they are planning, shopping lists, couponing. But the fundamental point of our business is the grocery store is still a great place to find value. As we take pricing action we take this in context of all the things we do to manage margins. Having said that we monitor inflationary trends and we think that we are going to need to include some pricing in some categories to manage these,” he said.
General Mills added that it expects to reduce spending on promotions and marketing in the fourth quarter. However, in terms of advertising the group was quick to emphasise that its marketing spend would remain high when compared to the industry average.
“Our advertising last year was up nearly 30%, so we had really very significant increase in adverting spend and we [are now] lapping a very strong period. While we will be off a little bit, we will still be at very high levels and we think that this is really at an appropriate level,” Powell insisted. “There is very good advertising impact this year and we have made adjustments for the intense merchandising levels that we have seen. We think that this will moderate.”
General Mills’ shares slid 2.19% following the group’s results release, declining to $36.10 at 4pm GMT.
