Aggressive Marketing Helps General Mills Beat Expectations

General Mills CheeriosA 13% increase in company-wide consumer marketing spend played a key role in helping General Mills perform above expectations for fiscal '08, according to detailed year-end results presented to the financial community on Wednesday.

General Mills did not break out FY '08 global or U.S.-only dollar marketing expenditures. However, for calendar year 2007, Nielsen Monitor-Plus reports total U.S. General Mills ad spend at $683.6 million--up nearly 14% from its $600.7 million spend in 2006.

The global consumer products giant reported that 14% fourth-quarter net sales growth helped push full-year FY '08 sales up by 10% to $13.7 billion, versus its original target of low-single-digit sales growth.

Fiscal '08 segment operating profits grew at 6% (versus a mid-single-digit target), for a 17.6% segment operating profit margin. Earnings per share (excluding certain non-cash items) grew 11% to $3.52, versus targeted EPS growth of 7% to 8%. The company returned approximately $2 billion in cash to shareholders through dividends and share repurchases during this latest fiscal, and has returned $5.2 billion to shareholders over the past three years.



General Mills' long-term growth model as adjusted in fiscal '06 calls for annual net sales growth in the low single digits, segment operating profit growth in the mid-single digits, diluted EPS growth in the high single digits, and double-digit shareholder returns.

The company has met or exceeded those goals for the past three years--and has substantially increased marketing investment in each of those years as well, including a 5% hike in fiscal '06 and an 8% increase in fiscal '07.

In addition to net sales gains, top-line growth for fiscal '08 came through a 5% improvement in price/mix, a 3% gain in pound volume, and a 2% lift from favorable currency exchange rates.

Even with 7% supply-chain inflation reflecting hikes in raw materials and other costs--and the bump in marketing spend--overall gross margin was at 35.7%, compared to 36.1% in fiscal '07, reported EVP/CFO Don Mulligan.

Chairman/CEO Ken Powell attributed much of General Mills' strength and continuing growth to its leading positions--both in the U.S. and worldwide--in food offerings that provide the health and convenience factors increasingly driving consumer purchasing decisions.

The company holds No. 1 or No. 2 positions in 12 categories within the U.S., ranging from dry dinner mixes to Mexican products, and No. 1 and No. 2 positions internationally in five categories (some joint-venture, some wholly owned). U.S. market share of General Mills-branded products rose 0.3 points last year, and its private-label U.S. share rose 0.1 points.

Powell also noted that the company's categories are staples with high percentages of household purchasing penetration, which bodes well even during recessionary economies.

He described the company's strategy as a "virtuous cycle": Continuing operational cost savings enable greater resources for consumer marketing, which in turn drive top-line growth and operating profit.

All three of the company's core segments--U.S. retail sales, international and bakeries/food service--showed gains for the year. Some highlights:

U.S. Retail Data
U.S. retail net sales grew 7% on a 3% volume gain to surpass the $9 billion mark for the first time. U.S. retail represented 66% of total company net sales and 48% of net sales growth for the year.

The three-year U.S. retail compound growth rate through FY '08 was 5%.

U.S. sales saw double-digit growth in all major retail channels except traditional grocery, where they grew in the mid-single digits. Operating profit rose 21.7%.

General Mills' "Big G" cereal brands saw net sales grow 5% and units 6%, and also increased market share slightly. Margins benefited from the "Right size, right price" strategy implemented a year ago, which instituted small price increases while decreasing box sizes.

The overall Cheerios franchise grew 8% in U.S. retail sales, including a 24% sales gain for Multigrain Cheerios between January and May of this year. Cheerios now has a 12% market share, compared to 5% for its nearest competitor.

Progresso ready-to-serve soups' dollar share rose to 34%, from 31.4% in FY '07, and first-year sales for the Progresso Light line exceeded $100 million. (New Progresso varieties being launched in '09 include five Light varieties with meat and a broths line.)

Grain snacks' dollar market share rose to 27.4%, from 24% in part through new offerings such as Fiber One snack bars, "indulgent" flavors of Chex Mix bars, and Cheerios Snack Mix. Honey Nut Cheerios Snack Mix will be launched in June 2009.

New products contributed 5.4% to U.S. net sales in FY '08, and approximately 55% of these sales were incremental. More than 60 new products will be launched in the U.S. in first-half FY '09.

In channels tracked by ACNielsen, plus Wal-Mart, the largest U.S. category gains were in grain snacks (+27%), ready-to-serve soup (+13%), yogurt (+10%), and frozen pizza and frozen hot snacks (each +9%). Frozen vegetables and fruit snacks each gained 5%, ready-to-eat cereal grew 4%, and refrigerated dough rose 3%. Only dinner mixes declined, by 4%.

FY '08 U.S. retail consumer marketing spend was increased by 12%--on top of 3% and 6% U.S. marketing spend growth in FY '06 and '07, respectively. (Trade cost per case decreased 6%.)

Ian Friendly, EVP/COO-U.S. Retail, reported that the marketing spend increase was a "key driver of net sales overall," and particularly important in driving non-promotional, baseline sales.

For fiscal 2009, General Mills is projecting the same or better growth in operating profit margin for U.S. retail. Growth will be driven by "holistic margin management" (protecting margins through reasonable price increases and significant operational cost savings, plus continued brand-building investment), continued focus on key consumer trends (health, convenience), growing retail customers, and further extension of major brands into new categories.

International Data
In international markets, combined net sales grew 21%--the company's fastest-growing segment--to reach $3.8 billion. Joint ventures such as Cereal Partners Worldwide and Haagen-Dazs accounted for $1.2 billion. International segment operating profit rose 25%.

The largest growth came in Latin America/South Africa (+28%), followed by Asia/Pacific (+15%) and Europe (+10%).

In addition to strong European performance, highlights included major success in greater China, solid cereal/grain performance in Canada, and top-line growth in Latin America.

This year, General Mills will continue to expand its international presence aggressively, with major focus on Haagen-Dazs (Eastern Europe, Turkey, China); Old El Paso (bringing successful items like Crispy Chicken to new markets) and Nature Valley (expanded distribution in Latin America/South Africa, and an expanded portfolio).

Bakeries/Food Service Data
Bakeries and food service net sales grew 11%. Gains were seen in cereals (+8%), yogurt (6%) and snacks (+4%). Food service sales within businesses and lodging are down, but sales within recreational, educational and health-care segments are up slightly or stable.

Company-wide, for fiscal 2009, General Mills projects 9% input cost inflation, mid-single-digit growth in net sales and segment operating profit, EPS of between $3.78 and $3.83, and a more than 50 basis-point gain in return on total capital.

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