• by Karlene Lukovitz  @KLmarketdaily, December 18, 2008

While factors such as the lingering effects of recent high commodities prices and consumer resistance to value-priced brands had some impact, both General Mills and ConAgra reported solid financial performance for their latest quarters on Wednesday.

General Mills reported a net sales increase of 8% to $4.01 billion for its fiscal '09 second quarter. However, net earnings were down 3.1% versus Q2 in the previous fiscal period, to $378.2 million. This reflected the effect of some commodity positions losses, as well as the sale of the Pop Secret microwave popcorn business.

Diluted earnings per share were $1.09, including a 49-cent net reduction related to mark-to-market valuation and a 22-cent gain from the sale of Pop Secret. Last year's second-quarter earnings of $1.14 per share included a three-cent increase from mark-to-market valuation of certain commodity positions.

All-segment operating profits grew 9% to $782 million despite higher input costs and a 21% increase in consumer marketing expenditures.

Net sales for the U.S. retail operations segment increased 10% to $2.79 billion, and operating profit increased 9.3% to $638.3 million, despite a 24% increase in marketing spend that included new ad campaigns for both launches and existing products.

The baking products segment saw 16% growth in net sales due to strong sales of Betty Crocker dessert mixes and Gold Medal flour. Yoplait's net sales grew 14%, reflecting good performance for Yoplait Light, Yo-Plus and Fiber One yogurts. Pillsbury's net sales grew 12%, led by Totino's pizza and pizza rolls and key Pillsbury refrigerated dough products.

For the meals division, net sales rose 10%, and Big G cereal net sales grew 8%. The snacks division's performance matched last year's despite the Pop Secret divestiture. Net sales for the Small Planet Foods division grew 26%, including results for the Larabar business acquired in June 2008.

For the first six months of fiscal '09, the company's net sales grew 11% to $7.51 billion, but net earnings declined 3.3% to $656.7 million. Diluted EPS was $1.88, including a 65-cent net reduction related to mark-to-market valuation and a 21-cent gain from the Pop Secret sale.

Overall segment operating profits increased 9% to $1.41 billion. U.S. retail segment net sales grew 11% to $5.08 billion, with pound volume growth contributing five points of the growth, and operating profits grew 10% to $1.16 billion.

Chairman/CEO Ken Powell said that General Mills will continue to "support the sales momentum in our businesses with product news, new product introductions and ongoing increases in consumer marketing investment."

While reaffirming an input cost inflation estimate of 9% and reporting that foreign currency translation is now expected to reduce reported sales and earnings for the year, General Mills increased its full-year earnings guidance to $3.83 to $3.87 per share, before impact from mark-to-market valuation and excluding the Pop Secret gain. Previous 2009 earnings guidance was $3.81 to $3.85 per share excluding those impacts.

At ConAgra, net sales grew 11% to $3.3 billion for fiscal Q2. This included 4.4% growth in consumer foods (to $2 billion) and 23% growth in commercial foods (to $1.2 billion).

Total operating profit for the period rose 7.7% to $408 million. Commercial foods increased 18%, to $155.5 million.

Consumer foods operating profit reached $252.5 million--a 2.2% gain on a non-comparable basis, but an 8% decline on a comparable basis (excluding $27 million in Banquet Pot Pie recall costs incurred in Q2 '08). The segment saw comparable sales growth of 4% due to price increases, but a 4% decline in unit volume.

The consumer foods profit decline reflected $170 million in input cost inflation and profitability challenges for the Banquet and Wesson brands, as well as overall volume declines. However, ConAgra CEO Gary Rodkin expressed confidence that "changes in our merchandising, slowing inflation and other planned operating changes will reverse this trend in the back half of this year."

For the full first half, ConAgra's total net sales rose 13.6% to $6.3 billion, including a 6.7% gain for consumer foods (to $3.9 billion) and a 27% gain for commercial foods (to $2.4 billion). Overall operating profit rose 6% to $728 million, including a 1.2% gain for consumer foods (to $439.6 million) and a 14.2% gain for commercial foods (to $288.3 million).

Diluted EPS from continuing operations for the second quarter was $0.38, an increase of 41% over Q2 '08's $0.27. ConAgra confirmed its full-year diluted EPS from continuing operations guidance of slightly above $1.50, excluding items impacting comparability.

"Financial analysts expected General Mills' margins to be a bit higher, but there's no arguing that they still showed a strong profit in dollar terms for the second quarter," comments Christopher Shanahan, research analyst, global chemicals, materials and food for marketing research firm Frost & Sullivan.

"And ConAgra's EPS actually exceeded analysts' expectations. These are solid performances for food companies--particularly when you consider the need to hedge the high input costs of this past summer, and the growing competition in supermarkets as consumers trade down on the products they're buying--although it helps that both companies have private-label businesses. Certainly, these numbers look particularly strong in comparison to the performance of companies in other industries."