General Mills Reports Fiscal 2009 Third-Quarter Results

Company Raises Full-Year 2009 EPS Guidance

MINNEAPOLIS, MINN.- General Mills (NYSE: GIS) today reported results for the third quarter of fiscal 2009. Net sales for the 13 weeks ended Feb. 22, 2009, grew 4 percent to $3.54 billion. Foreign currency translation reduced sales growth by 3 percentage points. Pound volume was 1 percent below prior-year levels that grew 6 percent. Gross margin for the quarter declined, reflecting unusually strong grain-merchandising profits last year and higher input costs this year. Consumer marketing expense grew 6 percent as the company invested in brand-building initiatives in markets worldwide. Segment operating profits totaled $560 million, below prior-year levels due to higher input costs, lower grain-merchandising profits, and the negative impact of foreign currency exchange. Net earnings for the third quarter include gains from mark-to-market valuation of certain commodity positions in both years, a gain from an insurance settlement in 2009, and the impact of a discrete tax item that represented a gain in 2008 and an expense in 2009. (These items are discussed in more detail in the section titled Corporate Items below). Diluted earnings per share (EPS) totaled $0.85 in the third quarter of 2009 compared to $1.23 in last year’s third quarter including these items. Excluding the items, EPS would have totaled $0.79 in this year’s third quarter compared to $0.87 a year ago.

Chairman and Chief Executive Officer Ken Powell said, “Our results this quarter reflect a difficult comparison against strong prior-year results, as well as significantly higher input costs in the current period. We’re pleased to see continued growth in consumer demand for our products in markets around the world, as third-quarter net sales for our U.S. retail operations rose 8 percent, and international segment net sales increased 10 percent on a constant-currency basis.

“In the fourth quarter, we expect our input cost inflation will be well below our estimated full-year inflation rate of 9 percent,” Powell said. “The benefits of this lower input cost inflation and an extra selling week this year will contribute to strong segment operating profit growth for the final quarter. The operating environment is very challenging; however, our good performance through the first nine months of fiscal 2009 has enabled us to modestly increase our full-year earnings guidance.”

Through the first nine months of fiscal 2009, General Mills’ net sales increased 8 percent to $11.05 billion. Pound volume contributed one point of sales growth, and foreign currency exchange reduced sales growth by 1 point. Segment operating profits grew 4 percent to $1.97 billion despite higher input costs, negative foreign exchange effects, and a 15 percent increase in consumer marketing expense for the year to date. Diluted EPS through nine months totaled $2.73 in 2009 compared to $3.19 in 2008. Excluding mark-to-market effects and the discrete tax item from both years, and excluding gains from the insurance recovery and the sale of Pop Secret popcorn in 2009, nine-month EPS would total $3.12, up 11 percent from $2.80 in 2008.

U.S. Retail Segment Results
Third-quarter net sales for General Mills’ U.S Retail operations grew 8 percent to $2.50 billion. Pound volume increased 1 percent from prior-year levels, which grew 8 percent. Operating profits grew 1 percent despite higher input costs and an 11 percent increase in consumer marketing investment.

Big G cereal sales grew 13 percent, including particularly strong increases by Honey Nut Cheerios and Multi-Grain Cheerios, Cinnamon Toast Crunch, and the Fiber One cereal franchise. Baking Division net sales rose 16 percent, including gains from Betty Crocker dessert mixes, Bisquick baking mix and Gold Medal flour. Pillsbury Division net sales grew 15 percent with contributions from Pillsbury refrigerated dough products, Totino’s pizza and pizza rolls, and new Pillsbury Savorings frozen appetizers. Yoplait Division sales grew 7 percent, including continued good growth for the Yoplait Light line of reduced-calorie yogurts. Meals Division net sales grew 5 percent led by increases from Helper dinner mixes and the new Macaroni Grill dinner mix line, Green Giant frozen vegetables and Progresso ready-to-serve soups. Snacks Division net sales were 4 percent below last year’s levels, which included contributions from the Pop Secret microwave popcorn business that was sold in this year’s second quarter. Net sales for the Small Planet Foods Division matched prior-year levels.

Through nine months, U.S. Retail net sales increased 10 percent to $7.57 billion. Pound volume grew 4 percent. Operating profits rose 7 percent to $1.65 billion despite significant input cost increases and 17 percent growth in consumer marketing investment for the year-to-date.

International Segment Results
Third-quarter net sales for General Mills consolidated international businesses declined 5 percent to $580 million, as foreign currency exchange reduced sales growth by 15 percentage points. Sales on a constant-currency basis grew 10 percent with pound volume contributing 1 point of growth, and pricing and mix contributing 9 points. International segment operating profits totaled $49 million, down from prior-year levels due to foreign exchange impacts and higher input costs. Through nine months, International net sales grew 4 percent as reported to $1.95 billion. Foreign currency exchange reduced sales growth by 6 points. Sales on a constant-currency basis grew 10 percent, as pound volume declined 1 percent, and pricing and mix contributed 11 points of growth. Operating profits totaled $207 million, essentially matching prior-year levels despite unfavorable foreign exchange and increased consumer marketing investment.

Foodservice Segment Results
Third-quarter net sales for the Bakeries and Foodservice segment declined 6 percent to $462 million. Pound volume declined 12 percent, reflecting difficult industry conditions. Operating profits were significantly below prior-year results that included unusually strong gains from grain-merchandising activities.

Through nine months, Bakeries and Foodservice net sales grew 5 percent to $1.53 billion and operating profits totaled $113 million. Subsequent to the end of the quarter, the company announced an agreement to sell a portion of its frozen unbaked bread dough business to Pennant Foods. The company expects to close the transaction and record a loss on the asset sale during the fourth quarter of 2009.

Joint Venture Summary
After-tax earnings from joint ventures totaled $16 million in the third quarter of 2009 compared to $30 million in the same period last year. Prior-year results included a net gain of $11 million from restructuring activities at Cereal Partners Worldwide (CPW), as well as a $2 million gain on the sale of our 50-percent share of the 8th Continent soy milk business.

Through nine months, after-tax earnings from joint ventures totaled $80 million in 2009, matching prior-year levels. Nine-month net sales for CPW grew 5 percent, with pound volume up 3 percent and favorable foreign exchange. Net sales for the Häagen-Dazs ice cream venture in Japan also grew 5 percent, as favorable foreign exchange offset a volume decline.

Corporate Items
Restructuring, impairment and other exit costs totaled $1 million in the quarter, compared to $5 million in the period a year ago. Total unallocated corporate items represented income of $46 million this year compared to income of $106 million last year, primarily reflecting mark-to-market valuation of certain commodity positions. In 2009, this includes the reversal of previously recorded losses on hedge positions that have now been reclassified to segment operating profit. During the third quarter, the company recorded a gain of $41 million pretax for the receipt of insurance proceeds related to a fire that destroyed a pasta plant in Argentina in fiscal 2008. The company intends to use these proceeds to construct a new manufacturing facility in the region.

Net interest expense for the quarter was $100 million, down from $103 million last year due to lower rates. The third-quarter tax rate in both years reflects the impact of court decisions on a discrete tax matter related to the company’s Employee Stock Ownership Plan (ESOP). On the basis of a U.S. District Court ruling last year, the company recorded a $31 million tax benefit in the third quarter of fiscal 2008. This January, a U.S. Court of Appeals ruling reversed the district court decision. As a result, the company has reversed the $31 million tax benefit recorded last year, along with $22 million in cumulative income tax benefits recognized over a period from fiscal 1992 to 2007. The effective tax rate for the third quarter including the discrete item in both years is 45.9 percent in 2009 compared to 32.5 percent in 2008. Excluding the discrete tax item in both years, the effective tax rate would be 35.5 percent in 2009 compared to 37.6 percent last year. Through nine months, the effective tax rate excluding the discrete item was 34.6 percent.

Cash Flow Highlights
Cash flow from operations through the first nine months of 2009 totaled $1.13 billion, up 24 percent from $914 million in the period last year primarily due to improved working capital trends. Fixed asset investments through the first nine months of 2009 totaled $351 million. Dividends through nine months increased to $438 million. On March 9, 2009, the company announced a quarterly dividend of $0.43 per share, payable May 1, 2009, to shareholders of record April 9, 2009. Through nine months, the company repurchased 18.9 million shares of common stock for a total of $1.23 billion. Average diluted shares outstanding for the third quarter totaled 340 million, down approximately 3 percent from last year’s third-quarter average.

Outlook
“We expect to finish the year on a strong note,” Powell said. “We intend to continue investing substantial levels of consumer marketing support behind our brands in order to help position our businesses for continuing growth in fiscal 2010.”

The company’s updated guidance for fiscal 2009 diluted earnings per share is a range of $3.87 to $3.89 before any impact from mark-to-market valuation. This guidance range also excludes the Pop Secret gain, the insurance recovery, the loss anticipated on the sale of the foodservice frozen bread dough business, and the discrete tax item. Previously, 2009 earnings guidance was a range of $3.83 to $3.87, excluding items.

In fiscal 2008, General Mills earnings per share excluding gains from mark-to-market valuation and the discrete tax item totaled $3.52, and the new 2009 guidance represents EPS growth of 10 to 10.5 percent from that base. Fiscal 2008 EPS including the tax and mark-to-market gains totaled $3.71.

Earnings per share excluding items, total company segment operating profit, earnings excluding items expressed as a percent of sales, and international sales excluding foreign currency translation effects are each non-GAAP measures. Reconciliations of these measures to their relevant GAAP measures appear in Note 7 to the attached consolidated financial statements.

General Mills will hold a briefing for investors today, March 18, 2009, beginning at 8:30 a.m. EDT. You may access the web cast from General Mills’ corporate home page at www.generalmills.com.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management’s current expectations and assumptions. These forward-looking statements, including the statements under the caption “Outlook” and statements made by Mr. Powell, are subject to certain risks and uncertainties that could cause actual results to differ materially from the potential results discussed in the forward-looking statements. In particular, our predictions about future net sales and earnings could be affected by a variety of factors, including: competitive dynamics in the consumer foods industry and the markets for our products, including new product introductions, advertising activities, pricing actions and promotional activities of our competitors; economic conditions, including changes in inflation rates, interest rates, tax rates or the availability of capital; product development and innovation; consumer acceptance of new products and product improvements; consumer reaction to pricing actions and changes in promotion levels; acquisitions or dispositions of businesses or assets; changes in capital structure; changes in laws and regulations, including labeling and advertising regulations; impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets, or changes in the useful lives of other intangible assets; changes in accounting standards and the impact of significant accounting estimates; product quality and safety issues, including recalls and product liability; changes in consumer demand for our products; effectiveness of advertising, marketing and promotional programs; changes in consumer behavior, trends and preferences, including weight loss trends; consumer perception of health-related issues, including obesity; consolidation in the retail environment; changes in purchasing and inventory levels of significant customers; fluctuations in the cost and availability of supply chain resources, including raw materials, packaging and energy; disruptions or inefficiencies in the supply chain; volatility in the market value of derivatives used to hedge price risk for certain commodities; benefit plan expenses due to changes in plan asset values and discount rates used to determine plan liabilities; failure of our information technology systems; resolution of uncertain income tax matters; foreign economic conditions, including currency rate fluctuations; and political unrest in foreign markets and economic uncertainty due to terrorism or war. The company undertakes no obligation to publicly revise any forward-looking statements to reflect any future events or circumstances.