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General Mills cuts profit forecast due to cost pressures; shares sink

U.S. packaged foods maker General Mills Inc. lowered its earnings forecast due to increased freight and commodity costs, sending its shares down by nearly 10%, despite reporting a surge in profit in the third fiscal quarter of 2018.

Net earnings attributable to General Mills more than doubled to $941.4 million, or $1.62 per share, in the quarter ended Feb. 25, from $357.8 million, or 61 cents per share, in the prior-year period.

The company's fiscal third-quarter profit was boosted by a tax benefit of $504 million from the U.S. Tax Cuts and Jobs Act.

Excluding one-time items, General Mills earned 79 cents per share in the fiscal third quarter, up from 72 cents per share a year earlier.

Revenue rose year over year to $3.88 billion from $3.79 billion, with net sales from the North America retail segment climbing to $2.52 billion from $2.50 billion. Net sales from the convenience stores and foodservice segment went up to $460.3 million from $448.5 million.

Meanwhile, net sales increased 10.7% for the Europe & Australia segment and 3.2% for the Asia & Latin America segment.

Shares in General Mills fell 9.47% to $45.20 in early market trading in New York.

General Mills Chairman and CEO Jeff Harmening said he was disappointed with the bottom-line results.

"Our third-quarter operating profit fell well short of our expectations, and cost pressures are impacting our full-year outlook," Harmening said in a statement. Operating profit increased to $592.7 million from $542.5 million a year ago. Total segment operating profit amounted to $628 million, down 6% on a constant-currency basis.

"Like the broader industry, we're seeing sharp increases in input costs, including inflation in freight and commodities. Because of our improved volume performance, we're also incurring higher operational costs," Harmening added.

General Mills is now expecting its adjusted EPS in fiscal 2018 to be between flat and up 1% from $3.08 earned in fiscal 2017. Its previous guidance was an increase of 3% to 4%. Constant-currency total segment operating profit is now expected to decline 5% to 6%, compared to the previous expectation of a range between down 1% and flat.

The company said it was planning various measures to mitigate rising freight costs, including increasing the number of its qualified freight carriers and using different modes of transportation.

"We are moving urgently to address this increasingly dynamic cost inflation environment. We've taken actions to improve profitability in the near term, and we've launched initiatives that will reduce our long-term cost structure," Harmening said. "While these actions will only partially offset the cost headwinds in fiscal 2018, we are confident they will strengthen our bottom-line results beginning in fiscal 2019."