June 28 (Bloomberg) -- General Mills Inc., the second- largest U.S. cereal maker, said profit rose 0.9 percent after soaring dairy and grain costs muted higher sales of new, healthier products.

Fourth-quarter net income increased at the slowest pace in a year to $224 million, or 62 cents a share, from $222 million, or 61 cents, a year earlier. Revenue climbed 6.9 percent to $3.06 billion, the company said today in a statement.

General Mills, based in Minneapolis, spent 16 percent more on advertising, including promotions for Fiber One snack bars and other new items. The company, which raised cereal prices this week, will charge more for Yoplait yogurt beginning July 2 and is curbing supermarket discounts to blunt commodities costs.

``They could potentially go further on prices in the face of what's happening,'' said Janna Sampson, who helps Oakbrook Investments in Lisle, Illinois, manage $1.4 billion, including General Mills shares. ``They're putting more dollars into marketing and are starting to realize gains.''

General Mills said profit will climb as much as 7.9 percent this year to $3.39 to $3.43 a share, behind analysts' estimates of $3.45. The company said commodity costs may rise 5 percent.

The shares fell $1.18, or 2 percent, to $58.27 at 4:02 p.m. in New York Stock Exchange composite trading. The stock has advanced 1.2 percent this year. Last year's gain of 17 percent was the best performance in six years for the maker of Green Giant frozen vegetables and Hamburger Helper dinner kits.

Earnings Estimates

Analysts estimated earnings of 63 cents a share in the three months through May 27, the average of 16 projections compiled by Bloomberg. Excluding one-time charges, the company met expectations, said Pablo Zuanic, a JPMorgan Securities analyst in New York who rates the shares ``underweight.''

Chief Operating Officer Ken Powell told analysts today General Mills plans a ``mid-single-digit increase'' in Yoplait yogurt prices on a percentage basis to counter dairy costs that have climbed 41 percent this year from a year earlier.

Rising dairy, grain and oil costs will drive commodity costs $250 million higher this year, after expenses rose $115 million in 2007. Half the increase, or $125 million, is covered by hedging, Chief Financial Officer James Lawrence said.

Corn prices jumped 62 percent in the quarter from a year earlier, after hitting a 10-year high on Feb. 26. Prices of wheat climbed 29 percent as yields were threatened by delays in harvesting winter crops in the U.S.

Writedown

One-time costs reduced profit by $41 million. General Mills wrote off $37 million to reduce the value of its unit that sells to bakeries, restaurants and other commercial customers. The company recorded a loss of $4 million from selling its frozen pie line and a plant in Rochester, New York.

U.S. retail sales rose on the debut of lower-sodium Progresso soups and the extension of the Nature Valley granola bars into cereal. General Mills added products with whole grains, including Fiber One snack bars, Powell said.

``We're quite confident that we have enough innovation and brand building to continue our momentum, even given the fact that input cost inflation is higher than it has been,'' Chief Executive Officer Stephen Sanger said in an interview.

Operating profit at the U.S. unit, the company's largest by revenue, declined 1.9 percent to $406 million because of the increase in marketing costs. Sales expanded 5.5 percent to $2.03 billion on demand for yogurt, soups and Cheerios, the top- selling U.S. cereal brand.

Outside the U.S.

International sales climbed the fastest, gaining 19 percent to $564 million on operating profit of $56 million, up 24 percent. Profit from commercial customers declined 3.2 percent to $30 million.

The company plans to increase its offering of healthier Progresso soups this year, with two new lower-salt flavors and a version with fewer calories, Powell said. It also will introduce healthier Yoplait yogurts.

In recent months, analysts questioned Sanger, 61, on General Mills' efforts to recoup costs after larger rival Kellogg Co., which sells Frosted Flakes, raised cereal prices 2 percent last year.

On June 5, General Mills said it would reduce the size of some cereal boxes to increase prices per ounce and to bring its prices in line with what competitors charge for their cereals.

The price increase amounts to about 3 percent, according to an estimate by Christopher Growe, an A.G. Edwards & Sons Inc. analyst in St. Louis. General Mills won't disclose how much it raised prices beyond calling it a ``small single-digit'' rise.

Costs for making and distributing the smaller packages will total $30 million, with most of the expenses in the next six months, Powell said. Yearly savings from the move are estimated to be $20 million.

Rising costs for fuel and other expenses have spurred Sanger to focus on reducing spending. The company eliminated slow-selling varieties of Pillsbury refrigerated dough and frozen vegetables while streamlining production. It reduced the number of pretzel shapes in Chex Mix snacks and the number of pasta shapes in Hamburger Helper in the past two years.

To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina, at cburritt@bloomberg.net.

Last Updated: June 28, 2007 16:18 EDT