General Mills Inc. (GIS) Thursday reported a 38 percent increase in quarterly profit, as the No. 2 cereal maker said that higher prices and lower interest expenses boosted results.

Earnings for its fiscal first quarter were well above Wall Street's expectations, despite a sharp drop in the amount of cereal the company sold, and General Mills shares rose 2.6 percent Thursday morning on the Inet electronic broker system.

Net income for the quarter that ended Aug. 28 was $252 million, or 64 cents per share, compared with a profit of $183 million, or 45 cents per share, a year ago, the maker of Cheerios cereal and Yoplait yogurt, said.

Excluding accounting for contingent convertible debt, earnings were 68 cents a share, the company said. On that basis, Wall Street analysts had been expecting earnings of between 54 cents and 58 cents per share, with an average forecast of 56 cents per share, according to Reuters Estimates.

Sales rose 3 percent, to $2.66 billion, General Mills said in a statement, while volume rose 1 percent. Overall volume, a measure that excludes price increases and currency fluctuations, was pressured by a 6 percent decline in U.S. cereal volume.

General Mills, like many U.S. food companies, raised prices last year to help offset a surge in prices on food commodities, fuel and other costs.

In June, however, the Minneapolis-based company said the price increase on its "Big G" cereals had led consumers to snatch up products by rivals such as Kellogg Co. (K), the world's largest cereal maker.

General Mills stock has done much worse than Kellogg this year, falling about 10 percent while Kellogg is down less than 2 percent. General Mills stock trades at about 15.4 times fiscal 2006 earnings estimates, while Kellogg trades at 16.8 times 2006 earnings forecast, though the two companies have different fiscal calendars.

Earlier this month, General Mills' chief operating officer of U.S. retail, Ken Powell, said cereal market share had grown steadily since hitting a low in April.

Interest expense for the quarter fell 20 percent to $90 million, largely due to lower debt levels, the company said. Restructuring costs were also lower, the company said.

The company stood by its earnings forecast of $2.78 to $2.83 a share for the year, including a 7-cent per share reduction due to accounting for contingent convertible debt.

Excluding the debt item, the forecast would be $2.85 to $2.90 a share. Analysts on average forecast $2.91, according to Reuters Estimates.

Chairman and Chief Executive Stephen Sanger noted that second-quarter earnings comparisons will be difficult, as earnings per share rose 20 percent in the year-earlier quarter.

"In addition, we expect to feel increasing margin pressure from rising fuel prices," Sanger said in a news release. "However, we believe we can weather the challenges and achieve our earnings goals for the year."