通用磨坊 (GIS) 2002 Q2 法說會逐字稿

Hello, everybody. Most of you know me, but for those of you who don't I'm Chris Wenker. I'm here with Stephen Sanger. Our CEO Jim Lawrence. With us are Joel Rolston and Janice Gustison. We'd like to thank everyone for being here and joining us for this call today. General Mills announced their second quarter results earlier. Hopefully you all had a chance to review that press release. The presentation will include forward-looking statements. Actual results may differ. We ask you to refer to the press release. Also for those of you listening on the conference call or the webcast, slides that accompany Steve's remarks are available on the website. Let me turn you over to Steve.

Thanks Chris and welcome, everybody.

It hadn't been very long it doesn't seem like since I had the chance to talk to most of you out in Minneapolis, I guess, a little over a month ago. We gave you a very much of an up-close look at the General Mills. And so what I can go today is update you on how things are going and also on our results for the second quarter, which, as Chris said, we just released. I would summarize our key points this way -- first, our second quarter results didn't meet our expectations. We had on-target results from pills bury. Second, as a result of that, General Mills is on track to achieve the objectives we have set out for fiscal's 02, our current -- [ no audio ] Is the Mike off? No, okay. There we go. Good. Okay. Did somebody not believe what I said? Before I review the details of our second quarter results, I should clarify things for you, these are not quite as simple as some of our reports in the past. Our reporting results include three weeks of Pillsbury domestic operation. November 1st through the 25th. On November 9th, our international results are going to be consolidated on a one-month lag. There are no Pillsbury international results in this quarter and remember, also, that there were General Mills businesses that were divested to international multifoods during November. They were sold on November 13th and so we only have a few days of them throughout -- we have up till November 13th for them in the quarter. So that's what is in and what's out.

When you total all that up, on this basis, second quarter sales grew 24% to a little over 00:12:40.855.3 billion and our earnings before interest, taxes and unusual items grew 6%. Now, that's adjusting prior results to eliminate the good will amortization. Earnings after taxage the same basis were 5% below -- let had he make sure I got that right. That is adjusting for the good will amortization. Earnings after tax on that same basis were 5% below the prior year. That reflects the increased interest expense and a higher tax rate. Average diluted shares outstanding increased by 10% for the quarter to 318 million shares. With that higher share base, diluted E.P.S. before unusual items and comparable for good will declined 13%, the 63 cents per share for the quarter. For six months, diluted E.P.S. on the same basis declined 4% to time.24. Obviously, our reported revenue growth is inflated by contributions from Pillsbury businesses during that three weeks and our businesses that have since been sold to I.M.C. If you exclude those sales, our top line grew 3% to just over time.9 billion. That sales growth was driven by continued unit volume growth by General Mills heritage businesses. In total, our second quarter domestic growth was up 3%, as was our worldwide unit. For six months, our worldwide volume was up 4%. Within those total figures, the serial volume was up slightly, for the quarter and it was flat through the first half. Combined Betty crocker was off 2% for the quarter. Within that total, baking products volume was even with a year ago, side dish volume was up.

Meals volume was down in the quarter and that reflects the introduction of at least two new competitive lines of chicken dinner mixes. Through the half year, however, total Betty Crocker volume is running above year-ago levels. Convenience foods, yogurt and snacks continues to be our strongest performer. It grew again at a double digit rate for the quarter as well as toward the year to date. Snacks and yogurt both posted strong gains. And General Mills heritage Foot Service led its growth, led by gains in the convenience store and vending sales segments. Outside of the U.S., our 100% owned international businesses grew 8% in the quarter and 11% for the first half. General Mills China and U.K. showed strong growth. Two international joint ventures also had good growth, up 6% and 7% respectively for the quarter. So combined international unit volume including our joint ventures grew 7% for the quarter and 9% for the half. Now let's move down the income statement. Both cost of goods and S.G. & a reflect the inclusion of Pillsbury. We can't separate out old General Mills in these numbers after October 31st. I say the cost of goods would likely have been up slightly for old General Mills as a percent of sales for the heritage General Mills businesses since we are carrying higher inventory levels in some businesses. However, the addition of Pillsbury, whose Gross margin historically has been lower than our level. Similarly, Pillsbury's S.G. & A. has been a bit above. A percent of sales was up slightly from last year due to the higher debt levels associated with our acquisition and subsequently purchased a 55 million shares from viago.

Our tax rate also reflects the impact of the acquisition, excluding unusual items, the effective tax rate was 38.2% for the quarter. That's up nearly 300 basis points year-to-year including an increase in the estimated annual rate as a result of the acquisition. We're anticipating a full-year tax rate of 37%. After-tax profits from our joint ventures totaled just over $3 million for the quarter. That's below last year's total of $5.9 million. There's two reasons for that. Europe's earnings were lower in the period. This is a venture that operates on a calendar fiscal year as does PepsiCo. S.P.E. is on track to deliver strong annual earnings gains, so they took advantage to invest some end of year spending for new products and sales initiatives in several European markets the second reason join the ventures declined for the quarter, this includes development spending associated with two new joint ventures. Eighth with ask our joint venture with Dupont. Both of our international joint ventures, however, are performing very well. Crunch C.W. is completing its tenth year of operations. Their unit volume is up 10% for the calendar year through November. Their largest business, united kingdom, continues to grow with unit volume up 6% for the calendar year to date and cereal partners U.K. has gained a point of share versus last year as well. Other European markets are also doing well, as is south America and Asia. C.P.W.'s breakfast bars continue to exceed expectations. Again, this reflects continued good growth in core markets like Belgium and Holland, as well as gains in eastern Europe.

According to the balance of shares outstanding, you'll recall as part of your agency commitments, with we do not expect to purchase any significant amount of company stock through fiscal 2004. We do, however, have outstanding put and call options. This quarter, we purchased 800,000 shares at an average price of $27. We also issued a net 79 million shares to diageo in the quarter, bringing diluted shares to 318 million. At quarter end, the balance for actual basic shares outstanding, that's actual basic shares outstanding was 365 million shares. So, here's our bottom line -- diluted E.P.S. excluding unusual items for the second quarter was 63 cents. That's down in percent from last year, as reported. We add back to good will, the E.P. is is down 13%. This quarter also included 22 cents per share of unusual expenses related to the acquisition. Earnings per share comparable for good will is down 43% to 41 cents. So the half, diluted earnings per share, excluding unusual items was down 1% with good will amortization added back to last year's first half, the diluted E.P.S. is down 4%. That will be unusual items, earnings for shares comparable for good will is down 13%. I'm sorry for the litany of different numbers, but we're trying to make clear what's where and how the earnings per share is built. Let me also give you a breakdown of the 22 cents per share unusual expense. We had just under a penny of income from insurance settlement proceeds from the quarter, which was part of our settlement from the old 1994 old Smith handling incident.

They recovered over 100 million net of associated costs from this insurance settlement. -- transaction expenses total 22 cents per share in the quarter and there are two main drivers of this transaction related expense. One is integration expenses, primarily severance of 5 cents a share and the other is 17 cents a share due to restructuring of our cereal manufacturing operations, which are related to a retirement to provide the Toledo, Ohio plant to international multifoods. And you'll recall that that plant in Toledo manufactured baking mixes and cereal. In transferring that to multifoods, we need to remove the cereal operations from Toledo. The vestiture, we'll be shifting cereal production to five other facilities which are already cereal manufacturing plants for us. In total, the second quarter expenses represent just under half of the $230 million to $250 million in transaction-related unusual costs that we've estimated for the full year. Now, I'd like to spend a few minutes updating you on our integration efforts. We've assembled a strong integration team that reports directly to the senior management. It meets weekly and reports daily on our intranet site. We are pleased with the progress we're making on integration to date. We had identified 215 critical action items to complete within the first 100 days. 40% of those are done, all but a couple are on schedule to be done on time. And nothing that isn't very much within the realm of what we expected it to be. And there's a couple that I point out to you, because they are particularly noteworthy. First, we have completed the international multifoods transaction, the divestiture that was mandated by. F.T.C. Secondly, our sales force called on all of our customers to introduce the new sales teams.

They were identified right at the start. I'll talk about that more in a minute. We've made significant progress relocating staff to get work teams physically located together. Many of you know there are two headquarters buildings in Minneapolis, the old General Mills and the old Pillsbury headquarters building. Our goal is to get people who are working in relevant businesses working together. We have moved, for example, all of the Pillsbury U.S. consumer foods marketing folks out from downtown to our offices already. We have moved the General Mills food service people downtown. In total, we have moved 1200 people in the Minneapolis area alone in the past 50 days. And while it may not sound like a big deal, it's actually quite critical. We have launched a common computer and E-mail platform and now have one online integrated phone directly, so our people can actually find one another, no matter where they came from. Let me spend another minute talking about sales. I think the early integration of that is absolutely critical. We're having successes there and we're right in the middle of it. It's very important. On November 1st, we implemented our sales organizational structure. We got plenty of time to plan it so we're able to implement it right away. We brought together a total of 1500 people into these new teams. That's up from 1200 people before. This new sales force assumed the direct sales responsibility for heritage Pillsbury businesses, many of which had been handled by a broker before. Today, General Mills sales force are calling on trade customers to represent all 1300 items in 25 different categories, which is up substantially from the workload and product load they had before. Taking on that expanded role, while maintaining our high levels of customer service.

The one thing we wanted to make sure is that the customers didn't see any service-related issues, particularly in this time of year, which is a critical time for baking products for both companies. We have maintained that 99% plus level of customer service. A selling responsibility, there are two things that I should point out to you, things that we had, but I want to make sure you understand them. First, Pillsbury and its broker force obviously had incentives to drive strong volumes through the close of acquisition. They did just that. In October, U.S. retail volume growth was quite strong for Pillsbury, the last month of old Pillsbury. We're seeing the predictable after-effects in November and December shipments. In contrast, Pillsbury Food Service trends are actually improving with both October and November up 2%, versus a year-ago comparisons. September had been lousy for Pillsbury in every other major food service supplier in the wake of September 11th. We're encouraged by the continued improvement in those trends. Pillsbury International also had a strong October with volume up 4%. We really don't have anything to report for November as yet. The second thing I mentioned that affects our sales force is that while Pillsbury brokers sold the merchandising, sold the plans to drive those businesses through December, because it takes time on that stuff, it's up to General Mills sales organization, the new one, to present that merchandising and sell it and execute it for January and beyond. So looking ahead to the third quarter, we will be converting the Pillsbury businesses to a common equivalent case factor. So we'll be able to report them to you starting in the third quarter on a combined unit volume basis for all of General Mills. You'll get third-quarter volumes for General Mills in total and we'll talk to you about what they are for the various General Mills divisions.

What I would tell you is that in total, we expect to deliver low single digit unit volume growth in that period, the third quarter. Hitting that target is going to require we begin to build merchandising momentum for the Pillsbury heritage brand in January and February. We're working hard to do that. Next quarter will also begin segment reporting. Our business segments are U.S. retail, bakery and foods service and international. We expect food quarter diluted earnings per share before unusual items will range between 40 and 44 cents per share. That compares to 56 cents, adding back in last year's third quarter. You're all thinking that will require a pretty strong fourth quarter for us to meet our annual objectives and that's right. That's the way we see this year developing, as we gain traction with our selling efforts behind the Pillsbury Heritage brands and as the synergies we have planned and we believe strongly and confidently we will achieve this year, begin to kick in, most of those affect fourth quarter. We talk now about the product and merchandising plans that we have coming. We have a solid line-up of activities in the months ahead and a highlight some of them for you today. I'll start with U.S. Cereals. I start this by saying, Wal-Mart stopped providing scanner data to Nielson and I presume to I.R.I. this fall. The published consumer movement data understates the growth rates for virtually all of our categories. What we tend to do is develop a model to use the consumer panel data to compensate for that and provide a projection of what trends are, including Wal-Mart. That projects ready to eat cereal and for all outlets to be up 1% for our fiscal year to date, which is about 200 basis points better than the Nielson reported data, which excludes Wal-Mart.

That seems logical to us. Our share of cereal category is up slightly for the date, exceeding 32%. Our pound share is up slightly as well. We're getting new products, in particular, harmony, chex morning mix are performing well. Remember, this share that we get in cereal does not include milk and cereal bars which Nielson tracks in the snack category. After a launch earlier this fall we'll have frosted mini wheats completing in February. As Mark Belten told those of you who were present last month in Minneapolis, we're getting good performance from most, not all, but most of our top ten established brands, cheerios, kix, Cinnamon Toast Crunch and Honey Nut Mix. Honey nut cheerios which posted share growth in the first half is looking forward to a stronger second half. You'll see us break heart health news on this, which is the second largest brand in the General Mills stable. We have reformulated the product to provide the same cholesterol lowering benefit as yellow box cheerios. We know from what we've observed on yellow box cheerios and from Oatmeal Crisp, that this is a very powerful motivation for consumers and we expect it to drive share gains on Honey Nut Cheerios as well. Talking to meals products, we have new products coming out in our new enlarged meals division. Hamburger helper is launching old El Paso flavor in January.

And seasoned taco meat. These are tubs of taco meat, both beef and chicken, which are sold in the refrigerator case, much like Lloyd's barbecue. All you have to do is buy our tacos, buy our meat, the other stuff we sell and you have to do almost nothing to make tacos, which is something every family should have at least once a week. So these two products represent our first initiatives, which combine Pillsbury brands and General Mills brands or capabilities and you'll see more of those in the months and years ahead. We also have a new S.K.U. of a very successful Bowl Appetite. Turning to baked goods, many of you mentioned that you've seen a lot of advertising for Pillsbury baked goods on TV. This is the time of year you should expect to see it. It's a period of peak market activity. Consumer sales trends are strengthening on this business. For the total line, the Nielson data shows Pillsbury refrigerated baked goods dollar sales are up a little over 5%, which is better than the 12-week growth trend and considerably better than the 52-week decline trend on those businesses. That's just four weeks. We have to see that trend continue. The newest Pillsbury line, which is freezer to oven baked goods is performing very well. Pillsbury first rolled out frozen biscuits regionally back in the middle of 2000. In July 2001, that line was expanded nationally and sweet rolls, cookies and dinner rolls were added. There's up to seven S.K.U.s. Distribution is very strong. It's around 90% and gaining share in a category that is growing double digits.

And like refrigerated baked goods, you saw strong support behind meat lines as well. They are more convenient in that they come a resealable bag. You can bake up one, two, or three, or however many you want. The quality is outstanding. So we think there's great growth opportunities for this Friesen-to-oven business. Our snacks division was led by strong gains in our salty snacks business. We launched our first salty snack in October. We took the opportunity to improve our retail merchandising system on all our salty snacks. You can see in the snack section photo shown here on the right that you will see many more sections that look like that for the warehouse delivered snack sections as you go store to store, since we have undertaken that effort. They have given us good momentum going into a key period of salty snacks, which is our January, sit in front of the tube and watch the NFL playoffs and super bowl season. We have major advertising efforts planned in January to make sure consumers bring home our salty snacks for the super bowl parties. It's just not the Pillsbury Heritage snacks. It's a key season for Totino's hot snacks as well. Kids can win a weekend with Brian Billick with the Baltimore ravens. That's, again, to the right on your screen here. Yogurt continues to be a great category for us. Our 6 ounce business continues to outpace the category. Our total yogurt business is up 15%, coming from kid products and our express yogurt in a tube.

In January, a new product will be in the stores. Some of you had an opportunity to try whips back in November. You know how good this product is. It's a light and fluffy mousse mousse-like texture with air whipped into the mix. We are launching six S.K.U.s and the customer accepted surplus has been terrific, given the success of our other lines. This is the one time in the year when consumers resolve to eat healthier for at least a month. And so -- this is a good time to bring in a new yogurt item. Whips is the latest reason we are excited about the future of the yogurt business. This is from the new product innovations that are bringing forth. I mentioned the merchandising initiatives that will be on the plate in the short term. The first of those is the Pillsbury bakeoff, which is targeted to go in February. Consumers have to use Pillsbury products in their original recipes. Those fit into one of four categories. This is an icon event. It happens every other year. It has extraordinary consumer awareness and great customer awareness as well. You'll see the efforts on products soon. And we also have a multibrand Olympic promotion this winter as well. We are the official Olympic supplier in most of our categories. We've learned that the most effective way to be involved with the Olympics is through in-store events and product innovation. That's what we're planning. We have three in and out products, a fruit snack item, and fruit clusters, as well as a Betty crocker Olympic cookie kit. We're running integrated promotions across the refrigerated and frozen aisles as well, including yogurt as well as others.

We have good product innovation and merchandising innovation to help us sustain our volume growth through the innovation period which will be a challenge for us and our sales organization. Let me give you updated estimates now on things that will help you if -- with your analysis of fiscal year 2002. First, we expect depreciation and amortization of roughly $300 million for the year. We continue to expect interest expense in the range of $440 million to $450 million. Although, I would say, it probably would be closer to the lower end of that range. We're still expecting a tax rate as I said earlier, of 37% for the year. For capex, we're estimating $580 million to $600 million for' 02. The fixed expenditures should be around $470 million. Maybe a bit above that. The remainder is primarily captain vestments related to to the acquisition. That includes construction costs for expanding our headquarters building and information systems costs to integrate Pillsbury into our S.A.P. system. For E.P.S., we continue to expect between 00:38:00.332.15 and 00:38:02.332.20 a share. And longer term, as the integration progresses and synergies kick in, we expect to see faster growth with E.P.S. in the range of 00:38:13.035.85 to 00:38:14.566.95, in fiscal 2003 and 340 to 350 in 2004. Our plans call for at least 14% compound in growth in earnings per share from the base of 00:38:30.456.28 which we recorded in 2001 before the acquisition of Pillsbury.

So to summarize, second quarter results met our expectations, our integration activities are going well, we're on track to achieve our 2002 objectives and long-term growth prospects we continue to believe are excellent. I'll be happy to take questions. I think we should start with questions here in the room and then we'll switch to questions from the conference call, Chris will be the traffic of all this.

Thank you, very much. Keep those hands up for a minute. Vanna is coming. I'm going to ask you, please, first of all, wait for the Mike. I'm going to try and introduce everybody. If I fail to say your name, would you please say who you are. Let's start with Dave Nelson right here.

David Nelson, first Boston. On food service, you posted a 6% increase, I guess that's combined with three weeks of Pillsbury where you said -- volumes were up 2%. What are you doing in food service that apparently everybody else isn't first of all? And second of all, Pillsbury had weakness in food service earlier this year, as was reported Sean you had talked about that in your meeting, but a couple customers were lost, you know, intentionally. What progress is being made there to recapture that customer-to-customer if you want?

Let me correct your characterization of the 6%. That's General Mills Heritage only, no Pillsbury yet. General Mills food service is -- it's key businesses are vending and convenience stores of which -- which have been doing fine. That's been the biggest driver in that 6%. A big part of our business is schools. Schools really weren't affected by September 11th. And the colleges and universities really weren't affected dramatically by September 11th. The character of General Mills food service business is not the kind that would have been as affected by the traveling, hotel kind of downturn that that really hit a lot of food service operators around or even the commercial restaurant business. That hit a lot of food service marketers around September 11th. Pillsbury had a lousy September. They felt it big time in September, and they have been struggling because of the things you cited before that. But they have been building that back, adding customers, you know in chunks. This Pillsbury food service business has been a dynamic growth business over the longer turn. Double digit volume growth business over the longer term. I think you should view the weakness they had in their calendar 2001 as more of an aberration. We would expect as the year goes forward, there's a good chance that business will strengthen further further.

Let's go to bill on the other side of the room.

about 25% drop in earnings for the third quarter. If you look at the other projection, you're citing estimates of 20% gain. Can you be more specific as to how you see such a wide deviation in such a short period of time?

Most of the integration activity is driving a lot of the things that were happening within General Mills. We are expecting that the fourth quarter will be the prime beneficiary of the synergies that we achieved this year. We talked about at least $25 million in cost synergies. That's something we're very confident we'll get. We think that largely will impact the fourth quarter. We also are going to need to build traction, in which Pillsbury Heritage businesses from a selling standpoint, we aren't able to influence that until January. December is -- whatever merchandising there is in December, really is the result of what was done by the prior organization. And our December volumes are like the November Vols you saw in the Pillsbury Heritage stuff. They are weak. But as we get into January and moving up, we believe that we will begin to gain that traction and begin to gain volume momentum, and that that will be stronger in the fourth quarter than the third. So that's really the two, I'd say, main factors that cause us to see the year breaking that way.

Did you mention synergy?

Did I mention synergy?

If you have a question, follow by the four at this time.

Have the changings in the second quarter changed at all? I don't think you discussed third quarter versus fourth quarter. Has there been any change versus your original expectations?

We didn't have quarterly expectations, Erika. We had the full-year expectations and second half were as a function of what we thought the second quarter was going to do. So I wouldn't really say anything has changed. We just have a better view now of what we think it will be.

Can you give us I guess forecast for the length and the quantity of investment that we should expect in insight and also AIDS con continuant going forward.

The length and quantity of investment and insight tools and AIDS con continuant?

I guess I can take a stab at starting to characterize a little bit. First of all, inside tools would be a more moderate undertaking here, because remember what that is. We are working with a company who has established expertise in conducting market research. And we brought expertise to that task as well. There's a piece that has to do with offering those INTERNET-based skills to third parties. What you're seeing in the second quarter and what you will see for fiscal 02, that is a year one introductory marketing spending burden underneath the products that we've induced. You'll recall that's currently in the east and west coast markets. And so you mitt have seen that there. You ought to look at this in the context of a year one introductory marketing spending burden. Is that helpful?

I would add that our join the venture line, those two things affected the second quarter, they'll there will be another thing that's affected in the third quarter, which is the Haggen Dazs. Which will contribute earnings to that line, which is in excess of what the two investment ventures would pull out. We would expect to see a strong in the year-to-year growth in that line, once again in 02 and strong year-to-year growth for the two ventures that you've been following, S.V.E. and C.P.W., although not a five-fold increase like we saw last year, but a strong double digit increase.

Let's go right next door to Katzman min. I'm trying to be fair, folks.

First, the capex numbers that you cited for this year are well above from what I was thinking. Are you pulling something in from fiscal 2003 and what kind of investment are you looking at? Second question, if we, like last year, for example, I excluded your vitamin settlement of two cents. To actually, your ebib was up 2%. Apples to apples, if you exclude that, is that accurate? And third, it looked like your -- is it accurate to say the U.S. retail business in September was up about 12%? Because you said 12% in September, 7% and then in October and then down 10% in the last month? Is that a fair way to look at it?

I'm going to ask for pieces on that.

Let's take the last one first. Are you talking about the Pillsbury U.S. retail? I don't know that we -- [ No audio ] I'm sorry. That was misunderstood. That's the October up, November down. That's Pillsbury's U.S. retail shipments. Pillsbury's U.S. retail shipments. Just trying to illustrate there they had a strong October. As they drove for their incentive goals at the end of the acquisition period. That goes through November and continues through December. With respect to the captain vestments question, I'll ask Jim to comment more on that. Go ahead, Jim.

The guidance which we're giving you here includes the normal capex for Heritage Pillsbury and General Mills which is about 450 to 270, that is indeed not changed from what Steve suggested when we last were together a month ago.

The additional expenditure, though, which we're citing here relates to money spent on information systems. We are making compatible the I.S. system of Pillsbury, which was already moving towards S.A.P., but we're completing that move and we're having it conform to our S.A.P. system. And as well, we're in the process of adding office space in golden valley, where the heritage General Mills headquarters are. And we are intent on them moving the Pillsbury people, who are downtown in the Pillsbury Tower out to Golden Valley when that's completed. That will be a positive M.P.V. investment. With no calculation of the benefits from having everybody in one place, which we think, frankly would be the greatest benefit that we'll get from that. As to the I.S., investments, they are critical. Essential investments in order to run a combined company. So we don't specifically look to calculate the returns on them. As to the regular capital expenditures for both Heritage Pillsbury and Heritage General Mills, they have both exceeded the hurdles that we've set for the type of capital that -- we've

never given guidance to what exactly those return expectations should be, but they are all richly shareholder value enhancing.

Let's come over to this side. Susannah. I'm going to work through people here. I'll start here.

Two questions, Steve. One is on the workdown of the Pillsbury product, the retail that was sold in through the broker network. When will that be completely worked through? When will you see your shipment of Pillsbury products match retail takeaway of those products? Secondly, cow give us a sense of what the big shipments were in the second quarter, excluding the milk and cereal products were?

The last one first again. I believe the big g shipments, excluding milk and cereal bars were probably down a%, Chris, would that be --

We low 1%.

On a question of how long it would take to work through inventory, I can't really speak to that. What I would say is that, we anticipate that our January shipment -- I think I'd be very disappointed if January shipments didn't at least match consumer sales. January going forward we will have our sales organization managing the merchandising execution at that point. It will be after the end of the year when retailers -- you know, retailers do bring their inventories down toward the end of the year. That's my instinct for it. Again, I'm predicting things that are sometimes hard to predict. I'd say that we're see something thought in November and December on the Pillsbury Heritage items to a greater degree than the General Mills Heritage items. I'd contribute that to those factors. We are really selling the whole thing, I think we should see the trends line up.

Let's take John and we'll go to Jaine next.

By calling it heritage General Mills instead of old General Mills, you've again showed your marketing prowl. A couple of questions, I'll ask them one at a time. First of all, to answer Eric's question, Jim, would you target '03 cap spending at this early date in the 450 to 470 level?

I don't know that we're ready to give guidance for '03 in capex. If we maintain that, that would be correct, but we're going into our planning season in January, where we put together our plans. And we're going to have to look across business by business and see what opportunity there's are before we can total it up.

I would average, we should presume some additional building-related capex. He's talking to you when we're at capex. This building project to expand the headquarters, you should reasonably assume we'll go beyond '02.

I think --

The information systems probably bridges as well. I'm thinking of the building project.

When Steve --

When Steve talked about the 5% volume gain for Pillsbury baked goods.

5% dollar sales.

Is that for a select line?

That's the entire refrigerated baked good lines in the last four weeks.

It's a better number.

Is it. It's 3% for the latest 12 weeks even it was down for the latest 52 weeks. That dollar sales in Pillsbury had taken price advances in these categories. I'm not sure exactly when, but I know it was within the past year. Those dollar sales figures are discernibly better than the volume, the unit volume. Nonetheless, the strengthening trend --

When you're talking about volume in the third quarter of very low single digits, you're using pro forma Pillsbury numbers as well?

Yes.

We're going to be able to have everything on the same equivalent case basis then.

Nothing left out.

My last question, there was minor insider selling, only time.5 million, but it came from people I happen to respect. It came a week after your analysts' meeting. Were there handcuffs put on these General Mills people during this prolonged period? If you could comment to the subsequent you can on the selling?

Wow, I'm not aware of any significant insider selling. If you look at our ownership by General Mills executives, it is -- I'd line it up with just about anybody else. Are you aware of what John is talking about there?

I wasn't, but in answer to your question, do we have policies wherein people have access to material information has not yet been shared by the street, yes, of course. I didn't know if you were -- [ no audio ]

I think one of the guys bought a new house. [ no audio ]

If you want to make weekly taco night a really good thing, could you send someone over to my place to cook them up for me? That's really convenient.

Jane, you can do this.

I don't know if I can do it, it's still hard. You were kind enough to shed insight on the volume -- the sort of underlying three months for Pillsbury. You gave a little commentary that the Gross margin for Mills alone was probably down slightly. Can you give us any idea of what a pro forma, all year bit would be have for the two businesses together in the quarter.

I really can't. I don't think any of us could. We never added that up.

No. I do know that we will have similar up to date perform ma numbers than were included in the deal proxy a few months ago, but I believe the quarterly data that's in there is probably more like through August. I apologize for not knowing off the top of my head.

What are you assuming about dough margins into '03? Obviously, we're questioning what Sara Lee will do and how you'll respond. Are you being conservative about some sort of defending your share kind of scenario up front or -- I just don't understand what the sensitivity or significance is.

In our planning, we have factored in an expectation that the competitive environment will increase in the refrigerated dough category. I think that's a prudent thing to do. So we have, without saying exactly how we've done that, I would say our expectations for fiscal '03 include some expectation that will become a more competitive category and we'll have to defend.

Lastly, I'm sorry, can you update us at all on the negotiation with Nestle and their optional Haagen-Dazs?

The negotiations are ongoing. You have seen the public statements by Nestle that they intend to exercise their right to buy 50% of ice cream hardeners, which is the U.S.-only joint venture. And the contract between Pillsbury and Nestle called for valuations on both sides. And then if you can't agree, you have to go to a third party. So we're in the midst of seeing if we can agree, and if we can, then we'll have a deal and we'll announce it once we -- you know, have concluded it. We'll share the outcome of it.

I'm going to switch to the other side. There's one phone caller. I'd like to take them before we run past our hour allotment. Can we go to the one person that's on the line?

Go ahead.

The couple of questions for you, one is you have changed any of your ideas for how the balance sheet will look at the end of the fiscal year and could you review some of our goals in that regard? Secondly, how long are you going to give products to perform or to come up to your expectations before you might think of moving them out of the General Mills portfolio?

I'll take the balance sheet and Steve, you can take the second question.

We're not changing the guidance. Now that we gave a month ago in Minneapolis. I will say that pro forma, that did not have the ice cream hardeners sale in it. So that might -- if that transaction happens, that might have an effect on the year end, otherwise, no change in the -- I'll stop there.

On the first question -- second question, whichever one it was, George, which is how long we will give underperforming products to improve their performance, I think that -- that is very hard to say.

It really depends on whether with the full implementation of the disciplines that have driven consistent performance growth in General Mills categories we, for some reason, find that we cannot generate growth, I suppose that's when you'd make a decision like that. I come back to the point that the underlying categories in which these Pillsbury Heritage brands are operating are showing good growth, in fact, better growth than most of the General Mills categories. One of the things I've been pleasantly surprised by in the 30 to 50 days since we actually closed the deal is the number of initiatives that the Pillsbury organization and the management in that organization conceptual initiatives and things in development that they have defined to address the growth opportunities that are there. These are not things that have been executed yet, obviously, but they are things that we believe the challenge is not -- it's not like we're starting with the bare cupboard and we have to figure out everything that has to be done to these brands. There's been a lot of good thinking on things like product superiority and how to get it and specific plans. You heard that in Minneapolis. I think our challenge is going to be prioritizing the various initiatives that are already on our radar screen and making sure we execute them in such a way as to drive growth. And it's not -- it's not that we don't know -- we don't have a lot, but we know what they are. We really

are not focused on how long they have to perform, it's what the are the initiatives that will drive the growth, what is skin the with our brand-building philosophy and how do we prioritize those and how quickly and effectively can we execute them?

Thank you.

Let's go back to the left side of the room, Andrew lazar.

I've been trying to get a sense of what you get by virtue of putting those brands into your own direct sales force, how much that can be? That in and of itself. What does the opportunity look like.

I believe that absolutely for sure, over the long term, that having the new General Mills sales organization responsible for these businesses going to be a significant plus. That's not to take anything away from the broker network, the cross mark that Pillsbury had to find, but it's simply that the General Mills sales organization is publicly recognized as one of the top three in the consumer products world. And they had demonstrated what they can do across a wide variety of categories on the General Mills Heritage brands. You've seen that. I don't need to tell you what they can do. They will be able to do the same things on the Pillsbury Heritage brands. The challenge will be to make sure that the -- we -- it takes a little out of the essence of the rhythms of the business, the merchandising things that really work and the things that don't. So -- we've got to make sure that they -- that they get the advantage, you know, as quickly as possible. But I think -- I'm absolutely confident -- I'm absolutely confident they will be a long-term success. I said to many of you before, I'm also confident this will be the biggest challenge we'll face in the short term, getting that put together and getting that up.

Let's take one last question, so we can let our webcast people go. Let's take Terry Bivens.

First on the cereal side, the data shows you being down more in the midsingle range over the last three periods. You mentioned today shipments were down one. Question gets to inventories. I know you're doing better on the Wal-Mart side, but what is the state of your trade inventories with ready to eat?

I start with the kmen that the our Nielson data is modeled to include Wal-Mart does not show that kind of a consumer sales decline at all. And so they're much more consistent with our shipment trends. And we think that, as a general rule, trade inventories are lower today than they were a year ago. A year ago than they were two years ago. We're seeing progressive shrinkage in trade categories. If I like at our December shipments, for example, coming out of the third quarter, our December shipments on cereal, is in line with our overall shipment trend.

Just a quick one on snacks to finish up, I haven't seen as many shelf sets as the one you showed today. Are you -- talk about sliding for a minute, is there significant sliding ahead with the snack business? Is that baked into the numbers? What's the situation there.

It goes through the retailer warehouses has to deal with sliding for those customers that require sliding and not all of them do. Wal-Mart, for example, does not. But that is a -- there's a different cost structure for any warehouse-delivered product. All of ours are warehouse delivered. There is the trade expenditures there, which are greater. On the other hand, the physical distribution expenditures are much less. So I think the economics of our salty snack business are quite attractive, and so we're benefiting from the gains that we're making in those categories and while we do not have or aspire to a full aisle set like you see in some salty snacks, we're not competing in the potato chip, corn chip matrix, but things like Chex mix, Bugles and others. Our profits are growing as fast or faster than our volumes.

Thanks very much, everybody. We'll be around here in the room for a while yet.

Thank you very much.