通用磨坊 (GIS) 2002 Q3 法說會逐字稿

Good morning. And thank you all for holding. At this time, all parties will be placed on a listen-only mode until the question-and-answer session of today's call.

Also, at the request of General Mills, this conference call is being recorded. If anyone has any objections, you may disconnect at this time. I would like to turn the call over to Miss

. Thank you ma'am, you may begin.

Thank you operator. Good morning everybody.

I'm here with Steve Sanger and Jim Lawrence, and we'd like to thank you for joining us, whether it's by phone or by webcast, to talk about our third quarter results. You should have our press release by now, it was issued earlier this morning. Please note that there are also slides posted on our Web site that supplement the remarks we'll make on the call today.

We're going to begin with Jim who'll run through the quarter, and then Steve will update you on our outlook as we move into the final quarter of '02 and toward '03. After we finish our comments, we'll take your questions.

Let me give you the standard reminder that this discussion will include forward-looking statements, which are based on management's current use and assumptions. Please refer to today's press release for cautionary statements regarding forward-looking information. And with that, I will turn the call over to Jim.

Thank you Chris, and good morning everyone.

As you have already seen, from this morning's press release, General Mills' earnings per share for the third quarter net, a revised guidance at 28 cents. Our reported results show exaggerated rates of change versus the previous, all of course due to the Pillsbury acquisition which was completed last October 31st.

As promised last fall, our financial reporting now includes segment results. Third quarter of U.S. retail sales were 2.4 billion, or 76 percent of the total. Bakeries and food services sales totaled 391 million, or 13 percent. And our consolidated international businesses generated the remaining 11 percent of sales, or 356 million. Our press release also includes unit volume detail for our segments on a comparable basis.

For the quarter, U.S. retail shipments were down three percent. Bakeries and food service volume was essentially flat, and consolidated international volume was up three percent. As a result, comparable yield volume for the total of the consolidated businesses was down two percent for the quarter. When you include our joint ventures, our worldwide volume was down one percent for the third quarter. And then, for the year-to-date our total worldwide volume is up one percent.

As we told you early February, transitional related issues caused our U.S. retail volume to fall by nine percent in December. Trends did begin to improve in January, but U.S. retail was still down two to three percent for that month. In February, we have returned to volume growth, with retail shipments up three percent overall. That included gains for four of our six major business units. The exceptions were Big G, which had a tough comparison in February when volume grew at a double-digit pace a year ago and in baking products, which has being seeing increased competitive activity.

With the renewed volume growth in February, third quarter retail volume finished down three percent, in line with our guidance. Volume was down five to six percent for Big G, meals and baking products. And those declines were only partially offset by more modest declines in Pillsbury U.S. and snacks plus the strong double-digit growth in Yoplait volumes. The volume decline and the mix of sales, as well as the consequent deleverage, negatively impacted our profit performance for the quarter.

I do want to point out that the declines in our third quarter shipments are not a mirror reflection of lower consumer sales for our brand. For example, while Big G shipments were down six percent for the quarter, consumer volume in all Nielsen-measured outlets was up slightly and our volume with Wal-Mart was up year over year, as well.

Bakeries and food service volume grew slightly in the third quarter. Sales to fast-food restaurant chains and wholesale bakeries contributed our strongest line growth. Volume decline in shipments to in-store bakery customers largely offset that growth.

Our wholly owned international businesses achieved volume growth of three percent in the quarter. Unit volume in Canada was up, led by new snack products and volume gains in refrigerated dough and baking mixes.

The strongest growth came in Europe, with good gains by snacks in the UK, by Haagen-Dazs, Old El Paso and Green Giant across the region. Volume growth in Asia was led by snacks and ice cream performance in China. Volume in Latin America was up slightly for the quarter, with a good performance by our local brands.

Let me turn now to our operating profit results. Before unusual items, total operating profit was flat for last year. Operating profit for U.S. retail was 239 million for the quarter. And that is down 11 percent from last year due, as I mentioned earlier, to

volumes and negative mix. Bakeries and food service contributed operating profits of 34 million. And international operating profit totaled 12 million.

For the year-to-date operating profits before unusual items reached nearly one billion, up five percent versus the previous year.

The profit results for our third quarter are disappointing. But they reflect a number of one time issues related to our acquisitions of Pillsbury. We've already talked about the unit volume trends which we experienced early in the quarter and which resulted in lost operating leverage and negative sales mix.

There are other merger related factors inhibiting our efficiency and therefore our profitability in the short term. For example we still have two separate information systems for our manufacturing and distribution activities. That means we cannot optimize either the size of our inventories or where they're positioned around the country. W will begin linking those computer systems in the first quarter of '03, but we're not there today.

The requirements of the Pillsbury desserts divestiture are another short-term disruption. We have lots of people and resources focussed on moving our desserts and cereal production out of the Toledo plant which we sold in that transaction. Meanwhile, one of our major refrigerated dough plants is being operated by a third party until the Pillsbury brand dessert mix production is moved out of that facility. So we have only limited access to one of our major plants.

These production transitions are due to wrap up in this fall of the year. And we have only minimal cost synergies in this sub year -- in -- sorry in this sub year to offset the impact of these one time issues. Next year, of course, we expect significantly more cost synergies.

On the JD earnings line we're seeing profit gains from Pillsbury this year. Third quarter JD earnings more than triple to $7.8 million after tax. That includes earnings growth for CPW and SVE which contributed a combined 5.1 million. And our new Haagen Dazs joint ventures contributed nearly as much adding 4.1 million in the quarter.

These profits have been offset by 1.4 million in development spending for our eighth continent soy milk joint venture with DuPont. For the year to date, joint ventures neared 20 million doubling the contribution of a year ago.

CCW continues its strong performance with volumes for the quarter up 14 percent. This included good gains in Europe driven by growth in the U.K. and France and Latin America, led by Brazil and Chile.

SVE volumes for the quarter was down five percent with gains in the eastern European markets more than offset by very touch comparisons in core western markets. You may recall that SVE ran a very successful Pokeman promotion there one year ago.

Unit volume for our Haagen Dazs joint venture was up 25 percent on a comparable basis, reflecting success of the new ice cream sandwich product in Japan. Unusual expenses for the quarter totaled 38.8 million before tax, or six cents per diluted share. Five cents of that total was a special contribution to the General Mills Foundation corpus.

Like General Mills, Pillsbury had a foundation, but Pillsbury's foundation had no corpus, and we needed to increase post-acquisition net assets for the now combined entities to support planned initial

. The other penny of unusual expense reflects assorted transactions costs, primarily office relocation expenses. After these unusual expenses, our third quarter earnings-per-share were 22 cents.

Let me wrap up with two quick updates on interest expense and taxes. You have seen net interest expense was 147 million for the quarter, reflecting the additional debt incurred from the Pillsbury acquisition. This seems a bit better than our early estimates, and we now forecast interest expense to be between 420 and 430 million this year.

Tax rate for the quarter was 34.6 percent before the unusual items. You will recall that we were estimating a tax rate of 37 percent for the entire year, and then 35.5 percent in next fiscal year '03. We now expect our fiscal '02 rate to be 36 percent. We had booked tax expense in the first two quarters at 36.4, so this quarter's a catch-up factor to bring our year-to-date in line with the estimated annual rate of 36 percent. We expect next years rate will be below this years. And with that, I'll turn the call over to Steve.

Thanks Jim.

Hey, it goes without saying that this third quarter was not up to our standards. And not up to what we originally expected it to be when we announced the Pillsbury transaction. It did come in pretty much as we indicated it would when we lowered our forecast back in early February. And the reasons that it came short of our original expectations have been covered very thoroughly back in that February phone call of

and so I don't plan to repeat them today.

I will comment, however, on the nine-month trends, and our expectation for the fourth quarter. Our U.S. retail volume on a comparable basis is flat the last year, through nine months. That includes declines for Big G and meals, and baking products is also off slightly, but comparable volumes for the other half of our portfolio are running above year ago levels. Now that's shipments.

Our consumer take away trends look somewhat better through nine months. We've achieved dollar sales growth in most of our categories. We do have share declines we need to address in a couple of categories, most notably packaged dinners, microwave popcorn and refrigerated dough. These nine-month dollar sales and shares are shown on that slide on the Web site.

I would note that we have the ability to include projections for Wal-Mart and some of the categories, only three of them so far, but we will have more as time goes on. And they are so indicated. The others are without the Wal-Mart data included.

Back in February, we told you we were moving quickly to get merchandising activity in place on the Pillsbury Heritage brand. And we did that. We strengthened promotional support for our refrigerated biscuits and Progresso soups in January and February. And this was reflected in improved volume trends.

We also firmed up fourth quarter merchandising plans, as well. And this includes Easter merchandising for refrigerated dough, which is an important season for that business. It also includes a cross category promotional tie in with the newest "Stars Wars" movie that'll be in effect in April and May.

Our fourth quarter should also reflect incremental volume from new items, some of which were introduced in the third quarter, some of which will be introduced in fourth.

Our newest yogurt, Yoplait

, started shipping in January. And it is off to a terrific start. In May, we'll launch another new yogurt product, Yoplait

in a third of the country.

is our first yogurt beverage.

We'll benefit from several new snack items introduced in the second half, including Disney Fruit Shaped Snacks and Pop Secret Kettle Corn that started shipping in January and two new varieties of Nature Valley granola bars, which we'll ship next month.

Also in stores for the full quarter will be new brownie and cookie items from Betty Crocker, our new vegetable and soft lines from Green Giant and three new helpers items, including a new Tuna Helper Complete, with a pack of tuna inside.

Big G will benefit from proven growth drivers, starting with product news on our established cereals, which is very important for us, including heart health news on Honey Nut Cheerios, which has driven a very sharp upturn in that business. The baseline volume has grown nine percent since that heart health news broke in January. The Wheaties Sara Hughes package is in stores now. And that old reliable, a new magic marshmallow on Lucky Charms is also in stores now.

Now these are in addition to Big G's new items, which include Frosted Mini Chex. Frosted Mini Chex achieved a .7 share in its initial markets. And it was rolled into the rest of the U.S. in February. And we're also shipping new items in our milk and cereal bar and Chex Morning Mix line. So we've got some good marketing and product innovation which should help drive growth in our fourth quarter.

Now balancing that is the fact that we're comparing against a strong quarter last year for General Mills heritage businesses, when domestic volume grew five percent. And we're still moving up the sales learning curve. So if you net it all out, we're expecting low single digit volume growth in the quarter.

We are continuing to make good progress in our integration efforts. In the fourth quarter, we expect to reach two key milestones in that record, and both of those are in our information systems integration. One is combined customer invoicing, and the second is a combined human resource platform. Now both of these are important contributors to achieving our longer term synergy targets.

On the subject of synergy, as I said before we are on track to deliver those synergies that we have talked about and more. And we plan to discuss, just how much more when we review our year-end results in June.

For fiscal '02, we're on track to meet our target of $1.90 to $1.93 in diluted earnings per share before unusual items. For fiscal 2003, that's next year, our guidance remains unchanged in the $2.85 to $2.95 range. And we several sources of growth contributing to this target. One of those is that $250 million and more in cost synergies. In addition, we will have 12 full months of contributions from the Pillsbury businesses as compared to a scant seven months this year.

We expect to resume volume growth in our U.S. retail businesses next year as we progress up the learning curve. And particularly as we cycle against the weak third quarter in '02, caused by the one time merger related disruptions. And that unit volume increase will give us better operating leverage than we've had this year. And finally, we expect increased joint venture earnings as CCW and SVE continue to grow, and as we get a full year contribution from the Haagen Dazs joint ventures in Asia.

So while the high end of the range that we've talked about may be a stretch, we are still confident in our ability to deliver on our fiscal 2003 guidance.

That's the end of our prepared remarks. We are now happy to open up the floor for questions.

Thank you. At this time, if anyone has a question, please press star one on your touch-tone phone. All questions will be taken in the order they are received. Again, star one if anyone has a question.

The first question comes from Mr.

, you may ask your question and please state your company name.

Prudential. Good morning everybody.

Good morning.

Good morning.

Steve, as you know Pillsbury did some loading before you bought it. And I just wondered to some extent we're seeing better takeaways for some of the businesses. Do you feel like you have a good understanding to what level of retail inventories exist in Pillsbury products?

Well the question of retail inventories John, applies not only to Pillsbury products, but to our own. As you observed, there was a significant gap between our quarterly cereal shipments, and our quarterly takeaway.

As I think there are a couple of factors that are at play here, and we're, we have a rough handle on them, but maybe not as good a handle as I'd like. That is, that there was some loading on the Pillsbury products. I think that is behind us now. The shipments we're seeing on those, you know, would suggest that there isn't still, at least to my visibility, any residual loaded Pillsbury inventory in the system.

We do have the ongoing reduction in the retailer inventories. That again, is not a new factor -- we've been living with that for a couple of years, but it certainly seems to be more pronounced in recent months. And so we're trying to get a handle on that. But I think overall going forward, I don't think you should expect any difference in the Pillsbury heritage and General Mills heritage pipeline situations due to loading the dates back to the close of the deal. I think that's behind us now.

And the Wal-Mart data that you give, is that Nielsen panel data, or your knowledge of what's going on at Wal-Mart?

What we do is take the Nielsen data, and then add to that a Wal-Mart projection based on consumer panel data that we get ...

Yeah.

... and verify it against our own Wal-Mart -- we get our own data for Wal-Mart, but we don't get anybody else's. So what we need to do is figure out what categories we're doing in Wal-Mart and what our competitors are doing in Wal-Mart and then project that based on the panel data and verify it versus what we know we're doing. And then come up with it. It's important to add that in because without Wal-Mart, the Nielsen data we think pretty consistently understates the growth across all categories by somewhere between one and three percent, depending on the category.

I thought we were all going on a diet. The cereal business which I asked about

, and just the decline in the quarter somewhat -- are you feeling on-track in your Big G business to your full-year plans, and if you'd just comment about the recent matters been changed there.

Let me, let me first say that -- pretty sorry about the management change. The management change that we made which involved several divisions, it was made for the purpose of giving three of our very high-potential young executives some different assignments. Marc Belton who had been leading Big G, we wanted to give him multi-unit assignment -- now he has four presidents reporting to him, and so that's a development move for him. He had been there three years and we felt that he had been there long enough that it was time for a move.

Ian Friendly, who's done such a wonderful job running Yoplait over the last four to five years, we wanted to see if he could bring the same kind of energy and growth to our cereal business. And we believe he can. And then, Bob Waldron, who's done a wonderful job in our -- in our meals business, was promoted to run Yoplait.

So these are the kind of changes that we've made to develop our people. You've seen us do it before. And we...

Yeah. It just seemed like an unusual time for it. You know, it just seemed like an unusual time to change your lineup, given the fact that there was already enough going on.

Well, it was actually the time we planned to change the lineup. I think it's unfortunate for Marc that we happened to announce it at a time when we had a cereal quarter that was down six percent. He would have rather we did it, you know, a quarter later when we'll probably, you know, have a much better picture. But, you know, we had planned to do it and so, we went ahead with it.

As far as our cereal business, clearly, the consumer sales say that we are

. We are -- our consumer sales are up a couple of percent in dollars. Our market share is up, I think, 16 basis points. As I said to

, this is not one of our stellar years.

On the other hand, our share is up and our sales are up. They're not up as much as Kellogg. I'd have to give Kellogg credit for being the strongest performer in the category this year. But we are growing. And we have some plans that we think can accelerate that growth. I think the things we've got coming in the fourth quarter will clearly produce a stronger quarter than you saw in the third quarter. Now that is not terribly high standards. But we feel good about where we're going in cereal. And the fourth quarter is starting out considerably better than our third quarter.

Fair enough. Thank you.

Thank you,

.

Thank you.

, you may ask your question. And please state your company name.

JP Morgan. I -- with regards to the guidance that has changed in terms of interest expense and the tax rate, if I -- if I take a look and we go back to November when you brought down the estimates for the

year and about 15 cents of earnings disappeared and then you had the initial stumble with the integration of Pillsbury and we had the revised guidance again in January. Now, you're holding your estimates the same for the stub year but the quality of the earnings has shifted dramatically.

In my view, if you just take the dollar value, you're knocking about five cents off of the operating line and putting it below the line. So isn't it really fair to say that the business has been more challenging and continues to be more challenging even after than the initial stumble that you originally expected?

, the business obviously is challenging. And we certainly had a very challenging third quarter. As Steve said, we're not happy with it. Back in November, we did not anticipate a stellar third quarter. And we anticipated that there would be challenges in putting the two companies together. And when we gave our estimates for the year, we gave the best estimate we could give at that time.

As we said, when we had a conference call back in February to give the new guidance for the third quarter and for the year, we unfortunately did not anticipate sufficiently how challenging the process would be. And we updated our guidance with regard to this year.

But even when you made those announcements you did indicate at the time that your interest expense forecast was steady. And there was no indication that you need to be bringing down the tax rate.

So my question is from that January announcement timeframe, when you did bring down those estimates again, has the business deteriorated further to account for the fact that your estimates haven't changed for the full year.

Let me, if I may, let me jus explain why we have changed the interest and tax guidance. Obviously, we are working constantly to see what ways in which we can pay fair and correct taxes but as few of them as possible. And at the time that you do a major transaction such as Pillsbury there are all sorts of entities which hold different parts of the business. And there are different international entities and what not, and different state taxes to be paid. And we have set the job to our tax people to do the very best job we can certainly paying all of the taxes that we owe, but no more than we need to.

We gave the guidance that we did obviously on a conservative basis to be sure that we were not going to give expectations of a lower tax rate than in fact we would be paying. But we kept working diligently to see if there things that we could do which would bring our tax down.

In fact, Pillsbury was less tax efficient as a U.S. entity than we were at the time of the close, and we said that at the time of the close. And we said that our overall tax rate would go up as a consequence. What we've been doing is been restructuring some things. And we've been working to get our tax rate down, and we have been able to do that and that's what the tax rate that we have in this quarter reflects. And frankly, we're going to keep working to see if we can't improve on that.

On the side of the interest, we went out and we sold 3.5 billion of bonds with the able assistance of your bank. And we were able to achieve a spread, a corporate spread which was lower than we had expected. And while we locked in the basic treasury rate sometime earlier, the corporate spend and not the market and we achieved a very good spread on that. And as a consequence we have a lower cost of interest. So that explains what has happened on the tax and interest side.

And I -- from my perspective, any dollar that you can prevent from spending, either on interest or taxes is wonderful. In fact, if you could get the same tax rate as Sara Lee, I think we'd all be ecstatic -- if it were legal of course. But, the -- I guess what my question is, that you've gotten an incremental five cents of earnings because you've managed both the interest expense and the tax expense so well, and yet you are maintaining your same guidance for the full year, so does that imply that the base business at the operating line has deteriorated by five cents?

Well

, I don't know that we -- to me, this is Steve -- the base business changed. We announced in February, which was due entirely to operating stuff. I don't think we got into, at that time, whether we were adjusting any other pieces. But, what I would tell is that the quarter has come in very much as we thought it would when we talked to you in early February, and we announce the lowered expectations for the year. And those lowered expectations included a forecast of lower operating results, and we factored into that some of the positives that we were getting below the line, in coming to the forecast we made for earnings-per-share.

So to answer your question, has the business deteriorated more since we talked in early February -- no, it has not. I think the volume performance has been very much consistent with what we had forecast it to be, and the underlying margin deterioration which came from lower volume,

operating leverage, has also been very much as we forecast it to be.

OK. And then just one follow-up, and thank you for that clarification. In that slide on your Web site, that shows what the shares have done in 11 of your categories for the first nine months of the year -- you've got three that are positive, and you've got three that are flat, and you've got five that are actually down on a share basis -- and you did mention this in your comments.

Three of those five are actually General Mills categories -- is that a function of the distraction from the Pillsbury business, and are you comfortable with the idea that a year from now you should show share improvements in the majority of your categories?

They represent a variety of category specific causes. But there is no question that overall, I think our shares were lower in the third quarter because of the distraction from the Pillsbury business. If you'll recall the December Nielsen's -- pretty ugly across both General Mills and Pillsbury

categories. And that is really the height of the disruption period. There are some specific things in other categories -- for example, microwave popcorn, our share is down partly because a year ago Orville Redenbacher had a supply problem and we had unusually high shares.

In the case of dinner mixes, while our volume has been fairly steady, the category growth has been prompted by a whole bunch of new entries. So our market share has declined. Some of that will correct itself as those new entries all wash out after the -- after their

allowances are collected and they're sent, you know, on to that happy hunting ground. But I think we have some work to do there too.

So I would -- I would attribute it to a combination of the normal kind of work we got to do to address share weaknesses in categories that occur in our business from time to time and all of it exacerbated by the distraction of the sales disruption, particularly in December.

All right. Well, thank you. And good luck.

Thank you.

Thank you.

, you may ask your question. And please state your company name.

Morgan Stanley. Good morning, everyone.

Hi, David.

Steve, I just want to go back

asked. When you gave guidance in February of 1.90 to 1.93, that incorporated the lower tax rate and the lower interest expense that you're now informing us about, is that correct?

Yeah. The guidance that we gave you incorporated everything we thought about, everything we knew about...

OK.

...

at the time.

OK. Fine. Secondly, you've been more forthcoming about your shipment trends. Can you give us a sense of what the business has been like March to date from a shipment perspective?

Well, we've only got a couple of weeks under our belt in March. What I would say is it's about even with year ago. It's better than December and January, not quite as strong as February. Our cereal business is up a couple of percent, which you might be interested in because it had been down in the last quarter.

I think, you know, monthly shipments can be a dangerous thing to get too wrapped up in. But we're pretty comfortable with where March is coming in at this point with respect to what our expectations are for the fourth quarter.

OK. Thank you very much.

Thank you.

, you may ask your question. And please state your company name.

o'neil: UBS Warburg. A couple of questions. You know, in looking at the balance sheet, inventory days and accounts receivable days are both up sharply. And I know you mentioned you haven't integrated the system. Do you think over a couple of quarters, you can get those metrics down to historical General Mills levels?

Good morning,

. It's Jim. It's a little hard to get the right

, you know, off of the data which was released in the -- in the press release. So let me, if I may, just comment on days sales outstanding with our

customers.

Interestingly, they are actually down slightly in February versus a year ago on an apples-to-apples basis, including Pillsbury and prior years' results. And true nine months, our days sales outstanding are flat. Now in all candor, with everything else that has been going on and given the challenges running to systems, we have not been able to A get all of the data, B focus on it, and C take the action. But rest assured that we will be getting the systems compatible, getting focus on it. And this is going to be something we're going to be keeping a careful watch on and trying to take action against it.

o'neil: Some other questions first, were there any pricing actions taken on either of the Mills or Pillsbury retail brands during the quarter? And can you just comment on the very strong growth in CPW being up 14 percent.? It seems unusually strong. What do you attribute that too?

You've got to say the last part of that again. You faded out.

o'neil: I'm sorry CPW up 14 percent seems very strong. What do you attribute that too? Is it a certain geography? Or why?

Well let me take the latter one first, I think our strength in CPW is very wide spread. The U.K. accounts for a big portion of CPW's in volume and profit. So it can't thrive unless the U.K. is thriving and the U.K. is doing very well. But really it's pretty much throughout this geography that CTW is showing growth.

I think they're driving it with good growth on the established brands and putting good new brands in there. And they are getting the benefit of a faster growing cereal category outside the U.S. than we have here. So all of those things are working very well.

With regard to your first question, I believe, I'm not sure if my timing is exactly right on this. We did announce a baking mix price -- desert mix price increase did we not in whether it was in the quarter, or it was in November, I don't know. But it was either before or just into this quarter.

And I'd also recall that we had a cereal price advance in Canada but that may have been ...

That's coming.

That's coming in the future.

Announced but not ...

Yeah, I'm not tipping you off. It's been announced but it doesn't take effect until June in Canada.

o'neil: Thank you.

Thanks John.

Thank you.

, you may ask your question and please state your company name.

T. Rowe Price. Thank you for letting me on. I just wanted to clarify something, Jim about the tax rate at 36 percent. For some reason I was under the impression that back in February you all ready had 36 percent as your expected tax rate for '02. And that this doesn't constitute a new announcement.

We -- I believe what we had been saying was that next year would be between 36 and 37. 35 and 36, 35 and 36.

Right.

And that back in November we had given guidance of 37 for this year. And we have been working against that, and have been, you know and as I said to -- in response to

question -- have been successful now in taking some actions.

Yeah, but some of the models that I've seen already show 36 percent for fiscal '02, and I'm confused as to why this is now sounding like 100 basis point drop in your tax rate guidance.

Yeah, you're right. It shouldn't, because we've been having conversations since we've gone on here, particularly around the time frame of

...

But I'm -- but I'm ...

... that we were making progress, so ...

But the point I'm making is that somebody mentioned that there's a five-cent increment here -- why didn't you raise your guidance, and to my way of thinking this isn't any change at all from February.

Yeah, I think that's the way we feel too.

Alright, now but as far as '03 is concerned if the tax rate is, you know the guidance is still 35 to 36 percent, I guess the germane question is, if you get that tax rate meaningfully below 35 to 36, would you expect to change your guidance on that?

Well

, you know we're working in every element of the company to hit our 285 to 295 ...

Right ...

... and we don't know what track site we will be able to achieve, which I've put as low as possible. But, you know we're trying to fight on every front, and we're convinced that you know, at the end of the day we will be successful ...

Right ...

...

between 285 and 295.

OK. On the foundation, what you called a special contribution to the foundation which cost five cents a share, I guess I'm wondering, was this voluntary or was this mandated. Is it something that you've been delaying doing. And finally, does it, does this special contribution relieve you of regular contributions in '03.

it is voluntary in the sense that it was -- we chose to do it. Let me just explain a little bit about how our foundation works. General Mills, as you know is, has a long-standing goal of contributing two percent of domestic pre-tax profit back to the community and we fund a lot of that out of our foundation. And do have a policy that our foundation should have a corpus. And we do have a corpus in the General Mills foundation. And the purpose of that is because most -- many of our grants are multi-year grants, and we wanted to make sure that they're covered out into the future.

The Pillsbury Foundation was combined with the General Mills Foundation when we put this deal together. Their grant making is roughly comparable to ours. And yet, they had no corpus. And so, our policy would say that this combined foundation needed a corpus of a certain level.

OK.

And so, we stepped it up to meet that policy. And it's a one-time thing. It doesn't -- it doesn't relieve us of -- it doesn't necessarily mean we won't make continuing contributions to it. But it certain -- it enables us to manage that much better than had we not have done it.

Was this $30 million a pretax number or did you know about that back at your November analyst meeting that you were going to have to do this in this quarter?

Yeah.

OK. Finally, I guess one of the questions that everybody has is the pro forma EBIT for '01 adding Pillsbury with adjustments to Mills with adjustment gives you a certain pro forma historical EBIT number for '01. If you did the same calculation prospectively on '02, your pro forma EBITs would be lower than in '01. And the question is for '03, do you all fully expect you can get EBIT back at least to the historical pro forma '01 level?

Well, I think you're raising a very good point there that if you take our EBIT pro forma at the '01 level and add to it, the synergies that we've announced plus making a fairly modest assumption of what kind of synergy -- incremental synergy we can get, that gets you very much into the range that is required to deliver our earnings guidance.

Now, you know, that is not to say that that is a

but I think what it says is that this is something we have confidence we can do.

Because '02 is down from '01 and so, the question is what's the right starting point for '03? Is it the '01 stuff or the '02 stuff? And you obviously think it's the '01 stuff.

That's right. We don't -- we don't -- we don't want to

. I don't think we've ever -- you've covered us for a long time. We don't typically reset the base when we have an unusual circumstance that it causes a year. And certainly, this combination is the biggest thing that's ever -- we've ever done, is an unusual circumstance.

But we don't reset the base for growth from there. We want to keep on the growth track for -- that we've been on. And that, to us, says that '01 is the base. And when we talked about what kind of growth we'll deliver, the 14 percent-plus, over the next two years, all that is calibrated against '01, not '02.

OK. Thank you very much. I appreciate it.

Yeah. Thank you,

.

Thank you.

, you may ask your question. And please state your company name.

Bank of America Securities. Good morning everyone.

Talk louder, Bill.

I was wondering if you could give us some gross margin guidance? Your gross margin this quarter was 41 -- excuse me 51.7. Normally you've done about 60 under the historic General Mills structure. What do you think the combined company's normalized gross margin should be?

I haven't contemplated that question. I haven't got an answer for you on that.

Well how do we get to the 290 next year then?

How do you get to the 285 to 290 next year?

Yes, gross margin are we assuming?

I haven't broken it down that way. You're catching me obviously flat footed. I mean we've thought about it exactly the way Stephen just discussed, which is to say you've got a clean site line in an '01 pro forma. That is the combined companies absent divested businesses and absent the one time disruptions, that clearly impacted what our margins look like in the third quarter. And that would be the place to begin.

Let me phrase it another way. Since Pillsbury is part of the Diageo, we couldn't see the same P&L structure that we saw for you. What -- did their businesses command a gross margin that was roughly the same as yours, you know, that 60 percent kind of level?

No, it's lower. It's lower. And you have, you know, you have two years of Pillsbury historical's out there to work with in the filings that we've made.

But you have know guidance for next year right now?

No, that's a June proposition for us. You're a little bit ahead of me.

And Jim, can you ...

We're right in the midst of doing business plans, business by business. And, you know, to then we can add them up and look at what you've got on a segment basis.

And Jim, can you give us some interest expense guidance for next fiscal year?

Yes, I can. The -- hold on one second. We would say that for next year, we've been saying an estimate of 285 to 600.

585.

Five eight -- sorry, 585 to 600. And the ...

.

A little room to maneuver there.

A little wiggle room.

585 to 600.

And the last question, do you have any vague quarterly guidance for next fiscal year? You're obviously going to have 30 percent more shares out standing in the first half. And the comparisons clearly get much easier in the second half. Would you expect a sot of modest EPS progress in the first half? And then a much stronger second half?

We have not yet worked through quarter by quarter, but we will get a sense of that in June.

OK. Thanks.

Thank you, Bill.

Thank you.

you may ask your question and please state your company name.

Hi, it's Deutsche Bank, good morning.

Hi,

.

I guess so far we've been talking -- the people have been talking a lot about the earnings. But what I wanted to focus on was a little bit more on the cash flow. It seems like obviously you're coming in with somewhat lower interest expense. I assume you're paying a little bit less out in taxes, plus your JB income is coming in a bit better, but your cap x number was a lot higher that what people had thought. So Jim, can you just kind of walk through what you're expected cash-flow assumptions are, and kind of however you want to define pre-cash-flow built up next year?

No, I'm not going to go into cash-flows for next year at this point

. Because we've not put together our plan for next year, business unit by business unit, and element by element. You know, as I said earlier to answer the question, you know we're going to working on each front, and we are quite confident where we're going to come out as to the bottom line.

What I can do, is I can give you some -- just reiterate where we are on some important elements of cash for this year if you'd like, and then you can make your own projections off that in light of our earnings guidance. If that would be useful.

Yeah, I mean you've given us some, I think, outlook on capital expenditures and depreciations. So, you know, has that changed given what you've learned within the business, or you know?

For this year, for this year we expect capital investment for General Mills to be about 600 million. Which is about 450 to 470 of our regular business-building cap x, and then about 120 to 140 related to the systems-integration costs to heritage companies as well as our headquarters consolidation in Golden Valley.

In addition to that, we are -- we're required by our agreement with International Multifoods to expend capital to the tune of $70 million in the Toledo plant, taking out the cereal equipment, taking out our dessert mix, and putting into Toledo the dessert mix business of Pillsbury. Which comes out of our Murphysboro plant, and of course that is something which we had to net against the 316 million that Multifoods paid to us for that business.

So that is the capital which we are running against this year. My guess is it we'll be higher next year, but we will not know until we've added up all the business plans and made sure that all the numbers tie-up.

And depreciation -- is that still running like 360?

What I've been using was everybody

used. 300 for depreciation/amortization this year, 375 as a placeholder for next year.

OK. And then, if I could follow up a bit, I guess, on

question about the pro forma. I mean, when I looked in your filings, we came up excluding IMC and Haagen-Dazs with a pro forma EBIT number of about 740, 750 million. One, can you comment, does that seem reasonable to you ..

that.

.

unid2 You talking just Pillsbury?

Just Pillsbury?

Just Pillsbury.

unid2 OK.

And then, second, to the -- to the extent that fiscal 2003, Pillsbury EBIT rebounds to that level. Is it -- I guess, as you look out, is it reasonable to assume that all of the cost savings, whether it's

or

or you would just assume that all of that flows through to the bottom line or is the competition in Progresso and refrigerated dough enough to concern you that not all of it can fall to the bottom line?

Well, certainly, we -- as we put the plans together, we are going to have to make allowance and address the needs for marketing activities to stimulate in places where we have unusual competitive situations.

But again, if you come back and look at the '01 combined pro forma, it's close to a billion-nine, I think. And so -- and we think we can get in excess of 250 million of synergies. So if you put any growth on top of that billion-nine, that should allow us to use at lease some of that synergy and still be able to get into our earnings range, is our view.

And obviously, you know, we're right now in the

business by business and making decisions where we do have to spend more against marketing if we -- if we need to. And there'll be some plusses and minuses, just as on capital side. We're making our choices where to put the capital in light of commitments we've made in the debt market to pay down 200 million of our debt from year to year.

I mean, I guess -- I mean, I don't think you can necessarily answer this. So I'll just state it. But, I mean, I think that most people will give you credit on your

businesses that you can rebound without difficulty. And that's why a lot of us have been looking at the Pillsbury pro forma numbers because that's really going to be the swing factor as to whether you can, you know, make the

or

number in a -- you know, in a high quality way.

So I'll just leave it there. If you have any other comments, fine. Otherwise, next question.

Thank you.

, you may ask your question. And please state your company name.

Good morning. AG Edwards. I just have a couple of questions for you. The first is to understand the fourth quarter and to the extent that volume would say, would return to even beyond the levels you're suggesting now, which obviously may not occur, but if it would, would that been used then say as an opportunity to market more behind the brands? Or perhaps getting Pillsbury growing more so?

I would say that, you know, our estimates for the third quarter are -- assume that we will do some additional marketing behind our brands. And so I wouldn't -- I mean I wouldn't expect that we would exceed those. I, you know, I think probably the range is probably pretty accurate.

OK. The other question was on your -- on integration costs. Just do you have an estimate of what those will total say in the next year for the combination of the two companies?

Not for the next calendar year, but we've hang on for a second, an we've got an update on what we've said for this current fiscal year.

OK.

Now if you remember we gave a break down on case back in December I believe. And we said total transaction expense this year, unusual items, transaction expense would be 230 to 250.

That's in fiscal '02?

Correct.

OK. With 8.8 out of the way all ready? Is that the way to look at it?

What's the 8.8?

From this past quarter.

Well you've had unusual expense...

Oh, OK. From before.

in the

quarter as well.

I understand.

Yep.

OK. Then the final question I had for you was on big G. There was a large amount of new products, I believe it was a year ago in the fourth quarter. Are we going to be up against that this upcoming quarter?

Well yeah, and actually of those products shipped in the third quarter, which is one of the reasons why the difference in shipping timing was one of the reasons our shipments were weaker this third quarter relative to a year ago.

We will benefit in the fourth quarter this year from several of those products, which we shipped last year and it sustained. Plus the addition of Frosted Mini Chex and Cocoa Puffs milk and cereal bar and the new Chex learning mix flavor. So I think we've got some new stuff coming here in the fourth quarter this year. But your recollection is right. We had a strong third quarter shipments and fourth quarter

last year related to the early days of those new products.

OK. And just a final question, there was a comment about the launch of Bugles in the U.K. which is probably not that big of a deal. But I was just curious if the combination of Pillsbury and General Mills offered you any leverage say in getting that product out to retail and say getting to market quicker than you would have under base General Mills?

Yeah, I think that's a perfect example. We were planning originally to set up a stand alone marketing operation in the U.K. We have a company which co-packs for us, a partner which co-packs for us Golden Wonder, as well as doing distribution.

But we were going to sell up a General Mills U.K. and staff it up to look after that one brand. That's obviously much less efficient than what we have done, which is taking one person who has been working on the launch, and placing that one person into the existing

infrastructure in the U.K. And then utilizing the excellent sales relations which Pillsbury U.K. has with the trade in the U.K. and all of the infrastructure which is already set up. So instead of setting up a company we basically sent one person over -- so that's a good example.

OK. Well thank you.

Thank you.

Thank you.

, you may ask your question and please state your company name.

with Lehman Brothers. I have a couple of questions.

Talk a little louder please

.

I'm sorry. A couple of questions. First, if I look at your balance sheet today versus your -- balance sheet as reported versus the pro-forma numbers at 11 25 it looks like you paid down debt of about 160 million pro-forma. I'm trying to figure if I did the right -- if my math was right here -- and what drove that reduction.

And also, in terms of your debt -- your goal for debt reduction this year, I think that you said something earlier that I didn't hear completely, and I wanted to hear that again. And then finally, interest rates you know, a lot of economists are now saying that they think interest rates are going to be rising. You look to have about $4.6 billion of short-term debt on your balance sheet and I'm wondering when you think you might want to fund that out.

Sure. Thank you Jan.

The -- we have paid down some net debt since we closed the transaction. We -- at the time the transaction closed we got press feeds from International Multi-foods. But we had not yet closed the transaction with Nestle to sell the half of ice cream partners, which was owned by Pillsbury. And we did close that right at the end of the calendar year, so we had the inflow of that, and so we have ended up with a net position which is reduced.

We expect it to close this year with 9.4 billion in all types of debt, and the comment which I made earlier was that we have said that we expect it to close fiscal '03 with 9.2 billion of all form of debt. So we expect to pay off 200 million from the end of this year until the end of fiscal '03.

As to interest rates, we are now split about 50/50 between long and short -- our short is all commercial paper now. And we paid off the bank debt we had at the time of the close before the end of the calendar year.

And we are going to term out the short interest over the next year, we would -- we would expect. We are paying an interest rate of 6.5 percent on our long debt. And obviously, the short is less expensive now

you suggested, maybe getting more expensive.

We have interest rate locks, which account for some of the debt, which is -- which is short term. So it doesn't really matter whether it is commercial paper or long as to the interest rate. But there is some portion which is -- which is purely floating at the commercial paper

.

Great. And just two questions, which maybe I'm just missing them. But could you tell me what your depreciation in cap ex was for the quarter?

I don't know cap ex for the quarter. I can get back to you on that. I've got a depreciation number. Hang on for a second. Actually, I'm sorry. I've got it combined. But there's very little amortization. So the depreciation and amortization for the quarter is 89 million versus 56 a year ago.

Great. And actually -- I'm sorry. But just to go back to this International Multifoods thing, you're saying that that was really the sale of the International Multifoods to International Multifoods was really what accounted for the net reduction in debt?

No, no, no.

No?

just commenting that at the time of the close was when the proceeds came from the sale of the Pillsbury dessert mix business to International Multifoods. And that was anticipated and that was -- you know, everyone was aware of that.

What happened after that and actually happened after our second quarter was that we sold the 50-percent interest in...

OK.

... ice cream partners, which Pillsbury held, along with Nestle, we were required to sell that back to Nestle...

Right.

... on Nestle's demand, which they made. And we negotiated a price and sold that.

OK. I remember that happening. And that's then what accounts for this reduction and...

That -- obviously, you know, we both had cap ex out and that

has positively affected it since the

.

OK. And on the International Multifoods, you said the proceeds that you got were 320 million, I think, roughly.

316.

Three-sixteen. And they were offset by $70 million of cap ex.

Yes, that we need to make in Toledo.

OK. All right. Great. Thank you.

Thank you.

We are -- we are over time. I think we'll take one more question. And then, obviously, you know, I'm home. Call me.

Thank you. Our final question comes from

. Sir, you may ask your question and please state your company name.

under the weather. Just

for Piper Jaffray. In the February conference call, you indicated that you were, you know, in the middle of budgeting and planning at that time. Could you just give us an assessment of where you are? And how, you know, how soon are you complete with

.

Does -- have you got all of the employees in the right places now? And you've redeployed everybody where they need to be? And finally has -- is the headcount stabilized and where you want it to be?

Well

, this Stephen. I'd say if we were in the middle, probably what we were in February was at the third of a mile place through the budgeting, we're now kind of two-thirds of the way through. We ultimately don't complete our plan until the end of -- really the end of April. And so all of our decisions relative to anything that's important component of the plan it's still being worked through here.

And that includes the SG&A cost line. It includes the organizational implications. All of that is still in process.

And are -- have you gotten all of the -for the integration all of the sales people and other employees into the spots you want them? Or do we still got more of that to go?

Well I think the way we look at it is the great majority of the sales people are in the slots we want them in. We did all of that that we could right out of the blocks in sales. But there will still be -- there will still be additional adjustments as we go forward.

For example in our retail coverage, where we -- we end up shifting coverage there from what had been broker coverage to our own sales organization. And as -- that's a constantly shifting thing, some of it is related to integration. Some of it is just related to customer changes. And so you know that -- but the big -- the disruptive part of it which was the big bang at the beginning is definitely over.

I think going forward, what you would see is the kind of change that is more routine in the -- we're always changing our structure to respond to customers on the sale side.

With respect to other parts of the organization, we tried to anticipate the changes we could at the outset. But as we put the organizations together we will see other opportunities for synergy. And we will pursue those. That is one of the reasons why we said we think our synergies will exceed the original expectations. And we'll talk to you more about those in June.

Thank you.

Thank you, George.

That wraps it up. I think we'll hang up on this end. And like I said, give me a buzz if you have follow up questions for me.

Thank you. That concludes today's conference call.