通用磨坊 (GIS) 2003 Q1 法說會逐字稿

Ladies and gentlemen.

Thank you for standing by.

Welcome to the General Mills first quarter results conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question-and-answer session.

At that time if you have a question, press one then four on your telephone keypad.

As a reminder this conference is being recorded Wednesday, September 18, 2002.

I would now like to turns the conference over to Kris Wenker.

Please go ahead.

Thank you, operator.

Hello, everybody.

I'll turn the call over to Steve Sanger and Jim Lawrence in just a minute.

First, let me give you the standard reminder that this discussion will include forward-looking statements which are based on management's current views and assumptions.

And I'd ask you to please refer to the press release we issued earlier today for cautionary statements regarding forward-looking information.

I also want to make sure you know there are some slides posted out on our Company website that supplement today's remarks.

After Steve and Jim finish their prepared comments, we'll open the call to questions.

So Steve, do you want to get us started?

Thanks, Kris and good morning, everybody.

As you've seen in today's release, we are off to a good start in fiscal 2003.

The business disruptions that we faced last year while integrating Pillsbury are largely behind us.

And we see General Mills solidly on track to meet the financial targets we have set for the year.

Our reported numbers reflect strong incremental contributions from the Pillsbury businesses that we acquired last October.

Net sales for the quarter exceeded $2.3 billion, that's a 68% increase, thanks to volume -- the unit volume from Pillsbury brands along with growth from General Mills product lines.

More important, our unit volume was up on a comparable base.

Worldwide unit volume rose 2% for the quarter and that was driven by 3% growth in our U.S. retail unit volume.

Our margins improved from last year's third and fourth quarter levels when weak unit volume performance led to a significant loss of operating leverage.

Joint venture income nearly doubled in the quarter on profit growth from our established ventures plus a strong incremental contribution from Haagen-Dazs ventures in Asia.

And these factors added up to good growth in our after tax earnings which increased 16% before unusual items.

And our diluted EPS totaled 56 cents for the quarter, which is a penny above the guidance range we provided back in June and 3 cents above the first call consensus.

I'd like to briefly comment on segment results which clearly reflect the fundamental changes in our business mix.

For our U.S. retail business, the 36% sales increase outpaced the 22% operating profit growth.

That's primarily due to the addition of new businesses like Green Giant vegetables and Old El Paso salsas and ingredients where selling prices and margins are somewhat lower than for our former product mix.

In addition, trade spending was up for the period consistent with our first quarter plan which included a high number of new product introductions.

Bakeries and Foodservice net sales exceeded $400 million for the quarter, that basically equaled the annual sales of our old Foodservice business.

Operating profits for Bakeries and Foodservice before unusual items doubled.

International results showed strong rates of sales growth as Pillsbury adds significantly to our former non-U.S. sales.

Our former sales were essentially our Canadian business.

Operating profits grew faster than sales which reflect first efficiencies in SG&A expense.

I want to turn now to our comparable unit volume trends.

And as you've seen, in the release, in the U.S., retail business, it was Big G that led the volume growth with shipments up 6%.

Now, in part, that reflects an easy comparison.

Big G shipments were down slightly in last year's first quarter.

We also had strong growth for our line of milk and cereal bars.

A year ago, this line was on allocation due to limited supply.

Today we've added capacity and launched a fourth flavor and so this popular line accounted for about a third of Big G's volume gain.

But the biggest growth factor was good performance by our core Big G cereal brand.

Particularly, Honeynut Cheerios, Trix and Lucky Charms.

The improved trends we have been seeing in the cereal category overall were a factor, as well.

Cereal category sales grew 3% in our first quarter.

Now, we calculate that, that's our all Nielsen measured outlets plus Wal-Mart, our projections for Wal-Mart.

Our -- so that's the category up 3%.

Our retail sales were also up 3% for the quarter.

And so our dollar share held steady at just under 32%.

And we're fine with that because it compares to a very strong Nielsen quarter a year ago where we had a 5% volume gain in last year's first quarter.

For our yogurt business, unit volume grew 11% in the quarter.

This reflects continued good gains by Yoplaits' established products, our 6 ounce products along with the success of new Whips which was introduced in January.

And in fact Whip's performance was so strong that it forced to us put all of our 6 ounce cup products on allocation briefly during the quarter and so we couldn't run any merchandising on these brands during the quarter.

And that affected our market share trends.

But it hasn't altered Yoplait's volume or profit outlook for the year.

For the Meals division, comparable volume grew 1% in total, Progresso Soup shipments were up nearly double digit.

Old El Paso dinner kits and Green Giant canned vegetables also posted strong gains.

Comparable unit volumes for Pillsbury U.S. division grew slightly less than 1% for the quarter and that reflects some volume gains by Totino's pizza and Pillsbury frozen baked goods which offset declines that we had on our toaster streudel and on refrigerated biscuits.

You heard me talk about our slate of improved products in this refrigerated dough area which really just began shipping in recent weeks.

And the unit volumes for this business were up in July and August after a soft June.

But we would expect to see the real consumer impact of that in the next quarter.

Unit volumes for snacks and baking products were down in the quarter.

Snack volume was off 1%.

This reflects weak performance by Pop Secret popcorn and a comparison also against year ago numbers that still included volume for our squeeze-it beverages.

You may remember we made a decision at the end of fiscal 2001 to exit that business but we still had some volume in last year's first quarter.

For baking products, volume declined 4% and that reflects very intense competitive conditions in those baking mix categories.

One of the slides we put out on the Internet summarizes first quarter retail trends for our major businesses.

And that again as I said includes all Nielsen measured outlets plus our projections for Wal-Mart.

I have already talked about cereals where both the category and Big G showed nice gains.

And I mentioned yogurt where changes in our year over year merchandising activity muted our growth.

For the rest of our retail category, it's pretty much of a mixed bag.

In the case refrigerated dough, ready-to-serve soup and dinner mixes, our product innovations have really either just shipped at the end of the quarter or are shipping now, so we really wouldn't expect to see consumer trends pick up on these until the advertising and other consumer directed marketing activity kicks in.

Our consumer trends for desserts and popcorn as I said reflect competitive conditions in the market.

But we're showing good consumer trends in some other categories like fruit and grain snacks where we've got product news and innovation working for us right now.

Turning to Bakeries and Foodservice business, comparable unit volume was down 1% for the first quarter and that reflects the economy-relate weakness in several of the industry segments.

We felt saw volume declines from our food service distributor segment and restaurants and also in supermarket in-store bakeries.

In contrast, however, our volume with super-center bakeries was up nicely.

I think that reflects the growth of that super-center segment as a whole.

Our wholesale segment was up and our volume in convenience stores grew at a double-digit pace so we had some offsetting strength there.

Finally, unit volume for our international business was down 4% in total for the quarter.

In Canada, volume was up 1% overall.

This includes a first quarter decline for Green Giant canned vegetables which we had anticipated because it reflected product shortages at the end of a bad market, -- marketing a bad 2001 vegetable crop.

Vegetable inventories are being restored with the new harvest, so we can fill depleted pipelines and support fall season merchandising.

If you pull out the canned -- the vegetables, though, volume for the rest of our Canadian business was up 7%.

In particular, the cereal business continues to perform well in Canada as category sales grew 5% in the quarter and our share grew a full point in that growth -- on top of that growth to exceed 22%.

Combined volume for the rest of our international business, consolidated international business I'm talking about now, was lower due to the economy-driven weakness in our Latin-American markets.

Volumes were up in Asia and Europe.

I mentioned earlier the strong first quarter results posted by our international joint ventures.

Their after tax profit contribution nearly doubled to reach $17 million in the quarter.

That reflects very strong top line driven growth by our established joint ventures.

Volume for Cereal Partners Worldwide was up 10% in the first quarter, Snack Ventures Europe showed an 11% volume increase.

In addition, several Haagen-Dazs joint ventures established by Pillsbury in Asia now flow into this equity income line and they contributed good profits as well.

In total, our renewed unit volume growth of 2% worldwide I have to say, was the key factor behind our first quarter results.

Now to give you a bit more on the details of the income statement and also the balance sheet, I'm going to turn you over to Jim Lawrence.

Jim?

Thank you, Steve.

And good morning, everyone.

Let's start with the income statement moving down from the sales line that Steve has just covered.

You can see that our gross margin looks a lot better than it did in last year's third and fourth quarters.

There's previous margins of 37% and 35% respectively reflected the loss of operating leverage which we experienced when our unit volumes declined in those two quarters.

By contrast, this quarter's margin at just over 41% is a much clearer indication of the true margin structure for our new business mix.

And I would just suggest that you feel comfortable using this quarter as a general basis for thinking about full-year gross margin estimate.

Now, our SG&A line totaled 22.6% of sales for the quarter.

And that, of course, is also an improvement versus our third and fourth quarter performance.

In terms of thinking about an annual estimate for SG&A, I would point out that our second and third quarters are expected to show higher level of sales than our first quarter has but our general and administrative costs are largely fixed.

Interest expense for the quarter totaled $142 million.

Now, we have given out an annual estimate of $600 million for interest expense across the year.

But, of course, we are a bit lower in our first quarter simply because we have started the year with more commercial paper than we planned to have at the year end.

Our effective tax rate for the quarter was 35.5%.

And that is consistent with the rate that we have assumed in our full-year earnings guidance of $2.60 per share.

Now, just to remind you, last year our effective tax rate was 34% in the first quarter.

So after tax as Steve mentioned our earnings grew 16% and our diluted earnings per share totaled 56 cents.

Now, that is before unusual items.

Unusual items expense in the quarter totaled $55 million pre-tax, or 9 cents per share after tax.

As you've read in the release, these expenses primarily relate to the closing one of our Foodservice plants in order to eliminate excess production capacity which was created by the combination of General Mills and Pillsbury operations.

We have also recorded some Pillsbury-related transaction integration costs.

In June in New York, I gave you a full-year estimate of $100 million pre-tax for unusual expense, and that continues to be a good estimate for our year.

Okay.

Let's shift from the income statement to the balance sheet.

Obviously, the year-over-year comparisons all reflect the impact of the acquisition.

So perhaps comparisons to May are a bit more helpful.

You will see the accounts receivable balance at the end of August is essentially unchanged for May.

And it's down roughly $80 million from the end of last year's third quarter.

If you drill down inside the receivables total and look just at retail trade receivables, our day sales outstanding trend is good.

General Mills' trade terms have been essentially the same since 1997.

So our DSO levels have been pretty consistent in recent years.

We've unified our terms and Pillsbury's since the acquisition and that has gone well.

And our DSO level for August was the lowest it's been in six years.

So we're quite pleased with that.

Our inventories balance was up about $200 million, compared to the May level.

And that's entirely consistent with the seasonality of our business.

Inventories are high just now on vegetables and certain finished goods like soup and baking products as we begin to approach the peak retail season.

The accounts payable balance in August is up roughly $100 million from May levels and that's due to increased trade accruals consistent with the good performance against first quarter merchandising activities.

Our notes payable balance is down roughly $300 million from May.

And that reflects the refinancing that we've done of some commercial paper, including the use of the minority interest.

You see that line minority interest reported separately a little further down the balance sheet.

Back in June, I told you that we saw the possibility of refinancing more than a billion dollars of our commercial paper using this structure.

In fact, we have sold just $300 million in minority interest, 150 at the end of our fourth quarter and another 150 in our first quarter.

And we have not done any more because in the current market environment, we have not found a larger scale opportunity at the terms that we would like.

I should also say that we have listened to General Mills investors who say this financing vehicle is more complex than it's worth.

Now, we don't believe that complexity should rule out a good idea.

But on the other hand, if it's not a good refinancing option, if it's not -- it's not a good refinancing option, if the terms aren't attractive.

And we have made the decision to turn our attention at this time to other opportunities for refinancing our commercial paper, which we expect to do through the end of the second quarter.

We're just at the beginning of the third.

I think most you saw Moody's indicate last week that they're reviewing the rating of our long-term debt.

They reaffirmed our short-term rating.

I have to admit we're a little perplexed by this since nothing has changed for some number of months now regarding both our financial position and future plans.

We continue to have credit facilities backing up 100% of our commercial paper position.

And those credit facilities extend out to January of next year and beyond.

I think we have a chart of that posted on the website.

As I mentioned, we intend to refinance the majority of our commercial paper this year with long-term debt, and we see plenty of flexibility, a number of different options, for doing so.

And we continue to plan to pay down at least $1.2 billion of our total debt position over the next three years.

The one thing that obviously has changed in General Mills' financial condition recently is the improvement in our business performance.

We're going to keep our focus on sustaining those improved trends and if we do, the cash flow from our businesses, the cash flow our businesses generate will translate to steady improvement in our financial position.

Now, the complete cash flow statement for this year's first quarter will be available when we file our 10-Q, which will be in early October.

I have two numbers today which I'll share which might be helpful.

Capital spending in the first quarter was approximately $100 million.

I do, though, want to reconfirm that we expect to invest $750 million in Cap Ex for the full year.

Depreciation and amortization in the first quarter was $90 million.

And we estimate that it will be $350 million for the full year.

So that covers the key items of the first quarter results which I'll review and I'll turn the call back to Steve for some wrap-up comments on our outlook for the rest of the year.

Thanks, Jim.

I'm pleased to report that our momentum is continuing in the early weeks of the second quarter.

Comparable unit volumes are up for September to date across our U.S. retail divisions.

And we have good merchandising lined up beginning with some strong back-to-school events our customers have built around our "Boxtops for Education" program.

And today more than half of all U.S. households with kids collect boxtops for their schools.

The schools redeem them from us for cash.

They use that cash to buy books, computers or whatever else they need.

We've expanded this program to include Pillsbury brands this year and that means boxtops merchandising covers over 800 SKUs in 20 categories throughout the store.

We're also running our annual 'Fall Salute to Savings" merchandising event.

This year's event features General Mills brand in 10 major categories across the store.

And again, it's time for Yoplait's annual 'Pink Lid Month" during this promotion for every lid consumers mail to us, we donate 10 cents to breast cancer research up to a total of $750,000.

Since 1999, we have contributed nearly $5 million to the cause of breast cancer research.

So we have a lot of merchandising going for us in the second quarter.

We also have a good continued level -- high level of new product activity planned for the quarter.

This week, we began shipping our new 6-flavor line of Betty Crocker complete meals.

These dinner mixes include canned Progresso meat and vegetables so everything you need for a fast family dinner is there all in one box.

In addition, we're shipping 10 new Helper varieties, some of these are traditional skillet varieties, some are oven-baked meals and we're adding three new varieties to our Bowl Appetit line of microwave ready entrees.

We mentioned earlier that our Pillsbury division began shipping a number of its new refrigerated dough items in the latter part of the first quarter so you should expect to begin to see advertising for these products in the next few weeks as we head into the fall baking season.

We've also begun talking to the trade about new products that are scheduled for farther down the road later in this year.

And these include two new additions to the cereal categories, number one brand franchise Cheerios.

We have a slide featuring these brands on the Internet.

New Berry Burst Cheerios will be available in two flavors, strawberry, and a triple berry version and that will begin shipping in January.

So to sum up, with roughly a third of fiscal 2003 completed, we're feeling good about our progress to date and about the momentum we're seeing across the businesses and across the organization.

We continue to meet the major milestones of our integration plan on or ahead of schedule.

As a result, we are still solidly on track to meet our goal of $350 million in cost savings in fiscal 2003 and on the way to a total of $475 million in synergies by 2004.

We expect to renew double digit growth in our earnings per share this quarter.

Today's press release included some guidance for you.

We're looking for comparable unit volume growth in the second quarter at a rate similar to our first quarter performance.

And we expect second quarter diluted EPS to total somewhere in the range of 71 to 75 cents before unusual items.

This would represent a gain of between 13 and 19% from the 63 cents we earned in last year's second quarter.

Despite the increase in shares outstanding.

Then the final two quarters, as you know, we will look for very strong triple-digit growth in earnings per share over last year's weak results.

This puts us right on track with our expectations for the year.

And let me recap for you the key factors we expect to drive our growth in 2003.

First, we have the full benefit of a full year of Pillsbury's results.

Second, we believe we can deliver 4% growth in comparable unit volume for the year and we expect that 4% growth to translate to at least 4% growth in comparable net sales for the year.

We expect to capture $350 million in acquisition synergies in addition to the baseline productivity that we expect ever year.

And we are looking for strong double-digit growth in joint venture profits.

Together we expect these growth factors to add up to earnings of approximately $2.60 per share before unusual items.

That completes our prepared remarks and so now we'll ask the operator to begin taking your questions.

Thank you.

Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone.

You will hear a three-tone prompt to acknowledge your request.

If your question has been answered and you would like to withdraw your registration, please press the one followed by the three.

If you are using a speaker phone, please lift your handset before entering your request.

One moment, please, for the first question.

Our first question comes from the line of David Edelman with Morgan Stanley.

Please go ahead.

Good morning, Steve, Jim and Kris.

Hey there.

Hi, Dave.

This might have been in the slides but I didn't have access to them.

Do you have data on what your composite U.S. retail takeaway was in the first quarter?

You know, I have to be honest with you, I don't have that handy to me.

Uhm...

I can follow up for people who are looking for a number, but that's not something that I have seen yet.

I got the individual category numbers but not a composite.

Okay.

And are you, uhm, willing to quantify the cost savings you generated in the first quarter from Pillsbury?

We really don't have the 300 -- you mean what part $350 million in synergies did we realize in the first quarter?

I don't think we have that broken out quarter by quarter.

So at least I'm not aware of it.

So I haven't seen -- do you, Kris have anything on that?

No.

David, the honest answer there is what we're tracking are the discreet items that add up to that $350 million in synergies.

And so your sight line on our progress there is the fact that we've completed actions for, you know, more than 75% of the totals, so our visibility and confidence on the 350 for the year is high.

I think what you might do as well is just the guidance we have given on gross margin and the suggestions on SG&A if you play that through with the growth rates that we have suggested for the top line, I think you'll find your way, uhm, in a fairly straightforward manner down to the $2.60.

Okay.

Thank you.

Thank you, David.

Our next question comes from the line of John McMillan with Prudential Securities.

Please go ahead, sir.

Good morning, everybody.

Good morning, John.

I'm sure Hershey's shareholders are going to collect boxtops now to try to get their way through the fall. [ Laughter ] Just, uhm, just one question for each of you.

You know, on David Edelman's takeaway question, it's clear that, you know, if you sum up all these takeaways, your takeaways probably were not up to 3% that your shipments were up.

So you've obviously, uhm, you know, been able to ship.

Now the question is, can you, uhm, sell?

But you have a lot of optimism, Steve that retailers essentially have accepted your promotional programs that you have the things in place.

But is it fair to say that you kind of shipped more than you sold in this quarter?

John, in certain categories, it's clear that we did.

For example, our shipments in things like soup and meals, uhm, and certain of the meals products and in refrigerated baked goods, uhm, were up, where the takeaways were not.

And that's new products coming in, in anticipation of the beginning of major marketing efforts in the quarter.

In the second quarter.

And those, uhm -- so the second quarter will be where we will see the takeaway that results from that promotional activity and the seasonal marketing activity.

And in cereal, uhm, you know, there really seems to have been a pretty dramatic improvement in the category, uhm, you know -- can you say that after just a couple of months?

Or are you seeing improved vitality in that area?

Well, I have been saying pretty consistently that I thought the cereal category dynamics looked better over the last 18 months or so than anytime I've seen them.

In this particular period, our -- the category grew about 3%.

We grew about 3%.

And, uhm, that is generally consistent with what our deliveries were.

Of course, Big G got a little benefited addition from the milk and cereal bars.

I think that's sustainable.

And the reason I say that is because our strength, if you look at it, is so clearly at this stage from -- from good solid growth on our core established brands.

We are not getting a big unusual kick from new products right now.

Our new products are coming later, as you've heard.

So, you know, I think what we have is with Kellogg, putting more emphasis on consumer brand building and us doing that, that we're back to a more healthy environment in the cereal category.

And just for Jim, the -- the -- the 260 -- $2.60 I guess had a little cushion in it from a potential decline in the tax rate as these, uhm, financing issues were given consideration or, uhm, now that you're scraping that plan, I guess there's -- there's less cushion to the $2.60 because of tax rate issues?

Am I hearing that correct?

The $2.60 is consist with 35.5% tax rate.

Obviously, if our tax rate were to go down and we, you know, constantly work to pay less tax if we can properly, there would be some cushion.

We are not at the moment pursuing larger investment in this minority-preferred interest so that particular avenue to get the tax rate will not come up so long as we don't pursue that.

So one could argue there is less of a cushion?

Well, uhm, there is certainly that particular cushion is not immediately available to us, but on the other hand, we're 4 months into the year and we do have very good confidence in the $2.60 for the full year given the full variety of things that we're aware of in the business.

Okay.

Well, congratulations.

Thank you.

Thank you, John.

Our next question will come from Andrew Lazar with Lehman Brothers.

Please go ahead.

Good morning.

Good morning, Andrew.

Hi, Andrew.

Just a quick one.

You talked about the pro forma volume being up around 2%.

I'm curious if you have an estimate again on a pro forma basis for what the impact of price mix, you know, sort of limited let's say the top line in the quarter?

Because obviously with all the new product launches, I'm assuming that was a bit of limitation, but you talked about sales being roughly in line with volume on a full year basis.

So I want to get a sense of whether -- you know, when you start to expect to see that, I guess, you know, turning direction and becoming actual positive to the overall top-line growth rate and why you have confidence in that given the heightened promotional environment I guess that we are seeing.

Andrew, I'd say that you're right, that the net sales, of that trade expenditures, didn't grow as fast as the unit volume did in the first quarter.

That reflects, though, more new products based trade introductory expense rather than heightened promotional environment.

And as we began to -- as we get the ongoing volumes without that new product expense, we believe that starting in the second quarter, we should see that phenomenon change, that the net sales ought to be roughly consistent with -- and ultimately slightly ahead of our unit volume growth because we do have some pricing and mix benefits that will affect that.

Andrew, it's Kris.

I want to come at this just on a reported basis so you have that trued up, also.

Sure.

So, first of all, we're talking U.S. retail right now, obviously, because that's where the new product activity is.

Right.

So that was up 3 --

Yes.

So on a -- shipped from comparable now to reported for a minute, so I'm going to true up to the reported sales increase you're seeing of 36%.

So for U.S. retail alone, trade spending would have grown slightly faster than that because of the support for the new product introductions .

But remember, the consumer marketing comes later.

So you ought not to presume that total marketing spend for U.S. retail exceeded that rate of sales growth.

Got it.

And then when you think total Company, because the mix of business has changed, certainly marketing spending was up in the quarter.

But it grew less than the rate of sales and volume growth.

Got it.

Great.

That's helpful.

Thank you.

Our next question will come Chris Rowley from A.G. Edwards.

Good morning.

I have a couple of follow-up questions.

First off, I guess the flip side of the shipments versus consumption question is that are you still seeing this pattern of trade deloading that was affecting you last year?

Is there any meaningful sign of that early in the year?

When we look at -- when we look at the, uhm, the figures, I'd say that really isn't -- that wasn't a factor in the first quarter.

As we pointed out, we did for seasonal businesses ship in a little more than consumption, which is normal heading into the high consumption season.

But we didn't see any evidence of deloading in the non-seasonal categories, like cereal and such.

So, you know, we have very pronounced level of it last year.

But at least in the first quarter, that was not visible.

Okay.

And I just have two questions, I think, for Jim.

On the minority interest partnership, the tax savings, will there be any incremental tax savings from the incremental investment of that vehicle from the -- the -- that came in the second quarter, early second quarter?

Early, early in the first quarter.

There may be some coming through, but the guidance that we've given of 71 to 75 cents for Q2 is on a 35.5% tax rate.

The other question I have is on the unallocated corporate items there was a shift from there from expense to income year-over-year.

I'm just curious.

What was at work in that line?

Hang on a second.

Do that one again?

The in unallocated corporate items there is a $7 million in income as opposed to $15 million in expense.

I'm just curious what was at work there?

That is just a bunch of little things.

You know, you're going to see that, uhm, unallocated corporate, you know, small little drips and drabs shift year-over-year.

We took a look at whether there was anything particular in there and no.

So would you anticipate, then, say income from that line?

I had it in expense for the year.

I don't even --

Okay.

-- have a -- you know, it's... it's accounting book stuff, and you know, it's all going to -- most of that stuff settles out at the end of the year.

So I wouldn't -- I wouldn't even try to hazard an estimate for you.

Okay.

That sounds great.

Thank you.

Thank you.

Our next question will come from Bill Leach with Bank of America Securities.

Please go ahead.

Good morning, everyone.

Hi, Bill.

Congratulations on a good quarter.

Thank you.

I had a question about commodity prices.

One thing that has changed since you issued your guidance is obviously the cost of wheat which has gone up about 40% and flour that's gone up about 50%.

How is that affecting you and do you think we're in an environment where you can pass that along?

You know, we do hedge and -- and try to buy forward on our commodity requirements.

Our ability to do that varies by the particular business.

It didn't affect us in the first quarter, and I think won't be a major factor for us for the year.

It may create some pricing in some of our categories.

And so, you know, that remains to be seen.

But I would say that we don't see it as a thing that is going to jeopardize our guidance for the year.

And it may create some opportunities.

And another question I had, can you give us some guidance on the joint venture income for the full year?

Should we just take 17 and multiply it by 4? [ Laughter ]

No.

No! [ Laughter ]

Wish you could.

Strong double-digit is as specific as we've said.

I think you know.

But, uhm, I can't tell you in good conscience you ought to take 17 and multiply by 4.

If you are thinking perhaps there is a little seasonality to ice cream business, that would be a reasonable assumption.

And, uhm, you know, as to CPW and SVE, I think if you go back and look at the quarters that we've reported for them in the past, you'll see a little a bit of seasonal pattern there, too.

So don't get carried away.

That item was $33 million last year.

Could it be roughly $50 million this year, just to pick a number?

I'm just going with strong double-digit right now.

Okay.

Thanks a lot.

Thank you, Bill.

Our next question comes from Leonard Titlebaum with Merrill Lynch.

Please go ahead.

Good morning.

I just have a -- two questions here.

On the accounts payable, where it's up $100 million, when does that roll off?

Is that all rolling off in next quarter, or is that going to be accruals that are going to be up to the retailer to spend throughout the year?

This is the one that's up primarily because of --

It will probably be coming down in the next quarter because it reflects accruals as we are merchandised in the first.

Right.

But I didn't know if you're booking it a quarter ahead or these are, uhm, merchandising credits that can be used throughout the year?

We've already expensed them so we should peak now and then trail off for the rest of the year?

It's as incurred.

Okay.

Uhm, you've introduced several new products.

Are they due -- and you talked about hitting the market some this quarter, some next quarter.

How much is going to hit after -- after this quarter in the last two quarters of the year?

I am expecting all the new products to be out before the end of this calendar year, is that a fair assumption?

Well, the ones we have talked about, other than the two new Cheerios items, will all be out before the end of this calendar year.

Most of them -- most of the ones we talked to you about are either in the market now or are shipping now.

You know, but... but, uhm, the new Cheerios items will come in the third quarter and there will be a good cadre of other new items coming in the third quarter, too.

We just typically don't announce those to the trade more than, you know, a couple months in advance.

And so, you know, you'll hear more about our second half new product line-up as we get closer to it.

See, the reason for my question, I'm trying to plod through on a -- let's say on a unit volume basis.

Are we -- obviously, there is the seasonality and we have to factor that in.

But volume from new products, I don't know if it's going to be a build throughout the year or it's a peak in the November quarter.

And then, uhm, kind of plateauing at that level.

And that's the reason for my question.

Well, certainly the volume peaks in the November quarter, total volume.

Is that --

I meant for new products.

That's the largest of the year.

I just meant from new products.

Is there going to be a new product build for the whole year?

Are we going to rise to the peak in the November quarter and then just plateau from there?

I think there will be a year-over-year new product pluses will probably grow as the year goes along simply because we had very little in the third and fourth quarters of last year.

We'll benefit not only from the ones that we already have in the market in the first and second quarter this year but also the new stuff we introduced in third and fourth this year.

So I would expect that, behind growth rate and the new product growth rate, will both pick up as the year goes along.

Okay.

Fine.

Thank you very much.

Our next question will come from Jane Moon with Salomon Smith Barney.

Please go ahead.

Hi, good morning.

Hi, Jane.

I just really want to go back to the volumes again in the quarter.

I know they have already been discussed and I know you say you're happy with the momentum but really still, when I look at the volumes, except for yogurt, and except for the fact that you were able to ship ahead of consumption on ready-to-eat cereal, just a lot of this stuff really still looks to be lagging.

So I don't know, why... doesn't this look as broadly bullish as I know you are having bullish confidence the rest of the year?

But I just feel like I'm missing something, to be honest.

Well, one thing is, of course, we didn't ship ahead of consumption on ready-to-eat cereal.

Our ready-to-eat cereal growth of 3% versus our shipments growth of two-thirds of the six, about 4%, is pretty close.

So that pretty well matched.

Yogurt is pretty well matched.

Our bars and snacks business pretty well matched.

The ones where we shipped ahead of consumption were on the cold weather seasonal items like baking, dough, soup and stuff like that or on meals where we have a lot of new stuff coming in the second quarter.

And you're right, those look pretty unremarkable in terms of consumption.

Actually, they don't look all that remarkable in terms of shipments, either.

But they, you know, early indications from the distribution we've attained on the new items and the volume we're seeing in September would suggest that we are going to see a nice pickup there.

I kept getting kicked out of the slides so maybe there is a slide about it.

But what was the year ago comparable volume number?

All in?

Shipment number was --

Unit volume -- I know for total consolidated Company pro forma basis, it was 2, I think.

Retail is 1.

Retail is 1.

U.S. retail was 1.

U.S. retail was 1 all in including the Pillsbury items.

You know, you're uhm -- you're up not at the trend you want to be versus a weak quote easy comp.

No.

The easy comps in the back half.

We've told you that the way we saw 4% comparable volume growth coming for the year was slower than that in the first half, faster than that in the back half.

That was our guidance to you in June.

This was below your guidance.

That's not what I'm saying.

I know that the second half are really super easy comps.

But you know, if you think about -- because -- but if you think about it, you're lapping a 1% growth number in the year ago.

And your outstanding long-term guidance, I believe, is that the two companies together should be able to do in excess of 4.

And I know you're not there yet, obviously you still have things to do and you're early in the integration.

But, uhm, it just -- I'm not saying it was different than your guidance.

Are you were very clear in saying low single-digit for the first quarter.

Yeah, Jane, the way we see this developing this year is uhm, a function of the way the new items come into the market, the way our integration takes hold and our learning curve comes up on operating as a single Company.

And the way the comparisons look.

And that's why we believe that we, you know, we needed to deliver low single-digit in the first quarter.

We need to deliver something similar to our first quarter in the second quarter.

And then going against minus 3, minus 4 kind of numbers domestically in the third and fourth quarters, we believe we will have much stronger volume growth and that's how we get to, I think we have been consistent in saying that's how we thought we would get to 4 for the year.

I'm not questioning your consistency of your guidance here.

I understand it.

I guess I'm just trying to pick, you know -- it's, quote, you know, easy to be up a lot when you're lapping something that's down.

It's easy to be up when you are lapping something that's been running below trend.

I guess I'm still would love to hear you just address, you know, what you think the combined normalized volume growth power of this -- of the Company is.

I mean, this is sort of a noisy year.

Well, you know, I think what we've said on that is, we believe the combined growth power is greater than the solo growth power of General Mills in any given environment for a variety of reasons that we have laid out to you repeatedly.

And we will be happy to discuss that with you as we get down the road.

Because we're coming off of a year where -- where volume weakness was -- was an issue for us, we are focusing very much on -- on delivering the near-term results and getting back on the kind of growth path that we have historically enjoyed.

And once we have established that, we have met the expectations or are meeting consistently the expectations we have laid out for you, I think it would be very appropriate to talk about that longer-term growth potential.

Just lastly, on the interest expense, Jim, are you still definitely using the 600 this year?

I know you said (indiscernible) refinance more later in the year but given that you already started with more CP than you thought you would have at this point or are you just building a little cushion in there?

The 600 is our guidance for the year, and we do anticipate through the next three or four months terming out a very good portion of the $4 billion of commercial paper that we have.

It's really second half interest expense that rises versus first half?

Second half will be higher than first half, I would expect.

Our next question will come from Terry Bevans from Bear Stearns.

Please go ahead.

Good morning, everyone.

Good morning.

Uhm, we've had a lot of discussion on the consumption takeaway thing and I guess that still troubles some people.

Do you think, you know, it seems to me a lot of us look at the IRI numbers and those weren't particularly auspicious over the last 12 months.

Do you think the difference between what you're looking at and what we're looking at is that you're using Nielsen plus your own estimates for Wal-Mart?

Well, first of all, if you are talking about a 12-month trend, our estimate --

I'm sorry, I meant --

Not particularly auspicious, either.

But for the latest quarter, I don't get IRI numbers so I don't really know what you're looking at.

I would say that the syndicated services -- and I presume IRI has the same problem as Nielsen, they don't have Wal-Mart which is clearly the biggest growth driver in -- and they don't have the clubs to a large degree and they're a growth driver in all the food business.

So we're finding that the Nielsen numbers alone do not provide a good reflection of the way our business goes.

However, if you take the Nielsen numbers and add data that you get from Wal-Mart or a panel projection in case of competitive items that you get from Wal-Mart, we feel like we can get a pretty good approximation of what the takeaway is that makes logical sense relative to what we're shipping.

It sounds like the Nielsen numbers in the quarter were closer than the IRI numbers from what you guys are saying.

I don't really know.

But I just would caution you to be really, really, uhm, careful in how you use that syndicated data because it's missing such important pieces of the industry.

I mean, probably within any given set, you can look at shares and have a reasonable expectation.

But in terms of actual volume trends, they are just going to be way understated.

Point well taken, Steve.

And I did as Richard Nixon would say misspeak myself.

I was referring to the 12-week IRI data, and it shows things like baking mix being off on volume 8%, refrigerated dough down about 6, yogurt down around 5.

And I think maybe that's causing some of the disconnect.

But certainly your point is well taken.

I just add it's not just that Wal-Mart is missing.

Wal-Mart is just growing so quickly now relative to other retailers that you don't just miss the data.

You end up missing the trend and we're doing, you know, quite well in Wal-Mart.

Okay.

Fair enough.

Just one quick question on cereal.

As I look at the latest 12-week numbers again flawed though they may be on IRI, it seems as though you guys are really kind of throttling back on your portion of cereal going out under some kind of deal.

Is it reasonable to expect that what we can look for going forward from Big G is going to more closely approximate the volume to value kind of strategy that Kellogg is using?

[ Laughter ] Well, you know, I -- I think, uhm, from what I've heard of it and I'm not an expert in it, I think Kellogg's volume to value strategy sounds like it's great strategy and it's doing very well for them.

I would remind you however that notwithstanding all the volume-to-value stuff they may have done, our value per unit still is far higher than theirs.

Yes.

Our percent of volume sold on promotion is still lower than theirs.

Our average price is still higher than theirs.

So I think you could say that the value strategy is where we've been and Kellogg is moving toward it and I think it's a good strategy.

And so I don't know what the IRI numbers say.

Our data shows that our percentage of cereal sold on promotion is very flat in the quarter from year ago and for the 52-week basis.

Still below Kellogg's.

And the thing that gave us the growth in the quarter was actually baseline, non-promoted volume.

Which we find encouraging.

And that's the way we like to do business.

As I've always said, for us, a merchandising promotion is largely a defensive game we play to stay competitive.

But we try to win with brand building and consumer innovation.

And that's what seemed to work for us in the quarter.

Okay.

Well I'll look forward to these new Berry Cheerios.

Thanks very much.

Our next question comes from SunTrust Robinson Humphries.

Please go ahead.

Hey, just a quick question on the Bakeries and Foodservice division.

You know, some of the weak volume trends you are reporting there, I mean, just comparing to the universe of Foodservice distributors, just heard from Cisco like things -- in general are okay with restaurants.

Do you think there's some competitive activity there that's driving that?

Or really just economic weakness?

As best as we can tell, the overall sector from the data we get is running down more than a percent on a volume basis.

And so the trends we're showing in some of those weaker sectors are pretty much mirrored by the broader sector.

That may be better performers within the sector.

I don't know.

And so the strength that we are getting are from really places you wouldn't consider traditional Foodservice sectors but we have in that particular part of the organization like convenience stores and super-center in-store bakeries.

But we do believe that and the other thing that we believe will help us as the year goes along is the ability to add new business by cross-selling General Mills items into Pillsbury former customers and vice versa.

So I think we expect to -- we don't expect to be held down to the sector level of trend.

I don't think that's something that we're willing to accept.

We have to outpace that but it's our view that right now, we're doing at least as well as the sector is in most of these segments.

Thanks.

And just one quick follow-up on the Wal-Mart data you mentioned.

Clearly, if you just look at IRI, you are clearly missing the absolute level of volume.

Would you think --?

Is it fair to say from your observations that there is a mix shift as well as in like some of your categories, there is a greater Wal-Mart effect than others or is it pretty much even across the board?

Well, the -- the, uhm, very rapid growth of Wal-Mart is a factor in every category in which we operate.

There may be some differences from one category to another and whether it's, you know, 25% growth or 35% growth, but that's the kind of, you know, order of magnitude we're talking about.

I mean, uhm, you know, that's the kind of growth Wal-Mart is putting up across the board in these food categories.

And that's it is so difficult to get a view of the whole market if you just look at that the non-Wal-Mart market.

Right.

Thanks, congratulations.

Thank you.

Our next question comes from (indiscernible).

Please go ahead.

Pardon me, your line is open.

Please go ahead with your question.

Our next next question comes from Janet Diller with Lehman Brothers.

Please go ahead.

Good morning.

I'm with Lehman Brothers Fixed Income.

I wanted to ask you, a question, I believe that you have said that your debt reduction -- you expect your debt to be flat this full year and I was just wondering if you could talk about whether or not that includes an allocation for the contingent value rights and then I have a follow-up.

Yes.

We do not expect to pay on the CDR this year.

And so we do not include that payment as part of our expected cash flow.

And so the flat debt at year end is with the expectation that we have not paid.

And wouldn't -- don't the contingent value rights -- aren't they become exercisable in I believe it's March?

No.

They are priced in April.

It is 20 days of our stock trading in April.

And if our stock is above 49, which we believe it will be at that time, we will not be paying the contingent value right and it then extinguishes at the end of April.

If you do, then -- but if you -- under the circumstances where you would have to pay, then, are you saying you wouldn't pay in the fiscal year, it would be payable in June or something like that?

No.

If we were to have to pay, we would have to pay immediately at the end of April which would be within our fiscal year.

And the worst-case scenario would be that $5 per share for each of the 79 million shares which Diagio holds now and if they hold them at the time, just slightly under $400 million, we would need to fund that within this year.

Consequently, our debt balance at year end would be 400 worst if that were to happen.

Okay.

Then I also want to ask you about the working capital.

Were you talking about inventory and the controls that you have had in payables.

I'm just wondering, are you expecting that you can generate some cash from working capital this year?

We did in fact generate some cash from working capital last year.

And we have in our plans expected working capital to grow consistent with sales.

But we are hopeful that perhaps we can do a bit better than that but that's not at the moment baked into our assumptions.

Okay, great.

Thank you very much.

Thank you very much.

Our next question comes from Eric Kaplan from Deutschbanc Banc.

Please go ahead, sir.

Hi, good morning.

Can you hear me?

Hi, Eric.

Man, I didn't think I was going to make it.

Uhm, I guess, uhm, I wanted to follow up on the raw material cost issue because, uhm, I guess Steve, I'm a bit concerned with your comments that you could pass through these costs not so much on the retail side of things because obviously, you know, you have proven in the past that you have an ability with your brands and relationships to the retailers to pass stuff through.

But seeing that about half of that business is Foodservice and that's just such a competitive and often bid kind of business, can you talk about that and I don't think it's so much a raw material cost issue for '03 because your annual report said that you had hedged through May of '03.

It's really more a function of, uhm, of '04 and maybe you could also just kind of comment on how those negotiations go forward with your Foodservice clients and is that a contracted business, are there usually cost-plus provisions in the contracts?

I'd appreciate that.

Eric, I don't know that I -- I'm capable of or want to get into the intricacies of customer by customer Foodservice business.

But what I would say is we do tend to cover probably more than our competitors do in the Foodservice business and so when you have these kinds of costs situations, and we have seen them in the past, everybody moves.

They have to because, you know, the prices are up and -- and, uhm, you know, so... if we have coverage, that's to our benefit.

But the reality is many of the competitors and particularly in Foodservice are operating in the spot markets for their commodities.

And so, you know, that -- they tend to follow those -- any increases quickly because you need to.

Everybody needs to.

And --

That has been the experience.

That's been the experience.

And I think, uhm, you know, that would be what we would anticipate going forward.

Okay.

And then as a follow-up, can you also comment on I guess in terms of the -- obviously, the merchandising effort that you are going to have to go forward with to keep the new products, uhm, moving, uhm, you know, we saw from Heinz the other day that they tried to shift a little bit away from promotion towards consumer and it really backfired on them.

Maybe you can talk about that a little bit in general.

Are you finding that the -- I guess struggling traditional retailers as opposed to Wal-Mart and the mass merchants are demanding more and more promotion as opposed to kind of going with you on a consumer based effort?

Well, certainly, a struggling retailer has a quandary because our promotional funds tend to grow with growing businesses and they move the other way with businesses that are shrinking.

And so where a retailer is experiencing volume declines, they are getting less promotional money as a result of that.

And so they really need, and we work with them on how to squeeze the inefficiency out of their promotional activity.

A lot of the traditional retailers I think are shrinking because they aren't getting full value out of the promotional funds.

They're kind of using it to fund this and that, you know, slotting and menus and all kinds of stuff but they are not putting it through to the consumer to drive, you know, genuine sales increases the way they should.

And so, you know, that's one of our challenges is to work with these traditional retailers and help them get more promotional value out of the funds that we have.

Wal-Mart does it very well.

And they're growing.

So that's double benefit for them.

But I think, you know, that is an issue that is present for all manufacturers in the market right now.

Okay.

Last question, then, Jim, I guess this is kind of a statement of the obvious, but obviously, if the CVR comes up, one, I assume that your interest expense assumptions would, therefore, move up to reflect it either probably more next year than this year.

But also, would you kind of look back at the minority interest preferred to raise capital to pay off the CVR if necessary?

No.

Not for that specific purpose.

We have been carrying -- you'll see a significant amount of cash.

We have been doing that because we have been funding a significant amount of our balance sheet in the commercial paper market.

And what we have found is with that with that amount of funding it makes sense to take up commercial paper opportunities when and if they arise.

So we don't want to run tight on the cash.

And quite simply, if we were to have to pay out some portion of the CVR, we would pay it out of cash funds.

And then we would end up with -- in the short term, more commercial paper at the time.

If we were to have to do that, we obviously we look at our financing plan for fiscal '04 and you're right, our interest costs would be greater in fiscal '04 than it would have been otherwise.

But since it would really just affect the month of May for fiscal '03, you again are right, there is not much impact to the 600 for this year.

Okay.

Thank you.

Good luck.

Thank you, Eric.

Our next question will come [INAUDIBLE] from CS First Boston.

Good morning.

In the past you have not ruled out looking at the possibility of issuing equity-linked securities.

Based on my recent conversation with Moody's, it seems like what's on their wish list amongst others is for you guys to issue some equity.

Can you kind of give us an update in terms of what your current thinking is on that topic?

Well, we have considered a range of different financing alternatives to term out the commercial paper and indeed we are in discussions with Moody's.

They put out a release a couple days ago saying they were reviewing our rating and in those discussions, they'll give us an indication of, you know, what their thinking is.

But we're going to make our judgment of what's the right balance of cost and term and tenor and I don't rule out something which is equity-linked.

But I also don't rule it in at the moment.

Okay.

With regard to the minority interest line, do you know how the rating agencies are looking at that?

I mean, are they adding that to your total debt balance at this moment?

Yes, they are.

They are.

Okay.

And you kind of indicated in terms of your timing for the refinancing of the commercial paper -- I seem to have understood kind of your second fiscal quarter.

Can you highlight for us perhaps some of the parameters that you are using in terms of deciding when to go to the market?

Is it a continuation of the earnings trend as we have seen in the first quarter?

Is it on the basis of your spreads tightening from current levels?

Or is it perhaps waiting until we hear more from Moody's?

Well, certainly we'll be waiting to hear what Moody's has to say.

The -- in the slides posted on the Internet, on our website, you'll see that we have credit facilities of a billion which end at the end of January, another billion at the end of January '06.

Three years out.

And then $2 billion more which end in January for a total of $4 billion.

So certainly, we intend within that time frame to term out the substantial portion of our commercial paper.

We'll obviously be looking at how the market reacts to this first quarter.

I think it was a good quarter.

And we'll see how the market reacts to it.

We expect, frankly, to have a very good second quarter.

We have said 71 to 75 cents EPS.

So you know, we may want to let the second quarter play out and allow the market to look at that before we go to the market.

And obviously, there are external conditions like we might have a war on at some point in the next few months.

So all those things have to be kept in mind.

And we will do so.

But I think that the end of January certainly would be a time by which we would have termed out the vast majority of that commercial paper.

Okay.

And then just one final question on private label.

With retailers struggling to build top line and trying to improve margins at the same time, are you seeing any increased demands from retailers to work with them on the deferred development of private label programs and what are you currently doing in that space?

We do not manufacture private label.

We never have.

We have routinely over the years had requests from retailer that we do so but we have declined to do that.

It really isn't our strength.

It's not part of our strategy.

And so that really isn't something we do.

Okay, great.

Thanks very much, gentlemen.

Thank you.

We do only have time for one more question and that question will come from Goldman Sachs.

Please go ahead.

I just made it!

Just following up on the private label topic, are you seeing any -- are you seeing private label growth accelerating in each of your categories?

In some.

I think private label has been strong in the refrigerated dough category.

In the latest quarter, Kellogg, General Mills and I think private label were the strongest performer in the cereal category.

Retailers, you know, particularly the traditional retailers are I think trying to figure out how, you know, how maybe they can use their private labels to help them.

But as I said before, it isn't like it was maybe 4 or 5 years ago when we saw big gains in private label across the board.

Today, I think the competitive balance is very much a balance of the national branded competitors and private label.

It's very competitive from all fronts out there.

Do you think, though, that, uhm, the recent increase in private labels is a bit more cyclical in nature than the secular trends that we have been seeing?

Cyclical in what sense?

More people trading down right now because of the -- you know, the economic environment.

Yeah.

Possibly.

Possibly.

Any specific categories where it seems more pronounced?

You know, it really doesn't seem all that pronounced in our categories, I must say.

It's there.

It's a factor.

There was a period where private label was receeding.

That's not happening anymore.

So I think, you know, you have a certain amount of cyclical as you say private label.

But I don't -- no, there are no categories that I'm aware of where that's an unusually strong factor other than, you know, refrigerated dough, as I said, where the only major competitor is private label in many of our dough categories.

Just getting back to sort of IRI and the data, can you just talk about a little bit about what percentage of your sales aren't captured by IRI or Nielsen?

We have disclosed in the annual report that we have one customer which represents 12% of sales so that's one thing which you can look to.

I'm not really sure what percentage it is.

You've got Wal-Mart and you have the clubs.

And both of those are growth big growth areas.

But, you know, I don't know exactly what percentage isn't covered.

Significant, obviously.

I hope that there are a few people out there still queued up, you can certainly get a hold of me.

I'll be back at the phone in a couple of minutes here.

So thanks to everybody for joining us today.

We appreciate it.

Thank you.

Ladies and gentlemen, that does conclude your call for today.

We thank you for your participation and ask that you please disconnect your lines.