通用磨坊 (GIS) 2002 Q4 法說會逐字稿

Hello, everybody, I'm Kris Wenker for those who I haven't met.

I am here with General Mills Chairman and CEO Steve Sanger and our CFO and Executive Vice President Jim Lawrence.

Our Treasurer in the back of the room, Dave and Susanna Gustanson who is on the IR Team are with me.

We want to thank you all for joining us everybody here and all of you on the conference call and the webcast.

The press release with details of our second quarter was issued earlier today, presumably you value had a chance to take a look at that.

Let me give you the standard reminder that the release and our presentation today do include forward-looking statements which are based on manage's current views and assumptions.

Actual results could differ.

Let me also remind those listening in that the slides we are using here in New York are available on our web site.

Where we are going to go today, Steve will begin with a quick overview of our results.

Jim will spend a little time on the details of the second quarter, and then Steve will wrap up with some outlook comments.

After that, we will take questions.

So Steve, I will let you get us started.

Well, thanks, Kris, welcome everyone and happy holidays to all of you.

I am very pleased to be here today to talk about the results of our second quarter.

I think it's the first real visible demonstration of the growth potential of the new General Mills that we have talked to all of you about in the past.

As you saw from today's press release, our performance in the second quarter and first half exceeded estimates.

Our growth accelerated in the second quarter, and that momentum is continuing into December.

Beyond the strong operating results, we successfully refinanced our debt structure and improved our cash flow outlook for 2003 and beyond, and as a result, we see ourselves on track to meet or beat the original earnings expectations we talked to you about for 2003 back in June.

We completed our Pillsbury acquisition as you all know October 31st of last year's second quarter included about three weeks -- exactly three weeks of Pillsbury results.

So with a full 13 weeks of the Pillsbury results in this year, our quarterly results show big gains on an as-reported basis, 60% higher sales, better than 40% growth in both operating profits and earnings after tax and diluting earnings per share grew 22% to 77 cents.

Now these comparisons are also before unusual items.

Our growth, though, wasn't just a function of the additional Pillsbury sales.

We generated good growth on a comparable basis.

That's comparable as if we had owned Pillsbury for the full quarter a year ago.

We had net sales on that basis up a solid 5%, and our comparable unit volume was up 3% for the period, accelerating from the 2% unit volume growth we posted for the first quarter on a comparable basis.

Our U.S. retail business, our biggest and most important business, led the second-quarter growth.

Five of our six major divisions had volume gains.

Our largest big U.S. unit, big G cereals had a 5% unit gain.

Exclude milk and cereal bars and talk about cereal volume, up 4% for the second consecutive quarter.

Our Meals division, growth accelerated to 4% in the quarter driven by Green Giant vegetables, Betty Crocker dinner mixes and Progresso soup.

Pillsbury drove 3% driven by gain force baked goods and hot snacks.

After being on allocation for much of the first quarter, Yoplait posted 20% volume growth in the second quarter as it resumed its full marketing program.

And snacks volume grew 2% led by double-digit growth on Granola Bars.

The only business with a volume decline was our baking products, that's cake and frosting mixes, Betty Crocker brand, and that is currently facing a very intense, very promotional competitive environment.

And that led to our weakness in the first half.

In total, our U.S. retail volume increased 4% in the quarter, which exceeded the first quarter's pace.

I am happy to report that our December volume is growing at an even faster rate than that.

Retail sales for our brands are also growing nicely.

Based on the Nielsen data plus a panel-based projection for Wal-Mart which is what we have got to do these days to capture a full retail sales picture, the composite dollar sales for our major retail product lines have grown at a 3% rate in both of the first two quarters.

And our composite dollar share performance is strengthening from quarter 1 to quarter 2.

I should also point out that these second-quarter figures are understated just a bit and that's because Thanksgiving week, which was in the second quarter last year falls in the third quarter this year because of the week later Thanksgiving.

And that's a very heavy retail sales week for some of our categories and for our business overall, and that will fall in our third quarter this year.

And that aggregate growth in retail sales reflects good performance in most of our major product lines.

Retail sales were up for two of all categories listed here and we maintained and increased our shares in five of the categories.

The shift in Thanksgiving timing has a very clear dampening effect on several of these categories, particularly the share trends, and in most particularly refrigerated dough.

And to just illustrate that, for the first week of the third quarter, you see that our dough consumer movement dollar share was down 2% in the quarter, but for the first week of our third quarter, our retail sales for refrigerated dough business was up 60% or 6-0 during that Thanksgiving week versus the post Thanksgiving week a year ago.

And that is stronger than the category's growth which was also double digit.

So that will even out when we get through the third quarter.

Switching to our Bakeries and food service business.

It renewed its unit volume growth during the second quarter.

Comparable unit volume grew 2% for the period and as you can see here we clearly have an improving trend for the first half of the year.

Second-quarter volume increase was driven by gains in super center, Bakeries, convenience stores and quick-service restaurants and this performance outpaced the industry which is still continuing to struggle with the affects of the weak economy.

Our international business also posted good top-line growth for our wholly-owned businesses around the world, only Latin America has shown a decline and that as you know is due to difficult economic conditions.

Volume up nicely in other geographic regions and international joint Chentures posted strong increases.

SVE's volume snack ventures Europe was up 12 and Haagen-Dazs joint ventures in Japan and Asia hosted a aggregate 10% volume gain in solid unit volume performance all across our businesses was the key factor in our strong second-quarter earnings growth.

For more details on the quarter now, I will turn the microphone over to Jim, and then I will come back and talk a bit at the end about how the businesses are performing and the outlook for next year.

So Jim.

Thank you, Steve.

And good afternoon to everyone.

I'll begin toy quickly recapping our segment results, beginning with U.S. retail.

U.S. retail net sales which represent more than 70% of our revenues grew 42% to 2 billion 145 million dollars.

Bakeries and food service net sales doubled to 483 million and international net sales more than tripled to 325 million, making in total just shy of 3 billion for the quarter with 60% growth year on year.

Let's now look at operating profit by segment before unusual items.

Profits for the U.S. retail grew 494 million, that's up 39%.

Bakeries and food service operating profit grew 34% to $51 million.

And international operating profit more than tripled to $21 million.

We believe that these are results that represented good profit performance by all three of the reporting segments.

Corporate unallocated expense before unusual items totaled $4 million.

Last year's unallocated expense was higher for the second quarter due to certain costs associated with the completion of the Pillsbury acquisition.

In total then operating profit rose 45% year on year to $562 million.

Our after-tax profits for the quarter include a strong increase in joint ventures.

In total, our JVs contributed $14 million in aftertax profit, nearly 4 cents per share, that includes a full three months of seasonally strong incremental profits from our Haagen-Dazs joint ventures.

Principally Haagen-Dazs Japan.

Don't forget, that's LAGS, that's full three months in this quarter.

It also includes good profit growth from YPW, Cereal Partners Worldwide and snack ventures Europe which combined to combine $12 million of the total.

Despite development spending behind our soy joint venture with DuPont, our total JV products through the first half are up $19 million year on year.

Now may I offer just a word of caution relating to profit projections for the second half for these JVs.

Please keep in mind that we have now lapped the inclusion of the Haagen-Dazs joint venture and we are past their seasonal business peak shop we would expect quite modest growth year on year on the JV line for the remainder of fiscal '03.

So let's turn now to the full income statement, cost of good sold totaled 59.7% in the quarter up from the first quarter due to the mix of sales in our second quarter, in contrast SG&A totaled just over 21% of sales, which is an improvement of 150 basis points from the first quarter.

So the EBIT margin was 19% or 30 basis points better than our August quarter, and we are pleased with that.

As you saw in this morning's press release, interest expense came in at 140 million dollars for the quarter, and that's better than we counted on.

Since we have now largely completed the refinancing of our commercial paper, we are able to say today that interest expense will be lower for the full year than-original estimates have been.

And what I would like to do now is explain just how that has happened.

Since June, we have been working with an estimate of 6.5% as an all-in cost of debt for fiscal 2003.

Assuming a total debt balance of 9.1 billion, which is where we ended fiscal '02, you get an estimated interest expense of just under $600 million.

A 6.5% rate assumption, included the impact of the interest rate swaps which we put on in anticipation of the Pillsbury acquisition.

That was obviously known and fixed, you about it also included several estimates.

For example, we estimated the rates that we pay on the unswapped portion of our commercial paper.

We estimated the mix of debt maturities and the amounts that would ultimately place through our refinancing actions compared to the mix of interest rate swap hedges that we built, we estimated when those refinancings would occur and at what rates we would ultimately be able to get.

And finally, we estimated spreads that we would pay on the portion of commercial paper that is matched up with the swaps.

Naturally, we tried to be conservative in all of those assumptions with the interest rates swaps we had put in place and with the assumptions, we felt confident that after refinancing this year's interest expense would not exceed the $600 million estimate and, in fact, it will be materially lower.

Now here is a summary of the refinancing actions that we've completed during the past calendar year.

In total, we have replaced more than 5.8 billion dollars of commercial paper.

Nearly all of the 6.1 billion dollars in additional debt that we took on one year ago to acquire Pillsbury and included in that number is the buyback of the 55 million shares from DIaageo.

This refinancing committee leaves us with 1.7 billion of net commercial paper outstanding today, going forward, we will continue our retail notes program, and we will turn out -- term out some more of our commercial paper with the right opportunity, we may actually do some additional modest refinancing, but we are essentially done.

We expect to end at fiscal '03 with somewhere between 1 and 1.5 billion of net commercial paper.

We return now to the interest costs on the debt.

To this point in the year, we have been fortunate, everything has broken our way with respect to the assumptions that we originally baked into the 6.5% estimate.

For example, we plan to issue roughly 1.2 billion in three-year debt, by matches up with 1.2 billion in debt reduction that we are targeting by the end of fiscal '05.

We assumed a 4% rate on that debt and as you know in October, we actually were able to do a 1.5 billion three-year debt at 2%, and since it was zero coupon, we have also saved cash interest.

The difference between 2% and 4% for seven months is about $17 million.

In addition, interest rates have stayed low so the rates that we have been paying on our unhedged floating commercial paper are roughly 75 basis points better than we had allowed for, and the spreads that we have been paying on our hedged CP have been significantly less than we had allowed for.

We are pleased to be at the best end of the range of A 2 P 2 barrowers and with better rates and spreads that means we saved $10 million in the first half.

With all of these factors and a few others breaking in our favor, interest expense through the first half totals $282 million.

That would project to an annual level of $565 million, if you were to assume that we are as fortunate in the back half as we have been in the first six months.

We don't want to count on that.

There are a number of variables that we will encounter, including what happens to rates, whether we make any payments to Diageo under the CR agreement.

Taking all these variables into account we believe that 555 million to 580 million of annual interest expense is a prudent range to use at this point for our annual interest billed.

That implies an average all in interest cost of between 6.1 and 6.4%.

I think that Dave and his team from treasury who are here today have done a terrific job in refinancing our debt.

Their good work means we will pay less interest this year which adds both to earnings flexibility and to the free cash flow in fiscal '03 and, of course, we expect interest expense next year to be lower still as we pay down debt.

Let me turn now to unusual items.

They totaled 4 cents in the quarter.

The net expense related to the Pillsbury transaction primarily cost for relocating manufacturing capacity and other transaction and integration activities.

These expenses were partially offset by just under a penny's worth of additional insurance proceeds that continue to result from the settlement of a 1994 boat channeling incident which by wait we have collected accumulated 123 million pretax from the insurance settlements.

For the first three months of this year our unusual expenses was $76 million pretax or 13 cents per share.

Let's switch over from the income statement to the balance sheet, which shows some major changes from November one year ago.

The cash balance has doubled to $1.7 billion.

That's because we have received the proceeds from our October and November bond offerings near the end of the quarter.

You will see that cash balance come down as we pay off commercial paper and remember that my earlier comments refer to the net CP position.

We have also completed the purchase price allocation from the Pillsbury acquisition and you can see that we have moved about 3.5 billion from good will to other intangible assets, and that reflects the value of the brand that we purchased.

We also recorded 1.3 billion in deferred income taxes, which are associated with those brands.

The third major shift in our balance sheet is between notes payable and long-term debt and, of course, that's the result of the refinancing actions which we just discussed.

If we turn now to working capital, our core working capital items, those trends we think look pretty steady.

Our accounts receivable balance at the end of the quarter was basically flat to last year, while November sales were obviously up significantly year-over-year and we are quite pleased with that.

Trade receivables measured at days sales outstanding were actually modestly lower than a year ago, and modestly lower than at the end of the end of the August quarter.

That is for the U.S. retail business.

So, again, we feel good about that trend.

Inventories were up $200 million from last November.

That is basically attributable to the addition of vegetable inventories to our balance sheet.

Last spring, we modified our agreement with our packer Seneca that packs or our Green Giant brand so the vegetables for our inventories would be on our balance sheet when they are packed rather than on their balance sheet.

The accounts payable balance in November is up $315 million from last year.

Trade and consumer marketing payables were up in line with key merchandising seasonality, but they accounted for less than one-third of that increase.

The remainder is just good cash management across the company.

And we had said we would make working capital management a focus this year.

We have done that.

We have seen good performance against that goal, and we are pleased with where we are thus far.

Our capital investment through the first half of 2003 totals about $250 million.

Of that, about $50 million relates to the two acquisitions specific projects that we have under way.

Those are the consolidation of our headquarters and the SAP integration costs.

Projects utilizing the remainder of the $500 million budget ready lined up and ready to go.

We expect Cap Ex for the full year to reach $750 million, and we continue to see that that will be the high-water mark for capital expenditure with capital -- with capital spending expected to come down next year in fiscal '04.

In summary, we are pleased with our financial results from the second quarter and with the good progress we have made through the first half of fiscal '03.

We have strengthened our operating margin, we have refinanced nearly $6 billion in commercial paper on good terms, improving our expectation for interest expense.

We have managed our use of working capital pretty well, I think.

And I believe we are on track to achieve this year's objective to hold growth in working capital below the growth in sales.

In addition our capital investments are tracking within our budget for the year.

That covers the key financial details for the quarter.

So I now turn you back to Steve.

Okay, thanks, Jim.

Obviously, we are very encouraged by the results that we have achieved through the first half of the year.

As we round the corner, heading into the third quarter, we have more than half of our annual earnings per share target in hand, and the key businesses that we prioritized and focused on in the first half have responded well to our brand building initiatives.

Pillsbury USA is one of the divisions that we cited as an area of focus.

And remember, this division includes not only refrigerated baked goods but also Totino's hot snacks and pizzas, Pillsbury frozen breakfast products, as well as the refrigerated baked goods line and frozen baked good lines.

Back in June I told you that our baked good business in particular has been lagging largely because of lack of product news and that was something we had been very dedicated to changing.

I told that you we have made significant product improvements in our Grand Biscuits and added two new flavors of Grands back in August.

There you see the impact of that product news.

For this comparison, I have matched this year's second quarter to the 13 weeks proceeding Thanksgiving last year.

So it is an apples-to-apples comparison taking out that difference in the Thanksgiving week.

As you can see retail sales for that 13-week comparison on Grands versus a year ago is up 7%.

We brought product news to Sweet rolls with the new orange-flavored sweet rolls.

Our sweet rolls delivered good growth in that 13-week period as well, retail dollar sales were up 4%.

We brought the most news and drove the fastest growth on our cookie segment.

We introduced a product improvement in our established ready-to-bake cookies.

Remember those visible chocolate chips on the top and launched a whole new line of Big Deluxe classic cookies.

Retail dollar sales for our cookie business was up 17% for the 13 weeks prior to Thanksgiving versus the same prior to Thanksgiving 13 weeks a year ago.

And that's driven by great growth in that ready-to-bake segment where we have recently captured share leadership.

So fueled by these innovations, retail dollar sales for our total refrigerated dough business were up 2% for the 13 weeks prior to Thanksgiving.

And as I mentioned earlier, we generated very strong sales growth in this year's Thanksgiving week.

Frozen baked goods are now an $800 million category for us at retail.

And we continue to grow sales for the new Pillsbury lines of frozen sweet rolls, biscuits and cookies and grow it as a strong double-digit rate.

Our retail dollar sales were up over 70% for the 13 weeks prior to Thanksgiving.

We are now the market share leader in this category, and it is a very fragmented category.

So there's plenty of room for growth yet.

Year-to-date, our dollar share is 19%, dollar share of the category, and that's up 4 points over last year.

The other division that we prioritize in the first half is Meals, and this division includes our dinner mix business, hamburger Helper, as well as Old El Paso Mexican foods, Green Giant canned and frozen vegetables, Progresso soup and Betty Crocker side dishes.

Soup season, early, we have two new flavors and a product improvement in our creamy mushroom soup.

We followed that news with product improves improvements in New England clam chouder and beef vegetable soup and results have been very good.

Second quarter Progresso retail dollar sales up 7% and increased total can market by near 'a total share point.

In the dinner mix category, we have been working to maintain our core hamburger Helper franchise in the face of very strong competitive new product activity.

Our strategy has been to introduce good new varieties, including an oven-prepared line, oven favorites.

This strategy has worked well.

Retail dollar sales for hamburger helper is up 3%.

Betty Crocker complete Meals this fall has gotten good retailer response and initial consumer trial.

Wand all of that product news, our dinner mix share grew 5 points in the second quarter.

Now while we obviously needed to focus on these fall and winter seasonal businesses, we haven't been ignoring the rest of the product line.

In big G, the focus through the first half have been on driving good growth in our established brands.

And we have been seeing that.

I said earlier that big G cereal shipments, exclude the milk and cereal bars grew 4% during the first half and consumer pound volume is growing right in line with those shipments.

This does not reflect any change in merchandising levels.

The percent of volume merchandise is unchanged from last year and so is our share of the category dollar sales which is just over 32%.

We have been generating good growth for our established cereals with our basic blocking and tackling, product news, effective advertising, good promotion.

For example, our cholesterol-reduction message on Honeynut Cheerios, which was initiated about a year ago now continues to drive great growth.

Retail dollar sales are up 14% since we made that product improvement last January.

We've got good advertising support on brands like cinnamon toast crunch which is driving that brand's growth and continuing to use effective value-added consumer promotions that help motivate consumers to buy our brands without requiring discounting, a good example of that is the full-length movie DVD that is we packed on selected big sizes of kid brands in the recent period, including Lucky Charms, which is shown here.

If you look at our top ten brands, and those are the ones shown on this slide, the ones highlighted in yellow have post red tail sales increases for the year-to-date.

You can see seven of our top ten brands have grown, four of our top five are growing.

Of course, new products are important growth drivers too and we have two promising new items coming to the market in January.

New Berry Burst Cheerios will come in strawberry and triple berry flavors.

The sell-in on these two items have been extremely strong.

Clearly the grocery trade is excited about these additions to the cereal market's number one franchise and so are we.

We have got some great new products coming in our snack portfolio too.

We have got new screaming green apple gushers.

And Elmo fruit shapes with starts shipping in January along with two new flavors of Pop Secret popcorn and a Chex trail mix which includes chocolate-covered candy pieces and building on the tremendous success of nature valley yogurt-covered granola bars with a new blueberry flavor.

Yoplait which has gotten strongly back on the growth track in the second quarter news all across the line.

Two new flavors of Yoplait light.

We have a product improvement in go-GURT along with a new flavor coming soon and two new flavors of Yoplait Whips a terrifically new successful line introduction.

You can see we have a steady drumbeat of product news coming in second half of the year as well and we expect it will drive continued good unit volume growth in our U.S. retail business.

And there's one point that I really should remind you of, I think, about this performance.

I think it is important to make.

And that that we are still not really running at full stride.

We've made terrific progress in just 13 months to integrate General Mills and Pillsbury, two companies about the same size, but we are not quite done.

Even during the latest quarter, we have been cutting over to new integrated information systems, relocating manufacturing production between various plants and reconfiguring our distribution centers all across the country.

Our salespeople are still learning their new categories going through this winter season for the first time as one company, and simultaneously, while they are learning those categories, selling in an unusually high number of new product.

Under the circumstances, I would say our execution was good.

But it can get a lot better.

And going forward we will have progressively fewer of these integration challenges on our to-do list and I think you will see the impact of that in typical General Mills-style execution and that executes a further growth opportunity for our business.

As we move into the second half of fiscal 2003, we expect our unit volume growth to accelerate.

We will now be comparing to the months immediately following the Pillsbury close when integration activities consumed our attention and disrupted our growth.

So we will be looking for mid single-digit unit volume gains in both the third and the fourth quarters.

Our U.S. retail businesses are performing well with a combination of good growth on a number of established brands plus a strong level of new product activity.

We expect our U.S. retail segment to record continued good growth in both shipment and retail sales in the second half.

Bakery and food service has carried good momentum into November and we expect this segment to achieve volume growth for the year in total.

Obviously if the economy was to get stronger, this is the segment that would clearly benefit from that, and it would be a boost.

And we expect to record continued good growth from our international operations, our wholly-owned international operations are on track to deliver their profit goals for the year despite the market challenges in Latin America and as you saw earlier our international joint ventures have posted excellent growth.

We continue to estimate our third-quarter earnings per share -- we currently estimate our third-quarter earnings per share, excuse me, in the range of 65 to 66 cents, that's basically in line with the consensus of estimates published by First Call.

Earnings in this range represent a strong recovery as you can see from last year's third quarter, which reflected the impact of our weak unit volume performance and the resulting loss of operating leverage last year.

So in summary, we see ourselves running right on track against a plan that we outlined back in June.

We are benefiting from the full year of Pillsbury contribution obviously as we expected.

We are still expecting to deliver 4% comparable unit volume growth, which should drive at least 4% growth in comparable net sales.

You have seen our sequential improvement here in the first two quarters.

We are still expecting operating earnings to show strong growth fueled by $350 million in acquisition-related cost sinner geese plus the ongoing productivity savings we target every year.

We are on track to deliver a strong double-digit gain in aftertax earnings from our joint ventures and we have added some new financial flexibility with lower-than-expected interest expense.

In total, these factors add up to earnings of $2.60 to $2.62 per share before unusual items, which is increase of more than 50% from the $1.70 we earned in 2002.

And more important than that, think I think,, we expect to carry this good growth momentum into fiscal 2004.

The product innovation that we have been implementing and plan to implement in the second half and into next year across our portfolio will help to fuel continued good unit volume growth next year.

Next year, we will also have the benefit of an extra week, fiscal '04 is a 53-week year for us which comes along every six years or so in our fiscal calendar.

So we would expect good top-line growth next year, that in addition to $125,000 in acquisition sinner geese could turn into earnings growth we think at the upper end of published expectation for the large cap food companies.

We plan to share more details and specific information on our expectation for fiscal 2004 and the longer term at the Cagney conference in February.

So that concludes our update on General Mills.

We would be happy to take your questions now.

And I am going to ask Kris and Susana to choreograph that.

Kris will recognize you and Susana will bring you a microphone and we will take your questions.

[ INAUDIBLE ] Steve, it looks like you have got this back on track.

Could you -- there is one element I would like to you comment on and that you haven't and that's price.

We have certainly seen that up in two categories here recently.

Can you give us your attitude of how that will work into your strategy and is there an appropriate or inappropriate time to use it, and when would you implement one if you felt a need to?

Well, let me take the last part of it first.

I do believe that we can implement price increases to offset -- offset increased input costs if and when we need to.

I think we have done that in the past.

You have seen us do it.

You are seeing other companies do it now.

And the the pricing environment is such that it allows for that when necessary.

We have to date needed to do that in our food service business, and we have taken price increases in the first half of the year in Foodservice.

As you can appreciate, while I would say I think that is something that we believe you can do and must do, if the cost structure dictates it, we don't really comment on any specific plans that we would have for pricing that I think you can understand going forward.

Steve, can you talk a little bit about the guidance you are giving for the full year?

It just strikes me as extremely conservative.

Better than expected in Q1, better than expected in Q2.

You brought the tax rate down, interest expense is coming in lower than you thought and you talk about the momentum getting better.

Through the second quarter into the third.

Well, I would say that, remember, we are not counting on the interest rates in the second half being as favorable as they were in the first half.

It's possible.

Jim gave you the range.

What we have said is those pluses in first-half performance versus expectations, we have added to the expectations for the full year.

But we are only halfway through.

And we don't want to get ahead of ourselves here.

We have a good volume performance, and we have good volume momentum.

We also have some strong growth that we need to deliver in the second half.

I told you mid single dij knits our domestic business which is -- you know, not in substantial growth.

So I think it's good at this point to say that we have the flexibility that gives us strong confidence we can deliver on that range we've articulated and I don't want to get ahead of ourselves at this point with a half a year to go.

Kind of nice to hear the question, why don't you raise your projections higher again.

I was going to say.

I think our projections are higher than most of yours at this point, so -- but you know, we're -- [ LAUGHTER ] --.

That was my comment, not my question.

I appreciate your comparisons to shipments and takeaways.

I just want to zero in on one and that's cereal.

Your shipment of up 4 -- you are saying and Nielsen is saying equals the takeaways of up 4, but that says that you show no share growth, which should suggest that the cereal category from June 1st through November is up 4 in units.

That just seems higher than what I am seeing.

Can you kind of describe it?

Is it a rebirth of the category?

Is that the number that the cereal category has been doing the last four or five months?

Yeah, you can get within a percent of rounding.

I think, though, that is the kind of growth we are seeing.

Kris, is it three or four on the cereal category?

I think on a unit basis category is at 4.

Dollar sales growth is probably a little behind that.

Dollar sales growth for the category is probably more like 3.

Yeah, but we are seeing stronger trends in the cereal category.

You've got -- you know -- a lot of that is coming when you add in the Wal-Mart data which is seeing good growth in cereal.

Let's keep working down the row.

Why don't you hand it to Jane.

Thank you.

The sequential change in sales from the first quarter to the second quarter, I think is about $600 million.

And your business has always had a seasonality and I guess Pillsbury too.

I guess given that supposedly a lot of leverage to your margin structure, I was surprised while margin percentages were not up more from first to second quarter.

Can you comment on that?

Sure, we can.

Jim do you want --

It largely has to do with mix between the first and second quarter.

In the first quarter, we had some products which are perennial through the year like cereal which have, you know, very, very good margins and in the second quarter we have soup and you have got Green Giant and products which are -- that do not add to the same robust margin and that's where you have it on the cost of goods.

Isn't just the fact that -- dough I always think of as a higher margin business and a lot of other things in your portfolio, I would imagine that is part of the big seasonality lift in revenues.

Not enough --

Not enough to offset.

But it is a good margin.

If I can just follow up on David's question where he said, you know, you are having conservative guidance.

If I go back six or some odd months, the first time you use that 260 estimate for the year you are know, your tax rate was higher.

And I think maybe the difference in tax rate was 5 to 6 cents.

Your --.

Tax rate is 2 cents.

2 cents.

Okay.

Interest expense at the low end of your range in you get lucky.

That's 7 or 8 cents?

If you get everything?

Right.

Maybe.

Then I think maybe a couple others -- you have raised your sinnerry target.

350 the same as before.

I thought you raised it since the beginning.

No.

I thought there was more incremental in there.

Okay.

Yep, go -- keep going.

We will get you.

Overall dollar share was flattish for the quarter, is that right?

Yes.

Overall?

Could you break that down into Heritage Mills into Pillsbury and then my follow-on question to that, were you at all disappointed with share given all the new product activity in this quarter as well the last quarter.

I would reiterate one thing.

I don't know if I could break it down Heritage Mills versus Pillsbury although that category-by-category chart we showed you at the beginning of the presentation I think would suggest that perhaps the Heritage Mills was stronger than the Heritage Pillsbury.

Obviously we are anxious to see shared growth, but remember that that Thanksgiving week change had a big effect on our Pillsbury heritage businesses, particularly the refrigerated dough, because we had such a strong year-ago retail sales in the last week of the quarter because Thanksgiving was in there, and this week that same strong week didn't occur until the first week of the next quarter.

So I think you really -- what we did see was positive momentum going through the quarter on our shares.

So we still got work to do to get shared growth.

I will not tell you that we are totally where we need to be in terms of our market share trends, but I think our momentum is moving in the right direction and I think we will continue to see that in our third quarter.

Okay, let's come up here to Bill.

Jim, could you explain again why your deferred taxes are up by $1.2 billion and, also, any early projections for capital spending next year?

Let me answer the second question first, which is, no, we are not prepared to give guidance on Cap Ex for next year.

We will probably give some guidance at Cagney when we give --.

But it will be down?

It will be down, 750 million this year and it will be down from that level next year.

I can say that.

This deferred tax line is a peculiar accounting treatment of GAAP and nonaccountant, I am going to be trying my best to explain it.

When you take the total purchase price of Pillsbury and you subtract from that the hard assets, you then have an amount of money which has to be allocated either into pure good will or intangible assets.

Under GAAP, you may take the value of brands and put them into intangible assets, and we have done that.

But while it has book basis, it has no tax basis, and so the accounting, in essence, says that while you have this book asset, if you were to sell it, you would have a deferred tax liability.

So at the same time that you put the brands into intangible assets, you have to also set up a deferred tax amount, which happens to also then be matched on good will.

And that's the accounting for it, which if it seems bizarre to you, you will be in the same boat with me, but that's how you are supposed to do it.

So there is no real cash liability there?

No.

Thank you.

My apologies to any accountants in the audience.

Go to the front row with Eric and work our way down.

Thanks.

If I could just follow up on that.

So the only way that the cash impact would be triggered is if you sold off some of those assets write now -- If you would to sell brands which have a zero tax basis, would you then have to pay taxes on those -- Okay, so that would be a reversal of the deferred cash item?

Corrct.

So as we model our cash flow statement going forward, the 90 to 100 million in deferred tax sources should continue?

Per year?

I think you were about 93 million last year.

Should that -- I think when I was in Minneapolis, Dave, I think you had said that 90 to 100 million was a decent number.

I have to answer that another way, a way I understand this deferred income tax entry that relates to the brands.

That will just going to stay static, as the brands on the intangible assets unless we sell something, unless we sell one the brands.

Okay.

And then some of the companies that we follow have started to split the top line more, I'd say in more detail between price promotion and mix.

I was just wondering if you could break down the 2% that was in volume how much in promotional head versus mix improvement versus, I guess, modest pricing that you took in Foodservice.

Well, the promotion is already out of the net sales number we are giving you.

That is a net sales number.

So it's all about price and mix between there and the unit volume, right?

I don't have a split on that.

The one thing I did check was whether FX was any kind of meaningful impact, and the answer there is, while it was positive, it was less than half a cent.

So, you know --

On EPS.

Yes.

One follow-up on that because I am not really sure about that.

Last question, I guess General Mills has been aggressive with new products and very successful, and one of your peers announced to the trade, kraft, that they are going to be more paid for performance with slotting fees and seeing that that's, you know, such an important part of what you spend and all companies spend.

Could you talk about that.

Are you going to follow that?

And is that a reasonable -- you know, to expect that to be successful?

Well, I think the way that we approach our new product merchandising fees, I mean, we badge certain amount for introductory merchandising monies and it is fairly substantial.

Some customers call that slotting.

Others call it introductory merchandising fees.

We have certain requirements that we agree with our retailer partners on to earn that money.

And we really feel that as long as we are meeting our objectives for acceptance, retail visibility and speed of shipment on the new products, we are happy with the way we are working with that money.

And I would say our results this year very much met our expectation in that regard.

So I can't really speak to what particular customer or circumstance Kraft is trying to address with their move, but I can say that we are meeting our objectives that we set for our introductory merchandising money with a very substantial new product line-up this year, and so we're happy with the way we do it and we are sticking with it.

Andrew.

Thanks.

With all of the executional challenges that come with launching so many new products in a short period of time related to a normal set of quarters, I was wondering if you have any early evidence around perhaps what the success rate has been from a lot of these new products relative to perhaps what your rate has been over time in more normal patterns.

And also, to the sense that you can get an idea, with all the new facings that you are getting, you know, perhaps what percentage is coming from our own SKUs that you voluntarily manage out hen new things come in versus what's coming in at the expense of expanding categories or competitors.

New face, you have garnered over the last two quarters.

On the first question, Andrew, I will say that we can say unequivocally that our executional success in getting this large number of new products into the retail trade and up and on the shelf and visible to consumers have met our expectations.

And so that execution phase is very successful.

It is always premature to characterize the ultimate success of a new product until it has had several months off in a full year of consumer takeaway and get through the full trial and repeat and multiple repeat cycle.

So there that is less of a testimony to execution than to how fundamentally strong your demand is, and that we will see over time.

Early signs on the stuff that went in early are quite good.

But I would say that we feel very good about the execution of that.

I would also say that that's going to be important because we have I think just begun to really scratch the surface of the innovation potential of these categories, and as I look at next year's kind of line-up of things that want to be in the queue for introduction in the first half, you know, the demands on our sales organization are going to be very comparable to what they were this year.

So whereas we characterize that as an unusual level of new stuff, it may not prove to be unusual in the long run, at least in the near term as we take advantage of so many opportunities we have across these categories that we have.

Now as far as what ends up being net incremental, I can't really quote you a figure on that.

Clearly the total space in store isn't expanding at the same rate that we are introducing new things.

At the same time, we are always recommending to our customers what to take out, to put in something new.

We typically recommend they take out the slowest-moving items in the categories.

Sometimes rarely those items are ours, but in fact, they will take out some of ours.

The latest I saw data -- and this was, I think, through October -- can you recall that figure, Jim in the average number of General Mills items in the store have gone from 550 to 575 or something like that?

In the order of magnitude?

In the order of magnitude.

There was a net increase clearly not as big as the total number of new items that went in, so there was definite replacement that goes on there.

That's healthy because they are not taking out the best stuff, they are taking out -- taking out the slowest-moving stuff.

Terry.

Two questions on the debt side.

First of all, Jim, I wat to make sure I understood you.

Did you say you want to reduce debt 172 billion between now and '05?

We plan in next fiscal year, and the fiscal year after, the next two fiscal years to take down net debt by 172 billion.

1.2.

Let me ask you on the contingency side, obviously that's something you want to minimize and indeed make evaporate I suppose.

But today extent you have all this cash on the balance sheet now, what's your posture with that?

Are you going to perhaps delay debt repayment to see how that goes?

How are you looking at that.

Obviously we have the CVR which will be priced in April that has a maximum exposure to us of $395 million.

And were we to have our stock trade below $44 through the month.April, we would owe $395 million.

We have sufficient cash balance now.

We will go into April with sufficient cash balance so that if we owed that full amount, we would simply write the check at the end of the month and we would be, you know, that much less cash balance.

As we expect, we go through that month in stock prices and it has been over during that period of time and we owe nothing, then we will take the amount that we reserved and we will simply pay down $395 million worth of commercial paper.

That's how we know that.

Okay, Susana, why don't you give the Mike to Chris and then come back on this side again and also want to moderate something I said earlier.

I am thinking about the market share in big G. I don't have the data here I was looking.

But I suspect category on a tonage basis still rounds to 3% growth.

I think my 4% statement wasO CF O too strong.

We have grown our shipments 4%.

So I think our share on a tonage basis is a little stronger than our dollar share performance.

I think I got a little carried away there.

Chris.

I know that some of the improvement is predicated in terms of the food service business on the economy.

But it was my understanding also that you were expecting so get some synergies from the respective customer bases, as well as putting some of the legacy mill products through the food service distribution system on the Pillsbury side.

Can you give an update on how some of the initiatives are going in.

The growth we are counting on in the second half of the year, the growth we are seeing in fact in October and November and December is -- is really not predicated on the economy improving.

I have we have been able to go from a negative trend for something like 18 months to a positive trend largely by virtue of picking up incremental business partly through cross-selling through our customers and partly just getting new business with existing customers.

I mean, an example would be instore bakery which is part of that business for us.

We added two new flavors of the cinnamon swirls in Wal-Mart.

And on top of the very successful one that we had.

And there is the super center bakeries have been a big source of strength for us, the convenience stores have been a big source of strength.

So we believe we can get growth for the full year as the economy remains as it is.

I think the upside is if the economy strengthens, the Foodservice business strengthens sw as well and this will take your growth level above the 2, 3, 4% up to something that is above the retail level.

We said over the long term that we expect food service growth to be faster than the retail segment growth.

That's the way it has been in recent years prior to the recessionry period and in the long run, we expect that to be that way again.

But clearly, the sector is not doing that now, and we are -- you know, we are a little more modest in what we are planning for our own growth this year.

I think we are going to take the lady back here and please say your name because my brain just won't do it.

And then we will catch one more and then I think we will cut it for the webcast.

And we will continue on.

Of course, we will stay here in the room.

Please stay your name.

I am so sorry.

Alexandra.

Thank you.

You mentioned impact of heavy competitive promotional activity volumes with your baking products.

What exactly is going on in that category?

What are your competitors doing that you are not?

Why do you not feel compelled to keep up with the level of promotion activity that they are putting on?

And how long do you anticipate this competitive promotional activity to continue?

Well, the competitors are a couple of good brands, Aurora foods, Duncan Hines and International Multifoods has Pillsbury which they got for a very good price. [ LAUGHTER ] And both of them are are secondary brands relative to Betty Crocker, and are seeking to gain distribution and being very aggressive about it.

And actually, we are not willing to see our business eroded by that promotional activity.

And we do not expect it to continue in the second half of the year; however, the promotional intensity was greater than we anticipated the first half of the year to the extent you could buy cake mixes at three for a dollar in some stores which is a very good value and we think that is an appropriate ongoing price for cake mixes.

But we have upped our merchandising and our professional activity for the second half -- promotional activity for the second half and we think it will perform considerably better.

I reiterate we see promotion across all of our brands as a defensive strategy and we play that game to tie and try to play the new product game to win.

But we are unwilling to lose because of promotion for very long.

And so we have to get ourselves in a position to tie that game and we intend to do so.

Let's take Art as our last question on the webcast and then as I say, we will be here to talk for a long time yet.

Could you all talk about the -- if possible on a comparable basis the increase in marketing spending in the quarter that it goes throughout expense on and the amount that goes through the sales trying to give me some sense as to perhaps how much of the synergy savings that you had to achieve in the quarter that might have been spent back because the synergy savings looked to me like they would be 12 cents a share, somewhere in that vicinity which is a lot of the earnings increase and I just want to get a sense of how much of that you spent back and that we saw real earnings growth here and not just from cost savings.

Kris, can you help with that breakdown?

Art is asking about a breakdown that I don't have in my head as to where the --

I am probably the best help here in terms of thinking about the synergies, because we don't comment specifically on marketing spending.

I think the comments that I offered to you there in a general sense on the marketing side of the equation is, first of all, you see that we have gotten past that heavy introductory trade spending that we needed to do to get that high number new products into the market place in the first quarter, and you have seen, as we moved into the second quarter, net sales growing ahead of unit volume, which is your sight line that we are back to sort of regular trade merchandising as part of the overall mix.

In terms of SG&A and the improvement on the SG&A, I have had a couple of people ask me today, does that mean you are holding back on marketing spending?

No.

The improvement that you are seeing in SG&A is a reflection of the synergies coming through.

When you think of the money we are targeting for savings this year, only 25% of that is targeted to be coming from the supply chain.

The supply chain cost synergies take longer to get to, those are the ones that have to do with moving production and the plants and aligning distribution systems and what not.

So you ought to draw the conclusion that there is proportionately more supply chain synergy in that incremental cost synergy we will be capturing in fiscal '04.

But for this year that SG&A improvement their seeing is cost synergy coming through and helping our EBIT margin.

Okay.

Now we've got a business plan that we built in June that was designed to drive 4% comparable unit volume growth and through the first half.

I think you have seen the plan deliver unit volume on track with what we are looking for.

That's best sight line that you have.

I want to thank everybody who joined us on the conference call and the webcast.

Please call back in Minneapolis if you have any follow-up questions.

Thanks so much.