通用磨坊 (GIS) 2003 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by.

Welcome to the General Mills Third Quarter and Fiscal 2003 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, please press the 1 followed by the 4 on your telephone.

As a reminder, this conference is being recorded Wednesday, March 19, 2003.

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

Please go ahead, ma'am.

Thanks, operator.

Hello, everybody.

I’m here this morning with Steve Sanger and Jim Lawrence .

I'm turn the phone over to them in a minute.

But first let me if I have the standard reminder that this call will include forward-looking statements which are based on management's current views and assumptions.

There is a slide file on our Website this morning with charts that supplement our remarks here today.

Please refer to slide 2 for cautionary statements regarding forward looking information and slide 3 takes the non-GAAP financial disclosures such as EBIT that we'll discuss today and reconcile them to GAAP numbers as required by the new SEC guidelines.

After Steve and Jim complete their prepared comments we'll open the call up for questions.

So Jim, you want to get it started?

Thank you, Kris.

Good morning, everyone.

And thanks for joining us.

Hopefully you've seen our press release issued earlier today.

We're pleased with our third quarter results.

This was our first quarter with a full 13 weeks of Pillsbury in both years and a result show a significant improvement over last year, when our heavy focus on integration activities disrupted our operating momentum.

Let me quickly recap the third quarter results.

And these comparisons are before unusual items expense related to the Pillsbury acquisition.

Our net sales grew 11%.

Our operating profits rose 71% to exceed $500m this year.

Earnings after tax more than doubled to $255m,.

And diluted earnings per share totaled 67 cents, and that was a penny better than our estimates in comparison to 28 cents in last year's third quarter.

Each of our three operating segments contributed to the third quarter sales increase.

Net sales for our U.S. retail operations grew 14%, with gains in all six of our major divisions.

Bakeries and Foodservice sales were up 5% to $419m, and our international sales also grew 5% in the quarter, reaching $316m.

Unit volume is, of course, the underlying driver of our sales growth, but other factors contribute, too.

Let me give you the components of our sales growth for the quarter and year to date.

And we have a slide of this in the slide file.

For the quarter, consolidated volume, that is excluding joint ventures, contributed 4 points of sales growth.

We got another 5 points from price and mix.

Our price promotion spending, which now gets netted against sales, was slightly lower year over year in this quarter.

So this spending efficiency contributed another 2 points of growth, for a total sales increase of 11% as you may see on that slide.

For the fiscal year to date, volume growth drove the entire 42% sales increase.

Price and mix, and in this case mix, was slightly negative through nine months.

But that was basically offset by our price promotion spending efficiency.

Obviously our trade and coupon spending is up double digit through nine months to support a much bigger business.

But our spending is up less than the rate of volume growth.

Which means our trade cost per case is lower than it was last year.

We're pleased, of course, by that, and it's consistent with our full year plan which calls for price promotional spending to increase at a rate slower than our volume growth.

Moving down to the income statement from the sales line, our profitability improved significantly in the quarter with our EBIT margin increasing 670 basis points over last year.

Cost of goods sold improved versus last year as higher volumes increased our operating leverage.

And acquisition synergies, along with administrative expense control, reduced our SG&A expense as a percent of sales in the quarter.

Our EBIT margin has improved each quarter this fiscal year, reaching 19.2% in the third quarter and again you can see a slide showing that progress.

Let's take a quick look at operating profit by segment.

For U.S. retail, operating profit nearly doubled to exceed $440m.

For Bakeries and Foodservice, operating profit was down roughly $10m in the quarter.

This reflects the impact of lower volumes and also higher supply chain costs.

Those costs were caused by the foodservice plant restructuring that is currently underway.

In our 10-Q filings, we have listed the plants that we have closed or plan to close as part of the Pillsbury integration.

Four of these plants are foodservice facilities.

So we are currently in the process of moving foodservice production lines to maximize efficiencies in our remaining facilities, but that does come with a short-term increase in costs.

International operating profits grew more than 80% in the quarter.

Several factors contributed to this substantial increase.

They include unit volume gains in the majority of our markets, improvement in certain markets where we restructured our business models, and [inaudible] pricing plus strong cost controls to combat the tough economic conditions in our Latin American markets.

Again, you can see all this listed on the slide [in the slide pack].

Earnings after tax for joint ventures totaled $13m in the quarter.

That's up from $8 million last year, Cereal Partners Worldwide and Snack Ventures Europe both continued to perform well.

The combined earning after tax for these two ventures doubled in the quarter to $10m.

After tax profits from our Haagen-Dazs joint ventures in Asia were up slightly in the quarter and offset introductory marketing spending by 8th Continent, our soy foods venture with DuPont.

Through nine months, joint venture profits have contributed $44m to our bottom line.

That's 12 cents per share.

These businesses are on pace to record high double digit growth for the fiscal year in total.

Results for both 2002 and 2003 include unusual items expense associated with the Pillsbury acquisition.

For the third quarter, Unusual Expense totaled $22 million pretax or 4 cents per share.

That brings nine-month Unusual Expense to $98 million.

Back in June, we gave a round number estimate of $100m for unusual expense this year.

With a quarter to go, it's pretty clear that we'd exceed that original estimate.

This is due to timing more than anything else.

The accounting rules for restructuring charges have changed.

Today, we must expense restructuring related items as incurred where previously the entire restructuring charge was recognized when the action was announced.

We're running ahead of schedule on several aspects of our integration plan.

So we'll end up booking more expense in fiscal 2003 and therefore, less in 2004.

Today our best estimate is $15m to $20m of Unusual Expense in the fourth quarter or roughly an additional 3 cents per share.

Now let's turn to our balance sheet and have a look at our core working capital trends.

We're pleased with these trends.

We have more than $1b in cash on our balance sheet.

That total is down approximately $500m from November.

We've been getting very good rates on our commercial paper, so we haven't felt any rush to pay down commercial paper any further.

In addition, we think this strong cash balance of more than $1b should provide visible comfort for any payment that we would be required to make at the end of April under the contingent value rights agreement that we have in place with Diageo.

And still after that payment, to have plenty of cash left over to run our business.

Accounts Receivable and inventories are essentially unchanged year over year.

Together these balances are down more than $300m from the end of the second quarter.

Accounts Payable are up year over year due to the volume of business and to our cash management actions.

The balance is lower than November's, as expected, since trade spending is also lower, sequentially.

Our cash flow statement for the quarter has not been completed as yet.

It will be available in our 10-Q which will be filed in early April.

I can give you a rough estimate of our fixed asset spending through nine months;

It should be about $425m. that means we've got a ways to go to reach our $750 million target for the full year.

We are still targeting $750m, but as is the case with our Unusual Items expense, the final number is function of how much we can physically get done.

Certainly, we do not expect to exceed our $750m budget for the year, and we might come in a bit below it.

Now let's turn to our debt position.

Back in June, we forecasted a year-end debt total of $9.1b before any CDR payment.

Today, we forecast that our free cash flow should be a bit higher than we counted on at the beginning of the year.

First of all, our earnings are coming in above the $2.60 per share that we estimated when the year began.

We got a tax refund of $109m in the first quarter from overpayment of taxes in fiscal 2002.

Couple those pluses with good working capital management, cap and spending that will not exceed our plan and some other small positives, and it adds up to better free cash flow than we had originally forecast.

So even if we have to make the maximum $395m contingent payment to Diageo, our year-end debt level is now expected to be no higher than $9.3b.

And if we do not have to make a payment, our debt balance should be no higher than $8.9b.

Wherever we end up, our plans to pay down $2b of debt over the next three years are unchanged.

Finally, let me shift from cash to say a word about a non-cash item, Pension Income.

Many analysts attempt to estimate our pension income and expense trends, and this is a difficult task.

The estimates we've seen for General Mills vary pretty widely.

It's really too early to talk specifically about our fiscal 2004 expectations.

We will not set our key pension assumptions for next fiscal year until June.

And we will share those specifics, along with all the other details, on our fiscal 2004 plans at our June meeting in Minneapolis.

However, as I said last month at Kagney, we are assuming lower pension income and higher post retirement costs for our plans for 2004.

So that's next year.

But our fiscal 2003 pension assumptions are none, so I can give you a good estimate of this year's pension income.

We are, of course, in an Over-funded position, and we are forecasting pension income of $78m pretax, or $51m after tax for this year.

That's down from $55m after tax in fiscal '02.

And with more shares outstanding this year, this represents a negative delta on our EPS of about 3 cents.

In addition, our post retirement benefits expense will be roughly 2 cents per share higher this year.

So the combined cost of these benefit items in 2003 is a nickel per share higher than last year fiscal '02.

So let me wrap up my comments on our financial performance to date in 2003.

We have delivered good growth and net sales, fueled by broad unit volume gains, positive mix, pricing and more efficient promotional spending.

Our unit volume gains generate operating leverage and combined with acquisition synergies, this has resulted in significant margin expansion.

Our joint ventures are contributing solid profit gains, and we are pleased with working capital trends.

We are on track to meet or beat our key financial objectives for fiscal '03.

To give you more detail on our division level performance as well as our outlook for the year I'll now turn the call over to Steve.

Thanks, Jim.

And hello, everybody.

Back when this year began, we said unit volume growth would be the key driver of our progress in fiscal '03.

And we said we expected unit volume growth to accelerate to a mid single digit rate in the third quarter and it did that.

With volume up 5% overall and 7% for the U.S. retail business.

Now, within our U.S. retail segment, Big G and Yoplait led volume growth in the quarter, each of them posted a 16% gain.

Baking products rebounded from a weak second quarter posted 9% volume growth.

Snacks were up 7%, thanks to continued good performance from granola bars and also PopSecret microwave pop corn.

And total volume for our meals division was up 2% in the quarter.

Pillsbury U.S. volumes were down slightly, 1%.

Primarily due to year over year differences in merchandising timing for refrigerated dough and I'll talk more about that in a minute.

Consumer movement for our retail businesses over the same three-month period looks good as well.

Composite retail dollar sales for our major product lines grew 8% for the quarter.

And that includes projections for Wal-Mart.

This includes gains of 20% for both dinner mixes and yogurt and 12% for soup.

There are a couple of notable differences between quarterly shipments and consumer sales, and if you're looking at our web charts, you'll see those.

One is cereal where volume growth outpaced retail sales, and the other is refrigerated dough where the reverse is true.

I'll give you a little more detail on each of those.

In cereal, three factors contributed to the disparity between third quarter shipments and consumer sales.

The first of these is the year ago pattern which was exactly the opposite, remember a year ago we had 3% growth in consumer sales but a 6% decline in our shipments due to our sales force disruption and the trade inventory reductions that we talked about.

That pattern reversed this year, and as you can see.

The second factor is the very successful launch of Berry Burst Cheerios this year which accounted for 40% of our shipment growth but a much smaller proportion of our consumer sales growth due to timing of the introduction.

And finally, it appeared to us that several of our customers ordered extra inventory after they saw our competitors raise prices.

And the competitors raised prices in early February, late January, and we thought we saw some extra inventory being ordered in February.

I should note that that would have only affected February, though, and our strongest volume growth actually came in December and January.

The pattern in refrigerated dough is really the result of more effective marketing and merchandising programs around the thanks giving and December holiday period this year.

Last year when we were scrambling to put some merchandise in place for the Pillsbury businesses, we funded merchandising programs in January and February.

And so our third quarter shipments last year reflected that later merchandising.

This year, we focused our merchandising in December where it belongs, and the result was slightly lower shipments in the quarter but better consumer takeaway.

Our retail categories in the aggregate are continuing to grow this year.

And our own retail sales are growing even faster.

Our aggregate market share was down at the start of the year but been steadily moving up surpasing last year's level in December on a rolling three month basis.

And then we widened that share gap in January and in February our composite three month dollar share was up more than a half a point to last year.

Here's where this good momentum puts us through nine months.

Unit volume for our U.S. retail segment is up 5% for the year to date, comparable for Pillsbury, and the components of that are 16% year to date growth for Yo plait, BG up 9%, Meals and Snacks each up 3%, Pillsbury U.S., up 1%.

And baking product volumes are down 3% for the year to date although, as you saw on the earlier chart, and heard me say earlier, our baking trends improved significantly in the third quarter.

I've already discussed the factors that contributed to the exceptional cereal gain in the third quarter.

It's worth pointing out, however, that this was the third consecutive quarter of 5% growth or better growth for Big G. 1% of that overall growth year to date is the continued success of milk and cereal bars which is in our Big G shipment numbers.

But the majority of it is cereal.

The cereal category continues to show solid growth.

It's up 2% for the nine months.

And we continue to generate growth on our big profitable established brands.

Seven of our top ten brands are up through nine months.

The sustained growth is a result of good levels of product news and efficient merchandising efforts.

In fact, our Nielson measured price promotional spending for Big G was down in the quarter even though the amount of merchandising support we received was higher.

And that's consistent with our plans to drive efficiency in our trade spending and lower it for the year on a cost [inaudible]basis.

And our plan is also to lower cereal trade cost per case further in 2004.

Big G's retail sales trends in the fourth quarter should benefit from the introductory consumer support for new Berry Burst Cheerios.

We've also got some fun marketing and merchandising events planned for the remainder of the year.

For example, General Mills will be the major sponsor of Nickelodeon's Kid's Choice awards program in April.

If you have young kids, you know the biggest honor the Nickelodeon channel can bestow on someone is dumping a bucket of their trademark green slim on the kid's head.

We'll recognize that that particular tradition with a special green slim cereal.

Not perhaps what you're looking for with your morning cup of coffee, but we think the kids are going to love it.

And six of our biggest brands including Trix will tie into the Nickelodeon sponsorship with on pack music CDs featuring 'N Sync and Britney Spears and Aaron Carter.

Wheaties will provide visible valuable as basketball fans transition from their NCAA March madness and gear up for the NBA final.

Double packs of Wheaties will Feature on pack DVDs that feature greatest moments in NBA finals Hstory.

And so while we anticipate relatively flat fourth quarter shipments for Big G coming off our strong gain in Q3, retail movement for Big G should be up in the quarter and give us nice momentum going into the new fiscal year..

Let me talk for a minute about Yoplait which continues to post great results.

Unit volume for our core 6 ounce cup product lines grew 17% in the quarter and that does not include Whips!.

Whips! is now in second year and showing continued good volume gains, too.

Our share of the 2.8b U.S. yogurt market is now 37% year to date which is up more than a half a point from a year ago.

This past Monday we began shipping Yoplait Nouriche, our new yogurt beverage, to the remaining two thirds of the country, it was in the third for the first part of the year.

Nouriche has been available on the West Coast since May and posted encouraging sales and market share results that captured about a 4% share of the total yogurt category in its initial market.

Nationwide, yogurt drinks is a $150m category with sales growing better than 40%.

So we think this is an attractive growth opportunity for Yoplait.

We have another beverage business that's also doing well and expanding nationally and that is 8th Continent soy milk, first product of our joint venture with DuPont.

That will be available in the remaining in the remaining 45% of the country beginning in June.

The soy milk category currently generates $700m in annual sales at retail.

The market also is growing rapidly and it's the refrigerated segment that's driving growth. 8th Continent consistently beats the market leader on taste and consumer tests and has already achieved the number two position in the refrigerated soy milk category.

So we're excited about this growth opportunity, too.

Let me touch on two final retail businesses where we focused a lot of attention this year.

One of those is Progresso soup.

Now, it was 65 degrees in Minneapolis this weekend, so I think that may officially mean that this year's soup season is just about over.

Progresso's numbers speak for themselves in terms of the success we've had this year.

Unit volume through nine months subpoena 7%.

And retail were soup category sales have grown 2% fiscal year to date and ready to serve soup has grown 6%.

Progresso has grown faster, with retail sales up 8%.

Our share of the ready to serve soup category has strengthened sequentially throughout the soup season to more than 26% for the year to date and up 60 basis points from last year.

And here again we've generate this had growth with good merchandising efficiencies.

Our trade cost per case should be about flat for the year.

I told you last month at Kagney our dinner mix business had weathered last year's competitive entries pretty well.

In fact, our dollar market share in the dinner mix category's been improving sequentially, too.

Year to date our dollar share is 58% but in the third quarter it was higher at 60%.

That reflects good performance from our core helper dinner mix line as well as incremental volume from the new Betty Crocker Completes line which we introduced last fall.

Our meals and baking businesses get their big fourth quarter push from Easter merchandising.

This year we have major merchandising efforts behind Pillsbury crescent rolls and biscuits,, Betty Crocker potato [dishes] and baking mixes, all great staples for Easter dinner.

We'll also have special Easter theme Ready To Bake cookies from the Dough Boy.

Now let me turn to Bakeries and Foodservice where our business trends continue to reflect weak overall industry conditions.

Our foodservice shipments were down 2% for the quarter overall.

Within that total volumes were down 3% with foodservice distributors and restaurants our sales to retail and wholesale bakeries were also down 3%.

Convenience store volumes, which are part of our foodservice unit, were the bright spot growing 17%.

If you use restaurant traffic as a proxy for industry volumes fiscal year to date, the market is down more than a percent.

And recent market trends from late December through February have been even weaker.

In this environment we held up pretty well with our volumes flat overall.

And although that's better than the industry, these are these results are clearly below our plan.

We expect foodservice to be a growth business for us in the long term, but with war in Iraq looming in fourth quarter, we're certainly not counting on in anytime soon.

Finally let me say a couple words with the international business. 2% so many growth with gains in every region except Latin American where political conditions affect us.

Highlights of international include a 4% gain in Canada with cereal volume up 14%, our unit volume in Asia grew 13% with particularly good progress in China.

As Jim mentioned earlier, our international joint ventures also posted good results.

CPW unit volume grew 6% in the quarter and SVE was up 10%.

Volume for our Haagen-Dazs joint ventures was down 10% but that was purely due to difficult comparison.

Their year ago volume was up 25% reflecting a very strong new product activity in that quarter a year ago.

So here's where all that third quarter results put us through the first nine months.

Total worldwide volume is up 3% year to date.

And that's on a comparable basis as if we've owned Pillsbury for both year.

The U.S. retail segment is leading that growth with volume up 5% for the year to date.

Bakeries and Foodservices flat, and our international business including the joint ventures is up 2% for the year despite the drag from Latin America.

So to sum up General Mills progress through the first nine months, we're clearly in the hunt to deliver the 4% comparable unit volume increase we've targeted for 2003.

And we are on track to achieve the 6% comparable mix sales growth we've targeted.

Our margins have strengthened this year and we're on track to capture the $350m in acquisition cost synergies we definitely identified for 2003.

Successful financing actions completed earlier in the year coupled with favorable interest rates have improved our financial flexibility.

As a result, we now expect our earnings to come in a bit better than previously forecast.

In December we estimated our 2003 earnings before Unusual Items would total between 2.60 and 2.62 per share.

We're now confident that we'll deliver at least the $2.62 and perhaps as much as $2.64 per share before Unusual Items.

And this will represent a strong recovery from last year's earnings of $1.70 per share.

We also continue to believe our progress this year positions us very well for another strong year in 2004.

We continue to expect sales growth of approximately 6% again next year, fueled by a good new product pipeline and one extra shipping week in the fiscal period.

We also continue to expect acquisition synergy along with productivity savings that many of you heard Randy Darcy talk about at Kagney and that would drive good operating profit growth.

Given these factors, we remain comfortable with the current call EPS estimate of approximately $3 per share for next year.

So that wraps up our prepared remarks.

I will now let the operator begin polling for your questions.

Thank you.

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One moment, please, for your first question.

Your first question will come from the line of Andrew Lazar with Lehman Brothers.

Your line it now open.

Please go ahead.

Good morning.

Hi, Andrew.

Steve, I'm just curious.

Of all the new products you've been launching through the first fiscal half, can you give us even a sense directionally on sort of the marginal structure of these products perhaps in aggregate relative to the corporate average?

Well, I would say in the aggregate I'm guessing here, but because most of the new products seem to be focused in good margin categories for us, cereal, yogurt, refrigerated dough tend to be among our better margin categories.

We haven't introduced a lot of new canned vegetables.

So I think --

Thankfully.

It's helping our margin structure.

So you know in terms of, perhaps, where some of the leverage that you're seeing and what kind of leverage you expect on the gross margin line going forward given the probably the better, you know, certainly better performance on the top line in the quarter than most expected trying to get a sense if it's not negative, sort of, operating leverage from new products, can you give us a sense on where, perhaps, gross margins can go as we go into fiscal '04?

Well, our goal is to consistently drive growth in our gross margins through the combination of productivity efforts that Randy Darcy outlined, and you heard him talk about many times at Kagney.

I think we've shown a pattern of doing that over the years, and our objective is to continue to do that.

And the bulk of that synergy at least in the near term I believe you mentioned was really going to be coming through the SG&A line relative to cost of Goods at least initially, is that right?

For this year, yes, but we're benefiting for synergies this year is on the SG&A line.

The synergy component that comes from supply chain capture is really more about next year.

Thanks very much.

Your next question will come from the line of G. Leonard Teitelbaum with Merrill Lynch.

Your line is now open.

Please proceed.

Thank you.

Good morning.

Hi.

Could you talk about how much of the current sales volume is done on promotion?

And I just didn't get the figure, Steve, about how much was your takeaway versus your shipments in some of the key areas here.

Could you review that for me, please?

Well, let me take the second question first.

If you have access to the chart on our Website, the places where there was a big difference between shipments and takeaways in the quarter were cereal, where shipments were up 16%, and the consumer takeaway was what, 2?

And that reflected the factors that I talked about.

One of which, a big one of which was Bery Burst Cheerios which shipped in January and accounted for some 40% of our shipments growth, but very -- much smaller proportion of our retail takeaway growth because it just wasn't in the market as long.

The other place where we had a discrepancy or the difference was the reverse of that where we had Pillsbury U.S. overall with shipments down 1% for the quarter, but on refrigerated dough which is the biggest part of Pillsbury U.S.,, retail were up 8%.

And the reason for that is that we get our merchandising focus around the right time, which is Thanksgiving and Christmas holiday period.

And so we had strong retail takeaway particularly in December, which both of those holidays fell in our fiscal December this year.

And whereas last year where we really didn't have a good holiday period, we were scrambling trying to get merchandising in January and February, we had pretty good shipments, but you just don't get the value of the merchandising in January and February on refrigerated dough that you get during December.

So the result of that is we simply had much more efficient promotional activity this year.

And that's really true across the entire line of products because we had corporate planned events, and we were able to leverage our full product line across some of the fixed costs of promotion.

We've been able to achieve more merchandising, really, with less money.

Len, it's Kris.

Just to round out the other components of that retail dollar to sales growth in the quarter, remember Steve said in his prepared remarks that the overall composite retail sales grew 8.

So that 8 lines up with the 7% Growth in shipment.

And the strong players beyond cereal and yogurt in there would be dinner mixes where our slide shows that the retail sales were up 20.

RTS soup up 12, grain snacks obviously up still, the big double digit.

So those were some of the key drivers on that retail takeaway trend.

I don’t want to over play the hand but it looks like you're getting a stronger lift than some of your competitors between the sales and the operating line.

I'm just wondering how much of that – I think Steve's answer is probably just the spending efficiency?

Yeah.

And in fairness, a year ago probably was not a very high water mark for spending efficiency for us as we were putting the two companies together, we were playing from behind, trying to throw things into the market to make up for the merchandising that wasn't schedule on Pillsbury in this quarter and you probably recall it.

So we would have expected to be much more efficient on an -- this year and on an ongoing basis in our promotion.

Thank you.

Your next question will come from the line of David Adelman with Morgan Stanley.

Your line is open.

Please go ahead with your question.

Good morning, Steve, Jim and Kris.

Hey there.

Good morning, David.

Can you characterize the sales pattern during the quarter?

Did you finish the quarter on a particularly high note because of the trade loading dynamic in part in U.S. cereal?

February was actually, I think, the slowest of the three months.

For cereal.

December and January were stronger.

Of course we had a stronger February a year ago.

And I think part of that is the year to year comparison.

So February was not an unusually strong month relative to the other months in the quarter.

In fact, it was the other way around.

And on the price mix being up 5% in the quarter, where was that concentrated?

Is that largely due to the strong cereal volume growth overall?

Well, that's certainly one of the factors.

I think if you look at the value of our cereal, our yogurt, our baking mixes, those categories that grew, again, you know, we got the growth in those as opposed to the lower value per unit categories like canned vegetables and certainly that gave us leverage on the mix line.

Last thing, what is the action plan that you're putting in place to try to drive sales in foodservice, recognizing the difficult economic back drop?

Are you doing things differently as a result of the economic environment in terms of products and so forth that you're emphasizing?

We are certainly trying.

We've talked about this in some of our past discussions to capitalize on driving more of our products into our existing customers by cross-selling Pillsbury products to the historical General Mills customers and vice versa.

But the reality is, when you've got fewer people going -- spending dollars in the restaurants and the in-store bakeries, that does put a pretty significant headwind against you.

So I think our goal is to make sure that we are optimizing our product line and building our business on the most profitable items and positioning ourselves to capture fully the profit growth that would be available when we see that whole sector turn around.

Did we lose everybody?

Hello?

Your next question will come from the line of John McMillin with Prudential.

Your line is now open.

Please go ahead.

I'm here.

Congratulations.

Thanks, John.

Thank you.

Steve, I'm on the road, so I got a chance to see you on TV.

I did like your acquisition starting the cook line.

Even though you can note that a lot of this quarter's strength came from, you know, old General Mills rather than Pillsbury products.

First of all, do you have any statement-- from just comment to that statement?

Well, we had some notable strong points from the Pillsbury line and Progresso is certainly one we point to there.

I think the -- we also saw progress in any given quarter the shipments and retail sales aren't going to line up perfectly.

We were very pleased with retail sales on refrigerated dough in the quarter.

And the continued progress on the cost side is very much related to the efficiencies we're getting by combining the two.

So you know, I think the good news here is that we still have some significant growth opportunities that are as yet unpacked, our foodservice is the obvious one.

But I think we still have -- we're still on the learning curve with some of the Pillsbury categories, and we should get better in those as time goes on.

Particularly if the R & D and new product effort can help.

About 20 minutes before you got on TV they were joking about the Diageo and some incentive you might have to kind of stuff the trade, push promotions, just kind of put the best food forward here, and then you go on TV and they didn't ask the question to you.

So let me, I guess.

You know, you're a quarter was very strong, but the 8% increase in takeaway sales is below the 14% increase in U.S. retail sales increase.

So there was some shipping ahead of consumption in the quarter partly tied to new products and so forth.

Is that correct?

I think you have to conclude that the pipeline grew in the quarter because of that difference.

And some of it was in cereal because of the fact that our pricing came at the end of the month, and we got some, I think, anticipatory buying there.

And so that's why we said we would anticipate flattish cereal shipments in the fourth quarter.

And yet a strong consumer sales to balance that out.

You remember at the end of second quarter people were asking me about did you stuff the channels on the refrigerated dough, and we said, no, the holidays are coming.

So this quarry we had the 8% growth in dough and retail sales and the relatively flattish shipments.

I mean, that's really a timing thing.

But I think -- and so you know, I think that's kind of a characteristic of our business.

Remember, too, that the comparison you just made, John, is between our retail sales and our net sales on the U.S. retail line and obviously that 14% number includes the price promotion efficiency and everything else.

So I think 7% shipment number and 8% consumer takeaway are the better comparison.

Is that 8% number a unit number, or is it a sales number?

Because I thought you said it was a sales number?

Yeah, it is.

And, you know, our unit won't have been any less strong than that.

In fact, they might have been a little stronger at retail.

Okay.

And just my last question.

I think it follows up where Andrew Lazar was going in his first question.

I mean, this 11% sales growth in the quarter was a lot better than I thought.

And certainly is a testament to your turning around this thing.

But I guess I was just surprised it didn't turn into more EBIT growth and again in this kind of environment I'll take earning surprises given some of the difficulties your competitors are having.

But I guess I'm just surprised the 11% sales growth didn't turn into more.

Was that number significantly higher than your plan?

Well, you know, we talk about a sales plan for the year of 6%.

And I don't know -- we typically don't do a sales growth plan quarter by quarter.

Our volume in the quarter, though, was about where we planned it.

We said we wanted to get it up to mid single digit.

We wanted to -- and U.S. retail had to carry that.

And we expected that the sales growth would be stronger than volume because you recall in the first part of the year, it wasn't.

And we said that we thought that would turn around.

But I can't tell you whether, you know, whether that was a percent of volume or wasn't a percent or so stronger than we expect.

Yeah, it certainly directionally, very much along the lines we would have anticipated, John, because, you know, we've been thinking about a differential between sales and volume on a comparable basis for the year all along.

I think it's been hard to see before you got this quarter's numbers exactly how that was going to play out.

Now you get a little better sense of it.

Great.

Thanks a lot.

Your next question will come from the line of Bill Leach, Banc of America Securities.

Your line is now open.

One moment, please.

Did we lose him?

Yes.

It will be just one moment.

Mr. Leach, your line is now open.

Can you hear me?

Yes.

) Good morning, everyone.

I had two questions.

One on the cereal gain, how much of that was bars versus traditional ready-to-eat cereal?

For the year to date we said 1% of the growth is bars.

1 point of the nine from year to date.

What about the 16% in the quarter.

It wasn't a factor because we anniversaried everything on milk and cereal bars so not at issue.

But aren't the the cereal bars growing much faster than traditional cereal?

Yeah, but it doesn't change the growth rate.

It's 16 with it or without.

One thing I'd just like to clarify, Jim, if you do have to pay the $395m,, it seems to me the only effect would be to reduce your annual EPS by something like 1 cent, forgoing that interest income on that 395.

Am I wrong in that?

It seems like the market is making such a big deal about this and it doesn't really affect your earnings outlook at all.

I think you've got it exactly right, Bill.

Thanks very much.

You're welcome, Bill.

Thank you.

Your next question is from the line of Chris Growe with AG Edwards.

Your line is now open, please proceed with your question.

Thank you.

Good morning.

I have a question quickly for you, Jim, as well, and that is with roughly $1.2b in cash, I know you have a plan for paying down debt, but how should we look at you distributing that cash paying down debt or commercial paper say over the next quarter or so [inaudible] next year?

Well, I think the most important thing is that, you know, we are holding that cash in reserve in case we need to make some or all of the $395m CVR..

So that would be the first use of it.

We make a judgment of how much cash we need to run on an ongoing basis and probably would be less than what would result from whatever we did pay down on the CVR.

What we've said is that over the next three years -- and obviously starting next year in earnest -- we will be paying down $2b of debt in total.

And so you know, we'll get on to that starting next year.

So if you cut back $400m roughly for the CVR and you had roughly $800m left, there's no reason to think you'd take some portion or a big portion and plant that on the debt in the fourth quarter, correct?

What we might do is take down the cash balance, but also then take down the commercial paper balance.

Okay.

Remember how we define total debt, Chris?

You know, it includes net income portion of cash against the debt and external obligation.

It's very consistent with the way we lay it out in the table in the MD and A. So you do need to think about those two lines together.

That makes sense.

The other question I had was probably for Stephen.

It was more on the Big G side.

I'm just curious how you see the competitive activity in the cereal activity and just in general how consumers or retailers for that matter, are reacting to the price increase that most of the large manufacturers have taken in the cereal category.

Well, I think the competitive activity, it's a very competitive category.

The good thing about it is that the increasingly the competition is being driven by product innovation.

Our strength in this quarter clearly, single biggest factor was Berry Burst Cheerios.

Kelloggs’ strength, and they've been pretty consistently strong has been their new products and product innovations.

So you know, that really is a good pattern.

That we like to see.

The cereal price increases are pretty modest when you look at them in 2%.

And I don't know that it's visible yet to be able to see because they've just been taken, within the past month or so, them showing up fully at retail.

Some retailers take the price up right away, others wait till they work through their inventory of lower price product and pick it up.

So you'll see that happening over the next couple of months, I think.

And will the price increase particularly in cereal overcome for the most part -- the commodity price increases that were, you know, driving this price increase?

Yes.

Okay.

Thank you.

Your next question will come from the line of Chris Gowan (ph) with JP Morgan.

Please go ahead.

Good morning.

Could you just comment on the pricing you got on your foodservice business and then secondly within foodservice, did you have any impact from any inventory build that's been reported by some of the distributors out there?

The second one, I hope not.

Our volume in distributor side was down 3% in the quarter.

I don't think we did.

I mean, you know, our businesses or quite a few of them are frozen and refrigerated dough products, and they don't really inventory all that well, for loading.

So that really hasn't been a big factor for us.

The pricing in foodservice, because we -- industry practice, really, is to maintain less of a forward position on commodities in our foodservice business than we do in retail.

And the pricing will more closely reflect the movements of commodities.

So we've had two price increases this year, in our foodservice business, the most recent one being January, I believe.

And those two combine to reflect in the fact that our sales trend was obviously far better than our volume trend in the most recent quarter.

Okay.

And then on the refrigerated dough businesses, as you continue to try to stabilize that, I guess against some pretty strong competitive activity the last year.

Do you think you can stabilize that business and get it growing again and maintain the margin structure that has historically been one of the best, I guess, margin structures in the food business for a period of years?

We do.

We think that the refrigerated dough business has a lot of opportunity for innovation that will affect the business.

We've been encouraged by the consumer response we've seen to the product improvements we've made this year.

And to the new products we've introduced like the big deluxe cookie.

And so I think the key to us is to continue to bring innovation for consumers in this business.

It had gone a while in the latter years with Diageo period without much in the way of product innovation.

I think the business stagnated as a result of that.

So we're seeing response, but we clearly have to do more and plan to do more.

And then just lastly, Jim, what is the extra week contribute next year to the 6% revenue target?

I think basically it's [inaudible].

Okay.

Works out that way.

I wouldn't tell you to just absolutely straight line that.

Okay.

So it's not just [inaudible]?

I don't think we're going to break out a specific impact.

I think you just have to know that obviously more shipping days is beneficial.

I've been muzzled by my handler Chris.

I know how you feel.

Okay.

Thank you.

Your next question will come from the line of Eric Katzman with Deutsche Banc.

Your line is open.

Please proceed.

Hi.

Good morning, everybody.

Now we lost you.

Eric, your line is now open.

If you're on a speaker phone, please pick up your hand set.

Can you hear me?

Yes.

A few questions.

Can you comment on the sales up 16% in cereal, how much was profits up?

Were they in line?

Less?

More?

We don't give profit by business line.

Yeah, but in the past you've -- when you've had a pretty good cereal number, you've directionally said, you know, how profits were doing relative to that.

It would not be less.

Not less.

Okay.

And then in terms of the promotion that you spent, or I'm sorry, the promotion that you handled more efficiently in the third quarter, if I follow up on I guess, John's question about a little bit more shipments versus takeaway, do you expect that the promotional spending will have to go up in the fourth quarter to move some of that product off of the shelf?

I do not anticipate that it will go up as a percentage of sales in the fourth quarter.

Again, you know, we have the benefit of having executing promotional plan that's been in places on opposed to one that we've scrambled to put in place.

And so I think, as I said earlier, our goal is to see promotional expense increase at a slower rate than sales so we reduce our promotion per case not only in the fourth quarter but next year as well.

So that's the pattern that I think you should look for.

Okay.

And then Steve, obviously we're all kind of wrestling with this promotional cost per case.

Is this a function of where your product is selling more?

I mean, is it basically that you're getting so much growth out of alternative outlets, whether it's, you know, Wal-Mart, C stores or others which aren't as promotional as the traditional retailers?

Is that's what's having the impact even though you have such a big percentage of your product line focused on new products?

Because it's -- I mean it's a fairly significant change considering how much new productivity you're doing that promotional cost would be down per case.

That's not what's been going on, you know, if you went through just a traditional grocery channel.

Well, you know, we provide the same basic level of promontional moneys and -- in the EDLP channels as we do in the traditional channels.

They just apply it differently.

And they use it, you know, specifically in the case of Wal-Mart, they drive it all into the cost of goods.

But then, you know, they do merchandise as well.

So I don't think that's it, Eric.

I think the fact is, comparing to last year, we are spending and executing a lot better.

We have bigger company wide promotions across which to spread some of these fixed costs.

You have -- a lot of the costs of promotion are relatively inefficient, menu costs, ad costs, and when you plan events that encompass a larger number of your items that drive more volume and you plan it farther in advance, you just get a lot more for your promotion dollar.

And on a year over year basis, we've gone from probably a low watermark where we were scrambling to get some action going on the Pillsbury items last year to what is a much more representative General Mills kind of promotional execution.

Okay.

I'll follow-up offline.

But I thought the argument was that it was a lower promotional environment when you're selling through the alternative or nontraditional outlets.

Okay.

We'll follow up later.

And then just last question, when does the -- in which quarter does the 53rd week fall next year?

Fourth quarter.

Fourth?

Yes, fourth quarter.

All right.

Thank you.

Your next question will come from the line of Romitha Mally with Goldman Sachs.

Hi.

Morning.

First just a clarification in terms of volume.

You said the shipments would be flat in the fourth quarter for cereal, that’s correct, right?

Relatively flat.

We're guessing, I mean, but we think they'll be relatively flat, but the consumer sales will be up.

What does that mean for overall volume in the fourth quarter?

Do you still expect it to be within your guidance around the 4% to 5%?

We're still be looking for a mid single digit all in.

Even with cereal flattish?

Yeah.

You know, the idea here was that we have even comparisons versus year ago in both the third and fourth quarter.

Okay.

And then just turning to one of your slides, it was the one on dollar share, it looked like dollar share peaked in December and then it started to taper off.

I recognize it's up year over year, but can you talk about that a little bit?

Sure.

You know, that reflects the seasonal pattern of our businesses.

When you look at the aggregate share for General Mills, you will find seasonally, the aggregate peaks in the winter season because that is the strongest volume season for some of our strongest share lines, like refrigerated dough where we have better than a 70% market share.

And that piece in the winter season -- so that really is a seasonal pattern that you would see every year in our aggregate market share.

And the thing that's significant is the year to year comparison, not the sequential comparison.

Okay.

And then just turning back to refrigerated dough -- and I know IRI data doesn't capture everything these days, but as I've been tracking it, it looked like refrigerated dough sales were down about 1% in the IRI channels.

Is that similar to what you're seeing in your Nielsen numbers?

And then I guess is most of the strength really here coming from these alternate channels?

The 8% takeaway really surprised me.

Well, certainly your statement is directionally correct.

I don't know if we're looking up what we've got on the traditional channels as we speak but we're seeing -- and this is true -- refrigerated dough and every other category retail sales in total, including the off channels specifically including Wal-Mart which we add to the Nielsen totals, is virtually every -- in every category stronger than the Nielsen data alone.

I don't have any additional detail here.

We can take a look at what your data's got offline and see if we can find anything else in there.

I think we've probably got time for one more question, operator.

Can we take one last one?

Yes, the last one will come from Lieb Gossons with Credit Suisse First Boston.

Good morning.

Congratulations on a great quarter.

Three questions this morning.

Jim, can you give us an update in terms of where you stand with the retail program?

I'm going to turn this over to Dave VanBenschoten, our treasurer.

He'll answer.

Dave?

Yeah.

It is continuing to grow week by week $5m to $15m a week and on various term and rates and it's just growing step by step as we thought.

And how much have you raised so far in the program, Dave?

We're probably up to about $50m, plus or minus.

Okay.

Second question I had is as we're moving towards the end of fiscal '03 for you guys, any update you can share with us in terms of your hedging strategy for the next fiscal year?

Fuel, grain and raw materials?

I think, really, I'd rather save all that, Lieb, and do the whole fiscal '04, all the details in June.

Okay.

And then the final question I have, as supermarkets are starting to implement the -- I can never pronounce this one, ETIF 2-16 rule with regard to vendor allowances, is that having any impact on your business as some retailers change perhaps somewhat the way they have accounted for vendor allowance, particularly the timing thereof?

No, no impact on us.

Okay.

Wonderful.

Many thanks.

Thank you, Lieb.

Thanks, everybody.

I'm around, so anybody we didn't get to, please give me a buzz and we'll try and get your questions answered.

Thanks very much.

That does conclude your conference call for today.

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