通用磨坊 (GIS) 2003 Q4 法說會逐字稿

Good morning everybody.

I'm Kris Wenker, and on behalf of all my colleagues at General Mills, I want to welcome you, those of you that are here with us in Minneapolis, and those of you

via the Webcast.

I think we're going to get started this morning with our review of General Mills' 2003 results and our outlook for 2004.

You should all now have copies of the press release that was issued over the wires early this morning.

That release is also available on our Web site for any of those of you who are on the Webcast.

I'm going to turn the microphone over to Steve and Jim in just a minute.

First, I need to give you the standard reminder that our remarks today will contain forward-looking statements, which are based on our current estimates and expectations.

General Mills' actual performance may differ from these estimates.

Please refer to the second slide in our presentation materials for cautionary statements related to forward-looking statements.

that our net results for both 2002 and 2003 include various non-operating items, primarily related to the Pillsbury acquisition.

We have

for you in the past, and we've resulted them on an unusual items line in our income statement.

Now, consistent with new Reg G from the SEC, we have in today's press release and in this table provided a separate breakout for our restructuring and other exit costs.

We've included

cost in SG&A.

We've included the insurance recoveries we received from a 1994

handling incident in our SG&A line, along with a special contribution we made in 2002 to the General Mills foundation asset base, following the Pillsbury acquisition.

And we've included 2002 costs associated with a flood at our Cincinnati plant in cost of good sold.

Those changes are reflected

and our footnote summarizes the changes that we've made in the presentation of these various items.

Let me also remind you that, consistent with Reg G, our disclosures today are going to focus on GAAP-defined financial measures.

We do recognize that many of you use a variety of on-GAAP measures in your analysis, and so slides four and five of our presentation will give you a reconcilation the GAAP and the non-GAAP measures we'll talk about today.

So I think that completes my version of the Miranda warning.

I will turn you over to General Mills Chairman and CEO Steve Sanger.

Thanks, Kris, and good morning everyone.

We hope you are well-rested and not feeling any ill effects from

you consumed last night.

As you've already seen in this morning's press release, we ran a pretty good last lap in the fiscal year just ended, 2003.

We finished the year with results that met or exceeded our performance objectives, and, here before you, you see those results.

Our net sales were up 10 percent in the fourth quarter, our unit volume was up 2 percent worldwide and 2 percent in U.S. retail, which is a significant gap versus the net sales, and that difference was partly because of higher pricing realizations, and even more so because of lower promotional

later in the presentation.

Our retail sales, just for your perspective, were up in U.S. retail 4 percent during the quarter.

Earnings before interest and tax doubled, earnings after tax reached 225 million dollars, and so, our net reported earnings per share totaled 59 cents, which is up 15 cents from a year ago level.

Our full year performance looks like this: Net sales exceeded 10.5 billion dollars, up

earnings before interest and tax rose 72 percent and earnings after tax doubled, and that represents GAAP earnings of $2.33 per diluted share, up 81 percent from the buck 34 we reported GAAP in 2002.

Now this slide excludes the restructuring,

and merger-related costs that Chris alluded to earlier and on this basis, earnings before interest and taxes grew 57 percent in 2003, to reach approximately 2 billion dollars, after tax crossed the billion mark for the first time.

Earnings per share on this basis would be $ 2.65, and that's a penny better than the high end of the forecast range that we had talked about the last time we spoke, and two cents better than the first call estimate.

And, it's also better, I think, than any of us were willing to count on a year ago at this time when we met in New York.

Last June, when we reported the second of two of those ugly quarters that followed the close of our Pillsbury acquisition, we said that intensive work was required to integrate General Mills and Pillsbury, and clearly it disrupted our business in the short term.

Now we are completing that integration.

It seems that that disruption was largely behind us as we enter 2003, and so, a year ago at this meeting I outlined plans for a year of strong financial recovery for General Mills, and I outlined these specific targets: We were looking for 4 percent worldwide unit volume growth, that's comparable for Pillsbury, as Pillsbury had been in a base year as well.

We expect the net sales to grow at least as fast as unit volume.

We expect to get over 350 million dollars in acquisition cost synergies in addition to productivity savings to improve our operating margins.

We targeted a strong double-digit increase in joint-venture profits, and we stated an earnings goal of approximately $2.60 per share before restructuring and merger-related costs.

Now, we felt this was an ambitious plan, and obviously many of you did, too, because the consensus of your estimates was several cents below that target.

Now, let's look at how we did against that plan.

Our topline performance was quite solid, our net sales for the year were 10.5 billion, up six percent comparable for Pillsbury, and this gain was driven by our U.S. retail business

six percent growth also.

But, our other operating segments posted gains too.

So, we achieved our overall sales target despite coming up slightly below our unit volume goal.

U.S. retail unit volume did grow 4 percent but bakeries and food service volume was flat for the year reflecting the overall weak food service industry environment, and international growth was held back by the difficult macro-economic conditions in Latin America.

So, in total, worldwide unit volume was up 3 percent, still pretty good.

Our margin improvement in 2003 was solid as well.

We've had our cost synergy and productivity targets for the year, and in addition to those savings, operating leverage increased as our unit volumes grew, particularly in the U.S. retail side.

So, as a result, our EBIT margin before restructuring and merger-related costs improved by 300 basis points.

After tax profits from our joint ventures grew by more than 80 percent to 61 million dollars in 2003, the total there reflects strong profit gains from both Cereal Partners Worldwide and Snack Ventures Europe.

Toss in for

profits from our Haagen-Dazs joint ventures, which contributed a full 12 months this year to the numbers.

Together, our JVs accounted for 16 cents of our earnings per share in 2003 and, in total, our earnings per share exceeded our goal that we outlined for 2003.

On a GAAP basis, EPS improved by more than 80 percent to $2.43.

Excluding restructuring and other merger related costs EPS would total $2.65, which is a nickel better than the target we set last June.

And finally, I'd point out the pattern of our earnings growth came in pretty much as we had predicted it.

Last June, I said we expected our earnings per share to be split fairly evenly between the first and second halves of the year.

The two halves of the year, in fact, were quite even, with earnings of $1.33 in the first half, and $1.32 on a rounded basis in the second half.

So we achieved virtually all of the major objectives in our 2003 plan.

We did so in the face of some pretty challenging external factors.

I already mentioned the difficult economic environments in the U.S. food service business and in Latin America.

Beyond these, results were also negatively affected by higher commodity costs, which were partially, but not totally, offset by pricing actions on our part.

And finally, several of our major customers, notably Fleming and U.S. food service, had difficulties that momentarily slowed our business with them.

Our 2003 growth also overcame some internal factors, internal to General Mills, and these were primarily synergy and integration actions that we are taking now and took during the year that will benefit our results in the long term.

For example, our gross margin was hurt a bit by some disruption from physically relocating tens of millions of cases of production capacity.

We also moved critical manufacturing and distribution data from legacy information systems onto a single common SAP platform at more than 200 locations across the company.

These shifts created some occasional kinks in our day-to-day operations.

We struggled at time to meet customer demand on fast-growing brands like Betty Crocker Complete Dinners and Yoplait Yogurt.

And finally, while we feel generally good about our marketing efforts in 2003, I have to admit, this is our first time through this peak seasonal selling season in some key categories like soup and refrigerated dough.

And in hindsight, we know we left some cases on the table this year, and we see opportunities to improve our execution on all these businesses in 2004.

So we didn't really hit on all cylinders in 2003, but we did meet our financial goals, and that resulted in superior returns to General Mills shareholders.

For the fiscal year, total return to General Mills shareholders was 6%.

This significantly outpaced the overall market, which delivered a negative 12% return to investors over that time, and we outperformed our peer companies by an even greater margin, as the total return for the S&P consumer staples group was a negative 15%.

So that's a quick overview of 2003.

At this point, I'm going to turn the microphone over to our Chief Financial Officer, who will provide some more detailed comments on the year, and also on the financial outlook for 2004 and beyond.

And then I'll come back with some final comments on our 2004 growth plans.

Jim?

Thank you very much, Steve, and good morning, everyone.

May I join Steve in welcoming you all to Minneapolis and this session today.

My first task is to give you some more specifics on the fiscal year 2003, which has just closed.

So, let's start with the component of our

unit volume, as you see on the slide was the primary driver, accounting for 30 points of that growth.

The combination of pricing and mix was neutral overall.

We did take pricing in 2003, but that was offset by business mix, which reflects primarily the higher percentage of Food Service and International sales in the year's total.

Increased efficiency in our promotional spending contributed two points in net sales growth.

In 2003, our promotional spending grew, but at a slower rate than our unit volume increased.

Our 10% sales increase in the fourth quarter reflects seven points of growth from a combination of pricing and mix, slightly lower year-over-year promotional spending accounted for the remainder.

Now, here are the net sales by our reporting segments, the new reporting segments we have.

For the final quarter in 2003, U.S.

Retail led the growth with a 13 percent increase.

Bakeries and Food Service, sales were down slightly, but sales for consolidated International businesses were up nicely, they grew 9%.

For the year in total, U.S.

Retail topped $2.4 billion, and they were up 25%.

Bakers and Food Service sales were $1.8 billion and up more than 40%, and the International sales reached $1.3 billion, or up nearly 70%.

Of course, all of those were benefited by the full year of Pillsbury.

As Steve mentioned earlier, comparable for Pillsbury, net sales grew at 6%, and sales gained by segment were 6% U.S.

Retail, 4% for each of Bakeries and Food Service and for International.

Now, the solid sales performance for our U.S.

Retail business reflects broad-based unit volume gains, and we show the different domestic units here.

Yoplait had the strongest increase, up 14%, and I should say that is their seventh consecutive year of double-digit growth.

The Big G unit volume was up 7%.

remember that this includes milk and cereal bars, and if you were to exclude the milk and cereal bars cases, just the ready-to-eat cereal volume was up 6%.

Our snacks volume grew at 4%.

Meals volume was up 2%, overall.

Pillsbury USA posted a 1% unit volume gain.

Baking products was the only division to show a volume decline, and that was due to some unfortunate competitive promotional spending.

So the overall trend in our shipments, we believe, was quite good.

And the retail movement of the brands was even better.

Combined retail dollar sales for major businesses grew 5% in 2003, versus that 4% shipments, and that is just for our major categories.

And it is just in Nielsen-measured outlets, plus projections for Wal-Mart.

So that retail sales number does not include our businesses like Small Planet Foods, and it doesn't capture sales at some of our fastest-growing outlets, such as club stores and natural foods channel.

But, the 5% retail sales growth for Nielsen outlets and Wal-Mart includes gains of more than 60% in snack bars, 14% for Yoplait Yogurt, 11% for dinner mixes, 6% for Progresso Soup, 2% for Big G cereals.

Combined sales for our major retail categories in these outlets grew 4%, so we gained retail share this past year as well.

Bakeries and Food Service volume was flat for the year on a comparable basis, as if we'd owned Pillsbury the full year.

We did see good growth in our sales to convenience stores and to the vending channel, and you see there that increased 15%, but that gain was offset by declines in our shipments to bakery customers and to food service distributors and restaurants.

Our International unit volume was up 2% overall, as you see at the bottom of this chart.

We posted gains in every geographic region, but for Latin America, which had its macroeconomic problems this past year.

Volumes in that region were down 20 percent.

However, and that of course reflects total growth.

If you were to set Latin America aside, all the rest of those regions and businesses, our growth everywhere else, works out to be 6%.

Let's now move to profit results, again by segment.

The fourth quarter shows strong gains for U.S.

Retail and International, which more than offset the profit decline for Bakeries and Food Service.

That decline in Bakeries and Food Service reflects weak volumes, supply chain cost inefficiencies because of our current manufacturing realignments, plus some slow net utilization pricing taken to offset higher commodity costs.

We'll be talking more about that.

The unallocated corporate line of our segment reporting, because of our gas compliance here, includes the merger-related costs, insurance proceeds, the Cincinnati flood expense, which have all been moved into SG&A, and into cost of goods.

If you were to exclude those merger-related costs, the unallocated expense for fiscal '03 would have been $6 million, net.

Let's now look at our margin performance.

Cost of goods declined 50 basis points as a percent of sales of 2003, and that reflects improved operating leverage as a result of stronger unit volume.

Supply chain acquisition synergies also benefited our gross margin somewhat this year, and we expect additional benefits next year.

The SG&A as a percent of sales dropped 250 basis points in 2003, and this reflects strong acquisition synergy benefits in areas like advertising, marketing, sales and corporate administrative functions.

General Mills earnings growth in 2003 benefited from both hard work and, I must say, good fortune on the items below the marketing line.

Our interest expense, for example, came in this year at $547 million.

Now, that's quite a bit higher than the $416 million that we paid in 2002, but it was quite a bit lower than the amount we thought that we might pay when the year started.

Our original estimate was $600 million, but rates not only stayed favorable for us, they actually continued to fall as the year unfolded.

We were also successful in refinancing a significant portion of our short-term debt with longer-term instruments at what we consider to be very attractive rates.

In addition, tax planning efforts got our effective tax rate back to General Mills' pre-Pillsbury level of 35%, and we benefited from that in the year.

Steve mentioned earlier the joint venture profits reached $61 million after tax this year, and here's a bit more detail on that performance.

As you can see, the two established joint ventures, Cereal Partners Worldwide and Snack Ventures Europe, CPW and SVE, continue to deliver strong results.

Their combined fourth-quarter profits were $14 million, and their combined annual profits reached $45 million.

That is up from $31 million a year ago.

Beyond this, we had the full-year contribution from our various Haagen Dazs joint ventures in Asia.

Those profits more than offset the development spending that we're doing to expand

continent soy milk joint venture into

, and you see that combination there on the second line.

So, when you add it all up, our 2003 earnings performance represents a strong renewal of General Mills' earnings growth.

Our net earnings per share, GAAP as reported, have grown at a compound rate of more than 12% since 1998.

Were you to exclude restructuring and merger-related costs, the items that we have previously described as unusual, our EPS growth has averaged 10 percent a year, and that's on the righthand side, culminating in the $2.65 for fiscal '03.

Beyond this good earnings recovery, General Mills made excellent progress on several balance sheet items in fiscal '03.

Control over our working capital.

We had set a goal of holding growth in working capital to a rate equal or less than the sales growth in 2003 and we more than met that target.

We had core working capital actually decline 10% for the year.

One of the factors here was good performance on trade receivables.

In fact, we lowered our average outstanding balance by a full day in this past year.

And you can see the performance on the other items on the chart.

We also did better than we expected to do, and than we forecast, on our total debt balance.

As noted in our press release, our GAAP-defined total debt declined more than $580 million this year.

We look at a broader debt measure, and we have described that broader debt measure to you in the past, which is total adjusted debt, including debt equivalent of lease expense, tax benefit leases and minority interests.

And all that is net of marketable investments in our cash balance.

The goal for 2003 was to finish even with last year's balance at approximately $9.1 billion in that total adjusted debt.

In fact, we managed

.

We refinanced the majority of our short-term debt that we put on in acquiring Pillsbury, and our debt mix now is approximately 20% short term and 80% long term, and the total balance, as you can see, is just a touch over $9 billion.

Now, here we have a chart with various cash flow items, and then whether the actual results, which is the dollar column, was better or worse than we had planned.

First of all, from a cash flow standpoint, we paid out $273 million under the terms of the contingent value rights CVR agreement with Diageo.

Frankly, we had hoped not to pay anything, and we did not have that in original plan, nor did we have in our plan the $90 million, with call option, on the 29 million shares that Diageo owns of General Mills, which we did as part of a convertible offering in the fall.

But, while those two cash outflows -- they were more than offset by better-than-planned interest expense, better-than-planned cash taxes, on-plan dividend expense and capital spending, and, of course, above target earnings.

And this is how, as you add it up, we ended up actually paying down some of that total adjusted debt from the $9.1 to approximately $9 billion.

With this performance in 2003, we believe we're in good position to deliver strong results next year and the years ahead.

This is going to be the end of my '03 comments.

Now, sort of looking forward from this year.

At the CAGNY Conference in February, we outlined these key growth targets for the next three years.

We said that we expect our net sales to increase at a compound annual rate of 5% to 6%.

We expect at our earnings per share to grow at a compound rate of at least 11% over the next three years.

We made that forecast at CAGY, and we continue to make it today.

We think sales growth in 2004 should be at the high end of our targeted range.

Our businesses performed well in 2003.

We've got a great lineup of new products and innovations coming, and you'll hear more about that today.

And, we will benefit of one extra selling week this year, our 53rd week, which will come in our fourth quarter.

We expect our operating profit in 2004 to grow faster than sales, fueled by additional acquisition synergies and productivity savings.

Now, I want to point out several items below the operating line that will in fact create some headwind for us in 2004.

As I said at CAGNY, our pension assumptions will be lower in 2004.

Our discount rate will be down 150 basis points, which increases plan liabilities, and that was set at the start of the new fiscal year '04 the first day of June.

And that's a direct reflection of the year-over-year change in rates four AA corporate bonds, which is used to create that discount rate.

We have also lowered our expected rate of return on plan assets.

We've taken that down from 10.4% to 9.6%.

This is a forward-looking rate assumption, and in fact matches our actual return over the past 10 years.

With that new discount rate assumption and that return assumption, we estimate our total plan dips just a touch below the fully-funded level for fiscal '03.

In addition to these pension assumptions, we're also expecting the cost of post-retirement benefits to increase in fiscal '04.

And we estimate the combined contribution from pension and post-retirement will swing from what was nearly $50 million in pre-tax income in the past year, fiscal '03, to a charge, to an expense of $10 million in fiscal '04.

That $60 million swing equates to roughly 10 cents a share.

Interest expense we currently estimate to be down, but modestly, from the $547 million we paid in 2003.

Remember that part of our below-estimate expense last year was the result of carrying a high-balance commercial paper, and today, we're 80 long, 20 short.

While interest rate swaps had the majority of our rates locked in, a portion of the CP was still floating, and those short-term rates were of course terrific in '03.

In fiscal '04, we expect to have less commercial paper in our mix, and I'm also not willing to count on rates staying this low for all of fiscal '04.

So we're currently forecasting interest expense from $500 to $530 million for the year.

And finally, our plans assume no change in the effective tax rate, will continue to be at 35%.

Despite these negative factors below the line that I've just covered, we do expect to deliver strong earnings per share gain in 2004.

The chart you see before you shows the growth we're expecting on a GAAP basis, and that is from a GAAP $2.43 in fiscal '03 to approximately $2.85 to $2.90 in fiscal '04.

That's a growth of 17% to 19% on an as-reported GAAP basis.

Our plans in '04 do include some additional Pillsbury merger-related and restructuring cost.

We've always expected that we would have these.

We're estimating those to be roughly 10 to 15 cents per share.

So, if your models track our growth before those merger and restructuring costs, that would meet or beat our 11% target and we'll put the net number at $2.95 to $3.05.

Here's how we expect pattern of those earnings to fall in 2004, and again, let me be quite clear, we're doing this on a GAAP basis, as frankly we're going to be required to do on a go-forward basis.

We expect our absolute earnings per share to be split fairly evenly between the first half of the year and the second, just as it was in fiscal '03.

We expect the Pillsbury merger and restructuring-related costs to fall a bit more heavily in the first half, but in all quarters, particularly in the first quarter, these costs should be lower in fiscal '04 than they were in '03.

So, as a result, we should post double-digit growth in each quarter of 2004, with a strong first quarter due to lower restructuring and merger costs year over year, and of course, we'll have a strong fourth quarter, because that will include the extra 53rd week.

As our earnings grow, so will cash flow from operations.

We planned

cash to pay down debt.

Specifically, we're aiming to reduce our total adjusted debt by at least $450 million in 2004, and that is a start on the way to a cumulative $2 billion debt paydown that we've committed to by the end of fiscal '06.

We'll also be reinvesting the cash that we generate into fixed assets, to support continued business growth and supply chain productivity.

We continue to estimate our capital spending will total about $650 million in 2004, down $100 million from the $750 million that we invested this past year.

With these goals for debt reduction and capital investment, we currently plan to hold the prevailing $1.10 annual dividend rate in '04.

Longer term, our plan is to increase shareholder dividends as earnings growth.

In the meantime, our dividend payout was over 40% in fiscal '03, and the yield remains attractive at better than 2%.

Finally, we want to focus on sustaining our trend of working capital improvement, and we set the goal again in '04 of holding growth in working capital at or below the rate of our sales growth.

And we see good opportunity to improve our core working capital trends as we complete our remaining supply-chain restructuring actions.

As we look to the next three years, 2004 stands out as having the strongest anticipated growth rate, up 17% to 19% from the base of $2.43, again on a GAAP basis.

As we've said, part of the strength will reflect the extra week in fiscal '04.

In fiscal '05, we'll have to compare against the extra shipping days we have in '04, so we've modeled '05 as the slowest growth year of the three.

Nevertheless, we believe that delivering our targeted results for fiscal '04 and our three-year plan will put us at the top end of our peer group.

And we believe that delivering superior performance is the key to achieving the ultimate goal, which is to drive continued superior returns for our shareholders.

And for more discussion of that, I'm going to turn the meeting back to Steve.

Thank you.

I think that's really -- Jim's last statement was the single key message we want you all to take away from this meeting today.

With the hard work of integrating General Mills and Pillsbury now behind us, our new company is positioned to deliver superior growth and shareholder returns going forward.

We're targeting growth in line with past performance, actually.

As Jim showed you a moment ago, over the past five years, we've delivered a solid double-digit growth in earnings per share, and that has resulted in superior shareholder returns over that period.

From 1998 to 2003, General Mills investors have received a 9% compound annual return, which significantly outpaced the returns delivered by our peer group of consumer staples companies, and by the broader market.

We plan to drive our future growth by focusing on the same four strategies that have fueled our past performance.

I've shared these with you many times before.

They are product innovation, customer channel expansion, international expansion and margin expansion.

And we continue to believe that adding Pillsbury has made each of these growth strategies better.

Pillsbury brought us new fast-growing category

U.S. retail business.

Combined retail dollar sales for our major product categories grew 4% in 2003, and that's not a one-year phenomenon, as you can see in this chart that shows you three years of history on that.

These categories have grown at a 5% compound rate over the past three years, and we think these categories offer great opportunity for product and marketing innovation.

You saw some of that last night.

We've capitalized on those opportunities in the past, and sales for our brands have outpaced their categories over the same time period.

General Mills brands hold leading positions in these attractive categories.

Because we've historically been successful at innovating, we've been gaining share in the majority of these markets in recent years, and we plan to keep that innovation flowing.

We've got 81 new products planned for the first half of 2004 for the U.S. retail channel.

That's really the grocery channel part of that.

That doesn't include the dollar stores and the natural food stores, where we also have several new products planned.

We see excellent opportunities to grow volume and share across this U.S. retail business.

Channel expansion is our second key growth driver, and some of the opportunities we see here are in fast-growing new retail channels, like dollar stores and natural and organic stores and club stores.

Club stores aren't new, but they're still very fast growing.

These players are not tracked by Nielsen and IRI, but they're generating strong growth in food sales as you can see by the figures on this chart.

We have several additional new products planned for these non-measured outlets.

Pillsbury certainly strengthens our opportunity to expand distribution of our brands beyond the retail segment.

The big opportunity here is food service.

Sales for food eaten away from home have been growing at a 5% rate for the past 15 years, and that is significantly faster than the rate for grocery store sales over that same period.

Now, we all know the food service industry did not show this kind of good growth in fiscal 2003.

And as Ray Viault will discuss later, restaurant traffic has been down slightly due to the weak economy and skittish consumers.

But over the long term, good growth in away from home food sales should continue.

The demographic trends support it, and the long term trends support it.

We're well positioned to take advantage of the expected long-term growth in food service.

All of you, I think, are familiar with the Cannondale Power Rankings.

It's a firm you know from their ratings in the retail food industry.

Recently, they conducted their first-ever survey of food service customers, and out of more than 100 manufacturers rated in that survey, food service customers rated us the third-best overall, which makes us the only food manufacturer ranked in the top three by both our retail and our food service operators.

So we have the capability to lead growth in this sector, just as we do in retail.

Our third growth strategy is to expand distribution of our brands in faster-growing international markets.

Today, with the addition of Pillsbury, we generate more than $1 billion of our net reported sales in markets outside the U.S.

And while the economic trends in Latin America are restraining growth in that part of the world, the trends everywhere else are quite good.

Our brands have been achieving steady volume gains in these markets, and we should see terrific opportunities here going forward, which you'll hear more about this afternoon.

Our international joint ventures aren't consolidated in net sales, but they are increasingly important contributors to our net earnings.

It wasn't very long ago that we were still investing to establish cereal partners worldwide in Snack Ventures Europe.

But in 2003, these two businesses, plus the Haagen Dazs JVs, contributed over

in after-tax profit to our bottom line.

We expect to show continued strong growth in the JV line of our income statement going forward.

Our final growth driver is continuous focus on productivity, and that expands our margins.

We've already captured $350 million in cost synergies through the combination of General Mills and Pillsbury.

We expect to realize an additional $125 million in acquisition-related synergies in 2004.

And on top of those synergies, we'll begin to drive productivity gains all across the organization, but particularly in the supply chain.

Randy Darcy talked at CAGNY about the ideas he and his team have identified to product $800 million worth of productivity over the next decade, and they're planning to capture $300 million of that total over the next three years.

So our four growth drivers have generated strong returns for General Mills shareholders in the past, and with Pillsbury added, I have confidence that these proven strategies will produce superior results in the years ahead as well.

There is one more factor that gives me confidence in our future growth prospects, and that is the strength of our people, and our company's unique culture.

General Mills has a long history of success, our values our strong, we care a lot about the strength of our culture, and we work hard on it, because it is a key for us to recruiting top people and retaining them.

Our employee retention levels are above the consumer products peers, and we want to keep it that way.

Last fall, we conducted a company-wide climate survey.

More than 90% of our employees responded, and I will tell you we were a little concerned about what we'd find out in this survey, because this is less than a year after the closing of the Pillsbury deal, and it was just after that period where we'd been very stressed by the integration, and we still had a lot of change going on.

It was also the first time we had asked Pillsbury people how they felt about the new company.

The climate scores that came back were our best ever.

Both Pillsbury and General Mills employees rated the company better than General Mills employees alone had on the prior survey, three years earlier.

scores to a benchmark group of major consumer foods peer companies.

And on most of the criticals it mentioned, things like leadership and commitment and people development, our ratings exceeded the very best scores we found in our peer group.

We're convinced that our pay-for-performance and stock-based compensation programs are fundamental to this culture and our company's superior performance going forward.

Annual compensation at General Mills blends a relatively low base salary with incentives that are highly leveraged, both up and down, based on performance.

A portion of our annual incentive payment is paid as restricted stock, and not cash.

A long-term compensation at General Mills is all stock based.

For the better part of two decades, we have sponsored plans designed to make employees at every level company owners of our stock.

And we have made four all-employee stock option grants, the last one in 2002 reached more than 26,000 employees.

As a result of those programs, more than 90% of our employees with three years or more with the company owned stock, and our top officers owned stock worth an average of 11 times their base salary.

Now, these stock-based programs have also created a large balance of outstanding options.

In recent years, we have modified our programs and begun working that option run rate down.

And we're committed to continuing to do that.

At this year's coming annual meeting, we'll be asking shareholders to approve a new long-term incentive plan that relies less heavily on stock options and expands our use of performance-based restricted stock.

That would further reduce our run rate.

And we think this plan strikes a good balance of reducing our options use, while sustaining the commitment to build employee stock ownership.

Our performance-based culture, our portfolio of leading brands and our focused growth strategies have all combined to produce superior returns for General Mills' shareholders and not just in recent years but over an extended period of time.

And all of us at General Mills today are committed to delivering results that build in this track record and continue that trend in the years ahead.

That concludes our prepared remarks for this portion of the meeting.

We will now open it up to questions and I'll ask Kris Wenker to play traffic cop and call on people.

All right.

Hang on.

Are you going to sit here?

Are you going - what are you going to do?

No.

I'm OK.

I can see.

All right, well, I have to start with the winner of the closest to the pin contest that would be Bill Leach.

Yes.

's coming.

Hang on for a minute.

We're going to make

aerobic here.

This is a long room.

Yes.

Right there.

Steve, could you just elaborate on the swing in promotional expenditures in the fourth quarter that added, it looks like 11 percent to your retail sales?

Was that the fact that promotions were too high last year or were they too low this year or - I've never seen such a big swing in?

Also, could you discuss the cereal shipment trends in the fourth quarter after the very strong third quarter?

The - the reduction in our promotional expense did not account for an 11 percent swing, that was a portion of it.

We had, remember, increased - increased prices.

We had taken price increases on a number of our lines and that was effective in the fourth quarter.

But we did have a reduction in promotional spending as well.

And I think it was partly a function of the way the year was planned, partly a function of the prior year being high promotional expense although not terribly efficient.

Remember, the year before we had put a lot of programs in place after the time we made the Pillsbury deal.

When you put promotional programs in place late you can spend a lot of money and not get a lot for them.

And that, I think, is the case in last year's period.

But it was an expensive period.

But, in general, we are trying to moderate our promotional expense as a percentage of sales and we've been successful doing that, both for the year and for the quarter.

Now, as far as the cereal shipment trends, we said, I think, that we expected them to be flat and they were roughly flat; weren't they Ian, down a percent or so in the - in the quarter which reflected the fact that the third quarter had been unusually strong as we saw some inventory build that were, kind of, related to the price advance that we took.

I just want to - hang on for a second.

I just want to reiterate, Jim actually gave you a little bit of a split on that fourth quarter so you've got 10 percent sales growth in the fourth quarter and he told you that 7 points of that were a combination of pricing and mix.

And there's volume and promotional spending down slightly year-over-year that was the remainder.

Let's go to John McMillin.

, can you scoot back there?

Congratulations on these results and also for, kind of, giving us guidance that goes out going back to CAGNY three years.

It just - it comes at a time when everyone else is afraid to give even quarterly guidance and part of the skeptical nature of Wall Street, kind of just wonders whether this willingness to give, you know, three year guidance partly reflects Diagio's input as a major majority shareholder.

And to the extent you can talk about that and, basically, the motivation to, kind of, laying out a three year plan.

Well, John, we have always tried to give pretty good visibility to what our goals were and what we're thinking.

I think investors benefit from understanding how we expect to perform and you can measure us against how we expect to perform.

I think, you know, and in my memory, we have always given the ranges of the kind of performance that we expected to deliver.

We think it's been particularly important in this recent period because, as we put General Mills and Pillsbury together, you need, we think, a better understanding of what we're thinking because this is a new entity.

And so you can't just take what General Mills alone did in the past.

And so, you know, we try to provide guidance which is a helpful as we can without, you know, getting into exactly what any given quarter's going to be.

It doesn't reflect anything at Diageo.

I know some of you thought that giving this kind of guidance was motivated by the upcoming CVR payment.

That's behind us now and you'll notice we're not changing.

So apparently it wasn't motivated by that.

I think it's just motivated by our belief that this is - this is the best way we can make - help investors understand General Mills.

OK.

Let's take the microphone across the way to David Adelman and then we'll work forward.

Steve, can you talk about Pillsbury USA. at

.

Business was up 1 percent, I think, in volume last year.

It was better than the prior year but it's clearly lagging overall General Mills U.S. retail.

Do you think ultimately it can grow at the overall average rate or perhaps even better than the overall average rate of the company and how many years do you think it will take to get the innovation pipeline there so it can grow at a faster rate?

David, I definitely think that Pillsbury U.S.A. can grow at a faster rate and one that's very comparable to the overall General Mills unit volume rate and I say that because in the most recent year, where we supplied innovation and

will talk more about this, where we supplied innovation in Pillsbury U.S.A. like in the cookie category, we had very strong growth.

And Grand's Biscuits where we brought improved products to the fore, we had strong growth.

There are some other sectors within that dough business where we have not brought innovation and they lag.

And so, none of us are satisfied with the 1 percent rate of growth in Pillsbury U.S.A. and we have a very strong innovation pipeline both in the coming year but also longer term that we think can accelerate the growth of that business.

We - it is one of the strong growth opportunities, we think, in the product categories we got from Pillsbury.

It's strong because we think there's a lot of innovation opportunity and because we have a very strong position in the category so we can leverage that innovation to drive category growth.

, can you grab that microphone and bring it up here to Terry Bivens?

Steve, just in terms of the fourth quarter, could you quantify, was there any hit from Fleming in there?

There definitely was.

You know, I - I'd be giving you an opinion but I think that the difference between our Fleming shipments in two years probably accounted for roughly 2 percent of U.S. retail in the volume in the quarter.

Yes.

Now, you know, that assumes that none of that volume went someplace else and you could say well, other - you know, certainly our retail sales were up 4 percent in the quarter.

Pretty consistent with our long-term trends.

So the shoppers kept shopping and the people kept buying.

But I think there's probably some inventory adjustments related to the

situation that, you know, won't be long-term factors but were a factor in this quarter.

OK.

And just more broadly, I know it's not the biggest part of your business, but baking and food service, the other public bakers seem to have hit an air pocket, food service is obviously kind of weak; how do you expect that to develop in '04, that division?

We are counting on stronger performance.

Significantly stronger profit performance and we're counting on some relatively modest unit volume growth from bakeries and food service in '04.

We tend - we have tended to out perform the overall market does.

We calculate what the overall market is in the combination of categories in which we compete and we outpaced that market by about 2 to 2 and a half percent, I believe the figure was, in '03.

And so, if we - we expect to continue to do that in '04 and we expect the market to get stronger.

But the big - the other big factor that will help us in bakeries and food service next year is that our cost side was hit very hard by some of the supply chain changes that we were implementing in '03.

We closed four plants.

We moved a tremendous number of SKU's around from one manufacturing source to another and we took some real cost hits in the short-term that won't be long-term.

In fact, we'll get great benefit from the supply chain costs longer term.

And so the majority of our profit improvement in bakeries and food service will come simply from supply chain rationalization that we'll begin to realize in '04.

, why don't you bring the mike up here.

We'll go with Romitha, and then Romitha, you can hand over to Eric.

Couple of questions.

First, in terms of the takeaway and the shipments for the full year it looks like it exceeded - the takeaway exceeded shipments in every category except for cereals so I'm just curious to know what does that mean for fiscal '04 for Big G and do you think that they can - that Big G can deliver close to the 4 percent unit volume growth that you're looking for overall?

Second, in terms of inventory levels as U.S. retail on a year-over-year basis, can you give me a sense of where they are today versus a year ago?

And then, finally, on the productivity savings, the 300 million between '04 and '06; how much of that do you expect to achieve in '04?

OK.

Let me start with the first question and in the case of Big G, one of the factors in that takeaway shipments divergence in '03 was that it was comparing to an '02 where you had the exact mirror image of that where we had consumer sales up and shipments down.

And we talked about the de-stocking that occurred in cereal in '02.

And what that meant was that even if sales and shipments were identical in '03, the growth rate would be much better in the shipment side because of the comparison.

And that is, to a great degree, what happened.

We expect to have good growth in our cereal business in '04.

And we typically talk about 2 to 3 percent growth in cereal as the pace that's needed to feed into the overall 4 percent growth rate we expect to get across the entire U.S. retail business.

I can't remember what your other two questions were.

One of them had to do with inventory.

Exactly.

The days inventory now versus a year ago and then the final question was on the productivity savings.

The first question - actually, I don't know the answer to either of those questions.

Jim, do you know the answer to the productivity

Well, I think I do know the answer to the inventory.

If you mean our overall inventories, they're 27 million greater at the end of this year than they were one year ago.

And the second productivity question was?

Was the 300 million in savings between '04 and '06; how much of that are you going to capture in '04?

Oh, you're talking of productivity.

We actually have not done a split of that three year total.

We were trying to give you a sight line, you know, if you remember Randy at CAGNY told you that we've identified 100 million over the next decade and we wanted you to understand that 300 million of that total will come in the three years that we're trying to give you some guidance on.

Isn't there an amount embedded in the '04 guidance?

Not that we've disclosed.

I think I'm going to follow up on that question. $2.65 in earnings if we exclude the charges to $3.35, if my math is correct, you have a negative hit of 10 cents from pensions, you have interest expense benefit if we take the mid-point of about 6 cents.

Synergy and productivity savings are 38 cents.

So if I back into that it basically means operations are flat in terms of contributions year-over-year.

So could you, kind of, walk me through what's - what's the difference?

I think you reversed the sign on the pension.

That's a 60 million negative.

Right.

So we have to make that up with -

Right.

So that's a negative 12 cent swing per share -

lawrence Right, so -

- and then you have -

- you put that back up on - with operations.

OK.

So the - so it's - that's the difference.

Are raw material costs still going against you?

Raw material costs are going against us but, you know, if we don't - the operating earnings will be up in '04.

Yeah.

Remember that we've given you, as part of our three year model, that we're expecting operating profits to go up faster than sales.

Productivity's part of that.

Right.

OK.

Well, that's what - that's what I'm trying to

.

The interest is to the good but the pension

.

And I realize these aren't necessarily cash items.

So it's not - it's not actually as important.

And then the second question is, can - how can we, kind of, track over time because you seem to be doing it a bit better than others, in terms of your return on promotional investment.

How, on the outside, can we track that?

How much of your gross margin expansion either in the quarter or the year do you tie to having to spend less trade promotions?

Well, I have to be honest with you, we will keep reporting for you on a quarterly basis the components of net sales growth because I do understand that that does help

.

In terms of trying to track us real time, I will tell you probably the best thing to do is to be in the stores and watch how the promotion is running.

You know, Jeff's team's good work in terms of bundling promotional spending across multiple categories, things like driving display at feature prices that are less depth of discount then you see from other players in the same categories where we compete.

If you see, you know, good store support behind broad platforms that we have like box tops for education and some of those things, those are your best real time sight lines as to how efficiently we're driving feature and display and that's what we're looking for.

We need a microphone over on the far side please.

Can you - I'm sorry, I can't do your name off the top of my head.

Anthony Crawlson

.

Thank you.

Two questions for Jim.

Jim, you talked about your distribution long-term debt versus short-term debt being 80:20.

First, are you happy with that distribution?

And, secondly, is that the same distribution in terms of floating rate debt and fixed rate debt or do you have swaps in place that could help you in terms of interest rates potentially going down further?

the 20:80 is where we wanted to end the year.

We're not certain, you know, how long we'll hold that rate through the balance of fiscal '04.

We may well take down the short and increase the long.

Within the 20 percent, a good portion of it - the majority of it, is floating and some of it is swapped out long.

And then with regard to your pension assumptions, if the Fed Reserve were to cut 50 basis points this afternoon and there would be a further flattening of the yield curve going forward, do you expect to make additional changes to your discount rate and could that potentially result in having to make a contribution?

Excellent question.

The way the pension accounting works, and I'm not an expert but I'm told definitively, you set the discount rate on the first day of the upcoming year.

And so it is what the rates were on that day.

It doesn't matter if they were higher a month earlier, as they were.

It doesn't matter if they're lower a month later, as they might be?

It doesn't matter if they're higher two months later, it's just what those rates were on that day.

So, we set it and it's done so that will not affect us.

And even if it would, you know, when I say we sort of dipped, I mean, it's just a very modest under-funding and we're not in a position were we could make a tax benefited contribution and we are well beyond any place where we're required to make a contribution into it.

I think we're going to wrap up the Webcast part of this right now because my window has closed.

I want to thank everybody on the Webcast for joining us today.

Those of you that are here live we're going to be on break now until ten o'clock.

So if you've got some phone calls you need to make, this is your moment.

Thank you.