通用磨坊 (GIS) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the General Mills first quarter fiscal 2004 earnings 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 one followed by the four on your telephone.

As a reminder this conference is being recorded Tuesday, September 16, 2003.

I will now like to turn the conference over to Ms. Kris Wenker, Vice President Investor Relations.

Please go ahead, ma'am.

Thanks, operator.

Good morning, everyone.

I'm gonna turn you all over to Jim and Steve in just a minute but first I need to remind you that our discussion will include forward-looking statements.

Which are based on management's current use and assumptions, please refer to the press release we issued earlier today, and to our 10-K for cautionary statements regarding forward looking information.

There are slides posted on our web site that supplement today's remarks, consistent with SEC Reg G we will focus on GAAP results, however we know many of you use non-GAAP measures in your analysis, in the slides you will find a page that reconciles the GAAP and non-GAAP numbers we will discuss today and you will also find a slide that gives you last year's fourth quarter costs of goods and SG&A presented on a consistent basis with the reclassification we made during 2003 for items like merger related costs.

That is the end of my housekeeping notes, so I am going to turn the call over to Jim.

Thank you, Chris and good morning, everyone.

As we reported earlier this morning in our press release we are off to a good start for fiscal 2004.

Our first quarter net sales increased 7% to over $2.5 billion dollars.

And our after tax earnings grew 29% to $227 million dollars.

Diluted earnings per share totaled .59 cents GAAP, which was up sharply from .47 cents last year.

These net results for both years include costs associated with the Pillsbury acquisition.

They are restructuring costs which we list separately on the income statement.

And merger-related costs that are included in SG&A.

In this year's first quarter, these costs totaled $15 million dollars pretax.

And that's versus $55 million dollars last year.

This $40 million dollar year over year decline in Pillsbury-related costs boosts our EPS growth rate as reported on a GAAP basis.

If you exclude these cost items from both year's results our diluted EPS grew 11% from .56 cents last year, to .62 cents in this year's first quarter.

And this performance met our expectations for the quarter and puts us on track to achieve our objectives for the full year.

Let me give you a little more detail on the quarter's results starting at the top of the income statement.

Our 7% sales increase was generated from worldwide unit volume growth of 3%.

Pricing, mix and currency combine to add 5 points of growth.

And promotional spending grew slightly faster than sales for this period, reflecting planned introductory support behind numerous new product launches so that accounted for a point down.

Cost of goods as a percent of sales was up 140 basis points for the quarter.

Manufacturing realignment that we have under way in our bakeries and food service segment is the primary factor driving these higher supply chain costs, and Steve will be discussing this in just a few minutes.

Largely offsetting the cost of goods increase, SG&A expense as a percent of sales was down 120 basis points, primarily due to good productivity in controlling administrative expense.

Interest expense, $134 million dollars, was 8 million lower year over year due to lower rates and the benefits of last year's refinancing actions.

This was consistent with our full year expectations.

We are still estimating $500 to $530 million dollars of interest expense for fiscal 2004.

That is in conjunction with our plan to pay down $450 million dollars of debt by the end of the year.

Our tax rate at 35% for the quarter was down slightly year on year.

But it matches last year's annual rate and 35%, these are is our estimated rate for the whole 2004.

Finally joint venture income increased by 18% in the quarter to $20 million dollars, driven by cereal partners worldwide and snack ventures Europe.

I will now touch briefly on our segment results and Steve will give you more details in a few minutes.

For our U.S. retail businesses sales increased 7% to 1.7 billion, driven by 4% unit volume growth here.

Bakeries and food service unit volume was down 4% in the quarter but sales were down just 2% as we have now begun to realize some net benefit from last year's commodity-driven price increases.

And sales for consolidated international businesses grew 17% to 367 million reflecting favorable currency and 4% unit volume growth.

As for the segment earnings, U.S. retail profits grew 11%, to $399m.

Bakeries and food service profits declined from 53 million last year, to 29 million this year.

Due to our lower unit volume and the higher supply chain costs which I mentioned earlier.

And international earnings increased from 22 to 24 million in the quarter.

A proportionate share of joint venture profits rose from 17 million and that is after tax, to 20 million.

Cereal partners worldwide, a joint venture with Nestle, and snack ventures Europe, our joint venture with Pepsico, drove this growth with combined earnings up $4 m for the quarter.

Combined profits from Haagen Dazs joint ventures in Asia and eighth continent are soaring a joint venture in the U.S. with Dupont were down slightly.

Haagen Dazs results were hindered by cold, rainy weather in Japan this past summer and a difficult comparison to strong year ago new product activity.

Eighth Continent soy milk just expanded to nationwide distribution in June so its results reflect introductory marketing spending.

Moving on to the balance sheet, and core working capital items, you can see our normal first quarter increase from May year-end levels, which is driven by building higher inventory, as we prepare for second quarter business seasonality.

You know our second quarter is our biggest of the year.

If you compare core working capital year over year for the quarter, there is not a lot of change.

Inventories were up $75 million.

And that reflects a somewhat earlier vegetable harvest this year, and the timing of our new product introductions.

We will not have a completed statement of cash flows until we file our 10-Q next month, but I do have two numbers for you.

Depreciation and amortization totaled $93 million dollars in the quarter.

Our full-year estimate is 390 million.

We're estimating capital expenditures for the quarter at 120 million.

Our annual cap ex budget for this year is 650 million, which includes spending to complete our Minneapolis headquarters consolidation and the information systems integration.

We continue to expect cap ex to hit this number 650 for the year.

The last item that I would like to touch on is the funded status of our pension plans.

At the end of fiscal 2003, the 10-K showed us being slightly under-funded.

That was calculated using the discount rate as of our May 25 year-end.

You remember of course that interest rates were at historic lows at that time.

Rates have since gone up, and if we did the same calculation today, that would show our plans fully funded.

As we've discussed with you before, we expect to make a cash contributions of roughly $10 million dollars to our pension plan and $20 million dollars to our other post retirement plans this year.

And that wraps up my review of the first quarter results.

Now, I will turn the call over to Steve for more details on our operating performance and to speak about our outlook for the rest of the year.

Steve?

Thanks, Jim, and good morning, everybody.

The first thing I would like to do is review business trends for our various U.S. retail divisions.

Jim told you earlier that unit volume was up 4% for these businesses overall.

And that includes volume gains for every division except Big G cereals, Big G had a tough comparison because last year they led our first quarter growth with a 6% volume increase.

And after a couple of years of good growth, the ready to eat cereal category has been a bit sluggish during the last three or four months with dollar sales declining slightly.

Big G's volume has run basically in line with the market trend, down a little bit more, however, our top 10 brands continue to perform very well, our market shares are up in the aggregate, among those key brands, and we're also seeing a continued goods performance from Berry Burst Cheerios introduced last January.

The recent monthly dollar shares for Berry Burst exceeded 1.3 share points.

Merchandising activity for Big G really kicked in, in a major way at the end of the first quarter as we planned it, to tie in with back to school programs and with our annual fall salute to savings event.

So we would expect to see our volume trend improve on cereals in the second quarter.

The other divisions as I said were all up, in baking product, unit volumes grew 1% driven by good performance from new desert mix items that we introduced.

The Pillsbury division which included all of our dough based business is off to a very good start in 2004, with unit volume up 4%.

Totino's pizza, hot snacks, Pillsbury refrigerated cookies and frozen backed goods lines posted the strongest increases there.

Our meal division unit volumes grew 7% that was led by Progresso and the launch of our rich and hearty soup line.

Key account acceptance of this as an eight item flavor, eight flavor line and key account acceptance exceeding our expectations and resulting in very good incremental SKU distribution for Progresso.

Dinner mixes continue to do well, led by product improvement news on Hamburger Helper, and Green Giant canned and frozen vegetables also had a good quarter.

Unit volume growth for the snacks division grew 8%.

Nature Valley granola products and Pop Secret popcorn led the growth but volumes were up for fruit snacks and salty snacks as well.

And finally Yoplait started off the year again with double digit unit volume growth, 11% reflecting the national introduction of Yoplait Nouriche beverage line and continued growth by the core established country yogurt products.

Consumer take away trends in the quarter also were good overall.

Composite retail sales for major product lines grew 4% which is right in line with shipments and that is Neilson measured outlets plus our nano projections for Wal-Mart.

I mentioned cereal a minute ago.

The only other major business with a slight decline in consumer sales this quarter was Progresso which of course was quite different than the strong shipments we had.

With Progresso we really haven't initiated or marketing programs for the fiscal year in the first quarter those start as we start the 2nd quarter and head into the soup season.

Our other products all showed good consumer trends in the measured channel and I should add we are seeing continued strong growth in consumer sales throughout the non-measured retail outlets.

Let me turn now to our bakeries and food service segment.

As Jim told you, first quarter volume for this business was down 4% overall.

Now, some part, a small part of the decline is a result of our own actions to eliminate low volume and less profitable SKUs but the bigger factor was lower sales and a couple of our key business segments.

In particular, our unit volumes were down 7% with food service distributors, and also down a like amount in the various bakery channels.

And these declines more than offset relatively stable volume with national account, that is, primarily restaurants and super centers and growth in our convenience store business.

Below our overall volume when you combine it with supply chain inefficiency that were caused by the manufacturing realignment we've got under way, caused a significant decline in first quarter operating profits for food service.

Last year, we had announced plans to close four food service plants, and realign manufacturing at other locations.

This involves moving over 2,000 SKUs, about 40% of our existing business.

And you see the impact of those moves in our food service results over the last three quarters.

And we're not honestly not finished yet.

But as we told you back in June, our plans call for an earnings recovery by bakeries and food service in the second half of 2004.

At that point, we expect to have the bulk of this disruption behind us, and we expect to show good profit growth for the full year.

Let me next discuss our international business.

In the first quarter unit volume for our brands grew in nearly every geographic region where we compete, there were just a couple of exceptions, Latin America where volume declined by a much lower pace than last year.

We continue to manage our business in this region to protect profit, not volume in an inflationary environment.

In addition our Haagen Dazs joint ventures in Asia saw volume fall slightly as Jim already mentioned.

Elsewhere around the world, there was growth.

Canada, up 1%.

It would have been more but for the blackout that caused them to lose a bit of volume at the end of the quarter.

Volume in Europe was up 5%.

Asia Pacific grew 17%.

And if you add in the end of volume gains of 4% for CPW and 13% for SVE, our total international volume all grew 5% for the quarter.

So all in all, we're happy with our progress in the first quarter and we feel like we're well positioned going into the second quarter, which is our biggest volume and earnings period of the year.

As we start the quarter, we've kicked off several key merchandising and promotional events.

The first it our box tops for education program.

This is a year-round program in which families collect box top labels from a wide variety of our packages to earn money for their local schools.

And while it is a year-round program, we put the main merchandising push behind it in the back to school period, many of our trade customers like to run big back to school merchandising events around this program.

We're also running our salute to savings promotion in the second quarter.

This is an annual General Mills event.

Offering merchandise products in almost every aisle of the grocery store.

And you probably started seeing the pink lids showing up on Yoplait cups once again as every year at this time we will donate 10 cents to breast cancer research for every pink lid consumers mail in before the end of the year, up to a total of $1.2 million dollars.

We introduced over 70 new products in the first quarter and we've got more planned for the second.

Consumer marketing support will begin on most of these products as they reach broad retail visibility which is happening now.

We think we have good levels of product news and innovation to drive our business in the seasonally important fall and winter months and we expect our U.S. retail business to again lead General Mills performance in the second quarter.

Offsetting what we expect to see is continued weakness in that quarter in our bakeries and food service segment.

This will put us right on track with our fiscal 2004 plans that we've shared with you before.

We’re targeting net sales growth of 6%, including the benefit of a 53rd week that falls in our fourth quarter.

We expect operating profits to grow faster than sales as we move through our manufacturing realignment and capture the incremental $125 million dollars in acquisition synergies we've identified for this year.

And we estimate our net diluted earnings per share will total approximately $2.85 to $2.90 on a GAAP basis, and that represents growth of 17 to 19%.

Now, remember, the EPS forecast includes some restructuring and merger-related costs of .10 to .15 cents per share, which is less than the .22 cents per share we incurred in restructuring and merger-related costs in 2003.

So if you pull those out of both years, our estimated EPS growth in 2004 is a bit slower than 17-19% but will still meet or beat our 11% long term growth goal.

So that's where we are.

We're off to a good start.

We're on track for a good year and with that I will conclude my prepared remarks and ask the operator to begin taking questions.

Thank you, ladies and gentlemen, if you would like to ask a question press the one of followed by the four on your telephone.

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

If your question has been answered, and you would like to withdraw the registration you may do so by pressing the one followed by a three.

If you are using a speaker phone please lift your hand set before entering numbers.

One moment please for the first question.

David Adelman from Morgan Stanley please proceed with your question.

Good morning, everyone.

Hi, David.

I want to ask two questions about the U.S. retail business.

First, can you go through the factors that accounted for the differential between 7% dollar sales growth and 4% dollar take away?

David, I think in the first quarter, we would typically have our sales exceed take away just a bit.

Because we're building up to the main promotional periods of back to school and the salute to savings that start in September and Progresso soup is a good example and of course as we come into the fall seasonal period, Progresso soup, our sales into the retailers were greater than our take away.

So that's more of a seasonal thing, I think, than anything else.

And secondly, Steve, did the margin performance in U.S. retail, was that consistent with your expectations?

In other words, I know have you higher pension costs.

But 7% sales growth resulting in 11% operating profit growth is.

That the way you think the business should behave from a profitability and margin perspective?

Yeah, I would say in the U.S. retail side it was roughly in line with what you would expect.

There is always some variation.

But the big place where the margin impact was a factor was in the food service side.

And lastly, what do you attribute the recent sluggishness in the U.S. ready to eat cereal category to?

Well, you know, there were price increases in April among all the major manufacturers, and I think everyone has been working pretty responsibly to try to make sure the price increases get realized.

If you look at the average unit prices on cereal, they have been moving up and that's true both for the shelf price and also for the merchandise price.

So the merchandising climate wasn't as intense.

The -- and the shelf prices moved up.

And I think in the near term, that is a Delta that may have caused some weakening in the category trend.

But it is something that needed to happen.

And so I think it is encouraging that those prices are showing up at retail.

Thank you.

The next question comes from the line of Romitha Mally from Goldman Sachs.

Please proceed with your question.

Romitha Mally your line is open.

Good morning.

Good morning.

The retail trends looked quite good across a number of the product lines and I'm curious to know whether the dollar share trends were as good as well.

In the aggregate, our dollar share, you know, we look at, you know, some categories our shares are up a bit, some are down a bit, the majority are up, and we like to look at the aggregate dollar share and for the quarter, that was up half a share point.

So that met goals that we set for growth in our dollar shares.

Could you tell me what happened to share in cereal?

Our share in cereal was, as we measure it, was off about a 3 tenths of a point and that reflected our sales being down 2% and the category being down about 1%.

Okay.

And then, you know, in terms of Progresso, you know, Campbell soup has a lot of initiatives in place for the year, how do you feel about your soup strategy?

We feel very good about our soup strategy.

We have of course a much more focused strategy on specific niche in the market than Campbell does.

And that focus, we believe, on the adult premium quality segment is really going to be a good one for us this year with the increase in SKUs on the shelf because of the introduction of our rich and hearty line.

We've had tremendous retail response to that.

Obviously, we haven't turned on the marketing or we have just begun to turn on the marketing for that.

But I think that is going to allow us to continue to increase our share of the total segment.

I think, you know, Campbell's has a number of good initiatives, too.

And they are going against broader -- a broader market than we are.

But I think the positive initiatives on the part of both of us are likely to be very healthy for the soup category.

Are there any plans to introduce any microwaveable products?

We don't share every detail of all of our plans Romitha, but if we do, I will let you know right after we talk to our first customer.

Okay.

And then just in terms of, you know, the -- back in June you talked about synergies from the acquisition and you also talked about some productivity savings and I'm curious to know whether some of those productivity savings were realized in this quarter.

Yeah, particularly on the SG&A side, you're seeing some of that come through.

Can you quantify that for me, Jim?

No, not beyond the improvement year on year.

Okay.

Which is visible.

And also, could you strip out the currency impact on the top line?

It is about a point on the top line.

And on the bottom line, it will be about a penny.

Great.

EPS.

Thank you.

You're very welcome.

The next question comes from the line of John Mcmillin from Prudential Equity Group.

Please proceed with your question.

Good morning.

Hey, John.

Congratulations, everybody.

Thank you.

If I strip out -- if I just look at unallocated corporate expense and strip out the non-operating items I get a positive swing of about $9 million dollars.

If I've done my math correctly.

Tell me if I haven't Chris.

But what did that come from?

You're close but I don't know if it is exactly 9 but that's right, you are going to see income on allocated line.

And remember what goes on there, we allocate most of our costs out to the division.

And so what you're seeing in the first quarter is, you know, actual expense, less than allocated, so it comes through as a plus.

On that unallocated line.

The bottom line to your question is, are we expecting income on that line for the year, no, we're not, it will be an expense line.

And the reason for the positive Delta is --

You got to settle out the difference between your actual costs in the quarter and what you allocated.

So somewhere, you got to settle that up, and it turns out to be a plus on that line.

Okay.

Our corporate overcharged our division for our services.

That's right [ Laughter ]

Like the government, right?

That's right.

You know, just in terms of -- and Steve, I asked Jim the same question a week or so ago, but just, you know, the major concern that a lot of people have is you're just going to get a tidal wave of stock from DIAGGIO.

To the extent you can talk about it, and you can argue it is just a week or two event but is there anything the company can do with such a leveraged balance sheet to kind of mitigate this overhang?

As you kind of get near the due date?

I can tell you, John, that nothing has changed since you talked to Jim a week ago.

What an excellent answer.

Okay.

I'll have to keep trying, thanks. [ Laughter ]

The next question comes from the line of Terry Bivens from Bear Stearns.

Please proceed with your question.

Good morning, everyone.

Hey, Terry.

One quick question to start, with marketing what did that do in the quarter?

You saw the price promotion component of total marketing spend was a point negative to the top line, because we were supporting a lot of new products.

You know, the consumer piece, I presume is probably pretty even at the percent of sales because remember, the consumer behind all of the new products really kicks in in the second quarter.

So I would look at that, that minus one point, the top line of promotional spending, and say that is basically your indicator for the quarter.

Okay.

Fair enough.

And just in terms of cereal, Steve, Kellogg has a slightly better look at the category, they think it is up, if you include Wal-Mart.

Now, granted they may be looking at a slightly different period but I guess your response before was you felt in your quarter, category was down 1%.

Was that in dollar sales?

Yes.

Okay.

For the year, what would you expect big G to do, given your kind of slightly more restrained view of the cereal category?

Do you think you will be up for the year in big G?

We expect to be up for the year.

And we expect -- you know, we expect to start seeing that in the coming quarter.

And is there any particular reason in your mind that the category would have been down over your measured period?

I mean the only thing I see private label as a little bit more promotional, but not a huge Delta there.

I mean in your mind, is it just a timing issue?

And things will get better as we go into September and we see more promotions?

I think that is partly it.

I think because we're talking about the immediate and aftermath, the four-month aftermath or so from the pricing increases, and the attempts to get the -- both the price -- the shelf prices and the merchandise prices up to reflect those price increases, and you combine that, which is happening, if you look at the Neilsen data, with the continued and in fact increased efforts by private label, and I think that is combined to cause a bit of softness there.

But you know, now that these prices are established, I think we are going forward from a new base, and so you're likely to see a more normal go forward performance in the category.

We've got a lot of innovation that we're expecting, both merchandising innovation and some new product items coming.

I'm sure Kellogg does.

And so, you know, I think with the prices up a bit, that will begin to take effect.

Okay.

So just to conclude then, you think it is -- you sound pretty optimistic that the category as a whole including Wal-Mart should be up in your fiscal year on dollar sales?

Yeah, I think it will be.

I think it will be -- certainly I don't expect it to be down.

Okay.

But you know, it is -- I mean I'm not a perfect predictor of the future.

I'm just telling you what we think.

I see.

Thanks very much.

Thanks, Terry.

The next question comes from the line of Bill Leach from New Berger Berman.

Please proceed with your question.

Good morning.

Good morning.

I was just wondering in terms of the quarter if you look at your annual guidance you're obviously forecasting low double digit gains and you got the extra week in the fourth quarter but I was just wondering you basically expect each of the next three quarters to show roughly comparable EPS growth?

I don't recall that we made any predictions about each of the quarters, Bill.

And so I think we're really going to focus more on the overall year.

You know that we do expect the next two quarters to be our biggest and the absolute of the year because the seasonal pattern, that is really all -- and we -- I think we have also said that we expect the bakeries and food service to contribute much more strongly in the second half of the year.

But beyond that, I don't really want to get into quarterly predictions.

Again, without getting into predictions just to mention the 53rd week does fall in the fourth quarter, so there will be --

So that increase will be bigger than the others.

Okay.

That's all I need to know.

Thanks.

Thank you, bill.

The next question comes from David Nelson from CS First Boston.

Please proceed with your question.

Good morning.

Good morning.

Promotional -- excuse me, higher promotional spending reduced sales this quarter by 1% where as last quarter for you, sequentially, it actually added to sales by 2%.

What do you think the long-term trend will be for you on that?

Should we expect it to be flat or up -- up here and a little down there?

I think over the long term, our desire would be promotional spending would grow at a slower rate than sales and certainly we build our plans that way, sometimes competitive activity in a category will force you off of that, but in the long term, our -- we model promotional spending to be a contributor to net sales growth.

Okay.

I guess the second question, I haven't heard the term trade D stocking so far in this call.

What do you think you might be doing that others might not or why do you -- why don't you seem to be affected by that?

That is a phenomenon that for reasons that I can't explain tends to occur in, you know, different categories, at different times.

And to different companies at different times.

We had a very significant restocking in fiscal '02.

And you know, it puzzled us.

But it may have been -- I was --

It was our turn.

It was our turn, yeah, I don't know why, but we haven't -- you know, we haven't experienced it in any significant way this quarter.

I think, though, it is a long-term, it is a long-term trend that is happening, and we fully expect that, we build it into our plans, that retailer inventories, that there are three weeks now, are going to head toward two weeks, as, you know, we go over the next couple of years, the technology allows it, our supply chain capabilities allow it, we encourage our retailers to carry lower inventories by virtue of our service -- increased service capabilities, it is good for the freshness of our product, and so the only -- the only issue is when it happens in fits and starts.

If it happens on an even way over time, it would be a non-item in our plans because we've prepared for it.

It is when you have a big surge of it in one quarter that causes companies problem, and maybe that's caused by promotional timing, you know, we haven't really frankly figured out why that is, but at least this quarter, it wasn't a factor for us.

Okay.

I guess one more question, please, on share account, it did tick up a bit this quarter and then your filing, you referred to another 15 million shares coming out, starting this October, through December of '05.

Could you comment on perhaps the timing of those additional 15 million shares coming into your statements?

Just to clarify, you're talking about shares that are being requested as part of the 2003 stock plan?

Yes.

That's in front of shareholders, so that’s a two-year plan.

Yes.

So but on a quarter to quarter basis, you couldn't give any guidance on that?

Have you expected -- do you expect it to be in big lump sums, on certain dates, at the end of your fiscal years?

Those are options.

Yes.

Largely options.

It is going to be a combination of options and restricted stocks.

David, I'm assuming the question behind your question here is how to think about shares outstanding for the fiscal year, is that what we're after here, so we've got about a 1.5% delusion in the current quarter.

Uh-huh.

Where we end up in the year is obviously going to depend in part on stock price performance, that is part of what drives your common share equivalent but 1.5% is probably a decent round number assumption for the year.

Okay.

Thank you very much.

The next question comes from the line of Bob Cummins from Shields and company.

Please proceed with your question.

Thank you and good morning, everybody.

Hi, Bob.

Steve, your analyst conference in June you commented that so far all of the financial benefits from Pillsbury were coming through the synergies.

And that you hadn't yet really benefited to any extent on the sales line.

I wonder if you could update us on where you stand on that.

Are you starting to see some sort of progress in that regard?

I realize the food service sector is down which doesn't help.

But where do you stand today?

Is that comment still true today that all the earnings gains are still coming from synergies still?

I think one of the most encouraging things from our stand point of this quarter is that the Pillsbury retail lines were a big contributor to our unit volume growth and we had growth in Pillsbury USA which is the dough product lines overall, and growth in Progresso soup in the quarter, vegetable business did well in the quarter so on the retail side, we actually are beginning to see some very nice -- very nice growth.

I said the retail volume was up 4% for General Mills in total, the retail dollar sales were up 4% but for General Mills in total.

The Pillsbury Heritage brands were up 6% in the quarter so they actually led the way which is the first time that's happened and we're very encouraged to see that.

So the answer to your question is that is beginning to do what we expected it to do on the retail side.

Food service,. (inaudible)

Great.

Thank you.

The next question comes from the line of Andrew Lazar from Lehman Brothers, please proceed with your question.

Good morning.

Hey, Andrew.

Steve, you launched a lot of new SKUs, even going back to the first couple of quarters of fiscal '03 and you mentioned another 70 in this most recent quarter and a lot of that has gone, you know, without perhaps a lot of the hitches that might come from launching that many new SKUs in products, and I'm just curious, you know, perhaps the, I guess the in store selling efforts some of the things that Jeff Roach might have talked about at your meeting a couple months ago, can you talk a little bit more in detail about what is allowing you now to you no execute that at retail perhaps better than you might have a year or two before that?

The pace Andrew of introductions I think is -- that's kind of a new benchmark that we're going to have to hit going forward, and this is a level of innovation that is pretty much built into the expectations of growth that we have.

And so we've been working to build the capabilities to execute those things well.

As you heard Jeff talk about, we've supplemented our in store retail sales force by -- I can't remember the number exactly that Jeff quoted, added 250, brings it up to well over 400 people, those are people that we can use on an ongoing basis to make sure that we get the retail distribution, we work with our customers, and the good news is, that our customers are becoming I think increasingly sensitive to the advantage they get when they are quickly -- when they are up first with one of our new products.

And so we saw really starting with the very first Cheerios introduction, a very strong desire on the part of our big customers to have it shipped the first week, get it up on display right away, and they see that, in this competitive environment, as an important thing for them.

And as they seek ways to grow sales.

So you know, the net of all that is that if the products are good, and the things that consumers want, we have the capability to drive that distribution quickly, and the retailers are very supportive of that.

That helps, assuming, also when you do these kind of storewide promotions more aggressively that you talked about you know, across a broader range of products I'm assuming that adds value in the process as well.

It adds value and there again hear combination of General Mills and Pillsbury really is one plus one is more than two, because we can pull out a retailer to run merchandising across virtually every aisle of the store.

With one of our storewide promotions which we really couldn't do before.

Got it.

And just a last follow-up.

Your initial comment around, you know, your benchmarking yourself at kind of a new pace.

Basically I take that to mean that the reality of I guess the world, you know, you're sort of operating in, is that that what it really takes at this point; probably a faster pace than maybe you and maybe others have been putting out there, maybe several years ago is.

That an accurate statement?

Well, for us, the big number is partly part of the business is twice as big, we are operating in more categories, we are operating in more sales, we've got innovate in more place, so I would say that is the big bulk of it is we've just got to do everything twice, two X what we did four or five years ago.

But certainly, I think more than ever today, if you -- if you slip and don't innovate in your categories you really can't expect to generate growth.

The innovation is absolutely essential to driving growth in our categories.

But you know, we do think that we're doing there is consistent with the 6% top line we're expecting this year.

And the 5-6 over the next three years.

Right.

Thanks very much.

Thank you.

The next question comes from the line of Eric Katzman from Deutsche Bank.

Please go ahead with your question.

Hi, good morning, everybody.

Hi.

A few questions.

The first, Steve, you commented on Progresso share or I'm sorry Progresso space on the shelf being incremental.

I find it hard to believe that the retailers are adding space to the soup category overall.

So is that coming from, do you think private label?

Or condensed?

Campbell's condensed line?

Since the ready to serve is generally growing.

Yeah, I can't tell you for sure, Eric.

But I would guess it is coming from condensed.

Condensed is declining, ready to serve is growing so I think logic would say that retailers are adding to the growing segment.

I mean we'll know more, you know, as the season goes along, but I think that's a reasonable expectation.

Second question, just Jim, maybe you could just kind of give an overview on the raw material cost outlook.

I mean I realize your business is a little more diversified these days, but in terms of grain costs, obviously, the U.S. crop has not come through as well as one would have expected a month ago.

Maybe you can comment on what some of the swing factors are we should look for on costs.

Sure.

Well, we you know, saw commodities costs going up last year.

We saw grain costs going up last year.

That was you know, behind a couple of price increases that we needed to take in bakeries and food service.

We also pushed, took a price increase in cereals.

We are going into this year with some rise in our costs.

We have a pretty good sense of what we will have for the year.

We are not completely hedged out for the full year.

But we are sufficiently purchased forward that we know that with some reliability, what those costs will be, and they are -- while up, they tend to the guidance which we've given relative to the bottom line.

All right.

And then the last question I guess, Steve, I'm wondering if you could kind of go into a little bit more kind of description on what appears to be for the last I guess three quarters, about a $25 million dollar negative Delta in operating profits for bakery and food service.

You've kind of I guess highlighted that the absorption of the integration or the changes there, the production of the bulk of it, but how much of it is also due to perhaps raw material costs?

Or I don't know, maybe new products that haven't worked out.

Maybe you can give a little more detail on the change there.

Sure.

I would say we had a rise in raw material costs last year that we tried to cover with two price advances on our main dough-based lines and we didn't realize those price advances as fast as we had planned to.

The competitive environment caused the pricing to stay down longer than we expected and that was -- that was a factor in the third and fourth quarters last year.

It appears that price realization is coming now so the first quarter, that is less of a factor.

I think the first quarter it is really primarily lower volumes, part of that is of course things we've done to rationalize our own product line, but part of it is the fact that the distributors segment is for us not to produce the kind of volumes that the growth that we needed to, and the bakery segment which includes in store bakeries and wholesale bakeries has continued to be soft.

We have seen better trends in the restaurant side in the national accounts particularly which I think is consistent with what the overall industry sector is seeing.

And we've seen real strong performance on a continuing basis in the convenience store segment which we operate out of food service.

But you know, the big distributors are probably the biggest part of our business and we got to see that business turn around.

The supply chain things are the biggest really I think the biggest thing in terms of the profit.

And that is simply a very complex integration.

Where we're taking a large number of items and a large percentage of our business from one plant to another.

And these are -- it is going to take, really through the first half of the year to complete that.

But once we do, we will have significant cost savings and that's why we're confident in predicting a second half upturn in profits.

All right.

Thank you.

The last question will come from the line of Bill Nobler from Adelman and Fossner please go ahead with your question.

Thanks very much.

Jim, could you expand on your comments, financial comments for the next few years, cap ex versus depreciation and also, some thoughts about your interest expense, and plans to retire debt?

Sure.

Let me start with our plans to retire debt.

Because we've been very clear what we intend to do with that.

We intend to pay down $2 billion dollars of debt over the next three years.

And we've been precise about how much we're going to pay down this year, which is $450 million.

And we've not given a specific guidance beyond that.

So that's what we intend to do with debt.

With the pay-down of debt, we do expect to see interest costs moderate but you know, I will not speak to that, other than to the guidance which we have given for the year which is $500-530 million dollars of interest cost.

That is what we expect in this year.

And the cap ex, we had $750 million dollars of cap ex last year, we will have $650 million this year, we have not been precise as to what to expect the next two years, other than to say we do expect it will go down in each of the next two years, to get back to more of a historic relationship between cap ex and depreciation and amortization by three years out.

And at what point do you feel comfortable in assuming that the improving financial situation will allow you to buy back stock to offset the creeping dilution that was -- that Chris mentioned before?

Well, we -- you know, we would like to get back to single A. For a long-term debt.

And we would like to get back to A-1 for our short-term debt.

So those are targets that we have which we think will serve us well.

We don't know exactly when we will get those ratings, because of course that is the judgment of the ratings agency.

We believe that the ratios that we would be showing in three years out, not this year, or the year after, but three years out, would be equivalent to what other companies have who are there and what historically you might need, but again, you can't be sure of that, because it is at the end of the day, the rating agencies judgment, before we get to you know, back to that level, I doubt you would see substantial repurchasing of shares and we've said certainly this year, we do not intend to repurchase any.

Right.

And my last question, on DIAGGIO, refresh my memory how many shares do they own and when are they free to sell stock.

They have 79 million shares but of those, 29 million are under option from us.

To back up the convertible offering which we did a little less than a year ago.

And so they're essentially 50 million, which are in their hands.

They, -- you know, as far as our contractual dealings with them, they are free to sell.

However, they have said that they believe their hands are tied, because of the short swing sale rule, until the first of November.

Beyond that, you know, really it is for them to describe their intentions.

They just had an annual results meeting last week where they made some comments but I would rather not characterize their position for them.

I will let them do that.

Thanks a lot.

A pleasure, Bill.

I have to apologize.

We do have additional questions and the next one will come from the line of George Askew from Legg Mason.

Please proceed.

Good morning, thank you.

Two quick questions.

The 5% price mix currency, you mentioned that 1%, the currency was 1% to the top line, what was the break-out of price and mix to that number?

Well, actually I didn't see that.

I am going to take a guess.

And that is all it is going to be.

I would presume it is roughly 50/50.

Okay.

I'm sorry, it is only a guess.

Okay.

No problem.

And then getting back to the question of sort of the quarterly earnings progression, the Bill Leech question before, back in June, the company pointed out that -- or indicated absolute earnings per share was expected to be split fairly evenly between the first and second half of the year in '04, just as it had been in '03.

We know that the 53rd week is obviously a fourth quarter event.

We know bakery and food service is back-end loaded.

It seems like, you know, I mean is there something unusual about the third quarter for example.

That would make it a little less strong and the fourth quarter much stronger?

Or will we see a heavier back-end -- or heavier second half of the year versus first half compared to last year?

You're referring to sort of the mile markers we gave you for the year, back in June, and remember, that we were talking about GAAP basis.

Okay.

But you did indicate as well, I think, that some of the restructuring charges were more front-end loaded as I recall.

It has been more than 50%.

But that's as much as we said.

So you still expect the front half of the back half to be --

We did not say precisely evenly split.

We said roughly so don't -- don't ask me to be too fine there, please.

Okay.

Very good.

Thank you.

Thank you.

And the last question will come from Jonathan Feeney, from Wachovia Securities.

Please proceed with your question.

Good morning, everybody.

Just one quick follow-up.

Jim, you mentioned cap ex coming down in the next two years, and potentially tracking over the long term at historical levels, are you talking about historical levels, probably not in absolute terms but relative to sales or historical levels relative to profits?

What are you thinking about?

Relative to D&A and over a long period of time, the -- in any given year, you know, you put in a cereal plant, you put in a yogurt plant and there is a substantial tab to be paid.

But over a longer run, we do run -- we have run cap ex in excess of D&A as we have been growing so it is consistent with continued growth at General Mills.

Okay.

That's all.

Thank you.

Thank you.

At this time I will turn the call back to you.

Please go ahead with any closing remarks.

I think we're all set.

If anybody has got any follow-ups just give me a holler and I will try and answer them.

Thanks very much.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation.

And ask that you please disconnect your line.