通用磨坊 (GIS) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the second quarter and fiscal 2004 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 1 followed by 4 on your telephone.

This conference is being recorded Wednesday, 17th of December 2003.

I'll now turn it over to Kris Wenker, Vice President of Investor Relations.

Thanks for coming here today.

If you don't have a copy of the handout.

There are some on the seats.

If you didn't get one please put your hand in the air, and they will be passed to you.

I think there's one over here.

Very good.

Kris Wenker, Vice President Investor Relations will get the program started, and we'll introduce other members of management who are in attendance.

If you are not a member of Cagne, you've got a couple of guys in the back, the fellows are about 6-5, and weigh about 400 pounds, they'll come and catch the dues for the meeting fees, but they can run pretty fast, so keep that in mind.

Kris, if you please.

Thank you, Len.

Hello everybody.

Let me quickly introduce who is here with me from General Mills.

Keith Sanger, our Chairman and CEO, Jim Lawrence, Executive Vice President and Chief Financial Officer, David Vandanscoten is with us who is our treasurer and Jeff Martin who works with me in Investor Relations.

I want to thank everybody for joining us here at the Inter Continental.

I'd also like to welcome folks listening by webcast.

I'll give Steve and Jim the floor in a minute.

First I've got to do my duty and remind you that our remarks will include forward-looking statements that are based on management's current views and assumptions.

Please refer to this slide or the press release we issued earlier today for cautionary statements regarding forward-looking information.

I'd like to point out for the webcast folks the slides we're using today are posted on our website.

Consistent with the SEC's Reg G, we'll focus on GAAP measures during this webcast.

However, I know many of you use non-GAAP measures in your analysis.

There two are slides at the back of the slide pitch in your handouts that reconcile the GAAP to the non-GAAP numbers.

And that's the end of my housekeeping duties. so I will turn this over to Steve.

Thanks, Kris, and good afternoon everybody.

As we reported in today's press release General Mills achieved good top and bottom line growth in the second quarter of 2004.

Net sales for the quarter increased 4% to exceed $3 billion, and net earnings grew 12% to $308 million.

The average number of diluted shares outstanding was up slightly for the period, so earnings per share grew 11%.

That's an increase from 73 cents a year ago to 81 cents this quarter on a GAAP basis.

Our results in both years include costs primarily relating to the Pillsbury acquisition.

These are restructuring costs which we list separately on the income statement and merger related costs which are included in the SG&A.

The second quarter these items totalled $28 million pre-tax.

And through the first six months the total is $43 million pre-tax. 28 million after-tax, or 7 cents diluted share.

That compares to 14 cents per share of Pillsbury related costs in last year's first half.

We currently expect approximately 3 cents of additional restructuring costs in the second half of this year.

So excluding restructuring and merger related costs our EPS grew 10% in the second quarter to reach 85 cents, and the GAAP and then excluding restructuring costs, comparisons are both shown on this chart.

Here's where those results put us through the first half of fiscal 2004.

Net sales are up 5% and exceed $5.5 billion.

Earnings before interest and taxes are up 11% to over 1 billion.

And our net earnings are up 18% to $535 million.

That represents earnings per diluted share of $1.40, a 17% increase from last year's strong first half.

If you exclude restructuring and merger related costs our EPS grew 10% in the half to reach $1.47.

As Jim will discuss in just a minute, our double-digit growth through the first half reflect a 2% increase in worldwide unit volume.

It reflects operating margin improvement and good growth in our joint venture profits.

Consumer sales for our U.S. retail businesses, that's Nielsen plus our Wal-Mart panel, are up 4% year to date.

And our aggregate market share across all of our categories is up nearly half a percentage point.

Our bakeries and food service segment achieved renewed profit growth, albeit modest, in the second quarter.

And our international business recorded first half volume and profit gain as well.

So looking ahead to the second half, we feel good about the product news and marketing programs we have planned.

But as we noted in the press release, we see a couple of areas of concern.

The first is our rate of unit volume growth.

Results for the second quarter fell short of our target.

Granted, some of that was due to one-time issues like the production change-over which hampered our ability to do Halloween-shaped cookies and the grocery workers strike in Southern California.

But, we also experienced continued volume weakness in bakeries and food service business and ready to eat cereal volumes decline for most of the category and Big G. We feel our plan will result in stronger trends in the second half, but given our performance in the latest quarter we believe there is some risk to fully achieving our target.

Our second concern is supply chain costs which are coming in higher than planned.

This is due in large part to the higher market prices we've seen for energy and for key commodities such as wheat and oil and eggs and vanilla, and Jim will give you some more detail on this.

But as a result of these factors, we are modifying our earnings guidance for the year.

Last June we gave you an EPS estimate of a range of $2.85 to $2.90 on a GAAP basis.

We now estimate our EPS will be between $2.75 and $2.85.

Now, this includes 10 cents of Pillsbury related costs as I discussed a moment ago.

Midpoint of this forecast range is 5 to 10 cents below the level of EPS we originally targeted for the year.

I know that's somewhat disappointing.

However, it still represents very solid growth for our business.

On a GAAP basis we're expecting growth of 13 to 17%.

If you exclude restructuring and merger related costs that growth range would represent 8 to 11% EPS growth.

This growth outlook for 2004 is consistent with General Mills long-term goals of generating double-digit growth in earnings per share.

We've told you that we expect EPS growth of 11% or better in the immediate three-year period.

That's this year and the next two.

Through fiscal 2006.

With the revision we've made to this year's earnings forecast our three-year compound growth may be lower when the restructuring and merger related costs are excluded but we do still expect our reported EPS to meet the 11% compound growth target for the three-year period.

We believe this will represent superior performance relative to our peer companies in that time frame.

In a few minutes I'm going to outline for you the growth plans we have for the second half, but right now I'd like to turn the microphone over to Jim Lawrence, who will provide some more detail on our first half results and our second half financial outlook, so here's Jim .

Thank you, Steve, and good afternoon to everyone.

Let me begin my portion of the presentation with a brief review of the income statement.

As Steve has already noted, we achieved sales growth of 4% in the latest quarter, and that will be 5% through the first half.

The slide you see gives you the components of that top line performance, both for the quarter and the half.

For the quarter, unit volume represented 1 point of growth, pricing mix and currency added another 4 points, promotional spending was up slightly more than volume in the quarter, so it reduced net sales by a point.

Through the first half, unit volume contributed 2 points of sales growth, pricing mix and currency again combined for 4 points of sales growth, which more than offset the impact of slightly higher promotional spending.

Let's turn now to the first half unit volume trends, and we'll begin with the U.S. retail business.

Through six months, our domestic unit volume is up 2% overall, and that reflects a 2% decline in Big G cereal volume, flat volume for Pillsbury and baking products divisions, and good growth in volumes for meals, snacks, and Yoplait yogurt, 5, 6, 9% respectively.

Consumer sales trends for brands remains strong through the first half.

Growing at a 4% rate Steve mentioned, essentially that's the same rate that we saw through fiscal '03.

By product line, the retail sales directionally mirrored shipments with softness in cereal and dough, strength in the meals, snacks, yogurt categories.

Turning to bakeries and food service, our unit volumes there are down 3% for the half.

However, several business segments showed sequential improvement in the latest quarter.

Importantly our sales to distributors improved from a 7% decline in the first quarter to a 2% decline in the second.

And that translates to 4% off for the half.

Bakery channel volume was off 9% in the first half.

That was due to general softness in the bakery flour segment and by our decision to close one of our mills.

We have seen promising trends in our national accounts.

It's mostly quick service and casual dining chain restaurants, and super centers.

First half unit volumes for this customer segment were up slightly.

Notably, our volume sold to national restaurant accounts was up 6% in the second quarter.

And finally our convenience store sales increased 16% through the first half, driven by continued success of cereal and innovative promotional activity.

Combined unit volume for international businesses is up 6% to date.

This aggregate number reflects gains for our business in most regions around the world.

Volumes for Canadian business and for our European operations were both up 3% through the first six months.

Our shipments in the Asia Pacific region were up 14%, reflecting strong performance by new products in Australia, and great performance across the board in China.

Unit volume for Latin-American business was down 1% for the half, but the second quarter volumes were up 4%, and that's an encouraging sign for that region.

And our various international joint ventures also turned in good first-half results.

Both Snack Ventures Europe and Cereal Partners Worldwide reported high single digit volume gains and volumes for Haagen-Das joint ventures in Asia matched prior year results despite a particularly cold and damp summer in the key Japanese market.

Let me turn next to cost of goods and SG&A.

Our supply chain costs were 80 basis points higher as a percent of sales in the second quarter and are up 100 basis point through the first half.

This reflects increased commodity and energy costs and some production inefficiencies caused by our integration.

However, these higher supply chain costs were more than offset by strong improvements in SG&A efficiency.

SG&A was down 120 basis points as a percent of sales through the half.

Our restructuring costs were also down as a percent of sales, so our EBIT margin improved by 50 basis points in the quarter and a full percentage point in the half.

And we'd expect to show EBIT margin improvements for the full year as well although perhaps not a full percentage point.

Here's how our profit results look by business segment.

U.S. retail profits grew 9% in the quarter, and 10% through the first half.

As I already mentioned, bakeries and food service showed marked sequential profit improvement in the second quarter.

While they're still trailing last year's results through the half this business is expected to record strong profit growth in the second half and for the year in total.

Finally, our consolidated international businesses reported strong double digit growth in profit for the quarter and the first half.

Continuing down the income statement, year to date interest expense totals $261 million.

That's slightly lower due to our refinancing actions last year.

We're still on track for 500 to 530 million of interest expense for fiscal 2004 as a whole.

Our first half tax rate was flat with last year's at 35%, that's in line with our full year estimate and last year's annual rate.

And finally our proportion at share of joint venture profits totaled $36 million after taxes in the first six months, and that is up 16%.

And here's a breakdown of those JV profits.

CPW, Cereal Partners Worldwide, and SVE, Snack Ventures Europe, continued 14 million in the quarter and 29 million through the half, as you see on the slide.

Profits for Haagen-Das joint ventures in Asia were partially offset by development spending for 8th Continent soy joint venture with Dupont, and together they contributed 7 million in earnings through the first half.

Now I'd like to shift over to the balance sheet, and at quarter end the balances for accounts receivable and inventories were essentially in line with prior year levels and the slight changes that were there offset one another.

The accounts payable balance was about 200 million below last year's November quarter end.

That is consistent with the year-over-year timing difference in our consumer spending.

It is lower for this year's first half and that consumer spending will be higher in the second half.

For this working capital use our total debt, as of the November balance sheet date, is actually up about 160 million from the start of the year.

Please don't conclude that this spells any trouble for our debt reduction plans in '04.

In fact, this year to date result follows the pattern of a working capital trends since we acquired Pillsbury.

And this chart which you see before you looks at core working capital by quarterly reporting period.

The green line shows the quarters of fiscal '02 that included Pillsbury, sort of half line coming down, the yellow line, the full half-moon there, shows you the full year pattern for fiscal '03, where you can see that our working capital built through the second quarter which mirrors seasonal inventory and sales trends of our business, then in the back half our working capital drops off significantly.

The red line, then, on top, plus this year's first two quarters, were our seasonal working capital use has ramped up again.

We expect to repeat the '02 and '03 pattern in the back half.

We'd also expect to be modest users of working capital for the full year but a much lower level than the first half would suggest.

Now, we will not complete our statement of cash flows until we file our 10-Q next month, but I can give you estimates of two key numbers which will be included.

Depreciation and amortization totaled about 189 million through the half, and for the full year we're still estimating around 390 million.

Capital expenditures totalled 275 million to date.

And also of importance I can tell you that cash flow from operations which was negative in the first quarter should be positive both the second quarter and then for the half as a whole.

Now, let me talk about why we are seeing higher than planned supply chain costs for the year.

As we indicated in the press release, higher commodity costs are a primary factor.

We buy roughly $3 billion of raw materials per year, that's both ingredients and packaging included.

Of that total, about one-third is for ingredients where we can hedge our costs to market transactions, roughly another third of those annual purchases are raw materials where we can enter into 12-month supply contracts if we choose to do so.

Then finally the remaining one-third of the purchases include ingredients such as eggs, meat and dairy, which are purchased on 30 to 90-day pricing terms, and that would include the ingredient purchasing for bakeries and food service business which tends to be done at current market prices.

Our original plan for the year built in assumptions of higher commodity costs, but our judgment was that some of the market prices we were seeing last spring would improve as the year unfolded, and that has not been the case for several items that are important to us.

That includes wheat, oil, eggs, even vanilla.

You'll remember today we sell lots of pints of Haagen-Das around the world with real natural vanilla.

As a result our commodity costs are now projected to come in above our original plan.

In addition, our supply chain reflects higher energy prices, and higher fixed charge costs per case in business where the volume trends are soft, most notably bakeries and food service.

So let me now review with you our current thinking and how it translates into the earnings update that we've provided today.

We'll start at the top with the original plan in June, which called for earnings per share of $2.85 to $2.90, including an estimated 10 to 15 cents of restructuring and merger-related costs.

That would be on a GAAP basis, the $2.85 to $2.90.

We're now estimating those identified costs at 10 cents which represents a modest positive.

On the other hand, second quarter unit volume, as we said, was below our target so we finished the first half two to three cents behind where we had planned to be.

In addition, the supply chain factors which I outlined represent 7 to 8 cents of higher cost for the full year.

These factors would put us about a nickel behind our original estimate.

The midpoint of original estimate.

We also have to recognize that the second quarter drop-off in our volume growth rate means that there is some risk to fully achieving the volume growth which we expect in the back half of the year.

So we factored up to 4 cents of volume related risks into our estimates, which brings us to the new guidance range that we've provided today.

Now, with the $1.40 of EPS in the first half that would leave $1.35 to $1.45 to split across the last two quarters.

And while we are not giving specific quarterly guidance, we would expect higher level of absolute earnings per share for the fourth quarter due to our planned marketing programs and, of course, the extra shipping week in that period.

Our other key financial targets for 2004 are unchanged.

As I mentioned before, we still expect to pay down $450 million of debt this year.

Even if our earnings grow at the low end of our estimates, and we still expect to pay down $2 billion of debt by the end of fiscal 2006.

Our 2004 plans still include 650 million capital investment which will support business growth, productivity initiatives, and Pillsbury integration-related spending, for headquarters consolidation and information systems.

Our dividend plans are unchanged.

This past Monday the board approved the February quarterly dividend at the prevailing rate, $1.10 per share.

We've made no changes in our tax rate or interest assumptions.

We're still using a 35% tax rate, and interest expense estimate of 500 to 530 million.

And in closing I'd like to echo Steve's point, that we continue to be headed for strong profit increase in 2004.

We've talked about our targeted earnings per share growth, which will represent solid performance relative to our peer group.

With a rate of absolute net earnings growth will be stronger than our per-share growth rate.

And we'll be generating strong cash flow from our operations, we will be positioned to deliver continued good growth and returns in the years ahead.

Now I'll turn the stage back to Steve for a look at what our business units have planned for the second half of this year.

Steve.

Thanks, Jim.

I said at the outset that as we move to the second half of the year we feel good about the overall level of innovation that we've got planned across our businesses.

Let me tell you more about that.

In our U.S. retail business we have 30 new product introductions planned for the back half of the year.

They are the items shown on this slide.

That is below the level of introductions we had in the first half.

We typically are very first-half skewed because of the seasonal items that we sell in advance of the winter baking and soup seasons, but the second half lineup is stronger than last year's back half and we expect a good ongoing contribution from those first-half new items that the record number of first-half introductions we had.

So let me quickly update you on each of our retail divisions, and I'll start with Pillsbury USA because we are right in the middle of the peak seasonal period for that division.

Through the first half, unit volume for the Pillsbury division was flat to last year.

But the consumer sales are running more than 3% ahead of last year in total.

That's the Nielsen sales.

The Totino pizza and frozen snacks business leads that performance with retail sales up 17% year to date.

OUr line of frozen breakfast items is doing well with retail sales growing 5% through the first half.

And our freezer to oven Pillsbury dough products continue to generate double digit sales gains.

But the business at the core is our Pillsbury refrigerated dough products.

And this business is down 4% year to date.

I -- it's down primarily because we could not offer seasonal Halloween cookies this year.

However, the big season for refrigerated dough is right now, November and December, and during that period so far we're looking a bit better.

At this point we've only got data for the month of November, and in the four weeks through Thanksgiving, the total retail sales spend was better, narrowing the gap to last year from the 4% I mentioned to down 1.5%.

Crescent rolls were the big winner in November with sales up 14%.

We obviously have lots of merchandising scheduled for December behind crescent's and biscuits and also our ready-to-bake Christmas cookies.

We're back in the game now on holiday cookies.

And while we haven't really got the retail data yet, our shipment trends for cookies have been strong.

So we're somewhat encouraged by these results to date and what they portend for the key holiday baking season.

The other U.S. retail business at the top of our priority list, of course, is Big G cereals where we're looking for renewed volume growth in the second half of this year.

As we've discussed with you before one of the issues for Big G has been the slowdown in category growth that we've seen in the wake of the price increases taken by the various manufacturers early this calendar year.

But Big G also gave up some market share in the first half.

We didn't have a lot of cereal product news in that part of the year, and you can see that by the fact this our merchandise volume was down 9% compared to the same six months last year.

So through November, our dollar share is just under 32%, and that's down about 40 basis points compared to the same point last year.

It is basically holding steady at a level that our full year fiscal '03 share represented.

And we think we'll see some share improvement in the second half as our innovation levels pick up and our share comparisons ease.

Our core established cereal brands continue to perform pretty well.

That's our top ten.

We look at those all the time in total, Big G's top ten brands account for about 22% of cereal category sales, and market share has been pretty steady through the first half with Kix and Cheerios and Honey Nut Cheerios leading the way.

But it's the secondary brands which have lost share and that has been largely offset by share gain from Berry Burst Cheerios which will celebrate its first birthday next month.

At this point Berry Burst Cheerios has generated more than 90 million in its first 11 months.

Next week we'll begin ship ago new strawberry banana variety of Berry Burst Cheerios that scored very well in testing.

We've got some samples of that for those of you here to take along and try for breakfast tomorrow.

Big G second half product news also includes a limited edition Loony Toons cereal available in conjunction with the children's movie in theaters now.

In February we will be offering a new triple berry variety of our popular Oatmeal Crisp cereal.

This has been introduced in Canada early this year, it's done quite well there.

In April Big G will introduce a peanut butter toast to our popular Cinnamon Toast Crunch brand.

One other thing you should expect to see from Big G in the second half is a lot of health news about cereal.

A scientific study has documented that adults who eat cereal regularly for breakfast weigh, object average, 8 pounds less than adults who don't.

And a separate study has been conducted involving children and concludes that children who regularly eat cereal for breakfast are less likely to be overweight than children who don't.

So we continue to see data that says it's hard to beat the vitamin, mineral, and whole grain benefits relative to the calories of a cereal breakfast.

We will be sharing this news with consumers in the second half and in advertising for several brands and in messages on our packaging.

Weight management has, I think, as long as I can remember, been a key issue with consumers.

It's an even bigger issue now with the obesity concerns out there, and, of course, it's particularly big always in the January, February, March time of year, post-New Year's.

One of the weight management approaches that is quite hot at the moment is the low carb/high protein approach embodied in the Atkins diet and other similar regimens.

We really can't say how long this phenomenon will last but it's clearly how now and we're responding to it with a higher protein, lower carbohydrate version of Total cereal which we will be shipping in the third quarter, new Total Protein.

So we believe all this product news will create improving retail trends for Big G in the second half.

In thinking about growth in shipments, I'd remind you that we'd expect Big G's trends to be stronger in the fourth quarter than in the third when we're going up a very strong third quarter prior year growth.

Remember, last year's third quarter included both the introductory pipeline shipments of Berry Burst Cheerios and its two original flavors and also we saw retailers buy in heavily last February after Kellogg raised cereal price and retailers anticipated that we would do so as well.

Which we did.

Big G is not our only business with compelling health news.

Increasing scientific evidence on the weight management benefits of calcium is big news for our Yoplait yogurt business.

Beginning in January, Yoplait advertising will remind consumers that calcium rich Yoplait Lite, as part of a reduced calorie diet, has been clinically proven to help you lose more weight and burn more fat and cutting calories alone.

We'll have that advertising message on the air in January for the New Year's diet resolution season.

We'll build on the success of our first yogurt beverage, Yoplait Nourich, by launching a four-flavor line of Nourich Light in West Coast markets first.

Like original Nourich, these yogurt smoothies are packed with vitamins and minerals, fat-free, they taste great, but they have a third fewer calories and just over half the carbohydrates of the original.

Adult yogurt beverages are now a $200 million market segment expected to double in size this year.

Refrigerated soymilk is another category that's growing at a rapid pace.

It now generates nearly $500 million in annual sales, and now for the weight conscious soymilk user we're introducing 8th Continent Light.

This is the first Light product in the soymilk category.

This slide shows you, on a per serving comparison, on the vanilla flavor versus skim milk, it's a third less calories than skim milk and two-thirds fewer carbs.

The chocolate comparison is even more striking.

This new offering from our joint venture with Dupont will begin shipping nationally in January.

Let me turn now to our Meals Division, where our dinner mix lines are delivering strong growth.

Combined shipments for Helpers and Betty Crocker Complete dinner kits are up nearly 5% year to date, up actually 5%.

Importantly our core Hamburger Helper franchise, which is the guts of this business, is growing at a 2% rate in the half.

Our Old El Paso Mexican dinner kits are showing good volume gains with shipments up 7%, and we're going to be adding several new dinner and side dish mixes in the second half.

You can look for two new varieties of Chicken Helper, Teriyaki and Cheesy Enchilada, and three new varieties of pouch sized seasoned mash potatoes.

The fastest growing business in our Meals Division has been Progresso soup.

Both shipments and retail sales are growing at roughly a 20% clip.

This reflects gains by established Progresso varieties and also the introduction of a new line of Rich and Hearty soups earlier this year.

We've gotten great retailer support for this new line.

Progresso's average number of skus is up by 7 since the line was introduced.

Our dollar share is up 2 points in both the total soup category and the ready to serve segment where we compete.

Our in-store merchandising push for Progresso begins in September.

Back to school -- began in September, tied to our back to school events and the start of the soup season.

For year to date our average merchandise price per unit is $1.30.

Which is up a penny from last year.

And compares to this year's non-promoted price of roughly $2.25.

We've lost the slides here, have we?

How long ago did we lose them?

Okay, well, everybody's got the handouts here in the room, that's good.

Anyway, I'm talking about our promoted unit price of $1.30, which is up a bit from last year.

I suspect that figure, it may be a surprise to some of you who commented on the 99 cent feature prices that you've seen around here.

But Progresso has historically followed a strategy of 99 cent promotional prices in the northeast, then higher merchandise price points typically four for $5, or something in that range, elsewhere -- everywhere else.

So it really isn't discounting that's driving Progresso's growth this year.

What it is driving is the great response we're seeing from consumers to the new Rich and Hearty flavors.

Progresso's non-promoted volume is up 18% in Nielsen measured outlets.

Rich and Hearty has largely been incremental to Progresso's established business and has really strengthened our relative market share position in regions of the country outside our historical strong hold in the northeast.

So we're very pleased with our progress if the first couple of month of the soup season.

Our snacks business is also having a very good year with market share gains for year to date on each of our major product lines.

In the second half we will be introducing new varieties of our fruit snacks, a new variety of Bugles, and a Carmel Crunch variety of Chex Mix.

And finally, we'll fuel the strong growth with new varieties of Nature Valley granola bars and a brand-new line of Sunkist fruit and grain bars.

The baking products division has seen good growth from recently improved Super Moist cake and frosting mixes -- and the canned frosting.

And we've seen -- we're glad to say we've seen moderation in the very intense competitive promotional activity in this segment, as a result our share of boxed desserts is up almost five points, our share of total desert is up 30 to 40 basis point in the Nielsen measured outlets this year.

We've also had success with new product that are geared at the club stores.

These include things like a brownie mix earlier this year and a jumbo muffin mix based on the popular Cinna-bon products that just recently shipped in club stores.

Let me wrap up my comments on U.S. retail segment with a quick update on Small Planet Foods, our organic business.

The line of Cascading Farm cereals we introduced a year and a half ago is doing well with three new varieties we added this summer, all in the top 15 cereals in the natural and organic channel.

We will be extending the Cascading Farm brand into a new category next month with the introduction of our new line of organic granola bars.

These have 0 fat, they come in multi-grain, fruit and nut, and harvest berry flavors.

Those of you here in New York can grab a box on your way out this afternoon.

Our second half will feature a strong lineup of merchandising events, starting with the 41st edition of the bi-annual Pillsbury bake-off which offers a grand prize of $1 million to any of you who are a creative enterprising cook and come up with the bake-off winning recipe.

With five of our six division now participating, bake-off participants can use such diverse ingredients as Progresso soup, Big G cereals and Pop Secret popcorn in coming up with the recipe.

The in-store merchandising kick-off for the bake-off is in January and then the contest runs through to the big winner event in the month of June.

We'll also continue our long partnership with NASCAR this year, but for the first time ever will actually have Hot Wheels brand cars in a variety of packages.

Over 20 million packages will feature NASCAR promotional items.

Finally, later this spring we will be partnering with Dreamworks to bring excitement into the grocery aisle with promotions and products tied to the long-anticipated release of Shrek II, the sequel to the popular movie of three years ago.

We will produce more than 70 million packages related to this movie.

Some will feature special packaging and premiums, and others will be unique products like Shrek cereal and Shrek fruit snacks.

When we add up all of our product and marketing and merchandising plans we expect unit volume growth for our U.S. retail business to accelerate in the second half versus what we've achieved in the first half.

We should show growth in each of our two remaining quarters but I'd remind you again the fourth quarter will have the stronger gain because it will include an extra week of shipments.

Let me turn now to our bakeries and food service business where our restructuring actions are starting to pay off.

We have essentially completed the manufacturing realignment and SKU rationalization that we undertook with this business.

With that behind us we can now focus on improving increasing our innovation levels.

The second half our plans call for the introduction of several new items, Pillsbury cheddar garlic and honey butter flavored frozen biscuits, the food service debut of Yoplait, a terrific retail product.

We've also introduced cereal in both cup and pouch for mats, organic cereals from Cascading Farms, Pillsbury scones, Yoplait Nourich, and several new snack items.

This wave of innovation should help us restore volume growth in the second half for the bakeries and food service business.

Overall we're expecting bakeries and food service to post low single digit unit growth in the second half of the year.

And we're expecting strong growth in operating profits.

If you look at this chart you can see that we will be comparing during the second half to those very low levels of operating profit that we had last year when our manufacturing realignment was underway in the third and fourth quarter so we have easy comparisons from a profit standpoint.

Turning to international, Jim mentioned our wholly owned international business saw 4% volume growth in the first half and all four geographic regions grew volumes in the second quarter.

Our business in Canada are doing great, particularly cereal, with market share up half a share point year to date.

I told you Big G borrowed the Oatmeal Crisp Triple Berry idea from Canada after seeing how well did it up there.

In the second half we'll introduce Berry Burst Cheerios in Canada.

That product has not yet comet o Canada.

Europe has also had success, bringing General Mills products to more of their markets.

For example, Nature Valley brand has been quite a successful expanding into market from Israel to Scandinavia.

Established brands are performing well.

Haagen-Das, for example, is driving growth with this new strawberry cheesecake flavor.

Thus far volume growth in Latin America has resulted primarily from expansion of the established local product line.

U.S. products such as Nourich and Berry Burst Cheerio's will make their debut in the next few months.

And in Asia, we continue to see strong growth behind products that we introduced last year, such as Wraps to the World in Australia, and we've got several new retail Haagen-Das products lined up for the next few months including the Rich Milk ice cream cups shown here.

Turning to our international joint ventures, Cereal Partners Worldwide is just about done with its fiscal year.

They're on a calendar year basis.

And it looks like CPW will record unit volume growth of about 7%.

They've expanded into four new markets and they've recorded share gains in seven of their top ten existing markets, and foremost among those is the U.K., by far their biggest market and where they've had a share gain this year.

CPW combined market share currently stands at 22%.

So here's how I summarize our outlook for the second half of this year.

Our level of new product innovation is higher, almost 30 new items in the U.S. retail business alone.

We will be leveraging health news in several key categories and generating in-store excitement with strong merchandising event.

Our international businesses are running with good momentum and bakeries and food service will benefit in the second half from increasing new product activity and from easier comps.

In closing I'll summarize the key points on General Mills today.

Through the first half of 2004 we delivered 5% top line growth and double digit growth in earnings per share.

We've identified supply chain and volume challenges that caused to us modify our earnings guidance by 5 to 10 cents per year, but that still reflect reported EPS growth of 13 to 17% with even faster growth in net earnings.

Our outlook for delivering long term double digit EPS growth remains excellent.

That concludes our presentation today.

We will now open the floor to questions and I'll ask Kris Wenker to act as the traffic cop and moderate the question period.

Hang on.

Remember, we've got webcast people, so I want to do this with the microphone.

Okay?

If you would like to register a question please press the 1 followed by the 4.

Do you think this could permanently put a dent in the market?

The question is could the Atkins diet permanently put a dent in the cereal market or affect it for several years.

We've seen so many diet phenomena come and go over the years, that it's really hard to say how long any one of them lasts.

The one thing you can say is that none of them have been truly timeless.

And so I think, I think right now it probably is affecting cereal and some of the other markets.

I mean, we've all read about how much egg consumption has spiked, and I think some of those eggs are coming at the expense of bowls of cereal, as much as it hurts me to say it.

But the issue here ultimately is not carbs, it's weight management.

That's what people are concerned about.

Carbs are just a way to manage weight.

The data on cereal as a weight management days is really compelling.

I think it's incumbent on us to get that information out there.

We're on the right side of this story and we've just got to do the right job of getting that information out there.

I think when we do I think you will see the cereal market respond positively to that story.

Just two questions, Steve, one to follow up on Bill's question.

If you look at Kellogg's, got a lot of high-fiber cereals, if you go through that South Beach Diet book, you know, your products, a little more sugar and less Atkins friendly, wonder if you could comment on that specifically.

Two, some other CEO's want to hear -- one of your principal competitors Nestle's had kind of evolved from this buying is everything kind of approach where it's all about volume to kind of more of a sales product mix attitude.

Are you evolving in that direction?

On the first question, we certainly are aware of the positive impact of fiber, and a number of our brands are high fiber, and I think, you know, we will be looking to where we can find good tasting products that offer more fiber, and no cereal is truly, none that I've seen, truly low-carb.

Some are low in net carbs but very high in fiber.

You can deduct.

Yeah, so our Fiber One is a good example of that.

But I think that is a -- it's a strategy, I think more protein is also a strategy, as we're doing with Total Protein.

On the second question, clearly we have always been a company that looks to drive our sales dollars higher.

They are related to volume, and particularly in the current environment where we have said that we will increase our purses at a rate slower than overall inflation which I think we have hinted we've priced, but we priced behind inflation for the past decade.

And so if you've got big parts of your product mix that are high volume, low value, you probably want to shift out of those.

We really, in cereal, for example, don't.

I think as Ian Friendly showed you, those of you who saw the presentation last year in Minneapolis, the profit value of our big volume cereals tends to be the greatest of any of our items, so we -- it's really important for us to make Cheerios grow, in unit volume.

When does it that the profit grows as well.

Our focus is always on growing our most profitable businesses but they tend to be big consumer, high leverage brands.

Hi.

Hi, Dave.

I have two questions on the reason you're lowering guidance today.

Half of it seems to be related to volume concerns yet I see all this new news coming in the second half.

I'm wondering, where are your volume concerns coming from?

Are you not getting as much growth, given X level of innovation compared to the past?

If you could touch on that, please, and the second reason you're lowering growth today is related to, you call it supply chain, looks like commodity cost to me.

Why you don't build in more margin for error.

These things can happen when you issue guidance.

On the first one, I think the reason we're cautious is because we have seen 1% volume growth in the -- and 4% sales growth in the quarter, and that's the most recent information we have.

And so we are going to have to bend that trend upward in the second half to reach our goals.

Now, we've got a lot of stuff coming.

I said we anticipate better growth in the second half than we got in the first half, but, you know, we have to recognize that our volume growth did weaken.

That's a fact.

And until we see it coming up, I think we've got to allow for the possibility that we won't get to the target we set.

And that's the reason we're cautious.

I mean, it reflects the reality we've seen in the quarter.

As far as giving yourself more room, what we tell you, when we give you guidance, is essentially what we expect to do.

There are times when -- and, you know, there is typically things that go better and things that go worse.

Sometimes the commodity costs come in lower, or the commodity costs come in higher and the volume comes in lower, but typically that's all captured in the range we're giving you.

What we're saying, as we look at the second half, is there's risk to two of the big items in our formula.

Both the commodity costs, which are going to be higher, frankly higher than we expected, and at the volume is uncertain, because of what we've seen in the quarter.

We have confidence in what we're doing, and in the first quarter it produced good growth, it produced good growth in the fiscal year last year.

And we believe it should produce growth more like that in the second half of the year, but until we see it, we're saying, you know, that's an issue, that's a risk.

If I may just add to that, Steve, just to dimensionalize the issue on supply chain costs, we started off the year and costs had risen, through last fiscal '03.

We saw them continuing to rise, and commodities are cyclical, and so we saw coming up we also saw it coming down, expected it would come down.

We have a $3 billion bill that we pay for our ingredients and packaging, and the 7 to 8 cents that we flagged for you about half of that is the commodities cost, about 40 million in total.

So half of that, 20 million, is the miss on the 3 billion in terms of what we expected the commodities cost to be and the balance is that we did not have the amortization of our costs, supply chain costs that, we expected due to the lower volume.

That's the other half.

That's particularly on the food service side there.

So, you know, you're absolutely right, Dave, we did miscall it at the start of the year, and we wish we could have hit that right on the head.

Two questions.

First, I guess, for Jim, I guess in terms of the debt pay-down assumptions, I guess I'm a little bit concerned because the slope of the line of working capital is pretty negative, and you're going to get a hit of roughly $40 million in terms of operating cash flow, so what makes you so confident that working capital is going to reverse and you can make up for the 40 million?

And then second question, for Steve, one of the negative things I hear, and I'm sure some of the other analysts hear, is just that the long-term growth rates for the company continue to be too aggressive, and it appeared as if you said your earnings growth rate, ex restructuring items, is now more likely to come in below 11% over a three-year compounded rate.

So should we take from that, that you are recognizing that maybe 11% is difficult to achieve and that the company will essentially have lower long-term bottom line targets?

Well, let me just answer that one, then I'll let Jim tackle the first one.

We said the long-term target is double digit.

We've said that consistently.

We did think that this three-year period we are in now, starting with this year, would be stronger than that, would be 11% or better, and that is partly because we're still getting some benefit from the synergies related to the deal.

What we're saying now is if you take year one down, on that, that is going to make it harder for the three-year period, of which year one is a part, to meet that 11% on a before unusual items basis, yes, I'm definitely saying that.

I think we may not make that on a before unusual items basis.

On a GAAP basis, we still will be likely to make it because for the first year we're saying 13 to 17%, so that gives you an awfully good start towards an 11% three-year period on a GAAP basis.

Now, the other question was --.

Sure.

In terms of debt pay-down, your caution which I have as we reviewed our mid-year update and we looked at the cash flow trends through the first half and what we expect on the back half, and indeed we have pressure-tested against the low end of the range.

We are not planning to hit the low end of the range, we're planning to do better than that, and we've given you what we think brackets the full range of outcomes, but even at that low end we are quite confident that we will pay down the $450 million of debt at year end.

Indeed, we must bring down our working capital through the balance of the year, we have done that, for each of the last two years.

We're very much focused on doing it in this year.

We have our hands on the levers, we know how hard we have to pull them, and we are quite confident that we will do so.

But, you know, as I said in my own prepared remarks, I can easily see how that would raise question, and I'm glad to have the chance now to say that we're very much focused on getting working capital down in the back half and certainly we do expect to pay down the full 450 million by the end of the year.

Steve, as, you know, given some of the commodity cost issues we've talked about, what do you think the potential is and the market's appetite for further sort of rate or list price increases in certain areas where it's hitting you hardest, given your experience with that, let's say over the last two years, and has anything been announced yet?

Secondly, just to follow up on Eric's question, around targets, we just focused on the earnings growth piece of that.

Do you still think it's prudent to have, over this kind of three-year period, I think we've talked about it as a 5 to 6% top-line growth target, or do you think that's also impacting the way folks operate their business?

Would it be more sensible, perhaps to, ratchet that back a bit as well?

Just your thoughts on that.

Thanks.

Sure.

On pricing, I think, certainly, if the higher commodity prices persist, there is potential for upward pressure on pricing, and nothing's been announced by us, but, you know, obviously over time if prices, commodity costs were to stay high, I think that does push prices up.

We have tried to keep our pricing behind the overall rate of inflation.

The inflation is not going up, we're just dealing with some commodities here, and so we want to make sure we keep the value equation right for our products, and that's the balance you're always working with, and it's the challenge we face all the time.

As to the five to 6% of sales growth, I think in our model that we have demonstrated historically the ability to hit that consistently over time, and we believe, as we look at what's going on in the consumer sales, for example, we're not seeing any reason to believe that the consumer is buying less.

In fact, our U.S. retail sales are trucking along at 4% rates and have been for the last 18 months pretty consistently.

So there's no, like, red flag sign there that that is suddenly going south.

There's some things that happened in this particular year that our shipments, some of them are one-time things.

So we still believe that that is the right range, and I don't think -- I think that is, having that kind of an objective is what motivates the kind of innovations necessary to produce growth.

That's fundamental to the model.

If you -- it's difficult to produce growth in this business if you're not bringing new things to the market and making your volume and sales grow.

Steve, also, two questions here.

I know this one's a little difficult to answer, but do you have any indication of a timetable to get this SEC issue resolved?

Not really.

That's not within our control.

We are simply responding to their request for information, and producing that information for them, and the timetable is totally within their control.

Okay.

Back to the business, I guess most of us would assume when you talk about volume risk going forward that maybe the two areas you're talking about are cereal and refrigerated dough.

I know we've had our ups and downs in the integration process but do you think there are any sales force issues attached to that, perhaps a lack of focus responsible for the softness in those areas?

I don't think so.

I think our sales force focus -- and we measure our sales force focus with a very wide variety of specific metrics, and they include distribution, number of items on the shelf, they include new products, distribution versus objectives, new product volume versus objectives.

And as we evaluate -- and we've been very sensitive to the fact that the sales force has to handle a much larger set of categories, are we seeing any slippage in the performance there, and the fact is, on the metrics that we value, of which we measure sales effectiveness, they are continuing to get stronger.

So I don't think that is an issue.

I think we have very good sales effectiveness.

The latest Canondale, again, we thought maybe there would be slippage there because we had customer service issues last year.

The number moved up again.

We held our same spot at the overall ranking was a little higher.

So that's not to say, you know, we're totally satisfied with everything but generally we're on a continued improving course there, so I don't think that's an issue for us.

Steve, another follow-up question on the whole Atkins phenomena.

Is it the cereal category that's being hit the hardest in your portfolio or is it refrigerated dough, bakery food service business, first I'm curious on that.

Then just in terms on looking out to the second half in terms of food service business, I understand why it's recovering from a profitability point of view.

Do you expect the top line to recover as well?

Second question first again.

Yes, we do expect the top line to recover.

We've brought a lot of new products to bear, and starting last year we began to weed out some of the product that brought volume but no profit.

We are getting through that period now.

So both volume and profit and, you know, volume is not yet up to our expectation.

I will make no bones about that.

But we do expect to see volume improve in the second half of the year and to see volume grow through the second half of the year.

As far as Atkins is concerned, I don't even know that I can really say with a lot of certainty that Atkins is affecting cereal.

I think it probably is, you had a market that was growing at 2% in units and sales dollars that suddenly, or pretty abruptly, kind of slumped to flat sales dollars to a 1 to 2% decline.

It could have been the prices moving up, sometimes you see that when you see a price adjustment.

We'll anniversary in that February, and Ian Friendly told me the latest Nielsen data for December showed a modest growth in cereal sales so maybe we're starting to see that come back.

But, you know, all I can tell you is the anecdotal stuff about you all telling me about people eating all these eggs, and I can't imagine they're eating them as midnight snacks, so probably that is affecting our cereal business.

Is it affecting refrigerated dough?

I don't really attribute it to that.

Our frozen dough business is doing fantastic.

Pizza is doing fantastic.

Hamburger Helper is doing fine, so there's a lot of business with plenty of carbs that are doing fine.

I think our challenge on refrigerated dough to bring enough innovation to that category to stimulate growth, just like in any other category.

Two questions.

The first is, thank you for providing the color on the hedging strategy.

Could you tell me, was there a difference between how you hedge this year versus prior years as far as timing?

Were you waiting for prices to fall so you didn't put on hedges, yet they didn't, so you got caught?

Was there a change in the timing at all?

No, you know, we made a judgment, as I said, at the close of the year, as to, you know, where we saw the peak and where we saw it coming down, and in certain commodities we might have hedged out further, and we didn't.

Then the second part, in the components of net sales growth could you break out for me, if possible, how much F X added in the quarter for the half.

Then also, I didn't exactly pull from the slides where the negative 1% in promo spending was really coming from, from the different divisions, so maybe you could give us color as far as what area in particular was having the greatest impact as far as the negative promotional spend.

Thank you.

I know we can brick out the sales growth.

Let me do that first.

It's 1%, both for quarter and the half on the top line from F X.

And that would be about a penny a share in each quarter on the bottom line.

And then your other question was where is the trade spending, the negative, and I would say you would see it in U.S. retail and also in bakery and food service although to a much lesser degree.

Price promotion spending is obviously a big component of marketing spending for U.S. retail.

Also two questions.

First, in response to the lower than planned volume in Q2, does part of the plan for the full year include higher levels of marketing and promotional spending than you had earlier planned?

Part of the plan includes higher levels of marketing spending in the second half relative to last year than we had in the first half relative to last year.

That really isn't markedly different than our plan.

I would say there is some modest increase in promotional spending but it's really not a big part of it.

But the spending in the second half will be higher relative to year ago, in both instances, which in the first half, the consumer spending is a bit lower.

Secondly, I wanted to ask about the margin pressure.

I mean, the issues you flagged, the volumes and the higher commodity costs, weren't they persistent in the second quarter as well?

So is there a way you've accounted for the higher costs that's making those impacts more pronounced in the second half of the year than the first, or is it sort of a net hedged basis, you're more exposed to the commodities?

You will see in the cost of goods sold line for the first half, the impact of costs and the, importantly, impact of the lower volumes.

And as we said, we missed our own internal EPS for the first half by 1 to 2 cents, which is inclusive both of the commodity costs and the lower volume.

The 7 to 8 cents which we're calling out is relative to the back half, and as I said, half of that comes from the costs of the inputs and half of it is from the supply chain case rate that we now have established based on the volume levels that we expect for full year.

Hi.

I'd like to just two back to the volume topic for just a few moments.

First off, what exactly is the full-year expectation for volume growth embedded at the midpoint of the guidance?

Well, I'll talk more about what we expect in the second half.

I'd say in the second half -- we had 2% in the first half, we'd expect to be stronger than that in the second half.

More toward where we were in the first quarter, which was 4% U.S. retail.

And then in addition, we'll get the benefit from a 53rd shipping week.

So that adds a couple of percent.

So we would expect mid single digits unit volume growth and pretty comparable sales growth.

We'll anniversary a lot of the price increases that came last year, so we don't expect to have as big a spread between volume and the sales.

Once we anniversary the price increases, but that would be the expectation, then they range around that, is the range of outcomes.

Then the second question is, this has been, I think, asked a number of times but I just want to be crystal clear here.

So volume shortfall in the first half relative to your expectations, I see on the sheet cereal and dough negative, take-away trends, but is it correct that that is where you did not see the volume growth that you needed in order to achieve your target for the second quarter?

Yes.

All right.

Then the follow-up question would be, those categories did not see the proper level of innovation, so we should not make the assumption that your new introductions, all these new products you came out with last quarter that you said on the last quarter conference call, that level of innovation was fairly critical in hitting your long term target.

Those new products then did achieve your goals, so it was really in the place where you innovate, we didn't see the growth.

Well, let's say there are a couple of things to, put a finer point on that.

In cereal we didn't introduce anything new in the first half of the year, so we were -- because all of our new product stuff tends to focus more on seasonal items.

A lot of energy behind soup, some behind dough, some behind other meal product, and so in the second half we've got a lot of new activity in cereal, and where as we had a merchandising -- without as much innovation and the fact we're trying to raise our merchandise prices consistent with the price advance, we had a merchandising decline in the first half on cereal, which we are not expecting to occur in the second half.

So more innovation and related to that, a stronger merchandising program and expectation for the second half of the year, I think on that.

In dough, we had a strong first quarter.

We were running ahead of year ago.

The second quarter, we definitely lost ground.

A big part of that was the fact that, you know, plant consolidation made it impossible for us to ship the Halloween cookies, and that seasonal merchandise is a big deal in dough.

That's not all of it but a big part of the second quarter.

I think we'll know more about the other dough pieces as we see the November-December holiday period play through and see how that goes.

We will, I think, have some dough innovation in the second half with you the seasonal period, really the key to dough, is what's going on right now.

We are over our window on the webcast, so I think I'm just going to bid the webcast folks adieu at this point, and obviously if you've got follow-up questions for us, I will be back in the office on Friday.

If you're out there listening live on the week cast, leave me a message, and I'll catch up to it.

Thank you.

Are we done?

We'll stay here.

Thank you.

Thank you.

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

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