通用磨坊 (GIS) 2004 Q3 法說會逐字稿

Welcome to General Mills third quarter 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 the one followed by the four on your telephone.

As a reminder this conference is being recorded Tuesday, March 16, 2004.

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

Please go ahead.

Thank you, operator.

Hello, everyone.

I'm here with Steve Sanger and Jim Lawrence.

Before they begin let me give you the standard reminders.

This conference call will include forward-looking statements which are based on managements current views and assumptions.

We issued a press release earlier this morning that contains some material information we'll be discussing today.

We've also posted some slides on our Web site this morning to supplement our remarks.

That file includes slides that reconcile our reported results with several non-GAAP measures we'll reference today.

After Steve and Jim complete their prepared remarks we will open up the call for questions.

So with that I'll turn the phone over to Steve.

Thanks, Kris, and good morning to you all and thank you for joining us today.

As you've seen from our release this morning we had a weak third quarter reflecting the various issues we talked about with you in December and then last month at the Cagney conference.

For the quarter our net sales grew by just 2%.

Operating profits declined 3% to just over $470 million, earnings after tax were up slightly to $242 million and our diluted earnings per share were flat to last year at 63 cents.

Let me give you a little more detail on the top line results.

First, looking at the components of our 2% net sales gain, volume for the quarter was down 1%.

That was offset by one percentage point of price and mix and then currency added two points of growth.

Promotion spending was a neutral factor.

On a segment basis sales for our U.S. retail operations were up 1%.

Sales for our consolidated International businesses grew 20% to $380 million reflecting volume growth and favorable currency.

Bakeries and Foodservice sales fell by 6%, reflecting lower volume and unfavorable mix of business.

Next let me give you some detail on our unit volume trends beginning with our U.S. retail business.

The comparison here was not a particularly easy one.

Last year's third quarter growth was 7%.

You recall last year we were recovering from a weak performance in the prior year in 2002 and also two of our U.S. retail divisions, Big G Cereals and Yoplait had particularly strong gains of 16% each in that quarter last year.

Big G was benefiting from the introduction of Berry Burst Cheerios and also our retailers stocked up after our competitor raised prices and Yoplait volume was boosted by new products like Whips and the Nouriche beverage line.

Against this prior year performance, Yoplait and Pillsbury USA posted gains but our other divisions were lower and in total U.S. retail volume was down 1%.

Looking at consumer movement across our major retail product lines you can see that growth slowed for our categories in the recent quarter and we continue to believe this is at least partly a result of consumer interest and retailer emphasis on low carb items.

But our own growth has slowed even more and for the first time since back in the first quarter of fiscal '03 our aggregate market share declined during the quarter falling 50 basis points.

In a few minutes I'm going to discuss our fourth quarter plans for restoring growth.

John Matusek gave a detailed update on the Bakeries and Foodservice Division at the Cagney conference last month and he showed that for the fiscal year-to-date through January volume in our major non-bakery channels, that's foodservice distributors, convenience stores, and restaurant accounts was up in the aggregate but volume in our bakery channels was down double digits due in part to the popularity of low carb diets.

This trend was true for the third quarter as well with non-bakery volumes up 3% and bakery channel volumes down 13%.

Let me give you just a bit more detail on those volumes.

I already mentioned the declines in our bakery channels.

Volume gains in our restaurant accounts more than offset declines in shipments to our foodservice distributors, so combined unit volume for these which really represent the traditional foodservice channels was up 1% for the quarter and our convenience store and vending channel volumes continued to be up strongly up 21% driven by successful new product introductions and by distribution gains.

Our International business showed the strongest volume results for the quarter with composite growth of 4%.

And volume gains of 4% in Canada and 13% in the Asia Pacific region, offset modest declines in Europe and Latin America.

Among our joint ventures, Cereal Partners Worldwide and Haagen-Dazs contributed particularly strong growth with gains of 8% and 10% respectively.

And Snack Ventures Europe recorded a 1% volume gain on top of 10% growth last year.

Slide 11 shows our operating profits by segment.

For U.S. retail operating profits fell 9% due to higher supply chain costs and higher consumer marketing expense as well as lower unit volume.

Bakeries and Foodservice profits were down significantly, reflecting their weak volumes, and higher supply chain costs.

Profits from our consolidated International businesses showed good growth due to the volume gains and favorable exchange rates.

So that's a quick summary of our top line and operating segment results.

Now I'll ask Jim Lawrence to go into a little more detail on our income statement and balance sheet.

Thank you, Steve.

And good morning to all of you.

I'll begin on the income statement with our cost of good sold which rose by 140 basis points as a percent of sales.

That is because we're seeing the higher costs for commodities such as wheat, eggs, oils and vanilla, that we identified for you in December and also because of unfavorable fixed charge absorption due to lower volumes.

Our SG&A expenses declined slightly as a percent of sales on a reported basis.

But if you exclude merger related costs from both years, SG&A actually was up slightly as a percent of sales driven by increases in consumer marketing.

Our identified items expense was lower this quarter since we completed our Pillsbury merger related actions.

Identified items expense amounted to 1 penny per share in the third quarter for a total of 8 cents through the nine months and we're still estimating 10 cents of identified items expense for the full year.

Moving on down the income statement, interest expense was down $12 million in the quarter, due to a lower debt balance and favorable short-term rates.

Taxes were essentially flat at 35% rate and earnings after tax from our joint ventures totaled $15 million for the quarter.

Our Cereal Partners Worldwide and Snack Ventures Europe joint ventures combined for $12 million of after tax profits this quarter.

And increased earnings from our Haagen-Dazs joint ventures in Asia offset development spending on our 8th Continent soy milk joint venture.

So here is where these results put us through nine months.

Through nine months net sales are up 4% to more than $8.2 billion.

Operating profits total $1.5 billion, up 6% from last year.

Our earnings after tax are up 12% and our diluted earnings per share has grown at 10% to $2.03.

That includes Pillsbury related identified items in both years and were you to exclude those costs, our earnings per share through nine months would total $2.11.

Now I'll move on to the balance sheet.

But first I'd like to talk about the trends of our core working capital.

As we showed you in December our core working capital increases through the first half of the year as we take on late summer vegetable inventories and prepare for high volumes during the soup and holiday baking seasons.

In the second half of our fiscal year we work our way down from the higher levels.

And as you can see on slide 15 from our Web site, it has come down in the third quarter just as it has in the past.

We're down over $100 million since November.

And here's the detail from the most recent quarter in slide 16.

Our accounts receivable balance is down $144 million since November and that reflects good collection performance, our days sales outstanding in February were down almost a full day compared to last year, and year to date we're down about a quarter of a days sales.

Inventories are also down from November and accounts payable were down from the November balance too, due to lower volumes and the seasonality of our businesses.

Our third quarter statement of cash flows will not be complete until we file our 10-Q.

But I will review for you our latest estimates.

Depreciation and amortization totaled $102 million for the quarter.

We're still estimating $390 million for the year as a whole.

So if you add together after tax earnings, depreciation and cash that we'll receive from option exercises we're on track to cover our planned cash uses for dividends, capital investment and debt reduction.

We are still targeting $650 million of capital expenditures for the year.

We have invested approximately $420 million of that through the first nine months.

We are still planning on a $450 million net debt reduction by the end of the year.

That will be year one of the three-year plan to pay down $2 billion in net debt.

We do not need to make significant cash contributions to our pension or post retirement benefit plans in fiscal '04.

In calendar '03, our pension funds earned a 24% return.

So as measured today our pension plans are fully funded.

We continue to estimate cash payments of $10 million to our pension plan and $20 million to our post retirement benefit plans this year.

I'd also like to take this opportunity to mention the five-year, $750 million credit facility that we finalized in January.

We replaced our $1.1 billion, 364-day credit line that expired in January with this new facility at costs in line with low A rated companies.

We still have another $1.1 billion facility that will expire in 2006.

So in total these two facilities provide us with $1.85 billion in available credit that more than covers our commercial paper balance.

To summarize our cash from operations is up for the year to date and our working capital trends continue to improve.

Total debt as reported on our balance sheet is down about $150 million through February and we expect to meet our $450 million net debt reduction goal for the year.

We are targeting $2.75 limited EPS for the full year which would represent 13% growth from last year's $2.43 per share.

Meeting this target will require strong fourth quarter and I will turn it back now to Steve for discussion of our fourth quarter plans.

Thanks, Jim.

Achieving our annual earnings target requires a 72 cent fourth quarter EPS and that is a strong double-digit increase over last year's 59 cents.

We see three key drivers of that growth.

First, our plans include more new product activity this year.

Our U.S. retail businesses will introduce 40 new items in the second half of the year, that's compared to 26 last year.

And importantly several of these new items will address consumers current intense interest in lower carb products.

Secondly we will be supporting our business with a higher level of fourth quarter marketing spending.

That partly reflects increased new product activity but we also plan to strengthen merchandising support behind key, established lines.

And then finally of course this fourth quarter has 14 weeks instead of the normal 13 and that difference alone will contribute more than half of our expected EPS growth.

Now, as far as the new product introductions, while a couple of our reduced carb items shipped as early as January we expect the greatest impact, or greater impact from these items in the fourth quarter.

In January, Yoplait introduced a light, lower carb version of our Nouriche beverage, 8th Continent rolled out a light version of its soy milk that has fewer cars than the original, Big G launched Total Protein Cereal last month and Progresso's lower carb chicken vegetable soup is on shelves this month.

Yoplait will start shipping four flavors of lower carb Yoplait Ultra in April and finally Hamburger Helper will be launching a lower carb version of it's Cheeseburger Macaroni flavor in May.

That's one we didn't talk about at Cagney.

That's got 30% fewer net carbs than regular Hamburger Helper.

And we also have a number of other new products and particularly in the cereal aisle.

As you're aware Big G. introduced a Strawberry Banana variety of Berry Burst Cheerios during the third quarter.

For the year to date, the Berry Burst Cheerios franchise has a 1.2 dollar share of the market.

We'll be shipping, we are shipping Triple Berry Oatmeal Crisp this month and Peanut Butter Toast Crunch cereal in April and the Shrek cereal will also ship in April to tie in with the May theatre release of the Shrek 2 movie.

For Yoplait the fourth quarter news is some much needed new capacity.

As you all know the double-digit growth of our Yoplait business over the half dozen or so years has created capacity issues for us.

And when we introduced Whips sometime back and sales significantly exceeded expectations we ended up having to put our entire cup line on allocation and have had to moderate our promotional support of that line ever since.

We had to cancel merchandising for several product lines through the first half of this year because of capacity constraints.

In April our new yogurt plant in Murphreesboro Tennessee will ship its first product.

This is our fourth yogurt plant.

It's the first one in the southeastern United States and it's located adjacent to one of our refrigerated dough plants so this will give us some good refrigerated distribution efficiencies in the southeast and we'll be able to once again put full marketing activity behind the yogurt business.

For Bakeries and Foodservice, we expect unit volume will be down again in the fourth quarter on a comparable thirteen-week basis but adding the 14th week should result in volume growth on a reported basis.

Operating profits should be improved from the third quarter’s depressed levels and from last year's fourth quarter, again, aided by the extra week.

Our International businesses should continue their strong growth through the fourth quarter and with the help from a few new products that should help sustain their growth.

Haagen-Dazs, for example, will introduce a European version of the crispy sandwich which has done so well in Japan.

It will add three more flavors to the popular Wraps To The World line in Australia and Cereal Partners Worldwide has extended the popular Fitness Cereal franchise into the United Kingdom.

Let me end with a summary of where we stand today.

Through the first nine months our net sales are up 4% and our diluted earnings per share are up 10%.

We are targeting to finish better than that and that's going to require a strong fourth quarter.

That will have the benefit of an extra week but we also need our underlying volume and market share trends to improve which means we need to execute better than we have in the last two quarters.

We've added new products and marketing and merchandising programs to fuel that improvement and the new product news addresses the thing that's foremost in consumers’minds right now.

We're also are working on our business plans for next year and will share those with you in June.

But I'll remind you that next year we'll be comparing a 52 week year to this year's 53 weeks.

So we are expecting next year's EPS growth will be less than double-digit.

The reason we wanted to clarify that today is because we know many of you are already looking beyond this year in your earnings models.

That concludes our prepared remarks and we will now ask the operator to take the first question.

Thank you.

Ladies and gentlemen, if you'd like to register a question please press the one 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'd like to withdraw your registration please press the one followed by the three.

If you are using a speaker phone please lift your handset before entering your request.

One moment please for the first question.

The first question comes from the line of Leonard Teitelbaum from Merrill Lynch.

Please proceed with your question.

Thank you.

Good morning.

First question I'd like to ask is, what is the base that you're going to be using to present your or to project first thing for the increase for next year?

Is it the GAAP base, is it the reported base?

I mean the scrubbed base or what?

We will report on the GAAP base but we will also share with you detail on the identified items as we have in prior years.

Yes, sir, But what I'm trying to get to is do we use $2.75 that you just mentioned, do we use $2.85 as the base from which we project?

I'd say henceforth we'll be using the GAAP base so you use the $2.75.

But I'd say again, we'll tell you.

So it's less than double-digit off $2.75?

I beg your pardon?

It's, your statement here of [inaudible] at high single-digit or less than a double-digit increase for 2005.

Steve, the only thing I'm trying to figure out here is, are you looking at $2.75 as a base from which we project or $2.85 which is without the restructuring charges?

$2.75.

Okay.

That's point number one.

Second thing is, you know, and I don't know quite how to ask this thing delicately, but you guys used to have your numbers pretty well in hand and now it just seems like we are missing just somewhat each time here.

Jim, have you changed the internal reporting methods?

I mean, we saw you the middle of February where we thought we had a handle on this quarter and came up light.

Has there been any change through your office as to how this stuff gets internalized?

To maybe give us some feeling that we've got a good handle on the fourth quarter here?

There is no change that we have made internally.

We have cited both in December and Cagney some circumstances which have worked against us this year and continue to work against us.

We do not provide quarterly guidance so I can't speak to what expectations were for this quarter.

We continue to target $2.75 for the year and we are on track to do that as of today.

All right.

I'll let someone else take over.

I'll live with my frustrations.

Thank you.

The next question comes from the line of David Nelson from Credit Suisse First Boston.

Please proceed with your question.

Good morning.

Hello?

On the supply chain, is that mostly ingredients, I think we talked about this in December but I think a year ago you were talking about supply chain benefits of like $1 billion over ten years.

Are you not getting those as fast as you expected?

We are getting the synergies and the productivity that we have expected.

Some things are ahead, some are behind.

But what we said in December was that we were seeing a $40 million problem which had developed, half of which was due for the year, half of which was due to increased commodity cost greater than we expect, half due to deleverage in terms of volumes coming in lower than we planned against.

Okay.

And then looking into '05, do you expect marketing to have to go up that much more again in '05 or perhaps how much more?

And then, again, for Cap Ex in '05, please?

Dave, we're really, we are going to share our '05 plans with you in June.

So the only reason I bought up '05 today was because the anomaly of the 52 versus 53 week to make sure everybody was sensitive to that.

And we're still putting our plans together.

So other than the longer term view we've given about debt pay down, for example, I'm really not prepared to talk about '05 today.

Okay.

Thank you.

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

Please proceed with your question.

Good morning, everyone.

Just quickly is there any update on that Wells Notice in terms of timing or anything else that could be shared with us?

We can't really tell you much about the timing other than the fact that we did respond to the Wells Notice as we said we would and the timing of the investigation now as has been the case is fully in the hands of the SEC.

Steve, I think at the last conference call I asked you a question about were there any perceived problems with the execution on the, with the sales force.

You alluded this morning in your remarks that the company needs to execute better.

Could you give us just a little more color on where you think execution on a corporate basis needs to be improved?

Let me talk about the two parts of the business that have come up weak.

As far as U.S. retail business is concerned, our strength, the way we drive growth is through compelling product news.

I believe that the product news that we have brought to the market this year, and we had quite a bit of it in the way of new products, but it proved to be not as compelling and timely as it has in the past primarily because the consumer interest was focused not on just additional varieties but rather on a very specific weight management and carb concern.

And we have been a bit behind the curve in bringing those products to the market.

We're bringing them there now, but that for us execution involves getting the new products out there when the time is right, when the consumer is high.

And this is not just a consumer issue.

This is a combination of the retailers and consumers’interest have been very intense in that area.

So that has, I think, been a big factor behind our volume growth and our share growth slowing down in our categories.

And we plan to address that with the activities that I described in the fourth quarter and then going on into the new year.

In Bakeries and Foodservice, it has been a matter of, John Matusek really discussed the execution parts of that I think in some detail at Cagney.

We need to get the focus on the profitable items and the growth back in the key profit driving parts of that business.

Just one quickie.

How much would you say Berry Burst Cheerios, the franchise, I guess we have three SKUs now, how much would that have added to your Big G totals for the quarter?

I don't really have that figure at hand, it's as I mentioned 1.2 share points which is, would equate to roughly close to 5% of our total cereal market share, a little less than 5% actually.

So the total, but if you're wondering about the specific new item introduction and what it added to this quarter, I don't have that figure at hand.

We can get it for you.

I'll follow up on that.

Thank you very much.

The next question comes from the line of David Driscoll from Smith Barney.

Please proceed with your question.

Thank you.

Good morning, everyone.

So the company has integrated its sales force.

You've begun to introduce higher number of new products that really, it appears to have started at the very end of your second fiscal quarter and carrying into the second half of fiscal '04.

The question, Steve, then would be kind of a high level question.

You've done the things that it looks like you needed to do to get the Pillsbury business in, yet when we look at the '05 guidance that you've kind of given us, it would appear to be, you know you're going to be lapping some very easy comparisons in International and obviously we all know about the first half new product problems that the company had in fiscal '04.

It just would seem to me that the '05 numbers, there's not enough going on in there to really represent what's happening fundamentally within the business and the new products that you're introducing.

So my question is that either, A, I've got this wrong, in which case I have to come back to your guidance of single-digit growth, or, B, really there is a fundamental new product introduction kind of lag here that we're really just not seeing these effects and it's going to take much longer than we originally thought.

Maybe a third possible conclusion that I could throw out would be that we are going to see substantially higher marketing expenses and that's the real reason for it.

But I feel like when I just look at the year-over-year comparisons I am not seeing the right kind of movement in the 53rd week doesn't seem to be enough to make me come to the other conclusion that the growth should come out to be something below 310 for '05.

I wouldn't read too much at all.

All I am really telling you about next year and I really don't want to go into much more detail just because our plans are coming together, we don't know what our plan is for next year yet.

We wouldn't typically at this time of year.

All I wanted to make people aware was aware of is that we're comparing 52 to 53 just as this year we're comparing, we're telling you we're getting a certain amount of growth simply because we've got an extra shipping week.

That turns around on us next year, don't forget that.

And beyond that, that's really all we're saying.

Okay.

So then in that I believe you said in your prepared comments that the 53rd week was half of the growth in the fourth quarter which is something like 8 cents a share, if we take half of that, it's 4 cents is due to that 53rd week.

Is my math right?

I think the required growth in Q4 is more like 13 cents.

Thirteen cents.

Are you doing it on the GAAP basis or the excluding one time item basis?

We're on GAAP.

Okay.

Then maybe just a last question here.

Steve, if you could go back to that new product introductions.

You know when I've looked back over time over the new products that the company has been introducing, it really looked to me like right up until the second fiscal quarter of '04 the company was at a lower rate than it has historically been at.

If I'm correct on that, then when are we going to see the real effects of the step up in new product introductions that you've begun within the last two quarters?

David, I would not agree with your view that up until the second quarter it was lower than it has been in the past.

Starting at the beginning of last fiscal year with the first full year of our combination with Pillsbury our new product activity ramped up very sharply, we had very strong growth last year fueled by a lot of strength of those new products.

We had good growth in our first quarter this year partly fueled by the new products that we were selling in.

What I would say about our new products though, is that they to a significant degree address consumers’ needs for variety and some of them were quite successful in that regard.

I'd say, I'd point to the Progresso Rich and Hearty Soups which has driven a nice share gain for us this year in the whole soup business.

But what they didn't address was the emerging consumer interest in low carb nor for the most part did they address concerns about weight management.

And that has been the product excitement in the grocery business over the last, at least three months, maybe more like six months.

And our products although they were there didn't address that.

And I think that is the place where our execution needs to get better.

Okay.

Thank you.

The next question comes from the line of David Adelman from Morgan Stanley.

Please proceed with your question.

Good morning, everyone.

A couple of questions, Steve.

First in terms of the issue of executing better, have you looked to change how the company is organized or how you managed the businesses?

We're constantly looking at that.

We've certainly changed organizational parts of it from time to time to streamline and strengthen.

I think in this particular case, though, what we're talking about, I am, I am not dissatisfied with the pace of our new product development or introduction.

I think where we didn't address in the last quarter is the particular subject matter that was of interest to people.

And that we will, we will address in the quarters going forward.

I think we are well-positioned to execute if you look at the longer term trends, you see that.

But here we found that we were behind the curve on a particular area of intense consumer interest.

Secondly, Steve, did the impact as you read it of Atkins or low carbs build through the quarter?

Because it appears to me from your comments at Cagney I got the sense that maybe Q3 unit volumes in the U.S. were tracking more in line with the plus 1% that they were in the second quarter and they ended up down one?

I don't know that they so much built through the quarter.

This quarter is a particularly strong one for diet interests every year.

So this would be a quarter where you would find certainly the retailers were quiet interested in it.

The other factor that affected us in the quarter and was unique to us somewhat is that we were going against a very strong third quarter comp a year ago, much stronger than the second quarter comp, much stronger than the fourth quarter comp.

So I think the combination of those two things is what's reflected in the weaker volume.

Can you quantify at all the decrease in merchandising support you got from retailers because of their emphasis on low carb products?

What we found as we analyzed this, and we've analyzed it pretty extensively is that the gross level of merchandising support wasn't down but the quality of that support, that is the intensity, the size of the features, the locations of the displays, tended to go to the low carb stuff to a greater degree in the quarter.

So while we got the same amount of overall merchandising, the impact of that merchandising, the lifts that you get on the merchandising were less strong than they typically are.

And I think that's because of both the retailer and the consumer were, the primary product news in the marketplace was elsewhere.

Okay.

Thank you.

The next question comes from the line of John Feeney from Wachovia.

Please proceed with your question.

Good morning, everybody.

Two questions if I could.

The first one is, I know we're following up on Lenny's question.

I know we're growing off the $2.75 for this year.

But could you identify it this time any one time items that we're thinking about already for fiscal year '05 that would affect the comparability of that?

Once again I'd have to beg off identifying any specifics of next year's plan simply because it's not done.

Okay.

But you just don't want to quantify at any point restructuring that's already been talked about for next year?

I definitely want to quantify it and I'll do so in June.

My second question then is with some below, I guess below what prior expectations and I'm talking about going back maybe a year, year and a half volume, any thought about reducing or any room to reduce capital expenditures maybe more than has been planned in the past?

I think you talked about 650 for this year.

You're on track to, it looks like you're on track to spend a little less than that.

Any room for next year to lower that a little bit?

Again, John, this comes into the classification of business plan for next year.

We have said publicly and I'll repeat today, we expect Cap Ex to be down next year.

We've not said by how much it will be down and in June we will tell you that and we'll obviously be keeping in mind capital expenditure relative to the total business model that we share with you in June.

Let me just ask the question this way and this is the last time, I promise.

Have you, has volume growth experience of this year, Jim, changed at all your thoughts about Cap Ex for the next five years?

Well there's no question that the volume growth this year has been below what we planned and as a consequence we are running our plants at a rate lower than we expected to and we have more costs and we have more capacity.

So that obviously has to go and will go into our thinking about our business plan for next year which will include our Cap Ex.

Excellent.

Thank you.

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

Please proceed with your question.

John McMillin, CFA: Good morning, everybody.

Good morning, John.

John McMillin, CFA: Jim, you went through the income statement but if you go on a segment basis, there was a big swing in unallocated corporate items.

And even if you take these one time items out you have about a $23 million swing, positive swing that benefited your operating profits.

What's in that number?

John, the first is that, and most important, is that our administrative expenses this year are coming in below the level that we programmed in June.

And the way we handle those general corporate and administrative expenses is to charge monthly allocations to the divisions based on the program amount.

But as the actual expense comes in below the programmed amount, difference then settles out as credit to the corporate unallocated line.

So that is the first and largest part of the difference that you have identified.

Then the remainder, just about in its entirety is due to a $3.5 million positive income item which is a settlement of, actually the final settlement from insurance companies relative to the oats handling incident which is back in 1994 and that $3.5 million is added to recoveries that we had prior year.

And the total is now 108 on that and that is finished.

John McMillin, CFA: And that's a pretax number, the 3.5?

Yes.

And I'll mention it for the full year you should expect the corporate unallocated line to reflect net expense when on the whole year's end.

John McMillin, CFA: Okay, but when you give a total identified items, hide the Pillsbury, you're obviously keeping this out of it right?

Separate from Pillsbury.

John McMillin, CFA: And then Steve, the volume assumptions that you need to get to this fourth quarter, what are you kind of thinking about for the fourth quarter?

Well, we're going to need to show volume growth in the high single digits but the majority of that will come simply from the existence of an extra selling week one, an additional [113] in the quarter.

However we do need to show a stronger volume trend than we have shown in the last two quarters, John.

We need to get about 3% unit volume growth on an apples to apples basis and we are counting on the new products and the added merchandising support to deliver that for us.

John McMillin, CFA: And just my last question.

This is not the first time you've said that don't expect double digit earnings growth for next year.

Didn't you say it in December?

I think we said it at Cagney in response to a question.

But we've gotten the question enough times since that we want to say it again.

John McMillin, CFA: Great.

Okay, thank a lot.

Thank you, John.

The next question comes from the line of Andrew Lazar from Lehman Brothers.

Please proceed with your question.

Good morning.

Morning, Andrew.

Steve you talked, you've talked openly for a while now around the impact that commodity costs are having on your cost structure and that's certainly the case for a lot of your peers.

I think you've also said that the flexibility around sort of list pricing is limited and I'd say that's probably also consistent with some of your peers.

But given what's happened with some of the commodity costs even since December when you originally stared talking about this more loudly, costs are up that much more.

And I'm just curious if you're, not asking you what or will you might do, but just from a though process, do you get to a point at some point where with that kind of cost pressure as the, let's say leader in a whole bunch of your categories you need to think about being sort of the pricing leader?

And then just being more apt to sort of take it back down if it doesn't work but at least to give it a shot.

Has your thinking changed at all around that?

Well I think you make a good point, Andrew.

Historically, we have priced sufficient to maintain or increase, I mean we actually price sufficient to maintain our margins, we've increased them by the productivity we brought to the bottom line and so our philosophy is you've got to maintain your margins.

Over time, we are seeing commodity price increases are greater than we anticipated and I think you will see pricing in our categories, many of our categories as a result of that.

And while I won't, I wouldn't talk perspectively about our plans, I think you're on the right subject that as challenging as the pricing environment is, we have lived through a period of stable prices so people are not used to dealing with the kind of commodity increases we're seeing.

But it appears that these situations of commodity increase are going to be with us for a while and I think that is going to require companies to think differently about moving their prices up and making sure they maintain their margins in the process.

Great.

Thanks.

And then just one last thing is, within Bakeries and Foodservice, do you feel like you've got sort of the internal systems capability because I know now you're trying to focus on those areas and customers and products where you have a much higher level of profitability versus some others.

Do you have that capability internally to well understand which are the most profitable products sort of by SKU if you will?

And if so, what allowed that mix to get out of whack in the first place I guess?

A couple of things.

Yeah we do have and increasingly have better ability to do that but I would say that the, some of the acquisitions that were made prior to our acquisition particularly the increase in the size of the bread business which tends to be a higher volume but lower margin business has unfavorably affected the mix of the whole line and one of our challenges as John Matusek articulated is to get our emphasis back on those higher margins within the line that make up what has historically been the Pillsbury core of the business.

The other thing that you sometimes have is there is attractive volume opportunities and one of the growth areas for us has been the national restaurant accounts.

But while those are good volume opportunities, sometimes they are a lower margin than say the bakery business which, the in-store bakery business which has been declining so we've got to get a mix there that we think will contribute to our profit growth in the way that it needs to.

We're not assuming any heroic mix changes for the balance of this year but going forward, that is something you're going to see from us.

Great.

Thanks very much.

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

Please proceed with your question.

Eric Katzman, CFA: Hi, good morning everybody.

Good morning, Eric.

Eric Katzman, CFA: A few questions.

Jim, you mentioned that as part of the cash flow in the second half and the debt paydown assumptions, some of that was due to the exercise of options.

Can you quantify how much that is?

How much you're building in?

Sure.

Just to clarify that.

We obviously track options outstanding and when they'll be expiring and we have a good historical record of when people exercise options.

The pro forma chart which I showed you on cash flow is our expectation for the year as to cash received for options exercised not for the quarter.

Eric Katzman, CFA: Okay.

I'm kind of out of the office so I don't actually have the charts in front of me.

But there's a detail as to how much is in there?

We're giving you a round number estimate, Eric of roughly $100 million cash from option exercise and you'll see that's consistent with what's been on the cash flow statement the last couple of fiscal years.

Eric Katzman, CFA: Okay.

Second question again, kind of somewhat related to the debt paydown assumptions of 450.

Based on your comments, it sounds like you did a pretty good job in working capital in the third quarter after a tough first half.

I'm kind of wondering how much will the new product effort in the fourth quarter which sounds like it's going to be significant, will limit the working capital improvement given that it's usually a use of funds to put out all these new products?

Well Eric I appreciate the compliment but frankly, I'm not satisfied with the working capital management and we have higher working capital now than I would like to see.

We had as a goal have working capital grow at the level of sales growth or below.

And again, frankly, our sales are below what we've expected them to be.

That's our fault and it's something we've got to correct but as a by-product of that, we've got more working capital than we should have.

And while it's improved relative to the second quarter in that it's down the absolute level, I'm not satisfied with it.

I do believe though, notwithstanding new product introduction in the fourth quarter that our working capital will be down again and it will be in line with the pattern that we showed you in December in New York and we basically reprised that chart, Eric, you don't have it in front of you but you'll see it when you go to our Web site, we've reprised that chart and it's come down, it's in the same pattern but frankly it's at an absolute level which I'm not happy with.

Eric Katzman, CFA: Okay.

And then last question I guess for maybe for Steve or whoever can answer this one.

I guess a year, two Cagneys ago, I think it was Randy Darcie who got up and talked about the long-term productivity effort, I think, I can't remember exactly, $800 million or $1 billion over the next eight or nine, ten years.

And we've seen in, I guess, in three of the last, whatever it is, eight or nine quarters where when General Mills does not get the volume growth that you expect, the negative leverage across the fixed cost base is pretty negatively significant and you've been upfront about saying that.

And I guess to the extent that we look forward and we get back to Randy's comments about productivity, if we as investors question the 5 to 6% top line growth and I think it was about 4% volume in there, should we then expect less productivity savings as a result?

I mean how much of this incremental productivity savings going out from his efforts are really tied to out performance on volume?

I will take that one, Eric.

The productivity savings that Randy outlines is all related to specific productivity enhancing actions, it can be the installation of technology, it can be consolidation of production and internally bringing a contract production internal and a whole raft of things that are specific.

They are not based on just some hope that the volume will grow and absorb more.

I think what has happened on a short-term basis is when we've had volumes that come in below our expectations as we have in this quarter, that creates a fixed cost absorption issue that raises our supply chain costs which really is kind of unrelated to that, that figure that Randy outlined, Randy's figure.

We are still, we track very consistently the productivity building efforts, the progress of those and the cost savings that they're generating and we are on track in those areas but is being offset by the impact of weaker volume at least in this quarter to a degree.

And the challenge there is to get the volume in line with our expectations.

Eric Katzman, CFA: Okay.

Then, Steve, if I could follow-up last question.

Have you considered, I guess just to be blunt about it, like asset sales of some of the company's or businesses that I just tend to doubt are performing well, for example, I think you are the number five or six grain miller in the country, still.

And I can't imagine that that business in particular is doing well with the low carb environment you had talked about, frozen vegetables, I'm sorry, canned vegetables, when the deal is closed.

And with operating earnings coming in lower than expected, are there any thoughts to use proceeds from asset sales to shore up the balance sheet any way?

The subject of our portfolio and whether we have any assets that would be more valuable to someone else than to us is someone we review periodically, Eric, and so the answer to your question is yes.

That's not necessarily a new thing but it is certainly something we do, we're very sensitive to, and we do it particularly as we go through the planning cycle.

So as we look to the plan for next year, one of the questions we'll be asking is, is there, are there any things that we should be doing in this regard because the businesses have more value perhaps to someone else than to us.

By and large, the U.S. retail businesses are more valuable to us than they'd be to anyone else because they build off the infrastructure, they absorb the cost of the infrastructure we have and they either throw off a lot of cash or they have the potential to grow.

And so those, we look at them each time we go through this exercise, make an assessment but because of the way we're structured there isn't typically a number of things that stand out.

But I will say that is a discipline we do go through.

Eric Katzman, CFA: Okay.

Thank you.

The next question comes from the line of Art Cecil from T. Rowe Price.

Please proceed with your question.

Good morning.

Do you all see a difference between earnings guidance of $2.75 and guidance at the lower end of the $2.75 to $2.85 range?

No.

You don't see a difference?

So whereas in February at Cagney which is five days before the quarter closed, it was characterized at the lower end of $2.75 to $2.85 and now it's $2.75.

The only difference is how you characterize it rather than any real difference, a penny or two?

Yes, Art, that's--.

Okay.

I just wanted to clarify.

It's in the $2.75, $2.85 range.

Right.

But it was characterized at Cagney as being at the lower end of the range and now it's characterized as being right at the bottom of the range and I just wanted to find out if it signaled any difference in the outcome of the quarter, and you're saying it didn't, it shouldn't be looked at that way, correct?

We didn't intend it to.

Okay.

I hate to keep pestering on the guidance for '05 but you all did all bring it up.

You've sort of given us a ceiling for '05 earnings and that ceiling is, don't look for double-digit growth.

Can you give us a floor for '05 as well?

Art, I hate to keep responding the same way but we haven't put our plans together and so other than pointing out the 52 to 53 which maybe it's so obvious I shouldn't have bothered to point it out, that's all I was intending to do, I'm not intending to give ceilings, floors, or any guidance but we will give that you that guidance as soon as we have our plan together.

But we are, as analysts were we now are kind of restricted in terms of what we should look for on the upside and I just didn't know whether you felt comfortable giving us any kind of comfort on the downside and I guess it's too soon?

I think it is too soon, Art.

Based on the fourth quarter if you just make some assumptions, the fourth quarter looking at, if we do 2 cents in one time identifiable items this year, and I think there was a nickel last year, it looks like even if you back out the effect of the extra week which might be 7 cents or 8 cents a share based on the numbers you gave us, that you're still looking for some operating EPS improvement in the fourth quarter, excluding one time things and even excluding the effect of an extra week.

That is correct.

Is that fair?

Absolutely.

Okay.

And the growth would be on the order of maybe 4 or 5% or something like that, which is certainly better than what we are looking at here for the third quarter and so I just wanted to clarify that.

And then as far as the working capital, Jim, I got the impression when you reviewed the charts that you were kind of pleased with the working capital performance.

But the charts all look like core working capital were way above where they've been the last couple years.

That was my point to Eric is that we are pleased if you look at the chart which is in our Web site 15 which is titled "Core Working Capital", it's the line chart.

We are pleased that it is down, we are pleased that it is showing the same pattern that we've seen in fiscal '02 and fiscal '03.

But we're not pleased with the absolute level and even though it's going to improve again in the fourth quarter, we are unfortunately we believe that the growth in working capital will be greater than the growth of sales and that is not the way we intend to run the business.

We intend to have working capital grow with sales or maybe just a touch behind it but that's not going to be the case for this year.

And the big problem seems to be in payables which have been pulled down $175 million over a year ago?

What's caused you to allow payables to come down to that magnitude?

Well, the payables from November to February is consistent with the seasonal pattern of the--.

Yeah, I'm looking at the year-over-year.

Versus years ago they're a variety of factors but perhaps more important is that we made faster payments of trade expense and consequently lower trade accruals.

That was totally necessary I guess?

We felt so but there are other things, other levers we can pull and we should pull.

Okay.

Thanks.

Thank you, Art.

The next question comes from the line of Thomas Denslow from Hamilton Investment Management.

Please proceed with your question.

Good morning, I was, wanted to refer back to a filing in your credit agreement.

From last month you increased the accounts receivable securitization amount from maximum of $750 million to $1 billion.

I wasn't aware you had such a program and maybe you don't in which case why was that portion of the credit facility amended?

Do you plan to start selling receivables?

We don't have any idea what you're talking about.

Hang on for a second.

It's in there.

We have made that amendment. [inaudible] That was just an opportunity that in the facility as we were negotiating better terms in this facility versus the ones that we had.

But for $750 million, that was five-year.

It was set in the new one, those terms, the ability to do that was suggested by the bankers just to add extra flexibility.

We don't have anything like that.

We don't plan on anything like that.

It was just part of improving the terms of the facility over the previous one.

It's just a provision to have that if we were, if we don't use it, we don't plan to use it, it was just sort of tossed in to add flexibility for the five-year deal.

Do you have any kind of securitization or do any AR selling to any affiliated entities?

Internally we have some factoring internally with internal affiliated entities, yes.

How large would that be and does that fall under the notes and accounts receivables that are mentioned in this amendment?

No, it does not fall under that and I'll have to get an answer on what's the size of that.

Thomas, why don't you call me, I'll give you my direct dial and then we'll try and get answers to questions of yours.

I'm at 763-764-2607.

Okay.

Thanks.

That was sort of some arcana.

These are easier questions, stock repurchase program was sort of put on hold until the Pillsbury debt was paid down, the stocks kind of sold off its highs recently.

Is there any chance you might step up and by stock in the near future or perhaps use money to increase the dividend which has sort of stayed at the same rate for quite some time?

We've made two different statements about those two elements of returning cash to shareholder.

As to the dividend we have had said we would not increase it through this fiscal year.

We have said that after this fiscal year we would return to the question of what should our dividend be and the rating agencies and debt holders are aware that we have made no pledge beyond this year as to what we do with the dividend and we have said that we will be considering that as we do our business planning for next year.

In terms of stock repurchase, by contrast we have said to the rating agencies, we have said to our debt holders that we have no plans to make stock repurchase prior to our pay down of the $2 billion of debt which we intend to do through this year and then over the next two years.

As we've said we expect to pay down $450 million of the $2 billion this year and the balance over the next two years prior to returning to stock repurchases, another alternative to get cash back to shareholders.

Thanks a lot.

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

The next question comes from the line of Christopher Muir from ABN AMRO.

Please proceed with your question.

Actually, I have some easy questions for you.

I was curious to find out if you could give us, I think you said $102 million in depreciation and amortization, is that correct?

Right.

And then can you tell us what the total cash flow from operations was?

I don't have the cash flow statements finished but you ought to assume that cash from operations is positive and we'd estimate that it's probably going to be at least as good as last year's third quarter, maybe a little better.

Would you consider releasing an 8-K as soon as you do have it finished?

Well, yeah, it will be our 10-Q which we'll make in early April.

Okay.

Thanks very much.

Thank you.

Miss Wenker, I will now turn the call back to you.

I think we are done here.

I'll just say I know there must be some follow-up questions out there.

Please give me a call and we'll try to get them answered.

Thank you all 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.