通用磨坊 (GIS) 2005 Q3 法說會逐字稿

Welcome to the General Mills third quarter fiscal year 2005 conference call.

During the presentation all participants are in a listen-only mode.

Afterwards we will conduct a question and answer session.

At this time if you have a question please press the one, followed by the four, on your telephone.

As a reminder this conference being recorded Tuesday, March 22, 2005.

I would now like to turn the conference over to Ms. Kris Wenker, Vice President of Investor Relations for General Mills.

Please go ahead.

Thanks, operator.

Good morning, everybody.

I'm here with Steve Sanger and Jim Lawrence.

They will share details of our third quarter results and current business trends in just a minute.

Before we begin, I need to point out that our comments today will include forward-looking statements which are based on our current views and assumptions.

Our 10(K) and 10(Q) reports discuss factors that could cause actual results to be different than our expectations.

I'm hoping you've all seen the press release we issued earlier this morning.

It contains the material information we will be discussing today.

We've also posted slides on our website to supplement the remarks we will make on this conference call, and that includes slides that reconcile reported results with nonGAAP measures we will reference today.

I would like to tackle a reconciliation of our earnings per share results right here up front.

Hopefully most of you have had enough coffee, latte, soda, whatever this morning, and that you powered through the first couple of paragraphs of that release.

But just to be sure, here it goes.

Let's start with the GAAP numbers.

Our reported EPS for the first quarter totaled $0.58.

This compares to $0.50 in last year's third quarter.

Those results for both years included identified items expense.

In this year's third quarter, this was $3 million of restructuring and other exit costs, and another $3 million of associated expense that's primarily accelerated depreciation of manufacturing assets as recorded in the cost of sales line.

Last year's third quarter included restructuring expenses of $5 million.

So identified items totaled $0.01 per share in each period.

This year's third quarter also includes a portion of the book taxes we'll record for the disposition of our interest in the Snack Ventures Europe joint venture.

We announced this transaction during the third quarter and it closed at the beginning of our fourth quarter.

Because we took actions during the third quarter to prepare for that disposition, we need to record a portion of the book taxes in this period.

This totals $45 million, or $0.12 a share.

The gain (inaudible) along with the tax liability recorded in the fourth quarter.

We will also the record sales of Lloyd's barbecue, which was announced yesterday in our fourth quarter.

Finally the new accounting standard for contingent or convertible debt, or CoCo, became effective for us during the third quarter.

This accounting rule change requires convertible bonds to be treated as if they've been converted to nearly (phonetic) issued shares when calculating EPS.

The rule change reduced third quarter EPS for both last year and this year by $0.03.

For those of that are tracking our results before identified items, without the SVE taxes or the accounting change third quarter EPS would have been $0.74 this year, compared to $0.64 last year.

You can find tables with this reconciliation for the third quarter and fort nine months year-to-date in our press release and also in our slide file on the web.

So with that, I will turn the call over to Jim, who will be followed by Steve, then we will open it up for questions.

Jim, you want to start us off?

Thank you, Kris, and good morning, everyone, and thank you for joining us today.

As you've seen in our press release, net sales for the third quarter grew 3% to $2.8 billion.

Earnings after tax decreased 5 percent to $230 million, but that is due to the partial SVE tax liability that Kris just described.

Without that $45 million in tax expense, net earnings would show double-digit growth for the period.

Diluted shares were down 2% year over year, due to the October repurchase of General Mills shares from Diageo.

And so our net earnings per share totaled $0.58.

Our 3 percent net sales growth in the quarter reflects first of all, 2 points of growth from worldwide unit volume.

Another 4 points of growth came from the combination of price, mix and currency.

And I should note that of that total, 1 point was from currency alone.

And then price promotion reduced the rate of sales growth by 3 points to get to that net 3 percent sales.

Looking at our sales growth by segment, U.S. retail sales matched prior year results.

Sales for bakers and foodservice business were up 5 percent for the quarter , driven by pricing and favorable mix.

And sales in our international segment grew 13 percent on good volume growth, as well as favorable currency.

Taking a closer look first at our U.S. retail segment, here's what we are seeing in volume growth.

Yoplait volume was up 18 percent , driven by good growth by Yoplait Light and Go-gurt, along with the introduction of several new products.

New product introduction also contributed to the 7 percent growth in snacks.

Yield's (phonetic) volume was up 5 percent, led by good performance from Progresso Soup and Dinner Mixes.

Volumes in our other three U.S. retail divisions were lower in the third quarter, due in part to various pricing initiatives that we have underway.

Volume for the Pillsbury division was down 4 percent in the quarter as good gains on Totino's Frozen Pizza and Snacks were more than offset by declines for refrigerated and frozen dough products.

As Steve will speak to in a minute, our dough business performed well during the November and December key baking season.

In January we announced list-price increases and higher merchandise price points on select product lines, and this is reflected in the full third quarter results.

Volume for our baking products division was down 6 percent, and here we are raising merchandise price points on selected items.

And finally, volume from Big G cereals was down 9 percent in the quarter, as we work to raise merchandise price points in that category.

Steve will discuss U.S. cereal category trends in more detail in a few minutes.

Consumer take-away for our major product lines was good overall.

Composite retail sales grew 3 percent in the quarter, with particularly strong performance by Progresso soup, while retail sales were up 10 percent.

Yoplait yogurt had sales which were up 9 percent and grain snacks had an 8 percent retail sales increase in the quarter.

Turning now to our bakeries and foodservice segment, volume was down 1 percent for the quarter.

As you know, last year's third quarter volume was down as well during the peak of the low carb diet craze.

So we did have a relatively easy comparison.

Still we are pleased to see improving trends for this business.

Shipments to convenience stores and vending channels continued to do well, with volume up over 20 percent in the latest quarter.

Volume from bakery channels was down 3 percent, but that represents the second quarter of sequential improvement for this segment of our business.

And we are also seeing improvement in our distributor and restaurant business.

Volume was down 5 percent in the quarter, but that compares declines of 11 percent in the second quarter and 7 percent in the first.

So this customer segment is looking better as well.

On the international front, third quarter volume for consolidated businesses grew 9 percent.

This growth was led by Canada, where new products and value-added consumer promotions drove increases on nearly all of our businesses.

And volume in Europe was up 4 percent on growth of Haagen-Dazs ice scream and Old El Paso dinner kits.

We saw continued good growth in China and India, which drove a 10 percent increase in the Asia-Pacific region.

In Latin America, Nature Valley granola bars helped to fuel a 12 percent volume growth in that region.

Our international joint ventures posted a combined volume growth of 2 percent in the quarter.

Operating profits grew 6 percent overall in our third quarter.

We saw profit improvement in all three of our business segments.

U.S. retail profits grew 3 percent and international profits were up 14 percent.

However, we feel the most significant improvement came in our bakeries and foodservice business, where food quarterly profits more than doubled, thanks to improved volume trends, mix and pricing.

In part , our operating profit results reflect improving gross margin performance.

As you know, commodity prices and other input costs are pressuring our gross margin this year.

The combination of some commodity cost moderation and productivity savings has helped narrow the huge yield gap in gross margin from 260 basis points, which we saw in the first quarter, to just 50 basis points in this third quarter.

We think we may give up some ground in terms of the margin gap versus last year in our fourth quarter, but this would be due to the rising energy costs that we are seeing as well as some increases in overall supply chain rates.

SG&A expense in the third quarter was very comparable to last year's.

Through nine months, our total SG&A expense is down slightly.

But, remember, last year's total did include $34 million of Pillsbury merger-related costs.

So, on what we would see as a like-for-like basis, our absolute expense through nine months is up slightly.

As for the other income statement items, interest expense was $16 million lower in the quarter.

Now, in part, that is due to lower debt levels.

But the decrease also reflects $12 million of interest income, which resulted from the resolution of certain tax issues in the quarter.

Our tax rate for the quarter was 46.5 reflects, which reflects the impact of the SVE taxes which Kris mentioned earlier.

Excluding both SVE and the identified items, the effective tax rate would be 34.9 percent.

And, finally, income from our joint ventures was up $8 million in the quarter to reach $23 million.

We would expect our fourth quarter JV income to be down year over year, since we will not be recording for SVE profit beyond the February 28th close.

We turn now to the balance sheet, and first the core working capital items, where we saw improvement in both accounts receivable and inventories, year over year.

Accounts payable decreased in the quarter, and as we discussed a number of times before, while this reflects several factors, most importantly, it is lower trade payables as some customers shift to off-invoice trade billing.

The third quarter balance sheet also shows that we continue to make excellent progress toward our debt reduction goal.

Total debt as defined by GAAP is down nearly $800 million from where we began the year.

As most of you know, we are tracking our progress in terms of reducing net adjusted debt, a measure that we use that includes the debt equivalent of leases, certain minority interests and is then netted of most cash and marketable securities.

On that measure, we have paid down over $500 million of debt through the end of the third quarter, and a total of $1.1 billion, since the end of fiscal '03.

And as you recall, our target debt reduction was $2 billion on that basis.

As the fourth quarter began, we received the net proceeds from our disposition of SVE.

And, as we told you, we intend to use this carb to pay down additional debt.

So here's where we are through the first nine months of fiscal '05, and again these are all GAAP numbers.

Net sales are up 3 percent to over $8.5 billion.

Earnings after tax are flat.

Our shares outstanding are down 1 percent, and EPS is up 1 percent to $1.94.

If you exclude identified items, the SVE taxes and the accounting change, our EPS would be up 8 percent to $2.28.

These bottom line results are consistent with our targets.

However, I should say that we are not happy with the unit volume and net sales performance of our U.S. retail business through our latest quarter.

As you've seen, we are not yet realizing benefit to our net sales from the pricing actions that we've taken.

That's because our trade spending and coupon expense, when combined, have grown faster than our pre-spending sales through nine months.

We need to get better efficiency from our price promotion spending and we need to start seeing that in the fourth quarter.

We also need to generate a better mix of sales than we did in the third quarter when our cereal sales were particularly weak.

And, finally, we need to see improvement in overall volumes.

On a reported basis, our unit volume for U.S. retail will be down in the fourth quarter because, of course, last year we had the extra week.

But on an apples-to-apples basis, we need to see growth in the -- we need to see growth in unit volume at better than the 1 percent rate that we just posted in this third quarter.

These execution challenges will be areas of focus for us in the fourth quarter.

And Steve is going to discuss these points and our current business trends in some more detail , so I will now turn the call over to him.

Steve?

Thanks, Jim, and good morning, everybody.

As Jim has just summarized, our performance through the first nine months is in line with our expectations.

Exactly where we finish this year will depend on a couple of things.

First, the progress we make in balancing net price realization and unit volumes in our U.S. retail business.

And then second, we will need to deliver another quarter of good profit stability from our bakeries and foodservice segment.

And we will need to do so despite the fact that we have one less week of business in this year's results.

I would like to share a bit more about both of these factors, beginning with the net price realization in our cereal business-- in our U.S. business, and I will start with cereal.

Back in July we announced list prices on our Big G. cereals to offset increased input costs.

Our major branded competitors also raised list prices last year.

And as you can see on slide 19, those higher prices were largely reflected on grocery shelves by October.

Slide 20 shows you what happened with market share trends from that October reflection point forward.

As you can see, the big market share run-up over this time period has been the price brands, that's the private labels and the low-priced items.

So, and they've had a dollar share increase of more than 1 point.

You can also see the relative performance for Big G and the other branded players in this latest five-month period.

Now as we moved into calendar 2005, Big G has taken actions to begin raising merchandise price points.

As we've been discussing with you, this is the second and key step to net price realization.

And the trick here is balancing these higher price points with the impact of volumes.

In the short term, you've been able to see the impact in the Nielsen data.

Our merchandise price per unit is up.

Some of our branded competitors have shown directional, although smaller, moves up in merchandise price points as well.

Others have not.

And the price brands really haven't moved.

Those trends are having a noticeable impact on our incremental volume trends, that is, the volume attributable to merchandising activity.

Slide 22 shows you that incremental volume for 3 of the 4 major branded players is down through the first two months of this calendar year.

And incremental volumes for price brands is way up, as these brands have benefited from increased merchandising activity by certain retailers.

We need to see a much better balancing of merchandising performance and unit volume on net sales realization for Big G going forward.

And we will be focusing our sales and marketing efforts on this objective in the months ahead.

Over the longer term, we continue to believe that bringing health news to this category is key to sales and volume growth.

Since January, our cereal marketing efforts have been focused on letting consumers know that all Big G cereals are either good or excellent sources of whole grain, and this consumer-directed marketing has included national TV advertising, couponing and instore sampling.

And we've seen results from that.

The Big G. baseline volume, that's non-promoted volume, is up for the two-month period since we've been communicating this news, and that is a stronger trend than we have seen before that.

Our fourth quarter plans include additional couponing and advertising that will tie directly to the USDA's update of the food guide pyramid.

Let me turn now to discuss some of our seasonal businesses beginning with refrigerated dough and desert mixes, for which sales for these categories peaked during the November-December, holiday baking season.

And for that holiday period, retail sales for Betty Crocker desert mixes increased 12 percent, led by cake and frosting.

Pillsbury refrigerated dough also had a good season, with retail sales up 4 percent. led by cookies and pie crust.

Fourth quarter activity on these businesses will be concentrated on the Easter holiday and merchandising tied to the call for entries in this year's Pillsbury Bake Off contest.

Third quarter sales growth for our meals division was led by good performance on Progresso Soup.

The chart on slide 25 takes the longer-term look at Progresso's dollar share performance.

Last fiscal year we gained significant market share with the introduction of our Rich and Hearty line of soups.

Our rolling twelve-month share grew from 25 percent at the start of the year to a peak of 26.6 percent in December of 2003.

And since then we've essentially maintained that dollar per share increase, even though we increased list prices last fall and the competition did not follow until this month.

As of February, Progresso's twelve-month dollar share is up roughly 80 basis points to 26.9 percent

Helper dinner mixes also contributed to meals division's strong growth in the third quarter.

Distribution gains on our core Helpers line drove baseline volumes up 7 percent and dollar share for our entire dinner mix line is up seven points in the third quarter.

Turning to the dairy case, health and weight loss news is driving growth in our yogurt category.

Volume on our core cup lines grew 8 percent in the quarter, and particularly the weight loss message on Yoplait line has been a hit with January dieters, but they have to resolve this year to get back to diets that emphasize healthy, low calories foods that taste good.

Third quarter retail sales for Yoplait Light were up 23 percent..

Our good unit volume growth for the Yoplait line in the third quarter also reflected introductory shipments of several new items.

Yoplait Healthy Heart yogurt containing plant sterols (phonetic), that have been proven to help lower cholesterol when part of a low fat diet is one of those factors.

Advertising and instore sampling began on that line early this month.

And we've made it easier to buy and store multiple cups of Yoplait with our new fridge packs.

The strong third quarter volume growth in our snacks business reflects a good contribution from new products as well.

Nature Valley Pecan Crunch bars and Sweet and Salty granola bars contributed to the 8 percent retail sales increase for grain snacks in the quarter.

We also recently introduced a first one-step microwave cheese popcorn.

Heretofore, you needed to add the cheese after the popcorn popped.

You don't need to do that with this one, it's already in the bag.

And with these new flavors, third quarter retail sales for our our Pop Secret brand grew 5 percent.

So we are pleased to see the good consumer take-away trends across a number of our product lines as we move into the fourth quarter.

But our focus now must be on achieving better unit volume growth, better mix and increasing net price realization for our U.S. retail business.

Turning to our bakeries and foodservice segment, we are quite encouraged by the performance that we've seen on this business in the latest quarter, and we are working on carrying that momentum through to the end of the year.

In bakery channels, our SKU reduction efforts have helped us to focus on our most profitable products, and we have had good success with new product introductions, such as our improved cinnamon rolls that stay fresher longer, and our new frozen cookie format that reduces waste for operators.

We're also beginning to benefit from improving trends in restaurants, as we've gained additional business from several of our quick service restaurants customers.

And convenience stores continue to be a good growth channel for us and are getting more of our products, particularly cereal product, on store shelves there.

Finally, our international business is continuing to perform well.

We expect continued good growth driven by promotional events and new product introductions in our fourth quarter.

In Canada we've had several merchandising events planned in the final quarter, including a tie-in with the May release of the Madagascar movie from DreamWorks.

In Europe and the Asia-Pacific region, new product introductions on our large global brands, such as new flavors of Haagen-Dazs ice cream and Old El Paso dinner kits will be contributors to growth.

In Latin America, they're focusing on continued good performance on local dough brands, such as La Pepino (phonetic) pasta in Argentina and building on the success of our Nature Valley granola bars across the region.

So, let me summarize our perspective on fiscal 2005.

Through nine months, our reported earnings per share results are in line with our expectations.

And we are ahead of schedule on paying down our debt and strengthening our financial ratios.

On reported performance for the full year will be different than the guidance we gave you back in June.

First of all, that guidance didn't include either the accounting rule change or our recent dispositions of SVE and Lloyd's.

As we announced in our press release this morning, we expect our fourth quarter results to include several nonoperating items.

The largest of these will be the gain from our disposition of SVE.

We also expect to record additional and identified items expense.

And this may include some further restructuring actions that could cause annual identified items expense to exceed our prior maximum forecast of $0.15 per share.

As a result of these factors, we expect our reported EPS for 2005 will exceed the $2.75 to $2.80 range that we provided back in June.

As for our underlying business performance, we continue to target results consistent with the implied target range of $2.85 to $2.95 that was associated with that earlier forecast.

Now, exactly where we finish will depend, as I said before, on the extent of our progress in better balancing net price realization and unit volumes in U.S. retail, as well as on delivering another good quarter in bakeries and foodservice.

We are currently working on our plans for 2006 and will share those with when we report year end results on June 29.

But I can give you a general sense of our expectations for the year at this point.

We expect net sales growth next year to include meaningful carry-over benefits from this year's action to raise both list and merchandise price points across a number of our businesses.

We expect input costs will rise again next year but at a slower rate than we've been dealing with in fiscal 2005.

And we expect productivity initiatives planned for the next year to offset much of this cost inflation.

With the sale of our interest in SVE, we will be paying down significantly more debt this year than we had originally planned.

As a result, we expect our interest expense to be lower next year.

We also expect to renew share repurchases in 2006.

And finally we believe our business portfolio is particularly well-positioned to leverage recommendations in the new dietary guidelines and to respond to consumer demands for foods that offer health and weight-management benefits.

We also see terrific opportunities to innovate to add convenience to our products for consumers around the world.

As I said, we expect to share the details of our 2006 outlook with you on June 29, when we will host an investor meeting in New York.

I think that concludes our prepared remarks for this morning.

So I will now ask the operator to open up this call for your questions.

Thank you. [Caller Instructions].

Our first question comes from the line of David Adelman from Morgan Stanley.

Good morning, everyone.

Steve, first I wanted to ask you, I realize you've highlighted in the past the need and the challenge to increase merchandising price points in the U.S. cereal business.

But it seems like versus prior periods of trying to execute this, you are finding it more difficult this go-around, say versus two years ago.

And I'm wondering what, if anything, has changed?

Why does it appear, at least initially, to be somewhat more challenging?

Well, I think the move this time, consistent with the list prices we've taken earlier, is really not-- this is the first time we've significantly focused on this in recent memory.

And we expect it to be bumpy at the outset.

At the moment that you are making the move, we anticipated that there would be some bumpiness.

And I think we expected to get through that, but what I'm saying is we really need to show progress against that in the fourth quarter.

If you looked at the-- I guess the other thing I would note, that if you just look at the Nielsen figures, it looks like we moved up more directly than our, most of our competition did.

Now that, I think, you know, may even out as we get further into the year.

But at least for the months of January and February, our increase in merchandise price points was greater than the competition.

And also, Steve, as a follow up, could you be a bit more specific about what it is that you and the sales team are going to try to do during the fiscal fourth quarter to improve mix to drive stronger volume growth. and to realize better pricing?

Not just in cereal, but across the U.S. portfolio?

Sure.

Well, I will start with cereal because cereal is a very important part of this equation.

We have strong instore merchandising offers planned around both the whole grain next wave of information, as well as other good offers.

Not necessarily discount price point offers but good instore merchandising programs that we think will drive a better volume performance on cereal.

And then we have good bake-off related promotional activity on other good margin businesses like refrigerated dough.

Our Yoplait business, which is another strong mix item, will help us as it continues to grow.

So I think our goals are based around the believe that we can improve our mix in the next quarter and show a better rate of volume growth than we did in Q3 in our U.S. retail business.

Okay.

Thank you very much.

Thank you.

Our next question comes from the line of Jonathan Feeney from Wachovia Securities.

Please proceed with your question.

Good morning, everybody.

First question.

I guess, philosophically, Steve, how much share gain from price brands?

I mean, they are off to such a great start January and February, is tolerable for, you know, for yourself and for, in your experience, your competitors, before you have to start thinking about pulling back and holding off on merchandise, fully merchandised price increases?

Well, I would say that we believe that the price brands are experiencing the same cost pressures that the branded players are.

And that, over time, those will cause those price gaps to return to more normal levels.

The -- and we are prepared, as we have said to experience some pain and bumpiness in the transition period.

We hope to and have had some success in compensating on the consumer side with baseline growth that reflects our whole grain message.

But it hasn't been enough to fully offset the initial disparity in promoted prices.

But I would say that at some point, obviously, we are in the long-term interested in maintaining and building our value share in cereal.

And so we, and I'm sure the other branded manufacturers, would adjust their plans if necessary if those price gaps remain.

Okay.

Thanks.

And just a question for Jim.

Your incremental debt pay-down of $2 billion, it's great you guys are getting to that singular target now.

And now you are talking about share rep purchases, which I think are terrific.

But any plans beyond the $2 billion to continue to pay down debt or is that-- can we assume now share repurchases and other uses will be top priority for fiscal '06?

Well, we will describe our priorities for fiscal '06 in New York in June when we see where we are as we've ended the fiscal year.

What I can say is that we made a very public commitment to get down to a $7 billion net debt level, to pay down $2 million on the Pillsbury acquisition, and we committed not to make significant share repurchases prior to that.

What we are saying now is that we see that in the horizon, that $7 billion net debt level.

And, consequently, once we pass that, we will be in position to enter into share repurchases.

That's not to say that we won't pay down some additional debt along the way.

We intend to improve our ratios as we go forward over the next one or two or three years.

We want to get back to an A1-P1 short-term rating.

We want to get back to a single A long-term rating.

And we will do that by improving our ratio and that will come both from our operating improvements and it could come from a little bit of debt pay-down over the next few years.

But what we will be able to do, once we hit that $7 billion mark, is to return to what has been a key financial policy for us, which was to use share repurchases to return value to shareholders.

Okay.

And could you just as a follow up, could you take a stab, I don't know if you're comfortable doing this, but if you were an A1-P1 rating now, what potential advantage in terms of total company financing costs there would be?

Well, I would not care to speculate on that.

We have actually been quite pleased that the-- that the cost of our borrowing, which may well reflect markets on (inaudible) getting to there, and so we don't want to do anything to change that anticipation.

But we simply feel most comfortable where we're at, A1-P1 having the access to commercial paper market, because our goal is to be 50 percent short and 50 percent long.

That's our long-term goal of managing the debt side of our balance sheet.

Okay.

And just a housekeeping question.

You have a nice slide in here showing cereal sales as you mentioned down only 2 percent in terms of retail take-away, but volume down 9 percent.

Do you have-- can you give us a sense what the shipment number was and what the price mix realized in cereal was?

I'm not sure I understand the question.

The shipments were down 9 percent.

That's a sales number, down 9 percent?

That's unit volume.

Okay.

Can you give me a sense of what the price mix factor was in cereal?

No, not off the top of my head.

Okay.

Maybe I could follow up with Kris.

That would be great.

Thank you very much.

Thank you.

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

Please proceed with your question.

Hi.

Good morning.

A few questions.

I think getting back to the cereal issue, you know, when I look at the chart, Steve, it says that you are about a 15 percent premium to private label and about $0.50 a box currently.

And that is the same thing as it was at the beginning of the chart, in terms of percentage and dollar per unit.

So isn't it really not price, but something to do with innovation that's kind of making you lose share?

Or--

I think that the thing that we are calling your attention to is the fact of the change in merchandise price points.

Because what we are seeing in the most recent quarter is a significant reduction of our merchandised volume, a reduction in our incremental volume as relates to merchandising.

And that is something that we have to see, and our merchandise price points, of course, are up.

And they are up by more than the price points which really aren't up at all.

So I think that's the factor that is, in the short term, affecting the January-February period, because that's the thing that has changed.

Our overall share over the period from October forward is off a bit as our prices are up, but the really significant place where we've lost the merchandising impact is in January and February.

Okay.

And then I guess second question is, Jim, I'm not sure I understand the-- I know it's a difficult line to forecast.

But it seems like last year corporate, unallocated corporate was a positive $27 million, versus this year it was-- sorry , a negative $27 million versus this year a positive $22 million.

One, why is corporate expense a positive, and then, based on the calculations, it would be like $0.08 a share benefit.

Can you help me figure out what's in there?

I think this might be helpful, too, Eric.

I will just cite two facts which I think will reconcile most of that unexplained difference and if we need to get into more detail, we can do that later.

Last year we received the final insurance payment which was related to the so-called beef-and-oats (phonetic) handling incident from 1994.

And so that income increased last year's corporate unallocated.

And this year we have recorded more restricted stock expense, which is found in that line, since this is now the second year of renewed stock plans.

You now have two years of restricted stock expensing.

So, just to be clear, on our third quarter numbers that we are looking at here, you've got corporate unallocated income of $19 million for the quarter this year versus $27 million in the quarter last year.

You had $470 million of operating profit from the three divisions , and if you look at the consolidated, it's $ 500 million.

So there's a $22 million gain in corporate expense.

You've got restructuring and other exit costs that are a negative three.

Are you looking at the operating profit schedule that we issued along with the press release?

I'm looking at the difference between your excluding items, your $478 million of operating profit, and then-- and that's on a segment basis, and then the $500 million of operating profit on a consolidated.

I mean, maybe we should go talk about this off-line, but it seems to me that there's a pretty big swing there in corporate unallocated year over year.

Let's talk about that off-line.

And then--

Yes, let's do, but the schedule that should be helping you is the one in the press release.

That is the operating segment schedule and that goes from the $478 million that you're referencing, operating profit from the division, takes you through the corporate unallocated restructuring and interest to get you to an earnings before- ax.

That's the one we're going to need to reconcile to.

Okay.

And then, just lastly, how much of that JV income of $23 million, which was a lot more than I thought, was due to SVE, since that's not really an ongoing income?

We don't break out profits by individual entities, so I am not going to do it for SVE.

But, I mean, isn't that really a discontinued operation?

I mean, I'm not-- it's not clear to me why, other than maybe one month, why that would even be included in JV income?

Well, we owned the business up until February 28.

Okay.

We closed the deal the-- right at the start of the fourth quarter.

Okay.

All right.

We will talk off-line.

Thank you.

Thank you.

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

Please proceed with your questions.

Good morning, everyone.

Hi.

Very good results today.

The first question I had for you, Jim, could you give us a quick rundown again on contingent convertible?

And, really, kind of an economic effect, and then quickly, what's going to happen in October.

I would be happy to, David.

As you know, we have $1.5 billion of contingent convertible debt, which we sold 2.5 years ago as partial financing for our purchase of Pillsbury.

We did that because we knew the highly cash-generative nature of the business we were buying was going to throw off a lot of cash and we wanted to have debt ratio that was matched up against the cash flows that we had.

So this is a debt which will come due in (inaudible) in October after three years.

Come due in the sense that it can be put to us or we can call it at that point.

We can also let it remain in place.

But what we have said is it is our intention, come October, to redeem it either with cash or with stock.

Now, as to the economics of that, there are two parts to it.

The first is that when we set this up, we decided we would hedge ourselves against the possibility of actually having to issue new equity, because we had a ready seller of equity in Diageo.

And so we struck a deal with Diageo and we bought a call on an amount of shares which would fully cover that contingent convertible, and that struck at a price of $51.56.

And so we can call on that stock from Diageo or we can use that stock on to fulfill part or all of the contingent convertible.

Now, on the other hand if for some reason our stock price were below that and we do not want to make that call from Diageo, we can simply pay it off in cash.

Now whether we pay it off in cash or whether we use the stock, we would have to buy the stocks.

We are going to need cash to do it and we would-- we anticipate now that the place we get that cash would be in the commercial paper market.

We would expect by that point to have little or no commercial paper, and we would be able to fully fund that conversion with commercial paper.

And so the economic impact, if we were to do that, would be would be that-- whatever the commercial paper rate would be, we would be paying that instead of the 2 percent rate that we are currently paying on the CoCo.

But the one thing which is clear is that we will not be issuing new stock, and hence the accounting treatment for contingent convertible we find to be particularly unhelpful relative to our situation.

I mean, we do have a very unique situation, in that it's completely covered and that's why a number of you have decided to sort of put that accounting to the side.

Next question is on foodservice.

When do you expect volume growth?

Well, I'd say that the sequential trend we are seeing on volume is encouraging to us.

Now we've got a thirteen-week quarter comparing to a fourteen-week quarter in-- coming up.

So that's a particularly difficult comparison to see volume growth.

But I will say the sequential trend of improvement is continuing as we go into the fourth quarter.

And that while we may not see it there, I would hope to see it next fiscal year.

And then can you say, Steve, that you are on track for profit stabilization?

Through three quarters, I can say we are.

We are even and the strong growth in Q3 brought us to stable.

We've got to maintain that in Q4 where we've got one less week, and that's the challenge.

Moving on to cereal, is Kellogg's gaining share in the non-measured channels?

We can only really talk to the channels that we measure.

We can see what's going on in Nielsen, we can see what's going on, we can measure Wal-Mart's performance through the Wal-Mart panel data that Nielsen provides.

And you can see the share trends there.

We really have a harder time saying what they might be doing outside those channels that are measured.

The perplexing result here is that Kellogg reported last week that their first quarter was going quite well.

And it would seem that your cereal performance and volume down 9% in the quarter doesn't seem to track with Kellogg, and I'm simply trying to reconcile.

Is there anything else you might be able to tell me that could be helpful?

Well, I don't know what they said about their U.S. cereal volumes.

The data we have on share would suggest that they have lost some ground since the prices went up in October.

But they have a big international business.

They have a positive currency.

So some of that stuff may be factoring in.

Maybe one final question.

How long do you expect will go by before we see a private label price increase in cereal?

Do you have any sense?

I wish I knew.

I mean that's-- I don't think that's one we can predict.

You would have to ask them.

Okay.

Super.

Thanks a lot, everyone.

Thank you.

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

Please proceed with your question.

Good morning, everyone.

Steve, just a question on the efforts to raise your promoted prices on cereal with the grocery channel.

Could you give us a little color on how that's going?

I mean, I've heard from some cereal buyers from some of the chains that it's really tough to move off things like the two boxes for $4.

If you could kind of give us a bit of a little progress report there?

Well, I think that-- you know, that challenge that you are out lining is a big factor in the quarterly volume that you saw.

Whenever you make a change from a merchandise price point that has been in place in a category for some time, there is a period of adjustment.

And that's what we are going through now.

But the fact is that retail prices have gone up, so that makes the discounted deeper at 2 for $4 than it was before.

And that-- I think for price realization to come to the category, those prices have to move upwards.

What we have tried to do is combine-- with a higher future price target, we try to combine other good merchandising ideas, plus the strong baseline stimulus of whole grain and good new products like Chocolate Lucky Charms, to try to bring the overall merchandising opportunities in the category going forward, to a level that retailers can continue to get growth in their cereal categories, even with higher merchandise prices.

But I think retailers do swallow hard when they've been advertising something for $2 and now they advertise for $2.50.

They are concerned that that doesn't look like an attractive price and it takes awhile for the market to adjust to that.

I would add two things, Terry.

When we raise prices back in the summer, we knew this was going to be a challenge and part of the challenge we saw was how consumers would react to this.

I think that overall inflation in the economy has been such since that time and rising gas prices especially.

That I think there's more of a sense in the market today that the prices are going up.

So that is, you know, while it has a downside in terms of input costs, it does change the environment a little bit from where it has been.

And in fact, we have gotten, and have persuaded the retailers to merchandise at new price points and with some other merchandising approaches that Steve has mentioned, we actually have seen reasonable consumer off-take.

It's not being so much the consumer not being prepared to pay at the higher merchandise price.

More a reluctance of retailers to attempt to do it.

Okay.

And just on the whole grains front, too.

I know it's still kind of early days, but there are clearly hopes that this could be another one of those nice periods where health news does lift the category.

I guess we are about three months into it now.

Give us your characterization of what, if anything, you've seen that the consumers are really beginning to look at this and perhaps by cereal in greater amounts than they were maybe a year ago?

Well, the couple of things I'd say is we track our baseline performance, which is a non-promoted volume, and that has definitely shown a more positive trend since we started the whole grain campaign.

The other thing we noticed at the outset, and it happened fairly quickly, was in retailers that don't do high-level merchandising, like club stores, for example, you saw some immediate response where the only driver is the kind of baseline off-take when the whole grain message hit.

I do think, though, that the ability to see a category growth that we think ultimately come from this is being muted at the present time by the countervailing effect of higher merchandise price points.

Certainly it is for us and I think, to a degree, for the category as a whole.

The good news though is that this whole grain effort is not a short term thing.

It's something that will be there for consumers continuously and we will get more emphasis from nutritionists, from the USDA, the food pyramid, and so forth, as we go forward.

So I think it's something that can have a pretty good long-term set of legs.

Okay.

And just on that one point, the baseline, can you give us just an order of magnitude as to what that increase was?

It's a matter of a couple of percentage points.

But that's significant for us.

Okay.

Yes.

Thank you very much.

The next question comes from the line of Judy Hong from Goldman Sachs.

Steve, I'm just wondering, Steve, if you can give your assessment of the performance of your new product introductions this year.

I think you started out the year with relatively strong pipeline of new product, and I think there is some optimism that these new product introductions could potentially offset volume impact as a result of the-- some of the price increases.

Do you think that the value proposition offered by these new products really didn't connect with the consumers or really the merchandise price that's really affected your performance in some of your major categories?

To answer your initial question, I feel quite good about the performance of our new products this year, starting with the cereal category.

Our market share growth attributable to new products is one of the bright spots of our cereal business.

Chocolate Lucky Charms is doing very well.

The three reduced sugar cereals are still holding their own that were introduced back in the summer.

The Fiber One product is off to what I consider a good start for an adult cereal.

Adult cereals tends to start slower than the kid cereals.

Compared to years past our cereal contribution is quite encouraging to us.

I think that the issue you are seeing in cereal, again, I just repeat it, is a line life issue related to a move up in merchandise price points off of what had been basic tool for $4 to something higher than that and the period of adjustment that relates to that.

But the other stuff in cereal, the baseline, the new product shares are quite good.

Across the rest of our line I think we are getting very good momentum out of new products.

I cited I don't plate where I don't play where you are seeing growth and contributing to that in snacks and particularly in the recent quarter we are getting a very good contribution from new products, Yoplait.

Our refrigerated dough, refrigerated dough business, perfect proportions that has been growing for the first time since we acquired Pillsbury.

I think when all is said and done we total up the year are going to find that the new products were a very positive contributor to the performance this year and helped us get through a time when we had some of the more significant price increases that we've experienced in the last decade.

Thanks.

For Jim, can you clarify whether the $12 million interest income that occurred in the third quarter was really one time in nature and they really shouldn't see any impact in the fourth quarter?

Yes, we certainly can.

What it was is tax issues were, where we will record for book purposes taxes but we will file at a tax return saying we don't zero this tax and we will discuss it with the IRS over time and finally it's resolved and there are a series of these which go back as far as 1991, 1992.

So it's quite one time in nature.

Okay.

Thanks.

You're welcome.

Thank you very much.

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

Good morning, everybody.

Jim, if it's totally one time in nature why didn't you call your operating number 72, not 74, when it clearly is 72?

Hello?

We don't -- the operating number is our point of view on that and we offer that up.

But if you want to deduct it that's certainly something you can do.

Just to make sure my math equals your math, when you are subject suggesting this 285, 295 operating number, are you suggesting a 59 to 69 4Q or is my number wrong?

We are not giving quarterly guidance.

We are simply sticking with the guidance that we gave for the full year.

I know, Jim, but when you give full year guidance and we only have one quarter left you are kind of giving quarterly guidance, aren't you?

You can do it this way if you like.

Help me with the math.

We say that nine months including identified items the SVE tax and accounting change we are at 228.

Okay.

I think I can get home from there.

And just on the shipments versus take a ways, I guess what you are saying is for the nine months you've basically, you've shipped what you've sold but I guess, Steve, there was a, this quarter you did less I guess that implies in the second quarter you did more.

Is that just kind of normal, is that just kind of normal moves or is this this year a little bit different in terms of retail inventory levels?

It just seems a lint more up and down.

You follow that?

I think the general trend is quite consistent with normal mules.

We always build inventory in the second quarter, retail inventories because that's such a heavy merchandising period for the seasonal item.

We end our second quarter at the end of November.

You have the Christmas holiday merchandising and so what happens is retail pipelines build through the first two quarters and then come down over Q.s three and four.

The other factor I would say this year is that whenever you had-- you have a reduction in merchandising, because the big-- where there's a difference between shipments growth and take aways and cereal.

And it is not unusually when you have a change in the level of merchandising to have that affect the retail inventories, retailers will-- your shipments-- when you are increasing merchandising tends to go a little faster than the take away.

And here where our merchandise-- that many hasn't been as much-- been as much inventory in support of merchandising events going in.

So, the shipments have come down a little bit more.

So I would say there's nothing that I see in my judgment that is particularly unusual about the patterns this year.

They are following the same seasonality and general patterns that we've seen in the past.

Just my last question, you've done a good job over the last year of kind of turning around Pillsbury USA.

This is not I guess the biggest seasonal quarter for the business.

But it did take kind of a step back in this quarter.

Can you just kind of go down a little bit more why it took a step back and whether or not your concern that this kind of momentum you've built in the last year has been broken?

Well, we think, we tend to focus our synergies very much on the holiday baking season for, in the fall for Pillsbury USA and we had a strong performance there, as I noted.

Now we had a volume quarter, we had a decline this quarter but I think we are going to have a good fourth quarter on this business.

Easter is a good merchandising period for Pillsbury USA.

What did happen is we increased prices on our refrigerated dough in January.

In other words, we had a very strong performance through December and then we announced price increases on dough in January.

And merchandising price points adjusting there.

And so that has affected our January, February business.

But what we are hopeful that's what we will see in that as we get into the fourth quarter.

Thanks a lot.

The next question comes from the line of Philip Salles from CSFB.

Do you have depreciation number for us for the quarter?

Say it again?

Do you have the depreciation number for us already?

Depreciation, hold on one second.

Okay.

109 was the depreciation and amortization for the quarter. 330 through nine months.

My second question, Jim, in light of your comments about targeting of 50% fixed versus floating rate mix of your debt portfolio.

With the proceeds coming in from the asset sale of SVE, are you still going to pay down commercial paper?

Or might you actually call some of your more expensive debt as part of that exercise again, to achieve 50% floating rate debt on a longer term basis?

Let me just repeat what our longer term goal which is to get back to 50% long, 50% short.

The immediate use of the proceeds from the SVE sale were to pay down all of the commercial paper that we had outstanding.

And then the remainder sits as cash.

And our long-term goal is to get back to 50/50.

Finally, Jim , can you share with us a lint more about your current hedging strategies for fuel, please?

Thank you.

Yes.

We go and lock in our fuel costs for the fourth quarter and we will be making judgment over the next months whether we should by ahead at prices available or should we wait and by in the market as we end the year.

We have not come to a definitive resolution of that.

Is that a significant component of your cost structure, Jim, fuel?

It's not the most significant input that we have but it is a very, an important input both for the logistics of moving the products around as well as for packaging and it certainly has an impact, has had an impact on our costs this year.

Thanks.

I think we have time to take one more, operator.

Our final question comes from the line of Chris Crowley with A.G. Edwards.

Thanks.

A couple of quick questions then.

First on the cereal division, just want to take John's question one step further and say that. in this quarter, given the shipment patterns and the consumption patterns, there was a discrepancy in volumes.

Is that usually cleaned up over one quarter?

Because it's lasted into the fourth quarter, first quarter of '06?

I'm not sure I want to get into predicting all that kind of thing, Chris.

But I would say that, to the extent that we can stimulate the right kind of merchandising support, that should even out.

I mean, the reason that we typically see where you have a decline in merchandising cases like we saw in Q3, is that the shipments fall faster than the consumer take-away does.

And our goal is to see an improvement in the volume trends in Q4.

And so I think my expectation would be you'd see considerably less of a divergence there.

Just divergence.

Were your marketing expenditures up in the third quarter and is that maybe a solution?

Not promotion but consumer directed marketing would that be a solution for the fourth quarter trying to get some of this.

Marketing expenditures in total when you include couponing trade and consumer were up and advertising were up in the third quarter.

And the timing of it in the fourth as well, so we are going to do what we can to reverse that, Chris.

Okay.

Just last question on the divestiture that was announced last night, will that have the same tax efficiencies that the sale of SVE joint venture had?

For example should we see a good bit of net proceeds coming there through for that guest which you are.

It does have tax efficiencies.

It is a very small transaction itself and the book impact will be negligible.

Thank you.

Thank you.

Thanks, everybody.

That was our last question.

We are done.

Thank you, operator.

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.

Thank you and have a good day.