通用磨坊 (GIS) 2005 Q4 法說會逐字稿

Good morning, everybody.

I'm just going to try and bring us to order here as you guys are working on breakfast.

I'm Chris Weincker (ph).

I'd like to welcome everybody who has joined us at the Grand Hyatt.

I'd also like to welcome everyone who's listening by the webcast this morning.

And I'd like to quickly introduce my colleagues from General Mills.

To the right are Chairman and CEO, Stephen Sanger, Jim Lawrence, our Executive Vice President, Chief Financial Officer and head of International Operations.

I think many of you also know our treasurer, Dave VanBenschoten.

He's in the back of the room, along with Jeff Martin and Sue Tsaraic (ph) from investor relations.

Before we begin this morning, I have to give you the standard reminder that our remarks will include forward-looking statements, based on management's current views and assumptions.

This slide, along with our 10-Q and 10-K reports, lists factors that could cause our actual results to be different than our projections.

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

You can find a copy of that press release on our website, along with the slides we'll be using for this presentation.

So with that, I'm going to turn the meeting over to Jim Lawrence.

Jim?

Thank you very much, Chris, and may I add my good morning to all of you here in the room and also on the webcast.

It's a pleasure to be with you today.

My part of today's agenda will be to review our results for fiscal '05.

Then I'll turn over the meeting to Steve, who will focus on our plans for 2006 and beyond.

And then after our remarks, we'll open the floor for your questions.

So, let me begin by summarizing fiscal 2005.

This was a successful year for General Mills, in several important regards.

First, we met the key targets for sales and earnings per share growth that we outlined to you at the start of this year, one year ago.

Second, we strengthened our balance sheet and improved our financial flexibility.

Third, our total return to shareholders outpaced that of our peer group and of the broader market.

And finally, with this good performance, we reached the end of the transition period that we had mapped out for ourselves, and we did this a full year ahead of schedule.

Now, I'd like to say a bit more about each of these points, and I'll begin with our sales and earnings results.

For the year, our net sales grew 2% to exceed 11.2 billion.

And you all know that we are comparing against a 2004 fiscal year that included an extra 53rd week.

If you exclude that week, 52 weeks on 52 weeks, our sales would have been up 3%.

Earnings after tax were 18% above last year's.

This does reflect a gain of 284 million from businesses, which were sold during the fiscal year, and that was partially offset by an 87 million after-tax expense, which was associated with debt repurchase during the fourth quarter.

And I'll be talking more about each of the those items in just a bit.

So, diluted earnings per share, on a GAAP basis, grew to $3.08, as reported, and that would be up 18% from $2.60 in 2004.

These reported results include several factors, which I outline on this slide.

The first one is the impact of the accounting change for contingently-convertible debt, or CoCo's.

We were required to adopt this new standard in the third quarter and, in our case, it results of the addition of 29 million shares to our total number of diluted shares outstanding, until the convertible debentures, which we issued in October 2002, are redeemed.

As we've discussed before, due to our own unique circumstances, we do not intend to issue new shares to redeem our convertible bonds.

We plan either to settle for cash or with shares, which are currently held by Diageo and upon which we have a recall option.

Nevertheless, our reported result do include the impact of this new accounting standard, which reduced EPS by $0.19 for the year, as you see on the chart.

Our 2005 results also include a net gain of $0.75 per share from two business divestitures, which we completed in the fourth quarter.

Pepsi redeemed our 40.5% interest in Snack Ventures Europe, and we sold the Lloyd's Barbecue business to Hormel.

We used proceeds from these divestures to pay down debt.

In particular, during the fourth quarter, we repurchased $760 million worth of our 6% notes due in 2012.

The cost associated with the debt repurchase totaled $0.23 per share.

And, finally, we recorded identified items expenses totaling $0.17 per share in 2005.

Our original guidance for these expenses, given a year ago, was $0.10 to $0.15 per share.

But, at the end of the third quarter, we told you we were considering some actions that might cause us to exceed that range.

And I suspect that most of you saw the 8-K that we issued in May, which described our decision to relocate a portion of our frozen baked goods production to a different facility and that did, in fact, increase the total identified items expense.

Last June, we provided guidance for earnings per share, excluding the accounting change and identified items.

We also did not forecast the business divestures for debt repurchase.

Our targeted EPS, on that basis, was $2.85 to $2.95, and we have met that guidance with results of $2.92.

Here's a quick reconciliation of the gain from those two businesses sold.

The net pre-tax gain from our dispositions of SVE and Lloyd's was 499 million, and that was recorded in the fourth quarter.

Book taxes -- book taxes on that gain totaled 215 million.

But, remember, we had to record a portion of those taxes in the third quarter.

And, so, for the fourth quarter, which includes the entire gain but just a portion of that tax, we see a bigger after-tax gain than the 284, which we recorded net for the full year.

Let me also give you some more detail on the debt repurchases, which we did in the fourth quarter.

In April, we repurchased 500 million worth of our 2012 notes, through a marketed tender offer.

Then, subsequent to that offering, we repurchased another 260 million of those notes through various open-market transactions.

The costs associated with these buy-backs totaled 137 million pretax.

The net present value of those repurchases, including all fees and expenses, were, in fact, slightly positive.

And this debt retirement will generate interest expense savings for us beginning in fiscal '06.

Identified items expense for the year totaled 102 million pretax.

You see 84 million of that total is reported separately on the income statement as, quote, restructuring and other exit costs, unquote.

The other 18 million is primarily accelerated depreciation for those assets associated with restructuring, and that portion is recorded in cost of sales.

And I should note that approximately 80% of the identified items expense in 2005 -- 80% of that 102 was non-cash. 20% cash, 80% non-cash.

Let's turn to the fourth quarter result, and here is a quick reconciliation for the EPS in the period.

Earnings per share, as reported in GAAP, grew 68% to $1.14.

That figure was reduced $0.07 by the impact of CoCo accounting.

The net gain from dispositions was $0.87 per share, partially offset by debt repurchases and the final $0.07 of identified items expense.

Excluding the accounting change, the identified items, the divestitures and the debt repurchases, our fourth quarter EPS would have been $0.64.

With the big divestitures gain in the fourth quarter, we obviously finished strongly on an as-reported basis, but were encouraged that we also finished with some very good underlying momentum for our business.

This slide summarizes the unit volume trends our a three business segments in the last quarter.

As you can see, as reported volume was down 4% but that is due, in large part, to the extra week last year.

On a comparable 13-week basis, all three business segments posted volume gains, 3% for U.S. retail, 1% for bakeries and food service, and 5% for international.

For our U.S. retail segment, that good finish resulted in volume growth the full year,, both as reported and on a comparable 52-week to 52-week basis.

In fact, five of our six major divisions recorded unit volume gains for the year.

Big G cereals was the exception.

Their volume was down 3% on a comparable 52-week basis due to our uncompetitive merchandising levels in the second half of the year.

But our overall U.S. retail volume, on a comparable 52-week basis, was up 3%.

And that included increases of 2%, the meals division; 3% each, the Pillsbury USA and baking products; 5% growth for snacks; and 13% growth for Yoplait Yogurt.

Consumer take-away for our major retail business grew in 2005. on a comparable 52-week basis, composite retail sales for our major products, as measured by AC Nielsen, grew essentially in line with shipments.

In the final quarter, consumer take-away actually outpaced our unit volume growth, with particularly strong consumer sales for -- Totino's, Yoplait, Nature Valley Snack Bars and Progesso Soup.

That double-digit gain for Progresso reflects some excellent non-promoted volume strength, and Steve will tell you more about that later.

Despite the solid performance on unit volume and consumer sales, our operating profits for U.S. retail segment declined 5% in 2005.

In part, this reflects the input cost pressures, which we called out when the year began.

We planned to offset a portion of that inflation with pricing, when we did take a number of actions to raise list prices and merchandise prices.

However, for the year, we did not capture any net benefit from those actions in our U.S. retail segment , as net sales grew only slightly.

In addition, the operating profit decline reflects disappointing results for Big G cereals, as our second half promotional prices were uncompetitive and we lost merchandise volume.

Steve will be addressing Big G further, in his remarks later.

For bakeries and food service, the operating profit news was much better.

This business segment renewed profit growth in the third quarter, and posted a 27% increase in operating profits for the second half.

That solid finish enabled bakeries and food service to meet our goal of stabilizing annual profits.

In fact, they actually posted a slight gain versus last year's 53-week results.

Our international division had a good year start to finish.

Net sales increased 11% to exceed 1.7 billion, and operating profits rose more than 40% to 171 million.

Favorable currency translation contributed six points of the sales increase and 10 points of the profit growth.

The rest was due to good unit volume trends, successful new product introductions, and strong productivity initiatives.

In total, the operating margin for this business segment improved by more than 200 basis points to reach a double-digit level in 2005.

And here can you see the international unit volume results by geographic region.

Our businesses in the Asia-Pacific region, Latin America and Europe are consolidated on a calendar month basis, so they were not affected by the extra week.

And, as you can see, we recorded volume gains in all three of those regions.

Canada volume was up 2%, as reported, and rose 4%, when you exclude the extra week and look at it like for like.

We also recorded strong after tax profit growth from joint ventures in 2005.

In total, earnings from joint ventures grew 20%, to reach $89 million.

And that number includes only nine months of earnings from SVE, before our interest was redeemed by Pepsico.

So, to summarize, our 2005 financial results were in line with the targets that we laid out for you at the start of the year.

And we're encouraged by the momentum we see in our businesses, as we exit 2005 and we move into 2006.

We are also pleased with the strong progress that we've made over the past year, to strengthen our balance sheet and to improve our financial flexibility.

Two years ago, at the end of fiscal '03, our debt balance stood at just over $9 billion.

That's adjusted debt, a measure that we use, which includes the debt equivalent of leases, tax benefit leases, and certain minority interests, net of cash.

We set a goal then to reduce this balance by $2 billion over the three-year period, which would end in June of 2006.

Thanks to the strong cash-flow generation in 2005 buyer businesses, plus the added cash from the sale of SVE and Lloyd's, we met our debt reduction goal a year ahead of schedule.

Adjusted debt at the end of the fiscal year-end was, in fact, $6.7 billion, down more than 2.3 billion from the May 2003 starting point and down over $1.7 billion in 2005 alone.

The significant reduction in our overall debt level led to a 10% reduction of interest expense for us this past year.

Capital spending was in line with our expectations for the year.

In fact, coming in at $430 million.

And that compares to depreciation and amortization expense of approximately 450 million.

Capital spending represented 3.8% of sales, down from 5.9% a year earlier.

And looking ahead for fiscal '06, we expect capital spending to be about $450 million again.

Our core working capital trends in 2005 were also good.

This is a chart that we've shown several times in the past, which illustrates how our use of working capital builds through the first half of our year, due to the seasonality of several of the businesses in our portfolio.

And then, working capital declines in the second half of the year.

And, as can you see in 2005, that's the yellow line on the chart, the core working capital actually dropped below year-ago levels in the second quarter.

And we ended the year slightly below 2004, as well.

At this meeting, one year ago, we announced a 13% increase in our dividend.

And that action renewed dividend growth, after a period of several years following the Pillsbury acquisition, during which time we held the dividend constant.

On Monday of this week, our board of directors approved a 6% increase of dividend, affective with the August 1 payment.

In total, therefore, over the past two years, cash dividends paid to General Mills shareholders have increased 20%, and the new annualized rate of $1.32 represents a 2.6% yield at yesterday's closing price.

So, we're pleased to have strengthened our balance sheet and to have returned to a position of greater financial flexibility.

Our dividends paid in 2005, together with our earnings results and financial progress, resulted in strong returns for General Mills shareholders.

For the fiscal year, total return to our shareholders was 10.7%.

That was better than the return generated by the S&P package food index, which was 9.5 %.

It was better than the S&P 500, which generated an 8.9% return.

And better than the S&P consumer staples index, which returned 5% for the year.

So, with this good progress in 2005, we have essentially completed the transition period that we outlined back in 2003.

As you recall, we said that, during this transition period, we would prioritize debt reduction as a use of cash.

That meant, we wouldn't repurchase any significant number of shares in the open market.

And, consequently, stock option exercises would create some dilution in earnings per share, which they did.

Today, we've met -- we've actually exceeded our $2 billion debt reduction goal.

And, while we do expect to continue to improve our balance sheet and key financial ratios in 2006, we also expect to resume open-market share repurchases this year.

Finally, we said that the transition period following our Pillsbury merger would include significant restructuring and merger-related costs in 2005, we separately forecasted and then reported these identified expenses.

Going forward, we do not plan to call out identified expenses in our growth forecast.

Instead, our guidance will be net of those costs.

So, today, we see ourselves moving into a new period of growth for General Mills, and to tell you more about what we see ahead, I'll turn the meeting over to Steve.

Thank you, Jim, and good morning to all of you.

As Jim just showed you, 2005 was a year of progress for us.

We finished well, and with some good momentum to get us started in 2006.

As we look ahead, we expect General Mills' financial performance to reflect a combination of good growth and improving return on capital.

We expect the growth of our business to fuel strong and increasing cash-flows.

And we believe that our financial performance will result in superior returns to our shareholders.

Over the next three to five-year period, we think General Mills is well-positioned to deliver low single-digit growth in net sales, mid single-digit growth in operating profit, and high single-digit growth in earnings per share.

And we believe this financial performance, together with an attractive dividend yield, should result in consistent double-digit returns for our shareholders.

Now, let me give you a look at our specific expectations for fiscal 2006.

And like almost any year, we'll have some pluses and some minuses.

First, as you all know, we took pricing in a number of our key categories last year, and we'll see some carryover benefit from those actions in 2006.

We expect a lower rate of input cost inflation this year, as we've seen commodity cost moderate from last year's very sharp increases.

While the rate of increase will be lower, input costs will still be up.

We've assumed an increase of $40 million over last year's total commodity cost.

And it's no secret to any of you that fuel costs are rising, as well.

We built $65 million of fuel-related increases into our plan.

And that's at the assumed -- that's at an assumed price that's higher than last year's actual rate, but below recent spot market prices of $60 a barrel.

So, if we had to cover at today's price, that increase would go higher.

Based on our plan assumptions, productivity savings should enable us to offset more of the input cost pressure in 2006 than we could in 2005.

And also on the plus side, our identified items expense will be lower in 2006, than the $102 million that we incurred in 2005.

However, it will not be zero.

We already know we'll have some costs associated with restructuring decisions that we made in 2005.

As Jim mentioned earlier, we won't be forecasting these expenses anymore, but we'll be reporting net of those.

And finally, we'll be facing employee benefit cost increases in 2006, particularly for retirement benefits.

Now, that latter one is not an increase in cash expense.

At the end of the fiscal year, our pension plans were more than 100% funded.

The return on our plan assets in 2005 was over 17%, and that is on top of an 18% return in the prior year.

Over the past decade, our annual return has averaged 11%, which is ahead of our 9.6% long-term assumption.

So the reasons for the earnings drag we expect in 2006 isn't performance or cash related.

It's simply a function of a much lower discount rate, over a percentage point lower than last year's rate.

As a result, we expect book expense for our pension and post-retirement plans to increase $50 million year-over-year.

Our increased use of restrictive stock in our long-term compensation plan means that that expense will be up over $10 million in 2006.

And our plan for the new year includes an increase of 12 million for active employee medical coverage.

And, of course, we'll have inflation in wages and salaries, as well.

When we put all the pluses and minuses together, we expect our net 2006 sales and operating profits to grow in line with our longer-term model.

We expect our GAAP EPS, though, to decline by 8 to 10%, and that's primarily because of the one-time gain that we recorded in 2005 from the sale of SVE.

On an adjusted basis for 2005, we expect EPS to grow in the high single-digit rate, roughly 7 to 8%.

Let me tell you how we look at that adjusted base for General Mills growth going forward.

We start with the $3.08 GAAP EPS in fiscal 2005.

We leave identified items expense in, since we won't be forecasting that separately going forward.

We back out the $0.19 accounting impact of the contingent convertibles, since we expect that to be resolved in October.

We subtract the net gain from divestitures and debt repurchases.

And we subtract the earnings contributed by SVE and Lloyd's, that totaled $0.08 a share in 2005.

So our earnings per share from continuing businesses, excluding CoCo accounting and the net gains from divestures and debt repurchase, would be $2.67 In 2005.

Now, off of this base, we expect to grow our EPS, again excluding the CoCo accounting, at a high single-digit rate, both in 2006 and over the longer term.

The key drivers of this growth haven't changed.

These are the same four factors we have discussed with you many times before.

Starts with product innovation, includes expansion into new retail channels, channels for food eaten away from home.

Expansion in international markets, and expansion of our margins, as we leveraged net sales growth, mix, and productivity.

I would like to spend the rest of my presentation today outlining some of the key 2006 initiatives on these growth drivers.

I'll start with product innovation and our largest business segment, which is U.S. retail.

We feel like we've got a strong lineup of product news going forward in our U.S. retail business.

In the first half alone, we'll be introducing 89 new items and I'd like to highlight some of our first-half plans for you.

I will start with our Big G cereal business.

Now for our cereal business, our whole grain story will still be big news in 2006.

As you all know, in January we began telling consumers that every Big G cereal brand is now a good or excellent source of whole grain.

And that means at least eight grams of whole grain per serving. 16 grams, if the cereal is listed as an excellent source.

Scientists and nutritionists agree on this.

Whole grains in the diet have been shown to combat heart disease and certain cancers.

And that's why the USDA's newly-revised food pyramid recommends that consumers get three servings of whole grain a day.

We'll continue talk to consumers about whole grain in 2006, with information about the new pyramid in our -- on our packages, and information about whole grain in our advertising.

In addition, we will remind kids and their parents about the importance of a healthy breakfast.

This is another place where the science is quite clear.

Studies show that kids who start the morning with breakfast tend to do better in school.

And kids who start their day with cereal have healthier body weights than kids who don't.

A cereal breakfast compares favorably to other options on the basis of calories and sugar content and, obviously, on fat content.

And cereal wins hands-down when you factor in the vitamins and minerals.

Now, we think this is an important message to communicate to kids and their parents.

You'll see it on our cereal packages.

You'll see it on TV.

Now, I'd like to pause here and show you a couple of commercials.

The first one is a Cheerios commercial that emphasizes the health benefits.

It recently won an industry EFFY award for effectiveness.

And, then, I'll show you our three 10-second spots that talk to kids about the importance of a good breakfast. [commercials playing]

Now, these messages about whole grain and healthy breakfast promote more than just our brands.

They promote the cereal category.

And we believe these messages are having some positive effect.

As this slide shows, cereal category trends have been improving in recent months.

But as you all know, our cereal trends are not improving.

Our brands have been weak recently and we lost some market share in the past six months.

And there are two keys to reversing that trend in 2006, product news and competitive merchandising levels.

Product news did some good things for us in 2005.

Our three reduced-calorie sugar cereals -- our reduced sugar cereals, excuse me, combined to capture three quarters of a share point and accounted for nearly 20% of the total franchise sales of these three brands.

And Chocolate Lucky Charms, which was introduced in January, is off to a very nice start, with over a half a share point in the fourth quarter.

In 2006, we will have product news across the entire cereal-eating spectrum.

For kids, we're introducing new Peanut Butter Cookie Crisp cereal.

For adults, we're launching three new flavors of Whole Brain Total.

For all family enjoyment, we've got new Yogurt Burst Cheerios, that you saw outside today, in strawberry and vanilla flavors.

And for the focused calorie counters, we're got new Great Measure cereal from our Cascadian Farms organic product line.

Now these are just the new products we've announced, as of now, and all of these will ship in the first quarter.

Along with this strong level of product news, we will also be working to achieve a more competitive promotional stance in 2006.

At the end of our third quarter, we showed you that our merchandise prices had risen far more than competition, and that gap led to volume losses in the quarter.

Since that time, we've been working with our customers to make our merchandising programs more competitive.

At the same time, merchandise prices for other cereal category players have tended up a bit.

Now, we'll need to monitor the continued category progress and keep our merchandising levels competitive.

But I'd say that, while this process is going need a little bit of time, the category direction is looking encouraging, I think.

I should also add that for Big G, specifically, last year's first quarter had very strong merchandising levels.

So the progress we're making in our merchandising programs probably will become more visible, as we move toward the end of the first quarter and into the second quarter.

From cereal, let me move on to the soup category, where product news has driven both our performance and category growth.

We introduced eight rich and hearty varieties of Progresso Soup in the fall of 2003.

As can you see on this slide, our sales growth in fiscal 2004 outpaced the category by five percentage points.

And last year, we grew almost nine percentage points faster than the category that.

And that growth has led to market share increases of three points in just two years.

Non-promoted sales growth is a big factor here.

In 2005, we advertised the fact that many varieties of Progresso contain less than 100 calories per serving.

And that campaign has helped boost our baseline sales 13%.

We'll have product news, once again, in 2006.

Progresso will be launching six single-serve microwave soups for this year's soup season.

We'll also be launching a new line of Muir Glen organic soups.

Now, we've been selling Muir Glen tomato products since we purchased Small Planet Foods in 2000, in the year 2000.

This is a brand that is very well known to consumers who shop the organic section, and also to gourmet cooks because of the great quality of these tomatoes .

And these are great tasting soups, consistent with that brand quality image.

And they will be available, nationally, starting in July.

The U.S. yogurt catagory is still growing strongly and so is our Yoplait line.

In 2006, Yoplait is bringing the healthy goodness of yogurt to chocolate lovers.

We started shipping three favors of Chocolate Mousse Whipped, which offer a chocolate fix, along with calcium, five grams of protein, vitamin A and D, and just 160 calories per cup.

The yogurt beverage segment has shown double-digit growth over the past several years.

And we've been in this catagory with Nouriche, a breakfast smoothie, that is doing well.

Just last month, we completed the national rollout of our GoGurt Smoothies for kids.

And now, we're introducing two more lines of adult-targeted Yoplait Smoothies across much of the country, low-fat original and a 90--calorie light version.

The refrigerated soy milk catagory is also growing at a fast pace. 8th Continent, our joint venture with Dupont, has increased its share by ten points over the past three years, with expanding distribution.

In July, we'll start shipping the first fat-free product in this market.

It has 25% fewer calories per serving than our original 8th Continent Soy Milk.

In the refrigerated dough section, Pillsbury gained market share in 2005 on the strength of product news.

And we'll have more news in 2006.

We're currently introducing three new SKU's of ready-to-bake cookies, a 32-count pack of chocolate chip, Smores variety, and a triple chocolate flavor.

Retail sales of our rate-to-bake cookies grew 17% in 2005, which drove a lot of that over-all market share gain for Pillsbury refrigerated dough.

Other new products in 2006 include sugar-free cinnamon rolls and three more varieties of our Perfect Portions biscuits.

Now these biscuits come in boxes of ten, but they're shrink-wrapped in packages of two within the box, so consumers can bake just a couple at a time.

The first perfect portions variety has done well since we introduced it last summer, attracting new users to the refrigerated dough section

Snacks, we're got a hot new product, Nature Valley Sweet and Salty Nut Bars that were launched last January.

Just the first five months since the launch, they've -- the sales of these two flavors topped $14 million.

We'll be adding a cashew flavor to this line later in the year.

Other 2006 introductions include two flavors of Chocolate Chex Mix.

And for snackers who are counting calories, we're now offering Pop-Secret Popcorn in convenient 100-calorie packs.

The baking aisle.

Retail sales of Betty Crocker dessert mixes have grown mid single-digit rate over the past two years.

In 2006, Betty is bringing new convenience to consumers, with a product called Warm Delight, a single-serve dessert.

Now, if you're in the mood for your own personal Molten Chocolate Brownie, you just add water to the product in its own pan, microwave it for a few a couple of minutes, and you'll have a warm, gooey chocolatey treat.

General Mills second gross driver is channel expansion.

And we see terrific opportunities for our brand in many alternative retail channels that are selling food today.

We have a strong lineup of products in natural and organic stores and we're expanding in our offering in other channels, such as dollar formats and drug and club stores.

Our sales in convenience stores continue to grow at a double-digit pace.

Because different distributors and brokers call on these accounts, these stores are actually part of our bakeries and food service segment, as opposed to our U.S. retail business.

Our growth in C stores reflects excellent cereal performance.

Unit volume rose at a strong double-digit rate last year.

The new Nature Valley Sweet and Salty Bars are a hit in this channel, as well.

And we're introducing some unique products, like the Rye Chips, which are many consumer's favorite part of the Gardetto Snack Mix.

Our bakeries and food service team does business in many other channels for food away from home.

One core channel for this segment is bakeries, and that's everything from wholesale bakers to the bakery department at Wal-Mart or your neighborhood supermarket.

For all of these bakery operators, we're working hard to make our products more convenient, and that innovation is paying off.

We saw sequential improvement in our bakery segment in each quarter of 2005.

We're also leveraging our whole grain portfolio in food service channels. we're seeing growth in cereal sales to schools, as bid business for the upcoming school year is trending upward.

Our new whole grain cereal bars are doing well, too, and we've developed a mix for bakery customers that allowed them to make white or whole grain breads.

General Mills' third key growth driver is building our brands in international markets.

We're leveraging whole grain news here, too.

As of this month, all of our Canadian cereals are made with whole grains and Cereal Partners World-Wide, our joint venture with Nestle, has converted all of its cereals in the U.K. to whole grain.

And they expect to expand this initiative to other markets later this year.

Canada already has good momentum in their cereal business. and across the rest of their portfolio.

Net sales, at constant exchange rates, have been growing nicely.

And in 2006, we'll keep the growth going with a lineup of introductions, including Nature Valley, Sweet and Salty Bars, and new varieties of fruit snacks, as well as Pillsbury dough products, Hamburger Helper, and Betty Crocker potatoes.

Product innovation on a variety of local brands in Latin America has driven strong sales growth there, after several years of tough economic conditions.

Strong performance in key markets in Brazil and Argentina led to growth in the latin American region.

In Europe, the introduction of Haagen-Dazs Cream Crisp Sandwich and our Old El Paso Guacamole contributed to good sales growth in 2005.

We'll try to build on that momentum this year, with new product introduction such as a premium line of Green Giant Grilled Vegetables, and by expanding the distribution of our Old El Paso products, and adding chocolate favor to the successful Haagen-Dazs Cream Crisp line.

Our sales in the Asia-Pacific region have been growing in a double-digit pace in recent years.

This year, our Haagen-Dazs joint venture with Japan, Japan will introduce Sorbet.

Dip Trix kids snacks will make their debut in India, and Australian's will be able to enjoy the convenience of Old El Paso Stand n' Stuffed Taco Shells.

We expect the expansion of our global brands and innovation on local brands to continue to drive a sales growth for our international businesses.

Our final growth driver is margin expansion.

In 2005, we did achieve margin growth in bakeries and food service and international.

But those gains were more than offset by a margin decline in our U.S. retail division, where we weren't able to achieve enough net pricing and productivity to offset input cost inflation.

In 2006, we plan to resume our margin growth, both in total and in each of our three business segments.

We expect our combined segment operating profits to grow faster than sales, and increase at a mid single-digit rate in 2006 and over the longer term.

As I mentioned earlier, we're focusing on delivering good growth in combination with improving returns over the years ahead.

We have set a specific goal to improve our return on capital by an average of 50 basis points a year over our three-year business plan, which goes through 2008.

The main driver of improvement in return will be the numerator, that;s our earnings growth.

What will influence the denominator, too, by being disciplined about our use of cash.

We intend to stay disciplined in our capital spending, which is forecast to remain generally in line with depreciation, and steady as a percent of sales.

We plan to make some further modest reduction to our debt balance.

And we intend to return significant cash to our shareholders through dividends and share repurchases.

On average, and I say this on average not necessarily each and every year, our goal is to deliver two points of EPS growth through share repurchases.

And we expect dividends to grow, over time, as our earnings grow.

Our new corporate rating schedule, the corporate score card which drives incentive compensation at General Mills, will focus on the important drivers of growth and return.

The four key metrics will be measuring our performance against our growth in net sales, growth in operating profits, growth in earnings per share, and improvement in return on capital.

We think this schedule will sharply focus our efforts to help drive superior shareholder value creation in the years ahead.

So, here's how I summarize the key points we've highlighted on General Mills today.

Fiscal 2005 was a successful year, as we met the key targets that we outlined back in June for sales and earnings growth, while strengthening our balance sheet and our financial flexibility.

With that progress, we completed the transition period that we set for ourselves, and we did so a year ahead of schedule.

We're moving into 2006 with some good underlying momentum in our business.

Our plans for this year and beyond are to deliver a combination of good growth and improving return on capital, with the ultimate goal of generating consistent, superior returns for our shareholders.

That concludes our prepared remarks this morning.

We will open the meeting for questions now, and Chris and Jeff have microphones, I believe.

So, if you'll wait until one of these reaches you, so the webcast listeners can hear your questions.

Okay, we're going to start with John.

It's not really on, though.

Here we go.

Steve, you're not really promising much earnings growth for fiscal '06.

You're saying you did 292 last year.

Your guidance range is somewhere in the 285 to 290 range.

I understand that 285 to 290 includes project costs, which you won't tell us anything except it's over zero.

But you do understand that you're really promising us nothing for fiscal '06, this morning.

That's point number one.

And point number two is, you know, if whole grain were really working and gaining traction with consumers, why would they buy private label and Kellogg non-whole grain products instead of yours?

Well, let me take those in the order you asked them, John.

We really haven't given any guidance that's comparable to the 292 that we're tracking this year, as you said, because -- because that -- that was with the expenses pulled out for the identified items.

What we've said and, you know, promising what we're telling you we expect in the way of growth, is mid single-digit operating profit growth, which would lead to high single-digit EPS growth, off a base of on-going operations including -- including all the costs for those identified items, which we're not going to separate out going forward.

Now, you know, there's some ups and downs within that.

But I think the basic way we look at the growth prospects for us is what I outlined at the start, which is low single-digit growth in sales, mid single-digit growth in operating profit, and high single-digit growth in EPS, off a base that would, be comparable year-to-year.

As far as whole grain is concerned, I think that what we're seeing in our consumer research is that this is gaining -- it has gained traction with consumers.

We're not the only company that has whole grain cereals, obviously.

Each of the cereal manufactures has some whole grain cereals.

And private labels have followed suit quickly, and where they are whole grain, have tried to play that up on their packages.

So, I don't see this as something that is only an advantage for General Mills.

What I do see it doing is telling consumers, once again, why they ought to be eating cereal for breakfast.

And I think that's an important thing to be telling them, in the wake of the Atkins fad that came and went a year or so ago.

Now, they're buying more competitive cereals than they are General Mills, because competitive cereals are cheaper on merchandise.

They merchandise more and merchandise at better prices.

And that's because of the fact that our merchandise price points went up faster than competition, and that caused our merchandising to go down.

We're adjusting to that.

I think we're seeing the retailers merchandising us more, as we look out forward, and I think we'll get that fixed.

Price differences like that, particularly merchandising-driven ones, tend to be temporary and fixable by adjusting your merchandising rates.

But we're also encouraged by fact that we're seeing the merchandise price points move up, somewhat, industry-wide.

Going to go Bill Leach here.

Steve, I have three questions.

Do you have any thoughts on the first quarter?

What are you assuming for interest expense this year?

And how big will the CoCo charge be?

We don't give quarterly guidance, as you know, Bill.

One thing I would say, though, that I would urge you to remember as you look at year-to- year comparisons, is our first quarter last year was kind of an unusual one in that the negative price realization, particularly in our U.S. retail business, and so our earnings were particularly weak because that.

That was when there was a lot of pricing actions taken that caused the trade expense to go up, and covering two 52nd business, and so on.

So, the pattern last year was a little unusual .

I think first quarter was a bit weaker than normal last year.

And that's a good thing to remember.

But I'm not going to get into forecasting what this year's quarter will be.

Interest expense, Chris was saying 420?

420.

Million down from 450.

455.

455.

And as far as the CoCo charge, Jim, maybe you've got that one.

If you assume, as we do, that the contingent convertible will be out of the balance sheet by October, it will be $0.07 for this coming year.

Okay.

We'll get a microphone to Eric Katzman.

Jeff, he's here on the right.

Hang on one second, Eric.

Thanks.

If I look through the slices, it looks like you have a head wind of roughly $0.18 a share on input costs and $0.12 on benefits.

So that's, you know, $0.30 cents, which was roughly 11% of your earnings base.

And yet, in your -- another slide, you said that operating profit or, I'm sorry, operating margins in U.S. retail should rebound.

And I'm wondering how that is given, you know, all of those expenses running through your biggest division?

And then second, you also assume continued international margin expansion with currency going against the Company now, assuming that the dollar remains strong.

I'm kind of wondering, first, if can you answer that?

Well, I also said we expect to have, as we typically do, significant productivity improvement in our U.S. retail business.

We're counting on -- this past year, we had -- we said we'd have 150 million and we had more than that in productivity improvement.

And I think we'll have at least that much next year, as well, in our supply chain alone.

So, we're counting on that productivity improvement to offset the increase in input costs that we talked about in the areas of fuel and hags (ph) and hag (ph) commodities, and that should cause our margin to improve.

We also have some carryover pricing benefit that we expect to get.

But all of that should cause our margin to improve in the U.S. retail.

Now, as far as international goes, I would say there you've got the benefit of increased sales driving scale, which is one of the margin improvement factors.

Jim, if want to comment further or what would lead to that.

Sure, we do expect to get return, some scale returns from growth in international.

We have some specific productivity initiatives in international.

But, just as our results were flattered this year by currency, it's conceivable that they would take a hit if the exchange rates were much different over the course of the year than they are today.

I simply can't predict that.

As the exchange rates sit today, we do expect to see improvement over the course of the year.

Eric, I might add just one little piece for you.

In the operating profit growth that you saw for international this year, which was very nice, something of the north of 40%, I believe, ten points of that would have been FS.

But the bulk of that good operating profit growth you saw this year is from the factors that Steve and Jim talked about, volume, scale and good productivity projects happening in international, as well.

And then, as a follow-up on a different slide, I think that you put up there that your convenience business is actually managed through bakery and food service.

That's the first time I've heard that and, yet, bakery and food service has generally, in the last few years, been quite weak, even though that's a channel that's been growing by leaps and bounds, and the other companies in the industry have done incredibly well.

So I'm kind of wondering, is that the right place for that outlet to be, I guess, recognized or managed through and what does that say about the non-convenience business and bakery and food service?

Yes, we think it's the right -- it 's always been -- bakeries and food services has always, prior to the acquisition of Pillsbury, our General Mills food service was where we managed our convenience store business.

And that business has been growing very well for us, both in the most recent year and in prior years.

That's been the strong growth area, within bakeries and food service.

What that says about the rest of it is that it was doing lousy until this year.

If you need a little bit of context on that, anybody, if you look at last year's annual report, on the inside front cover there's a pie chart that breaks bakery and food service sales down into the channels.

And you will see convenience stores and vending is around 10% of the 1.8 billion total sales we had last year.

[question inaudible]

Yes.

The question is he asked is if the Big G cereal product is sold in the convenience store, does that count against the bakery and food service sales and the answer is yes.

Hey, Jeff, do you want to hand a microphone to Ken Zaslow, right there?

Morning.

Can you discuss your return in invested capital on the whole grain effort , given that you're about six months into the effort?

Are you on target for your goals?

And the second part of my question, can you discuss the adverse mix-shift in General Mills' retail division, as high-growth, low-margin businesses such as YoGurt outpaced low-growth, high-margin businesses as syrup?

On the latter one, high-growth, high-margin businesses like yogurt are helping to offset the slower growth in slower-growing high-margin businesses like cereal Yogurt is a good margin business for us.

No, it's not higher than cereal, few things are.

But it's above our average.

What was the --

Yes, we really didn't have invested capital to speak of on the whole grain conversion.

That was -- that's a -- the impact there is more the change in ingredients, which there is some cost associated with that.

But, I don't think there's really an ROC to measure on that effort.

It's a -- it is a effort that we believe is vital to the consumer understanding of the importance of cereal, both in the short-term and the long-run.

We never viewed that as a short-term benefit.

I think if you look at the cereal category over the years, what you see is that it is been built by continually layering on by two things.

Layering on new levels of understanding of consumers about what the nutritional benefits of cereal are.

And then, by innovation and providing more products and more variety.

And this whole grain effort is very consistent with that, and we believe that it is important for us and for the category.

And you can -- the fact that we've had some share declines because of our merchandising competitiveness really shouldn't -- shouldn't influence your assessment of that.

Like to get the mic to Judy Hong, right next to Kim.

Steve, in the past, one of the challenges that you've talked about was getting the right balance between volume growth and price realization.

I was wondering if you can talk about how you feel about that, as we enter into fiscal '06?

And then, to Jim, from a timing standpoint, when do you expect share repurchases to begin?

On the first one, I am feeling better all the time about the balance between volume growth and price realization.

And if you look at our categories, other than cereal, I think we're showing solid growth momentum in those.

A number of them, we're getting price realization increasingly, as we came out of the year.

In cereal, we're having some price realization but at the cost of volume right now.

So, we don't have that in balance.

And we've got -- that's a challenge that we will address in the new year, is getting the price realization volume equation in balance.

Judy, as to your second question, just for a perspective, I should say that we had been repurchasing shares to a substantial degree prior to the Pillsbury acquisition.

From the time we announced the acquisition until we got to the $7 billion net debt level, we had said to the rating agencies that we would not have any significant open market share repurchases.

Steve said it is our intention now, and basically now is from, you know, this announcement today, our intention now is to return to our policy of repurchasing shares.

And he said that, on average over a period of time, you could expect a net 2% reduction in shares outstanding from share repurchases.

But, we're going to be doing that in a disciplined manner, one where if the price is higher, we'll be buying less.

If the price is lower, we'll be buying more.

And, so, we can't put a precise amount in it for this year.

But, basically, as this result -- these results are into the market, we will be able to return to this program.

Yes.

I'll pick up a few people here.

Chris Growe.

Thank you, I had a follow-up to Judy's question on pricing.

You've taken prices higher in a lot of categories, and how you're having to promote back in some, especially cereal, a little more aggressively.

How should we think about, in U.S. retail, your price realization for the coming years Is a 2% number a good number?

Or what sort of price realization would you consider a win, if you will?

And, the second one, , was there any categories where, you know, for example, private label got more aggressive or competitors where you're having to, perhaps, send back in some widening price gaps?

I do believe we will see -- we're expecting to see price, Chris, price realization in U.S. retail this year of 1%, maybe more.

And I think we should.

Last year, part of the issue was we didn't get the pricing taken at the very beginning of the year.

In some cases, we had to hold merchandise prices at pre-announced levels for a long period of time.

And, so, we don't have those things holding us back as we come to the new year, and that should help.

Private labels, you know, certainly the retailers, a number of retailers are increasing their merchandising of private labels.

It's one of their strategies for combating the continued growth of Wal-Mart.

But we've also seen strong growth in price brands, other than private label.

I think, in the cereal category, the prices of the private labels have stayed down, partly because of competition from other price -- other price-oriented folks like Malt-O-Meal.

We're seeing some move up in that now, as the chart I showed you.

You know, it's a -- I think, in general,, it's a environment where the pricing comes slow, maybe slower, than you would like but it seems to come ultimately.

David Adelman.

Thank you.

Two quick questions.

One, do you have a number on what the shipment volume decline was for Big G in the fourth quarter?

My recollection was down to about 9 in Q3.

Yes, I think it was 5% in Q4.

An improvement versus Q3, but certainly not what we look for.

And that's pretty consistent, I think, with what the retail take-away was in Q4, as well, as we measure in Nielsen.

And that's adjusting for the weak differentials, Steve?

Yes.

And then, secondly, you had highlighted the $0.08 dilution year-on-year from the lost profitability from SVE and the Lloyd's divestiture.

And I'm just curious.

That's a gross number, correct?

That doesn't include utilization of the proceeds to, presumably, pay down debt.

So, what would that be on a net basis?

Yes.

That -- you're correct in that.

That's the earnings that those entities contributed in the 2005 base.

The proceeds did help us to pay down debt, which is a contributor to our reduced interest expense.

Next year, on the other hand, you know, we'll have some offset to that, as we refinance our CoCo's, when that comes out in October.

And, assuming we refinance those at CP rates, that will be a little bit higher.

So, I don't that we've -- I don't even know that we calculated some, you know, taken part of that impact and netted that back against the sales.

We're just giving you that so -- because that represents the continuing operations base that we have going forward, without those in them.

Okay.

We still -- no?

Steve, two questions.

First of all, as you look at your portfolio, if you could give us some indication of how likely it is you might make another divestiture this year?

For example, Green Giant or something along those lines.

And the second thing, just so I'm clear on the new base and the new guidance, you're not giving us any special charges.

So, I guess, the number in consensus is going to come down.

But , how does Coco figure into that?

Is Coco included in your new number?

No, I've been taking the last question first.

In the new number, we have pulled -- correct me if I'm wrong --

(inaudible)

Okay, -- .

Yes, I just wasn't clear on that.

Just to be clear, we have given you two different things to work with.

First of all, let's start with GAAP, because we must.

And so, we told you off of the 308 GAAP number, which has CoCo's in it, we're going to be down 8 to 10%, and that's primarily because this year's GAAP number included that big gain from the sale of SVE.

That's going to work you into one range of EPS.

That does, in fact, include the accounting for the CoCos.

Yes.

Okay.

Now, we also give you a way to think about EPS next year, off of an adjusted base of 267.

We gave you the reconciliation for that in the press release.

That excludes the CoCo.

It's going to work you into a different range of EPS and the difference between the two, you're going to find $0.07 of difference, that's how much CoCo affect we expect to be in our GAAP EPS number, because we're assuming we'll have the CoCo's through October and then it'll be gone.

Does -- does that help?

Okay.

Yes.

That's good, Chris.

The divesture question, if you don't mind.

Our portfolio, as we look at it today, I think all of them are important parts of it.

And they're all contributing value and while, you know, we don't forecast acquisition or divestiture intentions, we see nothing there that isn't a valued part of our portfolio at this point.

Filippe Goossens.

Yes, good morning.

Two questions for Jim, if I may.

The first one, yesterday Campbell Soup indicated that they are revisiting whether it is still desirable for them to regain a full tier one CP rating. given the more mature nature of the business in which they operate implying, perhaps, more aggressive financial policies.

Can you just share with us what your targets still are in terms of the ratings?

And then, secondly, with regard to the potential refinancing of the CoCo's later this year, you have indicated in the past a preference to do that with, perhaps, commercial paper, given the amount of flexibility that would give you.

Now, given that you have taken out a fair amount of your longer date of bonds, it would still be nice to have kind of a new benchmark bond out there for you, and also take advantage of the low, long-term rates.

And the additional thoughts on that topic?

Sure (inaudible) Thank you.

First, as to our intentions for ratings, we intend to return to an A rating for our long debt.

We intend to return to an A-1, P-1 rating for our short debt.

I'll not comment on what other companies might do.

But in our case, over the longer run, it has been our policy to have a mix of short and long debt, which we think will help to optimize interest costs, And if we have a significant amount of short debt, we feel the most prudent position to be in is to be rated A-1, P-1 while carrying that short debt.

The second thing I'd say in comment in answer to your second question is that, at the moment, we have no short debt.

We actually have several hundred millions of cash and no short debt.

So, as consequence in terms of returning our balance sheet to what we'd like for the long term, there is an attraction to refinancing the CoCo with commercial paper.

On the other hand, we are not locking ourselves into any particular form of refinancing in October.

Rather, we're simply saying we expect to refinance it in that way.

And we're giving guidance, which reflects interest cost, which would be consistent with that.

And, at the time, we'll look at market positions and what's on offer, and make a judgment then what's in the best interest of General Mills, at the time.

Yes.

I'm going to catch one more up here and then, Jeff, if can you get ready back there.

This is Evan Morris I'm walking to.

Within your guidance for fiscal '06 , what are you assuming for the cereal business?

Are you assuming that you'll see up results for next year?

Or is it going to be down or flat?

No.

We expect to grow cereal earnings next year.

Okay.

And on the top-line?

Can you give us color around that what, what your expectations are and how that will progress throughout the year?

I think we expect to see growth on the top-line, as well, in cereal.

But, as I said, given that the first quarter a year ago was as promotional as it was, probably the volume rebound won't be visible until we get to second quarter and beyond.

Okay.

And also, you mentioned in one of your slides about new channel opportunities.

Can you just kind of touch quickly on how penetrated you are in those channels and what the real opportunities are and how incremental they can could become as early as fiscal '06 and maybe into fiscal '07?

Well, the biggest opportunity for channels does come through our bakeries and food service business, and there's a lot of incremental opportunity there.

If you look at supermarket bakeries, and I don't have statistics on it, but our penetration of those is vastly below who our penetration in the same customers is in the package good side.

And yet, we have relationships that we can build on, and we've done it successfully in a couple of cases.

But we can see doing many more cases to build strong businesses in the supermarket bakery segment.

There are other places like, you know, channels where food is increasingly showing up.

Just to pick one, electronic stores.

You're starting to see Best Buy have, for example, by their checkout, they'll have food items.

And so, you know, as time goes on, these are not individually huge, but they add up to other outlets where food is sold.

The mass merchandisers continue to add food floor space in their -- even in their non-super center stores.

The Wal-Mart's and Targets of the world are obviously building super centers, but you know about those, because they have full grocery stores.

But even in the regular discount stores, we're seeing the footage growing for food.

So, I think you're continuing to see a steady expansion and opportunities outside of the traditional grocery store.

We'll pick up Pablo Zuanic back there, please.

Thank you.

Steve, just a question, going back to the thing of pricing.

Seems to me, if I look at the whole , portfolio, the area where you have the most ability to increase pricing would be in soup.

Can you estimate a rank in your portfolio by categories, in terms of the competitive environment, where there is more opportunity?

And when you hear Campbell, they are talking that you're very -- you're still being very promotional on the soup, but when we look at that, it seems you have been moving up prices.

Just talk to me about soup, in particular, and then, is it fair to say that that's the area where you have the best opportunities to make up pricing?

Well, it's an area -- soup, I think I would agree, is an area where we expect the pricing to be higher in the new fiscal year.

You know, we increased our prices in soup last fall, going into the soup season.

And then, because of competitive, the competition didn't do the same, we had to moderate that increase.

But then, competition did increase at the end of the soup season and -- and we would expect both the, obviously the list prices but, I think, our plans are that both the list and merchandise prices would be higher in this fiscal year.

I see no reason why they shouldn't be.

Our business has been very strong, despite the fact that our prices are higher.

You're correct in saying that if you look at our -- our prices, they are up.

Our strength has been, been on the baseline every day, the everyday turns, although, as we got toward the end of the season because we hadn't gotten as much merchandising early, I think we probably got more merchandising late in the season.

So we have been a little uncompetitive in pricing early.

But then, at the end of the season, we kind of caught up.

But I think the thing that encourages us about the soup business is the continuing increase in our ability to build our share in the ready to -- ready-to-serve soup segment and do it with Baseline growth.

Just a follow-up for Jim.

I'm starting to the model, you know, my fiscal '08 numbers.

I trying to think of this in number of shares by October '07.

At that point, the buy that Lehman's issued will mature.

They have this right to buy shares from you.

The way I calculate the numbers is from 14.5 to 16 1/2 or 17 million.

Where will those shares comes from?

Will you take them from treasury?

Will you have to buy them in the open market?

What happens at that point?

In October of 2007, we will have the 750 million from Lehman and we may choose to use them to buy shares.

We may take the shares from treasury between now and then.

We have indicated that we will be back repurchasing shares, so I'm not going to give you a specific number now.

You are right to identify that that is something that is something that will happen and outline that full range of things that we might do at the time.

I think I'm going to jump in at this point.

We've kind of extended beyond our webcast and conference call timeframe, so I think I'm going to wrap up that webcast, so those folks can move on.

We will stay in the room for a bit here, and you've got one homework assignment.

There's several new products back there on design for to you take home and try.

There are bags back there.

So, please, pack up what you would like.

Ladies and gentlemen, that concludes the conference call for today.

Thank you for your participation, and we ask that you please disconnect your lines.

Have a nice day.