通用磨坊 (GIS) 2006 Q2 法說會逐字稿

Welcome to the General Mills second quarter 2006 results conference call.

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

Afterwards we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS]

And as a reminder, this conference being recorded today, Thursday December 22, 2005.

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

Please go ahead, ma'am.

Thanks, Operator.

Good morning everybody.

I'm here with General Mills Executive Vice President, and Chief Financial Officer, Jim Lawrence and Chris O'Leary, who's President of our Meals Division.

I'm going to turn the call over to them in just a minute, but first I've got to cover just a couple of housekeeping items.

Our press release on the second quarter results was issued over the wire services earlier this morning.

It's posted on our Web site if you still need a copy.

We've also posted some slides on the Web site that supplement our prepared remarks for today.

This conference call will include forward-looking statements that are based on management's current views and assumptions and the second slide in today's packet lists factors that could cause our future results to be different than our current estimates.

Let me also give you a quick reminder of our mid-year analyst meeting in New York City which is scheduled for January 11th.

That meeting is being sponsored by the Consumer Analyst Group of New York.

If you're planning to attend, though, I need to you RSVP to us at General Mills.

That meeting will also be webcast.

That's the end of my housekeeping so with that, I'll turn you over to Jim.

Thank you, Kris.

Good morning and thanks to all of you who are on the call with us this morning.

As we indicated in a press release that we put out two weeks ago, General Mills performance through the first half of fiscal 2006 has been strong.

And today's release gives you the details.

For the first six months our net sales are up 3%.

Our segment operating profits are up 7%.

And our diluted earnings per share are up 18%.

With this good start we've been able to raise the dividend rate for the second time in six months and to increase our EPS guidance slightly for the full-year.

Slide number four in our Web site materials summarizes the second quarter results.

For the quarter net sales grew 3%.

That's on top of a 4% increase in the same period last year.

Segment operating profit declined 2% in the quarter and that was against a solid performance last year when those profits rose 6%.

Aftertax earnings slightly exceeded last year's results and diluted EPS grew 5% in the quarter to reach $0.97.

Accounting for the contingently convertible debt reduced the second quarter EPS by $0.05 in both periods.

So if you exclude the impact of CoCo accounting, our second quarter EPS would total $1.02 for this year.

All three of our business segments contributed to the second quarter sales increase.

U.S.

Retail sales were up 3%, International sales were up 8% and Bakeries and Foodservice sales were up 2%.

We're very happy to see Bakeries and Foodservice back in the plus column on net sales and we're pleased that all three business segments showed net price realization for the period with net sales running ahead of volume.

Now you'll see on slide six a summary of our top line performance for our six major U.S.

Retail Divisions in the quarter.

The Meals Division made the strongest dollar contribution to our second quarter sales growth and they had a 9% increase.

Chris O'Leary will give you some detail on his team's good momentum in just a few minutes.

Yoplait posted the strongest growth rate with sales up 16%.

Snack sales were up 8% in the period and baking products posted a 3% increase.

Net sales for Big G cereals were 2% below prior year levels, but merchandising levels and market share trends showed continued sequential improvement within the quarter and I'll have a word more on that later, and Pillsbury USA sales declined 4% reflecting lower volumes for refrigerated cookies and Totino's.

Now I know that many of you have been following our Big G cereal performance.

Let me say a word about the improvement that we're seeing in this business.

We continue to rebuild market share that we lost earlier in the calendar year when our merchandising price points were uncompetitive.

For the latest month our dollar share in all Nielsen measured outlets increased to 31.4%.

It's pretty much back in line with the share levels that we held prior to raising future prices.

And In our in store merchandising support is back to competitive levels.

Our new cereal products, which we launched at the start of the fiscal year, are doing well, particularly Yogurt Burst Cheerios, and we'll be giving you a more detailed review of Big G's performance trends as part of our mid-year update meeting on January 11th.

Now slide eight shows that consumer purchases of our products accelerated in the second quarter, with composite Nielsen measured sales for our major brands up 4%.

Nature Valley Grain snacks, Yoplait yogurt and Progresso Soup each posted double-digit quarterly retail sales gains, and consumer takeaway on Betty Crocker desserts was up 9%.

Moving down the income statement you can see that our gross margin was up 70 basis points for the quarter at 41.1% of sales as productivity and favorable mix offset higher input costs.

Selling, general and administrative expense was 130 basis points higher as a percent of sales at 21.4%.

Increased consumer marketing spending, primarily advertising, was a key factor here which was up 18% in the period.

Customer freight costs were a second factor up double-digit compared to a year ago and that's a reflection of the higher fuel prices and higher carrier costs which were exacerbated by hurricanes Katrina and Rita.

Reflecting this cost increase total operating profits for the quarter were down 2%.

Slide number ten gives you the summary by business segment.

And as you see there the decline was concentrated in U.S.

Retail where profits were down 4% and that compares to a 5% increase last year.

International segment posted another quarter of solid double-digit profit growth and Bakeries and Foodservice profits matched prior year levels.

Again moving down the segment report you will see that restructuring and other exit costs totaled 2 million in the period compared to 3 million in the quarter last year.

Unallocated corporate expense also was below year ago levels and that included 8 million of identified items expense for accelerated depreciation last year.

And interest expense was down by 22 million primarily due to last year's significant debt reduction.

During this past quarter we refinanced the majority of our contingently convertible bonds with commercial paper.

However, surprisingly, not all the bonds were put to us.

Approximately 265 million in current accretive value remain outstanding and are part of our debt structure.

Now that doesn't mean that CoCo accounting will stay with us.

We've made an irrevocable election to satisfy future repurchases or conversion of the remaining bonds in cash so beginning in our current third quarter, we no longer need to add CoCo shares into our EPS calculation.

The bonds that remain carry a lower interest rate than the commercial paper that we assumed would replace them.

So that's a slight plus to our interest expense assumption for the full year.

Rates have also been somewhat favorable thus far this year, so back in June, we gave you an annual interest expense estimate of 420 million and today, I would suggest 410 million will be the interest expense for the full year.

Below the pretax earnings line key swing factors in the quarter were first, a higher effective tax rate year-over-year, second, we had lower earnings from joint ventures this quarter, only that's due entirely to the absence of SVE earnings.

Combined earnings for the ongoing ventures grew year-over-year in the quarter.

And finally, average shares outstanding were lower due to our share repurchases.

Now let's switch from the income statement and segment results and turn to the cash flow statement.

Through the first six months cash from operations is up 240 million, reflecting strong growth in net earnings and favorable working capital trends.

Capital expenditures through November are running about 40 million below last year's level and we now expect our Cap Ex for the full year to be about 400 million.

Share repurchases in the second quarter were modest, just 64,000 shares, but through the half we've repurchased 16 million shares.

And we've paid out more than 240 million in cash and shareholder dividends year-to-date.

As you know, in June of this past year we announce add 6% increase in the quarterly dividend rate to $0.33 per share.

Last week based on our good earnings momentum and cash flow through the first half, we announced a further $0.01 increase in the quarterly rate effective with February 1 payment.

Estimated dividends for the full fiscal 2006 now total $1.34 per share.

That is up 8% from the dividends paid in 2005.

Slide 14 summarizes our progress through the first half of this fiscal year.

Net sales increased 3% to exceed $5.9 billion.

Segment operating profits were up 7% to exceed $1.1 billion.

Net earnings are up 13% to 622 million and diluted EPS rose 18% to $1.60.

This does include $0.09 of dilution from contingently convertible debt, and if you were to exclude that accounting impact, EPS for the first half would total $1.69.

Now as I mentioned earlier, our growth through the first half of this year was led by our Meals Division and I'm now going to turn you over to our Division President, Chris O'Leary, who will give you a summary of the key factors that are driving his business.

Chris?

Thanks, Jim, and hello everybody.

I appreciate the opportunity to talk with all of you about the sales and profit momentum we are seeing in the Meals Division.

Our Division is General Mills' second largest profit center and our net sales in the most recent fiscal year totaled $1.75 billion.

We have four key business segments.

They are family dinners which includes Helper dinner mixes and Old El Paso Mexican foods.

Vegetables with Green Giant frozen and canned products.

Soup, where our Progresso brand is the growing number two player in the ready-to-serve segment.

And finally, specialty items such as Betty Crocker potato mixes and Suddenly Salad.

We have a good business story to talk about in Meals.

In the interest of time this morning, I will focus on three brands that have been particularly strong through the first half of the year, Hamburger Helper, Progresso Soup and Green Giant frozen vegetables.

There are three key factors driving the growth we are seeing on these brands.

First, effective consumer marketing, second, strong growth in baselines, which is a measure of non-promoted volume, and third, significant productivity savings.

Let me say a bit about each of these growth factors beginning with our consumer marketing efforts.

We feel great about the advertising messages we have on the air right now behind Progresso, Helpers and Green Giant.

In the case of Progresso, our strong performance through the first 11 months of calendar 2005 was powered in part by advertising with a strong weight management message.

Hopefully, most of you have seen our spot that reminds consumers there are 25 varieties of Progresso Soup that contain 100 calories or less per serving.

Based on our internal measures this commercial has the second highest ROI among the current advertising pool for U.S. retail.

In late October we began airing a new commercial that emphasizes the healthy ingredients and great taste that Progresso offers and initial testing suggests this spot will be effective for us, too.

Our new Hamburger Helper advertising reiterates the brand promise created back in 1971, one pan, one pound of meat, one happy family.

And it shows parents taking the pledge to have a home cooked family dinner tonight.

We know eating dinner as a familiar is something our core Helper user values highly.

We have the Jolly Green Giant back on the air after a decade without TV support.

As mom's look for convenient ways to get more vegetable servings on their family dinner plates, we think our Green Giant businesses has great opportunities to innovate and grow.

Product innovation and consumer directed marketing are driving strong growth in baseline or non-promoted sales as tracked by Nielsen.

Over the most recent 12 months our baselines are up 8% on Hamburger Helper.

We also have 8% baseline growth on our key valuated lines of Green Giant frozen vegetables, which are those products with sauce and seasonings added or resealable bags which add convenience.

And baselines are up 11% for Progresso Soup.

These strong baseline trends are driving solid overall retail sales and market share gains for these businesses.

For the Hamburger Helper line, Nielsen-measured dollar sales are up 10% through the first half of this year.

And that's coming on top of 5% growth for this business in fiscal 2005.

In frozen vegetables, the margin and profit are in the value-added side of the business.

Retail sales for our value-added frozen vegetables are up 2% in the first half building on high single-digit gains recorded in each of the last two fiscal years.

A consumer movement for our Progresso ready-to-serve soups continues to grow double-digit.

As a result, our dollar share of RTF category sales has increased to 30% through the first half of this year.

The third factor driving Meals Division performance in 2006 is significant supply chain productivity.

We've generated some of our cost savings by eliminating slower turning and less profitable SKUs.

In fact we've cut 140 SKUs in the last 18 months alone and we see additional opportunities to improve our SKU mix.

In addition, I think a number of you heard Ken Powell speak at an investor conference last September about our initiative to improve the consumer value equation on Hamburger Helper.

We've simplified the product line, cutting down on the number of ingredient pouches and the number of different pasta shapes we use.

That has reduced our cost goods and that's allowing us to both capture more than $20 million of productivity savings over a two-year period, and to reduce our every day shelf price, which is helping to drive the strong sales and volume growth we are experiencing on this brand.

We are working on a project for Progresso Soup that we believe will yield similar productivity savings over a two-year period.

Overall, we have a strong productivity plan mapped out for fiscal 2007 and 2008.

We see this ongoing focus on cost savings as key to our goal of delivering continued earnings growth beyond 2006.

So to wrap up, I'd say that the Meals Division is off to a good start in 2006 with net sales up 9% and operating profits growing at a double-digit pace through the first half of the year.

We are seeing solid baseline growth on three major businesses, Hamburger Helper, Green Giant frozen vegetables and Progresso Soup, driven in part by effective consumer marketing messages.

Our second half comparisons are tough, particularly on Progresso, but we see ourselves on track to deliver net sales growth and margin expansion for the year in total.

Jim, with that I'll turn it back over to you.

Thanks, Chris.

Let me just finish with a quick summary of our outlook moving into the second half of 2006.

As we've indicated, we're anticipating some significant cost increases in this period.

First of all, our plans call for advertising spending to be up double-digit compared to prior year levels.

In addition, our second half estimate includes significant input cost inflation.

When the year began back in June, we told that you our annual plan included 65 million of increased expense for fuel and resin-based packaging.

Now while oil prices have recreated from their peak levels they are still well above year ago prices and above the future market prices that we were seeing back in the spring when we built our plan for our fiscal 2006.

We now estimate fuel-related costs for us in 2006 will be up 100 million delta versus 2005 and not 65 million.

On the commodities side, our June plan assumption called for a $40 million increase in cost inflation year-over-year.

We now estimate our agriculture commodity costs will be up 65 million in 2006.

In total then, our estimated cost inflation from fuel and commodities combined is 165 million for this year, and that is some 60 million higher than we forecast back in June.

Now while we absorbed some of this in the first half, the majority of this input cost inflation will fall in the back half of our year.

Finally, as we outlined for you in June, our plan for the year also includes increased pension expense and other employee benefit costs year-on-year.

It is these expected increases in advertising spending, input costs and benefit expense that are restraining our earnings forecast for the second half of the year.

From a top line perspective, our businesses are carrying momentum into the second half and we expect continued good growth in net sales for the final six months.

So to summarize, General Mills' results through the first half of the year have put us ahead of plan.

Our estimates for the second half anticipate continued good growth in net sales but also significant expense increases for advertising, input costs, employee benefits.

These expected cost pressures are restraining our earnings expectation for the second half.

But with the good start we've made we felt comfortable in slighting raising our earnings guidance for the full year.

Now, that will conclude our prepared remarks.

I might add that as it turns out it was a good idea to do this as a conference call and not a meeting in midtown Manhattan.

Kris Wenker, Chris O'Leary and I are ready to take your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from the line of John Feeney, Wachovia Securities.

Please proceed with your question.

Good morning.

The first question I'd like to ask is, you know, going across your categories, particularly cereal, Jim, you've seen strong price mix especially last quarter and that's really kind of slowed down.

Have you been spending more than the trade, slowing down these price increases?

I mean the volume's been reasonably impressive, but can you give us a little color as to what's going on there particularly in the cereal business?

Sure.

Just overall, Chris, the trade spending's up year-on-year, but as a percent not as much as last year of the mix.

In cereal we are spending a bit more sequentially in getting back to a competitive merchandising level which we were uncompetitive and, as you know, the back half of last year, we began to correct that in the first quarter.

And just to follow-up on cereal a little bit, you talk about regaining consumer market share, Jim, but what are you using for the category because it looks like you're ready to serve?

I mean ready-to-eat cereal is flat, what did the category do?

We are down little bit on a year-on-year comparison in the quarter.

When I say we're up it's sequentially.

We hit a [nader] in our share back in April and since then we've been either holding or gaining a little bit of share month-by-month.

And if I just add, you know, for the second quarter you're looking at the consumer takeaway numbers we gave you and you see that Big G is running flat for the same period of time, the category including projection for Wal-Mart, would be up just a little under 3%, high twos.

And then just finally, if you could, about productivity costs.

I mean you talked about in your June plan something like 150 million last year, no reason why you couldn't do that this year.

Could you give us an update as to how much productivity you actually reaped as part of that plan and where you think you stand for the second half?

Let me just reiterate that the guidance for the full year which was we said we had done 150 million last year.

We expected to do that or more this year and we continue to reiterate that guidance for the full year.

Are you at liberty, Jim, to tell us how much of that's kind of been spent already?

No.

I'd just say that it's a pro rata across the year, probably a little bit back-end loaded.

Great.

Thank you.

Okay.

Thank you, John.

Our next question is from the line of Andrew Lazar, Lehman Brothers.

Please proceed with your question.

Good morning.

Just to go a little bit deeper into sort of the other price mix side around Big G, I think in the quarter volume was down one and that is obviously quite a bit better sequentially and price mix down one.

And I realize you're getting back to more competitive levels on the merchandising front.

Is there a way to think about your pricing in Big G versus perhaps before you took or tried to take the large increase this past spring?

In other words, would you say that your overall Big G pricing is still kind of up year-over-year perhaps, or the price points are higher before you made that move and that attempt to raise prices which are now just kind of trying to get back down to a more competitive level?

Or comparing against two years ago or what have you.

I think, Andrew, you've stated it correctly that our prices are up year-on-year in terms of what's actually on the shelf between everyday for sure and featured prices.

They're down a bit from where they were in the third, fourth quarter last year, when frankly we took them up to an uncompetitive level and needed to readjust which we did.

Got it.

And I'm assuming just to [inaudible] expectations, I'm assuming as we go into the fiscal third and perhaps fourth quarter, because that's when some of the shelf pricing that you were trying to go through really did sort of go up pretty significantly.

I would assume that the pricing dynamic may be somewhat similar to what we saw this quarter but perhaps obviously volume getting better given the easier comparison?

I think that's right.

And you recall what happened in the third quarter and fourth quarter last year was that we had the shelf prices up on an everyday basis from the price increase that we'd taken in the summer.

Our featured prices were up but it just wasn't, we did not get the merchandising that we expected.

So you net that out to a level which may be higher last year than it will be this year, but we do expect to see some volume up in the back half.

And then just lastly, how do you feel about I guess the innovation side on cereal going into the beginning of calendar '06?

I know did you a lot of yours at the beginning of your fiscal year.

Competitors tend to come out with whatever they do beginning of the calendar year.

Are there new things specifically in cereal that we haven't yet heard about or is it just now taking the things you talked about in this past two quarters and getting them out there more fully?

First of all we're very happy with the new cereals that we put out at the beginning of the year.

We'll be continuing to introduce some new things in the back half of the year, not as much in the first half and we feel good about that.

In total, we think this year will be a good year in terms of our new cereal offerings.

Thanks very much.

And Andrew, just to close the loop on the pricing question, you know, if you looked at Nielsen data for our first half, you'd see our pricing up whether you're looking at base price, average unit price or quality merch, and that's true for the category as well.

That's part of the good news here.

Thanks very much.

Thank you, Andrew.

Thank you.

Our next question is from the line of Terry Bivens of Bear Stearns.

Please proceed with your question.

Good morning everyone.

Happy holidays.

Just in terms of consumption versus the shipments, Jim, I think you mentioned in the release that the consumption was a little bit more robust than were your shipments in the period.

Was there any place in particular where that seemed to be especially exaggerated?

Well you can see it in baking where there was a big difference between shipments and consumption.

I would just say across the board our retailers continually try to work down their inventories and particularly they do that as they come to the end of their fiscal years.

Okay.

Just in terms, you know, you did mention looking ahead in the second half there are going to be obviously some input inflations there.

I know it's difficult to talk about future price increases but could you in general say the environment would be somewhat receptive should that decision be made?

Well, certainly, Terry, you know I can't comment and we don't comment on future pricing.

Through the first half you would see that our net sales has included contribution from that price realization and I think you'll see that over the course of the full year but I'm not going to comment on anything on the second half.

And just lastly with soup, obviously Campbell has made some decisions as to how they were going to manage their soup business early in the soup season.

Now that we're kind of closing out November or December, I hope I'm in the right month here, has there been any discernible change that you've seen in terms of their marketing strategy either with regard to baseline or incremental stuff?

Terry, this is Chris.

As we head into the, as we are now in the middle of the soup season we basically see our strategy of focusing on baseline growth and trying to wean off a little bit our feature pricing is going to continue and I think the soup category will continue to play that way out through the balance of this year.

Okay.

So in other words you haven't seen any unexpectedly aggressive moves by your chief competitors with going into December?

Is that a fair surmise?

That is fair.

Okay.

Thank you very much.

Terry, thank you.

Thank you.

Our next question is from the line of Chris Grow, A.G. Edwards.

Please proceed with your question.

Good morning and happy holidays as well.

I just had one question, a bit of a follow up on Terry's and this regards Pillsbury USA.

There was some weaker volume and sales in that Division, especially when you look at the takeaway particularly in soup and dough and even frozen snacks.

It was weaker that I expected.

Was that a matter of timing, maybe was there a first quarter build in some of these categories or is there any noticeable trend in Pillsbury USA worth mentioning?

Let me speak to Pillsbury USA and I'll let Chris, of course, deal with the Meals side.

In the case of Pillsbury USA, we did not have the quarter we wish we had.

In the case of Totino's, we saw increased competitive activity in the hot snacks category.

We had taken out a couple of SKUs on the pizza side which we have now restored.

We do expect Totino's to see renewed growth in the second half.

On the dough side, we actually had a solid November.

Market share was up for biscuits, bread, sweet rolls, crescents.

Crescents, in fact, gained a full point of share.

We don't have the takeaway for December but I can tell you the deliveries are going very well.

The other soft spot besides Totino's in the quarter was on refrigerated cookies, where first of all, on our side we were comparing against some very strong results last year, and then also we saw some pretty aggressive competitive pricing.

Chris, what did you want to know about soup?

That's me?

I mentioned that soup had strong takeaway and when I noticed that versus like dough and frozen snacks, that the Pillsbury USA volume weakness surprised me was the question.

Okay, I'm sorry.

I [inaudible] a question then as well, I don't know if you can give any more clarity, Jim, this is regarding the restructuring cost, but there was only a couple million dollars this quarter, a little bit last quarter as well.

I think many of us have tried to take a stab at what it is for the year.

In the second half, are there any bigger programs, any reason there should be more second half weighted versus first half weighted?

I don't think we'd care to go any further on forecasting restructuring than we have right at the start of the year, which was to say it would be, that there would be some in the course of the year, it would be less than last year, substantial less than last year in that giving you guidance, our guidance includes any restructuring that we might do and the guidance that we have recently given, which actually is a slight increase for the full year, is inclusive of all that restructuring.

Did it include any benefit from restructuring in the increase in guidance?

No, I wouldn't say so, no.

Okay.

And then my last question is just on the Foodservice Division.

To be clear that we get benefit in this year from restructuring that we did in the past.

That is in there.

Okay.

Got you.

And my last question that is regarding Foodservice and obviously you had some decent volumes this quarter.

The comps are pretty easy as well.

Profits though were flattish and I just was curious if that was in line with your targets, is there any sort of pressure in that Division and I guess the pricing ability broadly with raw materials still going up, this Division tends to show that pricing pretty quickly.

Should we see some more price realization in Foodservice that maybe things had already been announced?

Well, we have taken pricing in Foodservice in the course of the first half.

As you said we take it pretty quickly when costs move in that Division.

We were matched by competitors.

It's stuck and so that will roll on into the back half.

We're quite pleased with our Bakeries and Foodservice Division performance through the first half and we expect them to be on our plan for the full year.

Okay.

Thank you.

Thank you, Chris.

Thank you.

Our next question is from the line of David Adelman, Morgan Stanley.

Please proceed with your question.

Good morning, everyone.

First, Jim, on SG&A, I wanted to understand something, up about 9% for the quarter.

Was that principally the freight, advertising and higher benefit and related expenses?

Yes.

Okay.

And then secondly, is there anything that stands out in the decrease in corporate expense year-on-year?

In other words, if you strip out the unusual item in the second quarter of last year you went from 12 to $2 million.

Is that just miscellaneous issues or are there one or two material favorable costs variances?

No, just the usual pluses and minuses netting out.

Okay.

Thank you.

Thank you, David.

Thank you.

Our next question is from the line of David Nelson, Credit Suisse First Boston.

Please proceed with your question.

Good morning.

On the corporate, the change excluding the 8 million, to follow-on David's question, it's just going from I guess excluding the 8 million, going from 12 million to 2 million, that's just quarter-to-quarter noise?

Quarter-to-quarter noise.

Quarter-to-quarter noise.

Okay.

And then on fuel and energy you've taken, as you've mentioned, the cost up from 65 to 100 million for the year incrementally.

But as I looked back at where the oil futures were in May and June it was in the low 50s and now it's in the high 50s.

Are you assuming something a lot more than the high 50s for oil prices?

Well, first of all you have to understand that we don't by oil directly.

We buy natural gas, we by distilled fuel and there is actually a difference between the realized pricing in gasoline versus fuel with a higher margin today than there has been earlier.

And so the cost estimates that we've given you reflect what our actual costs we expect to have in the back half of the year.

Okay.

Thank you very much.

Thank you, David.

Thank you.

Our next question is from the line of Bob Cummins, Shields & Company.

Please proceed with your question.

Thank you very much.

Good morning everybody.

Could you give us a quick review of your International business?

Several other food companies are complaining about how difficult it is particularly in Europe.

In fact some of them have businesses that they're selling currently.

Could you just give us a review of how you're doing in the different important areas and whether there are these kind of competitive pressures and other problems that other food companies are seeing?

As you see from the results both in the second quarter and then if you look at the results for the first half, we are enjoying a good growth in volume, good growth in net sales and good profit growth in our International sector.

I should say that also is true of CPW, which isn't in that line, but is in the JV line, CPW is doing well also.

And I'm pleased to say it's broad-based across all geographies.

In Latin America we're doing very well across the different businesses in Mexico and Argentina and even Venezuela.

Brazil, which is an investment market, is doing well, growing ahead of plan.

In Asia we're doing well.

China in particular is a significant source of growth for us with big business in Australia.

New Zealand which is doing well.

And the balance of Asia is making a nice plus year-on-year.

And then in Europe, which I think is the source of many of our competitors complaints relative to their international business, we are having a good growth there both in the top line and bottom.

We've invested to a new Old El Paso facility in Spain which is helping on the cost side.

We play in niches of Mexican food, super premium ice cream and specialty vegetables.

And I think being in those niches perhaps helps us.

In any event, it's certainly performing well for us.

Great.

Thank you very much.

Thank you, Bob.

Thank you.

Our next question is from the line of Bill Leach, Neuberger Berman.

Please proceed with your question.

Good morning.

Jim, your full year guidance implies about a 10% drop in EPS in the back half with 4% fewer shares outstanding.

That just seems overly cautious to me.

Can you just explain why things would be that bad again?

I know you have higher commodity costs but that just seems pretty Draconian.

And would you see that decline in both the third and fourth quarters?

The expectation we have is for continued growth on the top line, but we have double-digit increase in consumer marketing and we think that's a prudent and appropriate thing to do for the long-term health of our brands and continued growth of the business.

And then second, we do have significantly higher input cost than we expect.

In fact, if you simply take the fuel and commodities expense which we just cited that's $0.10 a share higher than we had anticipated.

And, of course, something that we had flagged at the beginning of the year was higher benefit costs and they tend to show up in the back half of the year.

Do you see both the third and fourth quarters declining?

I don't care to give a quarterly estimate.

We've given full year guidance.

Can you give us a rough guess for corporate expense for the year?

I mean that was 27 in the first quarter and fell to only two this quarter.

What would you put it at for the whole year?

What would you suggest for Bill?

I don't have a specific forecast for you, Bill, but it's going to be expensed and we explained to you that we've got benefit increases coming at us and as Jim told you, it's more weighted to the back half.

And lastly, could you give us your latest thinking on option expensing for fiscal '07?

We will be expensing options in fiscal '07 as is our current expectation.

Can you give us a range of magnitude?

We haven't given a number for '07 yet, Bill, but I have given people something to work with for the current fiscal year.

We've said 5 to $0.06.

Okay.

Thanks very much.

Thank you, Bill.

Thank you.

Our next question is from the line of David Driscoll, Citigroup.

Please proceed with your question.

Good morning, everyone.

Wanted to speak with you a little bit about marketing expenditures.

Last year I believe your consumer marketing program you actually had a decline in spending here, now we're seeing spending rise double digits.

Jim, can you give me some high level thoughts?

Is the plan here to return this business to significantly higher levels of marketing spending and this is going to take many years so should we be anticipating double-digit increases in fiscal '07 and on and on and that's really the business model that you're offering?

I would not conclude anything in terms of the long-term from this year's double-digit growth.

As you pointed out, we saw a decline last year and we think that to hit the financial targets that we have for this year we can afford the spending that we're doing.

We think it's a good investment for the future.

We're not, you know, at this stage going to give guidance for the next fiscal year.

When we're at Cagney, we'll probably be discussing our longer term business model and we can get into it at that point.

David, one other point that I'd make is, and I think it's implied in your question, but total marketing spending growth as opposed to where you're doing the spending is part of the factor, too.

Remember last year we were taking pricing in a number of categories and that was reflected in some trade spending that went along with that.

This year you're seeing us lean back into the consumer directed advertising side of the marketing spend.

That's where we prefer to lien in and if you looked at the second quarter you're seeing that double-digit growth in the advertising.

I'll tell you trade spending was up on an absolute basis but down as a percent of sales.

And then moving over to Chris, since we have him available on the call, I just wanted to speak with Chris a little bit about microwaveable soups, really to the talk about what his thoughts were on their potential, what's the size that he really sees for the microwaveable soup business and really talk about retailer acceptance and the fact that you're, you know, a number of years later to the market than Campbell's is.

So curious to really understand that and then also if I could throw in here one more related question would be the cannibalistic nature of those microwaveable soups to the existing franchise.

Okay, David, first, our microwaveable soups are off to a very good start.

We launched in October.

Our account acceptance is ahead of what we thought.

We already have three of the top ten turning SKUs in the microwave soup segment.

Now remember it's early days but we're off to a very good start.

In terms of cannibalization, we are seeing this is a pretty incremental idea to soup, it's bringing new occasions whether it be lunch time or at work and the like.

So we're off to a good start and we think the category has merit.

Campbell's is offering a completely different thought with their Super Premium Campbell's Select Gold.

This is not an offering that you have yet your brand, in my opinion, is known for its high quality and I think that's really been the consumer appeal.

Are you at a dangerous competitive point here if the Campbell's Select Gold really gains significant traction?

The Progresso brand, you were correct.

The Progresso brand is known for high quality, it is also known for abundance of ingredients and big chunks of ingredients.

And that is really the brand proposition.

A pureed soup is not necessarily spot on our core positioning.

Of course we will watch that segment carefully, but we don't believe Progresso is in danger from a positioning standpoint.

Okay.

Super.

I'll turn it over.

Thanks, everyone.

Thank you, David.

Thank you.

Our next question is from the line of Leonard Teitelbaum, Merrill Lynch.

Please proceed with your question.

Good morning.

Jim, you had mentioned that if you pull oil out and I presume or truly related costs, et cetera, I presume that includes packaging.

Your commodities, which I don't know if you mean to be soft commodities or not, are up significantly.

Could you kind of identify which ones are really driving that gain because unless I'm missing something, and I sure could be, I just don't see where the push is coming from in the non-petroleum side.

Sure, Leonard.

Where we see it are soy beans, other grains and sugar.

Sugar in particular due to the Katrina effects.

I can see sugar but soy beans are actually below last year, aren't they or did you hedge in?

They're above what we expected them to be for the back half.

All right.

Now, have you protected, you've got a good sight line to that.

Does that mean that you've locked in these costs for the balance of the year?

We've locked in our costs for about 85% of the full year.

Okay.

Fine.

Nothing but upticks in '06, everybody have good holidays here.

Thank you very much, happy holidays.

Thank you.

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

Please proceed with your question.

Good morning.

I have a few follow-ups on Bill Leach's question.

When I do the math here, right, if shares outstanding in the second half, probably contributing 5 to $0.06 a share if we assume you don't even by anything more, okay, interest expense you say there's going to be a benefit of about $0.02.

If I take your, I think it was, what'd we say, 150 million in productivity, and let's say that's just, you said there was going to be above that this year versus '05 and that most of it is second half weighted or somewhat more weighted to the second half, so let's say that's another few pennies.

Right?

That basically offsets the $0.10 of input cost pressure that you're mentioning in terms of the 65 million incremental for the year.

So I guess, one, do you disagree with those numbers?

And then, two, given that Big G is your highest margin business, it was in free fall last year in the second half, you've got that better positioned.

So just the swing alone in that business should mean that the second half is going to be pretty good.

And I'm not really kind of again following up with the more numbers than Bill's kind of laid out, I don't see how you get the EPS down 10%.

Either there's a lot of restructuring coming which you said there isn't, or there's something that I'm just not understanding in your calculations.

Well, Eric, I'm not going to go through number-by-number the different estimates that you've made, nor am I going to give a profit forecast for one of our Divisions.

We don't do that.

I would simply reiterate our updated guidance for the year.

And I would say that in the case of Big G we do expect to continue to make progress and we certainly have comps year-on-year which are easy in the back half for Big G in terms of sales.

Okay.

Let me then try it a different way, the non-quantitative approach.

Historically when Big G, or historically when the company had relatively good volume growth there was tremendous leverage to the bottom line.

Steve has kind of always kind of hammered away at that.

So has anything changed so significantly?

Assuming that you're able to offset some of these input costs with some of those other items that would not make the profit swing in Big G pretty sizeable if in fact you can, just, what were you down like 7, 8% in the second half in Big G volume shipments last year?

Let me answer your question, Eric.

Has anything changed that General Mills benefits from volume with leverage?

The answer is, no, nothing has changed and General Mills does benefit from volume leverage and that does include Big G.

Okay.

And then last one.

You kind of mentioned the improvement in cash flow.

It looked like the bulk of that around 200 million was tied to working capital.

Working capital since you bought Pillsbury has kind of been a thorn in your side.

Is this kind of the turn?

I'm kind of surprised because given that input costs are up, I can't remember whether you're LIFO or FIFO, but shouldn't that also be, I guess basically comment on that and why shouldn't that give you even more leverage to either buy back stock or pay down debt or whatever you're going to do with it?

Let me address that.

We are pleased with our cash flow in the first half.

We are first of all pleased that our operating profits have gone up so much year-on-year which is a major contributor to it.

We're also pleased that our working capital has grown more modestly.

The second quarter is a quarter in which working capital tends to grow because that is a big quarter for us in sales and we have to sort of build up inventory to supply for our customers, then we're selling to our customers, and so that tends to be a high point in the year but we're very pleased with how we've managed that.

I would say looking back that working capital was a tricky thing to measure for us because we were spending so much on Cap Ex initially.

That's been coming down, continues to come down this year and so that isn't really a major influence year-on-year or quarter sequentially as to working capital.

We are very mindful of use of working capital today as we are of Cap Ex and we're very mindful of having as much cash available at the end of the year after we've satisfied our needs for investment to grow, to have excess left over to repurchase shares or to pay down debt and we'll use whatever surplus we have to do so.

All right.

I'll see you in January.

Thank you, Eric.

We look forward to seeing you in January.

Our next question is from the line of David Palmer at UBS.

Please proceed with your question.

Good morning.

Jim, the Company, you know, I think has had some pretty impressive advertising lately and we see many of these placements on prime time and network TV which, to some degree, is new.

And in increased consumer spending in this way, which you point out to the double-digits in the second half, it seems to be a different strategy than other package food companies or at least many of them who often say that the money's better spent in the store particularly with those kind of share gaining retailer partners.

You mentioned that the Company had some room in the P&L to spend on this with the current guidance, but I'm sure that there's something new in your thinking that is possibly leading you to this strategy.

Could you maybe comment on what your research is saying about the return on investment of advertising versus other spending?

Maybe also what does your research say about the right amount of advertising support for your brands?

Are you far away from that level?

Obviously that dovetails with the previous question which is, could you possible do this double-digit type increase in years ahead and drive some effective volume growth?

Thanks very much.

Thank you.

I'm not going to comment again on beyond fiscal '06, but I will say that we have always believed that you should be advertising against improvements, news in your products.

That's the time when it makes sense to tell consumers what you're doing or when you're introducing a new product.

And furthermore that we're very disciplined about looking at which copy will work and will move the needle and spending against that and not spending against advertising copy which doesn't.

I'm going to ask Chris to comment a little bit about spending in Meals on media advertising because in fact we have taken that up this year and as Chris mentioned, we're back on Green Giant which were haven't in some time.

Thanks, Jim.

We, [inaudible] for Green Giant, for example, we believe we have the opportunity.

We have now, have a campaign and a commercial that delivers an ROI that is in the, a healthy ROI, and we're now looking to increase our advertising support on Green Giant behind the belief that consumers are looking for healthier, they want more vegetables in their diet.

So that's an example where we are taking it up.

And then on Helpers and Progresso, we feel the, and we know the ROI on both of those spots and they are both very healthy and have taken our weight up this year because of the effectiveness of the advertising.

Thank you very much.

Thank you, David.

Operator, I'm going to cut in here and say let's take one more question.

I know there might be some others of you out there but I want to be respectful.

ConAgra is coming behind us and so we're going to wrap up on time here.

So could we have one more?

So the last question of the day comes from the line of Ken Zaslow, Harris Nesbitt.

Please proceed with your question.

Good morning.

Thanks.

Just two quick questions.

Your U.S. retail margins contracted again this quarter.

Maybe just following on a little bit with Eric's question, to what extent has that depressed in U.S.

Retail margins been related to the mix shift away from higher margin cereal business, just because volume's obviously in yogurt and other have been growing faster than cereal which I suspect is a higher margin business so to what extent do you think the pressure on the margins in U.S.

Retail is because of the shift away from cereal?

We don't comment business by business on margins.

U.S. cereal is in fact a high margin business and you're right as to the relative sales in the quarter.

Yeah, but I would not look at mix as the driver there.

The factors that are really in front of you in net operating margin for U.S. retail are the significantly higher advertising expense for U.S.

Retail in the period, U.S.

Retail's share of freight costs impact and the amount of input cost pressure that was in the second quarter which is less than what we're anticipating in the second half.

So if you do get the volumes back in cereal, you don't think that would cause an immediate rebound in your margin in U.S. Retail?

Well it's certainly margin positive but there are other factors going on this year and I'm telling you that the advertising spend and the input costs are probably the bigger things to look at.

And then just on a longer term thinking about restructuring costs, can we assume that going forward the restructuring costs will be in a year and for '07, '08, '09, or would you expect it to somewhat slow down after '06?

I think on this one, Ken, I'm just going to reiterate what our longer term guidance is, which is that we expect a high single-digit EPS growth over the long-term and that will be inclusive of restructuring.

We expect that the restructure is something which is going to happen year-by-year.

We're past big major one-time things which came about with the integration of Pillsbury on a go-forward basis.

There will be a little bit here, a little bit there, but we think we can absorb that within our P&L and net out to the EPS guidance for the long-term that we gave at the end of last year.

Thanks a lot.

Thank you, Ken.

Have a good holiday.

Happy holidays to everyone.

Again, thank you all for joining us today.

Thanks.

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

We thank you for your participation as you please disconnect your lines.