通用磨坊 (GIS) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the General Mills third-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) As a reminder, this conference is being recorded Thursday, March 23, 2006.

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

Please go ahead.

Good morning, everybody.

I'm here with Jim Lawrence, who is Executive Vice President and Chief Financial Officer with responsibilities for our International operations, and also Bob Waldron, who is president of our Yoplait division.

Before they begin their remarks, I need to remind you that this conference call will include forward-looking statements that are based on management's current view and assumptions.

We have posted slides on our website that supplement our remarks today, and the second slide there lists factors that could cause our future results to be different than our current estimates.

The press release that we issued earlier this morning is also posted on the Web, if you still need a copy.

And with that, I will turn you over to Jim.

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

As we reported in our release this morning, net sales for our third quarter grew 3% to exceed $2.8 billion.

Segment operating profits matched last year's results at $479 million, and this reflects higher costs for commodities, fuel, and employee benefits, along with increased advertising investment year-over-year in the quarter.

Earnings after-tax totaled $246 million for our third quarter, and our diluted earnings per share increased to $0.68.

Now, our EPS results for both this year and last year include some items that affect comparability.

The first one is the accounting for contingently convertible debt.

That represented dilution of about $0.03 per share in last year's third quarter; and beginning in this year's third quarter, our EPS no longer includes that CoCo dilution.

On the tax line, last year's third quarter included a portion of the book taxes on our SVE transaction; and that reduced EPS by about $0.12 last year.

As you saw in today's release, this year's third-quarter tax rate includes a catch-up impact (inaudible) a slight change in our annual tax rate.

We have revised that now from 35.5% down to 35.3% for the year.

That catch-up effect in the third quarter was a little bit less than a penny.

Last year's results included interest income of about $0.02, which stemmed from the resolution of certain tax issues.

Finally, both quarters include about one penny of expense for restructuring, other exit and associated costs.

Our sales growth for the quarter was consistent across all three of our business segments.

Volume grew in line with net sales overall.

We achieved good net price realization in our Bakeries and Foodservice segment.

In our U.S.

Retail segment, we were pleased to see that sales and volume growth was exhibited in all six major divisions.

If you have the website up, slide 6 will give you the details.

Baking Products posted our strongest growth rate; net sales there were up 12%.

That was due to strong performance during the key baking season and the continued success of our Warm Delights microwavable desserts.

Yoplait sales were up 9% in the period, and Bob Waldron will discuss the drivers of that performance in just a few minutes.

Net sales of Big G were up 5% against weak performance a year ago.

Our snack sales grew 4%, led by continued strength in our Nature Valley and Chex Mix businesses.

Both meals and Pillsbury posted 1% sales gains for the quarter.

Consumer purchases of our products increased 2% in the third quarter as measured by AC Nielsen.

Totino's hot snacks, Progresso soup, Yoplait yogurt and desserts showed the strongest consumer sales growth.

Now retail sales takeaway for cereal was below year-ago levels for the quarter; but unit volume comparisons were better, within 1% of last year.

That reflects a renewed balance of merchandised, nonmerchandised sales this year.

We expect our unit takeaway on cereal to continue ahead of sales takeaway in the fourth quarter.

Moving down the income statement, you can see that our gross margin in the third quarter held pretty steady at about 39% of sales.

Through the first nine months of the year, our gross margin is 110 basis points higher than last year, and we're going to work hard to hold onto as much of that improvement as we can for the full year.

Selling, general, and administrative expense for the quarter was 200 basis points higher as a percent of sales at 22.9%.

This reflects three main items.

First, higher employee benefit costs; second, customer freight costs, which were up double-digit, and this of course reflects higher fuel prices and carrier costs; and consumer marketing spending was also higher for the period.

Our segment operating profits for the quarter were essentially unchanged from last year, when we posted 6% growth.

If you have slide number 10, you will see the performance by business segment.

Profits in U.S.

Retail matched last year's levels.

Our International segment posted another quarter of solid double-digit growth.

Bakeries and Foodservice profits were down 8% after nearly doubling a year ago.

If we turn to our joint ventures, Cereal Partners Worldwide posted good volume and profit gains in the quarter.

Our net sales grew 2%, and that was limited by unfavorable foreign currency exchange.

Net sales of our 8th Continent joint venture grew 13% in the quarter.

This was driven by distribution gains from this year's launch of 8th Continent Fat Free Soymilk and Refreshers juice and soy beverages.

Our Haagen-Dazs joint venture saw sales fall 22% during the period.

Weather was a major factor here.

Japan has had one of the coldest, snowiest winters in memory.

In addition one of our competitors entered the market with strong introductory spending.

Total earnings after-tax from joint ventures totaled $15 million in the third quarter.

That compares with $23 million in the period last year.

The decline reflects the absence of earnings from SVE.

Year-to-date earnings for continuing joint ventures are now up 15% to $54 million for the nine months.

Looking at our core working capital trends, we saw increases in both accounts receivables, and inventories, but these were more than offset by increase in accounts payable.

So overall, our core working capital results were good.

Shifting to the cash-flow statement, you can see that through the first nine months cash from operating activities is up $208 million, driven by earnings growth, lower use of working capital.

Capital expenditures through the first nine months totaled $191 million.

Now that is less than we had been estimating due to timing of projects and good cost control, and we are now updating our capital spending forecast for the year.

We do not expect CapEx to exceed $375 million for fiscal 2006.

We bought back just over $800 million worth of stock in the year, or roughly 17 million shares, and we have paid out over $360 million year-to-date in shareholder dividends.

Slide 14 shows you where we stand through the first nine months of fiscal 2006.

Net sales are up 3%, which is consistent with our goal of low single digit top-line growth.

Segment operating profits are up 5% to over $1.6 billion.

Net earnings are up 11% to $868 million.

Diluted EPS have increased to $2.29, which does include $0.08 of CoCo dilution.

Slide 15 summarizes our operating performance through the first nine months.

We're happy to see net price realization across all three operating segments, with sales growth running ahead of unit volume.

Through nine months, we have achieved mid single digit growth in total operating profits, again consistent with our long-term target.

Now I would like to highlight a few of the businesses that are contributing to this operating performance, and I will start with the Baking Products division.

We have just wrapped up a strong baking season.

Consumer takeaway on our Betty Crocker dessert mixes was up 9% in the third quarter, and our dollar market share increased 2 points.

We will have continued good marketing support behind this business in the fourth quarter, including Easter merchandising, ongoing advertising for our Warm Delights microwave desserts.

The holiday baking season also is important to our Pillsbury dough business.

I showed you earlier that overall Nielsen measured sales for Pillsbury refrigerated dough moved 2% in the quarter.

That reflects good performance in Pillsbury Crescents, which were up 8% in the quarter and through the first nine months of the year.

In addition, Cinnabon cobranding we have added to our Grands! line has contributed to 17% growth in Pillsbury's sweet rolls business.

We continued to have a great year with Progresso soup.

Consumer sales increased 11% in the third quarter; and that was a tough comp against double-digit growth last year.

We have increased our rolling 12-month share of the ready-to-serve soup category by 4 points during the past year to over 30%.

In addition to this growth by Progresso, our line of Muir Glen organic soups is performing well and gaining share in that growing market segment.

For our Big G cereal business, dollar share was 30% in the third quarter; 3 points of that came from new items including Yogurt Burst Cheerios, which currently accounts for more than 1% of category sales.

Big G merchandising levels are up versus a year ago, and so are merchandised price points.

As we discussed before, Big G's second-half plans include a double-digit increase in advertising support.

This strong investment in brand building should help us to continue to build net sales and volume for our U.S. cereals business.

Now at this point, I'm going to turn it over to the head of our Yoplait business, Bob Waldron, who will highlight the key factors that drive the growth in this division.

Bob?

Thanks Jim, and hello, everyone.

I appreciate the opportunity to talk to you about the performance in the U.S. yogurt category.

Category sales growth have been strong, compounding at an average 10% rate since 1978, the year we entered the market.

From just $300 million in sales that year, the market has grown to over $3.5 billion today.

In the most recent 52 weeks, the category has grown over 8%.

In fact, yogurt is the second-largest category that General Mills competes in today, second only to cereal.

We believe there is still significant growth ahead.

Household penetration for the yogurt category is only at 74%.

For Yoplait, the brand with the highest penetration, our headspace for growth is even greater.

We are in just 46% of U.S. households today.

Yogurt is a low-calorie, high-nutrient choice for a meal or a snack.

So given the increasing trend towards health and wellness, we expect to attract more consumers to this category.

We also expect continued market growth will come from expansion to new retail channels beyond traditional grocery stores.

Finally, while adult consumption is currently heavily skewed towards female, kid consumption is an even split between boys and girls.

So in the future, more men will be eating yogurt regularly.

That is a trend that will bring the U.S. more in line with established international markets.

In fact, per capita consumption particularly in Europe is significantly higher than that in the U.S, as you can see on slide 23 in our materials.

With over 90% household penetration and a high buying rate, those European markets certainly present an exciting vision of what the future could be for the U.S. yogurt market.

Now, I want to turn to our business.

We divide our portfolio into three basic groups.

Core cup comprises 60% or over 60% of our volume.

We also manage a couple of regional cup businesses in the single serve format, the Colombo brand as well as large size.

Multipacks, which are six-packs of yogurt primarily targeted at kids, account for about 10% of our volume.

Finally, we pioneered the portable yogurt segment with our successful Go-GURT tubes; and more recently we have added Smoothies for kids and adults.

This morning I'm going to focus my remarks on our core cup business.

This segment is driving our good top-line growth in 2006, and it is also the driver of our profit strength.

We're focused and focusing on four key drivers to build our business.

They are superior product quality; brand building support; continuous product innovation; and transformational productivity.

Let me give you examples of each of these.

I will start with superior product quality.

While consumers come into the category for health, they choose their brand based on taste.

We regularly test and improve our Yoplait products to ensure that they are clearly preferred by consumers.

In fact, 88% of our cup of varieties are preferred 60/40 over the closest competitor.

Nearly three-fourths of our cup products actually win at a higher preference level of 70/30.

In my opinion, this is the top driver of our performance, and it allows Yoplait to enjoy the highest level of loyalty in the category.

The second key driver of our growth is the ongoing commitment to brand building.

We start with highly effective advertising.

Yoplait has the highest share of voice in the U.S. yogurt market.

Bikini, the TV currently on air, has the highest return on investment score among General Mills commercials.

We have run this ad for the past four years during the weight loss season that begins in January, and it keeps working for us.

In addition to effective advertising, we are the proud sponsor of the Race for the Cure.

This is a national and nationwide schedule of running events that raises money and awareness for breast cancer research.

You also know about our Pink Lids event, where Yoplait consumers help raise funds for The Susan G. Komen Breast Cancer Foundation.

To date, we have given over $15 million to breast cancer research, and this effort allows us to connect to our consumers in a very powerful, relevant way.

We also customize our marketing efforts for the large and growing Hispanic market.

We are the number-one brand with Hispanic consumers, and we expect to build upon that position with the addition of Soraya as our spokesperson.

When she is not winning Latin music awards, she is out promoting our Pink Lids to her fans.

Our third growth driver is continuous innovation.

We constantly refresh our product lines to keep them relevant and growing.

The clinically proven weight loss claim on Yoplait Light has helped drive strong double-digit growth for this line over the past two years.

We now have the largest light cup business in the category, and we think it will continue to grow.

We also pioneer new textures and flavors to keep our business growing.

We were the first to introduce a light and fluffy texture with Yoplait Whips!; now, with a proprietary recipe we have introduced the first Chocolate Mousse flavors, propelling the Whips! line to $100 million in net sales.

In January, we introduced the first Thick & Creamy product in the light segment.

While it is still early, this slide is off to a great start.

Our fourth and final growth driver is our focus on significant cost savings through productivity.

During the 1990s, we began investing in high-speed lines that increased our output and reduced our costs.

We also lowered our package costs.

Given that we sell over 2 billion cups a year, those savings add up quickly.

We also focus on process changes to drive longer production runs and improve consistency, resulting in reduced downtime and a 50% reduction in consumer complaints.

These initiatives drove a combined 20% reduction in our manufacturing costs.

This savings has fueled higher margin, allowing us to reinvest in aggressive brand building which drives sales, profitability, and share growth.

As a result of all of these efforts, Yoplait's core cup product line today account for more than 23% of the U.S. yogurt sales.

That is nearly double the size of this business just 10 years ago.

On top of this growth in our core business, we have added all the other new segments I mentioned earlier, multipacks, Go-GURT, and Smoothies.

They have added to our market share, too.

So our total share of category sales has increased from just under 23% in 1996 to more than 38% today.

We think the future looks bright for both the U.S. yogurt category and for Yoplait.

We believe our focus on product superiority, brand building support, continuous innovation, and productivity will allow us to continue to grow both the top and bottom line.

Thanks very much for your attention.

Now I will turn it back over to you, Jim.

Thank you, Bob.

Let me just finish with a quick word on our outlook for 2006.

Results through the first three quarters have us solidly on track with our guidance for the year.

That is despite significant expense increases for input costs, employee benefits, and higher advertising investments.

We're reaffirming our EPS guidance for the year of $2.80 to $2.85, which includes $0.08 of dilution for contingent convertible accounting.

Now it is still to early for us to comment specifically about 2007, but I will reiterate the preliminary view that we shared with you at CAGNY last month.

We feel that we have got a full pipeline of new products coming in the next fiscal year; and we also have a strong list of identified productivity initiatives to help to offset higher input costs.

While we expect continued input cost inflation in 2007, the rate of inflation does appear to be moderating when you compare it to the levels that we have seen in the last two fiscal years.

We expect these factors to help us deliver another good year of growth in 2007.

With that, we conclude our prepared remarks, and we will ask the operator to open the line for questions.

(OPERATOR INSTRUCTIONS) Chris Growe, A.G. Edwards.

I just had a couple questions for you.

The first one is just to be clear.

For the fourth quarter, obviously your implied guidance for earnings suggests that earnings will be down on the order of $0.05 to $0.10 per share from the prior year.

Is there anything unique to the fourth quarter we should know?

Whether it is restructuring charges, which I know you have not been able to give much guidance on for the year; but it's been a relatively small amount so far.

Or perhaps maybe on the marketing side that is going to really ramp up in the fourth quarter that could distort the comparison.

There is nothing in the fourth quarter which is different from our guidance for the back half.

As you know, we revised our full-year guidance at the midyear point.

We revised it up.

We don't give a quarterly guidance, so we're simply sticking with that annual guidance that we revised.

When we revised it, we said expect increased employee costs, expect input cost to increase, expect double-digit advertising increase in the back half.

All of that will be true in the fourth quarter.

Nothing special compared to the third.

Okay.

My other question is relative to the cereal division, which had a nice, obviously, turnaround from the year ago.

You had made a comment I think, Jim, that the volumes were -- let me ask you to clarify that.

I am just curious how the reported growth in cereal and the shipment growth -- the consumption growth, how those two differed.

Is there anything unique to this quarter that resulted in that?

First of all, thanks for the comment.

We are pleased with the direction of our cereal business.

We don't believe it is where we need it to be, ultimately.

But we expect, over the course of the back half and fourth quarter, to see a better volume growth than we do a sales growth.

But we are pleased to see that the -- year-on-year the average price realized has gone up.

So is the -- when you reported 5% sales growth, I think it was 6% volume, if I recall -- that was your reported growth -- that did differ from the actual consumption trend.

Is there anything unique to that trend?

(multiple speakers) difference between our sales and off take in the quarter.

I'm sorry?

There is a difference between our sales and off take in the quarter.

Is there anything to explain that, that you are aware of?

We have better merchandised sales this year than we had last year.

Those merchandised sales, though, are at lower prices than we had last year.

So that is an explanation between the volume and the sales difference.

Okay, thank you.

Terry Bivens, Bear Stearns.

Jim, I was going to ask you why you don't just raise guidance after this quarter, but I guess you pretty much answered that on the first time around.

Let me ask you this.

On the 200 basis points higher SG&A to sales ratio, would it be possible to give us a rough estimate of how much of the increase there was attributed to those three buckets, I guess, marketing, benefits, and input inflation?

All of it was due to that.

Okay, but I mean is it possible to kind of delineate between those three?

No (multiple speakers) split it between those, but it was that.

Those were the causes.

Okay, great.

Lastly, I guess, this is probably a better question for, I guess, a public meeting or something.

But one of the things I keep wondering about -- what is the bull case for staying with the Baking and Foodservice arm?

I guess there are some synergies there with General Mills.

But it just seems like it's kind of a slow growth, somewhat difficult part of the Company.

Granted it is not huge, particularly, compared to U.S. Retail.

But maybe just briefly if you could list a couple of the strong reasons why you feel it is a viable part of Mills going forward.

Sure.

The food eaten out of the home is growing faster than food bought out of stores.

So we would like to participate in that higher growth rate.

It is true that that is a lower-margin business than retail branded.

But still we believe that from the levels that we're at now, we can improve our own margins.

We're not happy with how that business has been performing in recent years.

But we are pleased that last year we stabilized the profits; and this year, through nine months, we have grown them nicely and expect to grow them through the balance of the year.

So we hope that we will be able to participate in that faster sector growth and improve our margins in that business in years ahead.

Okay, just one quick addendum there.

What kind of margin structure do you think is possible over time there?

Just a degree of magnitude sort of thing.

In the teens.

It was in the lower teens when -- the Pillsbury Baking and Foodservice business was in the lower teens at the time we bought it.

We have a number of Baking and Foodservice businesses around the world which are at that level of profitability.

So there's no reason that we should not get it back into the teens.

Okay, great.

All right.

Thanks very much.

David Adelman, Morgan Stanley.

It is actually a question for Bob.

Bob, your principal competitor has made a substantial push globally with probiotic products.

Obviously they have two products now in the U.S. market, one nationally and one regionally.

I'm curious about two things.

First, today, what do you think the prospects are of those types of products?

What does your data tell you about the consumer level of interest?

Secondly, do you have the technology, or do you have the access to the technology to launch those types of products if you elected to, if you were interested in doing so?

Yes, let me talk about those two separately.

Number one is just probiotics.

When you look around the world, particularly in the European markets, probiotic yogurts are an established market segment.

After years of sustained investment you can see markets where probiotics have captured 10% or so of category sales.

We will have to see what level of interest the most recent national introduction with the Activia brand generates with U.S. consumers.

It is relatively a new idea here.

When we have tested probiotic concepts, less than 5% of consumers know the term probiotic.

But this kind of innovation, working to introduce new product forms and new segments is a good thing overall for the category.

But today, I would say the strong growth in the U.S. yogurt market is being driven by the fact that yogurt is a great tasting, portable, light meal or snack that is low in calories.

So we have been focusing more on taste variety and reinforcing the weight management benefit of our products.

To your second question, what I would say is we have the ability to manufacture probiotic products if the market opportunity seems attractive.

Okay, thank you.

Andrew Lazar, Lehman Brothers.

I'm trying to gauge sort of, I guess, the level -- really more quality of some of your innovations, specifically in the Big G cereal arena.

That is an area that I think you have even said yourselves that you wanted to kind of continue to pick up.

There was a slide in there which talked about I think three points of share coming from new products.

So I was trying to get a sense of what time frame that is over.

I guess more importantly, how does that compare with sort of previous attempts at new products, or in various different years when you have come out with some new platforms or products?

Does that sort of score on the high end?

Does it tell you that therefore the quality of some of your innovation in cereal is kind of back up to where you want it to be?

Just trying to put it in perspective.

Then the second piece would be just a follow-up to Chris Growe's question.

Just I want to make sure I am clear on it.

There was a difference between your retail takeaway in Big G cereal sales or in volume and your Big G cereal shipments.

I was trying to get a sense again in this quarter what caused that differential.

Let me first of all take the innovation and the new products.

First of all, we're speaking to the third quarter where 3 points of our share came from new products; and in particular, we are pleased with our Yogurt Burst Cheerios, which yielded 1 point.

That is a solid performance.

We have done better, and I will ask Kris Wenker to comment a little bit on the history of that; but that is a solid performance.

We are, as I said earlier, we are pleased with the direction that we're going in Big G. But we are not happy that we're at the point we want to be.

We are moving in the right direction.

We have a pipeline of new products for next year, which I'm not going to discuss.

But we have said, both at CAGNY and we are reiterating today, that we are pleased with that pipeline.

Obviously, as we introduce those new products to the trade, we will share that with the investment community, and you will be able to judge yourself how you view that quality.

Now I will ask Kris to just comment on the history there.

One other point I would make on the difference between shipment and takeaway in the quarter, if you remember in December we talked about three new cereal that were launching in January.

One was Berry Lucky Charms, one was Neopets, and -- I am so embarrassed to say, the third one escapes.

I will come up with it in a minute.

But at any rate, so there is a little bit of new product shipments that is part of the difference that you are examining there.

In terms of the historical performance on new, certainly we have had quarters with a greater contribution from new products.

But what we are seeing this year is a good improvement versus the new product contribution we had a year ago.

So we are pleased with that.

Okay, thanks very much.

David Driscoll, Citigroup Investments.

Jim, I would just like to ask you a follow-up question here.

One of the other questioners asked about the restructuring charges. [Does] the pacing of the charges throughout the year looks fairly consistent.

Can you just confirm for us that we are not in store for a much different result in the fourth quarter?

I.e., has the pacing of the charges been roughly equal throughout the year, and the fourth quarter would be something of a similar magnitude?

David, I'm not going to give a quarterly forecast on restructuring or earnings per se.

But what we have given you is an earnings guidance for the full year which is inclusive of any restructuring.

We have made clear that as from this year we're giving guidance on GAAP basis, which is inclusive of that.

We had a penny of restructuring this quarter, and we do not anticipate anything major ahead, but I'm not going to give you a specific forecast on that.

On Big G cereal, kind of following along the lines of some of the other questions, can you talk about alternative channels?

So in the measured channels obviously there is a big difference between that and what you have reported in your shipments.

What do you see going on in the alternate channels?

Well, the most important of the unmeasured is Wal-Mart.

We are very pleased with our performance there.

Across the rest of them, it is satisfactory.

The share that we have given you is inclusive of our estimate of total share across all channels.

Going forward, and especially when I look back on the month by month comparisons from all of '05 versus '04, obviously there were significant share losses through that period.

Would you expect that, going forward in '06, that you will actually go into positive share-gaining territory in Big G cereal?

I.e., we were down so much last year on a year-over-year comparison, it stands to reason that we should see cereal market share up as you regain some of that lost share.

Do you agree with that?

What I'd say, David, is that we were unhappy with where we were.

We changed course.

We were moving now in the right direction.

As I said earlier, we do not feel that we are our where we want to end up; and we are just continuing to move in the direction that we are moving now.

We will see how it plays out in the marketplace.

On the Foodservice operations, this business looked like it started to get -- was starting to get better.

The volume performance, I think, [in] the quarter at flat;

I don't know what your comments are going to be on that one.

But I think from where we were, it is reasonably decent.

The margin performance, really however, really isn't.

I think this is a business that has a tremendous amount of potential.

What are you going to do here in order to make this thing do better?

What are the reasons, if you can actually talk to us a little bit about why this business continues to struggle on an operating profit basis?

What is the analysis?

Well, first of all, in the quarter we were pleased to see net price realization.

We took prices, and we are seeing that stick, and we are pleased to see that.

Through the first nine months, we're actually quite pleased with the year-to-date performance.

In the third quarter, we did have significant input costs.

That is reason for the impact on the operating margin year on year.

You do have to remember that last year's third quarter was a big, big improvement over the previous year.

I think when we wrap up the year, we will see an attractive improvement year on year from this business.

So would you actually say then the trajectory is positive?

Oh, yes, the trajectory is positive through the nine months, and we think it will be through the year.

At CAGNY we gave a forecast combining Bakeries and Foodservice and International, which showed outpacing U.S.

Retail business over the next few years.

Very good.

Last question on operating margins.

Down significantly in the quarter.

One question here.

Certainly, I think everyone has been asking about the marketing expenditures, and I know Terry was trying to get a little detail there.

Can you just talk to us, though, about the implications of the operating margins this quarter as to what it would suggest in the future?

I mean down 200 basis points is a big change.

So when we are all looking at our models, and we trying to make assumptions as to operating margins in future periods, is the pacing of this marketing spending here -- does it have any indication as to what you guys might do for marketing spending going into 2007?

Or was this a one-time step up in your opinion, and that is really the driving factor on margins for the back half of '06?

Let me comment both on longer-term expectations and expectations for the back half of this year.

We continue to reiterate that our top line should be growing at a low single digit and our operating profits growing at mid single digit.

That is what you can expect over the longer term and that is where we are as of nine months.

We said at midyear, that for the back half of this year we were going to be hit in particular with three things.

One was input costs had risen significantly relative to our forecast for the year; and we would have to absorb that.

Second, we said that employee benefit costs were going to be up, and they were in particular going to be up in the back half.

Third, we said that we were making a major investment in advertising in this year, and that you would expect to see advertising up double-digit in the back half.

All of that has played out in the third quarter, and we expect it to play out for the back half as a whole.

But both for the year and going forward, we think that the overall guidance as to operating margin, operating profit growth is valid.

David, if you're going to rank order these three factors that we have been talking about (inaudible) margin pressures in the back half, you would do it -- employee benefit, the double-digit increase in fuel cost that sat in SG&A, and then the consumer marketing piece.

That is really helpful.

Thanks a lot, everyone.

Jonathan Feeney, Wachovia Securities.

Congratulations, guys.

Jim, it seems like costs are moderating a little bit, particularly at the COGS line.

I know that fuel was hitting you in SG&A.

You gave us an update on cost inflation back in December where you actually raised your targets overall.

Is it fair to say that overall costs are behind what you expected back then, so between December and today?

The guidance that we gave you for the back half is good for the back half.

In fact, we are basically bought out in our costs for the full year.

I see.

So whatever happens in the spot markets through the fourth quarter will not have very much impact.

It is true that there is a moderation of growth in commodity costs, and certain specific costs are down on a spot basis.

But if you took the spot basis now across our basket and compared it to our average for the full year, it would be up across the full year.

That is why we say we expect for next year to see some inflation, but not at the level that we have seen in the last two years.

Thanks.

A related question on the increased SG&A spending here.

Everybody is seeing some freight and benefit cost pressure.

Of the big food companies, only you are really seeing the huge jump [related to] SG&A.

You mentioned increased consumer spending, consumer marketing.

Is it fair to say you're spending considerably more heavily against the consumer than you were at this time last year?

If this is fair, is this just kind of building more sustainability into the business, or is it some sort of competitive tactic for right now?

Yes, we are spending significantly more versus the consumer.

We are up double-digit year on year in the third quarter.

We will be up double-digit in the fourth quarter.

So spending more on consumers, absolutely true.

Then second, do we think that will provide more sustainability for the growth of brands?

Absolutely.

You heard from Bob a great example of how that can work in Yoplait; and that is replicated in other parts of our business.

Finally, just a detail question.

It would really help me if in the cereal, kind of the great takeaway kind of shipment divergence here, it sounds to me like, if you could give us a sense what the volume shipments were versus the volume takeaway, that would clear things up.

Because you mentioned a kind of merchandised pricing effect on the dollar takeaway.

Could you give me a sense of that?

We told you that shipments were up 6; and sales were 5.

On a Nielsen measured takeaway, I believe the sales number was the minus 3.

And we told you unit was better;

I think it was somewhere like minus 1, flat, somewhere in there.

That is including your alternative?

That includes Wal-Mart panel projections.

There are other nonmeasured outlets that are not in that number.

Which would probably -- is it fair to say those other outlets would buy [if] that volume takeaway higher?

It is fair to say that we sell products in nonmeasured outlets, yes.

Thank you, Kris.

Thanks, Jim.

Thank you.

Eric Katzman, Deutsche Bank.

First question, I think you are maybe the first company to report since that kind of cyclone hit in Australia.

We heard from a source that their entire sugar crop was wiped out, which is like the second-largest sugar crop out there.

So I know that that doesn't directly affect U.S.

But to the extent that we may be -- we're looking for some relief because of U.S. imports of sugar or raw sugar, can you talk about -- and I think at the last meeting you had in January, you talked about sugar as being a problem.

Do you see this latest development as being a more significant issue for fiscal '07?

Eric, to be perfectly frank, I have not gotten any report from our supply chain people on what impact that cyclone in Australia may have on Australian sugar, and how that may then affect U.S. sugar.

I am looking around the room to see if anybody else -- nope; nobody in this room knows anything more than I do.

What I can tell you is that our own sugar is bought for this year essentially, so it certainly won't have any impact on this year for us.

I would simply be speculating as to any impact.

When you say this year, do you mean fiscal or calendar?

Fiscal year, yes.

Fiscal?

Yes.

Okay.

Then second, I guess I am not exactly clear as to -- and this is just your data, not Nielsen.

But I am not exactly clear.

I am not sure that the slides are numbered here, but in U.S.

Retail, right, you've got volume up 3.

And I guess two of the three -- or two of the biggest divisions, Big G and Yoplait, were up significantly.

So what was down?

(multiple speakers) two of our big divisions, Meals and Pillsbury USA were up 1%.

I think it says Meals is up 1 and Pillsbury USA is up 2; but that was enough to bring down the average even though the two biggest were up 6 and 11?

Was there something that was -- like, I don't know, frozen vegetables that got hammered or something?

Or frozen snacks?

I'm just kind of -- I don't understand kind of how all that mix works.

You're looking at the results for all six divisions.

All right, so okay.

So, all right.

I guess Yoplait is just slightly bigger than Pillsbury USA; because otherwise I don't really understand how the mix works.

But okay.

Then Jim, can you give some sense as to -- and maybe it doesn't really matter because you still have a $0.05 range that we have to work with for the fourth quarter.

But the unallocated corporate, last year I think that ended up being for the full year a negative $14 million; but this year, so far you are running like a negative, I don't know, $40 million.

Actually corporate unallocated thus far through the nine months is $60 million.

58 to be precise.

Okay.

Approximately 60, and we would expect in the fourth quarter that it will be a cost again not a plus.

So initiative will be up more than that for the year.

Wow; okay.

That is due to all the factors that you mentioned; that is ex any potential charges you might take?

It is due to the factors that we mentioned.

Okay, last question.

Haagen-Dazs, who came in there?

Should we kind of consider that maybe a longer-term problem for JV income?

Because I know that is a very, very profitable piece of that business.

Haagen-Dazs Japan is profitable.

The nature of the Japanese ice cream business -- and for that matter, many Japanese food categories -- is that you introduce new products and they are a hit or they are not a hit, but you have to keep introducing them.

In this particular year, one of our competitors, Glico, put in a couple of products, really spent hard against them.

The products have not stuck, and so we don't consider that to be an ongoing problem.

But it was a problem this past year.

It's a business where you have to keep innovating, and we expect to do so ourselves.

We expect it would continue to be a nicely profitable business for us.

Okay, thank you.

David Palmer, UBS.

Jim, in discussing some of your costs, you noted that some costs were up double-digit in the quarter, but you said the consumer marketing spending was simply just higher.

You also said that you are expecting the takeaway on cereal to continue to be ahead of sales in the fourth quarter.

Just reading between the lines here, these comments, and just given the previous expectation for double-digit increase in consumer marketing in the second half, it appears that you might have a substantial increase in both trade promotion and consumer marketing in the fourth quarter, but particularly behind Big G. Am I reading this correctly?

First of all, let me clarify my remarks, if there was any misunderstanding.

Our consumer marketing is up double-digit in the quarter, and it will be for the back half.

Specifically within that, advertising is up double-digit in the quarter and will be in the fourth quarter.

So let me just clarify that.

We are spending on the trade side as well to drive our sales in Big G. But I'm not going to comment beyond that for the fourth quarter.

Okay, thank you very much.

Kenneth Zaslow, Harris Nesbitt.

How has your restructuring charges tracked relative to your expectations from the beginning of the year?

Basically on track.

The reason I ask is I think in the beginning of the year it was a pretty open gap of 0 to 100-and- something million dollars.

But there was never any intention to get higher than the 50 or $60 million, the midpoint?

We never gave guidance for the year.

We said it would be down from last year.

We gave GAAP guidance inclusive of those charges, specifically for the purpose of being able to give you a net number.

In terms of going out a couple years, do you expect -- do you see a lot of projects on the horizon that should at this pace?

Do you think it would accelerate, decelerate?

Just kind of giving us a view on what -- you know, not exactly which projects are in the queue, but how does that look going forward?

Is it going to accelerate, decelerate, or stay the same?

Again, one of the things we thought would be helpful about giving guidance on GAAP would be to be inclusive of our restructuring charges over time.

So as we have given you GAAP guidance out into the future, that is a net number.

I'm certainly not going to comment on any specific thing we might or might not do in the future, what magnitude of that.

What we're saying is that we believe we can absorb that and deliver the high single-digit EPS growth that we forecast, both for this year, at the start of this year, and over the next three years, as we confirmed at CAGNY.

I will take this opportunity to comment on CapEx, which is a little bit different.

We have taken down our CapEx guidance for this year, and we have done so for two reasons -- three reasons.

One is that we have been I think very efficient and disciplined on our capital spending.

Second, is that some projects have moved from this year out into next year.

Then third, we did take off one project that we had planned to do this year.

Thank you.

The next question I was looking at it is -- in the U.S.

Retail business, your margins over the last several years have kind of drifted down.

Is there a point in time that we are going to reach an inflection point, where we just start to believe that the margins will start to reverse and actually expand?

Is '07 the year that that would start to happen, or is it still a year or two out?

Well, we had two years of significant input cost increases.

We're very pleased with the job our supply chain has done in terms of productivity matching up against much of that.

We also have had certain amount of price realization over the past couple years.

Obviously, implicit in our guidance that we're going to see going forward low single-digit sales and mid single-digit operating profit growth is an implied increase in margins.

In the U.S.

Retail business?

Yes.

Okay, great.

Thank you.

I'm going to cut in and do two things.

I understand we have one more question in the queue, which we will take; but I also want to offer up a little bit of a correction on third-quarter consumer spend [on] advertising spend.

It is correct that advertising is up double-digit in the quarter.

But with the data that I have got here in the room, it looks like total consumer, which would include consumer promotion, might not be up double-digit.

So the guidance that we have been providing on where we are leaning into the brand building is really on the advertising side.

I do want to confirm that -- double-digit Q3; double-digit back half.

My mistake, apologies for that.

No, I didn't catch it quickly enough.

So we have got one more question in the cue, I think.

Could we take that?

Edgar Roesch, Banc of America Securities.

Just wanted to explore the leverage you're getting on the International business a little bit more, if you could speak to sort of the sustainability of that opportunity going forward.

Sure, we're very pleased with the performance of the International business.

We have said that we expect to see operating profits grow double-digit on that business, both this year and going forward.

The particular rate that we have had this year is not sustainable.

I had observed that it has been dampened a little bit, actually, by ForEx.

The levels of exchange rate today, going forward, are worse than we have seen in the last year looking backwards, so that may have some impact.

But we continue to feel good about that business.

We have got a portfolio of brands and a portfolio of country positions that we think can sustain good growth from International.

There is sort of a point where the infrastructure costs are somewhat fixed, and just a lot of incremental profitability on any sales growth is dropping to the bottom line.

Is that the base of the equation?

No (multiple speakers); we have a fixed central cost as profits grow country by country.

They grow against that fixed central overhead.

That causes a significant leverage on the reported profits.

If you take a look at the margin return on sales, you can see there is plenty of room to grow from where we are now.

Thanks a lot.

Thank you, everybody.

If there are additional follow-up questions off the call, please don't hesitate to give me a ring.

Thank you.

Thank you.

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

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