通用磨坊 (GIS) 2006 Q4 法說會逐字稿

I'm Chris Wenger.

I'd like to welcome all of you that have joined us here at the Intercontinental.

I also want to welcome people who are listening via the Webcast.

Here with me are General Mills Chairman and CEO, Steve Sanger and our Vice Chairman and CFO, Jim Lawrence.

Before they begin, let me remind you that our presentation will include forward-looking statements that are based on management's current views and assumptions.

As the slide behind me illustrates, there are many factors that could cause our future results to be different than our estimates.

We issued a press release earlier this morning that contains our fourth quarter and 2006 fiscal year results.

You can find a copy of that press release on our Web site, along with the slides we'll be using in today's presentation.

The last few slides reconcile some non-GAAP measures we'll be referencing today.

And with that, I'm going to turn the microphone over to Steve Sanger.

Thank you, Chris, and good morning, everyone.

Good to see so many people enjoying a healthy breakfast all at the same time.

I'm going to update you this morning on the progress of General Mills.

One year ago at this meeting, I told you all that we believed we were entering a new phase of growth for the Company.

And we said our growth model for that phase would be low single-digit growth in net sales, mid single-digit growth in operating profits and high single-digit growth in earnings per share.

We also told you that our corporate rating schedule, which determines the level of performance-based compensations that our people receive for the year was changing as well.

And the new rating grid directly aligns with our key growth metrics and also factors in an important return measure, the annual improvement in our return on capital.

Today I can report that we achieved gains on each of these key metrics in 2006.

Our net sales grew 4% for the year, slightly ahead of our long-term target, operating profits grew faster than sales, rising 5%, and that's consistent with our long-term goal of mid single-digit growth.

Earnings per share as reported were below last year's results, which included a $284 million after-tax gain from the divestiture of our Lloyds refrigerated meats business and our interest in Snack Ventures Europe.

In addition, the reported EPS for both 2006 and 2005 include the dilutive impact of accounting for contingently convertible debt.

As of December 2005, that CoCo accounting was behind us, however.

If you exclude the impact of the CoCo accounting and the last year's divestiture gain, our earnings per share would have been up year-over-year at a rate consistent with our long-term model.

Final earnings results were above our original guidance for the year and above the increased guidance that we communicated in December.

Thanks to this earnings growth and our disciplined use of cash, our return on average total capital improved by 60 basis points.

This exceeded our ongoing goal, which is 50 basis points annual improvement in ROC.

Cash dividends to shareholders grew 8% in 2006.

This included two increases in our quarterly rate, one announced last June and the second in December.

This past Monday, we announced an additional $0.01 increase in our quarterly dividend rate.

That will be effective with the August 2006 payment.

In total, we returned nearly $1.4 billion in cash to shareholders last year through dividends and renewed share purchases.

Our solid financial results are the product of significant operating progress across our business.

Our largest business segment, U.S. retail, posted growth in volume, sales, and operating profits and we achieved market share increases in several of our biggest retail categories, dessert mixes, ready-to-serve soup, yogurt, dinner mixes.

But at two important categories, cereal and refrigerated dough, we had share declines for the full year.

In both of those our share performance strengthened during the year and we posted gains in the fourth quarter, but overall for the year, they were down.

And we'll talk more about that in a bit.

Our International business segment achieved another year of double-digit growth, posting 18% increase in profit on top of 44% growth the year before.

And after stabilizing profits last year, our Bakeries & Food Service segment achieved a 4% profit gain for 2006.

We reinvested some of our earnings to support the long-term growth of our brands.

Advertising spending for our U.S. retail business rose 8% in 2006 and our investment was up double-digits in the second half of the year.

We also invested to support the strength and vitality of our organization.

Winning over the long-term is all about innovation and execution, so the key to success is getting and keeping great people.

And we'll continue to invest in initiatives that ensure current and potential employees see General Mills as a great place to work and build their careers.

Looking to next year, we are excited about the lineup of new products and the momentum we see in our established businesses.

We also believe that while input costs will rise again in 2007, the rate of cost increases will be below the levels that we grappled with over the past couple of years.

As a result, we expect another year of solid operating performance in 2007, with sales and operating profits growing in line with our long-term model.

Below the operating line there are three factors that we see which will affect the comparability of our 2006 and 2007 results.

First, our interest expense will be approximately $40 million higher in 2007 due to higher rates and differences in our mix of debt year-over-year.

Second, a favorable tax adjustment lowered our effective tax rate for 2006, and we expect next year to show a normalized, higher rate.

And third, we are required to begin expensing stock options in 2007.

Our 2006 results included no impact from stock option expense.

In 2007, we expect the impact of the new accounting rule to be 11 to $0.12 per share.

So for 2007, our guidance on earnings is a range of $3.03 to $3.08 per share, including the effect of the option expense, and we're going to have more to say about these 2007 expectations throughout the morning.

Here is our agenda for the rest of the morning.

I'm going to ask Jim Lawrence to come up next and give you a detailed review of the fourth quarter and our 2006 full-year, and Jim will also give you more detail on our 2007 financial targets and cash flow plan.

When Jim's finished, I'll provide an update on our key operating objectives and business plans for next year and then we'll open the floor to take questions.

So Jim, the microphone is yours.

Thank you, Steve, and good morning, everyone.

Thank you very much for joining us here in New York and on the Webcast.

Let's get into the details of our 2006 results beginning with the fourth quarter.

We felt it was a good finish to the year.

Net sales were up 5% to exceed $2.8 billion.

Operating profit grew at the same rate of sales, and that was despite increased costs for fuel and commodities, along with higher investment in our ad spending in the quarter.

Net earnings and EPS were down from last year's results, which included the net gain from divestitures.

If you exclude the one-time gain as well as the CoCo accounting from last year's results, our diluted EPS would be up 5% for the quarter and would have come in at $0.61.

The top line strength in the fourth quarter was broad-based.

All three of our business segments posted unit volume growth and all three segments achieved even faster growth rate in net sales, which reflects net price realization and a favorable mix order.

Segment operating profit grew to $493 million in the quarter.

International profits were down from a very strong prior year results.

Bakeries & Food Service profits were down 5% due to those higher input costs, so the profit increase was driven by our U.S. retail segment which posted an 8% operating profit growth gain in the fourth quarter.

This was solid performance in the face of those input cost inflation and it helped our fourth quarter come in a bit better than our target.

Our fourth quarter results included some additional items that I'd like to mention.

First, we recorded an additional $14 million of restructuring expense, and that brings total restructuring expense to $30 million for the year.

Second, corporate unallocated expense totaled $65 million in the quarter, and that's up more than 50 million year-over-year.

And I'm going to give you some detail on the drivers of that increase in just a moment.

Both of these are pretax items.

We also recorded an 11 million favorable tax adjustment in the fourth quarter.

This benefit was partially offset by CPW-related restructuring charges of 8 million, also after-tax, and that is included in the JV line of our income statements so the CPW number is net of that 8 million.

So with these fourth quarter results, for the full fiscal year 2006 our net sales grew to more than $11.6 billion.

Segment operating profits grew faster and topped $2.1 billion.

Reported net earnings and diluted earnings per share were below prior year results when you include divestiture gain and CoCo accounting.

If you exclude those factors, our EPS would have been up 8% for the year.

Our 4% sales increase for the year included 2 points of growth from unit volume and another 2 points from mix and price realization.

Foreign exchange did not have a meaningful impact on overall sales results.

And like the fourth quarter, all three of our business segments achieved net sales growth for the year.

For the U.S. retail segment in particular, our annual net sales growth was 3%, and that included net sales decline of 1% for both Big G cereals and the Pillsbury division.

The rest of our domestic retail business showed strong growth, which included gains of 7% for the meals division and 14% for Yoplait.

Snacks and baking products both posted mid single-digit sales increases.

Consumer purchases for our major retail brands also grew last year and our compensate dollar sales in the measured outlets plus Wal-Mart increased 4% in 2006.

And this growth was led by Nature Valley granola bars, Chex Mix snacks, Yoplait Yogurt, and Progresso soup, all of which posted double-digit retail sales growth.

For the Bakeries & Food Service segment, net sales results in fiscal '06 reflect positive mix and good price realization.

In particular, we achieved good business growth with food service distributors and convenience stores.

In the International segment, net sales grew 6% for the year and the driver here was unit volume, which rose 4% in total and included gains in all four geographic regions where we compete.

Foreign exchange added 1% of sales growth for that business segment.

As you all know, input cost inflation has been pressuring margins for food manufacturers in the last few years.

We battled another round of rising costs in 2006 and succeeded in offsetting them.

Our gross margin improved by nearly a full percentage point and segment operating margin, which captures the higher input cost as well as increased advertising spending, they also rose this year.

Now I promised earlier that I would give you some detail on the increase in corporate unallocated expense.

For the full year, it is up more than $90 million.

That is primarily due to higher employee benefits expense, which is a factor that we called out last June when we first discussed expectations for the year.

There are a number of drivers behind the benefits increase, including higher performance-based incentive awards.

And I should add that our domestic employee benefit costs grew more than $100 million last year and what is captured here is the portion of the benefits expense that is not allocated to the operating units.

Beyond these items, the corporate unallocated line also includes the 23 million increase in reserves for potential cost of environmental cleanup sites and the $10 million write-down that we took in the first quarter on a low income housing investment from years earlier.

After-tax earnings from joint ventures totaled $64 million for the year.

As mentioned, this includes $8 million of restructuring expense for Cereal Partners Worldwide.

Last year's joint venture earnings included 28 million in profits from Snack Ventures Europe.

So that's the primary reason that JV profits are lower on an as reported basis.

Earnings for our ongoing joint ventures before the restructuring charge at CPW grew 18% in 2006.

Share repurchases contributed to our EPS growth in 2006.

As Steve mentioned earlier, we repurchased nearly 19 million shares during the year.

Net of shares which were issued through options exercise, that reduced average shares outstanding by almost 4%.

I should note that I'm excluding the share impact of CoCo accounting in this slide.

Our repurchases in 2006 put us ahead of the pace, which we have in our long-term model and to remind you, that long-term plan is to reduce net shares outstanding by 2% per year, not necessarily each and every year, but on average over time.

We believe that the growth targets that we set for net sales, operating profit, and earnings per share are goals that we can meet consistently in the years ahead.

And we believe that the sales and earnings growth, coupled with an attractive dividend yield, should result in the double-digit return for our shareholders.

We did not reach that double-digit level in fiscal '06.

With the year ending in May, the total return to General Mills shareholders was 7.2%.

That was below the S&P 500 index, which returned 8.8% for the year.

Packaged foodstocks in general lagged the market and our peer group generated a negative return.

So when you look back at our 2006 results, it's clear that our earnings growth was concentrated in the first half of the year, and that was because it was a tale of two halves when you look at the year-over-year pattern of expense increases.

Our commodity costs were up $70 million for the year and fuel-related costs rose $100 million.

And as you can see, the increases were greater in the second half.

This was even more the case for domestic benefit cost increases where the year-over-year cost increase in the second half was double the first half amount.

That's because expense amounts for a number of performance-linked programs, such as restricted stock awards, cash incentives get finalized in the latter part of the year as our final results come in.

When we look at these expense factors in 2007, the pattern will be a bit different.

Our 2007 plans include a total of 145 million of fuel and commodity inflation year-over-year, but we expect that this year-over-year increase will be greater in the first half of the year.

We also expect our benefits expense to increase next year driven primarily by medical costs.

The overall increase should be significantly less than '06 and we estimate the total corporate unallocated expense will be fairly flat for the full year.

One other change, we'll be adopting the new accounting standard for stock-based compensation.

And that will be, again, in our first quarter.

In conjunction with that accounting change, we are considering allocation of stock-based compensation expense to the operating segments.

If we decide to do that, we will give you the ability to track segment operating results with and without stock-based compensation.

Additionally, about half of the 11 to $0.12 impact that we've called out for the year will fall in the first quarter of '07.

So here's a summary of our 2007 guidance.

We expect net sales to grow in line with our long-term model, low single-digit target.

We expect segment operating profits to grow faster, up mid single-digit again in 2007.

We think we'll incur some restructuring expense, but our plan assumes it is less than the $30 million total for '06 just passed.

Corporate unallocated expense should be relatively flat year-over-year, and that's before considering stock-based compensation, which will reduce earnings, as I've already noted.

Interest and taxes will be up in fiscal '07.

We expect after-tax profit growth from joint ventures despite a continuing restructuring expense in CPW.

Our average shares outstanding will be down from this year's balance, that's on a GAAP basis and again, this excludes CoCo dilution.

When we add it all up, our guidance is for earnings per share in the range of $3.03 to $3.08 for the year including that option expensing.

Some of you asked whether we don't have some favorability from pension accounting, so let me show you what we see in this regard.

Last June, we were estimating $50 million of pension and retiree medical expenses in 2006.

A driver of that estimate was the then declining discount rate.

Our actual expense came in better, $22 million for the year, primarily due to better than planned return on our assets.

For 2006, that return was 16%.

The superior performance has increased the funded status of our pension plans.

They are now funded at 125% of requirement.

For the next year, the increase in discount rate definitely helps our calculation, but we do not expect to carry all of the favorability into the P&L.

Recently, we negotiated some increases to our union benefits and overall healthcare costs continue to move up.

So we estimate pension and post-retirement expense will be less next year.

We're currently estimating about $10 million as expense, not income, 10 million.

Let me shift gears now to cash flow expectations that we have going forward.

Achieving our targets for net sales and operating profit growth will generate strong and growing operating cash flow.

We plan to continue to make disciplined use of this cash.

That means capital investment generally in line with depreciation and amortization over time, dividend growth in line with earnings growth, and returns of cash to shareholders via share repurchase on top of the dividends.

In total, we expect our plans to generate ongoing improvement in our return on capital.

For 2006, capital investments totaled $360 million, or just over 3% of sales and below depreciation and amortization.

Our capital projects for next year are targeted at 425 million, basically in line with what we estimate D&A to be next year.

Dividends will be up again in 2007 following two increases to the quarterly rate during 2006.

The new annualized dividend rate of $1.40 per share, after the announcement this past Monday, represents a 2.7% yield based on the recent market price for our stock.

Our payout ratio is in the mid-40s, which is consistent with our peer group.

We talked earlier about our ongoing share repurchase goals.

Let me remind you that our goal of 2% average annual reduction in net shares is after accounting for shares which will be issued via option exercises and after the shares which will be issued in fiscal '08, not this year, but 14 months -- 16 months from now with the Lehman notes transaction.

We set a goal to improve our return on capital by 50 basis points annually through 2010 and in 2006 we exceeded this goal with return on capital growing by 60 basis points.

We plan to achieve our targeted improvement again in 2007 by growing earnings and continuing to make disciplined use of the cash.

So to summarize the financial review, General Mills wrapped up fiscal '06 with a solid fourth quarter.

Net sales and operating profit performance showed good growth and that led to bottom line EPS ahead of target.

Results for the year in total met or exceeded our long-term goals for growth and improving returns on capital and our plans for 2007 call for another year of good operating performance as well as disciplined use of cash.

I'll now turn it back to Steve to provide more detail around our plans for 2007.

Steve?

Thanks, Jim.

As you've seen, 2006 was a year of improved operating performance across our businesses.

We exited the year with good momentum, particularly in U.S. retail where net sales grew 5% and operating profits rose 8% in the final quarter.

As we look at our business for 2007, we fully expect to achieve growth in net sales and operating profits consistent with our long-term model again this year.

We have four key objectives that are the drivers of our growth plans for 2007.

The first one is to renew net sales growth for the two divisions that did not achieve it in 2006, Big G cereals and Pillsbury U.S.

Our second goal is to deliver more growth from new products in 2007.

We have a strong lineup of new items that will be introduced, and they'll be introduced throughout the year.

We'll talk about some of the first quarter items this morning.

Our third objective is to accelerate our performance in the faster-growing retail channels, outlets for food away from home and international markets in 2007.

And finally, after successfully expanding margins in 2006, we want to do it again this year.

I'll give you a little more detail on each of these objectives, beginning with our plans for Big G and Pillsbury.

Big G showed improvement in fiscal 2006 from the sales and market share declines that we suffered in the latter half of 2005, when our merchandising rates were uncompetitive.

This represents progress, but the pace of the recovery was slower than we expected.

And so for the year in total, net sales finished 1% below last year and retail consumer takeaway sales only matched last year's levels.

And so this performance lagged the category's growth and Big G's market share declined for the year.

These overall results didn't meet our targets, however, we did get some important things done in our cereal business last year that helped position us for a better 2007.

First and most important, our merchandising levels for Big G are up and they're competitive once again.

Half of the U.S. cereal category volume is sold with trade merchandising.

As you can see, the average merchandise price per unit is up about a dime a box from year-ago levels for the category in total, for the branded players as a group, and for Big G which is right in line with this trend.

In 2006, we also honed the price points and targeted merchandising frequency for our cereals on a brand-by-brand basis.

Some of you heard Ken Powell outline these actions at an industry conference last fall.

On the market leading Cheerios franchise, we reduced the frequency of merchandising and raised our targeted price points and this business grew nicely as I'll show you in just a minute.

On kid cereals, we targeted competitive price points and put more flexibility into our merchandising programs, and those changes helped our kids cereals to show better sales and market share trends in recent months, which contributed to that share improvement you saw.

Now the rest of our cereal portfolio, we've honed the price points and merchandising strategies selectively, focusing on each brand, specific competitive set and consumer target.

These adjustments contributed to the quarterly share progress I showed you earlier and we expect them to continue to contribute to positive results in 2007.

Our Cheerios business continues to show very good momentum.

Retail dollar takeaway for the Cheerios line of cereals grew 5% in 2006 and our baseline, or non-promoted sales, grew 3%.

In total, the Cheerios franchise accounted for 11% of U.S. cereal category sales in 2006.

The new Yogurt Burst varieties that we introduced last August were important contributors to this performance.

In just nine months, they generated nearly $60 million in retail sales, which makes Yogurt Burst Cheerios the top new product launched in the cereal category since January of 2005.

We invested behind our cereal brands last year with significantly increased advertising levels.

In total, Big G advertising expense was up 13% in 2006 and we plan to increase our advertising levels again in 2007 due in part to a full slate of new product launches that we have planned for the year.

Five of those new cereals will begin shipping in the first quarter.

Fruity Cheerios, Double Chocolate Cookie Crisp, and Maple Brown Sugar Oatmeal Crisp are new varieties of our best-selling brands.

In particular, Fruity Cheerios offers the great fruit flavor that kids love, but with 25% less sugar than the leading fruity cereal, it also contains at least 16 grams of whole grain and 2 grams of fiber per serving.

So we think this one will be a hit both with kids and with parents.

We're also launching two new brands in the cereal aisle.

Those of you with preschoolers know all about the popularity of Dora the Explorer.

The namesake cereal that we're introducing is a great choice for young breakfast eaters.

It's made with whole grain, has 3 grams of fiber per serving and just 6 grams of sugar.

And because Dora is Latina, she has strong Hispanic appeal.

We have second new cereal launching in regional markets that Hispanics will recognize, too.

La Lechera is a Nestle brand and in Mexico, it's the number one brand of condensed milk.

The La Lechera cereal is available in many of CPW's markets and we're currently introducing the La Lechera flakes on the West coast, in the Southwest, and selected metropolitan areas where the Hispanic market would seem to be an opportunity.

These five new cereals should provide some volume momentum for Big G as we start the year and we have additional new cereal introductions planned later in 2007.

And fundamentally, we continue to like the trends we see in the U.S. cereal category overall.

There's some modest price realization together with increased product innovation and advertising support and all this has this big category growing a bit faster than it did in recent years.

So with good category dynamics in place, Big G's merchandising levels and price points restored, good levels of new product activity, and marketing support in our plans, we have every expectation of renewing growth for Big G in 2007.

The other business we need to start growing again in 2007 is Pillsbury U.S.A.

This division includes our refrigerated and frozen baked goods businesses.

The frozen breakfast items such as Pillsbury Toaster Strudel and Waffles and also the Totinos frozen pizza and hot snacks.

In 2006, combined net sales for these businesses declined 1% and retail consumer sales were flat.

The weakest part of the business was also the smallest part.

That is the frozen baked goods and breakfast items.

But our refrigerated dough sales, which is a large part of the business, while up, didn't keep pace with the category growth in 2006, so we lost some market share in that segment, too.

That market share decline was concentrated in cookies, where we saw strong competitive price promotion.

For the other major segments of dough, sweet rolls, crescent rolls, biscuits, Pillsbury recorded retail sales and market share gains in each of them.

In 2007, we'll be concentrating our innovation efforts and our consumer marketing support to drive favorable product mix in our refrigerated dough business.

New product plans include several new items being launched in the first quarter, which is shown on this slide.

We've also started shipping two new flavors of mega pizza rolls from Totinos.

These are quick microwave snacks.

The megarolls are twice the size of our traditional pizza rolls, which may not sound terribly appealing to you at 8:30 in the morning, but we think they'll be a big hit, particularly with teens in the after school and evening hours.

We expect both the refrigerated dough roll category and the market for frozen pizza and hot snacks, the market to enjoy continued growth in 2007.

We're raising our innovation levels in these categories so we expect the Pillsbury division to renew net sales growth in this year as well.

For the rest of our U.S. retail business, we really don't need to bend the sales trend, we just need to keep the good momentum we've got right now going.

And I'll talk about each of those.

In soup, consumer purchases of ready-to-serve varieties continued to drive the category growth.

Household penetration and units per buyer increased for this more convenient, ready-to-serve format.

Our share of ready-to-serve soup also continues to grow.

In fact, Progresso's share has increased 4 percentage point over the last two years, thanks to strong consumer marketing and new products.

In 2006, we continued advertising the fact that many varieties of Progresso contain less than 100 calories per serving.

We also launched several varieties in microwave bowls.

In July, we'll begin shipping four new varieties of Progresso soup that contain 50% less sodium than comparable varieties.

We think these soups are a great new choice for consumers who are watching their sodium intake.

Hamburger Helper is another business where great advertising is driving strong sales growth.

By reinvesting cost savings into advertising, this long-established brand has increased sales two years running, including 7% growth in fiscal 2006.

Starting next month, we'll be making preparation of a Hamburger Helper meal even faster with new microwave singles.

The meat is already included in these packets, you just add water, microwave, and you have a Hamburger Helper entree for one in just minutes.

We're bringing added convenience to Green Giant with our new Just for One vegetable products.

These are individual servings of broccoli and cheese or buttered corn.

They're 2 minutes preparation in a microwavable tray, they come in the frozen section.

We're also launching a new microwavable line of Green Giant seasoned steamed vegetables called, Simply Steamed.

The health benefits and great taste of Yoplait Yogurt kept this business growing in 2006.

In fact, net sales crossed the $1 billion mark for the first time.

Our advertising, which reminds consumers that eating Yoplait Light can help them burn more fat and lose more weight fueled 20% growth for Yoplait Light and 14% growth in overall retail sales for the full Yoplait franchise.

Our taste superiority is the foundation of our success in Yoplait.

Last year we brought chocolate to the yogurt category.

Our chocolate whips variety has boosted sales for the entire whips line to $100 million.

This year, we're introducing three more indulgent whips flavors, Dulce de Leche, Creamy Latte and Chocolate Mint.

Hopefully some of you had an opportunity to taste those at this morning's breakfast.

Nature Valley has posted double-digit growth and growth at an increasing rate in recent years.

In 2006, we were up another 29% and we're bringing more innovation to Nature Valley in 2007.

First we're extending the brand beyond granola bars with the launch of Nature Valley Fruit Crisp.

These are dried fruit snacks, they're baked not fried, and they offer one whole serving of fruit per 50 calorie pouch.

We are also adding two new flavors to our line of Sweet n' Salty nut bars, the cashew and roasted mixed nut varieties will begin shipping next month.

And for a somewhat different flavor profile, we're launching Caribou Coffee bars.

These are chewy granola bars dipped in creamy coffee coating.

Our Chex Mix franchise had a great year in 2006.

The launch of two chocolate varieties drove sales growth of 20%.

This Summer, we're launching three more new varieties, Chex Mix Select, combines real fruit with Chex cereal and nuts for a greater tasting healthier snack.

We're also launching Simply Chex, which features just cheddar-flavored Corn Chex and Wheat Chex cereal pieces.

One of the strongest performers for us in 2006 was Betty Crocker dessert mixes.

Sales growth accelerated to 7% and our margins expanded thanks to trade merchandising efficiency and favorable sales mix from new products, including the ones that are shown on this slide.

This Summer, we're launching two new flavors of Warm Delights, which had such a good introduction last year.

The new flavors are Peanut Butter Fudge Brownie and Lemon Swirl Cake and we're also shipping a new Hershey's Ultimate Fudge brownie mix and a more convenient form of our Bisquick shake and pour mix.

Let me also mention our fast-growing organic food business.

Net sales for Small Planet Foods increased 27% last year with gains everywhere from organic food stores to traditional grocery outlets to supercenters and club stores.

We expect to continue that growth in 2007 driven in part by new product launches.

In the first quarter, we're introducing Vanilla Almond Crunch cereal from Cascadian Farm that you saw on our buffet this morning and two new varieties Muir Glen organic soups.

We see excellent opportunities for our brands in emerging retail food channels, places like organic chains, drugstores, dollar stores, and the club format stores.

We participant in all these channels today, but we're putting increased focus on these faster-growing channels in 2007, both with pack configurations that match the unique needs of these shoppers in these channels and with a selling organization that is lined up directly against each of these separate channels.

So to summarize the outlook for our U.S. retail business, we started the year with some good momentum overall, we have a strong, strong lineup of new products that be introduced throughout the year, and we expect to achieve good sales and profit growth for this segment of our business again in 2007.

Let's shift now to our Bakeries & Food Service segment.

We were encouraged to see both sales and operating profit up in 2006.

As Jim mentioned earlier, this better performance reflected good sales and customer mix as we focused our efforts on the distributor and convenience store segments of our business.

Our sales to convenience stores grew 7% in 2006 as we gained distribution in this channel, particularly for our snack and cereal products.

Convenience stores will soon be distributing many of the new items that I've mentioned, including Caribou Bars and La Lechera cereal.

Our Foodservice distributor business is focused on growing key categories like cereal and snacks and yogurt.

For example, our cereal volume with this distributor segment grew 10% in 2006 and yogurt volume grew 6% for the year.

We're looking to build on those results in 2007.

During the first quarter, we'll introduce 12 new items targeted to this market, including Nature Valley Sweet n' Salty nut bars and easy-split sandwich biscuits.

Our International business segment had another good year with sales reaching $1.8 billion.

Operating profit grew 18%.

This growth was broad-based as we recorded gains in all four regions where we compete.

Our Canadian business posted 5% net sales growth on a constant currency basis.

Sales in Europe also grew 5%.

In 2007, new cooking sauces from Old El Paso and new flavors of our popular Haagen-Dazs Cream Crisp bars should help keep that growth going.

Sales in Latin America grew 8% last year fueled by continued expansion of Nature Valley bars and gains by local brands such as Frescarini pasta.

And in the Asia Pacific region, double-digit gains in China and Australia drove 9% sales growth.

Together, our International and Bakeries & Food Service segments have delivered double-digit operating profit growth the past two years, and we expect that trend to continue in 2007.

These two business segments will become increasingly important contributors to our growth in the years ahead.

We'll also have increasing contributions from joint ventures, particularly Cereal Partners Worldwide.

In fiscal 2006, CPW recorded 6% volume growth and faster than sales growth on a local currency basis.

Profits grew double-digits despite the restructuring charge.

The venture is continuing to launch new cereals in markets around the world.

In China, we've introduced Strawberry Milk Stars and Crunchy Mai Pian.

This is an all-family cereal based on the traditional Chinese mai pian hot breakfast.

I guess the U.S. analog would be Oatmeal Crisp, a cold cereal based on a hot cereal analog.

It's also a good start.

In Europe, we've added several new items including Fitness Honey Almond and Chocapic Duo a combination of white and dark chocolate pieces.

We started shipping Trix and yogurt cereal in Mexico and to seize on the excitement generated by the World Cup, we launched FIFA cereal in select markets worldwide.

When CPW completes the acquisition of Uncle Tobys cereal brands later this Summer, Australia will become the venture's second largest market.

Uncle Tobys holds a 19% sales of the cereal category sales in Australia with leading brands such as PLUS and Vita Brits.

So our International business should be strong contributors to our top line in 2007 and beyond.

We also expect those businesses, along with our other operations to grow profit faster than sales and improve their margins over time.

Margin expansion is a key component of our growth model and we were pleased to see that we achieved operating margin gains in all three business segments in 2006.

We've got to keep that improvement trend going, and we'll focus on using all the levers we have in our business to do that.

This includes net price realization and mix management.

In addition, volume growth and improved plant performance can enhance operating margins through greater fixed cost leverage.

And most important, we will continue to pursue productivity opportunities everywhere, but most substantially in our supply chain.

We have a strong lineup of productivity projects coming up this year.

As you can see, cost saving projects will account for a higher percentage of our capital investments in 2007.

We've also got a higher percentage dedicated to growth related projects in this year's plan versus last year.

In summary, 2007 should be another year of good operating results for General Mills.

We expect renewed growth from Big G and Pillsbury.

We expect stronger contributions from our new products, increasing sales in new retail channels, foodservice outlets, and international markets, and ongoing margin benefits from our focus on mix management, net price realization, and productivity.

We'll measure our progress in 2007 using the same key metrics we used in 2006, growth in net sales, segment operating profits, earnings per share growth, and growth in return on capital.

We've moved into a new phase of growth and we're off to a good start.

In 2006, we grew the top line, we expanded margins, we reinvested in consumer marketing to build our brands, and our final results exceeded the target range we set at the start of the year and the higher guidance we communicated at midyear.

Our plans for 2007 call for continued net sales growth, operating profit increases, margin expansion, all consistent with our long-term model.

Our objective is to generate good growth in improving returns that result in value creation for our shareholders, and we believe our prospects for doing that are excellent.

That concludes our presentation.

Now Jim and I will be happy to take your questions.

Let me just remind you that we've got microphones and we'll move around the room so the Webcast listeners can hear your questions and I'll let Chris recognize you and bring you the mike as you raise your hand.

Hello.

Yeah, it seems to be on.

Steve, it seems to me as we go into '07, one of your potentially big swing factors is going to be, of course, Big G. So if you could give us an idea of how you think the year will unfold there.

For example, wheat prices are up now, do you think your pricing is where it should be as you go into the year?

Are you still comfortable with the traditional premium that the Big G cereals have had?

Obviously, the first quarter was a little bit tough last year, if you could give us a little color on how you see the year unfolding there with Big G.

I think Terry raised a number of questions about Big G ranging from how we feel about our pricing to how we think the year will unfold.

I would say that we are entering this year feeling much more confident in our relative pricing than we were a year ago.

Our promotional pricing, as we showed you, is in line in terms of the increase with the category and our merchandising activity is back to a very competitive level.

Beyond that, our price spreads in some of the categories where we thought they had gotten too wide are back into a range that we think is appropriate and we've seen improvement in our sales in the fourth quarter as those spreads have come back into line.

So as I look at us competitively, I think we feel like we are in balance in terms of where our relative pricing is.

Now we don't typically talk about future pricing actions related to commodities and I really don't intend to do that today, but I just say as of now, we feel like we're in a good place.

I think the year will also reflect the pace of our new product introductions.

And we have a large number that will be shipping in July.

And so they will affect our first quarter business as we get toward the end of the quarter.

But we also plan to have additional very strong products coming later in the year, which we'll talk to you about when we talk about them to our customers, and I think that will kind of sustain and build.

We would expect our new product shares to grow across the course of the year as additional new items are added in.

The earlier quarters are the easier comps so we will need to build our strength as the year goes on.

But I think we feel both from a pricing standpoint, an innovation standpoint, and the strength of our ongoing media support for the brands that we have a much stronger outlook for Big G than we had a year ago at this point.

I'm going to go this way.

Steve, when you look at some of the great growth you've done in the organic business, it's still a pretty small part of your business and I guess I'm wondering, do you ever envision that being a substantial part of your portfolio and do you think, can you do that just purely organically, no pun intended, or do you need to do acquisitions to kind of get to where you need to be?

Well, I think it is relatively small now, but the growth rate, as you noted, quite substantial.

And it's going to take time I think for it to be a Yoplait.

I worked on Yoplait in the mid 1980s and I got lots of questions like that back then and we asked the same questions, but today it is a major part of our business.

And I think organic has some of the same characteristics and that it starts with kind of the leading edge consumers, it moves through, it is now moving into mainstream channels, the Wal-Marts of the world, the Costcos of the world and the traditional retailers are paying more attention to organic.

There has to be a growth in the supply chain because there are some unique requirements to organic raw materials.

So all of that would have to proceed at a pace that is not going to be explosive as much as it is going to be I think very steady.

But when you get out and years in the future, and who can predict that far out, but it's going to get, I think, continue to get bigger.

And whether we'll choose to add to our portfolio by acquisition, I think if the opportunities were right, we certainly could.

We've built our presence by acquisition, but we can, we have a very strong, long-range plan also for organic growth in the organic segment as well.

I just might add to Steve's comment about having required organic blend, acquired Muir Glen, acquired Cascadian Farms.

The substantial growth which we're now seeing there is coming into product lines that we introduced under the brand.

The cereal business we created after we bought Cascadian Farms and applied our cereal technology to the Cascadian Farms brand.

And in Muir Glen, we're offering excellent soups under the Muir Glen brand with the soup technology we have from Progresso.

Chris?

Thank you.

I have two questions.

The first question is on, I guess, price mix realization.

I know there's some benefit in this fourth quarter from reduced promotion.

Is that a trend we should see across 2007?

Can you add a little color to that.

And then the second question is on your productivity initiative.

I'm just curious how they would stand in 2007? 2006 I know had some very strong cost savings coming through with comparable levels in 2007.

Give some color on that as well.

I'll take them in order.

We anticipate sales growth in excess of volume growth again in 2007 and that reflects price realization.

And that comes primarily as it did in 2006 from merchandising, promotional adjustment.

So that trend, we would expect to continue in 2007.

I don't think we've given a public number for our productivity target in 2007.

You're right.

But again, we are anticipating continuing to add to our margins as I said, which means that our sales are probably going to have to grow faster than our sales.

And so that means that we'll have to overcome the input cost inflation at a minimum with productivity initiatives to achieve that.

David?

Good morning, I wanted to ask two things.

On the Bakeries & Food Service business, Steve, that's had fairly little growth over the last several years in profitability.

You were mentioning some of the initiatives on sort of the heritage General Mills businesses and convenience stores and you've done well there, but it seems to me to accelerate the overall growth of that business, you need to do better in the bakery channel.

Could you sort of address what are the issues you're facing there and what are the strategies to try to grow that more quickly?

And then I had a second question on cash flow.

Well, I would say, David, that we haven't exactly been explosive growth in Bakeries & Food Service, but the trend has been good.

This is the best year so far, it was better than last year, last year was markedly better than the year before.

On the Bakery side, I think our focus has been on the mix of business, going with the most -- driving growth in the most profitable items that we have more than just the absolute [sales].

In fact, we have cut back over time on a lot of the SKUs that we thought were lower margin, more commodity like, focus on the ones where we had competitive advantage.

The other strategy, though, that I think will help us in going forward is introducing operator-friendly configurations of some of these baked items.

This is like muffin [inaudible] that give people an opportunity to make larger or smaller muffins, one basic core product that is very easy to work with and gives the operator a lot more flexibility than current muffin dough offering has allowed [inaudible].

Or packaging that allows the operator to avoid using knives where cuts are an issue for -- an injury issue for operators.

And we have developed some packaging that really is quite clever in terms of enabling the operator to handle it without having to cut it with a knife and therefore risk cutting themselves.

These are all things that, they're not easy to demonstrate to you, but I think we feel we'll generate growth in that bakery side as well.

And we do expect faster growth next year than we've had this year.

As I said, again, this year was better than last.

We're progressively getting that on to the track that we see it going on [launch], which is faster growth than retail side.

And then Jim, if I could ask you a question about operating cash flow.

Could you comment on the developments of operating cash flow Q4 versus Q4 because I think through the nine months you're up about 210 million, nine months versus nine months and I think year-to-year it was up about 80 million.

So it was down in the quarter and I was wondering if you knew offhand what the drivers of that delta were?

I can't say right off the top of my head what the particular Q on Q, I'll come back to you on that.

[Inaudible]

Good morning.

This is an International question, maybe for Jim.

A few years ago you had your dessert partners joint venture, you had your snack partners, Snack Ventures Europe joint venture.

Now those no longer exist, but you have CPW, but a lot of those products are under the Nestle brand, Haagen-Dazs is a JV.

Bigger picture, how are you thinking about trying to grow globally as you look forward over the next five or ten years?

Is it mainly with JV partners, mainly with one category versus another?

Your thoughts?

First as to CPW, 16 years ago General Mills and Nestle concluded that in the cereal category, which is very distinct, very large category, both companies would be better off being in partnership.

We felt that owning half of this joint venture was going to be better than owning 100% going alone and so did Nestle.

And both parties thought they brought something to it and that view is unchanged today.

Today, both parties believe that the contributions of Nestle and the contributions of General Mills make that worth more.

A great example of that is in Uncle Tobys, where we bought a strong number two player in Australia and we paid a full price for that, a price which was attractive to the seller and we are convinced we will be creating value for our shareholders because what we bring from our capabilities around the world to that business and those brands in Australia.

So that is as to CPW.

With the acquisition of Pillsbury, General Mills got exposure around the world which we did not have in terms of wholly owned businesses, with one exception being Haagen-Dazs Japan where there's a joint venture with ourselves, Suntori for 40% and Takanashi 10%.

As to that particular joint venture in that particular country, we think that's absolutely the way to go.

Again, what Takanashi and Suntori bring, what we bring we think makes sense for Haagen-Dazs in Japan.

But for the rest of the world, I would say in general we believe the opportunity will come from General Mills own organic growth of our wholly owned businesses.

We see opportunities to make acquisitions to strengthen our positions in different countries and to help us enter new countries that we're not in as yet.

So I'd say that would be the principal thrust for us other than in Japan Haagen-Dazs and other than in cereal category, CPW.

Thank you.

You've shared some really impressive new product innovations coming out.

I was just wondering, just stepping back, are you looking at these product attributes such as health and wellness, convenience, taste, are you ranking those attributes differently from a top level and saying, we want to push our new products more towards convenience or health and wellness?

How are you ranking those attributes at this point or is it more of a brand-by-brand decision?

Thanks.

I would say that we do have some corporate-wide priorities to deliver more products that offer health benefit advantages.

We set some metrics so we measure not only new products, but also improvements that we can make in our established products year in, year out.

We track that on an aggregate basis and we're running ahead of the pace that we set for ourselves.

But when you talk about new products as such, I don't know that we would rank them on a corporate basis because it really does vary category-by-category.

The Hamburger Helper user probably has a greater interest in a more convenient alternative than in a healthier alternative.

Whereas the cereal side, the health benefits would be a more fertile area than the convenience benefit, health and taste variety are more the cereal user's hot button.

So it really does depend on the categories as to how you execute.

But we do have a corporate commitment to drive healthier products on a consistent basis over time.

David?

Thank you, good morning.

I'd like to talk about ad spending.

Did you give us the actual dollar number for fiscal 2006 ad spending, or can you?

515 million.

515.

Okay.

And then can you just talk about whether or not you're satisfied with these levels?

A lot of companies have been talking about ad spending rising.

Certainly your key cereal competitor has really made it a major focus, the double-digit increases in their brand building support, both ad and consumer and it really has driven their cereal share, I think quite nicely.

The question really is in looking where you guys, are you materially below where they are on your cereal portfolio spending relative to Kellogg?

You see that you really need to step this up substantially over time, and if you don't, why not?

Well, our view is that we do want to grow ad support for our business faster than sales growth [material].

And so where we have opportunity, where we have advertising that is working well and we're seeing good results from it, we intend to invest more behind it.

It's a little hard to compare General Mills and Kellogg on the published numbers because we're in different geographies, we have different product lineups and frankly, we use different media vehicles.

If you use measured media, and I think Ken Powell showed this at one of our earlier meetings, we are quite competitive in terms of the amount of measured media [inaudible] that we deliver with Kellogg.

But I think where we have advertising that is driving sales growth, we always like to have more of it, we'd like to be able to fund more of it.

We intend, we had more this year and we intend to have more next year.

Moving to the commodity side, we really have an interesting environment with the petroleum prices where they are, pulling on the agricultural markets.

I'm curious to understand what your view is on commodity prices going forward?

You are an enormous -- and I really mean this conceptually, I mean this is an unprecedented period of time for energy and its influence on agriculture.

Your purchases of grains are enormous.

This is a key raw material for you and your outlook on what happens in the United States on those products I think is quite important.

Yeah, well, I'm laughing only because if only any of us knew, we'd be in a great advantaged position on what's going to happen in commodity markets.

Our view is that the inflation we've seen in the last couple of years, if you look at the long-term trend, the 25-year trend, our particular basket of ag commodities is at a 25-year high.

And over that long-term trend, there have been, it has had a cyclical pattern.

There's no guarantee that we don't have a secular change, perhaps driven by energy.

But I think when it comes to ag commodities, my bet would be that over the long-term it will continue to have a cyclical pattern to it, albeit perhaps at a rising rate.

And so our prediction really, we don't go far beyond the coming year.

Our thinking in the coming year is that there will be inflation at a lower rate than we experienced in the last two years on ag commodities and we're pretty confident in that.

But I'm not going to hazard to guess as to the long-term future because it's been challenging enough to predict the shorter-term future in recent years.

[Inaudible]

Thanks.

Tryon recently questioned the overhead spending at Hines away from advertising, just looking at your '06 results, $2.6 something billion in overhead.

Could you give us an idea as to why that might be the right number?

Secondly, trade promotion dollars, what are you doing there to spend those more efficiently in '07 and beyond, and perhaps you can give us an update as to what the opportunities are there either in terms of top line growing or savings?

Thanks very much.

Let me answer the one on trade promotion spending and then Jim, you might want to comment on the SG&A.

But on trade promotion spending, I don't want to get too arcane into the structure of things.

Generally, we have a fair amount of pretty sophisticated analytical modeling that can tell us what is a good price point for trade promotion.

And we've been able to raise promotional price points over the past year in many of our categories to achieve a more efficient trade promotion.

Also the way we structure the promotions tends to funnel more of it to the merchandisers that really do promote.

There's always a bit of slippage in your promotional spending between what actually gets merchandised through to the consumer versus what the retailer gets paid on, and they're getting better at minimizing through a variety of means, minimizing that slippage.

So this is a big area of expenditure for General Mills and we've had a lot of attention on how to -- best practices from one region of the country to another.

We've really got a lot of focus, organizational focus on trying to make sure that our promotional expenditures are appropriately competitive, but that there's not any waste that isn't getting through to the consumer.

I think we've made progress on that, but we've got several more opportunities that we're pursuing without getting, again, I don't want to get into too much detail, some of it is competitively sensitive, but I think we feel confident we can make another step on that in 2007.

Now with respect to SG&A, Jim, you may want to --

Sure.

As to non-media, non-consumer spending within SG&A, we keep a very close watch on that as we budget for the year ahead.

We expect it to grow at a rate below our sales growth.

We scrutinize it function-by-function, department-by-department.

We take a bottoms up approach and a top down targeting.

We do benchmarking relative to competitors and we try to have continuous efficiency going from year-to-year, including taking a look at multi-year actions that we can take to reduce it and make it more efficient.

So we think it was the right amount next year.

We wanted to grow at what will be a smaller amount than sales growth in the years ahead to make us even better in the future.

Jason?

Yeah, hi.

A two-part question.

The first being a broad question on cereal and then a specific question on soup.

In terms of cereal, you showed a nice slide in there that showed continuing growth in the category minus 1% sales growth and then plus one and then plus two.

Do you see that trend continuing?

And if so, why?

And then in terms of soup, how did you achieve your 50% reduction in sodium?

Did you just take it out, did you put in a substitute?

How does it taste, how are you going to market it, that kind of stuff?

Thank you.

Okay, on cereal.

I think there is good reason to keep the cereal category growing.

The minus one was the tail end of the Atkins low-carb phenomenon.

The plus two, I think, is reflective of the fact that the consumer is hearing a lot of messages about the importance of whole grain and cereal is a great source of that.

A lot of those messages coming from us, that there's been good innovation in the cereal category and at least from our standpoint, the pace of that is increasing and we're seeing the competition maintain a strong pace of innovation.

And so when you've got the underlying health benefits of cereal coupled with good innovation, coupled with what has been a less inflationary pricing environment from the retail standpoint for cereal in recent years, relative to other things, I think this is a category that's got a lot going for it.

Demographically, we know that the 45-plus segment market has historically been one of the stronger, along with the young kids, the stronger performing segments in the cereal business and that baby boom generation moving into the middle, senior years should portend well for the cereal category.

So I think demographically and from a nutritional awareness standpoint and innovation standpoint, this is a category that ought to be able to sustain growth pretty consistently over the long-term.

Shifting to soup, I don't want to get into exactly how we do it, it's a different salt formulation, you might call it sea salt, there's a lot of sea salt out there, as you know, I mean the oceans are huge.

That's a great way to get a good flavor with the lower sodium levels.

Mike?

A question for Jim.

Just curious, of the $145 million of cost inflation you're citing for '07, can you give us a sense of how much of that is locked in, or how much is susceptible to the market moves?

In terms of commodities, about half is locked in for the year, in terms of fuel, less than half.

I'll get there, I've got one in the back.

John?

Just about CPW.

Normally fast-growing companies don't need restructuring charges.

Can you just kind of detail what the 6 million after-tax is from and what are you doing this year to kind of continue these charges?

And two, the cereal that's being sold in California, La Lechera, I guess, is that coming from Mexico and you're shipping it up and how is that kind of booked, and isn't that kind of, you losing, whatever sales you get there, does it come out of your domestic business?

Are you asking that La Lechera is coming from CPW?

No.

Nestle's got to get something from that, don't they?

Oh, yeah, we license the brand from Nestle.

In the U.S., we license any brand name we use other than General Mills, we have to pay a fee for it.

Just like we have to pay Hershey for our Reeses Puffs cereal and we have to pay Nestle for our Nesquik cereal that we sell in U.S. and Canada a license fee and we pay Nestle a license fee for the La Lechera.

But that's produced in the U.S. versus [inaudible]] that's made by General Mills as opposed to the CPW markets, where it's made in the markets, the CPW plant.

The particular restructuring charge, John, in CPW reflects a plant closing in the U.K.

We have three plants in the United Kingdom and the oldest one, the shredded wheat plant in Welwyn Garden City, that is clearly quite old and in need of substantial investment to bring, to enable it to keep operating at an efficient level.

A better investment, we concluded, was to move that capacity to one of the other two more modern plants and close that plant down it will produce very good returns for CPW.

It's a higher return restructuring, [inaudible] supply chain restructuring is what that is.

I think it's just a good investment.

Thanks.

Just three quick things.

One, you talked about a couple of headwinds that will skew earnings growth towards the back half of the fiscal year.

We're not going to [ask] quarterly guidance, if you could give us a sense of how severe perhaps you expect that first, second half sort of split to be.

Second, maybe just a comment on private labels, specifically in cereals.

Have they lost momentum with the higher input costs scenario that they've been going through or not?

And then third, it seems like, and I could be wrong, that for General Mills, your performance with accounts like Wal-Mart, specifically, saw a significant improvement in fiscal '06 perhaps versus what you were doing at the company in the past couple of years.

If that's true, was there something structural that changed internally that allowed you to drive that and that gives you some visibility there in the next couple of years?

Are you talk about specifically Wal-Mart, or accounts like Wal-Mart?

Specifically Wal-Mart.

Specifically Wal-Mart.

Well we did have a structural change with Wal-Mart that we assigned [inaudible] whole division because it [inaudible] it certainly merits a full division of our sales organization and named a Vice President to head that team and added, supported other functions to our Wal-Mart team including marketing and consumer insights and we continue to build the capabilities of that team.

They were particularly effective in '06 and I think we have a number of initiatives with that team that will come to further fruition in '07.

I think from our standpoint, there is visibility to continued strength with that very large, important customer.

I can't remember what the second question was.

Private label.

Private label.

Private label, I think, it's my perception that we have seen some slowdown in the growth of the priced brands.

When we got our promotional prices out of line, that did kind of give them a window to run through for a while.

Now that we've brought that back down, that seems to have slowed down somewhat.

I don't have -- I can't quote definitive figures on it, but just as I've observed it, it looks to me like that particular segment, that would include Malt-O-Meal and the private labels, they're all operating the same price zone.

Their growth appears to have kind of slowed somewhat.

And then, Jim, I don't know what your view on any first half, second half, the severity of the --

I would simply direct you to the chart that we have which shows the growth in EPS in the quarters of '06 and you can see on a comparative basis we've got a tough challenge first half versus back half.

And then recognize that that arose because of the timing of commodity cost increases last year.

I really wouldn't say more than that, but just direct you to that.

I think at this point, we're going to wrap up the Webcast part.

I'm kind of over the window here.

So I'll thank everybody that was listening on the Webcast for joining us today and we'll just see if we can't wrap up here in the room, okay?

Thank you.

Thank you very much.