通用磨坊 (GIS) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the General Mills first quarter 2007 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, today's conference is being recorded, Thursday September 21, 2006.

It is now my pleasure to turn the conference over to Ms. Kris Wenker, Vice President of Investor Relations.

Please go ahead, ma'am.

Thanks very much.

Good morning, everybody.

I'm here with Steve Sanger, Jim Lawrence, and Ken Powell.

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

We are trying real hard to get the slides posted and up on the Web site.

I understand there are some technical difficulties, we will get them fixed.

Those slides supplement our remarks today.

The second slide lists factors that could cause our future results to be different than current estimates.

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

And also on the Web are the schedules with 2006 and 2005 results as reclassified to match the current year's presentation.

So with that, I'll turn you all over to Steve.

Thanks, Kris, and hello, everybody.

I'm glad to be here with you this morning and I'm also pleased to report that fiscal 2007 is off to a great start for General Mills.

Net sales for the first quarter grew 7% reflecting good volume gains and price realization.

Our gross margins held steady despite higher input costs and a tough comparison to last year.

Segment operating profits grew 7% and our diluted earnings per share increased 16% to $0.74.

Excluding the CoCo accounting dilution in last year's quarter, that EPS growth rate was 9%.

Top line results for this quarter included volume gains and then even faster net sales growth in all three of our business segments.

U.S.

Retail sales grew 5%, International sales grew 13%, and we had a solid quarter in our Bakeries & Foodservice segment where sales were up 9%.

As some of you will remember that we achieved a significant improvement in gross margins in last year's first quarter.

Overall gross margin increased 200 basis point last year in the quarter.

This year we were able to hold on to that margin, hold it steady, despite the higher costs thanks to favorable product mix and efficient plant performance.

And as a result, segment operating profits rose 7% to reach $532 million on top of that 21% increase in last year's first quarter.

This is a solid operating performance and that plus significant share repurchases drove earnings per share up 16% to the $0.74.

This year's results include $0.07 incremental impact from the new accounting standard for expensing stock-based compensation.

Now with this good start, we believe we're firmly on track to meet the annual targets we set in 2007.

And those targets are low single-digit growth in net sales, mid single-digit growth in segment operating profit, and our guidance for diluted EPS is a range of $3.03 to $ 3.08 per share, which includes an estimated 11 to $0.12 of incremental expense for stock-based compensation.

At this point, I'm going to turn the call over to Jim Lawrence and then following Jim, Ken Powell Jim will give you some more detail on our financial performance and then Ken will provide an operating update.

So, Jim?

Thank you, Steve, and good morning, everyone.

We'll start at the top of our income statement with our 7% net sales increase.

And that increase reflects 4 points of volume growth, 2 points from pricing and mix, and we also got 1 point of benefit from foreign exchange for the total of 7% growth.

In total, our sales grew by just over $180 million in the quarter, our big U.S.

Retail segment contributed just under half of that increase.

The remaining $97 million of sales growth came from our International and Bakery & Foodservice segments, and if you have the slide, you'll see it stated there.

Slide 12 from our Web site summarizes the top line performance of the seven major divisions contained in U.S. Retail.

Yoplait led the way with 8% growth.

Sales in both the snacks and meal divisions were up by 7%.

Our Big G cereal sales rose 4%, baking products posted a 1% increase, and Pillsbury USA, and that's primarily our refrigerated dough business and the Totino's businesses, matched our prior year sales.

Small Planet Foods, our organic foods division, posted the fastest growth with sales up 34% for the quarter.

Steve already covered our gross margin results, so we'll move down the income statement to SG&A, selling, general, and administrative expense.

For the quarter, SG&A was 20 basis points higher as a percent of sales at just over 20%.

Now this SG&A includes $40 million in incremental expense arising from our adoption of stock award expensing in this year.

Consumer marketing spending was another factor, and that was up 9% in the period.

Despite these increased expenses, our segment operating profit rose 7% overall and Slide 14 shows you the performance by business segment.

U.S.

Retail drove our growth with operating profits up 8% to $447 million.

Profits for the International segment were 5% below last year, finishing at $56 million.

As Ken will discuss later in more detail, that simply reflects increased marketing expense or a high level of new product introductions and I should also mention that International had a tough comparison.

Last year's first quarter profits grew 74% year-on-year.

Bakeries & Foodservice profits increased 7% to $29 million and that performance was on top of 69% growth in the first quarter last year.

We continue to move down the income statement and you'll see that restructuring and other exit costs contributed $2 million of income this quarter compared to $9 million of expense last year.

The gain this year included a $9 million gain from the sale of a manufacturing facility in Spain, which then was offset by $6 million in charges associated with the sale of the par-baked bread business that was part of our Bakeries & Foodservice division.

As we indicated in June, we're seeing an increase in interest expense this year due to higher rates and changes in our mix of debt and in the first quarter, this expense rose to $105 million.

Our joint venture earnings after-tax totaled $19 million, and that included a $2 million restructuring charge which flows through the JV line which we incurred in CPW.

Without that expense, our JV earnings after-tax would have been up 11% over last year.

As Steve mentioned, we did make significant share repurchases during the quarter.

In total, we bought back 14.1 million shares at an average price of just over $52 per share in the quarter.

I point out that two years ago at this time, we had 381 million basic shares outstanding, two months later we bought 16.6 million shares from Diageo.

In fiscal '06, we bought just under 19 million shares, and as I just mentioned, we've purchased another 14 million in the first quarter of this year.

After option exercises, there has been a cumulative reduction of 36 million shares.

I know that some of you have looked ahead to October of the next year and the issuance of shares on the Lehman exchangeable bonds.

I'll reiterate our previous guidance.

We intend to buy back the same number of shares that we issue for the exchangeable bond, and furthermore, at the end of fiscal '08, that is, by the month May of 2008, we will have bought back net 6% of shares outstanding compared to fiscal '05.

If you turn to the balance sheet and look at core working capital items, you can see that we were a user of working capital as is typical for us at this time of year.

This included higher inventories, which reflect both new product production and some building back from the low overall levels that we had at the start of the year.

Our core working capital growth was below our sales growth pace.

We now shift over to the cash flow statement and in the first quarter cash from operations was $104 million, reflecting the higher use of working capital.

Capital expenditures totaled $61 million, that's up from $45 million last year.

Dividends increased to $126 million, as our higher quarterly rate was partially offset by share repurchases, and as I mentioned, we bought back $699 million worth of stock as discussed earlier.

Slide 19, then, summarizes our performance through the first quarter of fiscal 2007.

We're seeing good top line growth with increases across all three operating segments.

Both gross margin and segment operating margin results held steady at good levels and we're on track to achieve our annual financial targets.

I'll now turn the call over to Ken, who will provide more detail around our positive operating performance in the first quarter.

Ken?

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

Back in June, we identified four key operating objectives for fiscal year 2007.

They are first, renewing sales growth for Big G and Pillsbury, secondly, increasing our level of new product activity, third, taking advantage of growth opportunities in new channels and in international markets and, finally, continuing to expand our margins.

And as you heard, we're off to a solid start towards these objectives in the first quarter.

Our Big G cereal division achieved a 4% net sales increase for the period driven by volume growth including strong contributions from new products.

Consumer takeaway for our cereal brands was also up for the quarter.

Unit sales outpaced dollar sales in retail outlets because we have better levels of merchandising this year than we had a year ago.

Remember that a year ago we were still rebuilding our merchandising levels.

Slide 23 shows that our in store feature and display levels are back up this year, but not aggressively so, we're below merchandising levels from two years ago.

Equally important are our baseline trends, and that's our non-promoted sales, are looking good.

New products and strong consumer marketing support contributed to improving baselines, including greater than 2% growth in August.

Now the Cheerios franchise has been a key part of this baseline performance.

Retail sales for the franchise rose 8% in the quarter, well ahead of the cereal category's growth rate.

Share for the franchise increased to 11.6% of category sales.

Much of this growth came from recent new products, including Yogurt Burst Cheerios, launched last August, and now Fruity Cheerios.

Advertising support didn't begin for Fruity Cheerios until this month, but dollar share for Fruity Cheerios already exceeded 1% in August.

It's still early days but our other new cereals have had nice performance as well, particularly Double Chocolate Cookie Crisp.

We're supporting our cereal business with increased consumer marketing investment.

For the first quarter, consumer marketing was up 10%.

In addition to significant advertising support, this growth reflects greater focus on in store marketing programs, including advertising on milk cartons and on pack promotions to generate excitement at shelf.

In the first quarter alone, we delivered almost 10 million DVDs of the popular Scene It board game to consumers on several cereals including Cheerios, Trix and Cinnamon Toast Crunch.

So I'd say our Big G division continues to show improving results.

Our baselines are growing, our new product levels are up.

We expect this momentum to result in renewed sales growth for the full-year.

Turning now to Pillsbury USA, we saw good performance in the first quarter on two important businesses, refrigerated baked goods, and hot snacks.

Refrigerated doughs 3% growth came from new products as well as core growth on biscuits, crescents, and sweet rolls.

Retail sales on Totino's hot snacks were up 8% and included the successful introduction of a new line of mega pizza rolls that are twice the size of regular pizza rolls.

As we enter the key holiday season, we are significantly increasing advertising on our line of Pillsbury refrigerated baked goods.

We expect this increased advertising, along with solid new products, to contribute to sustained momentum on these businesses in the second quarter.

In the meals division, Hamburger Helper is important in terms of both sales and profit contribution.

The business continued to perform well in the first quarter through a combination of good, early performance on our new microwave singles product, along with 7% growth on core Hamburger Helper varieties.

Progresso soup also posted good results in the first quarter.

In particular, we're pleased with the early performance of our new line of soups with 50% less sodium than comparable varieties.

These new items are currently ahead of target from both a distribution and a retail sales standpoint.

In total, Progresso soups achieved 7% retail sales growth in the quarter.

We expect our growth momentum to continue as we head into the soup season.

Old El Paso has launched several new products, including flavored varieties of stand and stuff taco shells.

In the first quarter retail sales for this business grew 6%.

In our Yoplait division, retail sales rose 10% in the first quarter.

That's the sixth consecutive quarter of double-digit growth.

Our established product lines are doing great, particularly Yoplait Lights.

We're also seeing good initial performance from the new items we introduced in July, including three new Whips! varieties as well as a line of Yoplait Kids yogurts.

Yoplait Kids has 25% less sugar than the leading kid yogurts and no artificial sweeteners.

Sales have been so good on this item we're working hard to keep up with demand.

In snacks, our Sweet & Salty nut bars continue to be a hit with consumers.

In July, we introduced two new varieties, cashew and roasted mixed nut.

We brought additional innovation to grain snacks with the launch of Caribou coffee bars.

These are indulgent granola bars dipped in a creamy coffee coating.

Initial sales and early consumer feedback have been extremely positive.

These new items helped drive 4% retail sales growth for our grain snacks in the quarter.

Indulgent new products also contributed to 10% growth in our salty snacks business.

The chocolate varieties of Chex Mix that we introduced last year were the primary drivers of first quarter growth, but we've just introduced several new Chex Mix items and some Gardetto's special request items, too, so we can expect continued sales growth on this business.

In our baking products division, retail sales for dessert mixes increased 5% in the quarter and our dollar share grew by 2 points to exceed 41% of category sales.

Our Warm Delights microwave desserts continue to perform well and we launched two new flavors in July.

So as you look across our U.S.

Retail businesses consumer sale trends were strong overall.

Slide 35 shows our retail sales trends in Nielson measured outlets plus Wal-Mart.

I can tell you that we're also seeing good growth in non-measured channels, in particular our cereal and snacks businesses showed nice growth on both club stores and dollar stores this quarter.

So overall, for the quarter, U.S.

Retail delivered just the pattern we want to see, good unit volume growth, up 3%, faster sales growth, up 5%, and operating profits growing faster than sales, up 8%.

That's a great start toward our annual objectives for this business segment.

Shifting to Bakeries & Foodservice, this segment had a strong quarter, too.

The 9% sales increase reflects good volume gains, favorable product and channel mix, and pricing taken during the quarter.

We're focusing on growing our branded product sales to foodservice distributors and convenience stores.

In the quarter we saw particularly strong growth in sales of snacks and yogurt to our distributors.

And sales to convenience stores rose 23%, largely through distribution gains, including a number of our first quarter product launches.

We'll keep working on these opportunities for favorable product and customer mix, which we expect will help generate sales and profit growth for our Bakeries & Foodservice segment this year.

Our International division showed the strongest sales growth this quarter, up 13%.

Slide 39 shows sales were fairly consistent across the regions where we compete.

Latin America led the way with 13% sales growth at constant currency rates.

Europe and Asia Pacific were also up double-digit while sales in Canada rose 3%.

Excluding the impact of currency exchange, International net sales were up 9%.

As reported, including favorable exchange rate impact, net sales increased 13%.

To sustain this growth, we're launching more and more incremental new products.

Last quarter, we introduced Fruit Snacks into China.

We're also expanding distribution of Nature Valley granola bars into several new markets in Europe.

In France, we're introducing Green Giant vegetable snack pots, a healthy, ready to eat snack in a portable package, and we're introducing an entirely new product line in France, Asian dinner kits under the Wanchai Ferry brand name that we use on frozen dumplings in China.

Significant consumer investment to support these new products lowered first quarter profits slightly.

That pattern is expected to continue until the fourth quarter, where we have an easier comparison, but for the year in total, we fully expect our International segment to achieve another double-digit profit increase.

Let me say just a brief word about our joint ventures.

Sales on these businesses rose 4% in the first quarter and after-tax earnings totaled $19 million.

Cereal Partners Worldwide posted good sales growth, including double-digit growth on the Cheerios franchise and mid single-digit growth on our line of Fitness brand cereals.

CPW also completed the acquisition of the Uncle Tobys business in July.

Uncle Tobys holds a 19% share of cereal category sales in Australia and this market is now CPW's second largest behind only the U.K.

So through the first three months of the fiscal year, we're making progress on each of our objectives.

We achieved net sales growth in all three segments, including renewed top line growth for Big G, and gains on key product lines in the Pillsbury division.

The new products that began shipping in the first quarter are off to a very solid start, and we expect solid contributions from these new items going forward.

We achieved strong sales growth in non-measured retail outlets, foodservice channels, and international markets, and we held our margins overall, despite input cost pressures.

All in all, we feel good about our momentum as we head into the second quarter.

That concludes our prepared remarks, so I'll ask the operator to open the line for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Terry Bivens from Bear Stearns.

Please proceed with your question.

Okay.

Good morning, everyone.

Hi, Terry.

A question on the cereal category and specifically your pricing there.

You guys gave us the number for Big G. What did you see as category growth during your quarter?

Hi, Terry, this is Kris.

I've probably got something in here that is a look at measured outlet plus Wal-Mart.

No, I don't, I've only got measured outlet, so that's not going to give us the answer.

I can get back to you on that.

Okay.

Great.

And obviously, Kellogg took a recent price increase on the cereal line.

Have you followed that price increase?

This is Ken, Terry.

We haven't raised any cereal prices recently, but I think you know we've been working to raise some merchandising price points and reduce merchandising frequencies on some of our products, particularly the Cheerios franchise and so that's helping us.

And I would say, generally across the U.S.

Retail as we look at margin and margin expansion, we're focusing very much on this net unit opportunity.

We're focusing a lot on mix, we're looking at frequency of trade and all of those we think are contributing to the nice conversion to net sales that you're seeing and we also are maintaining a very, very strong and effective focus on productivity of both in plant and in logistic.

So you add all of that effort, which I'd describe as very comprehensive, and that's resulting in we think the pretty good margin performance that you're seeing.

Okay.

Great.

And just one last quick one for Jim.

Jim, what did you budget the price of oil to be in the fiscal year?

We don't disclose that, Terry.

Okay.

Thanks very much.

You're welcome.

Our next question comes from the line of Chris Growe from A.G. Edwards.

Please proceed with your question.

Good morning.

I just have a couple of questions for you.

Congratulations on the quarter, by the way.

The first question relates really to the guidance.

I'm just curious, should we presume it's too early in the year to even consider altering the guidance?

And the second point I want to make on that was perhaps, does the sort of quarter give you a reason to perhaps increase your marketing maybe more aggressively than you thought for the year which could preclude any real upside for the year?

Chris, this is Steve.

I'd say that it is a strong quarter, unquestionably, but it's also the first quarter of the year, which is, as you know, is not one of our larger quarters.

And the second quarter, by contrast, the one we're in right now, which is baking season and soup season and all the top volume season and sales season for us generally represents about a third or perhaps even more of our annual earnings.

So I think we do want to see that strength continue in second quarter before we alter, before we declare victory and alter plans for the year.

We have a -- our plans call for a strong increase in consumer support for our brands as we said at the outset of the year.

There may be opportunities where brands are responding very strongly to that to accelerate that further and we'll evaluate that as the year goes along.

It sounds like those marketing plans may not have changed as a result of this one quarter, though?

Not as of yet, no.

Sure.

And then I was just curious on the Foodservice division, the profit margin was down in the quarter and I had been expecting with the price and the mix realization and some of the efforts there the last, call it, year or two, to see a little more, actually, margin expansion.

Was there anything, I guess I'm sure commodity costs were a little challenging, was that the reason for the operating margins being down in the quarter?

Well, we are looking at, you know, in that division, as you know, increases in commodity prices, but we did offset that with increases of around 5%.

Those rolled in progressively over the course of the quarter so we didn't really have full realization until we got to the end, but we've got them through now and we think that that should put us into a good position here as we go forward into the rest of the year.

Okay.

Great.

I don't know if you quantify this, and perhaps I missed it but, I don't know, Jim, this may be a question for you, did you say how much commodity costs maybe as a whole were for the quarter, incrementally, could you give that number?

I'll just take a different stab at that.

You know that we've called out $145 million of commodity and fuel inflation for the year and we told you that we'd have a little bit more pressure from that in the first half than in the second half.

So I'd tell you to take that 145 and [weighs] a little bit more than 25% to the quarter and you'd be good.

Okay.

Thank you.

Thanks, Chris.

Our next question comes from the line of David Edelman from Morgan Stanley.

Please proceed with your question.

Good morning.

Kris, I take from that comment you haven't at this point changed your internal forecast of the incremental commodity costs year-over-year despite the recent decline in oil?

No, the 145 is what's built into our plan.

Okay.

And I wanted to ask a question on shares outstanding.

I was a little bit surprised that given the aggressive repurchases in the quarter that they were basically -- diluted shares outstanding were basically, sequentially flat.

If you could talk at all as to why that that was the case.

And also, if you could let us know, if you did the calculation at the end of the quarter, because presumably you did the repurchases dur8ing the quarter, what would be sort of the spot end of quarter diluted shares outstanding, [inaudible] please to help us forecast the remainder of the year?

And to that last point, that is on the slide.

Can you tell me, are the slides there now?

I was told they're up and running.

Have people been able to get them, David?

Have you got them?

I have them, yes.

Okay.

Apologies for that, but I just want to make sure everyone was out there.

345 million was the basic share count at the end of the quarter.

Okay.

Thank you.

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

Please proceed with your question.

Good morning.

I guess on just the first thing, in terms of the year-over-year change in kind of promotional spending, the part that would be netted from the top line, can you give us a sense of how that changed or what the impact on the top line was year-over-year?

Do that one again, please?

Sure.

The change in promotional spending, the impact on the top line year-over-year, so was that a contributor to the top line or a negative impact to the top line, just on the trade part, the part that's taken off the top line?

Well total price mix gave you 2 points of the growth for the total company, but trade spend was actually favorable, was down a bit in the quarter.

So there was some trade spending efficiency.

Got you.

That helped add to that plus two, okay.

And then, perhaps Ken, I know you had touched on this in some of the slides around baseline, improvement in baselines for cereal, I know that was something that the Company's talked about over the past year or so and wanted to improve baselines across a lot of the key U.S.

Retail businesses and it's tough for us to tell sometimes from the data we get in terms of the progress you've made.

Can you bring us through just briefly, a couple of the key U.S.

Retail businesses where you've seen some of that baseline improvement and I guess what the key things that drove that, and maybe where you haven't and if there's a reason why you haven't seen it in certain categories?

Well, I mean we're seeing, as you saw, we're seeing some nice baseline improvement on cereal, and that's good, solid advertising on Cheerios.

We're seeing some of our adult businesses, Total, Fiber One, we're seeing some good baselines there.

We've got nice new products coming in, which are helping.

We're seeing nice baselines on our refrigerated, some of our refrigerated dough businesses, particularly businesses like crescents and cinnamon rolls and these are very nice businesses for us.

So we're seeing good development there.

Yoplait baselines continue to be very strong, particularly on our core cup businesses.

We saw improvements on our baselines in some of our Kid brands there.

Snack baselines, particularly salty snack and grain snack baselines were very good.

Soup baselines behind our very effective weight management advertising on soup continue to be very, very solid and developing nicely.

So we do see good progress in a lot of areas and, in fact, I think for -- I can't remember the exact -- I think baselines for the U.S.

Retail were up between a half, or were half a percent or a little bit better overall across all segments, so it's good progress.

And Jim last one, just on corporate unallocated, I think the hit from the options was, I think, $40 million in the quarter and corporate allocated I think was 43.

So I was wondering where -- I would have thought that number would have been higher given the incremental $40 million from the options hit in the quarter.

I'm trying to get a sense of where I was off there and if you still expect that number, meaning corporate unallocated, to be, I think you had last quarter, roughly flattish for the year?

We do expect it to be roughly flattish and that is a place where there's a lot of ins and outs we capture benefits in there.

That's also where we have the restructuring charges in and out, so it just netted with the $40 million.

Okay.

Thanks very much.

And Ken, I just put a little finer bead, the schedule I was looking at for that trade spending efficiency, that was U.S.

Retail, so my statement holds there.

For total company, trade was up a bit year-over-year.

That's actually driven by strong growth in International where we've got all those new products going in.

Got it.

Thank you.

Our next question comes from the line of Eric Serotta from Merrill Lynch.

Please proceed with your question.

Good morning.

How much would you say that shipments of new products into the channel in Big G added to sales in the quarter, Ken?

Yeah, they added to sales in the channel for the quarter, that's for sure.

We shipped these, most of the big ones, beginning at the very end of July and so they were hitting strongly in August and the response to the new products has been very highly positive, particularly for Fruity Cheerios, which I think hit over a one share before the end of the quarter and before any advertising.

And so that one, we came in ahead of what we were forecasting and so we did have good contribution from new products at the end of the quarter there.

Okay.

And then you posted some pretty impressive growth in the Cheerios franchise in the quarter.

I think that you said that retail sales were up about 8%.

Now consumer takeaway in all of Big G was, if we're to assume that it was up somewhat greater than, I think, the 1% in measured channels, I guess, what was soft in Big G to bring us down from when you had your largest piece of the franchise up so much?

Well, Cheerios was solid.

Some of the core adult franchises that I mentioned were solid.

Chex franchise was solid.

Where we lose a little bit is some adult brands that we can't advertise, we don't advertise, we deprioritize them, things like Raisin Nut Bran, Wheaties, we didn't advertise in the first quarter, so we have some of those smaller businesses that aren't getting our focused attention.

We do see those decline a little bit.

But overall, the ones that we wanted to grow did grow and so we feel pretty good about the way the mix worked out for us.

Okay.

Thanks.

And along similar lines in Pillsbury USA, it looked like consumer takeaway in this case conversely outpaced your sales growth.

Could you just talk a bit about what the dynamic was there?

I think we came into the quarter with -- into the year with good momentum, particularly on those core refrigerated baked goods items that I mentioned, crescents, sweet rolls, breads, which are a very important part of our franchise.

We had a soft quarter on Totino's snacks a year ago and we've seen that business recover progressively over the last three quarters and so we entered the first quarter with very solid momentum on that business and saw that continue and so that was an important factor and so I think those are probably the two key factors there.

Okay.

Great.

Thanks a lot, Ken.

Our next question is from Jonathan Feeney from Wachovia Securities.

Please proceed with your question.

Thanks.

Good morning.

Ken, I wanted to follow-up.

You talked about the decision to de-emphasize certain brands within Big G. I mean is this just the normal course of business, or can you tell us a little bit about the thought process behind where you're spending marketing and advertising dollars right now within Big G?

Well I mean on all of our businesses across the entire portfolio, we have to make choices and we do do that in a disciplined way and cereal's no different and so we're focusing spending in Cheerios where we're getting a tremendous response.

I mentioned again, the adult brands that we're focusing on.

Obviously, we focus great resources on our Kid brands, which is a great franchise for us.

So we do have a process of putting our spending where we think it's going to get the best return and drive baseline and good share and volume growth.

And, again, we do that across every single one of our businesses.

I guess what I'm asking is, have you seen any data that's changed your thinking about approaching Big G, I mean for example, are there too many SKUs?

Is there a change to that process, or is this just kind of an ongoing adjustment to spending based on some opportunities you saw in Cheerios and maybe less so in certain adult categories?

I would really say that there's no change in our philosophy here.

We're really on an ongoing basis are trying to be as disciplined as we can to put the spending where it's going to get the best return at any given point in time based on and we do very careful studies of advertising and promotion effectiveness and we're constantly monitoring the sort of, what we call the ROI on marketing investments there.

So it's just -- I would say it's just a continuation of what we think is a very good process.

Okay.

And also on Big G, you had a really nice impact in the first quarter and it seems to me to be a really nice acceleration in the first quarter of innovations.

And I guess, do you see a maintenance or even acceleration of the contribution from new products throughout the year?

And I guess involved with that, do you feel like there are a bigger picture, you know, do you have the right tools, are you innovating to create a steady flow of profitable innovations in the years to come right now?

I think it's a great question and I feel very positive about the way we're approaching new product innovation and development across all of our businesses now and it's really, it's what you said, it's making sure we've got the resources in place to supply a steady flow of innovation across the quarters.

And that's what our goal is and I think you'll see as the year unfolds here that you'll like the new products that come here as we go on through the year.

We're going to have more good cereals for you and other new products in other categories.

Great.

Just finally, just one for Jim.

On the reclassification you announced last night, understanding it's all historical and has no bearing on the bottom line.

Just curious, what prompted the decision to reclassify freight and a number of the other changes you made that don't really have any major bearing?

Was it some suggestion you got from somewhere, or what prompted the change?

What prompted the change was that we made a business decision that we would move certain customers from the purview of Bakeries & Foodservice to our U.S.

Retail salesforce, given who those customers were ending up selling their product through to.

So that was a business decision, moving responsibility of those customers from one segment to another.

Having done that, we would then need to report the sales of those customers in the new segment, U.S.

Retail, and we felt, therefore, that we needed to reclassify previous years for the purpose of comparability.

While we were making that change, which we made for a business decision, we simply had a review across all of our accounting policies to see if we wanted to make any other changes since we were going to make that reclassification.

We chose to make a couple of them, most of them quite minor.

The only two which are of substance were flagged in the 8-K, where we changed accounting for where we have freight from SG&A to cost of goods sold and we also took some expenses which had been classified as trade and netted off of sales and moved that had down to an SG&A.

So just moving it within the income statement, obviously, not affecting the bottom line.

Okay.

Thank you very much.

Thank you.

Our next question comes from the line of David Driscoll from Citigroup Investments.

Please proceed with your question

Good morning.

This is Michael Avery on behalf of David Driscoll.

How are you doing?

I wanted to revisit interest expense real quickly, is the guidance unchanged for the year still?

Guidance is unchanged for the year.

Okay.

Great.

And then, was wondering if you could talk a little more about the low- sodium soups, or I guess the reduce sodium soups?

You said those are doing well.

Is there any indication of where that's being sourced from?

Is it incremental to the category or to the franchise?

Michael, thank you for the question.

First of all, let me just say, there's a, consumers have been telling us for a while that they have a great desire for reduced sodium soups.

And so we think that we're in there with products that are, we believe are very, very good and if you haven't tried them, I encourage you to do that.

Our competitor has launched some low-sodium soups.

That sector will be advertised and so I think going forward, I believe that this is going to bring, very clearly, bring new people into the whole category, and that will be positive for category growth.

Having said that, we both just launched these soups over the last six or seven weeks so we have early turns data, but it's too early to say how exactly how it will impact the category.

But there's no doubt from the customer reaction that we had and the speed that we got distribution that this is going to be a good thing.

And when do you expect the advertising on that to start?

We'll start advertising, I don't know the precise date, but we start advertising as we go into the so-called soup season here in the fall.

Okay.

Great.

Thank you very much.

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

Please proceed with your question.

Hey, good morning, everybody.

First question.

I've never known General Mills to not go after a price increase, so I'm a little bit curious as to why in Big G you're not following Kellogg's move?

I mean I really just think back over the last decade, I can't think of one time where you didn't follow-up on a pricing move.

Well, I mean we just -- we haven't felt it was the right thing for us to do right now but, again, I would just reiterate what I said before.

We are very, very focused in Big G and across U.S.

Retail on margin expansion, and margin expansion is a process and not an event and so we're looking where we can get list price increases, we've taken a few of those selectively.

We're looking very closely at all of our net units and frequency.

We're getting gains from mix.

We're getting tremendous gains from productivity, both on the supply chain and logistics, and it's resulting in good performance.

And I'll tell you, sometimes reduction in a net unit or reduction in trade frequency is a significantly better play than taking a list price increase.

List price increases, you have to trade back to hit price points and so a lot of it gets erode in increased trade spending.

You can see, we see sometimes there's elasticity in erosion, so it's not necessarily always the best thing to do.

We can get there in other ways and that's what we're choosing to do now.

And that's basically what happened to Big G last time, you know, we kind of know that.

But I mean I shouldn't, I guess another way of asking the question is, I shouldn't -- should I view this as kind of a change in philosophy as to how General Mills, not just Big G approaches pricing?

I don't think so.

I think we just felt that at this time that was not the best move for us.

But it doesn't mean at all that taking list price increases is out of our tool kit of margin expansion strategies.

And one thing you know, Eric, is that we never do speak in advance of price increases, only after we've made them.

Of course not.

Okay.

Second question, can you update us on the SKU cuts?

I think, I'm trying to remember my dates here, but weren't you going after a pretty big SKU cut across retail?

And how did that impact the quarter?

Eric, it is true that we are focusing on what I'd call business simplification and SKU rationalization.

I don't have a number to hand, maybe we could get that to you later, but I'll tell you we are, we continue to be, feel that that's a very effective strategy getting the right SKUs on the shelf.

It's something that we're pursuing across most of our businesses and segments, and just results in better business focus, better turns, better performance in the plants and the supply chains, so it's something that we continue to pursue and I can get you a percentage number later.

Okay.

And them I guess, next question on hedging, I know you can't get specific on the inputs, but I think last conference call, Jim, you had mentioned that you were about 50% covered across just broad inputs and 50% you were naked, and then I think this morning, Steve, you had mentioned on CNBC, like 70% hedged.

So you've obviously locked in more.

Is that -- do I have the right percentages?

Well, certainly, if Steve said 70, that's right. 70% on the egg commodities piece, and we have also put on some coverage on energy.

When we talked to you in June, we said we were less than 50% covered on energy, we'd be at about 50% now.

Okay.

And then just last quickly, Jim, Cap Ex, are you still at 4.25 roughly for '07?

We absolutely are 4.25.

All right.

Thank you.

Our next question comes from the line of David Nelson from Credit Suisse.

Please proceed with your question.

Good morning.

With working capital up, first of all, congratulations.

With working capital up as Jim called out, cash flow from operations was actually down.

Is that related to new product launches or anything else you'd like to call out, Jim?

I did call out new product launches and that is in particular what I'd focus on.

Okay.

I guess a lot of questions were related to trade promotion spending.

We're in a world where Kellogg has taken pricing and so a lot of it's been related to Big G, but Heinz has called out some pretty big numbers for trade promotion spending cuts.

How big of an opportunity do you see at General Mills for reducing trade spending as a part of your margin expansion program?

Well, as you know, companies like General Mills in the industry we spend a significant amount of money on trade promotion and so it's a pool of funds that we look at very closely, important that we get that productivity in the right ways.

We still, it's crucial for us to have merchandising effectiveness, to have strong levels of display in store, and those kinds of things, but having said that, this is an area of focus for us.

We think we think we can increase efficiency and have shown in many cases that we can do that and so that will be a continued area of great focus for us.

Okay.

Thank you very much.

Our next question comes from the line of Pablo Zuanic from JPMorgan.

Please proceed with your question.

Good morning, everyone.

Good morning.

Jim, can you help me out understand a little bit the price mix realization in the Retail division?

You know, 1.6%, close to 2%, or Ken, maybe.

Can you just expand a [growth] portfolio, like for example cereal, was it above that number, were soups above or below?

Just roughly to get a sense of what drove the 2% price mix gain in retail.

I would -- without going into very specific detail across the business, what I would say is that it is a combination of some list prices here and there.

For instance, in the winter and spring of last year, we had some list pricing, a little bit of list pricing in soup and also net units improvements in soup and so both of those carried over into the first quarter and I think there are other examples like that.

We did have, as I mentioned, some net unit changes in cereals and in some other businesses.

We're seeing some mix focus.

We talked about a very positive mix focus that we're working on in Foodservice.

We have good mix in Pillsbury and our baking products.

And so it really was a combination of things across a combination of businesses that are leading to pretty solid conversions in net sales.

Okay.

But when we try to think in terms of how you lap that, it seems that a lot of that could be sustained throughout the year, I mean in sequential terms assuming there are no changes sequentially?

Yeah, I think we can sustain these, absolutely.

And now, a second question.

In the past you've provided a slide with retail takeaways for most of your product categories.

I don't think that was provided this time.

Just roughly, again, retail sales shipments were up 4.6%.

Roughly, where would takeaways have been for the Retail division?

I don't know if you've got the slides in front of you, but I'll just run down the consumer takeaway numbers that we did provide.

It's Slide --

Okay.

So that's the -no, you don't have to [inaudible], but what was the net number for the group for Retail in takeaways?

Yeah, we don't do a composite because, as you know, increasingly there is growth in non-measured channels and so we don't have an ability to give you a complete clear read of takeaway.

Okay.

That's fair.

And then just another one, Ken.

When I look at the yogurt category, obviously explosive growth and that's very good for General Mills, but we look at the scanner data I see that Dannon is gaining share there and that actually they are realizing better price mix and you guys actually have seen your price mix come down in the case of yogurt.

Can you comment on that?

How would you describe the competitive environment there?

Are you having issues with pricing and are you gaining or losing share in yogurt?

We had a terrific first quarter in the Yoplait business, as I said.

Our business was up 10% and I believe our share was stable across our businesses and so we feel very good about the momentum there and our ability to sustain it.

The category is, as you know, very competitive.

Activia has come in and they've gotten trial on that business and just to give you a perspective, I think that business, Activia, now is a little bit bigger than our Whips! business, but so they've gotten trial and it looks like most of the -- they've taken most of their share from other Dannon businesses, but the category is competitive, but we're very happy with our momentum.

Good.

Ken, one last one.

Regarding ready-to-serve soup, Campbell it's rolling out the gravity feed shelves for ready-to-serve soup.

We've seen, I think, ConAgra, with Healthy Choice also been willing to follow that in some stores.

What's going to be your strategy there?

I'm sorry, Pablo.

He's asking about the gravity feed shelves in ready-to-serve soup.

Oh, okay, gravity feed.

Well, our strategy in, let me back up.

Recall that the, I think the way to think about Progresso soup is that it wasn't that long ago that Progresso soup and foods was primarily a northeastern-based business.

And our strategy for the last four or five years has been three-fold, to expand that business and gain distribution outside of the northeast, to grow baselines through very effective advertising around taste and weight control, and to add exciting new products, like low-sodium.

And that strategy has been, has worked terrifically well for us.

We're gaining distribution and shelf visibility across the country.

Our baseline turns are expanding and our new products have been a success.

So that's the game that we're playing and it continues to work very well for us and I think Campbell's is doing gravity feed primarily on their condensed soups for a different set of reasons that probably make sense for them, but don't really for us right now.

I hear you.

And one last one for you, Jim.

Regarding the unwinding of the Lehman Brothers deal, I hear what you said on the call about the share buybacks.

Can you help us out?

Can you remind us about the economics?

On the one hand, you're going to save on not having the minority interest on your P&L.

On the other hand, there will be a funding cost of the share buybacks.

Would you say that the whole unwinding would actually be a net positive for your P&L?

Well, if you go back to the very origin of the deal, we think this deal will have proved to be at the end very attractive for our shareholders.

At this point now, specifically, what will happen is we will get back from Lehman $750 million and we will give them a number of shares which varies depending upon the share price, the higher the share price, the smaller the number of shares.

It is our hope and expectation that we'll be at the top end of that range and as a consequence, we will have extinguished about 2 million shares from that transaction.

We will then need, obviously, to buy those shares back out of the market because we do not want to increase the net share count, so you can think of the transaction simply as 750 coming back to us, shares going out to them and then our buying an equivalent number of shares and with the financing costs will be what they are at the time, I can't predict what the interest rates will be when we do the financing for the share buybacks next year.

And then just to reiterate one more time, we do expect not only to buy those shares back to keep the share count constant, but we said that by the end of next fiscal year, by May of '08, we will have cumulatively bought down net 6% of shares outstanding over a three-year period.

That's very helpful.

Thank you.

Thank you, Pablo.

Operator, we're going to take one more question.

And then folks, I apologize, but I'm going end after that because I know Con Agra is coming right behind us and I don't to overlap on their time.

So can we have one last question?

Of course.

Our last question comes from the line of Todd Duvick from Banc of America.

Please proceed with your question.

Yes.

Good morning.

Just a couple of questions.

You've got about $4 billion of short-term debt on your balance sheet and $2 billion of which is coming due in terms of notes outstanding.

Can you give us some guidance in term of what we should look for in terms of new issuance?

No, we're not going to be specific today as to how we're going to refinance that.

It comes in two tranches, a $500 million tranch in this coming month of October and $1.5 billion in the start of the new calendar year.

We expect to refinance both of those two tranches, but we've not yet said what the manner will be that we'll refinance them.

Okay.

And then finally, prior to the Pillsbury acquisition, you were an A-rated company and I wanted to know if you have any designs of getting back to that rating category?

We do.

We have said publicly to the broader market and we said directly to the rating agencies, it is our intention to grow back to a mid single A.

We've not set any deadline to do that, we've not set any time frame publicly to do that, but we have been working on our ratios and we expect to continuously improve on those ratios over time and work our way back to a mid A.

And by growing into it, I assume you mean rather than debt reduction, primarily growth in cash flow and income?

Precisely, Todd.

Okay.

Thank you very much.

Thank you, Todd.

Thank you, everybody.

I know there are still some follow-up questions.

I'll be back in my office shortly, give me a call.

Ladies and gentlemen, that does conclude today's conference call.

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