通用磨坊 (GIS) 2007 Q2 法說會逐字稿

Thank you for standing by and welcome to the second quarter '07 results conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded, Thursday, December 21, 2006.

I would like to turn the conference over to Mrs. Kris Wenker, head of Investor Relations.

Please go ahead, ma'am.

Thank you, operator.

Good morning, everybody.

I'm here with Ken Powell, our President and Chief Operating Officer; and Steve Sanger our CEO.

Joining us on the phone is our CFO, Jim Lawrence.

Steve, Jim, and Ken have some prepared remarks so I'll turn it over to them in just a minute, but first I've got to cover a couple of housekeeping items.

The press release on our second quarter results was issued over the wire services earlier this morning, posted on the website if any of you still need a copy.

We've also posted slides on the website that supplement our prepared remarks.

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

I also want to give you a quick reminder of our midyear investor meeting in Boston that's scheduled for January 11.

If you're planning to join us live, we need you to R.S.V.P. to us at General Mills.

That meeting will also be webcast if you're to the able to attend.

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

Thanks, Kris, and thank you all for joining us this morning.

I hope you've had a chance to read the full press release that came out earlier today.

We see four basic headlines in the quarter.

First, we delivered both good sales growth and increased margins, and that's a good combination.

Second, our sales gains reflected a good balance of unit volume growth and net price realization.

Third, we recorded strong operating profit increases in all three of our business segments.

And fourth, this puts us ahead of our plan for the first half, and so we're raising our guidance for the year.

Now, those are the headlines.

We have Jim and Ken here to give you quite a bit more detail about all those, so I'm going to turn it over to them, starting with Jim, and then the three of us will come back and answer questions.

So Jim, over to you.

Thank you, Steve, and thanks to all of you on the call for joining us this morning.

If you take a look at slide number 5 in our website, that slide summarizes our results for the second quarter.

Net sales grew 5% and that is on top of a 3% increase that we had in the same period last year.

This year our segment operating profit increased 11% and after-tax earnings rose 4% and that is despite higher interest costs, a higher tax rate, and incremental stock option expense.

Finally, diluted EPS grew 11% to reach $1.08, and that is up from $0.97 GAAP in the same period last year.

Now as I say, these are GAAP results and I do want to point out that there are items which affect the comparability of our EPS.

Last year's second quarter included $0.05 of dilution from contingent convertible accounting, which is no longer with us, and this year's results include incremental stock-based compensation expense, which in this quarter was $0.02.

If you turn to the next slide, you'll see our 5% sales growth in the second quarter, included 3 points of growth from unit volume and another 2 points from mix and price realization.

Foreign exchange did not have any meaningful impact on overall sales results in the second quarter.

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

As Steve mentioned, our U.S. retail sales are up 3%, our international sales are up 15%, and bakeries and foodservice sales are up 6%.

We're pleased that all three business segments also showed net price realization for the period, with sales running ahead of volumes.

Turning now to slide 8, this slide summarizes topline performance for our major U.S. retail divisions in the quarter.

Our Snacks division achieved the strongest rate of revenue growth.

Net sales were up 7% in the period.

Yoplait sales grew 6%.

Both the Meals division and Pillsbury USA posted 4% sales increase.

Big G cereals posted a 2% sales increase.

Net sales declined for Baking Products.

And that reflects a tough comparison to last year's introduction of Warm Delights, and our own planned changes in merchandising strategy in this quarter.

Finally, our Small Planet Foods, our organic business, delivered 19% growth.

If we move down the income statement, you see that our gross margin was up nearly 40 basis points in the quarter at 36.9% of sales and that reflects favorable pricing and mix, along with productivity realized in the quarter.

And with that good gross margin performance, our total segment operating profit grew 11%.

Slide 10 shows you the results by business segment, with all three segments up.

U.S. retail operating profits rose 8%, International segment posted another quarter of double digit profit growth, and bakeries and foodservice profits jumped near 40%, reflecting favorable mix and pricing that fully offset the increased input costs for the period.

Our overall segment operating margin improved by 100 basis points for the quarter, up to 20.6%, and that reflects margin expansion in both U.S. retail and in bakeries and foodservice segments, while International sustained its margin year-on-year in the period.

Restructuring and other exit items on the income statement were negligible in both years, as you can see from slide 12.

Unallocated corporate expense was higher than year-ago levels at $40 million.

Part of that increase is this year's incremental stock-based compensation expense, and the rest reflects the usual quarterly variation that we see in the slide.

Interest expense was up as expected and joint venture earnings, which are after-tax grew 5% to reach $23 million.

If we turn now to the balance sheet and we look at the core working capital items, you can see that working capital has increased and at a rate faster than sales growth for the period.

Drivers behind this were higher inventories, particularly our grain inventory and increased accounts receivable, which reflect sales strength in November, ahead of the Thanksgiving holiday.

For the year in total, we do not expect the core working capital growth will exceed the rate of sales growth.

Last week, as I'm sure you all know, based on our good earnings momentum and cash flows through the first half, our Board approved a $0.02 increase in the quarterly dividend rate, and that's effective with the February 1, payment.

So if you take in the full year, estimated dividends for fiscal '07 will total $1.44 per share.

Over the last several years, cash dividends to General Mills shareholders have grown at a 9% compound rate, and that is consistent with our long-term goal of delivering high, single-digit growth in earnings per share.

Turning now to slide 15.

This slide summarizes our progress through the first half of the fiscal year.

So through the half-year, net sales are up 6% and exceed $6.3 billion.

Segment operating profits are up 9%.

Through the half, our net earnings are up 5%, and our diluted EPS through the six months is up 13% to $1.81.

As Steve just highlighted, this performance does put us ahead of our planned targets through the first half and as a result, we have raised our guidance for the full year.

Now I'm going to turn you over to Ken Powell who will provide some more detail on our operating performance and on our outlook for the second half.

Ken?

Thanks Jim.

Good morning to one and all.

I am on slide 16 now.

As you look at the strength of our second quarter operating performance, as Jim said, it does begin with the very solid results of our U.S. retail business.

And as you see on slide 17, this segment's running at just the right formula.

Our unit volume is growing, sales are outpacing volume growth, and operating profits are growing faster than sales.

Let me give you some details on how the various divisions are doing.

Now, we told you back in June that we were focusing on delivering improved performance in or Big G cereal and Pillsbury U.S. divisions.

We've done that through the first half of 2007.

Big G's growth in the quarter included good contributions from new products, particularly Fruity Cheerios.

We also saw gains on a number of established brands, including Trix, Cocoa Puffs, Golden Grahams, and the Fiber One franchise.

Performance in Nielsen measured channels showed our dollar share essentially even with year-ago levels a 30% of category sales.

And our business in non-measured channels is growing nicely, particularly at Wal-Mart.

Our Pillsbury division had a strong start to the holiday baking season, with retail sales up 4% on our refrigerated dough products for the second quarter.

This growth was led by double digit increases on crescent rolls and cinnamon rolls.

Totinos pizza rolls continued to perform well, led by the success of the new megasize varieties introduced last June.

And retail sales for Toaster Strudel grew double digit in response to renewed advertising support.

Pillsbury division President Juliana Chugg will give you a more detailed review of this division's progress as part of our midyear meeting on January 11.

For the Meals division, our Helper dinner mix franchise generated good sales growth and picked up 4 share points in measured outlets.

The new microwave singles line was a key contributor.

This line is currently projecting to reach $45 million in annual retail sales.

Progresso soup also performed well against a tough comp.

Retail sales in measured outlets were slightly above prior-year levels that grew 18%.

Baseline volume increased in the quarter and is up 4%, year-to-date.

Our four new reduced sodium soups also continue to perform well.

And Old El Paso Mexican products also had a good quarter, with retail sales up 6%.

The snacks division growth reflects some great new product performance.

Retail sales for our grain snacks were up 13% in the quarter, driven by new Caribou Coffee Bars and continuing growth on our Nature Valley line.

Salty snacks retail sales introduced 6% in the quarter, due in part to new fruit and nut Chex Mix and Gardetto's rye chips.

Turning to Yoplait, sales trends remain positive with consumer takeaway up 6% across the division.

And that is on top of 19% retail sales growth in last year's second quarter.

Yoplait light retail sales rose 25%, including contributions from new thick and creamy varieties.

And our new Yoplait kids line continues to do very well.

This line has 25% less sugar than other kid yogurts and no artificial sweeteners.

Retail sales are currently projecting to reach $45 million this year.

And this one has been the fastest-growing item in the kids' segment over the last six months.

In our baking products division, net sales were down 4% overall.

We saw a 19% retail sales growth on our Bisquick baking mixes, but that was more than offset in a 4% decline in retail sales for Betty Crocker desserts.

Now, remember that our dessert mix business faces a tough comparison of 9% growth last year, which was driven by the introduction of Warm Delights.

Baking products also executed some merchandising changes, raising feature prices and reducing frequency to partially offset higher ingredient costs.

This damp in volume had improved our sales mix and profits.

So to summarize U.S. retail, we like the momentum we're seeing on this business segment through the first half.

The table on slide 24 shows year-to-date consumer takeaway for our major product lines in the channels where we have data and I can tell you that our business in nonmeasured channels, such as club and dollar stores is also growing nicely.

Let's turn now to slide 25 and our bakeries and foodservice segment where we achieved strong sales and operating profit growth in the second quarter.

Our sales to foodservice distributors included double digit growth on both snacks and yogurt.

Cereal sales to schools and universities were also up.

Sales to convenience stores rose 15% as we continue to gain distribution on core products, such as Cheerios, Chex Mix, and Nature Valley granola bars.

And in-store bakery volumes also showed good growth.

Now, please don't extrapolate off that 40% operating profit increase we saw in this quarter, because we're not expecting that to continue in the second half.

In fact, input cost inflation for this business segment will be higher in the second half due to wheat prices.

And because we're now lapping prices taken in last year's second quarter -- I should say lapping pricing taken in last year's second quarter, we don't expect pricing to fully offset this inflation in the second half.

In our International segment, second quarter sales rose 15%, reflecting broad-based gains across all four regions where we compete.

Canada is our largest international business, and growth there was led by Nature Valley snack bars and cereal.

Growth in Europe was led by double digit gains in both France and the U.K., fueled by Haagen-Dazs.

Haagen-Dazs also fueled growth in China, where we had a strong Moon Cake season, that's a specialty dessert tied to a traditional Chinese holiday.

And in Latin America, Haagen-Dazs expanded from shops to retail in Brazil and entered Mexico.

And our Diablitos business in Venezuela also saw strong growth in the second quarter.

So overall, for the quarter, International delivered great results with unit volume up 7%, sales up 15%, and operating profit also increasing 15%.

And that was on top of comparable growth a year ago.

Looking to the second half of the year, we anticipate continued good sales growth for International, but we are not counting on sustaining the 14% rate we've seen through the first six months.

We do anticipate renewed margin expansion in the back half, and we are still targeting double digit operating profit growth for our international segment for the full year.

Our joint venture operations reported good sales gains for the quarter and contributed after-tax earnings of $23 million.

That's 5% of our earnings for the period.

Our cereal partners worldwide venture with Nestle led JV growth.

In the second quarter, CPW sales increased 20%, including the Uncle Tobys business in Australia that CPW acquired last July.

Excluding Uncle Tobys, CPW net sales rose 13% in the quarter.

Our Haagen-Dazs joint ventures in Asia and the eighth continent JV here in the U.S. also posted sales gains in the quarter.

So that's the first half.

It was really very solid across our business segments and ahead of our plans.

Looking ahead to the second half of the year, we see several factors that we believe will cause our growth pace to moderate from first half results.

We expect net sales to show continued good growth, but we're not counting on sustaining the 6% rate that we achieved in the first half.

We'll have ongoing input cost inflation to contend with, and in some businesses, particularly bakeries and foodservice, we do not expect pricing to fully offset the higher cost.

New product activity in the back half of the year will be up versus last year.

In total, we'll be launching 80 new SKUs worldwide.

We're also planning increased consumer marketing investment in the back half and expensing of stock-based compensation will continue to have an impact on our earnings comparison, although the majority of this was accounted for in the first half of the year.

So we do see some expense pressure in the back half, but based on the good start we've had, we are raising our earnings guidance to a range of $3.09 to $3.13 per share, which includes $0.12 of incremental impact from option expensing.

So in summary, our unit volumes are growing, net sales are growing faster, and our margins are expanding.

That's a great formula for earnings growth in the latest quarter and over the longer term that.

That concludes our prepared remarks we had for you today and I'll ask the operator to open the line for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Eric Serotta from Merrill Lynch.

Good morning.

This seems to be the second quarter in a row where consumer takeaway for Big G lagged your actual -- consumer takeaway in measured channels lagged your reported sales growth.

Was that -- last quarter you cited the preshipment or the shipment of new products into the retail trade as having some impact.

Was there any impact from items like that this quarter or was the delta purely growth in nonmeasured channels?

Good morning, Eric.

It's Ken Powell.

As we look at our consumer volume trends across the channels they're very much in line with shipments.

There really isn't much of a gap there at all.

We did have a little bit -- we did have a little bit of a difference there at the end of the first quarter because of the numbers of new products that we shipped, but as we look at it all in for this quarter, it's pretty close.

Okay, great.

And Jim, moving on to the cash flow statement, you had a pretty large swing in the other current liabilities area, it was $125 million contribution this year, versus the 324 million contribution in last year's period.

Could you give us some color behind why that $200 million drop?

Sure, two factors.

One, growth in accrued taxes in this year was lower than last year.

And second, accrued promotion expenses actually down slightly in this year.

Okay.

And why was growth in accrued taxes down this year?

Because of actually paying taxes as opposed to recording tax liabilities, which we did not pay with cash.

Okay.

So a higher cash tax rate--?

Cash tax rate.

Okay, well, very nice quarter, thank you very much.

Thank you, Eric.

Thank you.

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

Please proceed with your question.

Good morning, guys.

And hi, Kris, as well.

Just two quick questions for you.

The first one, I wonder if you can talk about the input cost inflation.

We know that you had been pretty well hedged at this point, I think the number you have given before was around 140, $145 million.

Is that still a good number to use for the year, that you believe, for input cost inflation?

It is, Chris.

And Jim, you can comment further on input costs.

Yes, the 145 is good for the year.

As it turned out, the balance between the first half and second half, it's quite a bit more weighted in the back half than it is in the first half and that has to do with the good purchasing that we made in the beginning of the year and then locking in prices as we went through the first and second quarter, which we now basically have locked in for the full year.

So we know we're good on the 145 with the bulk of that 145 delta showing up in the back half.

Okay.

And then, just a question related to that, and not to get into an individual brand or category, but how would you characterize the pricing environment?

Given that we've had a little spike here and it's a little more targeted to grains, is there a view that you can, again, in some of these divisions or some of these brands actually start to consider some price realization here?

Is the environment right for that?

Well, Chris, we don't really ever talk about pricing.

We are seeing and continue to see a good conversion from volume to net sales growth from the things that we've talked about, which is a little bit of list pricing, like we had beginning of January last year on soup, which carried through to the first half of this year, so some list pricing, lots of work on merchandising price points and frequency, which continues to help us.

Mix, as I mentioned.

We're getting good conversion on all of that, and that's -- we'll continue to look at all those factors to drive improved margin.

Okay.

And then my last question, just as relevant to the foodservice -- bakeries and foodservice division.

Just curious, obviously a very strong profit contribution this quarter.

Was that mostly mix driven, or just a function of the price realization still coming through?

If you can talk about what drove that a little higher this quarter?

it was both of those, Chris.

We've had good growth in products that have good margins.

We mentioned some of the branded product increases and nice increases in some of our in-store bakery products, so it's been a combination of mix, but also we got ahead in the first quarter with the pricing that we talked about, and you saw the very strong conversion, 1% volume growth, and 6% net sales growth.

So we got that pricing out there anticipating the tough commodity environment and both of those things came together to help us in the first half.

Okay, thank you.

Chris, let me just circle back to your first question and update.

We've been kind of letting you guys follow along on where we are on on coverage.

At this point, we're more than 90% covered on energy, and about 85% covered on ingredients, okay?

Okay, great.

That's helpful.

Thank you.

Our next question comes from the line of Jonathan Feeney from Wachovia.

Please proceed with your question.

Good morning.

Good morning.

Hey, Jonathan.

Ken, I wanted to -- last quarter when you gave us a Big G progress report, you gave us a little bit more color about volume in the segment as well as price mix.

Can you do the same for us for this quarter?

Well, I'll try.

I mean, in this quarter, our dollar sales were up.

Our share in measured channels was stable for the quarter.

I think September we were down slightly.

October was absolutely flat.

And November we had share growth, so we liked the trend there.

The merchandising -- our merchandising effectiveness, which you know, going back a year now was an issue for us.

I feel that we are fully competitive in where we want to be on that score right now.

So basically, we like the share trend in measured channels.

Our performance in nonmeasured channels is quite good, and at this stage, we're focusing on going forward in building our base lines and on bringing good new product innovation.

And was shipment volume up more than 2%?

Can you say that?

No, it wasn't.

That 2% growth in net sales for Big G includes both volume growth and a little price mix realization.

Okay, good to know, thank you.

And a follow-up on that point also, Ken.

You mention pockets of growth within Big G, the core segment here, and you did mention Cheerios as one of the -- I know Fruity Cheerios made a contribution, but I think you mentioned Cocoa Puffs, Golden Grahams, and Trix, and not Cheerios.

Did that disappoint you at all?

What sort of -- I know that's your biggest kind of core brand, is there any sort of plan in place to grow that business more?

Oh, no, the Cheerios franchise was probably an oversight not to mention that.

The Cheerios franchise continues to be quite strong.

Yellow box Cheerios, I think the share there was roughly flat.

Honey Nut Cheerios continued to grow.

Yogurt Burst Cheerios which we launched a year ago continues to perform very very well for us.

We're very happy with that brand.

Fruity Cheerios as we mentioned.

That franchise in total continues to do well for us and we're quite pleased with what's happening there.

Just finally, I just read a trade report about some of the Disney cereals coming out in January.

Can you talk about your pipeline of innovations to the extent you can?

Yes, well, thank you.

First, what I want to talk about is our launch of Nature Valley cereal.

I think you all know that our Nature Valley grain snack and bar franchise is a very strong, that has become a very strong brand in that bar sector of the grocery store and with double digit compound growth I think over the last three or four years, so it's a great and growing equity and our customers are very, very excited that we're extending that's equity from the snack area into the cereal aisle.

They think it's a natural and obviously we do to.

We think that that will be a very important launch as we go into the first half of the new calendar year.

Also, as you know, we're launching a line of Disney cereals.

What's good about those cereals, we think, is that those Disney equities obviously are going to have great appeal to kids.

There's a nice health and nutrition profile for those brands.

They have a good level of whole grain, they're lower in sugar than other kid cereals.

So we think that brings some mom appeal, and we'll be offering those at an opening price point.

So we think that's a good combination.

Our customer reaction has been quite positive, so all in all, we feel quite good about our third quarter cereal innovation.

I'll also tell you that we're not finished for the year.

We'll have more new products to launch as we get -- and we'll tell you about those as we get into the new year.

Great to hear.

Thanks very much.

Thank you.

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

Good morning, everyone, and Happy Holidays.

Thanks, Terry.

Just in terms of Big G, Kris, did I understand you to say you did get some praising realization there?

That's correct.

In the quarter?

Yeah, so net sales greater than unit volume growth in the quarter.

Okay.

As you look at Big G, clearly we're back on a more normalized path following some of the pricing actions in the past.

Given the fact volumes a year ago, according to my numbers anyway, were off just a little bit, are you happy with the way the unit has performed thus far in '07?

Yes, we are happy with how it's performed.

Our goal of this year was to achieve net sales growth and we feel we're very much on target to do that for the year and so we're happy with where we're at.

And as I said, we also believe that we have kind of restored and are where we need to be on the merchandising side, so that again, the focus in this division is to build base line growth through good marketing and to bring good new product innovation, and that's the way to kind of over time incrementally build sustaining levels of share.

Okay.

And I guess that was Ken -- I'm getting used to your voice.

Yes, sorry.

As you look at the cereal business again, with the level of pricing there -- I'm trying to get at the premiums.

Obviously you were one of the big players that did not go along with the more recent pricing actions of some of the competitors.

Do you think over the next six to twelve months, should we expect to see a slightly better market share as a result of that?

Well, we very much hope to build our share.

Like I say, we're focusing on net sales growth.

It's very difficult to predict exactly what the overall market will do in terms of its growth, so it's hard to predict exactly whether that will translate into share growth, but obviously that is something that we would very much like to see.

Okay.

And just one quick question on yogurt.

Obvious there's been a lot of talk about what Danone is doing with probiotics et cetera.

Doesn't seem to have really taken the shine off what's been very strong performances by Yoplait.

Are you still thinking that maybe you don't need to come out with a probiotic and that your further innovations there will have as good or better returns to you ex a probiotic?.

Well, first of all, I would agree with your first comment, which is we're quite happy with the momentum that we see in our yogurt business and particularly to see very solid growth on top of nearly 20% growth a year ago.

We were quite pleased with that.

From an innovation standpoint, again, I'll say what I said last quarter, there are many important segments in the yogurt category.

There's a weight management segment that is huge.

There's a taste segment, there's drinks, there's kids.

And in our view, it looks like there's an emerging probiotic segment, and we're very committed to bringing innovation across all of these segments and that's what you can expect to see in the months and years to come.

Thanks very much.

Thank you.

Our next question comes from the line of Mr. Steven Kron from Goldman Sachs.

Hi, good morning.

Hi, Steve.

Just a follow-up on Big G, obviously you've had a lot of new product introductions and there's more in the pipeline, but I know one of your objectives this year across all your businesses was to get increased new product activity.

Just wanted to see if you can give us a sense on what new products are as a contribution to sales, as a percentage versus prior years?

Steven, I don't remember the number exactly, but I do remember that the contribution through the first half is higher than it was a year ago, and I apologize for not having that number to hand, but we are seeing better growth in new products.

The other focus that we've had is we're really trying to, really focusing on incrementality, and we feel quite good about what we're doing there.

For instance, instead of launching Hamburger Helper line extensions, which clearly had become not very incremental at all, this year, what we've done is launched single serve Microwavable Helpers and that is proving to be a very highly incremental new product launch.

Instead of -- those products instead of being consumed at dinner, they're being consumed as after dinner snacks and quick meals over the course of the deal.

That product very much brings us into new occasions.

And that really is the model that we're pursuing and we're seeing that play out in a number of our new products.

Okay.

Ken, across U.S. retail, net price realization was up around 1%.

Can you give us any insight as to which businesses maybe led or which businesses may have lagged the overall division?

Oh, Kris?

Just a second.

While Kris is looking for that detail, I can tell you that most of it was driven through changes in more effective and efficient trade strategy across divisions.

Do you have any detail on that, Kris?

It looks like the two divisions you'd give credit to driving that two are Meals and our Snacks division.

Okay.

Not that we didn't have it elsewhere, but those would be the two divisions that stand out.

And Kris, would you provide the potential laggards, or you'd leave it at that?

Not really any laggards.

Some people that were not as strong sales growth ahead of volume growth.

Okay.

And then just one last question for Jim.

You mentioned the inventory build, part of which was attributed to the grain buildup.

Was wondering if you can just comment on -- is that a function of being ahead of Nature Valley cereal launch and this is maybe a new elevated level that we should be thinking about, or is this more a response to the inflationary environment?

And perhaps you can give us a little bit of color on where that grain inventory level might be compared to prior periods or--?

Sure, Steven.

What it is, it's not so much Nature Valley, but it's a grain used for -- cereals used for baking products across the board.

And I think that the absolute build, of course, reflects the seasonal nature of our business, but the particular year on year build reflects buying ahead of use for this year as we like the prices we saw in the quarter versus what we thought we would be getting in the future, and also, the need to mark to market the inventories that we have as prices rose through the quarter.

Okay.

Thanks a lot.

Thank you.

Thank you.

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

Good morning, everyone.

Good morning, David.

I was curious on two things.

First, could you provide any clarity on the expected level of restructuring costs this year?

I know coming into the year you said it would be down year-over-year.

I think last year it was 30 million.

I think through the first half, you actually have a slight amount of net restructuring, it's a favorable variance, net income from restructuring.

Can you tell us where you think -- or provide any more clarity where you think it may be for the full year?

We'd stick with that original guidance, David, which is that any restructuring that we're doing is in our guidance and we still are carrying an estimate for this year that it will be something, but something less than the 30 million for last year.

Okay.

And then secondly, can you characterize your advertising and marketing spending levels, either in the second quarter or through the first half, please?

Yes.

I can tell you that consumer marketing spend through the first half grew at a mid-single digit rate, and obviously we're telling you that we're doing a little bit of investing behind brands where we've got momentum in the back half.

And so I'd tell you to think about, if you're particularly focused on media and U.S. retail media, perhaps, you want to think high single digit growth for the year in total.

Okay.

Thank you very much.

Thank you.

Our next question comes from the line of [Alexia Howard] from Sanford Bernstein.

Please proceed with your question.

Good morning, everybody.

Hi, Alexia.

Hi, there.

A couple of quick questions.

Firstly, on the capital expenditures this quarter, it was up fairly markedly.

Could you just give a little bit of color about what drove that and how long that trend is likely to continue for?

Jim, would you like to comment on that?

Yes, I will.

Alexia, as we said at the beginning of the year, our full-year estimate for capital expenditure is 425 million.

As we have taken in both cost reduction projects and growth projects through the first half, we have seen some very good opportunities well above our hurdle rates for those types of projects, respectively.

And we have at this point approved a full slate of 425 million of projects for the year and the actual spending reflects a pace which is greater than the pace of spending last year, which ended up totaling 360 for the year.

Now you never know exactly how quickly you'll spend against an approved CapEx project and the lumpiness of the timing of that, but what we'd say at this point is that for the full year, we would expect to be at 425 or slightly above.

Our depreciation and amortization this year, we expect, will be about 450, and so we could be a bit above the 425 we originally projected, possibly at that D&A level of 450 or thereabouts.

Thank you very much.

A couple of other really quick ones.

The warmer organics initiative, can you give any color on how that's going at the moment?

Is that ramping up to being a substantial portion of Big G cereal sales, or is it more of a slow burn at this point?

Alexia, you're asking about organic?

Yes.

Yes, the organic initiative, the warm-up started earlier this year with basically converting some of its stores into stores that are stocking more mainstream cereal brands, but organic varieties of those.

Well, you know that for us, our organic cereal line is marketed under the Cascadian Farm brand, and that is broadly available, not just at Wal-Mart, but at many retail outlets.

That's fine, great.

Thank you very much.

And then the final one, just on trade spending, it seems to me that a number of companies have been reaping the benefits of getting betters insight into where they are getting the biggest bang for their buck on trade spending over the last few years.

Can you tell me how that's affecting you right now and whether reducing trade spending is part of the improvements in net pricing that you're seeing right now?

Well, Alexia, focusing on trade spend and being very clear-eyed and analytical about the effectiveness of each one of our deals and using information to eliminate ineffective deals and to raise price points, merchandise price points slightly where we can or to reduce frequency.

As we've said, this is very much what we're focused on and clearly you have to -- trade is a part of our business mix and we have to be competitive in order to be successful as we probably know better than most, but we are very, very focused on wringing efficiency from that bucket of spending and to just make sure that it's as effective as it can be, and we're making progress there.

All right.

Thank you very much.

Thank you.

Our next question comes from the line of John McMillin from Prudential Equity Group.

Please proceed with your question.

Congratulations and Happy Holidays, everybody.

Thank you, John.

Jim, I enjoyed your Uncle Tobys Christmas card.

Just don't pick Betty Crocker is probably what the teenage boys are saying.

Steve, you've been very quiet here, I'm going to bring you into it.

I guess with these health and wellness initiatives that you talked about in January, and now I guess you do have a probiotic in test, right, this yield plus is out there.

Are you looking at functional food, Steve, differently than you did in January?

Because you put cold water on it a little bit in January, towards going in that direction?

Well, John, I don't think -- we don't really talk so much in terms of functional foods, but -- because we say, look, all of our foods can be functional and are functional, particularly in the areas where we have good health credentials, but I would say, I think Ken described it very well in saying that we see multiple health benefit segments developing in some of our categories, particularly those categories which are fundamentally healthy to start with.

In cereal, you would have the fiber segments and they've been around for a while and iterations on that and in yogurt, the big driving health benefit segment and still has been and continues to be weight management, but I think some of the kinds of benefits like digestive health that probiotics can deliver, are, if you look around the world, are also a segment.

I think in Europe overall, maybe it's 10% of the market.

So we would expect to compete and innovate in any segment that we thought was -- had the potential for significant consumer benefit.

And that's certainly one of them.

And we're constantly looking for new ways to bring added benefits to these segments.

We would not want to have given you the impression a year ago that we weren't interested in adding health benefits and nutrient benefits to our lines, we certainly are.

And just in terms of your statements a month ago, which I listened to on the Internet about how the acquisitions kind of hurting your growth plans or your performance in recent years and now you're kind of beyond that.

It's clearly your decision to buy Pillsbury, but what was the point you were trying to get across there, in terms of this acquisition caused disruptions that you didn't anticipate and now don't expect any yields, as you're just going to focus internally?

Can you just kind of go into more detail what you meant a month ago?

Well, John, I'm getting to a stage in life where I'm not sure remember what I said a month ago but--.

I'm right there next to you.

But what I would say on that subject is, we have always, as a company, relied primarily, primarily on organic growth and innovation in our existing product lines to drive our long-term record of success.

And within that, we have used acquisitions typically of the bolt-on nature, like the Chex acquisition where we were in a category where we felt we could strengthen our position, or internationally where we felt it would help us gain mass in a market.

Those tend to be smaller.

What I probably said was that the Pillsbury acquisition, which was a one-time transforming event for us, certainly in our history where you double the size of your business, and that was done with some very specific goals, which by and large have been achieved.

One was to increase our exposure to and opportunity in international markets, and you can see by the performance this quarter and last quarter and the quarter before that, that is producing big benefits for us.

It was to increase our ability to participate in the growing food away from home market through a better variety of foodservice offerings, which at the early stages look like it might not have been the greatest ideas, but again, as you can see by the recent quarters, we're now getting strong contributions to profit growth out of that, and by getting us into categories that we felt would give us opportunity for growth, like soup and like Pillsbury dough and like Green Giant vegetables and you're seeing that come to fruition now too.

So I think probably what I referred to was that that was a significant effort to put two companies of roughly equal size together and it caused us to, for a time being, operate differently than we had been operating before.

And that includes the fact that during that period as we were paying down debt, we didn't increase our dividend, we didn't buy back shares in the open market.

So all the things for our core model for growth had to be altered for a period of time there.

But starting two years ago, we were back to operating our core model and have the benefit now of doing it with a more global, more diverse, and broader business, which puts us ahead of the game.

Thanks.

Just one last question for Ken.

I saw some Duncan Hines cake mix for $0.28 at Wal-Mart a few weeks ago.

Are they being -- and I know you're reluctant to talk about your competitor, but they kind of do rule a little bit -- are they being overly promotional, or if you can just kind of go -- I know you had a tough comparison, but was there reasons besides that in the decline of that area?

I wouldn't want to label any competitor any way, but $0.28 sounds like overly promotional to me.

Yes, me too.

Okay.

Well, I'll tell you how we read it, John, particularly in that baking division where basically you're looking at -- the cost base there is the grain complex that sugar and chocolate and obviously on our flour business you're looking at, so that was always going to be our highest inflation division.

The division that was looking at the steepest level of cost increase.

So we chose to lean in and get those -- change those merchandising net units and get some net pricing that way and we think that that was the smart move to make.

We took a little bit of a volume hit, but we think our margins and profit will be sustainable as a result.

And it just looks like Duncan Hines, for whatever reason has decided to go for the volume in Wal-Mart and we just decided to pass on a little bit of that this year.

Good.

Okay.

Well, thanks, Merry Christmas, everybody.

Merry Christmas, John.

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

Folks, I made a gentlewoman's agreement with my colleague, Chris Klinefelter that we would try and wrap a couple minutes ahead of the half hour so you all have time to hop on that call.

Let's take one more person from the queue, and then those of you that might still remain after that, obviously you can give me a shout in my office and I'll try and help you out.

Thank you.

Our final question comes from the line of Mr. Ed Roesch from Banc of America Securities.

Thanks for taking the question and congratulations on the quarter.

Hey, Ed.

I want to focus on the productivity enhancement.

The 3% topline growth we saw in U.S. retail saw maybe not out-sized leverage, but very healthy leverage up to an 8% operating profit growth.

Can you characterize the amount that productivity enhancements contributed to that leverage?

Do we have a number?

No, I don't have a slip for you, Ed, but you really are going tonight to think about -- I'll turn it over to Ken to elaborate in a minute, but I think you're going to want to consider all of the levers that we've been working here, not just productivity, but also good mix.

Ken, do you want to--?

Well, yes, it's -- we talked about mix and the net sales growth, and then as you move further down the P&L, we've also talked about how we're just very focused on looking for productivity and efficiency in all of our businesses and clearly we're being effective at finding that.

I will tell you that the relative study of volume growth that we've seen now over the last five or six quarters greatly supports our supply chain team.

As the volumes become more predictable and as we come closer and closer to selling what we forecast we would sell, it really helps them drive performance in the plant, and so we have a number of good factors that are coming together here to help us drive productivity and add to that margin expansion story.

Okay.

That makes a lot of sense.

Thank you.

And since that part of the efficiency is contributing so much, I think this year you had a little change in dynamic where fiscal '06 you had productivity enhancements driven by costs that were running through the income statement.

This year, I think the baton shifted a little bit more towards capital spending.

Do you have any thoughts about how you're going to be one mode or the other going forward from here to get some productivity benefits to continue into the future?

Well, I would say -- this is Ken still.

We are, as Jim said, because we are very, very focused on margin expansions and productivity, we are seeing a few more productivity-oriented capital projects coming through, but I wouldn't at all characterize this as sort of a shift in strategy.

We're continuing to see productivity come in a variety of areas and from a variety of divisions and from a lot of these fundamental things we talked about.

SKU reduction, product simplification, all the good things we're doing in the plants.

Si it's still, I would say, a very balanced and comprehensive approach.

All right--.

I would just add, that as we look at CapEx projects for productivity, we're very, very conscious that there's cash out for the capital and it's got to more than pay back the cash in for margin improvement if we make that investment.

All right, thank you.

Most of my other questions were answered so thank you very much.

Thank you, everybody.

And by all mean, give me a ring if you've got some outstanding questions.

Thank you.

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

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