通用磨坊 (GIS) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the General Mills third 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, this conference is being recorded, Thursday, March 22, 2007.

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

Please go ahead, ma'am.

Thanks, Julia.

Good morning, everybody.

I'm here with General Mills Chairman and Chief Executive Officer, Steve Sanger, Ian Friendly, who is Executive Vice President and Chief Operating Officer for the U.S.

Retail Business, and Jim Lawrence, Vice Chairman and CFO.

They've each got some prepared remarks for you and I'll turn it over to them in a minute.

But first, I need to cover a few housekeeping items.

The press release on third quarter results was issued over the wires earlier this morning.

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

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

This conference call will include forward-looking statements that are based on management's current views and assumptions.

The second slide in today's presentation lists factors that could cause our future results to be different than our current estimates.

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

Thanks, Kris, and good morning, everyone.

As you can see from the financial results that we released today, General Mills' good operating momentum continued in our third fiscal quarter.

Slide 4 summarizes those results.

Net sales grew 6%, segment operating profits increased 9%, earnings after tax also rose 9% as a lower tax rate helped offset higher interest expense and incremental stock-based compensation expense.

Earnings per share reached $0.74 in the quarter, up 9%, including $0.02 of stock option expense.

Our sales growth in the quarter reflects excellent unit volume gains, up 5% overall, and the remaining point of sales growth was split between pricing and mix and a positive impact from foreign exchange.

All three of our business segments contributed to the third quarter sales increase, with U.S.

Retail sales up 5%, International up 15%, and Bakeries and Foodservice up 5%.

As Ken Powell discussed last month at the CAGNY conference, gross margin expansion is a big focus area for us and our efforts are generating good results.

In fiscal 2006 we achieved a 40 basis point improvement in gross margin.

This year, we recorded gross margin gains in each of the first three quarters, including an 80 basis point improvement in the latest period.

We are reinvesting some of our gross profit increase in consumer marketing support to fuel the top line.

Consumer marketing expense increased at a mid single-digit rate last year and in each of the first three quarters of 2007 our consumer marketing expense has been up, although the growth varies significantly by quarter due to variations in programs and new product timing.

Slide 9 shows you the detail on our segment operating profits.

U.S.

Retail operating profit rose 6%, International profits grew by double digits, and Bakeries and Foodservice profits jumped more than 80% reflecting pricing and favorable mix.

Ian will be reviewing our U.S.

Retail performance in some detail, but I'd like to say a few more words about the other two segments.

In Bakeries and Foodservice, we continue to focus on our most profitable products and our most profitable customers, and that's producing good results.

For the third quarter segment net sales grew 5% and, as I mentioned, profits were up sharply from what was a relatively small base last year.

Through nine months Bakeries and Foodservice net sales are up 7% and segment operating profits are up 39%.

Now this strong performance is due in part to pricing actions taken earlier in the year and in the second quarter of last year, along with favorable mix.

But our input costs are going to be higher in the fourth quarter, and we expect operating profit to be down in that period.

Even so, though, we continue to expect double-digit profit growth for the year in total.

Our Bakeries and Foodservice segment sells to multiple channels and Slide 11 highlights three of those that produced good growth for us in the quarter.

Foodservice distributors, convenience stores, and bakeries.

Our snack and yogurt brands were the growth drivers for the Foodservice distributor business in the third quarter.

Our new place and bake muffins also generated significant growth with volume up 53%.

In the C-Store channel, snacks and yogurt had strong quarters and in the bakery channel, we saw growth in both breads and desserts.

Switching to our International segment, their third quarter sales rose 15% reflecting gains across all geographic regions where we compete and segment operating profits grew 17%.

Through nine months net sales were up 15% and profit is up 7%.

Now as we've discussed before, the slower profit growth to date reflects differences in timing of new product launches and marketing expense year-to-year.

Now here in this segment, the fourth quarter is a relatively easy profit comparison, so for the year in total, we expect and we continue to expect double-digit operating profit growth for the International segment.

On Slide 13, you see the broad-based third quarter sales growth in International.

Excluding the impact of foreign exchange, Canada's net sales grew 8%, Europe was up 11%, our Asia Pacific business was up 8%, and net sales in Latin America were up 23%.

Foreign exchange contributed 4 points of growth, bringing the reported sales growth in total to 15%.

We've seen continued good sales momentum going into the final quarter of the year.

Let me turn now to our joint venture results.

These operations include Cereal Partners Worldwide, Haagen-Dazs joint ventures in Asia, and 8th Continent here in the U.S.

As reported, after-tax earnings from JVs totaled $16 million in the quarter, but this year's results include a $4 million after-tax charge related to previously-announced CPW restructuring in the U.K.

If you exclude restructuring charges, JV earnings grew 25% in the third quarter and 14% through the first nine months of this year.

Cereal Partners Worldwide continues to generate good volume sales and profit growth.

Slide 15 shows you results for calendar 2006, which is their latest full fiscal year.

For General Mills' third quarter, CPW's net sales grew 22%, and that includes some incremental contribution from Uncle Tobys business in Australia, but organic sales still grew 15%.

So our international cereal business continues to grow and drive overall joint venture profit.

Slide 16 summarizes our progress through the first three quarters of 2007.

Net sales are up 6% to over $9 billion, segment operating profit is up 9%, our net earnings are up 6%, and our diluted EPS is up 11% to $2.55.

Now that's as reported.

On a comparable basis, if you exclude the CoCo accounting in 2006 and stock compensation accounting which began in 2007, our EPS would be up 13% to $2.66.

Our businesses are performing very well and financial performance through the first nine months of this year is exceeding our targets.

Today we are increasing our earnings guidance to a range of $3.14 to $3.16 per share for 2007.

This guidance, I'll remind you, is on an as-reported basis, including restructuring expense and an estimated $0.12 of incremental stock-based compensation expense in 2007.

It represents a meaningful increase from the earnings outlook we provided at the start of the year back in June.

With that, I will turn you over to Ian Friendly to hear more detail about our U.S.

Retail performance.

Ian.

Thanks, Steve, and good morning, everybody.

I appreciate this opportunity to update you on the strong performance of our U.S.

Retail Business.

As you heard earlier, U.S.

Retail sales grew 5% and operating profits increased 6% in the third quarter.

Through nine months, our sales are up 4% and operating profits are 7% above prior-year results, fueled by strong gross margin performance.

This year's strong top line growth reflects three key factors.

First, a solid contribution from new products.

We believe this year's lineup is generating a higher degree of incremental sales than was the case last year.

Health and wellness news on many of our brands is a second factor driving our top line.

And third, we've sharpened our execution around product mix and it's paying off.

Slide 21 gives you our net sales growth by division for both the quarter and nine months.

As you can see, net sales are even or up from the prior year for all seven of our business divisions for the year-to-date and our sales growth accelerated the majority of our divisions and per U.S.

Retail overall in the latest quarter.

That wasn't true for Big G cereal.

Its net sales declined in the third quarter.

That's not a reflection of unit volume trends, our shipments in the third quarter matched prior-year levels and they were up nicely in the early weeks of the fourth quarter.

The third quarter net sales decline is primarily due to year-over-year differences in the timing of price promotion activity.

Through nine months, Big G's net sales have matched prior-year levels.

Our dollar market share of the cereal category sales in measured channels has also been relatively steady at 30% for the latest quarter and fiscal year-to-date, and we continue to experience good growth in nonmeasured channels, including Wal-Mart and the drug and discount channel.

New cereals introduced in 2007 are making good contributions to sales and volume results.

They represent 2.4 share points in ready-to-eat cereal.

That's 1 point more than last year's new products, and our core Cheerios franchise continues to perform well.

So we continue to expect that Big G will meet its goal of renewed net sales growth in 2007.

With that being said, we're looking for better performance in 2008 through a series of initiatives that we'll share with you in June.

One of our fastest growing businesses in the third quarter was Progresso soup.

Both shipments and retail sales were up double digits and, as you can see on Slide 24, Progresso's market share continues to climb reaching 33% in the latest three months.

Our four lower sodium soups launched last fall have been good contributors to Progresso's growth.

In fact, we estimate that sales for these four SKUs are 50% incremental to our line.

There are 27 reduced sodium SKUs in the RTS soup category and Progresso has four of the top seven turners for our fiscal year-to-date and these four SKUs are all turning in the top 25% of the overall RTS soup category.

Our vegetable classics line has been bolstered by two of the new lower sodium flavors, minestrone and garden vegetable, and also by the "Best Life Diet" authored by Bob Green, Oprah's personal trainer.

This new advice book was released at the start of 2007 and features many General Mills brands.

For Progresso's 17 varieties of vegetable-based soups, baseline sales for this fiscal year through December were strong already at 8% growth over prior year.

In the latest two months, with diet season and Best Life Diet support, baseline sales are up 26%.

We are really pleased with this solid performance on nonpromoted sales.

Here's another example of a new product generating strong incremental sales.

Each packet of Hamburger Helper Microwave Singles makes a single serving, unlike our dinner mixes that use a full pound of hamburger.

So this new line is great for lunch or as a snack, and as a result we estimate that 70% of its sales are incremental.

This new line has sparked 5% growth for total Helpers franchise sales so far this year.

We're also building the Nature Valley brand with incremental new products.

Slide 28 shows you recent sales for the Nature Valley business.

As you can see, sales for the original crunchy bar, that we introduced way back in 1975, continue to grow.

And with the successful additions of trail mix bars, yogurt bars, and sweet and salty nut varieties, the Nature Valley franchise has grown to be five times the size it was in 2000.

This year we've expanded our snack bar portfolio with two new brands, Caribou Coffee bars and the new Fiber One bars.

These new products contributed to the 29% retail sales gain we achieved on grain snacks in the third quarter.

Value-added new products can be great contributors to positive sales mix, like Betty Crocker Warm Delights which we launched in fiscal year 2006.

These three-minute microwave desserts have been 90% incremental to our traditional baking mixes and both the everyday shelf prices and merchandise prices for Warm Delights are higher than the average for established items in this category.

The Pillsbury division continues to post gains this year by focusing on positive sales mix and gross margin expansion.

Retail sales for refrigerated dough are up 3% in channels where we have data driven by core products like Pillsbury Crescent Rolls and Cinnamon Rolls.

Retail sales for Totino's Pizza Rolls are up 8% and Toaster Strudel is posting a banner year with retail sales up 22% driven by renewed advertising.

In the U.S.

yogurt category, Yoplait continues to lead the category with strong sales growth and steady market share performance.

Slide 32 shows shares for the Yoplait brand and the Dannon brand so it excludes our Colombo business and Dannon's organic brand, Stonyfield.

Despite increased competitive activity in the category over the last 52 weeks, including Dannon's successful launch of Activia, Yoplait's share of category sales has held steady overall and was up in the most recent quarter.

That was true for our total share, including Colombo, too.

Yoplait's continuing momentum is due in part to the strong health and wellness credentials in this brand.

In the U.S., consumer's foremost health concern is weight management, which is why reduced calorie yogurts are one of the largest and fastest growing market segments.

Light yogurts account for approximately a quarter of all category sales.

Yoplait is the leading brand in this segment with a 37% share.

For several years, we've been reminding consumers that Yoplait can help them shed a few pounds before bikini season.

This year, Yoplait got an extra boost from the "Best Life Diet".

The result of this brand building is growth on growth with baseline sales up double-digit again this year.

Health and wellness news on Yoplait Kids yogurt, now with less sugar and Omega-3 DHA, is driving good growth on this line as well.

Retail sales for Yoplait Kids in the third quarter were up 45%.

Our organic product offerings continue to post strong growth.

On Slide 36, you can see our primary organic product lines and their sales growth rates in the natural channel, which represents approximately half of Small Planet Foods sales.

For example, Cascadian Farm cereal sales are up 12% through January and our Muir Glen soups and tomatoes are growing double-digit.

So through the first nine months of the year, our major product lines are generating good growth.

Slide 37 shows you year-to-date consumer takeaway trends in outlets where we have data.

You see double-digit growth on grain snacks, high single-digit growth for pizza rolls, yogurt and Progresso soup and mid single-digit growth for the Helpers dinners, Old El Paso Mexican foods and Pillsbury refrigerated dough.

Not all of our product lines are growing, but the majority are and our portfolio strength in the aggregate continues to deliver good sales and profit growth for our shareholders.

To summarize, U.S.

Retail has generated broad-based volume and net sales growth this year.

We have launched new products that have been incremental to our existing business, strong health and wellness news is driving growth, too.

Our profits are growing faster than sales.

With this momentum, U.S.

Retail is firmly on track to deliver excellent full-year results.

With that, I will turn you over to Jim Lawrence for a few financial updates.

Jim?

Thank you, Ian, and good morning, everybody.

Let me close out our prepared remarks this morning with some details on cash flow and some further comments on the fourth quarter.

Our cash flow from operations, as you see on Slide 40, continues to be robust.

Through the first nine months of this year, cash from operations exceeded $1.15 billion.

That's a bit below last year's nine-month results as we've used more working capital to date in 2007, however, if you back out the third quarter alone, cash from operations is up from last year with working capital as a source of cash and that is all consistent with our usual seasonality.

You remember, we tend to build working capital in the first half of the year and then it declines in the back half.

If you look at core working capital through nine months, you can see that it has increased and at a rate faster than our sales growth in the same period.

Receivables were the primary driver of that increase.

Our trade receivables were up essentially in line with sales growth but, in addition, noncustomer receivables, such as ingredient and energy hedge positions which must be marked to market, contributed to the increase.

Inventories were up 5% for the nine-month period, and that primary reflects higher grain inventory levels and higher prices on the grain as its marked to market.

With full-year, we continue to expect core working capital growth to be at or below sales growth.

We are disciplined in our use of cash and we expect that on average our capital spending will be in line with depreciation and amortization.

As you can see on Slide 42, individual years will fall above or below depreciation and amortization.

Through the first nine months of this year, we have invested $249 million in fixed assets.

For the full-year we continue to expect capital spending to be between 425 and $450 million.

Based on the growth that we are seeing in several of our businesses, including grain snacks and yogurt, we currently expect that next year's capital spending will be higher than depreciation and amortization but below the 2004 levels.

We'll give you more on that in the June investors' meeting.

In January we acquired Saxby Bros.

Limited, a U.K.

producer of chilled dough.

The Saxby business generated $24 million in sales in calendar year 2006, and this acquisition nicely complements our existing Jus-Rol frozen dough business in the U.K.

We returned cash to shareholders through dividends and share repurchases and our estimated dividends in fiscal 2007 total $1.44 per share and that reflects two increases to the quarterly rate within the last year.

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.

We continue to buy back shares in line with our stated goal of reducing net shares outstanding by an average of 2% per year.

Through nine months of fiscal 2007 we have repurchased 17.2 million shares at an average price of just over $52.

We remain on track to meet our 2008 fiscal year goal to have average shares outstanding in that year to be 6% below our 2005 average shares.

And I'll remind you that that is net of stock option exercise and that is net of shares which will be included in next fall's Lehman transaction.

In total we expect earnings growth and our disciplined use of cash to generate ongoing improvements in return on capital.

We have set a goal to improve our return on capital by 50 basis points annually through 2010.

In 2006 we did slightly better than that goal and in 2007 we expect to meet or beat that goal again.

Today's release included an update on our tax rate assumptions for the year, and I'd like to say just a word about that.

Last June we estimated our tax rate would be between 35.3% and 35.8%, but that we'd be working to see if we couldn't do better.

In fact, through the first half our effective tax rate was at the high end of that range at 35.8.

In the third quarter, our effective rate was 33.5%.

And this reflects both a change in the annual rate, which is now down to 35.5% and a discrete tax benefit of $4 million, which primarily comes from research and development tax credits which have now been allowed.

And we also noted in the press release that our tax planning initiatives continue and they may result in further reductions of the annual 2007 rate.

May I also give you an update on restructuring expense.

Through the first nine months of this year we've recorded very little on the restructuring line, just $1 million of expense in the third quarter and year-to-date it actually has been a positive net $2 million.

These entities are -- these entries are primarily adjustments to reserves for previously-announced restructuring actions.

As we noted in this morning's press release, we are evaluating our plans for certain long-lived assets, and we do anticipate that this review could result in impairment or restructuring charges in our fourth quarter.

Finally, we've noted in the release that we expect fourth quarter results to include increased input costs and increased consumer marketing expense, again, with some possible further benefit on the tax line.

So, in conclusion, to summarize our financial update today, General Mills has delivered strong volume and net sales growth through the third quarter of fiscal 2007.

Our gross margins are expanding due to volume leverage and supply chain productivity, and this helps to offset cost inflation.

We are increasing our consumer marketing investment to fuel continued top line momentum, and even with that increased investment, segment operating profit is up 9% year-to-date, which I'll remind you is well above our mid single-digit target.

As a result, we have raised our annual guidance for 2007 earnings to $3.14 to $3.16 per share, which includes restructuring expenses and includes incremental stock-based compensation expense.

In closing, may I remind you to please save the date of June 28th on your calendars.

We'll be hosting an Analyst Day at General Mills headquarters here in Minneapolis and, at that time, we'll be sharing our full-year fiscal year results and our plans for next year.

An e-mail invitation will be issued within the next week or so.

And with that, we conclude our prepared remarks and we'll ask the operator to come back on to open the line for questions.

Thank you all.

Certainly.

[OPERATOR INSTRUCTIONS] The first question is from the line of Eric Serotta with Merrill Lynch.

Please proceed.

Good morning, everyone.

Hey, Eric.

Ian, just wanted to talk a bit about the pricing in Big G.

You cited the timing of promotional activity.

Could you also comment on whether there was any customer mix issue related to that?

Yes.

Thanks, Eric.

There was to some degree in that quarter a customer mix issue in the standpoint of we had a greater proportion of our volumes coming from our EDLT customers than would be typical over the year.

And since you do pay trade expense on every unit sold through EDLT, there was a proportional change there.

The other thing that was different in that quarter is we had a higher level of consumer couponing expense than the prior year as well.

Okay.

And then as a quick follow-up, overall marketing spending you stated at the, I guess, on the mid-year call would be up, I believe, at a high single-digit rate and you reiterated that it should be up strongly for the year.

Are your current plans for marketing spending for either the fiscal second half or the fourth quarter above what you were looking at mid-year or are they still in line with that?

I know they're up year-over-year, but are they up versus your previous -- last time you spoke to us, your previous expectations?

They're at least equal to if not somewhat greater than that which we expected for the mid-year.

We're expecting consumer marketing expense to grow at a double-digit rate in the fourth quarter, and as you said, for the full-year, we expect a high single-digit increase.

Great.

Thanks a lot.

I'll follow-up afterwards.

Thank you, Eric.

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

Please proceed with your question.

Good morning, everyone.

Hi, Terry.

My question is on Big G and I know you don't want to let too much of your thunder get away this morning, but I guess if you look at last year's third quarter, Q3 '06, you did introduce Yogurt Burst Cheerios and I think there was a good deal more sold on [deal], but then I go back to the year before, Q3 '05, which was an extraordinarily weak quarter for Big G.

So I guess I'm wondering, you know, it's been quite a while since we've seen some robust growth there and to the extent Ian or Steve or anyone, really, that you're able to kind of address that a little bit now, I know you have more coming on it later, I'd still love to -- I'd love to hear what you do want to say this morning on Big G.

Terry, this is Steve.

I would say, as I think Ian said, we expect to have growth for the year in Big G, which would be an improvement in performance versus last year.

It's going to be low single-digit growth, and so I wouldn't necessarily characterize that as robust, and you said robust growth, and so we've still got some work to do there.

We are having good performance on our big franchise, Cheerios.

We are having, as Ian said, excellent new product performance.

But we've still got a couple of brands there that are underperforming that we're going to have to get back on a growth track, and we have clear plans as to how we want to do that.

I think we'll talk more about that in the -- when we meet -- when everybody's out here in June.

But for the year we're going to have a better year in cereal than last year and so we're making progress.

Okay.

Just one quick follow-up.

If you've abstained from taking this price hike, but the business still perhaps hasn't responded as well as we might have liked on volume, why wouldn't you take the price hike?

Well, we won't comment prospectively on our pricing actions, but we are very interested in margin enhancement.

We have commodity cost inflation.

We are looking thoroughly and seriously at every, as I think was said at CAGNY, every arrow in our quiver of how to expand margins, but also balance the price value as it represents itself to consumers, and we'll share more initiatives with you at our June investor meeting.

Okay.

Fair enough.

Thank you very much.

Thank you.

The next question is from the line of David Adelman with Morgan Stanley.

Please proceed.

Good morning, everyone.

Ian, could you address the divisions' overall strategy in the marketplace currently regarding price and mix promotional spending?

And I raise that in the context of two issues.

One is that great volume plus five, good revenue plus five, but it doesn't seem like you're getting any mix improvement.

Some of that, presumably, is due to the shift away from cereal.

But also if you look in the measured data, it appears that in a number of your categories, your price mix, although it's up, appears to be lagging the category overall.

Thank you.

Yes.

Our overall strategy is clearly to do both through productivity as well as pricing and mix to enhance, or in fact, grow our margins, as you've seen overall.

Third quarter we saw basically sales and volume grow at the same rate, but if you look, I think third quarter had some anomalies in it relative to how our spending flows were in at least some of our largest divisions and that will even itself out.

And I think if you look over the year, we will be realizing a price mix benefit, which is most definitely part of our strategy.

And is it fair to say that the mix shift away from ready-to-eat cereal in the quarter on a consolidated basis had a negative impact on price mix realization this period?

It is very fair to say that as our net sales in Big G was down 4% and our volume was flat that that had a negative impact in that particular area.

Right.

Okay.

Thank you.

The next question is from the line of Eric Katzman with Deutsche Bank.

Please proceed.

Hi.

Good morning, everybody.

Hi, Eric.

Jim, I have a question on the restructuring charge potentially regarding the asset impairments.

That, if you're going to recognize that in the fourth quarter, does the GAAP earnings that you put out for the year include those charges or are they not really going to be all that material?

Well, thank you for asking that question, because if there's any doubt at all, I'd like to clarify it.

Our GAAP earnings forecast includes our estimates of what restructuring charges might be.

Obviously, when you examine an asset and determine whether your book value is, you know, fairly reflects the economic value, you have to take the charge as it is, so it's simply an estimate.

At the beginning of the year relative to restructuring charges, we said that our earnings guidance would include any restructuring.

We said at that time we thought it would be greater than zero and less than the previous years, and we would reiterate that guidance today.

So you -- if I just kind of understand the math of it, you beat consensus by, let's say, 4 or $0.05 a share this quarter, you raised guidance by 3 to $0.05, depending on what you're looking at, but then you've raised the amount of restructuring charges you're going to put into the fourth quarter.

Well, we've never given quarterly guidance on restructuring charges, we've given annual guidance.

The annual guidance we gave at June we continue to have for the year.

What has happened is we've now gotten through three quarters and we've actually gotten that positive on the restructuring line and what we're saying is our annual guidance is still good but it will all take place now in the fourth quarter.

Okay.

And then as an unrelated, you had said your gross margins improved nicely in the quarter on a consolidated basis.

I'm kind of wondering how that jives with the fact that previous statements said that based on how you were hedged, your input costs would be up more in the second half than the first half.

So can you kind of break down the gross margin change?

How much of a drag was input costs so we can see kind of how much productivity is flowing through?

Yes, I'll take a run at that.

We do have inflation in the back half in terms of input costs and you see our outlook comment for the fourth quarter, we're telling you we're going to have higher input costs versus where it's been running for the year versus last year.

But we've also given you a little bit of a sideline to commodity and energy inflation that was built into our plan at the beginning of the year, that $145 million of inflation.

And I would tell you that I think we're going to finish a little bit better than that.

What does that, you mean better, I mean it's going to be lower than that?

Less inflation than the $145 that was originally built into our estimate, yes.

Okay.

And then last question and I'll pass it on.

I just, I don't know, I just have a, because we don't have as, obviously, as much numbers as you have.

You know, you were talking, Ian, you were talking about your soup, your low sodium soup being four of the top seven, then Campbell's soup gets on after you at CAGNY and says, well, they're using, I don't know, four-week data as opposed to 12-week.

What's the difference between how the two of you are measuring who's got the most momentum in the top five or seven or whatever it is?

Yes.

Well, I can't comment exactly on how Campbell's might or might not be looking at it, but what I can say is all of you have equal access, I think, to Nielsen or IRI data and you can look at it, and that's the data that I was quoting is really from the measured channels.

And over what time period?

The time frame [inaudible] --

Which is publicly available.

You can look at that yourselves as well.

And you're looking at 12-week?

No.

Fiscal year-to-date.

Fiscal year-to-date.

Okay.

Thank you.

The next question is from the line of Jonathan Feeney with Wachovia Securities.

Please proceed.

Good morning, everybody.

Hey, there.

Steve, let me just follow-up a little bit more directly, I guess, on Big G, or Ian, too.

Why not be taking pricing more aggressively and setting the bar sort of higher for the category in cereal at a time where news around input costs, you know, every single buyer from Wal-Mart on down is [inaudible] higher corn and wheat costs would certainly favor higher prices.

I mean, guess what's the strategic imperative that's kind of preventing that sort of aggressive pricing mentality?

I would just say, Jonathan, that we do foresee higher input costs in cereal, we do know that the competition has increased prices, and as Ian said, and I have said before, we see pricing being not just a matter of list price increases, but also a adjustments in our merchandising prices which affect 50% of sales in the category of package sizes, and all those rolled together.

So, you know, executing those in a way that keeps the business momentum strong requires some, you know, it requires good execution, requires working with customers and we do that to make sure that when we do take pricing that it's well executed.

I'm not saying we won't, we just haven't announced anything at this point.

And I will just say, we are mindful of the higher commodity costs and we have reiterated our desire to maintain or raise our gross margins.

Okay.

I think I get it.

Just to follow-up, Steve, you said consumer marking expense up double-digit for the third quarter.

Does that include trade spending?

And if you excluded trade spending, can you give us a sense like, for example, just advertising, is that increasing double-digit as well?

No.

The media spend you shouldn't assume is up quite as strongly as the overall consumer marketing expense in the third quarter.

Because remember, consumer marketing will capture some other things, like sampling.

And those other things it captures, some of those would be net revenue items?

But it does not capture price promotion.

That's up netted against sales.

So we're talking about pressure against the consumer in that consumer marking total that we told you was up double-digit in the third quarter.

And just to be clear, all of that is expense items, right, nothing in that is net revenue -- net of revenue?

No.

That runs through SG&A.

Consumer marketing runs through SG&A.

Terrific.

Just one question for Jim.

Could you refresh my memory on how hedge positions, particularly in corn, would affect accounts receivable?

I'm just a little bit unfamiliar with how that runs through.

I'm going to turn that over to Rick Lund, who is our expert on this.

Excellent, surprise guest.

Yes.

Good morning, everyone.

We had it [on reserve], Jonathan, for just such a question.

The big guns.

Our hedge position, obviously get marked to market.

As the market prices change on those hedges, the assets get increased and the offset is in our accumulated other comprehensive income.

I see.

Stockholder's equity.

So when you're in the money on hedges, your receivables go up and that gets offset below the line in equity?

That is correct.

Excellent.

Thank you very much.

Thank you, Jonathan.

The next question is from the line of David Driscoll with Citigroup.

Please proceed.

Good morning, everyone.

Hey, David.

Just wanted to go back on to the raw materials side.

Jim, can you give us your best estimate right now what you think the variance would be in F'08 on raw materials, just with where commodity prices are?

We will give you that estimate in June, Jonathan.

At this moment, we're not quite prepared to speak to that.

Would you at least say they would be expected to be up?

Yes.

We expect they'll be up for next year, but the percent increase we're not ready to say.

And remember, David, that as part of our CAGNY remarks, we gave you a broader picture of inflation for next year.

We showed you total supply chain input cost inflation, which includes more than just commodities and energy, it also includes wage and benefit inflation, for example.

And if you remember, we were looking for something like 4.2% for fiscal '07 and we gave you a preliminary plus or minus 4.5% for F'08.

That's helpful.

Thanks, Kris.

One final question on the tax rate.

Jim, in your prepared remarks you wrote that further reduction in '07 rate possible.

Can you give us some guidance here on what the magnitude of that number would be?

I mean, do you have an estimate for -- it sounds like it's some kind of tax planning initiative and it either happens or it doesn't.

Is there any magnitude that you can put to surround it?

No, not really, other than to say that in giving you the EPS guidance for the full-year, we're doing that inclusive of our expectations about the tax rate.

Okay.

Very good.

Thank you.

Thank you, David.

The next question is from the line of Alexia Howard with Sanford Bernstein.

Please proceed.

Hello, there.

Hi.

A quick question on new product innovation.

There was a comment in the presentation that you're getting increased incrementally from innovation in the U.S.

Retail segment.

Could you give us a little bit more background behind that and how that's being achieved?

Are there other differences in the way that you're thinking about and implementing new product developments that will be driving that?

And can you give us any comments on where you're at in percentage of sales from new products and where that's likely to trend over time?

I think I can -- this is Ian, by the way.

We have, I think in the last year in particular, have concentrated more and more on trying to come up with more incremental new items and a little bit less in terms of closed in line extensions.

And those can be valuable, too, but it's really the balancing act.

And we have put more of our time, energy, and R&D resources against these platform expansions, as we call them at least internally, that were expected to generate more incremental volume, and indeed as we've watched this year play out, they have.

And that's primarily because they're bringing in either new users or new usage occasions.

So by definition, those two don't have the same amount of steel as a flavor alternative might.

And so we've ramped up our efforts and I think that is something we will continue to want to make progress on, although we're gratified with what we've seen this year.

Thank you.

And then one quick follow-up that's linked to that.

I think when we were chatting last quarter, there was a comment that you were expecting sales growth to slow down somewhat in the second half.

And obviously, we've not seen that in the Q3 results, they've continued to be strong overall.

Do you see the kind of momentum that you've got in terms of sales growth continuing at these kinds of levels, or do you anticipate a bit of a slowdown?

This is Steve.

I don't anticipate a slowdown.

I think our annual figure will be a mid single-digit sales growth rather than the low single-digit that we talk about in our model.

And that is one of the reasons that's driving our -- that along with our margin expansion is driving the performance ahead of our initial guidance.

But we have very strong business momentum and obviously you can't predict precisely, but we see no reason to think that won't continue.

So the things that we anticipate in the way of fourth quarter effects on our business are more the things that we've outlined, like some increase in input costs, restructuring -- potential restructuring charges, and increase in our brand building advertising support.

That's great.

Thanks ever so much.

The next question is from the line of Kenneth Zaslow with BMO Capital Markets.

Please proceed.

Good morning, everyone.

Hi.

The Foodservice margin, Bakery and Foodservice has improved for two consecutive quarters.

You go back in history and your Foodservice margins have been in the 8% level.

Is there a possibility or a probability that you will eventually get to that level?

What are the actions that you need to do to get to that level?

And how soon can you get to that level?

This is Steve.

I will say there is very definitely a possibility we'll get to that level and higher.

The actions that we are taking consistently are to favor our higher margin businesses in terms of our support and innovation and our higher margin customer channels in those same regards and our goal is to get -- there was a time when that Foodservice margin for the General Mills side alone was a double-digit margin.

So I will say that we expect continued increase in the margin.

What I won't forecast is a time, because I think we're looking for continued progress.

This year has been particularly benefited by the fact that we got pricing implemented early and were able to realize some of those sales with fairly attractive raw materials that we had bought well and so that gave us a little incremental margin boost.

But the underlying plan is to keep increasing that margin.

I should just say, in the comments that we made, we did say that while for the full-year we think we'll have very satisfactory results for Bakeries and Foodservice, we do not have that same expectation in the fourth quarter.

No, I understand.

I was looking out further.

So I guess the idea is that there is no -- is there a structural change to the Foodservice and Bakery margins or has it been a General Mills execution issue?

I guess that's what I'm trying to figure out.

And it sounds like it's more not a structural issue.

We believe that the business that we have is capable of getting back to that margin in the low teens.

As Steve said, we're not prepared to say the time to do it.

We are making operating decisions about which customers to focus on, which products to focus on.

We sold off a couple plants, which make par baked bread this past year and you might characterize that as a structural decision, but we're just working quarter-by-quarter to continue to improve that business.

Great.

Thank you very much.

Thank you.

The next question is from the line of Pablo Zuanic with JPMorgan.

Please proceed.

Good morning, everyone.

Good morning.

First I've got a question for Ian on the cereal side.

Ian, if you can just help me understand from a strategic point of view, when you look at your brand portfolio, clearly you rely a lot more on line extensions of Cheerios, whereas your main competitor tends to create more platforms.

Tell me, how should we think about that?

Clearly, there's cost advantages [to] rely on Cheerios, but perhaps you don't enter new segments.

That's one question on cereal.

The second one.

Where the Nature Valley products, cereal products, and the new kid's products who have DHA, was that launched in the first quarter or in the third quarter or that has not been launched yet?

And lastly on cereal, when you think of the kid's or children's segment and what I call the adult segment, describe your competitive position there.

Would you be more indexed on one or the other or similarly indexed on both?

Thank you.

Sure.

As it relates to -- Cheerios is a fabulous franchise both from a consumer love and affection for the brand and as well as from a margin and financial aspect to us.

So we're very happy to see the Cheerios franchise expand and it's all been very profitable and incremental for us.

That being said, don't know how different that really is from competitors.

Kellogg's has expanded their main franchise, [inaudible] Special K by quite a few line extensions.

So I don't know if we're really dissimilar in that regard, we're just doing it on different brands.

You also asked about Nature Valley which we just launched a few months ago, so it's early days on that new item, but that is a new adult item in a new segment and in essentially a new platform and format, so it's exactly what you characterized in your first question.

And then finally as it relates to the kid's and children's segment, we would be relatively overdeveloped in that segment to the adult segment vis-a-vis the category to a certain amount.

Okay.

That's useful.

Thank you.

And Steve, if I can follow-up.

When I think of your whole marketing budget and there I would include what you call consumer marketing plus trade promotions, would you say that over time that has shifted more from trade promotion more into consumer marking?

And then within consumer marketing, have you also changed your mix, i.e., is there less advertising and more sampling, more push versus pull?

Just walk us through how your expenses, your mix of investments there have changed over time.

Pablo, we really look at trade on a whole different line in the P&L anymore.

That's in essence a net against sales.

Sure.

So that is really affected more by things like pricing in the categories and competitive pricing and such, whereas the consumer marketing, the brand building parts of the budget are the part that we look to try to increase on a consistent basis over time.

And as to the second part of your question, there are definitely areas where we have consumer expenditures other than media and some of those are growing.

Our Internet-based marketing efforts, which we find to be very productive and very successful, and they're still a relatively small part of the total, but they're increasing all the time.

Sampling is a very effective device for new products, and even some established and that is growing as a part of our total mix.

So while -- and even in the media side, sometimes accessing the spending as reported doesn't really tell you how much total media pressure is out there because we have found for some of our brands, the 15-second time format is as effective as the 30-second format and costs considerably less, so we can have more media impressions for the same amount or less amount of money.

But we are modifying our consumer spending over time to take advantage of the most effective vehicles that we have, and we have pretty good models for measuring those.

Thank you.

And then just one last one for Jim.

Jim, a couple of questions.

And [inaudible] Kraft at CAGNY, most companies actually disclose advertising on your 10-K and so you do, I think it's about 4% of sales.

That's pretty good for the group average.

I mean [inaudible] Kellogg and [inaudible] are both that are the companies I track but Kraft and other companies have quantified what they call brand building and I think [inaudible] Kraft they want to get to an 8 or 9% range.

Could you comment in terms of where you are in terms of what you call brand building or consumer marketing as a percentage of sales?

That's one question.

The second one very quick, to Eric's question, I think you implied the restructuring charges guidance for the full-year has not changed, so the full-year number, what you guided for at the start of the year, it has been back loaded but it's still the same number.

And one last one, it's going to be on the Lehman Brothers deal on October 7th, but if you don't mind just answering those two questions first, Jim, please.

I'm sorry, I missed the third question.

I'll answer the second question, [inaudible] but only in your last set of questions.

As to the second question, you are correct when you say our guidance is unchanged for the year, which was that restructuring charges we estimated, and you can only estimate, we estimated would be greater than zero and less than the previous year's, the previous year is fiscal '06 being $30 million.

So that would be the total amount for the full-year and as we are now in the fourth quarter, that would be whatever would be charged in the fourth quarter.

So the answer to your question is yes.

I'll turn it over to Kris for your first question.

What we disclose in our 10-K every year is media expenditure only.

And for the most recent fiscal year it was a little over $500 million.

So I believe in absolute that makes us one of the strongest spenders in our peer group.

As a percent of sales, it will rank below some of our peers and that's because we've got about $2 billion of Foodservice sales, bigger for us than most of our peers and there's not a lot of media spending that goes against that business.

And our International business, another $2 billion of our reported sales.

We're still subscale in a lot of those businesses and don't have the same level of advertising support on them that we would on our established U.S.

businesses.

So you've got to take that percent of total sales with a little bit of a grain of salt.

Thank you.

And Jim, my last question there.

Regarding October '07, I know we've talked about it before and you very clearly have stated that people should expect the number of share count to be down by about 6% over a three-period, I think by the end of fiscal year '08 we should expect diluted shares to be down 6%.

And I know you have never changed that and that's clear guidance.

But just, what I want to understand is that come October '07, you need to, as I say, pay back about 50 million shares to Lehman Brothers.

You either are going to take them from treasury or buy them in the market.

How should we think about that?

I mean I suppose it's going to be difficult to buy all that at the same time in one day come October '07.

How should we think about that?

I mean should I be adjusting you diluted share count right now increasing it by 15 million, or [do I] just assume that you take cash and buy that stock in the market in October?

Just walk us through what's going to happen there please.

Let me just be clear, there are two sides to the Lehman transaction.

You have mentioned one side of that, which is that they get between 14.3 and 17.1 million of our shares and they get it in October and the exact number that they get depends on what our share price is for the 20 trading days which begin on the 10th of September.

If the share price during those 20 trading days averages above $54.24, then they would get the minimum number, which will be 14.3 million shares.

And given where our share price is today, if that were to be the share price then they would get the minimum of 14.3.

At the same time that they get those shares, they will pay us $750 million.

So at that point in time, two things will happen.

Shares will go from us to them and cash will go from them to us.

What we will also do during the course of, you know, from now through the end of next fiscal year is we will continue our long-standing practice of buying back shares.

There are a variety of ways to do it, but what we have been doing in the past is doing that in the open market and we are confident that by the end of next fiscal year, when you calculate the average shares outstanding for next fiscal year, that number of shares outstanding for next fiscal year fully diluted will be down 6% from those which had been outstanding and fully diluted in '05.

That's very useful.

So then when they pay you in cash come October '07, that means that they're going to retain their stake in the cereal subsidiary, GMC, right?

And I guess that minority interest will not change.

Is that correct?

[The] minority interest is entirely separate.

That is due to be remarketed at that time, but that is not connected to the separate transaction.

Okay.

So that's going to be remarketed?

It is.

But you [won't] want to have a partner there, I suppose you'll want to buy that yourself, right?

We will see what the interest rate yields out of the marketing of those and if it's attractive, we will continue with that particular financing.

If we don't find it attractive, we'll do a different financing.

Jim, I'm sorry to follow-up.

Just the very last one.

If you do buy back that stake, wouldn't you have an issue with the tax benefit that you received when you sold that subsidiary three years ago, when you sold that stake to Lehman?

We anticipate no issues on the tax front at all relative to that transaction.

Thank you very much.

Thank you.

The next question is from the line of David Palmer with UBS.

Please proceed.

David, hang on just one second.

We'll take David since he got announced, but we've got to wrap up this call because ConAgra is behind us and I want to be respectful of their time so let's do this last one and then anybody that's left in the queue, I apologize, give me a shout afterwards.

Thanks, Kris.

Regarding the consumer marketing spending, I was wondering if Ian and Steve could maybe give some colors to what categories are perhaps getting a disproportionate bit of the increase and what type of marketing, for instance, is this all TV advertising or is it other?

This is Ian.

TV advertising remains important and the bulk of a lot of our consumer support, but as a trend, at the margin, many other vehicles now are reaching consumers in an increasing way while obviously TV viewership is something that's in a long-term decline.

So some of the areas that get more emphasis on the margin, as Steve referenced, was a lot of our household database Internet marketing.

Even when I talked about Bob Green, Oprah's trainer and the "Best Life Diet", which we spend a fair amount of expense doing in store feeder and those sorts of things, most of those are not measured in the measured media outlets, but can be very effective in building our brands and creating sales.

And so between, I would say in store theater, in store execution and new media vehicles like the Internet, they are getting a fast growth.

That being said, we also expect to solidly increase our TV media as well.

And a follow-up.

A lot's been talked about in terms of cereal innovation.

Is it fair to say that some of the shift in the focus of innovation to more platform-type innovation is a function of diminishing incrementally of trademark extensions of Cheerios?

Is it fair to say that that maybe a shift to a little bit riskier but more incremental type platform stuff is because of that?

I wouldn't characterize it quite that way because I don't think it's necessarily about what brand.

Fruity Cheerios was nicely incremental and sizable for us and so the idea that we could extend Cheerios in multiple ways is actually, continues to be positive.

I think the real variable in that, though, are the benefits to the consumer incremental, such that you can get new consumers or new usage occasions.

And where we can leverage an existing brand, that's a terrific thing, because obviously it's better known by the consumer and some of the familiarity is still there.

On the other hand, we won't shy away from broader or new brand extensions where they make sense.

Nature Valley is a pretty good example of one that kind of does both in the sense that it was an equity we brought, it's not a new equity, it's a strong equity from our snack business, but we did bring it to the cereal category to offer something a little bit different against adults.

I'll stop there.

Thank you very much.

Thanks, everybody.

If there are follow-ups, please give me a call.

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

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