通用磨坊 (GIS) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the General Mills first quarter fiscal 2008 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 Wednesday, September 19, 2007.

I would now like to turn the conference over to Ms.

Kris Wenker, Vice President of Investor Relations for General Mills.

Please go ahead.

Thank you, operator.

Good morning, everybody.

I'm here with Steve Sanger, our Chairman and CEO, Ken Powell, our President and Chief Operating Officer, and Don Mulligan, our Executive Vice President and Chief Financial Officer.

I'm going to turn you over to all of them in just a minute.

First, I've got to cover my usual housekeeping items.

The press release on first quarter results was issued over the wire services earlier this morning.

It's posted to our Web site, if you still need a copy of that.

We've also posted slides on our Web site that supplement today's prepared remarks.

The 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.

With that, I'll turn you over to Steve.

Thanks, Kris, and thanks to all of you who have joined us this morning.

As you can see from the financial results that we released today, General Mills continues to generate good growth and operating momentum in fiscal 2008.

Slide 4 summarizes results for our first quarter.

Net sales grew 7%.

Segment operating profit increased 9%.

Earnings after tax rose 8%.

And earnings per share grew 9% to reach $0.81 for the quarter.

Margin expansion remains a focus area for us and our efforts continue to produce results.

Our first quarter gross margin represented a 40 basis point gain versus the comparable period a year ago.

Our segment operating profit margin expanded as well.

This operating margin growth includes a strong increase in consumer marketing.

You can see on slide 6, our first quarter consumer expense grew 11% this year, and that was on top of an 8% increase last year.

Then on the bottom line, diluted earnings per share of $0.81 for our first quarter represented a 9% gain, which also came on top of a strong growth in last year's first quarter.

So I would summarize our first quarter performance this way.

We had broad-based sales growth across our businesses, our operating profit grew at good rates in all three of our business segments, U.S.

Retail, International, and Bakeries and Foodservice, and in the process, we expanded our margins and invested in consumer marketing to build our brands going forward.

With this good start, we expect to meet our objectives for the full year.

I'll say a little bit more about that and about our annual outlook in a few minutes, but first I want to turn you over to Don Mulligan for more details on our financial results.

Following that, Ken Powell will provide some operating highlights for the quarter.

Don?

Thanks, Steve, and good morning, everyone.

This is my first quarterly results call and I'm glad I have some great numbers to report.

Let's start on the top line of the income statement.

Our 7% sales growth in the first quarter reflects solid volume gains, up 3%, price and mix contributed an additional 3 percentage points of growth, and foreign exchange added 1 point.

On a segment basis, U.S.

Retail sales were up 6% and the International segment posted 19% growth.

Bakeries and Foodservice sales declined slightly in the quarter, as reported, but that's due to discontinued product lines.

Sales for continuing product lines grew 2%.

Slide 12 shows you the detail of our segment operating profit.

U.S.

Retail profit increased 6%.

International profits grew double digits and so did the profits for Bakeries and Foodservice.

When you look at our profit growth in dollars, our U.S.

Retail business generated just over half of the total.

The remaining profit growth came from the International and Bakeries and Foodservice segment.

Restructuring, impairment, and other exit costs totaled $14 million in the quarter compared to $2 million of income last year.

With higher debt levels, our interest expense was up 8% this quarter.

Our tax rate in the first quarter was 3 percentage points lower than last year.

This decrease was primarily due to foreign and other tax credits.

We still expect that our annual effective tax rate will be between 34.5 and 35%.

The benefit from this quarter's tax rate was largely offset by a reduction in net earnings used to calculate EPS.

This reduction was due to $8 million of capital appreciation earned by holders of the B1 minority interest we repurchased during the quarter.

That capital appreciation is a reduction in retained earnings and is excluded from net earnings available to common shareholders.

So our diluted EPS is calculated from net earnings of $281 million, not the full $289 million earned in the quarter.

After-tax earnings from our joint ventures totaled $22 million in the quarter.

Like last year's first quarter, these results include a $2 million after-tax charge related to previously-announced CPW restructuring in the U.K.

Excluding those charges in both years, joint venture profits grew 14% to $24 million.

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

In the first quarter of fiscal 2008, we repurchased 20.9 million shares at an average price of just over $58.

This was a somewhat higher level of activity compared to prior first quarters.

That's because we do expect to issue approximately 14 million shares in October under our forward contract that we have with Lehman.

Lehman will pay us $750 million in cash, which we will use to reduce debt that we took on in the first quarter to support the share repurchases.

We remain on track to meet our 2008 goal of 353 million average diluted shares outstanding, which would be 2% below last year's average shares.

That's net of stock options and net of the shares to be issued next month.

Let's move from the income statement to the balance sheet and core working capital items.

In total core working capital was up 6% versus last year.

The increased inventories balance reflects higher grade inventory prices and levels, as well as increased levels of finished goods.

On a trailing 12-month basis, core working capital grew slightly less than our growth in net sales, in-line with expectations.

For the full year we expect core working capital growth to be in-line with sales growth.

I'll next highlight a shift on our balance sheet that has simplified our capital structure.

We repurchased a net $897 million of minority interest during the quarter.

The repurchase and our share buybacks were funded with commercial paper, which drove increased debt for the quarter.

Next month we expect to pay down some of this debt with the cash from Lehman.

So at the end of fiscal 2008, we expect total debt plus minority interest to be down versus last year.

That's consistent with the guidance of mid-single digit growth in interest expense for the year that we gave you in June.

Our operating activities generated $20 million in cash in the first quarter compared to $111 million last year.

The change reflects increased working capital use due to seasonal increases in core working capital and decreases in other current liabilities, primarily from payments for interest and compensation and benefits.

Dividends grew to $132 million in the quarter, reflecting two increases in the quarterly rate.

Capital expenditures totaled $68 million for the quarter.

We continue to estimate that for the full year, capital spending will total $575 million, including capacity additions to support growth we're seeing in our businesses such as grain snacks and yogurt, as well as productivity projects.

So our financial results for the quarter were strong, led by growth in net sales and operating profit.

Our capital structure was simplified by the repurchase of minority interest and for the full year, we are on track with our uses of cash, including share repurchases, dividends, and capital expenditures.

With that I'll turn it over to Ken for some details in operating performance.

Ken?

Thanks, Don, and good morning to one and all.

Let me highlight what's driving our operating momentum, beginning with the U.S.

Retail business.

As you heard earlier, both U.S.

Retail net sales and operating profits increased 6% in the first quarter.

Slide 23 gives you our net sales growth by division for the first quarter.

As you can see, net sales are up from the prior year for our six largest divisions.

Only Small Planet Foods showed a slight sales decline, and that was against strong growth of 34% in the first quarter of fiscal 2007.

Earlier this month, we provided you with an update on Big G Cereals.

Net sales for this business grew 5% in the first quarter.

In part, this growth reflects in good execution of our initiative to reduce box sizes, align suggested retail prices, and increase price per ounce across our Big G Cereal line.

At this point in the conversion, more than 80% of Big G packages scanned at checkout are the new boxes.

We're also seeing solid reflection of the new suggested retail prices on the shelf.

And through this period of transition, our customer service levels have remained very high.

Slide 24 shows our new cereal products, Cheerios Crunch, Chocolate Chex, and Curves that launched recently.

These products contributed to our net sales growth in the first quarter, but they've not yet had a significant impact on Nielsen-reported retail sales.

Advertising supporting these launches is just beginning to run this month.

Yoplait posted net sales growth of 3% in the first quarter, led by core 6 ounce cup lines.

We just shipped several new products, Yo-Plus+ probiotic yogurt, Yoplait kids beverages with Omega-3 and Fizzix carbonated yogurt, so their full impact on results is yet to come.

Yoplait's second quarter will include strong levels of consumer support.

Media weight on our core cup business will be up double digit versus last year.

Plus there will be dedicated media supporting our new products.

September and October are also the months of the annual save lids to save lives promotion support breast cancer research.

We expect these consumer marketing initiatives to drive good retail sales performance for Yoplait in the second quarter.

Our Progresso soup line grew retail sales 16% in the first quarter and base lines were up 12%.

The recent launch of Progresso Light soups, which carry a zero point endorsement from Weight Watchers is off to a strong start, and we have an array of other new products from the Meals divisions, including offerings from Green Giant and the new Wanchai Ferry Chinese dinner kits.

Our grain snacks business continues to post substantial growth, up 39% in measured channels.

This growth has been generated by both the core Nature Valley granola bars, as well as newer products like Fiber One bars and we have generated good share growth so far consistently during this calendar year.

The first quarter was another good quarter for our fruit snacks business, up 3% led by the Fruit Roll-ups franchise, including the new Stackers product.

We've been showing good market share in this business too.

Pillsbury also generated growth in retail sales across its portfolio.

Refrigerated dough sales were up 4%, driven by sweet rolls and cookie dough, as well as new products like Pillsbury Simply Bake Bars and Flaky Cinnamon Twists.

Totino's Frozen Pizza and Hot Snacks both delivered strong growth in the quarter, and retail sales for Toaster strudel were up double digits and that's a continuation on the strong growth in this business since we renewed advertising support.

In our Baking Products division, innovation has been a key driver of our good results.

We brought new convenience to established categories like pancake mixes and desserts and supported those launches with consumer spending.

Here you can see the turnaround on Bisquick, with the launch of Shake 'n' Pour Bisquick and Heart Smart Bisquick, which generated 10% growth last year.

And the first quarter of this year was strong again, with sales up 10% in retail channels where we have data.

Looking forward to the second quarter, we've planned a significant increase in media weight against our U.S.

Retail businesses.

Our GRPs will be up double digit.

The quarter is also an annually strong time for consumer promotions with box tops for back-to-school period, as well as Yoplait Save Lids to Save Lives campaign.

This year we have more brands turning pink.

Our new initiative, Pink for the Cure is a cross-category promotion with more than ten brands participating, including Cheerios, Progresso, Nature Valley, and Pillsbury, which will raise additional funds for breast cancer research.

So overall, U.S.

Retail generated good topline growth to start fiscal year 2008.

And heading into the second quarter, our consumer spending ramps up in support of our new product launches to drive further growth.

Let me shift to Bakeries and Foodservice, where we continue to focus on our most profitable products and channels, and with good results.

We have proactively managed our mix by exiting a handful of businesses over the past year.

As a result, first quarter net sales were down 1%, but segment operating profit for Bakeries and Foodservice was up 17%.

As Don mentioned earlier, sales for continuing product lines grew in the quarter.

Our Bakeries and Foodservice segment sells to multiple channels.

In convenience stores, snacks, including new products like Caramel Bugles and Hot and Spicy Chex Mix continue to generate growth.

We're also excited about our second quarter lunch of Pillsbury Sweet Minis which are snack-sized cookies, brownies, and mini doughnuts all designed to be purchased warm from heated display cases.

In our Foodservice distributor business, core-branded product lines like snacks, cereals, and muffins grew, but that strength was offset by product line divestitures, so the net sales were down slightly.

And in Bakeries, our sales grew 1% in the first quarter.

We're using both pricing and productivity initiatives to offset the higher input costs for this business segment.

I'd also mention that we recently announced a shift for our Foodservice business to a predominantly direct sales force, although some account coverage will remain with brokers.

We believe that this shift will provide us with more direct insights into our markets and our customers.

So with these activities to drive topline and margin growth, Bakeries and Foodservice is targeting double digit operating profit growth for the year.

In our International segment, first quarter sales rose 19%, reflecting gains across all geographic region regions where we compete, and segment operating profit grew 27%.

On slide 38, you see our topline strength by region.

Excluding the impact of foreign exchange, Canada's net sales grew 5%, Europe was up 9%, our Asia-Pacific business was also up 9%, and net sales in Latin America were up 40%, reflecting pricing in key markets.

Foreign exchange contributed 7 points of growth, bringing the reported net sales growth to 19%.

For fiscal 2008 as a whole, we expect to see continued broad-based net sales growth, bolstered by our new product launches.

We also anticipate that strong earnings growth will continue for the balance of the year.

Cereal partners worldwide, our joint venture with Nestle, posted a strong quarter with an increase of 26% in net sales.

Foreign exchange contributed 7 percentage points of growth and Uncle Tobys Cereals, acquired in Australia, added 8 points.

But organic sales growth was the biggest factor, up 11%, led by key franchises such as Fitness.

So we've made a good start toward our key operating objectives towards 2008, which we shared with you in June.

Our plans call for another year of broad-based growth on the top line, with contributions from unit volume gains, mix, and more net pricing than in 2007.

We want to build on last year's success in the newer retail formats and in Foodservice channels.

We're targeting strong sales growth and margin growth for our International businesses in 2008.

We have a solid lineup of cost savings projects, designed to help us offset the higher input costs that we're seeing.

Finally, we're targeting strong levels of investment in media and other consumer-directed marketing programs to build our brands and fuel continued topline growth.

So now I'll turn you back over to Steve to wrap up our comments today.

Okay.

Well, as you've heard from Don and Ken, we're off to a very solid start in fiscal 2008, and we expect to achieve our full-year targets of low single digit net sales growth, mid-single digit segment operating profit growth, and we are reaffirming our earnings per share guidance of $3.39 to $3.43 per share, which would represent high-single digit growth from last year's EPS of $3.18.

Our estimates take into account continued inflation in our input costs over the year ahead.

The charge you see here covers total supply chain inflation, including raw materials, energy, wages, and benefits and some other expenses.

These costs have been marching upward for several years now and we've assumed a further 5% cost increase in our fiscal 2008 business plan, as I said back in June.

This overall number includes an estimated $250 million of inflation in ingredient and energy costs.

We work to offset supply chain cost pressure with a combination of pricing and productivity.

Our plans include price realization through a continuing list of price -- through a combination -- excuse me -- of list price increases, reduced merchandise price discounts, reduced promotional frequency, and positive sales mix.

We've already taken pricing in a number of businesses during calendar 2007, including the low-single digit price increase for Big G Cereals, which you heard quite a bit about, a mid-single digit price increase for Yoplait, which we announced in July, mid-single digit pricing across our Bakeries and Foodservice business, and increases on selected SKUs across a number of other businesses that are indicated on the slide.

We are actively monitoring the need to pass on additional input cost pressures as they arise.

We'll also continue our company-wide focus on margin expansion and productivity.

This is an effort that we call holistic margin management, and these initiatives include launching higher-margin new items, eliminating slower-turning or lower margin products, we've reduced our trade expense per case in each of the last two years, and we have a target to reduce it again in 2008.

And we're simplifying our ingredient requirements and streamlining manufacturing steps to eliminate non-value-added costs.

This is an ongoing focus for us, and we continue to add products to our list of cost-saving ideas.

These margin improvement initiatives allow us to increase our level of brand-building investment, particularly advertising, and we're doing so in markets worldwide.

We believe this consumer-directed spending drives awareness and trial for our brands and it supports growth in sales at everyday prices rather than at promotional discounts.

In 2007, we increased our consumer marketing investment by 8% and we have plans to raise our investment level again in 2008.

So I'd summarize 2008 and the operating outlook for General Mills this way.

We're looking to deliver another year of quality sales and operating profit growth, consistent with our long-term model.

Our plans include broad-based volume and net sales gains.

We plan to continue funding strong levels of consumer marketing support across our brands, and we will continue to focus on holistic margin management to help us grow profits faster than sales.

We're encouraged by the momentum we're seeing across our business portfolio today and we feel we have a strong lineup of new products and marketing programs for the balance of 2008.

That concludes our prepared remarks today, and I will ask the operator to open the line for questions.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Kenneth Zaslow from BMO Capital Markets.

Please proceed.

Good morning, everyone.

Hey, Ken.

Just had a couple quick questions for you.

With the recent increase in wheat and oil prices, is there any risk to the $250 million in commodity cost inflation?

And would you be more inclined to take another round of pricing?

Ken, this is Steve.

We don't really comment on future pricing expectations, but I would say that we are watching that carefully and it is very possible that that $250 will rise and so if it does, we will have to -- we're monitoring closely whether we need to pass those costs on, and we're also very aggressively pursuing those holistic margin management goals.

So I'd say that's on our radar screen, but we are reaffirming our guidance for the full year, which reflects the fact that from what we can see now, we believe we can manage that if it occurs.

So you can manage the higher wheat and oil prices?

And the second question, just as a -- the advisory fees and the B1 eliminated costs, those are one-time in nature?

We're not going to see those again, just to confirm?

That's correct.

One-time.

Great.

Thank you very much.

Our next question comes from the line of David Palmer.

Please proceed.

Thank you.

The question is on the Cereal category.

I know these are early days with right-size, right-price, but have you seen a measurable impact or a measurable response in terms of the retailers with regard to that?

Perhaps there's even been a competitor response to it.

Has there been one?

If not, do you expect it?

Thanks.

This is -- good morning, David.

This is Ken Powell.

Hi, Ken.

I would say the Cereal market's been very calm.

As you know, our right-price, right-size conversion initiative has gone very well.

I think when we talked to you a couple weeks ago, we reported that 75% of the products that we were shipping were the new products.

As of this week, it's over 80%.

So it's gone very, very well.

It is difficult, still, to have good detailed information on some of the Nielsen diagnostics, but we believe that our base lines are improving, and that's something that we are counting on and we're seeing some of that.

So that's very encouraging.

And promotional spending in the category is very stable and consistent.

Ken, just a quick follow-up on that.

Is there some bit of a nail-biter here about the consumer repeat, ultimately here.

Because obviously if you have less volume per box, the bet is that you can step up the pace of repeat on the number of boxes, and for this essentially to be a sustainable benefit.

Is that -- how concerned are you about that repeat?

We're not -- we're not really very concerned about that, David.

Our big concern was just sort of executing the change and getting it done with all of our customers.

But because we've tested this idea on a number of brands prior to implementing the program, we'd seen the way that consumers respond to these targeted prices.

Also, remember, that as our mix changes, as we strengthen our base line, these are more full-priced boxes that we're selling and fewer of the discounted promotional boxes.

So we have a -- our expectation is for low-single digit growth in units, stronger, better mix and those higher prices and we think that will all come together into a sustainable program for us.

Thanks very much, Ken.

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

Please proceed.

Good morning.

Hey, Eric.

Good morning.

Hi.

Just wanted to follow up on David's question with respect to the repeat purchase and your comment that you're not too concerned.

Are you seeing the low-single digit increases -- I know it's early days, but are you seeing the low-single digit increase in unit shipments that you guys had been expecting and building into the plan?

From what we can tell, Eric, we're seeing those low-single digit increases.

We're seeing the better base lines that we'd hoped for.

So far, we're very happy with what we're seeing on the right-size, right-price conversion.

Great.

And how much of the 30 -- or approximately how much of the $30 million conversion cost for right-size, right-price were incurred in the first quarter?

Boy, I think we said that maybe two-thirds of those would be incurred in the first quarter, Eric.

It's like 17 to $18 million.

18.

Yes, so a little more than half.

From everything I'm hearing, Eric, we're absolutely right on target with that.

I think that's going to -- the expense related to the conversion is going to be just about where we thought it would be.

Okay.

Two more quick questions here.

Yoplait, your sales in the quarter were a little bit below trend.

You commented on strong growth in the core cup business and the new products coming in later in the quarter and the advertising just kicking in.

Do you think Yoplait is still on track for a high-single digit increase for the full year?

In terms of net sales?

I think we'll have strong growth in Yoplait this year, Eric.

We did have a quarter of 3% growth and I believe that that compared to very strong double digit growth of 17 or 18% in the quarter a year ago.

So we knew we had that tough comp.

And as we go into the second quarter, we really do have a very, very strong lineup of new products that we're just starting to advertise now.

Additionally, we have new advertising campaigns on our core business.

This Pink for the Cure promotion, which is the so-called Save Lids to Save Lives has proven to be a powerful event for us.

So we're feeling quite good about the business as we enter -- go into the second quarter here.

Great.

Just a quick one for Don.

You mentioned higher finished goods inventory.

Could you just give me some color as to the drivers of that?

Was that largely new products preparing to go into the channel, or was there something else behind that?

Well, it was a combination of both new products but also it's our seasonal build as we buy the vegetables for our Green Giant and Cascadian Farm brands.

You'll see that every year this time of year as the crop comes in.

Okay.

So it wasn't year-over-year increase in new product -- in -- it wasn't a year-over-year increase in finished goods inventory?

It was a year over year in finished goods.

Okay.

Obviously, the volume was higher as well, so it was commensurate with that, but the large increase in the quarter is seasonally driven by our purchase of the vegetables for those two brands.

Okay.

Thank you so much and I'll pass it on.

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

Please proceed.

Yes, good morning.

Hey, Todd.

Hey, Todd.

I had a quick question.

First of all, Don,congratulations on your new appointment.

Thank you, Todd.

It's good to hear from one of our fixed income guys.

Thank you.

Appreciate you taking the call.

I had a question, I think, on you mentioned that you expected the debt balance to be down at year end, and I wanted to know if you can just kind of briefly outline how we're going to get there, or how you're going to get there?

to be clear, it's a combination -- it's a combined total of debt and minority interest.

So GAAP debt will be up, largely because of the minority interest we repurchased this period.

But if you think about the balance of the year, we're going to have $750 million in cash coming in October from Lehman, which will be used to pay down some of the commercial paper that we issued in the first quarter.

Then we have our normal seasonal cash flow trends, which strengthen the back half of the year as we work down the inventory that we're currently building for our key selling season.

Okay.

All right.

Then I guess with respect to the refinancing needs, you do have $500 million coming due in November.

I think you probably -- after you get the cash in, you'll probably have some availability in your credit facility.

What are you looking at in terms of the timing for deciding whether to tap the capital markets and when you might come to the market?

We continue to monitor the credit markets and see where the best time was.

As you're aware, we had a debt issue at late August as a result of repurchasing the B1 and also with a we thought was an effective window in the credit markets to issue a five-year paper.

We'll continue to monitor that as the next few months unfold.

We would expect to be back in the market during the balance of F '08 to term out some of the commercial paper that we have and as you allude to, to refinance the $500 million of maturities we have in November.

Okay.

One final question and then I'll turn it over, but at the analyst meeting in June, you had a change in financial policy where previously you had talked about growing into low-A credit rating and then the change was basically, no, you're happy at high BBB.

I want to know if you can confirm that that is still your expectation, that you just want to stay, keep your credit rating about where it is?

That is correct.

And our actions to end the year with lower total debt and minority interest are commensurate with that target.

Right.

Okay.

Thank you.

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

Please proceed.

Good morning.

Good morning, Andrew.

Hi, Andrew.

Just a quick one on gross margins.

You'd noted that they'd expanded in the quarter and obviously despite the onerous input cost to [re-nine] and perhaps some of the costs around the cereal conversion and such, I'm curious on the puts and takes.

Is there a way to figure how much was price and productivity driven, versus was there any significant impact, let's say, from building inventory of the new cereal box sizes, which could have impacted plant utilization in the quarter in a really positive way and helped gross margins, but might not be as sustainable over the next three quarters.

Andrew, this is Don.

I'll take that one.

There wasn't one specific thing that we would point to.

We think it's a continuation of a trend that we have been seeing for the last several quarters, actually for the last couple of years.

We obviously did see favorable price mix as we saw in the sales line, which does benefit our gross margins, but there isn't one particular item that we would point to that drove the gross margins outside of the overall, our continuing to look at pricing as well as our holistic margin management.

Got it.

Okay, that's helpful.

I appreciate it.

One last one.

With respect to consumer brand building, that's something that you've obviously been talking about the last couple quarters or many and have been picking the pace up on that, whether it's in-line with or above the rate of sales growth.

I know you don't look at it necessarily as overall consumer spending versus a percent of sales versus your peers, it's brand by brand and you build it up from the bottom up.

Generally speaking, is there a way to say where you are or with a your comfort level is, sort of corporate-wide, with your levels of brand building versus where you think they need to be?

In other words, is the goal over the course of the next, whatever it is, going forward to continue to try to raise that in-line with or at a greater level than sales or not?

Andrew, it's Ken.

We've had increases, I think this is now -- we're entering the third year where we're seeing solid increases in brand building, so we like that trend a lot.

As you heard Steve say, we're also getting some trade spending efficiencies that's allowing us to slowly reduce that trade cost per case, over the last several years.

And we really like that combination of factors an awful lot.

A steady, gradual reduction in trade, nice increases in consumer spend, and we still see -- we still see a number of brands where more advertising and more sampling would be better and would drive more topline growth.

So we're going to keep the focus on increasing at that high-single digit level.

I think we're -- we still think there's some head room there for us.

Great.

Thanks very much.

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

Edwards.

Please proceed.

Hi, good morning.

Hey, Chris.

Hey, Chris.

Hi, guys.

I just had a couple questions for you.

I just was curious, if you look at your measure of retail sales for Big G, what that gap was between shipments and takeaway from a retail sales standpoint?

I think what we've said previously, Chris, is sales, retail sales were 5% --

Our net sales.

Our net sales, thank you Kris, were 5%, our net takeaway was between 2 and 3%, so there was a gap there, and the vast proportion of that gap was due to the fact that we were shipping new products at the end of the quarter in advance of retail sales, so those products are now in store, on shelf, and for most of them we've just started the advertising and we'll see the impact of those new products this quarter.

So that was the gap.

Okay.

That could be corrected a bit, it sounds like in the second quarter.

Beg your pardon, right.

Yes.

Last one, I don't want to keep going on Big G, but one more on Big G.

If you could sort of characterize the level of promotion that occurred in the first quarter, it seemed quite heavy, although you mentioned some stronger base lines.

I wonder if you could characterize your experience in the first quarter with promotion?

Our promotion was very, very comparable to the year-ago quarter, Chris.

In fact, if anything, it was just a very tiny titch down.

So the levels of promotion were very, very comparable, the merchandise price points were actually a little bit higher.

So as I said earlier, earlier in the report, that was -- I would say that's very much in-line with what we expected and nothing unusual on the promotional side for us.

Okay.

One more question relative to the Foodservice division.

You had mentioned some business that you moved away from.

Is that just like -- sort of like an SKU rationalization, was there some kind of small divestiture there, or what led to the decline in sales?

These were sales of a couple of par bakes, these are frozen bread businesses, Chris, that we divested over the course of the year.

So those are out of the comparison now.

Okay, I got you..

Thanks so much.

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

Please proceed.

Good morning, everyone.

Hey, Terry.

Two quick ones.

Ken, just one more brief one on the Big G line.

80%, I guess, on the shelves.

I know it's still kind of early days on this, but of the missing 20, is that SKUs that you want to take down in price or take up?

On the box size?

Well, the 80% number, Terry, is a aggregate number of the percentage of products on shelf that are the new SKUs.

I don't think we've given and I'm not even sure we know the details of which how much is cheerios and how much is other products.

It's very much meant to be an aggregate measure.

My guess is that, although I don't have documents, my guess is that if you were to look at that, you would see that probably Cheerios franchise is a little bit higher and some of the other franchises might be a little bit lower, but on average it's at 80%, which is ahead of where we thought it would be at this point in time.

We expect in a very short period of time we will be virtually concluded on this changeover.

Okay, fair enough.

Just a quick question on Don.

Congratulations on your new job, by the way.

Thank you.

Cash conversion cycle.

If you look at it, we're now into the fourth quarter where it's kind of moved the wrong way.

Can you talk about that a little bit?

Don't want to put you on the hot seat right away, but...

I would say we clearly have to focus on core working capital growing in line with sales.

We have held to that over the last several quarters.

I can't quote directly our cash conversion, but be happy to get back to you on that.

As I alluded to, as we look at this year, we are confident our core working capital will come in-line -- growth will come in-line with our net sales.

Okay.

And would you expect that to kind of trend down over a certain period?

The core working capital?

The cash conversion, cash conversion is more what I was interested in?

Well, I think you're probably going to look ate pretty stable if our core working capital continues to trend with our sales growth.

Okay.

Fair enough.

Thank you.

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

Please proceed.

Hey.

Good morning, everybody.

Hi, Eric.

All right.

I've got a few questions.

I guess one, what is the new estimate, if there is one, on your total restructuring for '08?

I'll jump in and answer that.

We gave you guidance in June to think about that restructuring line as being comparable to what you've seen the last couple of years, so somewhere between 30 and $40 million.

When we announced first quarter restructuring actions, we gave you an annual estimate that puts it at about $37 million.

So it's pretty comparable.

Okay.

Then second on -- kind of going back to input costs, I guess the one thing that was not hedgable, you guys have obviously done a very good job of hedging on selected items, but dairy and Yoplait, that hasn't been a hedgable item and I'm kind of wondering, what are you seeing in nonfat dry powder milk and do we have -- do you have more concern or less concern on that item?

I'd just say, we do -- this is Steve, Eric -- we do take positions on dairy, we can do that.

That helps us to manage it, but it has, it's running higher than a year ago, by quite some amount.

Part of that was built into our plans, part of it's been covered with the price advance that we announced in Yoplait and I don't give specific coverage percentages on any individual commodity, but I would say that we're watching it and we'll cover as necessary with passing on additional prices, if that's required.

Okay.

Thanks, Steve.

Then I guess, when did you raise selected soup pricing on a ready-to-serve Progresso, and how much was that?

It was earlier in calendar '07.

Okay.

I apologize, I can't remember the month.

Okay.

But certainly benefiting us this month.

Nor do I remember the percentage.

I'm sorry.

Okay.

Then the second to last question.

I got to say, my FASB accounting knowledge is not great, but the last footnote that you have in the release, there's a lot of big numbers there with the adoption of FAS 48 --

Actually, it's FIN 48.

FIN 48, does that have any impact on cash flow that we need to think about longer-term?

Eric, this is -- Eric, this is Don.

You don't need to worry about the cash flow from FIN 48.

The way I would characterize that is it's a change in the standard in terms of the threshold for uncertain tax positions.

The net for us was no change on the P&L or in cash flow, but there were some reclasses in our balance sheet, a large amount, about $750 million that was reclassed out of other current liabilities to goodwill, other liabilities and additional paid in capital.

From a cash flow standpoint, it won't impact us this year.

Okay.

Then my last question and I'll pass it on.

I guess the part of the Bakery and Foodservice division includes products that you might normally characterize as being more in-line with your U.S.

Retail, and as you kind of scale back the Foodservice and Bakery part of that business, I guess is there a question that's reasonable as to whether that's properly segregated?

Why shouldn't you report the C-store and the vending branded product sales in U.S.

Retail, if it's becoming a bigger and bigger percentage of that segment?

See what I'm getting at?

Yes.

Eric --

I don't know, maybe it's not a big percentage at all, but it seems to be a growing percentage, if anything.

Historically, branded items have been the largest part of our Foodservice business and that includes items that are sold to commercial and institutional feeding situations, colleges and universities and such.

Convenience stores is kind of the one that's in the gray area.

The reason we classify that with Foodservice is because very increasingly, the things we sell to the convenience store channel are consumed for immediate consumption.

Ken just mentioned the most recent innovation that we're introducing there, which is the warm doughnuts, brownies, these are ready to eat and they're in the warmer.

So people come in and grab a cup of coffee and grab a cup of cookies.

So this is the way we think about it, the way it's organized within General Mills, the way we balance the profits.

All of that is done within the context of Foodservice.

And the fact that it's branded really is not unusual, because most of the -- the better part of our Foodservice business is branded, some of it isn't.

Some of the dough -- it's all branded as we sell it to the Bakery operator, but that brand doesn't come all the way through to the consumer and most of the Bakery business.

But I think it's really just a function of how the products are used and how we organize to develop them and market them.

And just to quantify that a little bit, so you had $1.8 billion in sales in Bakeries and Foodservice in fiscal '07, 10% of that in convenience stores and vending.

Okay.

So it's still a pretty small percent.

Yes, growing rapidly, you're right about that, but still a relatively small percent.

More of the branded products flows through that much bigger distributor segment.

Can I ask one more?

I apologize, but --

Why not.

I guess, Steve, we've talked in the past about your financial targets that were clearly in this period of inflation.

The company's done a great job of pricing up and passing through when necessary.

I guess to what extent do your long-term sales targets -- to what extent are they not meaningful if there's so much pricing and/or promotional reductions, which as you know is a deduction to net sales -- or gross sales versus net, why shouldn't we kind of assume in this inflationary environment, kind of mid-single digit sales growth?

Because that seems to more accurately reflect kind of what's going on and what could very well go on for several years if we continue to have this kind of input cost volatility?

I think that's a fair question.

We have been delivering mid-single digit sales growth and we continue to do so and certainly if we have the kind of continued pricing pressure that we've seen, you could argue that you need more sales growth to hit that mid-single digit operating profit growth.

We have articulated that model, I think, two, three years ago and we've seen a couple years of inflation since then.

So nothing is forever.

I think the thing we want to make sure we're delivering is that high single digit EPS growth that leads to, coupled with our dividend, over time that double digit total shareholder return.

And if the top line part becomes a bit bigger because of persistent inflation, we'll adapt to that and we'll modify what we articulate, if we see that continuing.

Okay.

All right.

Thanks for taking all the questions.

Thank you.

Our next question comes from Robert Moskow from Credit Suisse.

Please proceed.

Hi.

Thank you.

Hey, Rob.

The aggregate is what matters in U.S.

Retail and U.S.

Retail was strong in the quarter, but I was taking a look at yogurt, and here are the numbers I had: 14% sales growth in '06, 6% sales growth in '07, and then you have 3% here in the quarter and actually I found that the comparison versus the prior year was 8%.

So it seems like this is kind of a disappointing quarter for the Yoplait division.

And then you have the rising cost environment, which is probably higher than you expected.

Can you -- then -- so are you losing market share there -- I guess that's the bigger question.

Secondly, you used to provide consumer takeaway statistics for all your divisions and you're not showing that slide here.

Can you show that to us in the future in other quarterly presentations so we can kind of track consumption versus shipments?

Rob, this is Ken.

It was -- we were below our trend, our longer-term trend line in the quarter and there's no question about that, although I will say our core business was very, very strong.

We do -- we are very happy with the new products that we've just launched.

We think that those are going to be good, very good entries.

We do have very, very strong marketing initiatives here coming up for the second quarter and we think that -- so we think that the performance will improve and we're targeting very good performance for the year.

So you're right, we were below our long-term trend in the first quarter and we want to see that improve.

Okay.

And what about just being able to provide for all the divisions the consumer takeaway trends on a regular basis again?

Well, we've talked about that before and the problem is as the growth in U.S.

Retail food sales is increasingly coming in non-measured channels, that a lining up of our net sales growth in a period versus consumer takeaway in only a segment of our customer base is less and less robust comparison.

Yes.

Well, I think increased visibility is part of the reason why Mills' stock has done in the past year and that the transparency has improved.

I guess we can make our own assumptions as to what's going on in alternative channels and I would just encourage it in general.

Just wanted to make that statement.

Thank you.

Yes.

Our next question comes from the line of David Driscoll from Citi Investment Research.

Please proceed.

Thank you.

Good morning, everyone.

Good morning.

On Big G, given the price increase and the 5% sales growth, would it be fair to conclude that Big G margins expanded in the quarter, and importantly that the expansion will accelerate throughout fiscal '08 as the box right-sizing costs decline?

David, we don't give -- we don't give that kind of detail on margin, but I will tell you that with the efficiencies that we're going to derive from this right-size, right-price initiative, we do believe that that will be -- that that will be support margin expansion in Big G.

So right-size, right-price coupled with other productivity initiatives that we have going in the division, coupled with the pricing that we've seen makes us believe that we can grow margins in that division.

Bigger picture on pricing, you had three points of price mix in the quarter.

Do you see just that particular component staying relatively constant through '08, or do you have any guidance for us on how it will fluctuate?

Hello?

Yes, here we are.

I would say -- I'll take a shot at it.

This is a year where we did know that we would again be in a challenging inflation environment and so we planned for that challenge with strong productivity and with pricing that's a bit more aggressive this year than it was last year.

So the plan kind of was a function of what we foresaw.

I think it depends to a certain extent on how the COGS environment is going to fluctuate year to year.

If it continues at this level for another year or two, I think as Steve commented earlier, there's probably going to be a little more net pricing that we have to build into the plan.

Ken, what I was really trying to drive at was not a question to ask you about future price increases, I know your comments on that.

Simply, that you've given guidance at $250 million of cost inflation, you have certainly your target for net sales, on just the price mix component, just with your stated guidance as of today, is the three points of price mix or something fluctuating thereabouts, is that approximately correct for how you see Qs 2 through 4?

I don't think we're going to forecast components of topline growth, but you've gotten a pretty clear indication that as we put the plan together this year, we're always looking to get some contribution on the top line from volume, some from price mix and this year there's a little bit more price in our thinking.

The only thing I would say, Kris, is that in the past you have talked about components of top line growth, but I understand you don't want to give that detail.

On the final question I have for you, on the input cost side, would it be fair to conclude that the soft commodities are more than 50% of that $250 million versus the energy transportation and packaging components going into raw material cost inflation, Don?

On the $250 --

It's mostly ingredients.

Yes, it's mostly ingredients, that is our inflation factor.

And packaging's not the huge driver of that.

We're talking egg commodities is the primary driver.

And what percent is hedged?

Will you give us that bit of information nor the balance of the year?

Yes.

We are currently 65 to 70% covered on ingredients and 75 to 80% covered on capacity.

That's fantastic.

Appreciate the help.

Thanks, everyone.

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

Please proceed?

Thank you.

Good morning.

Good morning.

Hi, Jonathan.

Just a quick one for Don.

Of the 300 basis points of price mix across the company, can you give us a sense of how much of that was price and how much of that was mix, like total net pricing?

I'm sorry.

Say that one again?

How much of the 300 basis points of price mix across the company that you disclosed in the slide there, how much was actual net pricing and how much of that was mix?

Roughly.

I don't have that detail.

Jonathan, there's a number of actions we take to drive price mix, including new products as well as the price increases that Steve detailed.

We don't break out the 3%.

That will fluctuate from quarter to quarter, there it's price or it's mix.

Okay.

Fair enough.

Talk about 7 to 9% targeted consumer brand building.

I think that's comparable with the 11% you talked about this quarter.

I guess if that's the case, were you spending more this quarter because results were clearly coming in ahead, or was this sort of a planned front end loading of that kind of brand build spending on the fiscal year?

It was planned spending across selected businesses, so it was a little higher than our goal for the year.

It will continue strong as we go into the second quarter as we bring and begin to support new products.

So the first quarter was a little bit higher, but I think the important thing is that for the year, we're thinking it will be 8 or 9% in total, which is a very healthy level of increase for that U.S.

Retail business.

Thanks.

Just finally, when you think about the media spend, you've talked about the different places you've had some nice increases.

One of the things you talked about back in January that I thought was interesting is how maybe emphasizing some of the core products with that media spend were maybe in the past maybe a little bit more disproportionately against new products.

Can you tell us how you think about that and when we look at this strong performance against baking mix and Pillsbury USA, where there hasn't been such a strong performance consistently over the past three years, is that what we're seeing, increased media spend against those sort of core products?

Thank you for that question, you make a good point.

And we do -- we are seeing that increasing media and increasing marketing activity against these core businesses are driving base lines for us.

So we're paying very, very close attention to that.

As we talked about our Yoplait business, for example, we have very strong media support for our core cup line and that will -- has driven and will continue to drive growth there and then bringing in the new products and bringing incremental media support to those products.

I think that's the combination that can really drive growth, but we are, as you say, very focused on making sure that we've got the right levels of support on those core businesses.

Thank you very much.

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

Please proceed.

Good morning and thank you for taking everyone's question.

One question here in terms of the resizing strategy, I understand that it's going to help profit margins in the year ahead, but can you give us some color regarding the first quarter, where resizing was a drag on margins?

I.e., without resizing would operating margins in the retail division have been up, is that a way to estimate that?

I think, Pablo, we've already said that we have a significant one-time cost associated with the conversion of $30 million, of which 18 or $19 million of it was hit the first quarter.

So there was a one-time impact, a one-time cost associated with the conversion.

However, over time, those new boxes and new cases will be more efficient for us and they will generate some margin improvement for us over time.

Now related to that, can you give us a sense of whether price at the retail level, whether they are where you wanted them to be?

You said that 80% of the sales are the new SKUs, but are prices on those SKUs where you want them to be?

Any metrics there would help?

We did complete an audit a few weeks ago in which we presented the information from that to you and we're very close to our targeted price points, Pablo.

We're within a few cents as of that audit.

So the prices have come down in-line with what we were planning for.

There's probably a few cents to go there, $0.02 or $0.03 or $0.04, but we're very close to where we wanted to be and that price reflection has gone very, very well.

Just a follow up.

Those costs that you were talking about, those $30 million, are they going to be booked, are they being booked on the gross margin line or some of that on the SG&A line?

I'm just trying to understand the quarter in terms of gross margins and SG&A trends.

It's a mix, Pablo, between gross margin and SG&A.

Okay.

Just one last one.

In terms of when I think of brand building, clearly you are increasing brand building, but can you benchmark yourself against other companies?

Is this something where you're actually playing catch-up, or are you already ahead of your peers and you're extending that lead.

Help us put this number in context, or if you could give us what percentage brand building as a percentage of sales that will also help.

But some color there would help.

Pablo, it's very difficult to benchmark to other companies because their mix of business is different, and so each company has a different portfolio of products and the way they work, so we're focusing on what we're doing and where we see our own opportunities internally, and the fact is that we see continuing opportunities to invest in brands, to increase advertising support, to add sampling, there just seems to be lots of opportunities for us to expand the penetration of our branded portfolio.

So we're testing our way into these things.

We're adding support where we've learned and know that it will really work and get us a return, and taking this disciplined approach to it, but with the belief that higher levels of brand building will drive baseline, and those are the profitable sales, and the most profitable sales, and so that's how we're approaching this, and the comparisons to other companies can be I think difficult.

Okay, Don, and if I may, one very last one.

Next quarter, when you sell those shares back to Lehman at $54, I think $54.24, I calculate that the one-time loss is going to be about $50 million.

Granted, it's a one time item, but how do you want to factor that?

Is that going to be another charge?

Or it's clearly no factor of $57 million in guidance on restructuring costs.

Pablo, there is no P&L impact to the transaction we have with Lehman, it will all be captured in the balance sheet.

We will issue shares out of treasuries, and we will collect cash, so what you see is a debit to our cash and a credit to treasury shares and additional paid-in capital, so you won't see any impact on our P&L.

All right.

Thank you.

Our next question comes from the line of [Ben St.

Andrews] from Morgan Stanley.

Please proceed.

Thank you very much, everyone, but my questions have been answered.

Okay.

I think we're kind of past our time here, so maybe I'll cut it off at this point, and people that have follow-ups, please give me a shout if we can help you some more.

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.

Have a great day, everybody.