通用磨坊 (GIS) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the General Mills third quarter fiscal 2008 results.

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 Tuesday, March 19, 2008.

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

Please go ahead, ma'am.

Thanks Operator.

Good morning everybody.

We appreciate your interest in GIS today.

I am here with Ken Powell, our CEO, and Don Mulligan, our CFO.

I will turn you over to them in a minute.

First I need to cover my initial housekeeping items.

The press release on our quarterly results was issued over the wire services earlier this morning.

It is also posted on our website, if you still need a copy.

On the website you will find posted slides that supplement the prepared remarks we are making this morning.

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

The second slide in today's set states that our future results may differ from current estimates.

With that, I will turn you over to Don.

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

As you see from the results that we released today, General Mills had an excellent third quarter.

Slide 4 summarizes our results, net sales grew 12% to $3.4 billion, segment operating profit grew 14%, earnings after tax were up 61%, and earnings per share up 66% to $1.23.

This strong growth was driven by volume and net sales increases across our businesses.

We also benefited from certain noncash items as shown on Slide 5.

First, we received a favorable ruling on a tax case, for which we had previously established a reserve.

Reversing that contingency reduced our booked income tax expense by $30 million, or $0.09 per share.

Second, valuing our current commodity position with market prices resulted in a noncash gain of $151 million pretax, or $0.27 per share.

This net mark to market gain related to hedges of open commodity positions, as well as our grain inventories.

Excluding these noncash items, earnings per share wold have totaled $0.87, up 18% from last year.

The key driver of that 18% EPS growth in the quarter was the sales line.

Our 12% sales increase reflects good pound volume growth up 6%.

Price and mix contributed 4 points, so we gained 2 points in foreign exchange.

Each of our three business segments contributed to the sale increase, U.S.

retail sales were up 9%.

The International segment posted 20% growth, and sales for Bakeries and Foodservice grew 13%.

Our third quarter gross margin of 39.8% was almost 5 percentage points above the comparable period last year.

This mark to market valuation of commodity position, productivity and pricing, offset significantly higher input costs.

If you exclude the mark to market gains and the $2 million of recall expenses on Progresso Italian Wedding Soup, gross margin was 35.4% for the quarter, up 30 basis points from last year.

The year-to-date the story is the same, we are holding and actually slightly growing our margin.

Mark to market valuation of commodity positions helped drive an increase in our reported gross margins to 37.7%.

Excluding that noncash gain, recall expenses and the $17 million of accelerated depreciation that is part of this year's restructuring activity, our gross margin grew nine months to 36.5%, up slightly from last year.

This strong performance is in the face of very elevated input cost inflation.

Our ability to counter these higher costs allows us to maintain strong levels of investment in our brands.

Our results for the quarter include a 13% increase in consumer marketing expense.

We believe this investment is and will continue to fuel sales growth.

Slide 10 shows you the details of our segment operating profit in the third quarter.

U.S.

retail profits increased 9%.

International posted another quarter of strong double-digit profit growth, and Bakeries and Foodservice profits grew 68%, driven by strong earnings growth from our grain merchandising activity.

As background, since our earliest days as a Company, we have earned profit from buying, milling, and storing grain.

The recent large and rapid grain price increases this year have resulted in above average profit in this area.

After tax earnings from joint ventures totaled $30 million in the quarter.

These results include a net gain of $11 million, associated with the restructuring project, CPW has underway in the U.K.

Excluding restructuring items in both years, joint venture earnings were essentially flat, but that includes a $2 million gain on the sale of the 8 Continent soy milk business during this quarter.

Our Hagen-Dazs joint ventures in Asia recorded good sales and profit growth in the quarter, CPW sales grew double digits in the quarter.

However profits were lower as we priced a bit behind inflation in the quarter, and made some strategic consumer marketing investments.

Our year-to-date JV earnings growth remains strong, up to 8% excluding the CPW restructuring, and a continent gain.

Through nine months, our joint ventures have contributed $80 million in after tax earnings to General Mills of $0.23 per share,

Let's move the the cash flow statement, where cash from operations was lower in the third quarter, due to increased working capital.

As we discussed in the second quarter, inventories are the primary driver of this increase, as we reflect higher prices on higher levels of grain inventories.

For the full year, we expect flow to capital to grow faster than sales, due to the higher raw material prices we have seen.

General Mills has a strong tradition of returning cash to shareholders through dividends.

Our goal is to grow dividends with earnings over time.

On March 10th, we announced an increase in the quarterly dividend rate to $0.40 per share.

This is our seventh rate increase in the last 16 quarters, and brings planned dividends for 2008 to $1.57 per share.

In total, General Mills dividends have grown at a 9% compound rate over the last four years.

We also returned significant cash to shareholders through stock repurchases.

During the third quarter we repurchased 2.8 million share, at an average price of $55.00.

Through nine months, our average shares outstanding were 346 million, down nearly 4% from last year's average.

I would estimate that our average share count for the full year will be slightly higher than this, but it will be below the 350 million we previously targeted.

Slide 15 summarizes our financial results for year-to-date.

Net sales have grown 8%.

Segment operating profit is up 7%, earnings after tax grew 21%.

And earnings per share are up 25% as reported to $3.19.

Excluding tax and commodity gains of $0.39 per share, our EPS grew 10% to $2.80.

For the first nine months of the year General Mills has delivered strong net sales and volume growth across our businesses.

Our underlying gross margins have held steady, despite significantly higher input costs, our segment operating profits are up 7%, including double-digit growth in our consumer marketing investment.

With this good performance we are clearly on-track to receive our full year earnings per share targets.

As we turn to the fourth quarter, we expect to record continued good sales growth, but we are not counting on sustaining the double-digit pace we set in Q3.

Our guidance will be from mid- to single-digit growth in net sales.

Input costs will show the highest percent increase we have seen this year.

And our plan includes a double-digit increase in consumer marketing investment in the final quarter, which we expect to help us carry good topline momentum out of this year, and 2008 and 2009.

For the full year, our reported EPS will show strong double-digit growth, including the noncash tax item in commodity hedge gains that we estimate a combined $0.30 per share.

Excluding these noncash items, we expect EPS to total between $3.45 and $3.47.

This represents high-single digit growth from last year's EPS of $3.18, we see this as good performance in a challenging cost environment.

That concludes my update on our financial results.

With that will turn you over to Ken.

Okay.

Don, thank you very much.

Good morning to one and all, and let me join Kris and Don, in thanking you for your continuing interest in General Mills.

As we look at our results through the first nine months of this year, what pleases us most is the way we are achieving our growth.

Our product invasion and consumer marketing investments are driving strong growth on the topline.

Top savings efforts together with pricing actions, are offsetting significantly higher input costs, and they are protecting our margin.

As we shared with you at CAGNY, our earnings growth in 2008 will exceed our original target.

Most important, the actions we have taken in 2008 to protect our margins, to reinvest in our brand, and to deliver health and convenience innovation for consumers, will position us well for delivering good growth again in 2009.

In talking with a number of you at CAGNY last month, I know there is concern about food price inflation, and the potential impact on volume and sales.

We are going to continue to watch this closely, but we are encouraged by the strong demand we are seeing for our products.

Year-to-date our volume is up 3%, and net sales are up 8%.

And in the latest quarter the trends had accelerated with volume up 6%, and sales up 12%.

Now looking first at our U.S.

retail business, we see the same pattern of strong topline growth.

Slide 21 shows you that year-to-date U.S.

retail sales are up 6% overall, with growth in every one of our divisions.

And in the third quarter, sales growth accelerated to 9% overall, with double-digit gains for Snacks, Small Planet Foods, Yoplait, and Baking Products.

We see several fundamental reasons for this good growth.

First of all we participate in growing categories.

The chart on slide 22 shows category growth in measured channels for our latest quarter.

Not every category is up, but most of our categories are showing strong take-away demand, combined retail sales for our key categories, which represent more than 95% of our business, grew 3% in the quarter, and this is in measured channels only.

As you know, overall sales growth is stronger when you factor in non-measured outlets.

Sales for our brands are growing with, or faster than our categories.

For the most recent quarter, our share is flat or up across our major categories, and up slightly overall.

Our fruit snacks share is up 5 points.

Grain snack share up 4 points, with the continuing growth of Nature Valley and Fiber One bar.

We also posted good share gains in Soup, Dessert, and Dinner mixes in the latest quarter.

And our products offer consumers high quality at a good value.

As you know, we have raised prices over the last nine months in most of our businesses, to partially offset higher input costs.

Slide 24 shows the current national average non-promoted or base-price per unit for an assortment of our brands, and the corresponding price per serving.

Our leading brands are great tasting, and they are affordable choices for today's family.

Successful innovation is driving growth on our brand.

For example, slide 25 lists the Top 20 items ranked by retail dollar sales, in the ready-to-serve soup category for the past nine months.

11 of those Top 20 soups are Progresso varieties.

The five light soups we launched last July were a great addition to our line, and in fact two of those light soups are already in the Top 20, and I believe that those are highlighted in yellow on that slide.

All five of our light soups would make the Top 25, and all five are among the fastest 16 turning items categories, that is if you just look at turns per point of distribution.

Our strong weight management and health news is driving double-digit growth with Progresso again this year.

Health news is also helping to drive strong growth in our Yoplait business.

We will helping to lead category growth, with innovative weight management advertising, and new product introduction.

These new products include Yoplait, which contain fiber and probiotic cultures, and our new Fiber One yogurt, which we launched in January.

Retail sales are up 14% in the latest three months.

Slide 27 shows the retail sales trend for Big G cereals, in channels where we have data.

Here again, our consumer movement has been accelerated, with consumer take-away up 5% in the latest month.

non-promoted or base-line sales are accelerating as well, and were up 4% in February.

We are prioritizing our core brands, and driving growth through increased investment and focus.

A great example of this focus is our Cheerios label, as you know, Cheerios is the #1 ready-to-eat cereal franchise, representing 12% of category sales.

Yellow box, Honey Nut and MultiGrain Cheerios are all seeing strong sales increases, and our newest Oat Cluster Cheerios Crunch is off to a great start.

Combined retail dollar sales for all Cheerios varieties are up 5% year-to-date, in channels where we have data, and baseline volume is the key driver of this growth, and was up 5% through nine months.

We are also seeing good growth on other cereal brands we prioritized this year.

Cinnamon Toast Crunch was up 16%, Lucky Charms was up 10%.

The Fiber One franchise was up 40%, due in part to some great new varieties, and other new cereals, including Chocolate Chex and a new variety of Cascadian Farms Organic cereal are adding good incremental volume.

Like Cheerios these brands are growing in the right way, through increases in non-promoted, base-line volume.

So our U.S.

retail businesses are delivering strong results.

We are in growing categories.

We offer consumers high quality products for a good value.

We are innovating and increasing investment in our brands to drive baseline growth.

Shifting now to Bakeries and Foodservice.

This business segment has been affected to a greater degree by higher input costs.

We have increased productivity, and we have taken three pricing actions to counter this input cost pressure.

These price increases have resulted in modest volume declines, but a 6% increase in net sales through the first nine months though year.

Segment operating profit for Bakeries and Foodservice was up 16% year-to-date, reflecting profits from grain merchandising activities, along with the higher selling prices on our product line.

As I shared with you at CAGNY, a large portion of our business is in Foodservice channels that don't demonstrate the kind of cyclicality you may think of with restaurants.

Examples include K-12 schools, colleges, hospitals, and lodging chains.

In fact, these Foodservice channels are quite resilient.

Slide 32 shows you the five-year compound growth rate for these Foodservice segments, along with their growth in 2007, and projections for 2008.

Of all of these segments, only business and industry is projected to show a sales decline in this calendar year.

The rest of these channels are projected to show continued good growth.

So we see our Bakeries and Foodservice business on-track to deliver good sales and earnings growth this year.

We continue to focus on driving positive sales and profit mix, by prioritizing the best industry segment in the country.

Reported earnings for Bakeries and Foodservice will include strong profits from grain merchandising this year, which will make for a challenging comparison in 2009.

Nevertheless we feel good about our business strategies, and the long-term growth prospects for this segment.

International continues to be our fastest growing segment.

Year-to-date sales are up 20%, reflecting gains across all geographic regions where we compete.

And segment operating profit grew even faster, up 30%.

Slide 35 shows year-to-date sales growth by region.

Excluding the impact of foreign currency exchange, Canada's net sales are up 1% year-to-date, and sales are up 10% in Europe.

Our Asia Pacific business is up 15%, and net sales in Latin America and South Africa grew 35%.

Foreign exchange contributed an additional 9 points of growth, bringing the international segment reported net sales growth to 20% for the first nine months.

This growth was driven by good performance on our core brands.

In Canada, brand building investments on MultiGrain Cheerios, and the launch of Sweet and Salty Nature Valley bars, drove growth on these priority brands.

In China, Green Giant, Betty Crocker mixes, and Nature Valley bars are selling well, particularly in the U.K.

In the Asia Pacific region , a strong Hagen-Dazs Mooncakes season and Wanchai Ferry growth, are driving double-digit sales increases in China.

And in Latin America, sales increased 35% with good growth by the Diablitos in Venezuela, and Nature Valley bars, which had we launched in Latin America last March.

Cereal Partners Worldwide, our 50/50 joint venture with Nestle, continues to achieve sales and profit growth in arterial markets outside of North America.

Slide 37 shows our Top ten markets ranked by tonnage.

As you can see, we have leading share positions in this market, so the global cereal business remains a strong growth engine for us.

Across our worldwide food business, we have been steadily increasing our brand building investments, and improving the effectiveness of our advertising.

We now expect to increase our consumer marketing investment at a double-digit rate in 2008, positioning us for continuing growth next year.

So to close this morning let me give you a few preliminary thoughts about 2009, which is shaping up to be another good year for General Mills.

We expect to achieve continued good topline growth in our fiscal year 2009.

We are targeting a mid-single digit increase in net sales, somewhat above our long term growth model, and we will share more details in our '09 growth outlook review in June.

We are actively planning for another year of rising input costs, and we have a pipeline of holistic margin management projects identified, to help counter this cost pressure.

We will benefit next year from a 53rd week, and we expect to reinvest that incremental contribution in business building initiatives both domestically and internationally.

In total, we expect another year of continued good earnings growth, consistent with our long term growth plan.

So that concludes our prepared remarks this morning, and with that, I will ask the operator to open the line for

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Chris Growe with Stifel Nicolaus, please proceed with your question.

Thank you, good morning.

Hey, Chris, good morning.

Hi, nice quarter.

I just had two questions for you.

The first one is your implied earnings growth as you kept your full-year guidance the same, it seems like a pretty strong increase in marketing in the fourth quarter.

As I'm looking year-over-year you do you have a lot of charges in the fourth quarter a year ago.

I just want to be clear on how to look at the fourth quarter, was it a significant increase in marketing, or maybe more restructuring charges you are going to bring through in the upcoming quarter?

Chris, this is Ken.

There are three things to remember, keep in mind about the fourth quarter.

First of all, we expect our sales will be really strong, but they won't be double-digit strong the way that they were in the third quarter.

So we expect good solid sales growth, but more in-line with what you have seen as an average rate of growth over the last three quarters.

So sales will moderate somewhat.

We do plan to increase investment and marketing at a good level in the fourth quarter, both to drive sales, and also to help us continue momentum as we go into the next year.

And also, finally, the fourth quarter is the time when we really start, when we will face the highest input costs that we will see this year.

This is the time of year when we start to move on some new contracts.

We have seen costs edge up over the course of the year, and the fourth quarter will be the highest cost quarter for us.

So keep those three things in mind.

Chris, this is Don.

The only thing I would add to that is if you look at our full year tax expense guidance, you will see the fourth quarter is coming up from our year-to-date of our Q3 rate, so we will have an adverse tax rate versus last year when we actually had quite a favorable rate to end up the quarter.

It doesn't plan any big charges coming through in the fourth quarter from a restructuring standpoint, correct?

No, that is correct.

Our full year guidance for restructuring is up a touch, because of the 3 million we put through this quarter, related to the Bakeries and Foodservice restructuring project.

That is the only adjustment to our guidance in that area.

I just wanted to ask a final question if I could on the U.S.

retail division.

There was less pricing sequentially quarter to quarter.

Was that an uptick in promotion, or was there something unique that worked against the overall price and mix realization in the quarter?

Not really, Chris.

We have taken I think as you know, pricing now on across many, if not most of our businesses, we are realizing that as we go through the year.

We did have, we did have very strong tonnage growth in the quarter, which was good.

I think what I focused on is the nine month cumulative.

I think we have got 3% of volume growth, 2% increase realized from sales, and 2% from mix.

The quarter to quarter can be somewhat lumpy, and I think I focused on that nine month trend as a more accurate indicator of where we are at.

We feel good about the pricing that we are realizing, and it is coming through as planned.

Okay.

Thank you.

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

Please proceed with your question.

Hey, Andrew.

Two quick things, one you talked about the volume uptick in the quarter, and obviously it shows through very clearly, particularly in your U.S.

retail.

I am curious how much of that do you think is attributable to maybe it is selling ahead of price increase, which is I realize would be an industry-wide phenomenon, but it seems that type of an uptick in volume, particularly as you are trying to get more pricing through, and we do see pricing coming through, at least in the scanner data?

It just looked odd to me.

Yes, Andrew if you look at the nine-month data for U.S.

retail, our sales compared to consumer take-away, they are really quite close.

I think our sales is at 6%, and our consumer take-away as we can measure it in channels that attract in retail workings is between 5 and 6%.

So year-to-date, they are tracking quite closely.

The point I would make on tonnage, particularly quarter-to-quarter.

I mean we are in, there is a mix element here that you have to watch out for.

We have got businesses where the density is pretty low, in the cereal business, we are also in the flour business and canned vegetable goods mixed in.

We had a not quite as good a quarter in vegetables and flour in the second quarter, and that has probably depressed our tonnage a little bit.

Those businesses were stronger this quarter, and they drive mix.

So tonnage is, it is what it says it is, it is pounds, and it is sort of a, it is a lumpy measure for us.

I would focus on the nine-month data, where we are 3% on tons and good retail take-away.

I think I would look at that.

Okay.

You are measuring the volume in tonnage this year.

That is different I think than last year, if I am not mistaken?

That is right.

Andrew we try to point out helpful details on the unit sales, for instance as you know, our tonnage in cereal is down a little bit this year, because of right size, right price, I think it is down 3 or 4%, but our unit sales in cereal, which I think the most key and relevant measure, is actually up 5% through the first nine months of the year.

Got it.

Okay.

And then, the last thing is this fiscal year it seems like your productivity, when you have talked about the holistic margin has ramped up, to perhaps cover more than half, if not much more than half of the incremental input cost inflation that you are seeing.

Can you talk a little bit about the pipeline or you mentioned it?

Can you talk about your visibility in the cost base pipeline going forward, and I guess is this magnitude of savings the type of level you think you can deliver incrementally next fiscal year, because obviously the worry is input costs are clearly not going down, and they may continue to go up, but as you roll over some contracts and things, that becomes more onerous next year, putting more pressure on price and productivity.

First thing, Andrew, the productivity focus that we have, is proving tremendously helpful to us.

We have good momentum there right now, you said covering much more than half.

I don't think that is correct.

If you thought of it as covering perhaps a half, in that neighborhood, that would be closer.

That is very, very significant, and allows us to manage prices as best we can.

It is covering about half.

We are expecting more inflation, although we really don't know what the magnitude will be yet.

We also do have very good visibility on our productivity pipeline going forward.

I think as I said before, this is a strategic activity for us, a focus on margin.

We meet with our division leaders several times a year, to review what they are doing here.

We look at a 3-year pipeline of ideas and initiatives, and I will tell you that over the last several years that pipeline has gotten stronger, as the divisions have gotten more deeply into this holistic margin management exercise.

So we feel very, very good about our ability to continue with this strong productivity momentum we have.

Andrew, this is Don.

I had one more aspect to that, as you think about our gross margin.

That is the mix component as well.

We separate that out on the topline impact but the bottom line impact is equally valid or more meaningful, it is the advantage of us having a broad product portfolio, and changing the way, everything from the way we think about it internally to actually manage our sales force from an incentive standpoint, with more weight on the profitability of the products we are selling, and not just the volume itself.

We have combined that with much more stringent new product guidelines, that are focusing us on launching margin-accretive products at a much higher rate, much more highly incremental and also margin accretive products than we have.

That continues to improve, so that factor as well has a very material impact on our gross margin.

Thanks very much.

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

Good morning.

Just to follow up on Andrew's questions in terms of prebuy ahead of price increases.

Were there any specific price increases that are going in around now or early this quarter, that there might have been prebuy ahead of, or do you think that it, I know that you didn't point to much prebuy overall, but do you think that there could have just been general anticipation of price increases, given the commodity environment?

There were no price increases, Eric, at the end of the quarter that would have caused that.

The one thing that I might point to here is one of the very strong features of our third quarter, was that we had a very good baking season, and by that, I mean both our Pillsbury division and our Betty Crocker baking division were very, very strong, and they were strong throughout the quarter.

This is the time of year where consumers are entertaining and holiday baking, that sort of thing.

We thought they would do well, and they did better than we thought.

It is possible because of Easter timing was a few weeks earlier, we got a little bit of a kick there.

But I don't really think it is overly significant.

As I said, they were strong throughout the quarter, and we are starting off March very solidly.

So there may have been a little bit of benefit from the earlier Easter.

Okay.

And then shifting to Big G, through the fiscal first half it seemed that your shipments were a little bit stronger than we had anticipated, particularly in the second quarter after the very strong first quarter.

You had what looks like a very good shipment quarter, as well as consumer take-away quarter, in the fiscal third quarter.

Just, wondering whether you could comment on customer inventory levels, and how this has all washed out after nine months, how you feel about inventory levels, and the overall success of right size, right price?

Well, I mean, Eric, we feel really, really good about right size, right price.

It is fully behind us right now.

We have established the new retail prices, we have monitored those.

Those have been very, very stable.

We are seeing very good improvements in baseline sales over the course of the year, in-line with what we predicted.

We are seeing good consumer initiatives across the Cheerios business.

We tried to show you how strong our Cheerios franchise is, but also we have our major kid brands are growing strongly now, as are several of our adult brands.

So we feel that right size, right price has been very successful for us.

It is just what we wanted it to do, and thought it would do, and we see good momentum continuing in our sales business.

We are going to have a good year in cereal.

In terms of customer inventories, are you comfortable with customer inventory levels, are they a little on the high side still?

We are very comfortable with the inventories Ken.

Great.

Well, thanks a lot.

Great quarter, guys.

Thank you.

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

Please proceed with your question.

Good morning, thank you.

Wanted to dig in a little bit more, a lot of talk about trading down out there.

Can you comment on particularly Big G, but just across your portfolio, on price gaps relative to private label, and have those gaps generally narrowed or widened in the most recent round of price increases, and what effect that is sort of having on your pretty strong volumes here?

Hi, Jonathan.

You know, we are very closely monitoring that, and I know that you are interested in it, and we are looking at it.

I think at CAGNY a few months ago, we reported to you that the private label share, aggregate share for our category, so this isn't for the whole industry, but just for our categories because we are in a lot of categories, the private label share was flat year-to-date for our categories, and we have updated that.

I will tell you, it is again flat.

It hasn't moved at all.

So we are not seeing in our categories, the private label competitors gain share, it is absolutely flat, if anything they are down just slightly.

It doesn't look like we are seeing trade down in our categories.

We do monitor how our pricing is passed through, and how their pricing is passed through, and we have noticed that the price increases for our private label competitors have tended to be bigger on a percentage basis than ours have been, and I think that reflects the margin structure and scale of those competitors.

They need to take more to cover cost increases, and so we are seeing perhaps a little bit of a narrowing of the price gap.

I wouldn't say it is dramatic yet, but if anything it is narrowing.

Thanks, just one follow up, how about your percent, rough percent of volume or dollars bought on deal, on some sort of special across your portfolio?

Have you seen any uptick or unusual gyration in that data?

Not really.

That has been pretty stable, and as we have told you before, for our cereal business, in fact, we expect our merchandise expense in that business to be down a little bit for the year.

So that has been--

That is mainly really due to right sizing--?

Yes.

We haven't really changed any merchandising price points, or done anything like that.

It is pretty stable.

Okay.

Thanks very much.

Okay.

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

Please proceed with your question.

Morning everyone.

Hi, Terry.

A couple of things, going back to the volume, traditionally General Mills, the productivity has been driven by volume.

I guess one of the impacts of right size, right price would be, for a period of time your pound volume would probably be reduced, but your price per pound up.

So I am just wondering how this shakes out as we go forward, given the importance of Big G to the U.S.

retail division.

As you see pound volume now as a source of productivity for the cereal line, as well as division.

How should we look at that?

I don't know if you will recall this, Terry because it was kind of a inside baseball look at right size, right price, but as part of that right size, right price exercise, which involved changing the size and shape of all cereal boxes, we also were able as part of that exercise, to kind of revise and improve the way the cereal boxes go through the manufacturing line, the way the cases work, the way they fit on pallets, and all of this sort of thing.

So there is actually going be a quite significant productivity gain in material business from moving to those revised right size, right price package configurations.

So those sort of productivity opportunities, which were inherent in right size, right price, coupled with the fact that our unit sales are up quite nicely this year, and it is really units that we make in our factory, we see many opportunities for driving productivity in the cereal business going forward.

I would say we have increased the size of that pot significantly over the last year and a half as we focused on it.

So we are going see continued productivity growth in the cereals business, part of it because of the more efficient right size, right price box sizes.

Okay.

Just a question of innovation, we hear Kellogg is gearing up to launch several products this summer, including a new line that may go after toaster strudels.

We were also looking at some data that suggested that Curves may not be doing as well as you would like.

So can you kind of address the innovation effort?

Should we look for kind of an on-trend innovation effort as we move into fiscal '09?

Will it be geared up?

How should we look at that as well?

First of all, I will tell you that this year we think our innovation has been very, very strong.

Oat Clusters Crunch Cheerios has been one of the strongest new cereals in the market.

And then as you go across our portfolio, we have had a spectacular success with Fiber One bars.

We have had a great success with Light soup.

We have just launched Fiber One yogurt.

We are very optimistic about about that.

Yoplait yogurt continues to develop well, and is gained trial, has very strong, and is gaining trial and that brand is now over a share point in the yogurt category.

So we feel quite pleased with the innovation and the new products that we launched this year.

We are preparing our new launches for first quarter of next year.

I will tell you that we are very happy with how that is coming together.

We think it will be another good year of highly incremental innovation.

We are will tell you more about that in June, but I will tell you that we are very focused on continuing to keep that pipeline of innovation flowing.

Okay.

Thank you very much.

I am sorry.

Go ahead.

What I would add to that, is I think one things that has really helped us perform this year, is the fact we have had really good new product innovation in the marketplace, combined with our higher consumer investment to support those new products, and while we spent a lot of time the last few months talking about inflation, and how we are acting to counter that.

The basic blocking and tackling in the business is new products, and increased consumer investment is really what is driving us and will continue to drive us in 2009, and so to Ken's point, that will continue to be an area of focus for us.

We will share the specifics when we get together in June.

Okay.

Thanks again.

Our next question comes from the line of Ken Zaslow with BMO Capital Markets.

Please proceed with your question.

Good morning, everyone.

Morning, Ken.

Just turning to a different business sector, the general bakery margins exceeded our expectations, and I was just kind of looking at, what do you think key factors were?

I am assuming they exceeded your expectations as well.

What do you think the key factors were, and do you think this type of margin structure is more sustainable, even in the face of higher wheat prices?

Can I just clarify?

Are you asking about Bakeries and Foodservice?

Yes.

Yes.

Well, an important factor in their performance this year as we said, has been the benefits they have gained from our General Mills grain merchandising operations, and I think as you may know, General Mills, literally since the Company was listed in 1928, even before then, the name of the company is General Mills, and so we have grain elevators, we have grain mills.

We buy grains store it, we process it.

We have assets and we have expertise in acquiring and taking positions in grain, and we are managing, and we manage our costs that way.

In much of those, and we concentrate that effort in two areas.

Wheat and oats, which are the two primary grains that we use in the business.

And much of the benefit and the gain from that operation, which creates value from General Mills year-in and year-out.

Much of that benefit goes to the Bakeries and Foodservice division, because they are using a lot of flour, and we sell a lot of bakery flour to everybody, from Wal-Mart to other grocery stores up and down the street.

So a large part of their gain this quarter was their benefit from that operation.

Okay.

Great.

Thank you.

Just to your point on the margins.

The unusual run-up in grain prices benefited that operation in this quarter and year-to-date, so we have seen some margin expansion beyond where we should otherwise, but as we look at the underlying business, we still see stable margins, and we still have are confidence that the strategy we are undertaking to move more to branded, move more to the high margin, higher growth opportunity segments is playing out, it is being challenged this year, because of the high inflation that we are seeing across the board.

But we are confident we will still be able to protect our margin this year, and to grow them in the future.

I guess the only thing I was trying to get at is exactly that, when you get the pricing power that you got in this division seems to be higher than I would have thought, and it seems to kind of funnel through to the margin level.

So I understand that there is this grain gain that you were enjoying during this quarter, but it seems like again, that some of the margin structure in this business is a little bit more stable than I guess I would have originally thought, given that the pricing power seems to be more there?

That's all I was trying to get at.

That is a good insight because we are, as we demonstrated at the show at CAGNY, we are very pleased with the categories that we play in.

We have very pleased with the margin performance we are seeing.

We are not where we want to be long term, as we said, but we are moving in the right direction, and certainly if you look at our performance versus most of our competitors, the strength of our strategy is playing out with the results.

And your ability to actually get access to the wheat, even if there is a shortage again, because you have the milling side of it, there is no inability for you to supply your operations, is that fair?

That is correct.

We purchase more wheat and oats than we use, and part of what we earn of that, that gives us two advantages, one we get to sort for the highest quality, but second we also have some additional, excess inventory we can sell into the market.

We have no issues with supply, and again advantages in both quality and pricing standpoint.

And also, just remember, we talk about the pricing power we have.

I mean obviously we are taking multiple price advances, but so is the market and so are our competitors.

So we are moving aggressively in a general market that is also moving.

Great.

I appreciate it.

And our next question comes from the line of Todd Duvick with Banc of America Securities.

Please proceed with your question.

Thank you, good morning.

Morning.

Morning, Todd.

Wanted to ask a balance sheet question or two.

You have got a $1.15 billion convertible note that is maturing in 2037, and I think you said in your 10-K that you expect that to be put to you next month.

Is this still the case and if so, what refinancing plans do you have for that?

Todd, we do expect to be put to us, it is not in our hands.

It is in the holders hands to decide that.

But we do expect based on the economics of the bond for that to be put back to us the middle of next month.

Our plans are to refinance it in the near term with commercial paper.

We did a $750 million-dollar, 7-year note last week, to free up capacity in our commercial papers to accommodate the fact that that may be put back to us.

Okay.

All right.

And then I guess, with respect to the balance sheet, I think you made earlier commitments earlier in the fiscal year, that your combination of debt and minority interest at the end of fiscal year which is going be May, is going to be at or below year ago levels, and I wanted to know if you could clarify if you were meaning on a net debt and minority interest, or just total debt and minority interest, and if that means you are going to be paying down some additional debt in the next fiscal quarter?

Well, it was on our GAAP debt plus minority interest basis.

Okay.

We are actually now projecting to see that increase slightly at year end, and that is directly driven by the fact that in January when the equity market declined, we took the opportunity to go in and repurchase what we think are some very undervalued General Mills shares, as we noted in our release.

That is going to put some pressure on our debt line at the end of the year.

We do expect to pay down something, a bit from where we are at the end of Q3 to year end, but we are now projecting at the end of the year, our combined GAAP debt and minority interest balance will be above last year.

Okay.

Just one final question, with respect to your debt balance overall, are you fairly comfortable with the overall debt balance, and are you also comfortable with the mix between the short term and the long term?

Yes, we are on both.

Our commitment is that we are focusing not so much on the dollar balance, and on the metrics, our coverage ratios, for example.

And given the improved performance, the financial results beyond the original plan, that gives us a little flexibility on that debt line, as well with maintaining our liquidity and financial metrics.

We did have proactive discussions with the rating agencies before we went into the market in January, just to make sure that they were clear on our intents, and what our projections are, and they were comfortable with that.

That is important to us, because we are very committed to maintaining our BBB+ credit rating, and we keep that always in mind whenever we make any of our financing plans.

Okay.

Very good.

Thank you.

And our next question comes from the line of Eric Katzman with Deutsche Bank.

Please proceed with your question.

Hi, good morning everybody.

Hey, Eric.

I guess my first question is maybe a follow up on the balance sheet.

I am not exactly clear as to how interest expense is down, even though your net debt year-over-year is up 24%, I think.

Can you kind of walk me through that?

It is a combination of two things.

The primary driver is the fact that because we very actively use commercial paper, we have been the beneficiary of the 200+ basis point drop in our CP rates from last year to this year.

Another smaller factor is that we have accumulated some cash offshore, and we have some interest income that begins that interest expense line this year a little higher than what is was a year ago.

The primary driver is the fact that we have been on the front end of the yield curve.

I see.

So, given your responses to Todd, and as you look, I mean, should we expect interest expense in '09 to be basically flat or down, given what you have done on the front end of the curve?

Well, we are not going to provide guidance on that just yet, but as I said, we will be going into the year with a higher balance this year than we exited last year, and we would expect that balance to grow through next year, again as we keep our metrics flat, earnings and cash flow grow, and our debt would grow in accordance with that.

So that is going to clearly drive up our interest expense.

We will have to see where the markets are at that point, as we think about what our commercial paper rates are going to be, but we would expect that our mix of commercial paper, would be roughly consistent with where it has largely been this year.

And we expect to continue to run a 2 to $2.5 billion average balance in our commercial paper.

It will be a little higher in the front end of the year as we are building inventories for our selling season, and then it will come off a little bit in the back half, as it has typically done.

Okay.

Let me switch, Ken, I guess, my first question is it seems like the environment has become a little bit more high/low than EDLP, and historically, pre-Pillsbury, General Mills was a very strong, had a very strong sales force and culture that really excelled in a high/low environment.

I know when you bought Pillsbury, that added some expertise on the EDLP front, with people in Bentonville, but do you still think that the sales force culture excels in a high/low, and does that give you some competitive opportunity?

Well, I mean we have a very, very capable sales force, and some of our customers, many of them continue to be high/low, and pretty aggressive merchandisers, some as you know are EDLP.

I mean I would say if anything, our customers are looking more these days at hybrid versions, of some EDLP on certain items, coupled with ongoing merchandising.

I would say if anything the trend is toward a little bit more awareness of EDLP opportunities, and our guys are very, very comfortable working in both of those kinds of environments.

I would say, so that is one part of what we are trying to do, but our sales force has, over the last five years especially, I would say, we are not only bringing merchandising programs and initiatives to these important customers.

We are bringing them all kinds of services and other capabilities.

We are bringing them know-how in consumer insights, marketing in-store, helping them work with us to reduce logistics costs, and all of these things are really quite important in building a strong partnership with our major customers now, and we are very, very good at all of those things.

I would stay as well as operating in the two different kinds of merchandising, EDLP and high/low.

So I think we are very, very, we feel very good about our capabilities there.

Okay.

That is helpful.

Last follow up it seems like, and I want you to put more of an industry hat on, as opposed to a General Mills hat, since you have broad exposure, but it seems like a lot of the companies, we have all raised prices, but I understand from contacts that the coverage on the price increase for many companies is extending into the summer.

And I am wondering, do you think that there is a risk that we start to see this tradedown to private label, or demand elasticity hit, when the price coverage promote programs that are out there end, and the wheels kind of hit on the shelf, hits the family with in their wallet?

Can I just because I am getting a little bit of a crooked look across that table here, Eric, what you are talking about is that some companies are only going to take a little price increase for a period of time.

They are protecting the kind of merchandise--?

Bingo.

that is already scheduled for retailers, for a while you are extending back against that, is that what you are asking about?

Bingo.

The key brands --

We are not, nobody, except one company out there, but basically, none of the companies are saying we are seeing any demand elasticity, but then again there is a lot of price protection going on.

I am wondering what happens when the full price increase goes through this summer?

Like is that when we see it?

I wish I could put my industry hat on for you, but I am not sure I can.

But what I can tell you is, we look at how our own pricing is passing through.

We look at that very closely to see if it is happening, when it is happening, how it is happening, and what I can tell you that what we are seeing is exactly what we would expect to see across the categories, as we are taking pricing.

There is sometimes a delay, but it is not a long delay, and we are seeing our customers pass through, all of the full impact of the pricing.

They are not passing through more than that.

But they are passing the full impact through and so we don't think there is any sort of lag effect here waiting to hit us.

The pricing we have taken has already appeared at retail, and consumers are seeing somewhat higher prices already.

I don't think we have looked at it across other categories or, we have certainly focused on our own.

Yes, we have looked at our categories, and pinpoint kind of on a dollar for dollar basis, pricing is translating through.

It differs a little bit by category, but on average it is going through on a dollar for dollar basis, which does means the the retailer is not taking the margin on it, at least that is passing through.

The other comment I would make is to the extent that there is any tradedown, there is more trade-in if you will, because clearly some of the restaurant chains are seeing an impact in their traffic, and that is actually trading into groceries.

Net/Net to Ken's earlier point, we are not seeing private label pick-up any share, and if anything, the branded guys, certainly in our categories, we are seeing stronger performance.

So the combination of our new products and our consumers advertising and consumer marketing investments, are allowing us to maintain and grow our share across most of our categories, and helping to offset whatever risk of tradedown there may be.

Okay.

Thank you.

And our next question comes from the line of David Driscoll with Citi Investment Research.

Please proceed with your question.

Thanks a lot.

Good morning everyone.

Morning David.

Don, I wanted to start off with the commodity hedges theme.

$0.30 I think so far for the year, or thereabouts, can you just describe to me, these gains are gains that will ultimately be something that would apply to future periods.

So it is hedges that you have put into place for future quarters, which is why you guys are kind of backing it out, and looking at the core operations for the quarter, conceptually am I right on that?

Yes, that is exactly right.

They are gains on our open hedge position at the end of the quarter, and this is based on the new accounting treatment that we implemented at the beginning of this fiscal year, for positions taken in this fiscal year, and we mark to market based on our coverage, open hedge position, based on market prices at the end of the the quarter.

We also mark to market our grain inventories, and that has been our historical account, so that is not new, usually it is immaterial, but with the recent run-up, it has become more material, so we wanted to tell you that [deeps] out as well.

Both of those though to your point, are future, they will settle in the future, and they will impact our results at that time period.

A couple of important things to note is that these gains are not in our operating profit, so the hedges and inventory gains will move to operating profits when the commodity is used, and the contract settles, so the operating profit matches with the coverage.

You get a clear clean line of sight on our margins, it is also as we segregated out in the slide, we segregated the gross margin impact for that same reason, is to give you a line of sight on the underlying performance.

So that is the commodity gain in a nutshell.

It is for future, positions to be closed in the future.

Those positions would go out how far approximately, the next three quarters?

Well, they will go out as we said at CAGNY, we are about, end of the the calendar year, cover through the end of the calendar year roughly.

It is going to vary by categories.

Some of that will reverse in the fourth quarter, that is why we signal a $0.30 number for the full year, supposedly we already gave a year-to-date basis.

So a portion of it will settle in the fourth quarter.

My second question is that in the quarter, it appears that you had a $14 million gain on the sale of an asset in the joint venture line, and then also a $1.7 million gain from the sale of your 8 continent, that amounts to about $0.05 a share.

Is that $0.05 a share included in your $3.45 to $3.47 estimate?

Yes it is, we had a gain on our CPW joint venture of $11 million, for the restructuring activity this quarter, which includes a gain on the property that you mentioned, and the 1.7 on the 8 Continent.

Both of those are in our numbers in the quarter, and our underlying projections, guidance for the year.

Great.

Thanks a lot, everyone.

And operator, I am going to cut in.

We are coming to the end of the hour.

Let's take one more, and I apologize to everyone who is still in the queue, and I will speak later with you.

All right.

The next question comes from the line of Vincent Andrews with Morgan Stanley.

Please proceed with your question.

I will ask one quick one then.

In terms of the grain merchandising as it relates to Bakeries and Foodservice, does that factor into the 2% nine-month volume decline, or how should I think about that?

It is all captured in our COGS line.

Okay.

Externally it is in the sales line, not necessarily what we mill and transfer internally.

So then the answer is that 2% volume decline has nothing to do with the grain merchandising.

That is correct.

Okay.

Thank you very much.

Thank you, everybody.

If you have follow up questions, please give me a call.

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

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