通用磨坊 (GIS) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the first quarter fiscal 2009 results.

During this presentation, all participants are in a listen-only mode.

Afterwards, we'll conduct a question and answer session.

(OPERATOR INSTRUCTIONS) I would like now to turn the conference over to Ms.

Kris Wenker, Vice President Investor Relations.

Please go ahead, ma'am.

Thanks, Tommy.

Thanks for your interest in GIS.

I'm here with Ken Powell, our CEO.

Don Mulligan our CFO and Jeff Harmening who heads up our Big G cereal division.

I'll turn you over to them in 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 also posted on our website if you still need a copy.

In addition, we've posted slides on our website that supplement the remarks we'll make on this call.

The 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.

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

Thanks, Kris, and thanks, everyone for joining us this morning.

As you have seen from our financial results release this morning, General Mills is off to a strong start in fiscal 2009.

Slide four summarizes our first quarter results.

Net sales grew 14% to $3.5 billion.

Segment operating profit grew 9%, despite significantly higher input costs and a 17% increase in consumer marketing investment.

Earnings after tax were $279 million and diluted earnings per share were $0.79.

Our earnings results include a net reduction related to mark-to-market valuation of certain commodity positions in grain inventories.

That noncash impact totaled $91 million pretax, or $0.17 a share.

Excluding this mark-to-market impact, our diluted EPS would have been $0.96, up 19% in the quarter.

The key driver of our growth was strong worldwide sales of our products.

Sales grew 14%, with four points of that growth from increased pound volume.

Price realization and positive sales mix grew nine points in growth and foreign exchange added one point of sales growth to the quarter.

Top line results were strong across all business segments as shown as Slide six.

US retail sales were up 13%.

International segment posted 15% growth and sales for bakeries and food service grew 17%.

Our gross margin as reported for the first quarter was 34.1%, down from 37.6% last year due to two factors.

First, higher costs for inputs used during the quarter and second, mark-to-market valuation for commodity hedge positions.

We adapted mark-to-market accounting for the first quarter last year when it resulted in a net reduction of less than $1 million pretax.

This year, our first quarter gross margin includes the $91 million net reduction I just mentioned.

Excluding that mark-to-market impact, our gross margin would have been 36.7%, down 100 basis points from last year.

This decline was primarily in our bakeries and food service division, where we've taken strong pricing to offset the inflation impact on a dollar basis, but margin is still pressured.

As we told you in June, we expect the strongest year-over-year increases in our 2009 commodity costs to fall in the early part of the fiscal year.

Our plans included a decline in the first quarter margin, but we expect to protect our margins for the year in total.

Protecting gross margins allows us to continue supporting our brands with strong levels of consumer-directed marketing.

Our consumer marketing spending was up 17% for the first quarter and that was on top of an 11% market increase in last year's first quarter.

Slide nine shows our segment operating margin results for Q1.

Despite higher input costs and strong increases in our consumer spending, margins were reasonably steady in US retail international.

Bakeries and food service margins were down more significantly as I mentioned earlier and overall, the operating margin for our combined segments was 18.1% for the quarter.

Segment operating profit dollars grew at a very high single-digit rate, up 9% as shown on Slide 10.

US retail profits increased 11%.

International posted another quarter of double-digit growth.

Bakeries and food service profits totaled $27 million, but that was below strong prior year results.

Let me comment briefly on our bakeries and food service segment, which is operating in a challenging environment right now.

We saw double-digit top line growth in the first quarter, driven by continued pricing to offset higher commodity costs.

But industry volumes are challenged as consumers cut down on meals they eat away from home and buy more at-home meals.

This trend benefits General Mills as a whole, but it's not a positive one for bakeries and food service segment.

We'll continue to prioritize our higher margin, branded product lines and the more resilient food service channel.

As we told you back in June, our plans for 2009 call for modest sales growth in this business and we expect earnings to be flat to 2008 and strong grain merchandising profit contributed significantly to our results.

Moving down the income statement, after-tax earnings from joint ventures totaled $31 million in the quarter.

Last year's JV results included a $2 million after-tax charge associated with the CPW restructuring in the United Kingdom.

Excluding restructuring items, joint venture earnings were up almost 30% in the first quarter.

That growth reflects good sales gains with CPW sales up 21% for the quarter and sales for our Haagen-Dazs joint venture in Japan, up 7%.

Let's shift now to the cash flow statement.

Slide 13 summarizes our core working capital items.

In total, core working capital grew 9% in the quarter, below our growth in net sales.

Inventories were up due to higher input costs, but the total grew only modestly, because last year's first quarter included some high finish goods inventory to support our packaging change in Big G.

We purchased eight million shares in the first quarter, down significantly from the 21 million shares we purchased in the first quarter last year.

Our purchase activity will be spread more evenly this year and our goal is still to reduce our net shares outstanding by 1% in 2009.

Let me wrap up this financial summary.

Our year's off to a solid start.

Top line momentum remains strong across our businesses.

Our focus on holistic margin management is helping us counter significant increases in input costs.

We're continuing to invest at strong levels behind our brands and the bottom line, earnings per share in the first quarter came in above our plans.

As a result, we are raising our earnings guidance for fiscal 2009.

We've updated our guidance to a range of $3.81 to $3.85 per share.

That's excluding any impact of mark-to-market valuation, and excluding the gain we will record on the sale of our Pop Secret microwave popcorn business.

One of the key drivers of our strong growth in recent quarters has been the Big G cereal business.

I would now like to introduce Jeff Harmening, the President of our Big G Cereal division to talk more about what is driving growth in that business.

Jeff?

Thanks, Don, and good morning, everyone.

I'm glad to have an opportunity to update you today on our US cereal business.

Big G had a good first quarter, delivering 10% net sales growth and mid single-unit pound volume gains.

I would like to share some of our key drivers of our growth.

Let's start with a category.

It's healthy and it's growing.

Sales in ACNielsen measured channels were up 2% in fiscal 2008 and that has accelerated to 3% growth so far in our new fiscal year.

Sales in non-measured channels are growing even faster, so we estimate that category sales growth through all outlets was about 5% in the first quarter.

The drivers of this growth are things that I think will continue.

Cereal is a great value.

A bowl of cereal with milk is less than $0.50 per serving and is a healthy choice and low calorie meal option.

As Don mentioned, people are eating more meals at home today and cereal is a quick, convenient option for them.

Demographics are working in our favor as well.

We know the consumers eat more cereal as they reach their 50s, so cereal's very much on trend with our aging baby boomer population.

And these trends are being supported by strong brand building efforts and innovation by industry players.

Big G is currently leading the growth in the category.

Our share in measured channels is up almost half a point in the latest 12 months and our growth has accelerated with retail sales of Big G cereals up 8% for the first quarter in ACNielsen measured channels alone.

Growth in baselines or non-promoted sales is a key part of Big G momentum.

Our baseline performance has improved significantly over the past few years and for the first quarter, our baselines were up 2%.

That is a trend that drives category growth and profitability.

Our right size, right price initiative one year ago provided an important foundation for our growth, making our everyday prices per box more competitive.

We've built on this with broad-based business innovation and when I say innovation, I don't just mean new products.

Innovation on our core businesses with strong brand building efforts and improved merchandising efficiency is a big contributor to our growth.

And these efforts would not be possible without our innovative approach to protecting and growing our margins through holistic margin management, or HMM.

Let's look first at our marketing innovation.

We plan to increase our media spending for Big G at a double-digit rate this year.

But it's not only how much you spend, it's where and on what that counts.

Let me share a few examples of our current marketing initiatives.

Multi-grain Cheerios is a great product with strong health credentials.

The new advertising for this brand is driving tremendous growth.

The message focuses on weight management benefits and results so far have been terrific.

The commercial has been on air since last January, the beginning of our second half of last year, and as you can see on Slide 24, our baseline or non-promoted sales have responded strongly.

In addition, it's rare you hear an update from General Mills these days that doesn't include Fiber One.

So let's talk about our favorite high fiber cereal.

Most people know fiber is good for you, but not many people think it tastes good.

So we've introduced some great tasting Fiber One cereal varieties and started telling consumers about them.

This is the message that is driving our strong baseline growth.

Honey Nut Cheerios is another cereal that tastes good and is good for you.

And that is why it is now the second best cereal in the US, according to ACNielsen dollar share data, right behind original Cheerios.

Honey Nut Cheerios appeals to multiple consumer targets, baby boomers, kids and Hispanic consumers all love this product.

Recently we've increased our advertising spending to reach more consumers and the brand has responded nicely.

Baseline or non-promoted sales are up 21% in the first quarter.

We also have some terrific kid-focused brands in our cereal portfolio.

The fastest growing one is Lucky Charms.

This brand has been around for more than 40 years and we reenergized it with product innovation and marketing.

We've added a new marshmallow, an hourglass charm that gives Lucky the power to control time.

Now I know this doesn't sound very exciting to many of you, but if you're a nine-year-old, this is really cool stuff.

First quarter baseline sales were up more than 20% behind this initiative.

And we're always working to improve the health benefits of our products.

Big G kids cereals are made with whole grain and are now a good source of calcium and vitamin D and we're the only cereal manufacturer that can say that.

Along with our brand building, we support our products in-store with merchandising and point of purchase marketing.

This in-store promotion provides good visibility for our brands and is good for our customers as well.

Last year during our first half, we were focused on a lot of things as we implemented right size, right price.

But merchandising wasn't one of them.

As a result, our merchandising was down in the first half and down double digits in the second quarter.

We were also merchandising more minor brands as we worked through our inventory.

We want our merchandising to be competitive, but we do not aspire to be the discount leader.

We do aspire to continue improving the effectiveness of our merchandising and we did that in the first quarter this year.

For the quarter, our trade cost per case was down and the percent of our volume sold at merchandise price points was down as well.

The effectiveness of our merchandising improved with a better mix of brands, event tie-ins like the recent Batman movie and an increase use of displays.

That better mix drove an improvement in the net dollar volume gains we get from merchandising activities, or the percent of our merchandise volume that's incremental to our business.

Now in the second quarter, I expect that our volumes sold with merchandising will be up.

That's because of the low year-ago levels I just told you about.

Overall, we're planning for a more even flow of merchandising over the year.

And for our fiscal year end total, we are not planning significant changes in the depths of discounts we offer or the number of times we merchandise our products.

And we're planning for trade cost per case to be flat for the year.

We will also continue to bring new ideas to the cereal aisle.

During the first quarter we launched Total Cinnamon Crunch and Coco Puffs combos and our Small Planet Foods division introduced two new organic cereals under the Cascadian farm brand.

These products are performing well.

We have additional new products coming in the second half of the year and we'll tell you more about those at our mid year meeting in January.

The product and marketing innovation we just discussed needs fuel, so our goal is to protect our margins, not only in terms of absolute dollars but on a percentage basis as well.

Big G grew its margin in fiscal 2008 and we're using holistic margin management approach, a combination of productivity, pricing and mix improvement to improve our business performance and protect margins again this year.

Let me wrap up my comments this morning.

Big G is off to a great start this year and it's continuation of momentum that we created in 2008.

We're generating good baseline growth through broad-based innovation and keeping our business healthy by protecting our margins.

This is our approach to driving growth for Big G and the US cereal category as a whole.

With that, I'll turn you over to Ken for some operating highlights on the rest of our businesses.

Okay.

Well, good morning to one and all.

Thank you, Jeff.

As you can see, Big G is a good example of the growth we're seeing across our portfolio.

In fact, sales growth accelerated across our divisions and business segments during our latest quarter.

Fiscal 2008 sales were up 10% and in our latest quarter we saw double-digit gains in almost all our divisions and reporting segments and 14% growth overall.

Let's take a quick look at what's ahead.

We're moving into soup season and I think it will be another great year for the ready to serve category and our Progresso brand.

We'll build the light segment, we created last year, with four new varieties of our zero-point soup.

These are the ones that have just 60 calories per serving and we're introducing five new SKUs of one-point soups.

These are the ones that contain meat.

We're also entering the $500 million broth segment, with three all natural varieties in aseptic packages.

We'll continue to support Progresso with strong marketing.

We have two new television ads this week.

Progresso's retail sales were up 9% for our first quarter in channels where we have data and I feel good about our plans to keep this momentum going.

We are also coming up to the winter holiday season, which is an important time of year for our refrigerated dough and baking businesses.

As we mentioned earlier, consumers are eating more meals at home right now and Pillsbury and Betty Crocker products are well positioned to capitalize on this trend.

This year we're introducing some great products for our consumers to use every day, not just over the holidays.

And this includes our new Savorings line of frozen appetizers, which we think will be a great addition to our portfolio.

In October, we'll kickoff Pink Together, our proprietary national breast cancer awareness campaign.

Pink Together builds on a decade-long relationship between our Yoplait brand and the Susan G.

Komen for the Cure Organization.

Pink Together leverages our broad portfolio featuring leading General Mills brands across 13 categories in the grocery store.

It will include promotion on our packages, in-store displays and advertising efforts, focused during October and November, as well as an online social networking site that extends throughout the year.

This campaign to fight breast cancer is something that our consumers and our retailers care about and so do we.

So to summarize the outlook for our US retail business, first our categories are on trend with consumers and are showing strong growth in the current economic environment.

Our brands hold leading positions in these attractive categories and our brands are growing due to effective innovation and increased consumer marketing investment.

For 2009, we're continuing to target mid-single-digit sales growth for our US retail segment.

And we expect a combination of strong productivity, pricing and mix will enable us to hold or grow our operating profit margin for the year in total.

Now, looking outside the US, sales momentum on our international business remains good as well, up 15% overall.

Volume, measured in pounds, was flat in the quarter, but if you exclude Argentina where we lost our major pasta plant in January due to a fire, volume would have been up 3%.

Slide 40 shows sales growth by region.

Excluding the impact of foreign currency, Europe's net sales were up 5%.

Sales were up 5% in Canada.

Our Latin America and South Africa business grew 10% and sales in Asia-Pacific increased more than 20%.

Foreign exchange contributed an additional six points of growth, bringing the reported total to 15%, and this is on top of 19% growth in the comparable period last year.

This growth was driven by good performance on core brands across our three growth platforms of super premium ice cream, world cuisine and healthy snacking.

In Europe, Haagen-Dazs is performing well, particularly in the UK.

In Canada, our cereal business is strong.

In Latin America, sales increased 10% with good gains on Diablitos meat spread in Venezuela and continued growth on Haagen-Dazs and Nature Valley.

And in the Asia-Pacific region sales of Haagen-Dazs and Wanchai Ferry frozen dumplings in China, along with sales of Old El Paso Mexican foods in Australia drove strong double-digit increases.

Looking ahead to the rest of 2009, we expect to see continued strong top line growth with effective marketing and strong innovation like the introduction of new flavors to our successful Haagen-Dazs Dolce product line and the expansion of the Nature Valley product line outside of the US with the introduction of chewy bars.

We'll continue to take our brands to new cities and markets including expanding our Wanchai Ferry brand to new cities in China and opening new Haagen-Dazs shops in Eastern Europe and Turkey.

And finally, we'll remain focused on improving our margins with HMM, the benefits of scale, and pricing actions where needed.

Cereal partners worldwide, our 50/50 joint venture with Nestle continues to achieve sales and profit growth in cereal markets outside North America.

Volume grew in our latest quarter, with our continued focus on core brands, such as those pictured in Slide 43 and expansion of our Oat Crisp franchise.

Price increases taken across all regions to offset significant input cost inflation, also contributed to sales growth.

The outlook for CPW is very positive and we see continued category growth ahead as per capita cereal consumption expands in markets around the globe.

So to wrap up our comments this morning, we're on track to generate another year of good sales and earnings growth in 2009.

We expect mid single-digit growth in net sales and segment operating profit.

And as Don shared with you earlier, we have raised our earnings per share guidance for the year.

We're sticking to the fundamentals of our game plan and intense focus on productivity to protect margins and strong investment in brand building.

We think this balanced approach will lead to quality top line growth, which we plan to convert into quality growth in operating profit and earnings per share.

So that concludes our prepared remarks this morning and I'll ask the operator to open the line for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Andrew Lazar with Lehman Brothers.

Please go ahead with your question.

Good morning, and I guess now it is officially Barclays.

There's a first for everything.

Hello there.

Good morning, Andrew.

Happy to be on the call.

So just two quick things, one, a little broader, which is -- I think there was a story yesterday regarding [Azda] in Europe.

Just talking, about you notice, cutting some pricing on some of their food items, kind of across the board and, again, I don't know that this is -- changes sort of perspective on pricing really at all.

I just didn't know if -- where you thought that was coming from or maybe just more broadly, is there any maybe something different going on in certain parts of Europe, maybe just the UK specifically that might be a lot different than what we're seeing here, where it would seem like pricing is clearly going to be a part of the landscape for a while?

Hi, Andrew.

It's Ken.

I saw that article just as I was getting ready to head off yesterday, so I am familiar with what was said there.

Our -- and I don't know enough about the specific situation in the UK to comment.

I will tell you that our view is pretty much what it has been for the last, for the last several quarters, which is that we anticipated that we would have 9% inflation this year.

Obviously we've just said that we still expect that to be the case and have a pretty good line of sight on that.

We though -- we expect inflation to begin to moderate though, in the out years and hopefully we're beginning to see the signs of that.

Moderate inflation in our minds would be inflation along the lines of 4% to 5% a year, still significant, but not 9%.

So our view is that it is going to moderate and we'll be able to offset more of it with productivity, but we are in an environment, we believe, of continuing global growth and continuing pressure on commodities.

Okay, thanks.

And then just a last one, just as we think ahead to the fiscal second quarter.

I remember last year, I think particularly in US retail, there was a bit more of a skew in terms of the top line growth towards volume.

I think you had a pretty successful quarter with some of the products that were heavier from a tonnage standpoint.

Is there any reason to think we would see that skew kind of back one way or the other this year based on your sort of marketing plans or perhaps might that be more balanced in the way we see US retail's top line as we go into the next quarter?

Yes, I do remember, Andrew, that there was some -- we had some of the heavier products drive that second quarter last year.

I think we were a little heavy on vegetables and soup and that sort of thing.

We're just entering the quarter, and my expectation is that we'll probably see a bit more balance in the quarter, but it's early days.

Great, okay.

Thanks.

Andrew, this is Don.

The only thing I would add is as Jeff mentioned on merchandising, our merchandising will be more balanced in Big G.

So it will be more, have more merchandising in this second quarter than we did in last year's second quarter and given that Big G is some of our lighter products, that will probably gear more towards balancing it, as Ken alluded to.

Got it.

Okay.

Very helpful, thanks so much.

Thank you very much.

We'll proceed to our next question from the line of Eric Serotta from Merrill Lynch.

Please go ahead with your question.

Good morning.

Good morning, Eric.

Good morning, Eric.

Still Merrill Lynch here, so -- Moving on, very nice results this quarter, pretty much across the board.

Had a couple questions on Big G.

You highlighted several brands where your, you're really seeing tremendous baseline and overall sales growth.

In order to reconcile that with 2%, a 2% baseline growth and 10% overall sales growth, there had to be some brands that aren't performing at quite that level.

Could you talk a bit about the opportunity to further, I guess broaden the performance across the Big G portfolio?

And would that be a priority in let's say the second half of this year and have some initial efforts like the -- I think you have a new product in Total this year, on the Total brand this year.

Are they showing much traction?

Yes, I'll take that.

The -- I didn't want to bore all of you with all the examples we have of some of our big brands that are growing, but Total's doing a lot better than that it was before.

It's now up this year versus being down a year ago.

Reese's has seen growth.

Cinnamon Toast Crunch is seeing growth.

Yellow box Cheerios is seeing growth and so what we see is growth among our big core brands.

And the places where we're losing volume are the places where we gained a year, on right size, right price.

Remember, we were moving out a lot of inventory of lesser brands and they saw a lot more growth than we would have thought.

So what we see this year is really the reverse of that and better momentum on our core businesses and not as strong business on our lesser businesses.

That's a great mix for us and that's frankly the goal of what we're trying to accomplish.

Eric, this is Ken.

I would just echo what Jeff Harmening just said.

One of the most exciting things about Big G now is the breadth of the core brand strength and we still see, they have very strong marketing ideas in that division.

We like the quality of the advertising that we have seen.

We see a number of good places where we could invest in additional advertising and expect to get a very good ROI on that advertising.

So we're feeling quite confident about the direction that division is heading in.

Okay, and in terms of overall consolidated, I believe you talked about 9% or high single-digit increase in consumer marketing for fiscal '09.

You obviously started this year well ahead of that.

Should current performance continue or anything close to current rate of performance continue, are there opportunities out there for you to further put dollars to work for -- to continue the sustainable growth?

Or should we expect, you know, perhaps a greater amount than last year to fall through to the bottom line?

Well, I think balance is always the key, Eric.

You know that over the last two years at least, as we've seen our momentum accelerate and our sales accelerate, I think we've responded appropriately by increasing marketing investment where we thought there was the opportunity get a good return and where we thought it would really help to accelerate or sustain our momentum.

And that's pretty much the approach that we'll be taking this year as well.

And as we see how the year unfolds, if we see opportunities to sustain or strengthen our momentum with good, high ROI, incremental investment, that's something that we'll be looking very closely to do.

Terrific.

Well, good luck, and I'll pass it on.

Thank you very much.

We'll proceed to our next question to the line of Chris Growe from Stifel Nicolaus.

Please go ahead with your question.

Hi, good morning.

Hi, Chris.

Hi, guys.

Very good quarter once again, and thank you.

I just wanted to ask a question first relative to the gross margin, and obviously the percentage for gross margin was down on the quarter.

You're talking about gross margin stabilization for the year.

Does that, just by the math, require more price realization around your cost inflation to keep that gross margin flat?

Or what changes in the next three quarters that can kind of overcome this 100-basis point underlying decline in the gross margin?

Chris, this is Don.

I think there's a couple factors to take into account.

First, as we highlighted in June and indicated again this morning is, we do see our inflation more front loaded this year, so the inflation, while still remaining elevated in historical terms will moderate some as the year unfolds.

Second is that we've taken most of our pricing actions that were in the plan, but they still are taking full effect in the second quarter versus what would have come through in the first quarter.

And then third is on, is on bakeries and food service, which, again, is where we see the crux of the shortfall in the first quarter.

We see that business as the year unfolds stabilizing some in terms of getting the the price through as inflation, again, stays high, but moderates a bit.

And then lastly, I guess maybe a fourth factor would also be our productivity, which we'll continue to see benefits from as the year unfolds.

Okay.

And then I guess I would ask on the, on the bakery and food service side, again, it sounds like of you have gotten a good bit of pricing through there, but that was one of the major factors in your gross margin.

So, again, is that pricing in place in just a matter of kind of hitting the mark -- [Inaudible -- audio difficulty] is that right?

I'm sorry, Chris, could you repeat that?

You kind of broke up.

Sorry for that, yes.

I just asked on bakeries and food service, you've gotten your price increases through, it sounds like in relation to the cost inflation.

You made that comment in your opening remarks.

Is that -- you've got the pricing through in relation to the cost inflation for the year is the question?

Yes, the pricing that we're getting through in bakeries and food service is really matching our dollar inflation and that's really where we're trying to balance the volume and the pricing.

In , as you understand, very challenged, very challenged segment.

So that's one that's going to continue throughout the year, one that we're going to have to most closely monitor in terms of its gross margins.

But if we look at the total company, we still remain confident, certainly remain targeted to holding our overall consolidated gross margin to last

Okay, and just one question, just relative to your hedging, have you -- I didn't hear an update, and perhaps you gave one and I missed it, but I didn't hear an update in terms of how hedged you are for the year in your costs.

Yes, we're approximately 70% hedged for the year.

We came in the year 60%, so we've extended some of that coverage.

Again, it varies by category in terms of our actual coverage.

Okay, great.

Thank you.

Thank you very much.

And we'll proceed to our next question, the line of Eric Katzman of Deutsche Bank.

Please go ahead with your question.

Hi, good morning, everyone.

Hi, Eric.

Good morning.

I guess my first question has to do with your forecast.

Based on your, Don your answers to Chris' question and the fact that if you keep your interest expense at the same run rate, that's a $0.10 positive swing year-over-year.

I guess I'm just surprised with the cost of goods being pressured in the first quarter, plus the pricing coming through, bakery and food service doing a bit better, and the interest expense swing, why your earnings estimate outlook isn't better?

Well, Eric, let me talk about interest expense and I'll back up a little bit, talk about the total.

Interest expense in the first quarter was benefited versus last year for a couple of reasons.

First off, we exited F'08 with a little better debt position than we anticipated because the cash flow was much stronger at the end of the year because of the strong earnings.

But in the first quarter, as you see in the cash flow statement, we did not buy as many shares back in the first quarter, so our debt balance in the first quarter was further benefited from that.

And we are -- and that was because last year we were buying early in the year in anticipation of closing the share forward contract with Lehman in October, which we did.

So this year what you're going to see is a smoothing out of that debt -- I'm sorry, of that share repurchase, which will mean an increase of our debt year-over-year versus what you saw, versus what you saw in the first quarter.

And then the other factors within interest, is we are seeing pressure on the interest rates.

They are down year-over-year on the first quarter, current environment is certainly putting pressure on those rates as well.

So that's -- on the interest expense, I wouldn't annualize the Q1 savings versus last year as you think about your modeling.

Overall as we said when we gave our initial guidance, we are looking to ensure that we remain -- we continue to deliver consistent results, strong top line and strong bottom line.

And as Ken alluded to, we want to make sure that we are supporting those through the adequate consumer spending.

And as the year upfolds, as we see opportunities to reinvest in the business, we'll do so as we have in the last two years.

And in the last two years, we've -- with incremental in spending through on the right brands to continue to drive that growth, as we've seen the earnings improve, but we've also flowed some of those earnings, some of the earnings positives through, as we've exceeded our original guidance in both of the last two years.

What we're indicating today is that we see some of that positive momentum already coming through in the first quarter and so as we look at the full year, we already see a bit more positive picture than we just saw two months ago, when we met with you in Chicago.

Okay.

Then, still sounds to me like you're being awfully conservative, but so be it.

Eric, we're only one quarter into the year.

Yes, we have the second quarter--

We have 80% of the year in front of us, Eric.

All right.

Ken, I guess my follow-up question has to do more strategically in terms of your kind of approach to M&A.

So far, you got rid of Pop Secret.

I think it was under your watch with Lloyd's Barbecue or some of those other businesses.

You bought LARABAR's.

Can you talk a little more about how you view that, given that cash flow is accelerating, your yield is competitive, you're buying back stock, your debt balances are okay.

So kind of how do you think about M&A and just kind of explain the strategy so far?

Okay.

Well, let me answer that in two parts.

First of all, I want you to know, and we'll just repeat what we said in the past, which is that we continuously are looking at all of our business and business segments to make sure that for each business we can see, a very clear vision for the future and ways to drive value for shareholders with those businesses within our portfolio.

If we don't see that and don't really see a way to make that happen for us then we're -- then we're willing to see if those businesses would be better off in someone else's hands.

And you gave a couple of recent examples of that, Lloyds and then just within the last few days, Pop Secret.

So we are continuously going through that in our portfolio.

On the acquisition side, as we've said in the past, we love the categories that we're in, both in the US and around the world.

We're looking for good ways to, to add to those categories, to build on them, possibly through tuck-in acquisition.

And so that is something that we're very much looking at and we think that could be a way to accelerate our momentum in certain categories.

And would you have a bias to do it more international than domestic or you really don't care?

Well, I mean I -- there are opportunities in both places and there probably are a few more internationally, but there are many -- we're in such great categories in the US and they are on trend and they are growing.

We see opportunities here as well.

So we really are looking, Eric, in both places.

Okay.

Thank you.

I'll pass it on.

Thank you very much.

Our next question comes from the line of Terry Bivens of JPMorgan.

Please go ahead with your question.

Good morning.

Hi, Terry.

Good morning, Terry.

Hello.

Two things this morning.

There was mention by Kroger, they released their results yesterday and it had a much higher proportion of private label food sales than I was expecting.

And I guess the question would be, I think, Ken, you guys at the Lehman conference noted that the market share I think for all food, you were giving us somewhere around 20%, only 14% for your categories, I think this data was as of nearing the end of July.

Have you noticed any change?

I beg your pardon?

Those numbers sound right, Terry, generally right that you're quoting.

There really hasn't been a change, much of a change in our category.

I think that our -- Kris, I think our aggregate share is 25 in our category, something in that neighborhood, and private label is at 13 or 14, so you're roughly right.

As you know, in aggregate, we gained share in the first quarter and we're gaining share in most of our categories.

So we're doing well.

We're doing well at Kroger.

And I think the tradedown phenomenon that we believe is most significant in this environment is the shift that we're seeing of food away from home to food purchased at the grocery store.

And I think that that is really a very significant factor here.

Okay.

So no real acceleration then as far as you're concerned on the private label?

Not really, no.

Okay, and just the second thing.

If you look at the Nielsen data, it looks as though there's less pricing in ready-to-serve soup than you see in most of the other food categories.

It makes me wonder, have -- going into this soup season, has there been any tendency to kind of revert to a lot of the promotional spend that we've seen in some earlier years?

The concern there would be maybe RTS is looking at a slightly less rational year than we've seen in the past.

No, Terry, if anything, I would say I'm very encouraged by the pricing environment in soup.

I think as you know, the appropriate and needed list price increases have gone through over the last several months in the category.

We don't see any signs of irrational behavior on the merchandising side.

This is a category I think that is being driven increasingly by brand building on the part of both competitors and new product innovation.

And so we are, there are very good messages in the soup category.

Our messages are around light and soup as a low calorie option and great tasting option and with zero and one point, we've added to that messaging.

Our competitors have theirs and so we see it as a very positive environment for innovation and brand building right now.

Okay, terrific.

Thanks very much.

Thank you very much.

We'll proceed to our next question to the line of Jonathan Feeney at Wachovia Securities.

Please proceed with your question.

Good morning, thanks.

Hi, Jonathan.

I wanted to maybe ask a little bit more specifically.

I think a lot of us are wondering at this juncture, now that commodities are declining with the same sort of headlines and vigor which they went up.

Is there a building expectation at the retail trade that you're detecting right now that if continued commodity declines, and I realize they are still up year-over-year right now and probably where you've had at the levels where you had a lot of pricing conversations,.

But as commodities come down if they continue their slide, is there an expectation that there will be some substantial price givebacks to consumers and to retailers before that?

What do you think about that?

Well, I'll start and then I think Don will want to jump in.

We just -- commodity, any sort of significant commodity deflation is not really the scenario that we're counting on.

And the reason for that is that, we believe that the key driver of the last decade and particularly the last five years, which is huge increases in demand globally and outside of the US in Asia in Eastern Europe and South Asia.

We think that that fundamental aspect of the economy is going to continue and it's going to continue to put demand on all sorts of commodities.

I mean it's everything.

It's grains.

It's dairy.

It's metals.

It's meat, it's packaging.

And we don't really see that going away.

We do see it moderating, as I said, and we think we're beginning to see the signs of that.

So that, Jonathan, is really the scenario that we're counting on.

The only thing I would add to it, is our approach over the last number of years particularly in the past year, we have seen the spike in the inflation is to work our holistic management margin level first.

And our pricing across all our categories, we have taken significantly less in the input inflation that we've experienced.

And so I think that will serve us well as this does moderate, at least hopefully it moderates.

And just one follow-up if you wouldn't mind, Don.

I think if commodities keep going up, it's a moot point, or if they stay where they are, it's a moot point, but I guess -- I realize you have absorbed some of this cost increase to your profit line, up til now.

I guess I'm wondering, is there understanding among retailers that that's the case and -- to the extent you can, do you know what their expectations are?

Sure.

They certainly understand the efforts that we've undergone to take costs out of the system.

To a great extend we work with many of them to work jointly to take the cost out of the system, so they are very aware of it.

As we've spoken before, they feel it in their own businesses, they manage their private label business.

So there's a very good sensitivity from a retailer standpoint on the input inflation factors that we're all seeing.

And I think there is an appreciation of the efforts that we make to take costs out before we have to come to them and talk about pricing.

Okay.

Thank you very much.

Thank you very much.

We'll proceed to our next question on the line of Vincent Andrews of Morgan Stanley.

Please go ahead with your question.

Thank you, good morning, everybody, and congratulations on very nice results.

I'm wondering if you can just help us understand that the tradedown that you mentioned a few minutes ago related to eating less outside of the home.

Is what you're seeing, is this consistent with prior economic downturns, or is there something different about it this time?

And ultimately, when the economy recovers or gas prices go down further and the consumer eats out more often again, how do you think about that?

How do you plan for that?

Do you model for it?

Is there some sort of historical way that you're looking at it that you can share with us?

Well, I think what's -- the last time we would have seen this kind of inflation is a long time ago, 20, 25, 30 years ago.

And at that point in time, the amount of money spent on food outside the home was and the proportion of the consumer's food budget spent away from home was less than it is today.

I mean, in the world we live in today, half of all food dollars are spent outside the home, about a half trillion.

So we're not talking about a huge shift in the recent year.

It's restaurant -- restaurant counts are down 2% or 3%, but that's very significant and meaningful for, for -- in terms of grocery trips and our categories.

And so I think that is a tail wind for us.

I think our business momentum over the last three or four years has been fundamentally driven by our investment in innovation, our increased investment in brand building and advertising.

That's been, I think, primarily responsible for the acceleration in baselines that you've heard us talk about over the last several years.

And in the current environment with consumers, oriented a little more to the grocery store, that just -- you think, I think is a little bit of Icing on top of the cake, helps our categories a little bit more.

And Andrew, I think what -- Vincent, I'm sorry, I think what we're trying to do is use this opportunity for however long it may last that people are trading more into the grocery store to ensure that we're capturing more than our fair share, we're doing that by having the right offerings from a health and wellness standpoint, from a convenience standpoint.

So as economic times stabilize or improve, maybe we'll change some buying habits and have more people buying more in the grocery store.

At the same time, we're working to make sure we're in the right bakeries and food service segments that can drive growth and sustain the kind of margins that we've been looking for.

Okay, thank you.

But there's no -- if we think back to the difficult economic times of let's say, '01 and '02 and I guess most of '03, there's nothing comparable to that or to how that cycled out in '04 and '05 that we should be thinking about?

I don't think so.

Okay.

Thank you very much.

I'll pass it along.

Thank you very much.

And we'll proceed to our next question from the line of David Palmer of UBS.

Please go ahead with your question.

Thanks.

Hello, everybody.

Hi, David.

Congrats on the quarter.

Realizing that holistic margin management is more than just cost cutting, could you provide some numbers or some direction on the productivity savings that you're generating this year versus fiscal '08?

And perhaps just a perspective on the productivity pipeline today versus, say, a year ago?

David, we -- when we talk about our holistic margin management, as you mentioned, it is more than just the productivity side.

It's mix as well and it involves our trade.

It even really talks about our administrative expenses.

So what we try to provide guidance on, rather than ind of the components of it, what's it going to result in.

We've given guidance that we're seeing 9% inflation.

We've given guidance that we are committed to holding our gross margins flat.

And that's really the result of what we're doing from a holistic margin management standpoint and I think that's what we really want to remain focused on.

Now, that said, given the inflation, we do expect more savings, direct productivity from holistic margin management efforts this year than last year.

We have semi annual meetings with our business units to talk about what is their HMM project and savings pipelines.

And as we've had those meetings over the last number of years, the depth of the pipeline and the dollar value of the projects that are being put forward have continued to increase.

And that's what gives us the confidence to not only talk about this year in terms of our gross margin, but also reaffirm our long-term growth model from a margin standpoint.

Okay.

Well, thank you, and just a big picture question, as you know, dinner has been shifting rapidly back home and I was just looking at some data yesterday.

It now appears that starting just in the last quarter or so, that breakfast has stopped moving away from home and may actually be shifting back home recently.

Do you see kind of evidence of that invisible hand perhaps of breakfast starting to shift a little bit in your -- if you would kind of take a category perspective, all channel, are the breakfast categories such as cereal and yogurt beginning to pick up in terms of volume recently?

David, it's Ken.

I think you might be one data point ahead of us in this -- what you're reading about breakfast.

Although as I said earlier, I mean generally we are reading and seeing a shift to dinner and frankly we're seeing, we're seeing consumers -- the percentage of consumers who brown bag and bring their own lunch.

That's also going up a little bit.

What we are seeing is very healthy growth in the yogurt category and we're seeing the cereal category as Jeff Harmening outlined in his presentation.

We're seeing the cereal category also accelerate.

So we are seeing both of those categories which cereal obviously has -- mostly breakfast and yogurt has a big breakfast component.

Both of those categories are doing very, very well, so that would be consistent with your hypothesis.

Okay, thanks.

Thank you very much.

And we'll proceed to our next question from the line of Robert Moskow of Credit Suisse.

Please go ahead with your question.

Hi, thank you, and congratulations.

I had a question about how to think about second quarter sales growth for US retail.

The sales growth was so robust, double-digit in cereal and then something like 25% in the baked goods.

I think the comment was that merchandising will look a lot more robust for cereal in second quarter because it was down 11% last year.

So can I take that to mean that you will have another quarter of close to double-digit growth in breakfast cereal in second quarter or is there any chance that some of the volume got pulled forward into first?

And then also, on baked goods, it's just so -- it's such a big increase in first, how should we think about second quarter and whether anything got pulled forward there?

Thank you.

So, Robert, we didn't -- to my knowledge, we didn't have any significant shifting into, into Q1 across any of our businesses.

That -- our success there was driven primarily by good base lines and good brand building, as you heard.

As for the second quarter, I mean we don't -- we don't like talking in detail about what we're going to do next quarter.

I will tell you that we have a lot of confidence in our business model right now and our momentum and we're anticipating a solid second quarter.

Okay.

And then as far as the merchandising comparison, will it -- will your merchandising just look optically, will there be just a lot more growth in second quarter, but it won't necessarily mean that sales growth is going to be accelerating as well?

Is it just going to be comparison issue?

Yes.

The only callout that we have on merchandising, was we wanted you to be aware that a week, a year-ago comparison in cereal when we were preoccupied with right size, right price.

And when the merchandising was down quite significantly and we wanted you to be aware of that because, as Jeff said, we intend to have a very consistent level of merchandising in cereal over the course of the year and that means the second quarter will be up year-over-year.

But looking at our other businesses, there's nothing -- there are no noteworthy exceptions that we would want to highlight in terms of the merchandising.

Should be consistent and appropriate throughout the year.

And just so I'm clear, one last thing, are your merchandising price points, the price that you do merchandise at, is that -- are those higher than they were a year ago as well?

Are you talking a specific -- cereal or--

Cereal, yes, again.

In cereal, the price points are really about the same as they were a year ago.

What has improved is the mix of what we've done, the quality of our merchandising is much better behind events like Batman and the mix of brands is better because, again, as a result of right size, right price and the inventory we had to work through.

So our effectiveness is really built on increased efficiency based on the brands and the merchandising mix and our price points are virtually the same as they were a year ago.

I would say, Rob, just as a general comment, our trade cost per case, I think as you may remember, has been declining over -- a little bit, but declines are good over the last couple of years.

And our focus really is on improving the efficiency of that trade spend by, sometimes by listing price points as opposed to dropping them down and by eliminating deals that aren't efficient.

And so I would say if anything, we're very, very focused on improving the efficiency of that trade spend so that we can get cost per case down.

Okay.

So it's a combination of that, but also some list prices are up on your -- in your cereal portfolio as well, right?

That's right.

And those are the two ways -- list price increases are obviously, a way to get price increases, but adjustments in trade strategy and a real focus on trade efficiency is another quite important way to improve net sales.

Absolutely.

Congratulations, again.

Thank you.

Thanks, Rob.

Thank you very much.

We'll proceed to our next question to the line of [Ed Roach from Zolai Securities].

Please proceed with your question.

Good morning, and congratulations.

Thank you.

And it's really [Ed Rach], right?

It is [Ed Rach], yes.

Thank you.

I just want to touch base on snacks.

Last year that division grew 16%.

You had a big contribution from grain snacks, which were up I think 40%.

Once upon a time, that was a tough number to comp against and this year you're up 14%.

So could you just break down some of the contributions to this year's growth between volume and price and then new versus existing products, please?

I'll take a shot at it.

This is Ken.

We have -- you correctly identified grain as a powerful driver in that division right now.

Our momentum in that division is primarily driven by baseline momentum on our core franchises.

So the Nature Valley franchise, the crunchy bars, the granola bars that you're familiar with and the chewy bars, that is a terrific franchise for us, well supported.

That continues to have good baseline development.

And then on top of that, we've had, we've had a very, very successful launch with Fiber One bars, which is now one of the largest products and brands in the category and growing very rapidly.

And what you're seeing us do in the first quarter of this year is extend that Fiber One range with a number of new flavors, frankly so we can keep that product on the shelf.

We just need to have more visibility at shelf and more varieties for consumers.

And then we've also launched a new product here in the first quarter, a new product, Chex bars.

And I think as you know, Chex is a very good franchise in the snacking area.

We have Chex snack mix.

So we do have very good momentum in that division.

We have a terrific grain snack franchise and we're just continuing to build on that momentum with good new products and solid advertising.

So to follow up, would you say that new products were a bigger driver this year or last year?

It's hard to say.

I mean if I had to guess, I would say it will be about the same.

We -- these -- the extensions to the Fiber One business that I mentioned to you, the new flavors I think are going to be very highly incremental and will add a lot to that business.

And we're very excited about Chex bars, which is a new product.

And so we think we're going to have, this year again, a good combination of baseline development on that business and incremental volume from new products.

I should also mention, is Honey Nut Cheerios snack mix.

We just launched in the snack mix area, where our Gardetto's products and Chex Mix reside, we very successfully launched Cheerios snack mix last year and now we're extending that product line with Honey Nut Cheerios snack mix.

And those have been successful and very incremental and so we have new products in places other than the bar area as well and that's helping us.

Thank you.

And one follow-up, if I could, on sort of this trade-in phenomenon.

I mean is there any sense that health and wellness is a little less of an emphasis for these incremental dollars that are moving in-home from out of home?

I mean doesn't seem the consumer was going to Applebee's really looking for health and wellness before.

So is there anything in the trends maybe where your baking products and snacks and Pillsbury USA are seeing a disproportionate benefit from that trade-in?

No, I mean if anything, I would say that consumer awareness around health is as strong as it's ever been.

And in fact, in the research that we do and the consumer insight that we have, they would rank health values and health benefits as among the top two or three attributes that they look for in products.

And I think that's why, for instance, the Fiber One bars that we were just discussing, here's a product that combines great taste with a very nice health benefit.

It explains why that product was so wildly successful.

It explains why zero-point soup has been such a great success.

These are products that really taste good and they only have 60 calories a serving.

And so we're finding that there's high interest in health values and when you get it right, when you combine a health value with great taste, that is a really winning combination.

And we're spending a lot of work looking for other products that do that.

Good luck, and thank you.

Okay, yes, thank you.

Say Tommy, we're up to our time, but let's take one more call and then apologies to anybody else that's in the queue behind that.

I'll happily try and catch up with you later.

Can we catch one more and then we'll finish up?

Not a problem.

And our next question from the line of Alexia Howard of Sanford Bernstein.

Please go ahead with your question.

Hello, there.

Quick question on bakeries and food service just coming back to that.

I know we've touched it a couple of times today.

It seems as though a number of other packaged food companies have been really falling on hard times in that sector and obviously the results this quarter for you guys actually bucks the trend.

Could you talk a little bit about what's enabling you to be more successful there, particularly on the top line?

Is it the bakeries that are doing particularly well and maybe the food service sector is a little weaker?

Just some color around that would be really helpful.

Sure, Alexia.

This is Don.

I think it's a combination of the efforts we've undertaken over the last several years to make sure that our portfolio is focused on the customer segment, while growing and [fidus] the margins that allow us to reinvest in the business.

That -- part of that certainly has also been the fact that an increasing percent of our sales are in branded products, which, again, provide that margin and provide that support and get a halo from the investments that we're making on our retail side of the business as well.

So whether it's in C stores, whether it's in health service facilities, universities, and also through more broader food service channel where we have reinvested, if you recall a year ago, we went from a broker network to an in-house sales force across that channel.

We're undergoing the same on the C stores.

And I think that extra weight in the marketplace, if you will, has allowed us to gain accounts and gain distribution where some of our competitive set has been.

So it's a combination of all those efforts that have allowed us to, I think maintain a stronger position than most of our peer companies have in that segment.

Great, thank you.

And then just finally, the joint ventures income, or the minority interest income, seems to be coming an increasingly large proportion of your earnings growth drivers.

Is that mainly because we're now seeing the benefits of the restructuring program that was put in place in cereal partners worldwide a year and a half or two years ago at this point?

Or are there other factors in there that are really allowing the profits to come through more forcefully in that area?

Well, Alexia, there was that significant restructuring in the UK that had an impact on that line for a couple years.

As you reflect, and we're past that now.

We've completed that restructuring and so that's a one-time factor.

But, I would say clearly in the case of both of these joint ventures, with CPW and Haagen-Dazs Japan, both of these are stories of continuous sales growth, continuous improvement in profitability.

They are doing the same things that we're talking about here.

They are very focused on brand building.

The cereal category, just as an example, outside the US and a few European countries, it's still very low penetration and has huge upside opportunity for General Mills and Nestle.

So that's going to be a story of continuing category development, good top line.

We're just starting to look for the HMM opportunities in that business as we extend that program into those businesses.

So there's -- we expect continuous development, good development of those JVs.

Great.

Thank you very much.

Thank you.

Thank you, everybody, and for those that we didn't catch up to, apologies.

Give me a shout afterwards.

Anybody with follow-ups, please give me a call.

Appreciate your time today.

Thank you very much.

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, everyone.