通用磨坊 (GIS) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the second quarter fiscal 2009 results conference call.

During the presentation all participants will be in a listen-only mode.

Afterwards, we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded Wednesday, December 17, 2008.

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

Kris Wenker, Vice President Investor Relations.

Please go ahead.

Thanks.

Good morning everybody.

I'm here with Ken Powell our CEO; Don Mulligan our CFO; and Juliana Chugg who leads our Pillsbury division.

I'll turn you over to them in just a minute.

First I've got to cover my usual housekeeping item.

Our press release on second 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 our prepared remarks.

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

So with that I'll turn you over to Don.

Thanks, Kris.

Thanks to all of you who have joined us today.

As you've seen from our financial results released this morning, General Mills had another strong quarter.

Slide four summarizes our second quarter results.

Net sales grew 8% to exceed $4 billion.

Segment operating profit grew 9% despite significantly higher input costs and a 21% increase in consumer marketing investments.

Earnings after tax were $378 million diluted earnings per share were $1.09.

These earnings results include a net reduction related to mark-to-market valuation, certain commodity positions and grain inventories.

That impact totaled $269 million pretax or $0.49 a share.

We also recorded a gain of $129 million or $0.22 per share in the sale of Pop Secret microwave popcorn.

Excluding the mark-to-market impact, and the divestiture gain, our diluted EPS would have been $1.36, up 23% for the quarter.

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

Sales grew 8% with 2 points of that growth from increased pound volume, price realization and positive mix drove 8 points of sales growth.

For the second quarter, foreign exchange reduced net sales by 2 points and reduced EPS by approximately $0.02.

Top line results were strong across our business segments.

As shown on slide six.

US retail sales were up 10%.

International segment posted 2% growth as recorded.

On a constant currency basis sales were up 10%.

Sales for bakeries and food service grew 6%.

Our gross margin as reported for the quarter was 30.4%, down from last year due to mark-to-market valuation of commodity hedge position.

If you exclude mark-to-market impact from both years and also exclude product recall costs and restructuring related accelerated depreciation from last year's results, our gross margin would have been up 70 basis points from last year to 37.1%.

As of the end of the second quarter we've covered approximately 80% of our ingredient and energy costs for the year and we're still tracking in line with the 9% increase in input costs we built into our plan for the full year.

We're continuing to invest strongly behind our brands.

Our SG&A expense for the quarter includes a 21% increase in marketing expenses, that's on top of a 10% increase in last year's second quarter.

Slide 10 shows our segment operating margin results for the second quarter.

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

US retail operating margin was roughly flat at 23%.

We saw a 90 basis point decline in international margins reflecting higher consumer marketing and administrative expenses in the period.

Bakeries and food service margins were up driven by strength in our core businesses.

Overall the operating margin for our combined segments was 19.5% for the quarter, up slightly over last year.

Segment operating profit dollars grew at a very high single digit rate, up 9% as shown on slide 11.

US retail profits increased 9%.

International profits were down 5% due to foreign exchange.

But on a constant currency basis segment operating profit was up 5%.

Bakeries and food service profits grew $16 million or 33% reflecting both pricing and favorable business mix.

Moving down the income statement, after tax earnings from joint ventures totaled $33 million in the quarter.

Last year's JV results included a $1 million aftertax charge associated with the CPW restructuring in the UK.

Excluding that restructuring, joint venture earnings were up 14% in the second quarter.

I'll now turn to the balance sheet.

Slide 13 summarizes our core working capital items.

In total, core working capital actually declined slightly compared to last year's second quarter.

Receivables grew but at a rate well below our sales growth.

Inventories also grew slightly but lower market valuation of grain inventories restrained that growth and accounts payable grew 7%.

We continue to be disciplined in our uses of cash.

First half capital expenditures totaled $241 million.

We continue to estimate that for the full year, our capital spending will total $550 million.

Dividends through six months totaled $294 million.

And the current annualized rate represents a 10% increase over dividends paid in fiscal 2008.

Through the first half, we've purchased almost 19 million shares including nearly 11 million shares in the second quarter.

So through the first half we've shown broad top line growth momentum.

Net sales for US retail and bakeries and food service each grew 11%.

International was up 8%, on an as reported basis or 9% excluding the impact of foreign exchange.

That puts segment operating profit up 9% for the first half, on top of 4% growth through the first six months last year.

As we look to the second half of 2009, we'll be comparing its double-digit sales increased to those in 2008 and we now expect foreign exchange translation will be a headwind for the rest of the year.

Despite these factors we see ourselves on track to meet or beat our goals of mid single digit growth in sales and operating profits and we've raised our earnings guidance to a range of $3.83 to $3.87 per share.

That's before any impact from mark-to-market valuation and the gain on the Pop Secret sale.

This new guidance represents growth of 9 to 10% from $3.52 earned last year, before gains from a tax matter and mark-to-market valuation.

Our businesses are clearly performing well with broad based sales growth in the quarter.

In particular our Pillsbury division has been posting good sales gains as it ramps up for the holiday season.

To tell you more about that I'd like to introduce Juliana Chugg the President of Pillsbury USA division.

Thanks, Don, and good morning everybody.

It is a pleasure to be here today to discuss the recent performance of the Pillsbury division and our goals for the remainder of the year.

I'll start with a quick overview of the division.

We compete in five discrete categories with sales relatively evenly split between refrigerated and frozen products.

The refrigerated segment is our largest business and Pillsbury is the category leader here with a 69% market share.

Including refrigerated and frozen products, the Pillsbury brand is one of the largest in General Mills' portfolio generating nearly $1.2 billion in net sales for that division.

The frozen pastry and hot snacks category have been posting several digit sales growth over the past several years.

Here we compete with our Totino's brand.

Totino's accounts for nearly one-third of our division sales.

That makes Totino's roughly equal in size to our Progresso soup brand on a sales basis.

All of our categories offer taste, convenience and value, important benefits for today's busy consumers.

From pizza to hot snakes to refrigerated dough, we provide consumers with quick and easy ways to bake at home and we're able to price for the quality and convenience we offer, giving the Pillsbury division one of the best margins in US retail.

When I met with you in Boston two years ago, I described the key objectives for the Pillsbury division.

Margin improvement was one of them.

As you can see from slide 20 we have consistently and judiciously expanded margins since 2006.

We are targeting another 70 basis points of gross margin expansion in 2009 despite unprecedented levels of input cost inflation.

The largest driver of our margin expansion has been productivity, particularly in our supply chain.

Through SKU rationalization, we've improved our asset utilization with fewer production line changeovers, longer production runs and lower inventories.

We have reduced waste with tighter controls and streamlining work flows and we have benefited from global sourcing of various ingredients and packaging material.

In addition, we've improved our trade productivity.

With higher merchandise selling points.

For example, last year our crescent rolls were merchandised at two packages for $3.

This year, they're at three packages for $5 and merchandising performance through Thanksgiving was just as strong as last year.

We're also improving our margins through product mix.

Our lead growth businesses are those product lines with higher margins than the division average.

In 2007, 43% of our portfolio fell into this category.

Today, nearly 60% of our products qualify as new growth businesses and they have been generating good growth with net sales on those lines up 11% so far this year.

This performance has translated into strong overall division performance with sales up 12% for the second quarter and 9% for the year-to-date.

As I just showed you, we continue to improve our gross margin.

We're investing some of our savings in increased consumer spending.

It will be up double digits in 2009 and operating profit is still growing nicely.

Our marketing investment drives future sales growth, fueling the cycle going forward.

This model is working so we're definitely sticking with it.

Slide 23 shows our dollar share performance through the end of November including the Thanksgiving holiday.

Which was a week later this year.

Our shares are down slightly in measured channels but that's not a complete picture of our business.

Nearly 70% of our sales growth this year is coming in non-measured channels.

We're posting good growths in outlets such as Wal-Mart, Sam's, Target and BJs which isn't captured in reported share data.

If we include our estimates for these non-measured outlets our share trends through November would be relatively steady year-over-year.

Let's take a close look at our portfolio and I'll start with Totino's.

Totino's is unique in General Mills' portfolio in that it's a value priced brand.

Totino's is right for the times, given the current economy and this brand is off to a very fast start so far this year.

Retail sales are up 10% for pizza rolls and 11% for pizza in channels where we have data.

Earlier this year input costs forced us to take price advances on these products.

For the first time in several years, yet they continue to appeal to value conscious consumers.

In fact, for a while demand exceeded supply so they were temporarily on allocation.

They're off allocation now and we continue to see good price on our Totino's brands.

In frozen breakfast, Toaster Strudel continues to post strong levels of growth over the past several years driven by increased consumer investment in the brand.

Pillsbury Savories is ur newest frozen product and these heat and eat appetizers are off to a strong start.

Since we launched them in July, Savories is trending in the top third of the frozen hot snacks category and has gained nearly 4 share points.

As we continue to build distribution on this product we expect to see additional share gains.

As I mentioned earlier, Pillsbury is the leader in the $1.7 billion refrigerated dough category.

60% of households in the US purchased at least one Pillsbury refrigerated product in a year.

However, when you look at individual product segments where we have strong share positions, there is significant opportunity for growth.

Advertising is helping to drive penetration.

This fall we launched our Home Made Calling campaign focusing on the overall Pillsbury brand, rather than just a specific product line.

In addition to traditional TV advertising we're promoting the home made goodness of Pillsbury baked goods in non traditional channels such as the intimate in movie theaters and on billboards.

Consumer response to this campaign has been very positive both -- during the holiday baking season and it's contributing to good growth in our refrigerated dough categories through the Thanksgiving holiday.

Slide 29 shows our retail sales including Wal-Mart through November 29.

Sweet roll sales are up 16%.

Crescents and biscuits are each up 9% and cookie sales are up 2% which is a turnaround from several years of declining sales.

Early reads on December trends are encouraging.

The category is up strong double-digit due to Thanksgiving timing and Pillsbury has picked up several share points in the first two weeks of December.

Innovation will continue to drive growth for the Pillsbury division.

This year we launched a range of new initiatives.

We had line extensions on our refrigerated dough including an adult oriented Boston Cream Pie Toasted Strudel.

We extended the Grands brand into frozen dough building off the success of the refrigerated sweet rolls.

And we've expanded into the frozen appetizers section with new Pillsbury Savories.

These products have been highly incremental and represent good platforms for future expansion.

So to summarize, this year we are focused on continued sales and earnings growth through our productivity initiatives.

We're effectively managing or margins and driving division operating profit growth and we're investing in our higher margin platforms with increased consumer spending.

Finally, we're leveraging innovative new products to drive incremental sales and earnings growth.

This approach has been working well for us.

In 2009 we expect our division to generate solid sales and earnings growth.

And we see plenty of opportunity to build on our success in the years ahead.

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

Okay.

Good morning, everybody and thank you, Juliana.

Pillsbury's just one example of the good growth we're seeing across our portfolio this year.

Slide 33 summarizes our first half net sales performance.

Through six months, we've recorded sales gains in every division and segment of our business, with more than half of them growing at double-digit rates.

Let's take a look at what's driving this top line momentum and I'll start with the Big G Cereal division.

Our ready to eat cereal business remains strong.

Retail sales in Nielsen measured outlets alone are up 9% year-to-date.

That's being driven by growth in baseline, or non-promoted sales.

Our merchandising activity was above last year's levels, which were unusually low while we completed implementing our right size, right price initiative.

However, our merchandising remains below that of our branded competitors.

And our cereal market share is up roughly 2 points for the fiscal year to date.

We're seeing good growth for many of our large Big G brands.

Our Cheerios franchise is the market leader and continues to perform well with double-digit sales growth on original, Honey Nut and Multigrain Cheerios.

Other brands including Lucky Charms and Fiber One are also posting very healthy sales gains.

So we're pleased with the breadth of Big G's momentum and we see the business on track to deliver good sales and earnings growth in 2009.

Progresso is in the midst of another good soup season, building on its track record of innovation and growth over the past several years.

This year, we launched four new varieties of our zero point soups and five flavors of one point soups that contain meat.

Together, these great tasting, low calorie soups are helping to drive continuing growth on the Progresso brand.

In November alone, Progresso posted more than 1 point of share growth and it's up 1.6 points of share so far this fiscal year.

Yoplait yogurt is also posting good sales and market share gain.

Yoplait Light is the leading brand in the reduced calorie segment of this market.

Retail sales for light are up 23% so far this year and that's powering double-digit growth in our overall yogurt division.

In addition, our YoPlus, probiotic yogurt, and Fiber One yogurt and gaining distribution and together these lines are growing at strong double-digit rates.

In January, we'll be launching several new yogurt flavors just in time for diet season.

Bob Waldron, President of our Yoplait division, will share more about this growing business at our mid-year update in New York on January 9.

In grain snacks, innovation and strong consumer directed marketing continue to drive sales and market share growth.

In the past two and-a-half years, since launching Fiber One bars, we've increased our share by almost 7 points.

And for the latest 52 weeks, we've captured market share leadership in this $2 billion retail category.

So overall, we're maintaining very good momentum on our US retail businesses.

We are operating in a challenging environment.

Yet, we're still seeing growth for our categories and for our leading brands, as consumers shift some of their food spending into more meals eaten at home.

This trend is a good one for General Mills overall because at-home food is our biggest business.

Now, this spending shift does create some challenging times for our bakeries and food service segment.

Which sells to outlets for food eaten away from home.

Yet, sales for our branded products are growing in food service channels.

Net sales for our yogurt products grew 9% in the quarter while both cereal and snack products posted double-digit sales growth.

These branded products are driving growth across our customer segments.

Sales to food service distributors and restaurants were up 4% in the quarter.

Sales in convenience stores also grew 4%, led by cereals and snacks.

And our sales to bakery customers grew 10% as our back of house brands have gained distribution in a variety of in-store bakeries.

Looking outside of the US, our international business posted a 2% sales gain on an as-reported basis.

As Don mentioned earlier, foreign exchange had a significant impact on reported results.

Excluding that impact, sales were up 10% for the quarter.

Slide 41 shows sales growth by region, excluding the impact of foreign currency.

Europe's net sales were up 3%.

Sales were flat in Canada.

Our Latin America and South Africa business grew 15%.

And sales in Asia Pacific increased 25%.

In Canada, we saw strong sales growth on cereal, led by Fiber One and both Multigrain and Honey Nut Cheerios.

Sales for refrigerated baked goods were also strong.

In China, we continue to post sales gains with Wanchai Ferry frozen dumplings and our popular Haagen-Dazs brands.

In Latin America, Nature Valley granola bars and Diabolitos sandwich spread were among the best performing product lines.

In Europe we're seeing growth across all of our product platforms including Old El Paso dinner kits and Green Giant canned corn.

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

Net sales grew 4% in the latest quarter as reported, with constant currency sales up 11%.

CPW continues to focus on core brands, like those pictured on slide 43.

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

While near term cereal category growth will likely slow due to economic conditions, long-term we see continued opportunity ahead for CPW as per capita cereal consumption expands in markets around the globe.

As we look toward the second half, we see good prospects for continuing growth.

Our categories are growing.

In the US, retail sales in Nielsen measured channels show yogurt up 7%, frozen vegetables up 6%, deserts up 5%, and ready to eat cereal up 3%.

In total, the major categories where we compete are growing at a 5% clip.

And this data is just for Nielsen measured outlets which represent 60% of our US retail sales.

Sales in Wal-Mart and other non-measured channels are generally increasing at faster rates.

So the total growth rate for our categories including these non-measured channels would be even stronger than 5%.

Now, price increases are part of this growth story.

But the good sales trends in our categories also reflect the fact that these products are staples for many consumers.

We compete in large, mainstream categories.

Slide 45 shows the US household penetration for a number of those categories.

And as that slide shows, two-thirds or more of all US households shop each of those categories for their families.

And our brands are very well-positioned in these attractive categories.

General Mills brands rank either number one or number two in their major retail categories.

That makes our brands important growth drivers for our customers across the shelf stable, refrigerated, and frozen sections of their stores.

And our brands represent good value for consumers.

Slide 47 shows the price per serving for a variety of our products.

These are the non-promoted prices before any merchandising.

Even after the price increases we've taken to partially offset higher input costs, our brands remain high quality, affordable choices for families.

Now, private label shares are growing in this environment.

Slide 48 shows that on average, private label has a 19% share of food sales across the grocery store for our fiscal year to date and that share is up about 1 percentage point.

In our major categories, private label penetration is lower.

About 14% of sales on average.

And that share also is up about a point for the first half of our fiscal year.

At the same time, we're seeing share gains for our brands in a number of categories.

Slide 49 summarizes our dollar market share trends for the fiscal year to date.

Our share isn't up in every segment but we're gaining in the majority of our key categories.

Innovation is the key to driving sales and earnings growth and we've got a variety of new products coming in the second half that will help sustain our momentum.

In the US, examples include new flavors of some of our best known cereal brands such as Banana Nut Cheerios and Fiber One shredded wheat.

In selected Western markets we're launching new flavors of Progresso soup designed to appeal to Hispanic consumers.

And we're introducing new flavors of Yoplait yogurt and new versions of several of our grain and fruit snacks.

So we've got a very good line up of new products outside of the US too, including Nature Valley chewy trail bars, launching in the UK and a Haagen-Dazs smoothie coming to European markets.

Ian Friendly and Chris O'Leary will talk in more detail about these initiatives on January 9.

So to wrap up our comments this morning, we see General Mills on track to deliver another year of solid growth.

Building on our long-term track record.

The current economic environment is challenging, but our brands are a good fit with consumers' needs for great tasting, healthy, convenient foods at a good value.

We're seeing broad-based demand for our products in markets around the world.

We continue to invest in our brands, with consumer spending up 21% so far this year.

And we're protecting margins through our holistic margin management efforts.

The fundamentals of our game plan are strong.

Our balanced approach to protecting margins, reinvesting in our brands, and ensuring our products provide good value for consumers is working.

We've generated strong results in the first half which has enabled us to raise our full year guidance and we're going to continue to focus on strong execution in the second half of the year.

So that concludes our prepared remarks this morning.

I'll ask the operator to open the line for questions.

Thank you very much, sir.

(Operator Instructions) Our first question comes from the line of Ken Fassler with BMO Capital Markets.

Please go ahead.

Good morning, everyone.

Ken.

Just -- I didn't hear, did you say how much the FX headwind would be for the 2009?

No, we didn't give you specific detail on that.

We just told you clearly it's -- was helping us and now it's moving against us.

Even with that FX headwind, though, we have enough confidence in our first half, what we've done in the first half and our business prospects going forward to raise guidance a little bit.

When you're talking about the FX, because obviously yesterday the environment may have changed a little bit for the foreign currency, what were you expecting in terms -- did you use rates as of like two, three weeks ago or are you using rates as of yesterday and potentially -- the potential for the weaker dollar going forward?

Ken, this is Don.

We have to take a point in time when you do any estimate.

Clearly, that number is going to move on any given day, given the volatility of the foreign exchange market.

So this isn't something that we necessarily update every day but we looked at the rates over the last week and we said where do we think -- where do we see those impacting our full year results.

Okay.

And then my second question is a lot of the retailers have been discussing potential rollbacks of pricing.

I want to understand, you have not actually been pricing to your inflation.

To what extent do you think that there will be pressure from the retailers to reduce some pricing or will you be able to maintain?

How do you think about the environment in terms of the retail pressure coming on the pricing side?

Well, Ken, we discuss pricing and merchandising.

Frankly, continually with our retail customers.

What we're explaining to them in the current environment is that as you said, we've done a very, very good job of pricing well behind the rate of inflation.

So over the last four years, for example, our input costs increased 25%.

And yet our price increases ranged from 8 to 10%.

So well behind the rate of inflation.

We explain that to our retail customers and I think they understand that and that's working for us right now.

So generally you would not expect any major rollbacks in your prices, going into the new year.

Is that a fair statement?

Well, we never talk about pricing going forward.

But I just want you to understand what a terrific job we've done of pricing well behind the rate of inflation and I think that our retail customers understand and appreciate that performance on our part.

And my last question is in terms of the international environment, there's been a lot of concerns about the weakening consumer.

However, it doesn't seem like your underlying growth in your international businesses have actually -- have been hit by the weakening economy.

Can you talk about how you look at it going forward and do you think that there's any risk to a slowdown in your international sales growth?

Well, first of all, you are of course right.

We are seeing recessionary headwinds in most markets around the world and so as we all know, this is a global slowdown.

Having said all of that, our international categories continue to grow, in most of our markets, and we're gaining share for most of our categories in most of those markets, so our performance continues to be quite good.

Our largest international markets which would be Canada, UK, China and Australia, they're all performing -- they're all performing very well.

So we expect to hit our targeted levels of top line and bottom line performance this year.

And we are seeing some softness in France, although recently that is improving.

We're also well behind last year in Argentina and that's a significant business.

We're behind there, due to -- you may recall a fire that we had at a pasta plant outside of Buenos Aires last year.

We're still not fully back into business as a result of that but we're getting back so we expect that to improve in the second half.

So there are pockets, if you will, of softness.

But overall, we feel quite good about the performance of our international business and expect it to hit target.

Great.

I appreciate it.

Thanks.

Now our next question comes from the line of Andrew Lazar with Barclays Capital.

Please go ahead.

Good morning.

Hey, Andrew.

Good morning, Andrew.

I know you were talking about all of the talk on both the retail and the vendor sides around press pricing and what have you.

We've been hearing that maybe there is even potentially in the cereal category some incremental pricing that's being either thought about or has already been taken in cereal going forward.

I didn't know if there was something out there publicly with the trade now that you'd be able to address in light of the comments on the earlier question, or if General Mills has announced anything to the trade, forward-looking.

We haven't announced any pricing on cereal, Andrew.

Okay.

Have there been things announced to the trade there from others that you've heard about?

Kellogg's I believe announced some pricing for the new year.

We're generally aware of that.

You may be aware of that as well.

We haven't announced any pricing though.

Okay.

And just a quick one.

I saw that the, at least relative to what we had modeled the corporate unallocated was quite a bit lower in the quarter.

Don, I didn't know if there was a sort of rough estimate of what you connected there in the full year or if some of that was just timing and then potentially what we could think about around timing for the restructuring which I guess is a little more back half owe loaded this year?

If you look at corporate unallocated on a year-to-date basis the first six months and you back out the mark to market it goes through both this year and last year and the gain that we had through last year on a small corporate investment that we sold in the second quarter last year, if you equalize for all that actually corporate unallocated was about flat over the two six-month periods and you are right on restructuring.

Our guidance for the full year would be in line with the most recent couple of years in the 30 million to $40 million range would indicate it's going to be more back half loaded this year.

I assume that's part of the reason anyway around the way you've thought about guidance relative to what was in the quarter versus what you're looking for for the full year?

That is correct.

That is a factor.

And overall in terms of our guidance, our focus is on executing the plans for the balance of the year.

We just don't want to get ahead of ourselves from a financial target standpoint.

Thanks very much.

And our next question comes from the line of David Palmer with UBS.

Please go ahead.

Thanks.

Congratulations on a great quarter and first half.

Thanks, David.

I just had a question, I know getting specific to a category, particularly with a large competitor can be a touchy subject but your share gains in this first half in cereal, particularly lately, seem fairly extreme and may speak to relative promotion spending.

I wonder how we should be thinking about what is sustainable, what is healthy for the category and ultimately will there be -- do you anticipate there will be gives and takes in terms of the ebb and flow of promotion spending between you and your branded competition in that category.

Yes, well, David, that's a good question.

We feel very, very positive about the momentum in our cereal business and the reason we do is because we have such strong baseline momentum across so many of our core brands and I called out a few of those in our prepared remarks.

Cheerios is very very strong really across the line.

Fiber One continues to be strong.

Our core kid brands of Lucky Charms and Cinnamon Toast Crunch, Total now gaining baseline shares so great strength on full price sales across the line.

Now, we know that during the first half of this year, one of our competitors was affected by a severe flood at one of their plants which we believe affected their ability to fully supply.

We also know that the Post cereals are in transition from the seller to the buyer and I think as you look at the shares of those manufacturers, they were a little bit low in the first half.

We expect the environment to become more competitive as we move to the second half of our fiscal year and we won't see -- we don't believe we're going to see these kind of share gains.

Having said all of that, we believe the fundamentals of the business are very, very strong and we look forward to a very good second half.

I'll stop there, thanks very much.

Dave, I just am going to add one other thing.

Remember that when Jeff Harmening was on this call in the first quarter, he kind of described the pattern that we were going to have on promotion this year.

Because we had very little merchandising going on in stores a year ago in the second quarter, we knew the year-over-year comparison would show some merch here.

Once again he told you he's targeting a cost per case decline on trade and Big G for the full year so it's about even spread across the full year instead of last year where the merchandising was pretty much in the back half.

Thanks very much, Kris.

And now our next question comes from the line of Terry Bivens with JPMorgan.

Please go ahead.

Good morning, everyone.

Hey, Terry.

Ken, I don't want to pitch too hard on cereal here but as you look at the Nielsen numbers at least for the quarter that -- or for the period that kind of corresponds with your quarter, you guys are -- show one of the few negative prices we're seeing and I guess if you look, if you try to make a reasonable extrapolation it may be negative pricing at alternate channels as well.

So the question is really, is this mainly a comparison issue?

And I think what a lot of the questions are trying to get to is particularly as we look forward into next year and we see I guess no one really knows where grains are going to settle out but it could be that they're markedly lower.

The concern would be that maybe there's a little bit of a price war there in a category that's traditionally very profitable.

Could you kind of comment around that if you would, please?

Sure.

Well, just to go back to the -- just to go back to the first part of your question, it does relate very much to that point that Kris made earlier.

A year ago at this time we were very focused on implementing our right size, right price initiative and our merchandising levels fell, particularly during the second quarter.

And so as we restored the level of merchandising, really to our historical levels and as I noted in the prepared remarks, still a little bit below the category average, but as we restored that, you've seen the price points come back into line accordingly.

So it's very -- that is very much a case of a year-over-year comparison where a year ago we had weak levels of merchandising.

Going forward, we see, again, very positive category dynamics for us.

I will comment on what we think the -- our input cost environment will be.

We'll talk about that in June.

But right now we think the level of merchandising in the category is very much in line with what we've seen historically.

We don't see really that changing or moving and so we're very optimistic overall about the category going forward.

Okay.

And I think when you did mention it, you mentioned you would like to return to the 2006 kind of level of promotional spending.

Is that still pretty much what you're looking at?

I don't know that we've ever said anything like that.

I think what we have said is that our merchandising would return to our historical levels, particularly during the second quarter this year and that has happened as we predicted.

Going forward, we would expect those levels to stay in line with what we've seen historically.

Terry, the one thing to keep in mind for the year is that the flow will return to the historical norm and our cost per case, our trade cost per case will continue to decline.

Okay.

Okay.

Very good.

Thank you.

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

Please go ahead.

Hi, good morning, everybody.

Happy holidays.

Hey, Eric.

I guess first, a specific question on food service because that was really the business that surprised me the most.

Most everything else was in line.

Given everything we hear about the macro environment and impact on restaurants and food service consumption, I'm just surprised that you put up $60 million of -- over $60 million of EBIT which I think is the strongest quarter you've had since you've pretty much set up the division that way, post the Pillsbury deal.

So could you kind of talk a little bit more as to kind of what we should think about in terms of a profitability level for that segment and kind of how that jives with what's going on on a macro basis?

Yes.

The food service performance was the story there I think is similar to the story that you're seeing in our other divisions.

It starts with ongoing and very good productivity efforts across their business, so they've done a continuing -- they've continued to do a very good job of driving productivity across their line.

We did take pricing in that business, as you know, as our input costs ran up.

So the combination of pricing and productivity was very effective for us and really the third and very important area is our high focus on these branded products.

So we had great sales in cereal and bars and yogurt.

These are our high margin categories and through the highest margin channels which are our distributor channels and our sea store channels.

So it's the case of pricing, the case of productivity and it's a case of focus on the high margin elements of that business and I agree with you, it's a very good performance for those guys in a very challenging environment.

For the year, we're targeting -- we believe they're going to hit their targeted levels of sales and earnings but a very good quarter for them.

Just put some specifics on the full year, as we said in June and we continue to hold to for the business, we expect earnings, dollar earnings to be flat to last year.

And that is taking into consideration last year we had some unusually high earnings from our grain merchandising, which we don't expect to reoccur this year.

And that will put some pressure on the back half profit because most of those grain earnings last year came in the second half of FY '08.

Got you.

Then as a quick kind of more macro follow-up, Ken, we've been focusing a little bit more on private label share gains, which you kind of talked about within your categories, but you're doing well.

So, how do you see this playing out for the tertiary brands?

Do you think that private label is a more secular threat for them?

And what are you hearing from retailers with that regard?

That would be helpful.

Well, we're focusing -- we focus very much and take very seriously private label products.

Really, think of them as retailer brands and our divisions and our marketing teams really study those brands and take them very seriously.

We test our products against many private label products to make sure that we have superiority and so I think it's important for you to know that we do take them seriously as a competitor and in this environment I think the fact that we're gaining share in most of our categories shows that consumers continue to strongly prefer our brands.

I think you're right, that the number three or number four or number five brand in the category can be in a very difficult position, situation, when you have private label growing and the number one and number two brands in the category growing as well.

I think it does play out in a very difficult way for those fourth and fifth brands.

And if they cut prices to try to hang in there on the shelf, what do you think the retailer's reaction is to that?

Would they prefer private label over the tertiary brands?

Because it seems to me that that's going to be a critical competitive element, if we see the rollover in ag and it gives these tertiary brands the opportunity to play a price weapon versus what the major brands seemingly have been a little more rational.

Yes.

I mean, it's very, very hard to predict, both what commodities are going to do in the future and how these individual dynamics are going to play out and I'm not going to try to make a prediction there.

Other than to say, again, that I think in this environment it can be tough for those number four and number five brands, generally.

Okay.

I'll pass it on.

Thanks.

Yes.

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

Please go ahead.

Great.

Thank you.

Good morning, everyone.

Good morning, David.

Hey, David.

Couple of questions here.

First one is on the consumer spending number.

21% for the quarter was very impressive.

I think that's got to be one of the largest numbers I've seen from you on a quarterly basis in a long time.

What is the goal for the year?

What should we expect on consumer spending goals?

It will be double-digit for the year, David, so it will moderate in the second half and what you saw in the second quarter was some incremental new initiatives Juliana in her remarks talked about some new very effective advertising for the Pillsbury division where we devoted incremental spending and we're very, very pleased with the effects of that advertising.

We also had some new and incremental campaigns for our Green Giant vegetables, for our Old El Paso Mexican products that we advertised for the first time in many years and for both of those campaigns very pleased with the results as well.

So we had some incremental initiatives in the second quarter that drove baselines very nicely and we were very pleased with those efforts.

But we would expect the expenditure to moderate in the second half and we'll come in at a double-digit level for the year.

Don, can you comment on your input hedging?

Is any of your F '010, has that been hedged already, given the size of the mark-to-market it would seem like that's a true statement but I'm just curious if you started to do any of that hedging at this point?

Yes, David, we've laid a little bit into F '10.

Our focus is we took positions earlier this year even exiting F '08 was to ensure we had a good line of sight on '09.

As the commodity costs have come off, we've obviously turned our attention to F '10.

We have lagged a little bit into F '10 but most of these hedges are still for F '09 year.

Can you also comment on interest expense.

This number was quite a bit lower than what I thought and I believe at the beginning of the year your guidance for interest expense was up a little bit but it sure doesn't look like that's how it's going now.

We've been pleased with where our interest rates have gone in the last month and-a-half.

They certainly have spiked after September but they've started could compress a bit and we've been able to still maintain steady access to the commercial paper markets we've been able to still tap into the low end of the curve.

That said, our guidance for the year, you're right was for low single digit increase in expense.

I think that's probably still a good number to carry.

We may come in for flattish if interest rates continue to remain at the current levels.

But that's a tough one to predict right now so I wouldn't want to necessarily commit to that or put that target out there yet.

Last question for Ken, on net sales guidance, so for the year first half of the year you're up double digits, you're guiding for mid single digits for the full year.

That would mathematically just imply relatively no sales growth in the back half.

Is that correct?

And if so, can you just give me a little detail on why the back half would look like that?

Yes.

I think that's the way -- you're correct.

That's the way the math works out.

And what I would say there, again, is we have a lot of confidence in our business model right now.

We feel very good about the business.

It is a challenging environment and so as you heard earlier, our focus for the second half will be to keep the team here focused, very focused on good, solid execution and we have raised guidance a little bit here in the second quarter.

We don't want to get ahead of ourselves in terms of financial guidance.

So you're hearing some prudence and some conservatism for the second half but a lot of confidence in the business model.

David, just to -- on the numbers, as we said in our remarks, we expect to meet or beat the mid single digit sales and operating profit guidance that we had given earlier in the year.

Depending on how you draw the range on mid single digit that does imply some low single digit growth in the back half which is also going to be depressed from translation on an FX standpoint.

To Ken's point, it is still -- we're still cautious as we look to the back half in terms of setting new financial targets but there is still going to be some real growth, real organic growth in the back half on the top line.

The report was a great report.

I appreciate all the answers.

Thank you.

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

Please go ahead.

Thank you.

Good morning, everyone.

Good morning.

If I could just ask, if you could touch a little bit on margin management, obviously that had an effect in bakeries and food service in the quarter.

Could you just give us a sense of what -- how you're thinking about that over the balance of the fiscal year and into fiscal 2010 and are you trying to flow it along with commodity cost increases?

So are you accelerating or decelerating it based on the way the cost environment appears to be playing out or are there any particular segments of the business that you expect to have more or less benefits from holistic margin management on a go forward basis?

I think what I would say there is that we continue to maintain a very high focus on holistic margin management as we have over the last four years, and clearly that initiative has helped us in many, many ways.

So we have a very high focus on it.

We have very good visibility on the level of productivity and margin management initiatives going forward, really over the next three years.

We review this regularly with our team leaders.

You heard Juliana in her remarks talk about how holistic margin management has played out in the Pillsbury division.

It's been a key part in their success.

The details of what she has done are different from what has been done in other divisions, but any division President that you talk to here will be able to describe to you in a fair amount of detail how they've attacked HMM and how it's benefiting and fueling growth for their business.

So it's a very important activity for us.

We have great visibility on what it's going to do for us going forward and we continue to have a very high focus on it.

Okay.

And then with the -- as a back drop, you're performing -- your results are excellent and continue to be excellent.

Can you talk a little bit about anything that's going on in the business that concerns you, whether it's in your own business or from a competitive perspective or from a consumer perspective.

What if anything is keeping you up at night right now?

Clearly, we're in a challenging economic environment.

It's recessionary in the US and around the world and consumers are very concerned and so that I think is keeping everybody in business up at night.

Fortunately we have terrific brands that compete in very large categories.

Because of the holistic margin management activities that I talked about earlier, we've been able to keep our price increases to a minimum, keep those brands as affordable as possible, and so do well in a very difficult environment.

But we're aware every day that these are challenging times.

Okay.

Thank you.

I'll pass it along.

Operator, we're going to take one last question and then everybody I'm going to stop in a timely fashion so that we're off in time for ConAgra.

And our last question comes from the line of Chris Growe with Stifel Nicolaus.

Please go ahead.

Hi.

Good morning.

Just under the wire here.

Hey, Chris.

Hi, guys.

I just have a couple quick follow-ups for you.

On the marketing side I think you gave a good rundown of that.

Ii was just curious, are you shifting your marketing in any way to maybe more value oriented marketing for the consumer in this environment?

Have you had any major changes there?

Our marketing, Chris, continues to be really very focused on core brand benefits and, health benefits for Cheerios and Fiber One and taste for yogurt.

So we're really, our messaging continues to be around the fundamental benefits of our products.

In partnership with some of our retail customers, we are highlighting in store, the great value of our products and so it's -- buying all the ingredients to make a pizza, for example, in store, one of Juliana's pizza crusts, so pizza and sauces and sausages to put on pizza, all merchandised together at a great value.

That sort of thing can be a very good message for us right now.

So we are doing some of that messaging in partnership with our retail customers but our brand advertising remains very, very focused on the core benefits of the brands.

Okay.

And then I just was curious, in your US retail division you had about roughly 5% price realization.

Within that, could you tell us, just in rough terms, maybe what mix, if that was helpful for you in the quarter and also be curious if trade promotion, year-over-year was up as well.

Chris, for the total Company, we had 8 percentage points price and mix.

That was predominantly price which was a bit of a shift as we see more of our price come through.

And trades for the full year, again, we expect trade cost per case to continue to climb for the third consecutive year so we're managing that very carefully as well.

And the quarter would trade have been up year-over-year, something you could verify?

We would have to get back to you on the exact number on the trade but there wasn't anything unusual outside of the flow of the Big G timing, the cereal timing versus last year that we talked about but we have to follow-up on the exact number there.

But that would be the only thing that would be an anomaly from the annual trends we're expected to find.

Fair enough.

Just a quick one for you, Don, then on the share repurchase was more than I expected in the quarter and there's been some comments I think it was out of S&P about you're trying to get your debt levels down and to maintain your rating.

Is that something that we should look forward to now more a little more debt reduction or focus on the balance sheet going forward?

Well, you know, our debt for the -- if you compare quarter end this year to quarter end last year was up about 3%, given the size of the growth in the business top and bottom line that's very manageable and obviously we're in regular discussion was the rating agencies on the rating which we are cognizant of.

Our share repurchase program is ongoing, although quite honestly we're not necessarily putting our foot on the gas pedal right now given the economic times.

But we continue to manage our cash with our focus on the reinvestment in the business, our dividends and the share repurchase with an eye toward ensuring that we maintain our credit rating and reinvest that cash.

Okay.

Great, thanks for the time.

Thank you everybody.

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.