通用磨坊 (GIS) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the General Mills third 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, March 18th, 2009.

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

Please go ahead, ma'am.

Thanks Alex.

Good morning, everybody.

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

Before I turn you over to them I have to cover my few housekeeping items.

Our press release on third quarter results was issued over the wire services earlier this morning and is posted on our website if you still need a copy.

We have also posted slides on our website that supplement today's 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 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, and thanks to all of you who have joined us today.

The third quarter was our toughest quarterly comparison for the year for reasons you are familiar with.

We faced a significant year-over-year increase in input costs, and we experienced a full quarter's worth of foreign exchange head wind.

Last year's third quarter results included unusually strong grain merchandising profits, and nonrecurring gains in our joint venture results.

And we're lapping last year's strong top-line growth.

The results we reported this morning reflect this difficult comparison.

But that's not the complete picture.

Underneath the comparison items, we're seeing continued strong operating momentum in our business, and with that solid performance through the first nine months, we're raising our earnings guidance for the year in total.

Slide five summarizes our results for the quarter.

Net sales increased 4% to $3.5 billion, segment operating profit totaled $560 million, below prior year levels, primarily due to lower grain merchandising profits, FX, and higher input costs.

Earnings after tax were $289 million, and diluted earnings per share, as reported, where $0.85.

These results include several items that impact comparability as shown on slide six.

Our earnings in both 2008 and 2009 include gains from mark to market valuation of commodity positions.

In 2009, the gain totaled $71 million pretax ,or $0.13 a share.

In last year's third quarter, the mark to market gain was twice as big, $0.27 a share.

Our earnings in both years reflect the impact of court decisions on a tax matter.

Last year, on the basis of a US District Court ruling, we recorded a $31 million gain or $0.09 a share.

This January, a US Court of Appeals ruling reversed the District Court decision.

As a result, we reversed the $31 million tax benefit recorded last year, along with $22 million in cumulative income tax benefits received over a 15-year period.

So this year's third quarter includes a charge of $0.15 a share for this tax item.

Also in this year's third quarter, we recorded a gain of $41 million pretax or $0.08 per share for insurance proceeds related to a fire that destroyed our pasta plant in Argentina for fiscal 2008.

We plan to use these proceeds to construct a new manufacturing facility in the region.

Excluding these items, earnings per share would have totaled $0.79 in the quarter compared to $0.87 a year ago.

The decline in our underlying EPS is more than fully accounted for by the comparison items I mentioned a moment ago.

Grain merchandising profits were $37 million lower than last year, or $0.07 per share.

Last year's joint venture after tax earnings included an $11 million net gain related to CPW restructuring actions, and $2 million from the sale of 8th Continent for a total of $0.04 per share.

And foreign currency head winds reduced our earnings growth by $0.04 a share this year.

After taking these items into account, business performance in the quarter was actually quite solid.

You can see in that our top-line results.

Slide eight shows the components of our 4% net sales growth, which came on top of a 12% increase last year.

Pound volume was down but that was against a 6% volume growth in the same period last year.

Net price realization and positive mix drove eight points of sales growth, so organic net sales growth was 7% on top of a 10% increase in organic sales for the same period last year.

Foreign exchange reduced net sales growth by three points this year.

Slide nine shows our top-line results by segment.

US retail sales were up 8%, on top of 9% growth in the third quarter last year.

Our international segment posted a 5% sales decline as reported.

But on a constant currency basis, sales were up 10% with growth across all geographic regions where we compete.

And that was on top of similar growth in the same period last year.

Sales for bakeries and food service were down 6%, reflecting difficult industry conditions and tough comparisons.

Our gross margin as reported for the quarter was below last year's results as we had previously indicated.

If you exclude mark to market valuation effects from both years, gross margins would have been 34.1% this year, down 120 basis points from last year.

Changes in grain merchandising profits drove 110 points of that decline.

We expect our gross margin to expand in the fourth quarter as our cost pressures ease.

Slide 11 illustrates our inflation trend by quarter.

In the fourth quarter, our input cost inflation will be well below our 9% annual rate as we begin to draw on lower cost position.

And for 2009 in total, we expect gross margin before any impact from mark to market valuation will hold steady to last year, reflecting the success of our holistic margin management initiative.

Our SG&A expense for the quarter was $671 million, up 3% from last year's levels.

Consumer marketing spending for the third quarter was up 6% on top of a 13% increase for the same period last year.

As we noted in the press release, this year's SG&A expense includes the $41 million gain from the insurance settlement.

Segment operating profit totaled $560 million in the third quarter.

US retail profits were $490 million, up slightly despite higher input costs and 11% increase in consumer marketing.

That's good performance versus year ago profit that grew 9%.

International profits were down 6% due to foreign exchange, and bakeries and foodservice profits were down significantly as earnings from grain merchandising returned to more typical levels compared to historically higher earnings we recorded last year.

Moving down the income statement, after tax earnings from joint ventures totaled $16 million in the quarter.

Last year's JV results included gains from CPW restructuring activities and the sales of 8th Continent, as shown on slide 14.

Excluding these gains, joint venture earnings were $1 million below last year's level due to unfavorable foreign exchange.

Turning to the balance sheet, slide 15 summarizes our core working capital items.

In total, core working capital is down compared to last year's third quarter.

Inventories in particular were down significantly due to lower market valuation and lower physical levels of grain inventories.

Total debt at the end of the third quarter was $7.7 billion, relatively unchanged versus the prior year, but the mix of our debt has changed.

Our debt today is more fixed rate and longer tenured.

As you know, we issued $1.2 billion in 10-year notes in January, and used the proceeds to repay a portion of our outstanding commercial paper.

With that successful offering, and with continued low interest rate on our remaining commercial paper, we now expect full-year interest expense to be roughly $400 million, down from $422 million last year.

We continue to be disciplined in our uses of cash.

As we shared with you at CAGNEY last month, our retirement plans are well funded, and we do not anticipate making any significant cash contributions to our plans this fiscal year.

We continue to target $550 million of capital expenditures in fiscal 2009.

Beyond our capital investment needs, we continue to return cash to shareholders through dividends and share repurchases.

General Mills and its predecessor company have paid dividends for 110 years without interruption or reduction.

Our dividends have been growing in recent years, and at today's stock price, the current rate of $1.72 a share represents a yield of more than 3%.

Our Board of Directors declared a quarterly dividend of $0.43 a share last week, payable May 1.

Our annualized dividend rate for fiscal 2009 is a 10% increase over the $1.57 per share we paid last year.

Over time, we expect our dividends to increase in line with earnings growth.

We also returned cash to shareholders through share repurchases.

We reduced net shares outstanding by 9% over the last three years.

And through the first nine months of this year, the balance is again down slightly.

We've bought back nearly 19 million shares of common stock year to date.

As you know, we're taking a deliberate approach to our commitment of cash in this environment, and that means we may not get all the way to our 2009 goal of a 1% net reduction in average shares outstanding.

However, our long-term goal continues to be an average annual 2% reduction in net shares outstanding.

So here's where we stand through nine months.

As you see on slide 20.

Net sales are up 8%.

Segment operating profit is up 4%, despite significant input cost increases, negative foreign exchange, and increased consumer marketing spending.

Earnings after tax totaled $946 million, and diluted earnings per share were $2.73 as reported.

Excluding mark to market effects, the tax items and gains from Pop Secret and the insurance recovery, diluted earnings per share would have been $3.12, an increase of 11% from $2.80 last year.

Our businesses continue to perform very well in a challenging economic climate.

US retail sales are up 10% through nine months.

International segment sales are up 10% as well on a constant currency basis, and bakeries and foodservice sales are up 5% in a very tough environment.

Our holistic margin management activities are helping us offset commodity increases and we expect to hold our margin for the year in total.

We're investing to keep our brands strong with consumer spending up 15% year to date.

And we've delivered good growth in segment operating profit despite tough comparisons and foreign exchange headwinds.

Based on this very solid nine-month operating performance, we're raising our 2009 earnings guidance.

We started the year with a goal of earning $3.78 to $3.83 per share.

We're now targeting $3.87 to $3.89 per share.

That represents double-digit EPS growth in a very challenging environment, and we see this as a solid base to build on in fiscal 2010.

As we look ahead to the fourth quarter, the 53rd week will contribute to our sales and earnings growth.

We'll begin to see the benefits of lower commodity inflation and we expect to deliver good margin growth.

We expect to record a loss related to our frozen dough divestiture, and we'll exclude that from adjusted EPS results just as we're excluding the gain from selling Pop Secret.

On the restructuring line, we expect to incur an additional $11 million of charges related to previously announced restructuring actions for an annual total of $17 million.

I don't have any new restructuring actions to announce today, but if we take any, we don't expect total restructuring expense in 2009 to exceed the $30 million to $40 million range we've seen the last few years.

And we include these restructuring costs in our EPS guidance.

Finally, we're planning strong levels of consumer marketing support behind our brands in the fourth quarter to help position our business for continued growth in fiscal 2010.

We'll finish the year strong delivering our fourth consecutive year of earnings growth that meets or beats our long-term model.

Despite the challenging environment, our businesses are performing well and we're positioned for continued growth.

Now I will turn you over to Ken to share more about our operating performance.

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

As we move into the final quarter of our year, we're pleased to see continued good consumer demand for our products around the world, despite a very challenging operating environment.

As we told you at Cagney, we believe we have a portfolio for all seasons.

Slide 25 shows you that our top-line growth continues to be broad based.

For the year to date, all of our businesses and segments posted sales growth with more than half of them up by double digits.

Remember that international sales are up double digit, too, on a constant currency basis, and snack sales would be up 10%, if you excluded Pop Secret from last year's results.

And the categories where we compete, are good ones to be in.

They meet consumer needs for taste, health benefits, convenience, and value, and as a result, these categories are growing.

Slide 26 shows you the category growth in measured channels through the first nine months of this year.

You can also see in that most cases, our brands are outpacing category growth, and trends in nonmeasured channels, including supercenters and club stores, are generally stronger than the growth you see here.

Our sales growth within our categories is driving good market share performance.

We're not up in every category, but overall performance has been strong, with nice share gains in some of our larger categories, including soup, cereal, grain snacks, and dinner mixes.

Let's take a closer look at some of these businesses, and I will start with our Big G cereal division.

Big G cereal is having a terrific year, and the driver of that performance is baseline growth.

As you can see on slide 28, nonpromoted sales of Cheerios, Fiber One, Honey Nut and Multi-Grain Cheerios are growing at double-digit rates, as we promote their health benefits.

Our Total brand is also post going baseline growth and so are kid-oriented brands such as Cinnamon Toast Crunch and Lucky Charms.

So all eight of our largest brands or brand franchises are showing strong sales gains at everyday shelf prices.

Our cereal merchandising has been restored to normal levels this year and the efficiency of this merchandising is higher.

As a result, we expect our trade cost per case will be down in 2009.

And that follows a decline in 2008.

Our new products are doing well, particularly Banana Nut Cheerios, which has captured nearly 0.8 of a share point in recent weeks.

We'll continue to invest in our brand with strong levels of consumer support, particularly TV advertising that promotes the health benefits of cereal.

So I expect our cereal business to deliver excellent sales and earnings growth in fiscal 2009.

We just wrapped up a very successful holiday baking season.

Retail sales for Pillsbury refrigerated dough grew 12% in the quarter, due in large part to our Home Is Calling advertising campaign, that focused on the home baked goodness of products across the Pillsbury brand.

Betty Crocker baking mixes also performed well with retail sales for dessert mixes up 13%, led by brownies and muffins.

Bisquick baking mix was up 21% on the success of Shake and Pour Pancake Mix, and sales of Gold Medal Flour grew 38% in the quarter, as more people baked at home.

Our frozen hot snacks also posted strong gains in the third quarter.

Totino's Pizza Rolls and new Pillsbury Savorings appetizers combined for 27% retail sales growth.

Sales for our value priced Totino's Pizza grew 28% in the quarter.

Our Meals Division is posting solid growth as consumers eat more meals at home.

Retail sales for dinner mixes are up 9% year to date on good performance from Hamburger Helper and Macaroni Grill entrees.

New Green Giant Steamers are contributing to 5% retail sales growth for frozen vegetables, and the soup season has been good for our Progresso brand.

Retail sales are up 3% year to date, and we continue to gain share.

Retail sales for Yoplait yogurt have been growing nicely over the past several years, and sales are up another 9% fiscal year to date.

Yoplait Light is our growth leader with sales up 17% so far this year as we continue to emphasize this product's combination of great taste and weight management benefits.

We're also posting continued share gains in the grain snacks category.

We're lapping very strong prior year results, but generating continued sales growth due in part to the January launch of new flavors of Fiber One and Chex Mix bars.

By providing high quality products at good value, we're growing our US retail business in a healthy, sustainable way.

And we're supporting our brands with increased levels of consumer spending.

Our consumer marketing investment will grow at a double-digit rate for the full year.

This support is a key driver behind the baseline sales growth in our major categories shown on slide 35.

Nearly every business is showing growth year to date led by frozen hot snacks, yogurt, and grain snacks.

In the fourth quarter, we have several unique consumer promotions planned.

Betty Crocker is partnering with the Make-A-Wish Foundation to grant wishes to children with life-threatening medical conditions.

Through our Stirring Up Wishes promotion, consumers can vote on the Make-A-Wish chapter they want to receive one of the 12 wishes Betty Crocker will grant in the next 12 weeks.

We're launching our first ever Win Cash promotion.

Consumers enter a product UPC code from specially marked packages on to our Win Cash website to participate in an on-line sweepstakes, including four prizes of $25,000 in cash.

Our Pound Per Pound challenge highlighted on the popular TV show the Biggest Loser, continues to generate excitement on many of our products, for every pound consumers lose, General Mills will donate $0.10 to Feeding America food banks.

We kicked off this challenge in January, and so far, we've received pledges from our consumers to lose more than 2.5 million pounds.

And next month, talented cooks can begin submitting their recipe entrees to vie for the $1 million prize in the 44th Pillsbury Bake-Off Contest, one of the longest running cooking contests in America.

So let me summarize the trends in our US retail segment.

Our categories are growing, and our brands hold leading positions in these categories, which we think give us a strategic advantage in a challenging marketplace.

Our focus on HMM continues to help us protect margins and generate funds to reinvest in our business.

We're supporting our brands with strong increases in consumer spending.

This consumer support is contributing to excellent baseline sales growth across our portfolio.

So our US retail segment remains on track to deliver high single-digit sales and profit growth for the full year.

Turning to our bakeries and foodservice business, as we mentioned before, the trend of consumers eating more meals at home is challenging for this division.

Sales in the third quarter declined 6% overall, but sales in the key distributor and restaurant channel were down just 1%.

And through nine months, sales are up by mid single digits, which represent some true resilience in this market.

On the profit line, last year's third quarter included significant contributions from grain merchandising, as grain prices hit peak levels.

When you exclude grain merchandising profits from both years, we're posting 8% profit growth year to date on the rest of our business.

And we think that's a very solid performance in the current industry environment.

Last week, we announced the sale of a portion of our bakeries and foodservice frozen bread dough business to Pennant Foods.

We expect this transaction to close by the end of the fiscal year.

This sale is a continuation of our ongoing strategy to focus our bakeries and foodservice portfolio on branded products and on the most profitable customer segments.

So I'd characterize our Bakeries and Foodservice division as broadly on track for their earnings target for the year, despite challenging industry conditions.

Our international businesses generated good sales gains, again in the third quarter.

Slide 40 shows that net sales grew in all of our geographic regions on a constant currency basis, driving 10% sales growth for the segment in total.

Our business in Canada had a good quarter, led by continuing strong performance on cereal and Nature Valley snacks.

Sales in Europe grew 5% on the strength of Old El Paso Mexican products, Nature Valley granola bars, and the launch of new Haagen-Dazs smoothies.

In Latin America, Nature Valley granola bars and Diablitos sandwich spread contributed to 18% net sales growth.

In the Asia Pacific region, sales grew 17%.

New flavors of Old El Paso dinner kits in Australia and double-digit gains for Wanchai Ferry Dumplings in China contributed to growth in this region.

Through nine months, our international sales are up 10% on a constant currency basis.

And Chris O'Leary and his team are on track to achieve their plan objectives which are set on a constant currency basis.

Net sales for our Cereal Partners Worldwide joint venture are up 5% year to date, with particularly good increases in Mexico, Russia, and Australia.

We've seen international cereal category growth moderate in recent months.

However, the overall category is still projected to grow.

So we continue to expect volume and sales increases for CPW with earnings results constrained by foreign exchange in the near term.

So despite the worldwide economic challenges, our international businesses are performing well.

We expect to post good sales and earnings growth for the year on a constant currency basis.

Foreign exchange will impact our recorded results this year.

But we have built a strong profitable foundation for growth.

We like the categories in which we compete around the world.

Our brands are building solid share positions in those categories.

And we see plenty of growth ahead, as we increase both retail distribution and household penetration for our brand.

In total, we're executing well against our 2009 plan, and we have confidence in our long-term growth model.

We've met or exceeded our growth targets in the past several years, and we're on track to exceed our high single-digit earnings target in 2009.

So to summarize our remarks this morning, the economic climate continues to be very challenging.

But our portfolio is showing real resilience and our business is growing.

For fiscal 2009, we expect to achieve strong sales and earnings gains, and we expect to protect our margin, despite 9% input cost inflation.

We're on track to exceed our long-term EPS goal with a double-digit gain this year.

And the fundamentals of our business are strong.

We're executing well in growing categories, and we're positioned well for continued growth in 2010 and beyond.

That concludes our prepared remarks this morning.

So I will ask the operator to open up the lines for questions.

Thank you.

(Operator Instructions).

And our first question comes from the line of David Driscoll with Citi Investments Research.

Please proceed with your question.

Thank you.

Good morning, everyone.

Hi, David.

Good morning.

Certainly I think these results in context of what we're seeing out there in the environment do look good in that US retail segment is -- I would call it somewhat amazing.

Big G cereal sales up 13%.

Ken, can you talk to us about really the kind of if we could peel the onion, about the factors within Big G between the category competition, your new products and your promotion?

These are, again, some of the best numbers that you've produced in that particular segment within US retail in quite some time, and I think a lot of people are quite interested in how you attribute the success.

Well, thanks, David, for the question.

The category, as you know, has been pretty solid all throughout the year.

A little over 2% year to date for us.

Recent month, category trend was a little better than that, and that's in measured channels only.

So we think clearly when you include all of our channels the growth is even better than that.

So the category is very solid in this economic climate.

People are probably choosing to eat breakfast a little bit more at home, so that's good, but I think the big, big factor for us is that our execution right now is so strong across the board, we have very solid messages across the Cheerios franchise, and I commented on that in our remarks.

We had a very, very solid initiative behind Multi-Grain Cheerios this year, which has that brand growing now in the high double digits, and so the Banana Nut Cheerios adding almost a full share point, so Cheerios, which is the largest franchise in the category, is also one of the fastest growing brands in the category.

So that's a great story.

Fiber One continues to perform very well fours.

We just launched a shredded version of Fiber One, and that's going to help that franchise.

Total Cereal now is growing at strong rates.

Our kid brands, very good execution there.

So it's really a story of excellent marketing fundamentals with, as I said earlier, all eight of our core franchises growing on a baseline basis, which is, I think, is the best indicator of that good execution across the board.

When you look forward, and you think about sort of the next 12 months, and you think about private label and commodities, is there any significant negative in terms of competition from private label that would you call out for us right now?

I mean, obviously the strength here is amazing, and so I acknowledge that, but always on a go forward basis, we're trying to be sensitive to this economic environment, and what might happen because of the decline in the grain costs.

What I would say on that, David, is that we've had a year of higher inflation.

If you look at the decade, inflation has probably averaged a little better than 5%, input cost inflation.

Last year, for us it was 7%.

This year, as we said, it will be 9%.

And we've offset a lot of that with productivity, so our pricing has lagged that.

And actually, private label cereals in aggregate in this environment have increased their prices a little bit faster than we have.

And so we're sitting at maybe 6 or 7% now, for all our categories, and private label is probably closer to 9%, so we see private label pricing a little bit ahead of us, and we don't see any evidence as we look in a lot of detail at the tracking data, of private label prices coming down.

And I think the reason for that is that they're in the same commodity environment that we are, and as they look forward, they probably see the same thing we see, which is less inflation next year.

Today we guess it will below single-digit inflation, but we're probably still going to see some input cost inflation next year.

So I think we're all living in that environment.

We expect to sort of price balance between our cereals and private label cereals to stay pretty constant as we go forward.

We pay attention to that balance, coupled with all the other great brand advantages that we offer in terms of price and quality and health benefits, we think will hold us in good stead.

Great, that was very helpful.

Thank you.

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

Please proceed with your question.

Good morning, everybody.

Hi, Eric.

I guess my first question has to do with the argument that the gross margin is going to expand so much in the fourth quarter.

Stock's down pre market 4 or 5%, so I guess investors are somewhat concerned as to your visibility on that.

So, Don, maybe could you go through that a little bit in more detail, and then I have a follow-up.

Sure.

As you know, Eric, at the beginning of the year we said that we would have 9% inflation in the course of the year.

And we're still tracking to that number.

At the beginning of the year, based on the flow at the time, we expect that to be more front loaded in the first half of the year but actually the way our positions worked out, it ended up that Q3 was our highest inflation quarter, and clearly we did not have a line of sight on where those costs were going to come in for Q4.

While we're going to see inflation, it's going to be materially down from what we've seen year to date.

Given the pricing and the mix that we've had year to date that will hold in the fourth quarter, the algorithm of those increases combined with a decelerating inflation from our current position, current commodity position, get us that expansion that gross margin expansion in the fourth quarter.

So it's really a matter of the flow of inflation being different than what we had anticipated the beginning of the year, the total year being the same, but being a little bit more evenly spread through the first three-quarters as opposed to first half of the year.

Is HMM contributing more to the gross margin expansion in the fourth quarter, or is that pretty much on a similar run rate to what we've had during the year?

Yeah, it's pretty constant.

Obviously the savings builder, we're also building over a baits of last year as well.

It's fairly constant.

The movement you will see in the fourth quarter will be primarily driven by the fact of lower cost position on the commodities.

Okay.

And then Ken, what I understood was that the industry kind of -- and the trade loaded a bit in the fourth quarter.

The December quarter, I should say.

And on some decent deals, then the consumer decided to pantry deload, and then in January, order trends were just surprisingly weak versus history, but then kind of February and March have come back to a more normalized environment.

Is that a fair description of what you think happened in the industry over the last few months?

Well, he let me just comment on on General Mills, and, I mean, I can't really speak for the industry and sort of the inside workings of loading and de-loading and inventory adjustments for each of our competitors.

What I will tell you is that inventory adjustments, end of year positions for our major customers, we see that virtually every year for the customers whose fiscal years end in December, January, and February, and frankly, it's very predictable, and we didn't really -- we didn't see anything this year that was outside of the norm in that context of inventory deloading, and certainly nothing that I would call out to you as a factor in our performance.

So I guess to summarize, our customers really are, typically will do a little bit of that adjusting at the end of the year.

There was nothing unusual this year, and it wasn't a factor in our performance over the last quarter.

Okay, I'll pass it on.

Thank you.

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

Please proceed with your question.

Good morning, everyone.

Hi, Terry.

Good morning, Terry.

Two things this morning.

Ken, in terms of the cereal business, as we look at it as you go through the second half of the calendar year, I guess your first half, it looks like Kellogg is lapping some fairly easy comparisons.

You guys are lapping some tougher ones.

And I think Kellogg has been pretty clear that they are going to promote more.

So the question is this.

Two things.

You mentioned that your trade promotion per case is going to be down in this fiscal year.

Would you expect it to be up next year as you match or may match what Kellogg is going to do, and do you think you can hold on to that market share that you got in cereal this year?

Well, Terry, we did have this year in the second quarter, as you know, as we had that comparison to the right size, right price initiative in the previous year, we did have strong merchandising in the second quarter in that comp and strong share gains.

As we move into the second half of our fiscal year, our trade spend, as we predicted and forecast for you, our trade spending is moderating and will be down, as you just said, on a cost per case basis for the year.

As we plan the next year, our plan is to continue to grow our share incrementally.

That share growth will be driven by baseline strength.

We think that really is the story of Big G right now is those full price sales that we're getting across all of our core franchises, so we're going to focus on the baseline.

Our goal is to continue to reduce our trade cost per case, and I would expect that that would be our goal again in cereal next year.

We will have those comparisons that you highlighted, as we move from quarter to quarter, but we'll be planning in the context of the whole year and in gaining incremental share over the course of the year, and I'm pretty confident that we'll be able to do that again next year.

Okay, fair enough.

Just a quick one on soup, and I think this kind of dovetails into Eric Katzman's question.

February seemed to be just an awful month for soup, both for you guys and Campbell.

I have spoken to Campbell.

I didn't really get an explanation there.

Was there anything trade-wise going on in the month of February?

It just looked like both you and Campbell had a very tough month.

I didn't quite understand that.

Yeah, well, again, looking at it on a one-month basis, Terry, I don't know how productive that is.

As we look at our soup business over the first nine months of the year, and as we wrap up the season, and as we look ahead to next year, we're quite happy with our soup performance.

We've got sales growth, we continue to gain sharing again this year.

I think as you have seen, a very, very competitive environment, and so I don't think one month doesn't a soup season make.

Overall we're quite happy with how our soup business is unfolding for this year, and very happy as we start to closes in on our innovation and our initiatives for next year.

So we continue to be very bullish.

I didn't want to get too near term.

It's just that it kind of surprised me with the depth of it, but maybe it was January pantry loading by consumers.

I don't know.

We'll see.

But, anyway, thank you very much.

Thank you, Terry.

And our next question comes from the line of Judy Hong with Goldman Sachs.

Please proceed with your question.

Thanks, good morning.

Just more clarity about the fourth quarter outlook.

First off, just in terms of the extra week, is it still your intention to reinvest all of that extra week up side into marketing?

Judy this is Don.

No, we actually, as we look at the fourth quarter now, we do anticipate flowing some of that profit through to the full year.

Okay.

And then secondly, if I take your midpoint of your full year guidance, I think it implies EPS growth in the fourth quarter of about 5%, and I'm wondering, just given the strong sales momentum that you have in your business, you've got the margin expanding in the fourth quarter, now you're talking about some of that, the extra week flowing to the bottom line.

I'm just wondering why you are not expecting even stronger growth than that 5% number that's implied by your guidance.

A couple of the head winds that we mentioned in the third quarter carry into the fourth quarter.

In particular, ForEx will continue to be a head wind in the fourth quarter.

We also have the majority of our restructuring costs now falling in the fourth quarter.

As I said, year to date our restructuring costs versus last year has been down quite significantly, but we are still guiding to a number of comparable to prior years net $30 million to $40 million range, which means that the majority of that this year is going to fall in the fourth quarter.

Last year's fourth quarter restructuring charge is actually quite low.

So you are going to have both the ForEx and the restructuring head winds.

The underlying business, to your point, continues to perform very well, and we're very bullish on the sales and the operating profit growth in the fourth quarter.

Okay.

And then can you just give us some broad comment about fiscal '10 outlook?

I think at Cagney you have talked about underlying EPS growth, sort of in line with your high single-digit target, even with the currency head wind that we should expect to see.

Maybe just give us some perspectives as we look out into fiscal '10, some of the head winds and the tail winds that we should think about as it relates to meeting or exceeding that long-term target.

We'll talk about F '10 in June more completely.

We don't want to start giving pieces of guidance today, but as we talked about at Cagney, we had committed a year ago, probably three years ago, to an F '10 target that we raised last year to $4.05 a share.

As we look at that number, we think as we've beaten this year's number, we would look to be ahead of that as well next year, and the factors are going to be the underlying strength of the business but with obviously some new external factors in place, particularly around foreign exchange that will create a head wind which had not in the previous couple years, and next year as we think about ForEx, it is both the translation as well as the transaction, which we have hedged this year, which has protected us, but we'll see some of that drag into next year as well.

That's probably the fundamental environmental shift that we'll be seeing as we look at next year, but we'll take you through more complete guidance with F '10 with our June earnings release.

Finally on bakery and foodservice I think your prior guidance this year had been a flat EBIT goal.

Is that still the case?

Flat EBIT versus prior year, yes.

As Ken pointed out today, that actually, when you strip out grain merchandising costs, from last year, it actually implies very strong growth in the underlying business, which we're very pleased with.

Thank you.

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

Please proceed with your question.

Thanks.

Two quick questions, both kind of theoretical, so hopefully you could give some help here.

We're seeing some increases in promotional activity in some categories, and they're reaching irrational levels in places like frozen entrees, to pick a well publicized example.

Do you see unhealthy promotion activity or discounting to risk to more categories and is it linked, perhaps, to things where you can inventory the items, for instance, people start to or players start to discount to try to get that in the pantries?

Secondly, there's been a lot of dialogue with investors by the food retailers, implying or directly saying that prices will need to be rolled back, and that they are going to push private label harder.

I'm wondering, is collaboration dead between the top suppliers and the food retailers, to the degree that it feels like it is dying, and perhaps you can give some color around that, thanks.

Hi, David.

This is Ken.

Let me address the second question first on pricing and the need for roll-backs.

I can tell that up I haven't had any major or minor smaller retail customer ask me about that.

The question that I'm asked most consistently by the senior executives of our retail partners is what is our outlook for inflation.

What do we think is going to happen in the commodity environment going forward, and they're very concerned about that.

They appreciate that the environment is very volatile.

Many of them have their own private label businesses so this is an important factor for them.

And so our collaboration and partnership with our retailers I would say has never been stronger.

They're very concerned about the volatility of the input cost environment and we talk about that, and as I said earlier, there are some comments in the media about some customers who may think that prices should or will come down, or that their private label prices will come down, but we're not actually seeing that in any of the data.

As I said, private label prices have increased a little faster than branded prices over the course of the year, and we don't really see any evidence that they will come down, and I think the reason for that is because our retail partners are probably anticipating some level of inflation next year, in their input cost, even if it's a significantly lower level.

There will be some.

And so that's my take on that conversation.

On the promotional side, I don't really see in any of our categories, I think you called it unhealthy promotional activity emerging in cereal.

I think the promotional environment is very consistent right now, and as we said for our business, if anything, our promotional levels are moderating, and that's a category that's being driven by baseline now.

We saw a little bit of promotion earlier in the calendar year in yogurt, but as we move further into the year, it appears that that category is moving in the direction that it consistently has over the last two decades, which is new product innovation and brand building advertising, and so I think that category will continue to be driven by fundamentals, and so in our categories, we're not seeing that right now.

Thanks very much.

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

Please proceed with your question.

Good morning, everyone.

Hey, Ken.

There's been a lot of discussion about promotional activity in the cereal category.

Can you just frame for us and give us a discussion of how General Mills' magnitude versus efficiency has played in in trade spending in cereal?

Because it seems like that's a big controversy out there.

So if you could just give us a color around those two, one is size versus efficiency of what you are doing.

I will try, Ken.

I think that our general sort of merchandising program in cereal, as I said, has tended to be very consistent.

We usually enter the year with a very solid program of events that we can merchandise around, and we have a very disciplined approach on price points that we want to shoot for, and I think you are all familiar with those.

Going back several years, we were two for four, and we moved that up to better mixes over the last several years, so we enter the year with a very comprehensive plan in terms of the number of events and frequency.

What we are seeing, I think in the current environment, is that our promotions are more efficient.

There's a little bit more pull against the promotion, and I think that's a reflection of value seeking on the part of consumers.

From our standpoint, that's a good thing, because there are a lot of fixed costs that go into these promotions.

There's costs with our retail partners to set them up and to build them and execute them in store.

Often we have so-called consumer overlays around these promotions to add some consumer interest and appeal, and so there are fixed costs.

And if we can get a little bit more movement off of them, that, in fact, lowers our cost per case for us.

So there is a little more efficiency in this environment, and I think it reflects consumer value seeking, but I would say it's nothing that we didn't anticipate or haven't built into our model going forward.

Ken this is Don.

The only thing I would add to that, on the consumer pull part that Ken referenced, one of the reasons that we're seeing better effectiveness from our merchandising is because we are running such strong baseline which speaks to the new product strength that we've had, the consumer support we've put behind it, and we have baseline growth that has doubled the category growth.

That then makes all of our merchandising more effective as well.

My last question is --

Very good point.

Whenever we have strong base lines we basically see the merchandising programs work a little bit better.

My next question is, or my last question as well, I understood from Cagney presentation that it seems like you guys were pretty comfortable with your long-term growth targets, even in 2010.

What would prevent General Mills from generating their long-term growth targets for 2010?

Are there some of that change since Cagney, or is it just you are just being cautious on the call?

It's a little premature to talk in detail about F '10, but as I mentioned, for ex has been a little bit more of a head wind, and we're now flowing the 53rd week into this year so the base becomes a bit higher, which again we're delivering over our growth model this fiscal year.

So those are a couple of factors, but the underlying business remains very strong, and if you look at where our US business is, look at our international business on a constant currency business, look at bakery and foodservice ex grain merchandising all those businesses are on track not only to exceed our internal plans for the year, but also their longer term trajectory as well.

So we feel very good about the soundness of the underlying business.

Great, thank you.

And our next question comes from the line of Jonathan Feeney with Janney Montgomery Scott.

Please proceed with your question.

Good morning.

Thank you.

Hey, Jonathan.

First, just to clarify on volume.

Sort of big picture, but I know there's some comparisons in here but it's striking to me that Q3 '08 sales at US retail were 9%, and that was almost all volume, and Q3 '09 sales were 8%, and that's almost all price.

Could you highlight maybe where the sort of outliers were as far as comparisons within the US retail, on the volume, versus price/mix side within the US retail business that sort of drove that change in sort of algorithm?

I think, Jonathan, you have in your question highlighted the key factor, which is that we had unusually strong volume growth in the third quarter of last year.

8%.

And for the year, for the total year, fiscal '08, our volume growth was 3%.

So that third quarter was very, very high.

It was a difficult comp, and frankly we're happy to have some volume growth on top of that this year.

And year to date, in US retail, our volume growth is actually through nine months, our volume growth is actually ahead of last year.

I think it's closer to 4% through nine months and last year, at this point in time we were up 3%.

So volume -- that measure, as we've said in the past, is kind of a lumpy measure, and it moves around a little bit, and I think the key factor is that it just -- it was unusually big in the third quarter of last year, and it will even out as we move on through the end of the year.

Is it safe to say, going into Q4 with that easier 3% comparison you would expect volume to accelerate off the plus 1% number?

I think we'll have volume growth in the fourth quarter, yes.

Okay.

And just one other question, the detail on bakery and food service, I remember from your Cagney presentation, the restaurants are a little less than half, it looks like, of your business, and you have talked about them actually performing better than the 12% volume decline in Q3 and being more profitable.

I look at these other venues, like K through 12 and colleges and healthcare and whatever, I see a lot of places that are probably volume-wise holding up better than restaurants.

Do you have a negative margin mix issue currently, or sort of coming in Bakeries and Foodservice?

I understand focusing on the more profitable customers, but what if those more profitable customers are declining more?

Do you see that as a risk, and are you seeing in that the numbers right now?

Well, we are not seeing that in the numbers right now, just to clarify the split of the business, a little less than 50% is restaurants and foodservice.

Within that is K-12 schools and business offices, et cetera.

And we actually see quite a healthy mix in bakeries and food service, for example, in our C-store business, which is about 10%, where we're growing with our branded product, we see it on our Foodservice distributors, which get to those K-12 and hotels and other distribution points.

And as we grow sales there we actually see he a positive mix in our Bakeries and Foodservice business.

But broadly speaking, is it such that the business you do would say institutions, broadly, is lower margin business?

How are you defining institutions?

Schools and universities?

Yeah, schools, universities, businesses, industry, military, that sort of thing, versus, say, restaurants.

I'm thinking discretionary versus nondiscretionary expenditures.

I'm happy to be enlightened as to how you define it because I don't really have a great idea, either.

the schools and the universities and the healthcare institutions, the places that are serviced by Foodservice distributors, that is the healthy higher margin more stable part of our business.

So that's where we're really moving the business over time.

That's why we've taken these restructuring actions that we've taken over the last four or five years, but those channels, schools, universities, hospitals, we're selling branded cereal, branded yogurt, branded snacks, which are all our high margin products, and we're selling them through the Foodservice distributor, which is the high margin distribution channel, so that's really the positive mix play for us,.

And the part that was disappointing and probably disappointing versus expectations, too, is the sort of bakeries business that you are trying to maybe emphasize a little less than some of that other business.

That's right.

Okay, thank you very much.

Our next question comes from the line of Alexia Howard with Sanford Bernstein.

Please proceed with your questions.

Hello.

Couple quick ones.

Still coming back to the US retail segment and the promotional activity in there.

First of all, you talked a lot about trade spending efficiencies kicking in.

Can you tell us a little bit about what the genesis of that was?

Is it IT based?

Was there some particular factor that has allowed you to get that much more efficient on the trade spending program?

Linked to that I'm just looking at the price increases that you got on average across US retail, I think it was about 7% this quarter, which it's similar to other packaged food companies in this environment, yet I look at the consumer price data, and I'm seeing much lower price flows to the consumer for the General Mills portfolio and US retail, generally below sort of 4.5 to 5%, whereas price increases for many other companies are up at the 8, 9, 10% level.

Is there something going on there maybe to do with the trade promotion improvements that you have made that is enabling you to drive share gains and volume growth because of that?

Let me answer the first question first, then I think we may have to come back for just some clarification on the second question.

But on the trade spend and the trade efficiency side, Alexia, we continuously evaluate and study all of our trade promotional offerings with all of our customers.

So we evaluate the effectiveness of different price points and how they work and their attractiveness to the consumer.

We evaluate the effectiveness of different consumer overlays that we might associate.

We look very closely at the mix and the promotion of the proper size, and in all of these factors, over time, allow us to continue to refine our trade spending, so that we have the most effective price points on the most effective SKUs, combined with the most effective sort of in-store consumer programs, and all of that over time has allowed us to pretty consistently reduce our trade spending per case.

So it's kind of an ongoing program of testing and measurement and refinement and learning, and it's really a paid tremendous dividends over the last four to five years.

I didn't fully understand your question on consumer pricing, and maybe if you would restate it for us.

Sure.

I guess it's quite simply, when I look at the IRR data give us an indication on consumer pricing, it seems as though the consumer price inflation that the retailers are setting is lower year on year than the price realization that you are getting across the US retail portfolio.

Maybe you can't answer the question, because I presume it's to do with the retail side about how they choose to pass through pricing to the consumer, but I wondered if there was anything within perhaps the trade promotional budget that was enabling us to see that.

I don't think so, Alexia.

We look at our -- the way we look at this is in our categories, so we just look at where we compete, and we look at aggregate measures across our brands and competitive brands, and what we're seeing consistently this year is that our price hag lagged a little bit behind our major branded competitors, and it's also lagged, as I said earlier in this discussion, it's lagged behind private label as well.

And the reason for that is the same reason that's allowed us to lag for the last several years, and that is our focus on productivity.

We're able to absorb some of the cost impact pressures, and that means that we've had to take a little less pricing a little later than many of our competitors, including private label.

So that's our strategy, and it's again played out that way for us this year, all be with it levels of inflation and pricing that were higher than what we had seen in the previous five years.

Okay, great, thank you very much.

All right, thank you.

And operator, we're up to time here, but let's sneak in one more.

Perfect.

So our final question will be coming from the line of Andrew Lazar with Barclays Capital.

Please proceed with your question.

Good morning.

Thanks very much.

Good morning, Andrew.

Quick one.

I guess with less incremental pricing likely as we head into 2010, for fiscal for you, still obviously some inflation, albeit not as significant as the past several years, it really does put that much more onus on sort of the incremental productivity programs that you've got.

I'm just wondering, and seeing the stock, frankly, on the open, as we look out to 2010, is there any way to help better quantify in some way what the incremental productivity coming that you might have have left on these programs?

A number of companies kind of put out different metrics, whether it's incremental productivity, as a percentage of cost of goods, things like that, and the only reason I ask for that type of clarity is just obviously given the reaction in the stock this morning.

I think part of this has much more to do about frankly the outlook around fiscal 2010 and some of your preliminary comments than does it about the quarter, per se.

Productivity and HMM activities continue to be a huge focus for us, Andrew, and without going today into too much detail on metrics, I will tell that you in the US we continue to have a multiyear pipeline going forward of productivity initiatives, and we've grown the level of productivity consistently over the last several years, I'm sure we'll be able to do that again in US retail next year.

The other thing I would say is that remember that we didn't start these initiatives internationally until later in the game, and so that is a very significant opportunity for us as we ramp up HMM and all those productivity ideas outside the US.

We think that we have a lot to go for there.

So I think overall for the company, this continues to be a very key part of our strategy, and so I'm very confident that we're going to be able to use productivity to expand margins and invest in our brands into the foreseeable future.

Thanks very much.

Okay.

All right, thanks, everybody.

There are some follow-up questions, no doubt.

You know where to find us.

Give us a shout.

Appreciate your time this morning.

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.