通用磨坊 (GIS) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the General Mills fiscal first quarter 2010 results conference call.

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

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

(Operator Instructions).

As a reminder this conference is being recorded Wednesday, September 23, 2009.

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

Kris Wenker, Vice President of investor relations for General Mills.

Please go ahead.

Thanks, operator.

Good morning, everybody.

I'm here with Ken Powell, our CEO, Don Mulligan, our CFO and Ian Friendly, head of our US Retail business, and I'm going to turn the microphone over to them in just a minute.

First I need to cover my usual housekeeping items.

Our press release and first-quarter results was issued over the wire services earlier this morning.

It's also posted on our website if you still need a copy.

We have posted slides on the website, too.

They supplement our prepared remarks this morning and these remarks will include forward-looking statements that are based on management's current views and assumptions.

The second slide in today's presentation lists factors that could cause our future results to be different than our current estimates.

And with that I'll turn you over to my colleagues, beginning with Don Mulligan.

Thanks, Kris, and thanks to all of you who have joined us by webcast.

As you've seen from our financial results released this morning, General Mills is off to a very strong start in fiscal 2010.

Slide four summarizes our first quarter results.

Net sales grew 1% on top of 14% sales growth in last year's first quarter.

Segment operating profit grew 21%.

This reflects strong gross margin performance, driven in part by recovery of margins that we gave up a year ago due to sharp input cost inflation, but excellent operating performance in our plants was also a key factor in reducing our cost of goods sold.

Net earnings totaled $421 million and diluted EPS increased to $1.25.

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

That noncash impact totaled $0.03 per share this quarter, less than the $0.17 recorded last year.

Excluding mark-to-market impact from both years, diluted EPS grew 33% to reach $1.28 per share.

These results significantly exceeded our expectations.

We anticipated our Q1 input costs would be below year-ago levels.

In fact, costs came in a bit better than our plan estimate.

Our plant operating performance was also better than planned.

This was a result of continued good sales levels, which created operating leverage in our facilities.

Mix was favorable and our multi-year focus on continuous improvement and holistic margin management, or HMM, is generating accumulating efficiencies in our plants.

The net sales gain of 1% overall is consistent with our annual guidance.

As you know, we're targeting reported sales comparable to 2009 levels, but I'd characterize our top-line results as a bit ahead of our first quarter expectations, particularly in US Retail, where growth was stronger than the low single-digit increase we're targeting for the full year.

In addition, foreign exchange was a bit less of a drag in the quarter than planned.

We're going to reinvest a portion of this quarter's strong earnings increase in additional 2010 consumer marketing initiatives to help us maintain our strong top-line momentum.

Even with that reinvestment, we now expect our full-year earnings to grow well above our previous target.

We've added $0.20 to our guidance, bringing the range up to $4.40 to $4.45 per share before any mark-to-market effects.

This growth represents -- this represents growth of 11% to 12% from comparable earnings of $3.98 per share in fiscal 2009.

Let's spend a few minutes taking a detailed look at our top-line results.

Our sales comparisons for this quarter was daunting.

As you recall, last year we posted double-digit increases in all three of our business segment.

Slide six summarizes net sales in -- net sales results on an as-reported basis.

US Retail sales rose 6%.

Remember that Pop Secret was still in first quarter results last year, so growth would have been even stronger adjusted for that divestiture.

Ian will review the operating highlights for this business after my financial review.

International sales declined 4% as reported.

Growth here was reduced by negative foreign exchange and product line divestitures in Brazil.

You'll hear more about our International business from Ken in a few minutes.

And our Foodservice segment reported a 16% decline in net sales due entirely to product line divestitures and index pricing for bakery flour that is currently below year-ago levels.

Underline trends in this business segment are exceeding our targets and we'll give you more details of that a bit later, as well.

Slide seven shows the components of our 1% increase in reported net sales.

Pound volume matched year-ago levels that included sales from divested product lines, favorable sales mix and net price realization contributed three points of sales growth, and foreign exchange reduced the growth rate by two percentage points.

We saw solid volume trends across our businesses, especially when you break out the impact of divestitures.

Slide eight shows our pound volume trends for the quarter by segment.

Below the chart you see the impact of divested product lines in our reported results.

Divestitures reduced pound volume for US Retail by one point, International volume by two points, and represented a ten-point volume reduction for our Bakeries and Foodservice segment.

In total, divested businesses reduced pound volume growth by two points.

Our gross margin improved to 41.5%, as reported, and 41.9%, excluding mark-to-market effects.

This quarter included some moderating benefit from price actions taken in F '09, but we've now lapped a vast majority of those increases and don't expect pricing to have as much of an impact for the remainder of the year.

Commodity and fuel costs were below year-ago levels for the quarter.

And I mentioned earlier that strong plant operating performance was a key driver of growth.

A number of factors contributed here.

Good sales and volume levels almost always translate into good leverage.

As you already know, pound volume trends were pretty good for our businesses overall.

More importantly, at the plant level physical case volume was up.

Also, our mix was favorable and the work our teams are doing with continuous improvement and HMM is a gift that keeps on giving in terms of plant operating performance.

These factors increase my confidence in our ability to recover margin we lost through the first three quarters of last year and expand our margin for 2010 in total.

Protecting our gross margins effectively has enabled us to steadily increase our consumer marketing investment.

Increased media spending, for both traditional media and fast-growing online media vehicles, has been driving the growth in our brand spending.

In the first quarter, media expense was up 16%.

Our 2010 plan already included double-digit increase in media spending for the year.

We're now planning to reinvest some of of our first quarter earnings growth in additional media and consumer marketing programs.

As always, we'll maintain strong vigilance over the ROI associated with these initiatives and we expect our increased consumer spending to contribute to continuing sales momentum.

Slide 11 shows our segment operating profit results for the quarter.

Total segment profits grew at a strong double-digit rate, reflecting terrific performance by our US Retail business, a more than doubling of profits for Bakeries and Foodservice segment.

International profits declined, as reported, but once again that's a reflection of negative foreign exchange translation and transaction effects.

Excluding these factors International operating profits increased at a double-digit rate.

Slide 12 summarizes the operating margin change by segment.

The total segment operating profit margin for the quarter expanded by 370 basis points to 21.8%.

That was driven by margin improvement of more than 300 basis points in US Retail, and nearly 900 basis points for our Foodservice segment.

After-tax earnings from joint ventures totaled $24 million for the quarter.

That's below strong year-ago results, due in part to negative foreign exchange impact.

However, Haagen-Dazs Japan volumes were down in the period, reflecting the weak economic climate there.

And while CPW sales grew on a constant currency basis, foreign exchange did pull down the reported sales.

Results did vary by market but overall CPW continues to gain share in its combined market.

Completing our review of the income statement you see interest expense up 6% for the period.

That's a reflection of our actions last year to shift our mix of debt to include more fixed rate and more long-term debt.

Commercial paper rates have been a bit better than we planned so we now think that our full-year interest expense will be comparable to 2009 levels.

That's better than the low single-digit increase we projected in July.

The effective tax rate for the quarter was 33.8%, a point lower than the same period last year, but in line with our estimate for the full-year rate.

And the average number of diluted shares outstanding was down 4% for the quarter.

We remain on track to our target of reducing average shares outstanding in 2010 at a rate less than our long-term goal of 2%.

Let me comment briefly on the balance sheet and our core working capital trends.

Core working capital grew roughly 6% in the quarter.

That's consistent with our usual seasonal pattern under which we increase working capital levels through the first part of the fiscal year and NC levels decline in the back half.

For fiscal 2010 in total, our goal is to hold growth in working capital at or below the rate of our sales growth.

With that let me quickly summarize today's financial results.

We saw good top-line performance in the first quarter despite challenging prior-year comparisons.

Gross margin performance was excellent, fueled by our ongoing HMM initiative, as well as recovery from prior-year margin declines driven by sharp input cost inflation.

We're continuing to invest to build our brands with ongoing product innovation and increasing levels of advertising support.

Clearly, it's been a very strong start to the year.

This momentum points to better-than-planned results so we've increase's our full-year EPS guidance to a range of $4.40 to $4.45.

This performance would exceed our long-term growth targets despite negative foreign exchange and one less week in the fiscal year, while still allowing us to reinvest back in the business and keep our momentum going.

With that I'll turn the microphone over to Ian Friendly for a review of the momentum we're seeing in our US Retail segment.

Ian?

Thanks, Don, and good morning, everyone.

The US Retail business is off to a strong start in fiscal 2010.

We coupled good volume growth with margin improvement.

We're executing well against our proven business model and delivering strong fundamental growth.

The same factors that have been driving our growth the past few years are still working well for us.

For one, we're an advantage category.

Over the last -- over the latest 52 weeks the categories where we compete are growing more than two times faster than food and beverage categories in total.

We're seeing good growth across most of our categories, including high single-digit sales increases for hot snacks, Mexican products and dessert mixes, and these are growth rates in measured channels.

Sales in nonmeasured channels are generally growing at a faster rate.

This category growth has sustained in recent months.

Overall sales growth hasn't slowed as we've lapsed price increases because we've seen unit growth accelerate.

Slide 20 shows the growth for our combined categories over the latest year, the latest quarter and the latest month.

Our categories continue to grow at a robust 4% rate in measured channels alone.

And our brands continue to drive growth for our retail partners.

General Mills has about a 3.5% share of total food and beverage sales in Nielsen measured channels, but our share of total growth across all food and beverage categories was higher than that in the most recent three months, so our overall share of industry sales was up.

This increase is a result of the strong categories we compete in and the good performance of our brands.

The fundamentals of our brands remain healthy.

Baseline, or nonpromoted sales, for our brands grew 2.5% in the first quarter on top of strong growth in the same period last year.

And our brands continue to gain distribution.

Despite increased pressure to reduce items on store shelves our total points of distribution were up 3% in the latest quarter.

We remain firmly focused on innovation to drive growth for our categories and our brands.

We have a number of new items in markets, like new varieties of our Savorings frozen appetizers, Nature Valley Granola Nut Clusters, new Yoplait items, and several new Cascadian Farm and Muir Glen organic products.

We're offering consumers new benefits like Betty Crocker gluten-free baking mixes and we're delivering convenience with new Wanchai Ferry frozen entrees, ready in just 14 minutes.

We're also innovating in how we reach consumers.

Increasingly we're connecting with consumers online and on the go.

We're offering coupons to consumers through their mobile phones.

Betty Crocker, one of our oldest brands, is offering ideas and inspirations on her Facebook page.

Our "Box Tops for Education" program is using social media to support our product and help people earn more money for their schools through new blog outreach and YouTube videos.

And Fiber One has created a series of webisodes that deliver our brand message in a fun, entertaining way.

Our high-quality brands deliver good value.

Slide 26 shows the average nonpromoted retail price per serving for a variety of our core products.

Our brands continue to be very affordable choices for consumers.

So our sales strength in the quarter was driven by the fundamentals.

Pricing did contribute, but it wasn't the biggest driver of our growth.

In total, our net sales were up 6% with good momentum across our divisions, as shown on slide 27.

Let me share a few highlights.

I'll start with Big G.

Our cereal division had a great first quarter.

The US cereal category remains vibrant.

We continue to lead growth in the category and our share was up almost a point in the quarter.

Our core established brands are performing well.

Retail sales for the market-leading Cheerios franchise were up 4% in the first quarter in channels where we have data.

Sales for the Cinnamon Toast Crunch and Fiber One franchises continue to post double-digit sales growth and Chex franchise sales increased strongly in the quarter with our gluten-free news.

We have some great new items in markets, including Cookie Crisp Sprinkles and a Blueberry Pomegranate variety of Total cereal, and we just announced the introduction of Wheaties Fuel.

We're supporting these new items and our established cereal brands with some terrific advertising, including a new division-wide campaign telling consumers to look for the white check on every box of Big G cereal, a reminder that all our cereals are a good source of whole grains.

There is plenty of opportunity for continued good growth in the US cereal category.

More than 90% of US households buy cereal each year and the number of servings consumed annually is growing.

Consumers increased their cereal consumption by almost a billion servings in 2008.

We like the prospects for future growth in this category and Big G remains focused on leading category growth.

Let's shift to the soup aisle where Progresso's share of the ready-to-serve segment is up more than half a point over the latest 12 months.

This includes good gains in our most-recent quarter.

We think this category is on trend with consumer needs for taste, convenience and value, and we're looking forward to a good soup season this year.

This category has historically grown with good innovation and we're trying to do our part.

We're bringing the benefits of high fiber to the soup aisle.

We introduced four new soups that provide 28% of the daily recommended fiber intake.

We've seen great success with high fiber items in the cereal and grain snacks aisles and we think this is some good health news for the soup category.

We're also supporting Progresso soups with some terrific new advertising.

We have five new ads that just broke last week; you'll see three of them on TV and the other two online.

All the ads focus on the great taste of Progresso and show consumers calling into our culinary kitchen via their soup can phones.

We're working to remind people about what's good in soup and bring more consumers to the category.

Let's shift to yogurt.

Yoplait sales grew 4% in the first quarter with particular strength in nonmeasured channels.

We've seen heightened promotional activity in this category recently.

The left side of slide 34 shows the changes in the level of merchandising during the last three months for Yoplait and the category.

The right side of the page shows the percent discount for items being merchandised.

Let's look at the category trend.The percent of yogurt category volume that was merchandised in the first quarter increased to 41%, up four points from the same period last year.

Category merch price was hotter, as well.

The depth of discount for the category increased by two percentage points.

In contrast, merchandising activity for Yoplait increased at a rate lower than the category, and we did not increase our discount level.

We believe the US yogurt category still has a lot of room to expand by bringing in new households and increasing usage by current consumers.

And although price promotion has a role, we think the key to driving category growth is innovation.

Yoplait recently launched a number of new items.

With our new frozen Yoplait Smoothie you just add milk and blend.

Sales for this frozen item won't show up in the refrigerated yogurt category, but it's a great addition to the Yoplait brand.

In the refrigerated section we introduced a reduced calorie version of our Yoplus+ probiotic yogurt.

It has only 70 calories per serving and is a nice addition to this growing line.

In July we introduced Yoplait Delights in four indulgent flavors.

This product has a thick, creamy texture and a unique, two-layer format.

At just 100 calories per serving it makes a great snack or dessert.

First-quarter volume exceeded our expectation and we're getting positive feedback from consumers.

We have some new Yoplait ads that just went on air as well, including a new weight management ad that targets Hispanic consumers.

Yoplait has focused on this important demographic in the past but this is our first effort to build our light business with this growing group of consumers.

We think our innovation and brand building efforts will result in a stronger sales growth for Yoplait and the yogurt category beginning in the second quarter.

The US yogurt market is still young relative to many markets around the world and as we look to the future we see lots of opportunity to drive growth for the category by increasing US per capita consumption.

I'll turn now to Pillsbury, which was our fastest growing division in the first quarter.

Net sales rose 12%.

Pillsbury Toaster Strudel and Totino's hot snacks partnered on a back-to-school program that drove strong double-digit retail soles growth.

Pillsbury refrigerated cookie dough had a good quarter, too.

Sales benefited from a competitor's recall, but also reflected the launch of our new Simply Cookies product line.

Overall, refrigerated baked goods retail sales were up 8% in the first quarter.

This month, we introduced some new Pillsbury advertising that builds on last year's successful home calling campaign.

We have several additional ads that we'll introduce over the next few months and we're looking forward to a strong holiday baking season for Pillsbury.

As consumers make more meals at home our dinner mixes offer great quality and convenience at a good value.

We had strong orders on these businesses in the first quarter and we've got great merchandising lined up this fall that we think will drive good retail sales performance.

Taco night also makes for a great family dinner.

Retail sales of Old El Paso Mexican items are growing nicely, up 9% in the first quarter in channels where we have data.

Across our business we're supporting our brands with strong levels of media spending.

In addition to the examples I've shown already, this month you'll see new advertising for Bisquick around pancake morning.

Hamburger Helper is on air with a spot featuring Beyonce and support for hunger relief with Feeding America.

And Fiber One bars are on TV for the first time.

In total we're targeting a double-digit increase in media spending for US Retail in 2010.

Let me sum up my comments on US Retail.

Our categories are growing and we've got an advantaged brand portfolio that's leading growth.

For 2010 we're continuing to target low single-digit growth in net sales.

We have a strong innovation lineup and we plan to continue to support our brands with increased levels of consumer marketing.

We'll use HMM to fuel this investment and help us expand our margins and we're planning for a mid single-digit increase in operating profit, in line with our long-term model.

Now I'll turn you over to Ken for some operating highlights on our other business segments.

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

Appreciate you joining us on the call today and let me start my comments with a review of our Bakeries and Foodservice performance.

As you know, it's a challenging environment for this business right now as consumers eat more at home, but our Bakeries and Foodservice team is performing well.

We've made significant changes to our business over the last few years, dramatically reducing the number of items we offer and consolidating our supply chain operations.

We recently built an in-house sales force for the convenience store and food service distributor businesses that is helping drive differential performance for us.

Our sales for this segment totaled more than $400 million in the first quarter.

About 60% of those sales were to bakeries and national restaurant accounts, 30% were to food service distributors, and just over 10% went to convenience stores.

We believe the last two channels I mentioned, distributors and convenience stores, are our best opportunities for profitable, sustainable growth.

Our sales to distributors were up 1% in the first quarter, despite industry sales decline.

Industry sales were down in convenience stores, as well, but our business grew 8% in the quarter, driven by distribution gains and new product innovation.

Higher-margin branded products now generate more than 65% of our Bakeries and Foodservice sales and we expect that percentage to increase again this year.

These products are branded either to the end consumer or to the food service operator.

I'll highlight results for a few key segments.

Net sales for our cereal brands in these channels were up 6%, yogurt sales were up 12% and sales of our snack brands were up 15%.

By focusing on the best channels and our higher-margin products we'll continue to improve our mix.

This is one of the factors that drove strong operating margin improvement in the first quarter.

Segment operating profit more than doubled, and as Don showed you earlier, operating margin improved significantly to 14.1% of sales.

In addition to mix improvements, we also saw strong performance across our manufacturing and logistics operation, and commodity costs came in below last year in better-than-planned expectations.

Grain merchandising profits were up, as well, but neither the increase nor the overall profit level was out of the ordinary.

In 2010 we continue to expect that reported net sales in volume for this business will be below 2009 levels because of product line divestitures, lower prices on bakery flour, and continued weakness in overall food service industry sales.

However, we expect to grow our share of industry sales in 2010, and our plans call for margin expansion in this segment, driven by productivity, better costs, and positive mix.

And longer term we still like our growth opportunities in the half trillion dollar US market for food away from home.

Outside the US our International businesses continue to generate good growth.

Slide 49 shows net sales for our geographic regions on a constant currency basis for the first quarter.

In total, sales outside the US were up 5%, excluding the impact of foreign exchange, which reduced reported sales by nine points.

Our business in Canada was particularly strong, with sales up 12% on a constant currency basis.

Cereal sales were up double digit in the quarter with our Olympic promotion and the launch of several new items.

Grain snack sales were strong, as well, including the introduction of new dark chocolate varieties of Nature Valley Granola Bars.

Sales in Europe were down slightly in the quarter.

We're seeing good growth on grain snacks in the UK and Old El Paso Mexican products in France, but overall economic conditions in Western Europe remain challenging.

In Latin America, sales were up 10% with good growth from regional brands, including La Saltena pasta in Argentina and Diablitos sandwich spread in Venezuela, And in the Asia-Pacific region, sales grew 6% with Wanchai Ferry Dim Sum items and super premium ice cream in our Haagen-Dazs shops contributing to good growth in greater China.

For 2010 in total we continue to target good performance for our International segment.

Our brands are driving good growth with innovation and distribution gains.

Our focused platforms have margins above the Company average, so as we grow these businesses we'll improve our overall margin.

Holistic margin management is also contributing to margin gains and generating funds to fuel brand investment.

Foreign exchange headwinds will impact our reported results on both a translation and transaction basis in 2010, although a bit less than we originally planned.

Overall, we're continuing to target mid single-digit sales growth and double-digit operating profit growth on a constant currency basis.

Cereal Partners Worldwide, our joint venture with Nestle, posted a sales decline, as reported, but once again that was due to foreign exchange.

As Don mentioned earlier, sales were up in the quarter before foreign exchange impacts.

Our core brands, including Fitness, Nesquik, Cheerios and Chocapic are showing good growth.

Chocapic Petites, which we launched earlier this year in France, is off to a strong start and we're having good success with our whole grain advertising message.

As we look across geographies, it's a bit of a mixed bag.

Some markets, like the Middle East, Asia and Latin America, are growing well for us.

Other markets, especially Europe, are slower, but we continue to gain share across our combined markets and we believe the growth prospects for global cereal sales and CPW, in particular, are excellent.

Let me wrap up by comments and then we'll take your questions.

Over the last few years we've focused intently on a business model that uses supply chain productivity, sales mix management, and other cost savings efforts to protect our margins from the pressure of rising input costs.

This helps us limit price increases and also allows us to direct significant resources back into our business in the form of ongoing product innovation and increased consumer marketing support.

This reinvestment fuels continued strong sales trends for our brands.

That's helping us drive growth for our food categories in markets around the world.

This market is working well, it's sustainable and so we're sticking with it.

For fiscal 2010 we still expect annual net sales to be comparable to 2009 levels, as reported.

With our good margin expansion we're now targeting segment operating profits to grow at a mid single-digit rate.

That's up from the low single-digit target we shared with you back in July and we've raised our earnings per share guidance to $4.40 to $4.45 per share before any impact of mark-to-market valuation.

This EPS range represents growth of 11% to 12%, which is above our long-term model.

OUr focus on the fundamentals is driving high-quality, sustainable performance across our portfolio.

We'll stay firmly focused on executing our plan and extending our track record of strong performance.

So that concludes our prepared remarks and I'll ask the operator to open the lines up for questions.

Thank you.

(Operator Instructions).

Our first question comes from the line of Chris Growe from Stifel Nicolaus.

Growe.

Please proceed.

Hi, good morning.

Hi, Chris.

Good morning, Chris.

Hi.

Very nice quarter, good job on this first quarter here.

I wanted to ask, if you look at the first quarter, obviously that's just tremendous gross margin performance.

You obviously had some strong pricing coming through, particularly in US Retail, and input costs were lower so I'd just be curious if you had something you had planned on costs being lower in the first quarter.

Do you have that view now for the full year that input costs will be lower?

Chris, this is Don.

No, not for the full year.

We still expect low single-digit inflation, a bit lower than we had originally thought but still on the plus side of the ledger.

We did see lower input costs in the first quarter but as you referenced and as we said, that was actually planned although they did come in a bit better than our expectations.

Okay.

And then in this environment of lower input costs -- and obviously we still saw some residual pricing in this quarter, which was very good -- but are you seeing any change or increase in competitive levels of promotion, or do you anticipate that in some of your categories where -- typically where the input costs are markedly lower?

Hi, this is Ian.

Hi, Ian.

Overall I wouldn't characterize it that way.

I think we're seeing fairly normal levels of competitiveness across most of our categories.

As I said in my comments, we are seeing a little bit more competitive pressure in the yogurt category, as dairy prices have come down and our key competitor has discounted fairly heavily, but we feel that's pretty much manageable.

Throughout the year we monitor always our trade and promotion and pricing activities and make adjustments.

I wouldn't characterize what we believe the go-forward to be anything atypical or uncharacteristic of the past.

Okay.

If I could just ask one final one and that's just, in the Foodservice division and the absence of those couple divestitures, could you give an idea of what that contributed to the margin or to the profits of the business?

I don't know that we're giving that level of detail.

I think we told you that it took out about -- of that sales decline, ten percentage points were from that divestiture and we don't go into that level of detail on margin but I will tell you, Chris -- this is Ken, that we've made multiple divestitures over the last four or five years.

I think we've taken out over half of our plants now and it's approaching over 60% of the SKUs and all of this activity has been to get this business leaner and more focused on those higher margin branded businesses that go through the higher margin channels.

And I think the cumulative impact of all of that work over the past several years is it's just really starting to pay off for us in fundamentally better margin profile for the overall business.

Okay.

Thank you for your time.

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

Please proceed.

Hey, good morning, everybody.

Hi, Eric.

Good morning, Eric.

I guess couple of quick questions.

One, how much do you think the fact that Nestle was off shelf helped the margin performance with US Retail with -- because I know the refrigerated dough business is a high-margin business to begin with and then if your competitor was off shelf I have to imagine it was extremely good this quarter?

Yes, I would say over all of US Retail that effect was obviously muted.

Within our Pillsbury refrigerated baked goods it was -- I think we gained probably about four share points out of that.

It was a factor.

Certainly, we had a more positive-than-expected Q1 in Pillsbury on that business as a result.

We would have had good results, though, even without that.

So I would say it was obviously a tailwind in the quarter but not material as it relates to the total results.

Okay, thank you for that.

And then just as a follow up to Chris' question, so Ken, to just understand, it's been a long time since the Pillsbury acquisition and the Foodservice business has always been -- I'd say operated below expectations from the original plan, but can we -- do you think we can start to model this kind of margin level going forward for that division?

Are we now with the latest divestitures at just a sustainable new level?

Well, I think this quarter, Eric, was -- for all the reasons Don mentioned, was particularly good.

We were going up against very high input cost inflation a year ago and we had very significant lower costs during this quarter and those effects and we also had substantial pricing during the first quarter in Foodservice a year ago and so those effects will moderate over the course of the year.

But we do think -- our goal all along has been to get our Foodservice business sustainably into double-digit margin territory and that continues to be what we're going to strive for.

We've got a good shot at doing that this year and obviously, as we continue to restructure the division and get it more focused, I think we're making very good headway at that sort of sustainable margin performance that you're describing.

And then last, then I'll pass it on, Ken, do you think -- maybe you could just describe the state of relations with the retailers, not -- you don't have to get specific, but obviously there's a pressure to cut SKUs, perhaps more than there has been historically.

Some of the major packaged food -- sorry, some of the major consumer products companies, like Proctor, lowered prices, which seemed pretty unusual.

How do you describe the -- across your categories and across the retail partners, how would you describe the situation?

Very, very positive, Eric.

We're bringing them a very strong portfolio of leading brands, number one or number two share brands in categories that they really care about.

We're bringing them terrific innovation and Ian described some of that for you.

And so we're certainly delivering on our responsibility to help them drive their categories.

We're also bringing them across the board a lot of capabilities.

We're bringing them marketing and consumer insight capability to help them with some of their programs.

We've got a lot of focus on jointly trying to get logistic costs out of the system.

So I would describe the relationship with our retail partners as very strong across the board.

They like what our brands are doing for them.

We do know, of course, that SKU rationalization is something that they're focused on and as we've said before, we think that that makes sense.

That's an appropriate strategy for them.

We do that to ourselves and -- because we think that's a good way to drive mix.

But even in this environment, distribution for our US RO products during the first quarter increased by three percentage points and I think that just shows the overall strength of our brand portfolio.

Ian, would you want to comment?

Just two other things to add to what Ken said is, as I mentioned in my remarks, we're driving very strong baseline sales growth by our reinvestment in our brands, and not only is that the most profitable volume for us but that is the most profitable volume for our customers, as well, so we're driving business off the shelf in that kind of way ahead of our categories.

That's a win-win situation for everyone involved.

And I would just support the notion, as Ken said, in -- well, we have expanded our distribution in a world that rationalizes.

It's really the number one or number two brands that are creating growth that are going to win in that environment so we like what we're doing.

The last thing I'll mention is in the area you asked about, which was pricing, and if you just looked at Nielsen data for us in the last quarter our prices now are effectively up 1% to 2%.

I would say most of the branded manufacturers in our category are roughly the same, And retail brands, that's our customers' brands, are up about a point higher than we are.

So we've been very modest in our pricing and really using HMM as the first line of defense on what was inflation and now against driving our margins and keeping our pricing very well in line with the market.

Thank you.

Pass it on.

Our next question comes from the line of David Palmer from UBS.

Please proceed.

Thanks.

Hey, everybody, congrats on the quarter.

Thanks, David.

You mentioned your international cereal sales are up and that you're gaining share.

I was wondering if you could perhaps give some big picture comments about the cereal category in Europe and perhaps other International.

How is the trend category growth-wise and perhaps even branded share?

Any sort of comments on that would be helpful in the economic environment.

David, this is Ken.

It's -- typically the cereal category outside the US will grow 2% -- 2% or 3% year over year.

I'd say the last year-and-a-half it's been closer to 1% -- 1%, 1.5%, so it is down a little bit.

I don't know that I can right now give you too much detail on the mix of that.

So we have seen it slow down a little bit but still growing and CPW is still getting good top-line growth, and from memory, the last time I looked at this we were -- our share was up in seven or eight of our top ten markets.

So we're -- so there has been, I think, probably a little bit of an impact in this current economic environment on the cereal category outside the US.

But again, still growing and still a category where, when you look at the penetration of this category compared to what it is in the US, there is just huge upside to continue to grow it, grow penetration.

I think we have decades of growth to look forward in the international cereal category and CPW, very well positioned to continue to grow and continue to capitalize on that market.

In fact, really two years ago the cereal category outside the US became larger than the cereal category in the US, so that's actually -- the international part of the market is the larger part of the global cereal market now.

So it's big and growing and very promising for us.

And just one quick one on Yogurt in the US.

In many ways that category seems like the perfect food, including value, and it doesn't seem obvious that that category overall would slow during tough economic times, but it definitely does not have the growth that it did before and that's obviously now a very high-margin category for you at that scale.

What do you think is the big picture for yogurt?

Is -- are we past -- is there a long curve playing out here where we're not going to see the growth of yesteryear in that category?

Yes, David, this is Ian.

I still think in yogurt we're in the early innings and I don't think that story or that curve has run out at all.

I do think that we need more innovation to drive the category and as I said earlier, I'm not sure that heavily discounting the product is a good long-term growth strategy for the category.

We're going to focus our energies on innovation and our brand marketing support, which has increased substantially in yogurt and I think we're seeing that now as the different months go by that yogurt will get progressively better as a category.

The other part that you probably don't have nearly as much visibility to is the channel side, which is substantial.

As you know, you don't have Wal-Mart in the Nielsen data nor club stores or drug and discount, and particularly Wal-Mart and club are very, very big players in yogurt.

Those categories and our business with them are growing tremendously and that isn't entirely visible in the Nielsen data and there's probably some channel shift going on there, as well.

Thank you, guys.

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

Please proceed.

Hi, everyone.

This is Jackie for Vincent.

First of all, congratulations on a great quarter.

Hi, Jackie.

I just have a question on -- your COGs obviously came in very favorable relative to where we had thought, is there a way to think about how much of that might have been dairy related?

Hey, Jackie, this is Don.

Rather than break out individual components of it, if you look at our COGs year over year, it was down significantly and there's a couple of major contributors.

One is mark-to-market.

The mark-to-market adjustment that we make each quarter contributed about $77 million of that swing.

If you recall, we had about a $91 million charge last year first quarter, this year it was only about $15 million or $14 million, so that's about a third of that reduction.

The rest, about half of it or a little over half of it is rate and mix and that's a combination of the deflation that we saw, great plant operations, great logistical savings, so all the supply chain performance that we saw this quarter.

Volume contributed a little over 10%, and while volume was up the divested lines actually had a higher cost per case -- COGs cost per case, so that contributed to the reduction in COGs.

And then finally, for ex had a impact, too, of a couple percent -- 2% or 3% in the reduction.

Okay, great.

Thanks.

And I guess on FX you're now thinking that that's going to come in a little -- as slightly less of a headwind than you had thought.

You previously talked about $0.15 per share, is there any update to that?

In the guidance we do have an plus f $0.02 or $0.03 versus our plan.

If you remember, in July, when we gave our guidance we said there was that $0.15 headwind but you have two things to remember.

The majority of it was transaction and a large portion of that was hedged, so that is a -- that's fixed and even as the dollar moves we won't see any change from our plan rates in that portion of our foreign exchange.

So the part that actually has any variability to it is only a fraction of that $0.15, and as I said, given the recent movement in the dollar we see $0.02 or $0.03 plus coming through for the full year versus our guidance in July and that is obviously embedded in our current guidance.

Okay, great.

Just one more quick one, if I could.

On Bakeries and Foodservice you're obviously saying that sales are going to be lower year over year but that your margins are going to expand.

How is a good way for us to think about operating profit growth in that segment?

Jackie, what we said in July and we can certainly expand on that now is that we -- while we expect sales to be down because of divested businesses and the index pricing on the bakery flour, we still expect margin expansion.

That is, we expect profit to decrease by less than sales.

Given our strong first quarter and the momentum that we see in the business, we're even more bullish than that and that bullishness is also factored into our current guidance.

As Ken just mentioned, our goal has always been to return that business to a double-digit operating profit margin and we thought that was a couple years out.

We're going to strive to see if we can get there this year.

Okay, great.

Thank you so much.

Congratulations again.

Thank you.

Our next question comes from Terry Bivens from JPMorgan.

Please proceed.

Good morning, everyone.

Hey, Terry, how are you?

Good, good, thank you.

I guess this is for Ian.

Ian, if you look at US cereal all channels, what do you put category growth at here?

I would estimate about a mid single-digit growth in all channels.

Okay.

Five or sixish maybe?

Four to five is sort of where I would pick.

Four to five, okay.

As you look at what appears to be pretty strong category growth, I guess the question would be where do you think you're sourcing most of your market share gains from?

Do you mean by brand or by customer or what is the --?

I would say by competitor was what I was trying to get at.

I think for the category primarily for the quarter, in cereal you interact with everyone but if you look at the total quarter I think Kellogg's was up slightly, Post was obviously down a great deal in the quarter.

So I think they went through some pricing and some transitional issues logistically, so for our first quarter I think most of the people in cereal probably sourced to a disproportionate degree from Post.

I don't think that's necessarily a long-term trend but that's how that quarter played out.

Terry, we don't -- this is Ken.

We don't really think about it that way, going after competitors to get share.

We're sourcing our share growth from the consumer and if you really -- If you look at -- think back to Ian's presentation, we really have -- I think as a result of very sound marketing execution, brand by brand, across our portfolio, baseline growth on all the core brands.

It really is a case of building it up, brand by brand, focus on execution, get the baselines going and that is leading to couple years now of very consistent share growth for us.

And I think, as Ian said, from the competitive standpoint, who's up and who's down in any given period it depends largely on what they're doing.

We just keep our focus on our brands and on the consumer.

The other thing I'd just add to that is, Terry, I think the big story in cereal primarily is the vibrancy of the category and the consistency of the category's growth.

This is very good growth for cereal.

It's carried through, as I mentioned, as we've lapped pricing now.

It's really been unit volume growth.

Cereal as a category is very healthy and that's a good story for us and probably all the players in the category.

No, I couldn't agree more there.

I think there's a very strong demographic that supports it, as well, baby boomers like myself, I guess.

Question, quick one one on yogurt.

I know you didn't want to quantify the profitability fact with Yoplait, but it would seem that it was a pretty good contributor given what appears to be -- you stayed a little bit more rational there and obviously you're benefiting from lower input costs there.

Is that a fair statement to say that that was a nice contributor to the US Retail performance?

It's a very fair statement to say that yogurt was a nice contributor.

I will tell you, though, that on our earnings side it was very strong earnings growth really across all our divisions.

And so while yogurt was terrific, I can tell you there was pretty terrific performance across the board.

Okay, very good.

That's it for me.

Thank you very much.

Our next question comes from Ken Zaslow from BMO Capital Markets.

Please proceed.

Hey, good morning everyone.

Good morning, Ken.

Just a very quick and probably obvious question but just wanted to double check, is there any reason to believe that General Mills' long-term growth target would change at all just given the strength of 2010, or going beyond you can still keep that exact algorithm that this is the new base earnings, per se?

We're going to -- we like that growth model that we have and we're going to -- we'll stick with that.

That's a model that -- it's our promise to shareholders that we're going to figure out a way to get them a double-digit return year in and year out and that's a combination of high single-digit EPS, coupled with a good dividend yield.

So we like that model and we'll stay with it.

We're obviously pleased that we're doing better than that model this year, but we'll stay with it and we're very confident that that's a sustainable model for us.

And the reason that we are, Ken, goes back to the conversation that we just had with Terry Bivens, our categories are just absolutely rock solid.

They're doing very, very well, growing 4%.

They're great categories that really respond to innovation and we've got great leading brands in those categories.

So we really have a lot of confidence in our ability to sustain good consistent performance going forward.

Okay.

My second question, I know you only give it out once in the 10-K every year but can you discuss your ability to exceed your overall growth with your number one customer?

And what are you doing to drive the out-performance relative to your other businesses -- obviously, it's Wal-Mart -- because I know you give it out in the 10-K?

So I'm sorry, Ken, what's the question?

in your 10-K you always are able to provide your top customer and what the -- you could always back into what the growth is on the sales line of your top customer and year after year you guys do exceed your overall sales growth in that one -- with that one customer.

I'm just trying to figure out exactly what you're doing in that one channel that is really exceeding your underlying overall sales growth?

Well, Ken, our commitment is we want to lead growth and drive growth with all of our retail partners.

And so we're bringing these great brands and all of our capabilities and all of our marketing initiative to all of our retail partners to help work in a coordinated way with their strategy and we really want to lead growth with all of them.

Now, it so happens that over the last several years Wal-Mart has been able to grow faster than many of our other retail partners and we've grown faster with them, as well, because of all the things that I just mentioned.

But our commitment really is to lead that growth everywhere that we compete.

But is there anything special that you do with them, or is it just sort of the -- ?

Well, each customer has their own approach, their own -- they focus on different things and our job is to partner with them in the ways that are most important to them to help drive growth in their categories.

And I don't want to go into the details of Wal-Mart's strategy versus another person's strategy, but we think that we're doing a very good job now of really listening to our customers and aligning with their growth drivers and really delivering differential growth for them, so -- and again, this is something we're trying to do across all of our customers.

My last question, can you give some examples of some meaningful changes that you're doing in HMM?

I know the lids was the old one, if you could just give a litany of examples of what you're doing.

I know that they probably don't -- each in those themselves probably doesn't add up to much, but if you could give us some examples of exactly what you're doing it would be helpful?

Thanks for that question, Ken, because it -- HMM continues to be a very, very high focus for General Mills and a key driver of our performance, including this corner -- this quarter, and we all have our hands raised because we want to answer the question.

But I'll give you -- one that I think is very interesting is that on the logistics side of our business this quarter, our fuel use -- I'm not talking about the dollars that we spent on fuel, I'm talking about the gallons of fuel that we used, was down over 10% in a quarter where our volume was up and the reason for that was because of a very high focus on HMM thinking.

So we improved our forecasting, we changed the way we're -- we coordinate and manage our trucks.

We got a lot smarter and developed software and different techniques to fill those trucks better.

And that sounds very mundane, but actually being able to do those kinds of things enabled us to deliver goods much more efficiently, use less fuel, take trucks off the road, and drive costs out of that logistics system.

So that's just another example of how this very broad-scale HMM effort continues to pay dividends for us.

I don't know, I think Don had one that he wanted to talk about.

Yes, Ken, there's very -- there's different facets of it.

Ken alluded to one that was in the productivity side, as we call it, supply chain productivity.

Mix management continues to play a role.

If you look at our Pillsbury business, not only is it contributed from a mix standpoint but it's growing faster than our overall business with its higher-margin product line.

But it's done that consistently over the last several years as we've reallocated and redirected more of our innovation and advertising support behind RBG, our refrigerated baked goods business.

And as a consequence, over the last three years we've seen a 350 basis point improvement in our gross margin in our Pillsbury businesses here in the US.

We have a similar -- we can talk similarly on snacks, for example, where we've done some packaging redesigns in our fruit snacks business, which is taking cost out of the product but also driven some efficiencies in the manufacturing platforms, and we've seen over a point and-a-half growth in our gross margin in our snacks business.

So again, it's really -- I think the key thing to take away is it's broad based.

The other thing that we talked about more recently is the expansion of HMM to International where we're going to double our HMM contributions this year.

We see it in our administrative costs, which are trending below our historical growth rates because we're applying those same value stream mapping tools and continuous improvement tools to our administrative processes and seeing savings there, as well.

So it really permeates the entire organization so there's a -- we could name 1,000 examples and they -- in and of themselves, some of them are material, some of them are less significant but in aggregate they are very meaningful to our results.

Thank you very much.

Our next question comes from Andrew Lazar from Barclays Capital.

Please proceed.

Good morning everyone.

Hi, Andrew.

First thing is just on plant efficiencies.

Last year in fiscal '09 you had very strong volumes for a lot of the year, as well, and I guess I just don't remember hearing as much about plant efficiencies as I'm hearing ,currently, so I'm trying to get a sense of maybe why that was or what's changed, what's different now that you're seeing so much more of that volume strength drive the plan efficiencies?

And as part of that, how does case volume being ahead of tonnage help your operating leverage?

I just want to make sure I understand the dynamic of that.

Well, I would say to answer the first part of your question -- this is Ian, Andrew -- is that indeed you're quite correct is that we last year had very strong volume growth and this year have strong volume.

What is changing consistently is an integral part of HMM for us has been a continuous improvement effort in our plants and with those efforts have seemingly reached a nice tipping point, are starting to shine through, and so what we're finding now is much better than expected plant performance.

When you put volume leverage over that, it really rang through in the quarter and I expect it'll ring through for the year.

And so that -- it really is just operating smarter, all the principles of HMM and continuous improvement now really showing up in a meaningful -- a very meaningful way in our plants' operation, differential from prior years.

And so I think -- and Ken gave one example of that on the logistics side just a moment ago.

As it relates to case volume, what our plants really run on on volume isn't pounds.

For example, Green Giant canned vegetable is a very heavy product, but -- and so you could have that volume move, and let's say that's down and a cereal case is up.

You'd have a lot more cereal cases required on a weight basis.

And so what we're seeing is as we also shift our mix typically to what is higher-margin products for us they tend to also be more case volume out the plant door and so you get that leverage.

And in US Retail our internal case volume was very close, just a little bit below our sales growth increase, so it's quite a bit above the pound volume statistics you heard and so that's providing extra leverage and that's really what a factory runs on.

Great, that's helpful.

Thank you.

And just the last one.

In thinking over the last quarter or so, we've seen a bunch of food companies raise their spending estimates about what they're spending back behind, let's say -- we'll call it upfront costs, the spending that they embed in their earnings to drive future productivity.

And obviously with the kind of earnings upside that you've shown you are going to spend some of that back because you talked about around marketing reinvestment and such.

You're embedding around $30 million or so of expected restructuring in the year.

I''m just curious if you've looked at are there additional opportunities to use some more of this to drive productivity down the line?

Obviously you're generating the productivity in a pretty big way, so is the spending behind HMM already at levels that you deem adequate?

I'm just trying to get a sense of if you've looked at that and how that analysis goes?

Andrew, this is Don.

Our guidance for the year still remains the $30 million for restructuring, so we don't see any change in our upfront costs, as you called them, or restructuring, as we classify them, which is very similar to what we've done for the last several years, so we think that's the right budget for us.

The efficiencies that we're seeing and the gains that we're seeing in HMM, because they are very broad-based, we don't see requiring more upfront costs.

What you have noticed is we have increased some of our capital spending behind that and also capital spending behind our growth and our capacity, which we think is the phase two benefit of HMM.

That is we've seen the savings, we've reinvested effectively and now we're seeing the stronger top-line growth, so HMM is, if you will, contributing a second wave of benefit.

Now we're seeing it on the top line, as well as in the middle of the P&L.

Great.

Okay, thanks very much.

That's helpful.

Everybody, I'm sorry, but we're a little bit over time here and one of my speakers at least is booked heavily today, so I apologize.

We're going to have to cut it off there.

I know there are other people with questions.

Please give a shout.

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

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

Have a great day, everybody.