通用磨坊 (GIS) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the General Mills third quarter fiscal 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 today, Wednesday, March 24th, 2010.

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

Kris Wenker, Vice President Investor Relations at General Mills.

Please go ahead, ma'am.

Thank you, operator.

Good morning, everybody.

I'm here with Ken Powell, our CEO, Don Mulligan, our CFO and Jeff Harmening who leads our Big G cereal division.

I'll cover my usual housekeeping items quickly.

Our press release on third quarter results was issued over the wires earlier this morning.

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

We have posted slides on the website also.

They supplement our prepared remarks for this morning.

And these remarks will include forward-looking statements, 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, starting with Don.

Thanks, Kris, and good morning everyone.

Thanks for joining the call, for your interest in our Company.

At General Mills we're now nine months through the fiscal year, and our portfolio of leading brands continues to perform very well.

The results we released this morning reflect another quarter of high quality performance.

Our sales are growing, even as we lapped robust prior year increases.

Our margins improved, reflecting lower input costs, favorable mix, and continued benefits from holistic margin management, or HMM.

We continue to reinvest in marketing and merchandising programs to fuel momentum for our brand in the fourth quarter and into fiscal 2011.

And our earnings per share increased at a strong double-digit rate.

Slide five summarizes our third quarter results.

Net sales grew 3%.

That's on top of 4% sales growth last year.

Price and mix contributed 2 points of growth.

And favorable foreign exchange added 1 point.

Segment operating profit rose 8% including a double-digit increase in media spending.

Net earnings totaled $332 million, and diluted earnings per share increased $0.96.

Our reported results include several items affecting comparability.

Third quarter 2010 earnings include a net reduction related to mark-to-market valuation of certain commodity positions, and grain inventories.

That reduction totaled $0.01 per share this quarter, bringing our adjusted earnings to $0.97 per share.

In last year's third quarter, we reported a $0.13 gain for mark-to-market valuation.

Our year-ago results also included an $0.08 gain for insurance proceeds related to a plant fire in Argentina and $0.15 reduction due to an impact of a court decision on an uncertain tax matter.

Excluding these items affecting comparability in 2009 and the mark-to-market effect in both years, diluted earnings per share grew 23% in the third quarter.

Top line growth continues to be an important driver of our results.

US Retail sales rose 3%, on top of 8% growth in the same period last year.

International sales grew 11% as reported.

This includes favorable foreign exchange but volume growth, net price realization and mix drove a 3% increase in sales on a constant currency basis.

Our Foodservice segment reported a 10% decline in net sales.

But this includes the impact of divestitures and index pricing tied to wheat markets that are below year-ago levels.

Underlying performance in this business segment remains quite good.

Slide eight shows the pound volume contribution to net sales growth, with the impact of divested product lines noted below the chart.

On a reported basis, pound volume contribution to net sales was unchanged versus last year, with divested products reducing growth by 1 point.

Pound volume for US Retail segment was comparable to last year, despite declines in heavier products like soup, flour and canned vegetables.

Unit volume, measured in equivalent cases was up 4% for the quarter.

Pound volume for international was up 2% despite a 2 point reduction from divested businesses.

And divestitures significantly reduced volume in our Bakeries and Foodservice segment.

Excluding divested businesses, pound volume would have increased in the quarter, well ahead of overall industry trends.

Our margins recovered from year-ago levels in the third quarter.

As reported, gross margin increased from 36% to 38% for the period.

Excluding mark-to-market effects, the expansion was stronger, reflecting lower commodity and fuel costs, favorable mix and HMM benefits.

These more than offset a $48 million pretax charge from a change in our capitalization threshold for spare parts.

We expect this change will help us further improve our capital management going forward.

We continue to invest funds generated by gross margin improvement to drive top line growth.

Our media spending was up 33% in the third quarter.

As we have discussed with you before, we're increasing our digital and multi-cultural marketing.

We're also bringing growing brands like Old El Paso Mexican products and Green Giant Frozen Vegetables back on the air with TV advertising.

And we continue to invest to grow our global brands in markets around the world.

We do pay close attention to the returns on our media spending and still see plenty of good opportunities to invest to fuel future growth.

These strong levels of advertising and media investments contributed to an increase in SG&A expense in the quarter.

But our third quarter SG&A growth was particularly high, because we're comparing to a year-ago number that included a $41 million pretax gain for the receipt of an insurance settlement related to a plant fire in Argentina.

And SG&A expense for the third quarter this year includes the effects of the decision by the Venezuela government to devalue the Bolivar exchange rate against the US dollar.

The effect of the devaluation was a $14 million pretax foreign exchange loss this year.

Slide 12 shows our segment operating profit results for the quarter.

Combined segment operating profits grew 8% to reach more than $600 million.

US Retail grew 9%, including a 27% increase in media spending.

International operating profits declined due to transactional foreign exchange effects and the impact of the foreign currency devaluation in Venezuela.

Excluding currency effects, international operating profits were up for the quarter, including a strong double-digit increase in advertising and media spending.

Operating profits for the Bakeries and Foodservice segments rose significantly for the quarter, reflecting lower input costs and strong operating cost performance.

After tax earnings from joint ventures grew to $24 million for the quarter.

Foreign exchange was favorable.

Excluding the impact of currency, third quarter sales for CPW, grew 5% driven by strong volume growth.

Haagen-Dazs Japan sales declined 8%, due to the challenging economic environment in that market.

Turning to the balance sheet, you'll see that our core working capital is up versus last year.

Receivables grew roughly in line with sales growth.

Payables were down.

Primary driver of the increase was inventories which were down from second quarter but up from February last year.

That's due to increased grain prices, a couple of product lines where demand was slower than expected, and some deliberate inventory build ahead of strong merchandising programs this year.

We expect working capital to increase slightly faster than our growth in sales for the year in total.

Our operations generated over $1.5 billion of cash through the first nine months of fiscal 2010.

Up almost 40% from last year, driven by our strong earnings growth.

We used some of our cash for capital investments.

We're still tracking the capital spending of approximately $630 million for fiscal 2010.

Next we prioritize returning cash to shareholders through share repurchases and dividends.

We expect our average diluted shares outstanding to be down for the year.

And expected dividends per share in fiscal 2010 of $1.92 represent a 12% increase over the $1.72 per share paid in 2009.

We're clearly on track to deliver another year of high quality sales and earnings growth in 2010.

Through the first nine months, sales were up 2%, segment operating profits grew 14%, including a 29% increase in advertising and media spending.

And earnings per share, excluding certain items affected comparability reached $3.78, up 21% from last year.

Based on this very solid nine month performance, we're raising our 2010 earnings guidance.

We're now targeting earnings of $4.57 to $4.59 per share, excluding any mark-to-market impact.

That represents growth of 15% from 2009 earnings per share of $3.98, excluding certain items affecting comparability.

These good results will extend our track record of consistent superior earnings growth.

As we look to the future, we believe our portfolio of leading brands and advantaged categories creates excellent prospects for quality growth.

The biggest category where we compete is ready to eat cereal.

At Cagny a few weeks ago, Chris O'Leary discussed the potential we see in international cereal markets.

I'd now like to introduce Jeff Harmening who will update you on our US cereal category, and our Big G business.

Jeff?

Thanks, Don and good morning everyone.

I'm pleased to report that the US cereal market is healthy and growing, and our Big G business is on track to deliver a third straight year of sales and earnings growth.

Big G had a strong third quarter.

Sales increased 6%.

We delivered pound volume growth of 4%.

And we continued to invest in strong levels of brand-building support with media spending increasing at a double-digit rate in the quarter.

We're seeing our fastest growth in non-measured channels, where cases sold grew at a double-digit rate for the period.

In Nielsen measured channels, several of you noted that we gave up some share in February.

That was really due to our own very tough comp.

Last year's February share was up more than 2 points driven by a significant merchandising event that's running in March this year.

You'll see that reflected in measured channel data this month.

Baseline sales were up for the quarter and we increased distribution of Big G cereals.

For the fiscal year end total, we expect to lead growth in the category and modestly increase our share of cereal sales, Consistent with our long-term goal.

Leading growth in this category in particular is a great place to be.

Retail sales for ready to eat cereals totaled nearly $10 billion in the latest 52 weeks across measured and non-measured channels.

It's a high penetration category with more than 90% of US households buying cereal each year.

That makes an important category for our Retail Partners, driving good traffic in their stores and delivering a nice margin, and most importantly, the category is healthy and growing.

Retail sales have increased between 2 and 4% annually in the last few years, and we expect that trend to continue.

And because of its size, even modest growth in this category drives a significant increase in sales.

Cereal category sales have increased by $1 billion over the last four years.

This growth in the cereal category over the past few years exceeded the total annual sales for 85% of the categories Nielsen measures across the store.

We're very optimistic about the continued growth opportunities for cereal, and let me tell you why.

To start with, consumers are simply eating breakfast more often.

Although breakfast is still the most often skipped meal, the annual number of breakfasts eaten annually by US consumers have been increasing over much of the last decade.

Most people eat breakfast at home.

And of all the items consumed in the morning for breakfast, cereal is the most common.

But even so, it's only part of a third of all breakfast occasions.

So we see plenty of upside.

The number of times consumers eat cereal each year has been steadily rising and we see that number continuing to increase, driven by a couple of key factors.

First, cereal delivers good value.

Value starts with price.

And at less than $0.50 a serving including the milk, cereal's an affordable breakfast option.

Value is also about benefits like convenience.

Cereal is quick and easy enough for kids to prepare for themselves, and taste, which is something we know consumers are not willing to compromise on.

It's about health.

Cereal compares very favorably to other popular breakfast alternatives in terms of overall calorie and fat content.

It provides the benefits of whole grain with cereal delivering about 10% of the estimated whole grain consumed in the US each year and cereals can promote heart health, help with weight management, and deliver required nutrients like calcium and vitamin D.

So value will drive future cereal consumption, but simple math on demographic shifts in the US also supports continued growth.

Slide 24 shows the annual cereal eatings per capita for several age groups over the last four years.

Cereal is consumed most heavily by kids under 12.

It declines after that, before picking up again with consumers age 45 and up, today's baby boomers.

As you see below the chart, the two age groups that will drive population growth in the US over the next five years are kids under 12 and boomers.

Consumer trends and demographics support continued cereal growth.

I would like to shift now and talk more specifically about how Big G is performing.

As I said earlier, fiscal 2010 will mark our third consecutive year of strong sales growth.

We have powerful brands that are driving good growth for retailers.

For the latest 12 months, we have the top five fastest turning SKUs in the category, and six of the top 10 turning items.

Our growth has been driven by strong execution on key fundamentals, distribution gains, baseline gains, investment in our brands and innovation.

Let's start with distribution.

I know there is a lot of attention right now on SKU reduction by retailers.

Cereal distribution has held up well, over all points of distribution, are basically flat for the category, over the last nine months.

We're seeing more facings, of bigger brands which makes it easier for consumers to shop the aisle and improves productivity for our retail partners.

Big G is benefiting from both additional facings of our products and overall increase in the number of Big G items carried by retailers.

Our points of distribution are up 3% year-to-date in measured channels.

Even though we're increasing distribution, we are still underindexed compared to our market share which represents a clear growth opportunity.

Our growth is being driven by everyday demand for our products, not price promotions.

On a case rate basis, our merchandising spending has been declining for several years and will be down a bit again in 2010.

It's our baseline sales that are driving growth.

Baseline sales have increased in each of the past two years, and are up 3% for the first nine months of fiscal 2010.

These sales are the most profitable for us and for our Retail Partners.

And strong baselines are one of the best indications of the health of our brands.

We're keeping our brands healthy by investing to tell consumers about the benefits our products deliver.

With our current advertising and media estimate for 2010, we expect spending to increase at a double-digit rate for the most recent two years, and we aren't seeing a slowdown on the returns we're able to get for this increased investment.

And our growth has been well-balanced.

We're adding new items that deliver unique benefits and bring excitement to the category, but just as we're focused on growing our established products.

And our investment based approach to how we manage our margins is allowing us to generate significant resources to invest in our brands and fuel continued growth.

Let me give you a few examples of each of these factors.

Cereals is the largest franchise in the US, with 13% of category retail sales in Nielsen measured outlets.

You might think that in the 69 years since we launched Cheerios that we have introduced all the good extensions of this terrific brand.

But the success of our recent introductions tells a different story.

Banana Nut Cheerios, which we launched in January 2009 had year one retail sales of $50 million across all channels.

It was the biggest item launched in the category in calendar 2009.

And Chocolate Cheerios, launched this January, is off to a tremendous start.

During February, it generated almost 1% of total category sales.

We're estimating annual year one retail sales of $75 million across all outlets.

Sales for the first two months are ahead of the introductory pace of any other cereal we launched in the past decade.

We've also got good news and innovation on Wheaties, our oldest cereal brand.

Wheaties Fuel hit store shelves in January, and results so far are very encouraging.

It's been our largest cereal launch outside the Cheerios franchise in the last nine years.

And soon, you'll see new packaging in store on original Wheaties, featuring three Vancouver champions, Alpine skier Lindsey Vonn, snowboarding sensation, Shawn White and two time snowboard-cross winner, Seth Wescott.

Innovation on established products is also important to our growth.

We're focused on efforts on consumer groups that will drive future category growth.

Boomers, kids, and multi-cultural consumers.

This slide highlights examples of our boomer-focused efforts.

Boomers are not willing to sacrifice taste for health benefits.

Honey Nut Cheerios combines heart health benefits with great taste.

It's the number one selling cereal in the US.

Fiber One proves that high fiber can taste good, and it's the category leader in fiber, three times bigger than its nearest competitor.

Multigrain Cheerios offers the benefit of weight management in a great tasting cereal.

Retail sales for Multigrain have more than doubled in the two years to more than $130 million across all outlets.

Innovation is also driving growth for our kids cereals.

All of our kids cereals rank as good sources of calcium and vitamin D, and have at least 8 grams of whole-grain per serving.

Moms like this, but kids like the taste and the fun that we add to our products.

For example, sales of Trix are up 10% so far this year, driven by the addition of swirls, and baseline sales are up more than 20%.

Baseline increases are the key growth driver for Lucky Charms and Cinnamon Toast Crunch as well.

Multi-cultural consumers, particularly Hispanic consumers, are another focus for us.

More than half of the US population growth over the next five years is projected to be Hispanic.

Our advertising spending targeted to Hispanic consumers has more than doubled in the last two years.

Results have been very encouraging.

For example, retail sales with Hispanic consumers are up 6% on Honey Nut Cheerios and more than 20% on Cinnamon Toast Crunch and Fiber One.

Our innovation focus also includes holistic margin management.

One example is our recent work with Rice Chex.

We wanted to free up funds to communicate gluten-free news, and increase advertising during the seasonal Chex Mix holiday period.

Our team identified the cost to transport rice to our plant as a savings opportunity.

Together, the team worked to find a new source of rice closer to the plant that delivered the same quality product for consumers, but significantly reduced transportation costs.

Our savings allowed us to increase advertising spending on Chex, including doubling of our digital media spending.

That contributed to retail sales growth of 7% through the first nine months of 2010.

Over the past 25 years, General Mills has grown our share of total ready to eat cereal sales by an average of 30 basis points a year.

Going forward, our goal is to continue to lead category growth, resulting in further share improvements over time.

And we'll do that by using HMM to fuel continued investment in our leading brands and by innovating across our portfolio, growing established products and introducing new items that deliver meaningful consumer benefits.

As we look to the future, demographic trends continue to favor annual cereal consumption growth.

It's a great category that will thrive on healthy competition and innovation from all players.

We have a lot of confidence that cereal will remain a growth category for retailers and for General Mills.

With that, I'll turn it over to Ken for operating high lights on the rest of our portfolio.

Thanks a lot, Jeff.

Big G's led our growth this year but we've seen good performance from the rest of our businesses as well, so I'll share a brief review of each of our operating segments beginning with US Retail.

In total, year-to-date sales for this segment are up 4%.

As you can see on slide 39, most of our divisions are growing at or above that rate with two exceptions.

Baking sales through nine months were up 1%, lapping very strong pricing in the year-ago period.

And meals sales matched last year's levels as disappointing soup sales offset gains on other meals items including particularly strong growth on Old El Paso Mexican products.

As we look to the fourth quarter, we'll continue to build momentum on the products we've launched this year.

Especially our January launches of Chocolate Cheerios, Wheaties Fuel, Yoplait Greek-style yogurt, Simply Gogurt, and Dark Chocolate Nature Valley Granola Bars.

We'll bring some excitement to our categories with two in-store events.

In March, we have a spring savings event that will offer savings on items across our portfolio, as well as product sampling and recipe books.

And in April and May we're partnering with the new Shrek Forever After movie with in-store displays, coupons, sampling and in pack premiums.

We're increasingly turning our attention to fiscal 2011, and have strong marketing support in place to keep our momentum going into next year.

Our advertising and media support will be up in the fourth quarter for US Retail.

So we expect good sales growth for this business segment in the fourth quarter on a comparable week basis.

For the year in total, we're targeting low single digit sales growth and high single digit operating profit growth as reported.

And as we look to 2011 and beyond, we expect continued good performance for our US Retail business.

Turning to Bakeries and Foodservice, our work over the last few years to position our business for profitable growth continues to pay off.

We're focused on those channels that are the most resilient and offer attractive growth opportunities for our branded products.

And our direct sales teams are bringing valuable capabilities to these channels, resulting in increased distribution and growing market share for our products.

Slide 42 shows year-to-date net sales results for our key channels and brands.

The operating environment remains challenging, but we're outperforming Foodservice and convenience store industry trends.

Through nine months, General Mills sales to Foodservice distributors were down just 1%, and sales to convenience stores were up 6%.

Sales in these channels accelerated in the third quarter, with Foodservice channel sales growing 2%, and sales to convenience stores increasing by 9%.

And our consumer branded products are leading our growth.

Cereal sales are up 3% year-to-date, sales of yogurt grew 4% and snack sales increased 9%.

Our focus in the fourth quarter is supporting the successful new items we've launched this year like the mini pancakes and Yoplait Parfait Pro we introduced with Foodservice distributors, and our sales teams will continue to go after opportunities to expand our distribution.

I'm very encouraged by our Bakeries and Foodservice margin performance.

Our operating margin is up significantly year-to-date, and for the year in total, we'll achieve a double-digit margin.

We feel these 2010 results reflect a new base for this segment and we'll work to grow from this point going forward.

International segment sales have grown 4% on a constant currency basis through nine months.

Excluding the impact of foreign exchange, year-to-date sales were up in all of our international regions.

Canada is leading our growth with a 7% increase in constant currency net sales.

We continue to drive growth in our categories, gaining share in both cereal and grain snacks.

Asia-Pacific sales grew 7% as well, driven by good performance by Haagen-Dazs and Wanchai Ferry in China.

Sales in Europe are up 2% year-to-date, after a strong increase in the third quarter driven by Old El Paso Mexican products and Nature Valley Granola Bars in the UK.

And Latin America sales were up modestly despite the loss of sales from businesses divested last year.

We invested strong levels of consumer marketing in the third quarter and are projecting a double-digit increase for the fourth quarter as well.

The conditions in economies around the globe are still a bit of a mixed bag, and I think it's too early to point to any significant recovery.

We'll stay focused on growing our global brands and accelerating growth in emerging markets.

Particularly China.

For 2010 in total, we continue to expect mid single digit growth in international segment sales, and double-digit operating profit growth on a constant currency basis.

Our Cereal Partners Worldwide joint venture is performing well, and we continue to gain share in aggregate across the markets where we compete.

Constant currency sales are up 5% through the first nine months.

Category growth has been fairly strong in Australia, Asia and Latin America.

Category sales were up in Spain over the last 52 weeks, but cereal sales in much of Southwest Europe remains soft.

Going forward, we're increasing our marketing efforts to drive growth across our core brands.

Now for General Mills as a whole, as we look to the fourth quarter, let me remind you that we're lapping an extra week in 2009.

That week added 6 points to our sales growth in the fourth quarter last year and the earnings contribution was about $0.07 per share before incremental investments we made in consumer marketing.

The fourth quarter last year was also the period where we began to see lower input costs, so we're beginning to lap reduced inflation levels.

These factors will restrain reported results for the final quarter.

We expect to deliver good sales and operating profit performance on a comparable weeks basis.

And as we move into the final quarter, our plans include strong levels of marketing reinvestment and targeted merchandising initiatives, designed to fuel continuing growth for our brands into next year.

We're on track to deliver excellent performance in 2010.

Earnings per share of $4.57 to $4.59, excluding certain items affecting comparability would represent 15% growth from 2009, ahead of our long-term model and well above our original expectations for this year.

As we look forward to fiscal 2011, we will be building on a solid foundation.

Our market categories are growing.

Our brand positions are strong.

And we have a full lineup of product news and innovation planned for the new year.

Most important, we're running on a strong and sustainable business model and this gives us confidence in our prospects for continuing growth.

As a reminder, we'll outline specific plans for 2011 at the end of June.

We'll hold a conference call to share fourth quarter results on Tuesday, June 29, and then, we'll host an investor event in Minneapolis later that week.

We'll issue more information on that event soon, and I hope many of you can join us.

So with that, let's move to your questions, and operator, can you please open the lines and get us started?

Certainly.

(Operator Instructions).

Our first question is from the line of Terry Bivens with JPMorgan.

Please proceed with your question.

Good morning, everyone.

Hey, Terry.

Couple of quick questions on the interface with retailers.

One of the things we hear is that a certain I guess large retailer down south is contemplating some pretty aggressive pricing action and I wanted to ask you guys if you've seen that?

I know you don't like to talk about specific customers, but more of a broad question.

Are you seeing any pressure to take your pricing down?

Well, Terry, as you said, we never comment prospectively on our pricing.

I think what I will say is we still have haven't reached the end of the year but as we look to next year, we do expect to see some return to an increase in input inflation and clearly that's going to be factored in as we all plan for next year.

to be factored in as we all plan for next year.

Okay.

And then, again, there seems to have been a move, I think perhaps too far by some retailers, to streamline their SKU count and it's our understanding that certainly in a couple of cases you guys are actually getting some space back, particularly in the cereal aisle.

Maybe if I could get Jeff to comment on that?

Well, cereal's a very important category for our customers and they realize the importance of it and so as we look at the cereal category specifically, we haven't seen any decrease in distribution for the category as a whole and, in fact, what we are seeing are an increase in facings on the biggest brands because they really help drive the growth for our retailers and make it easier for consumers to shop and we feel great about our prospects in that environment because we have a lot of the top turning SKUs in the category, so we're seeing increased distribution but also increased facings in addition to the number of items.

For us, we really don't see SKU reduction by retailers having been a negative factor in the category performance.

I would just add to Jeff's comments, I'd say those comments are generally applicable across our portfolio.

Just look at our distribution, it has been consistently up 2 and 3% over the past really 12 to 24 months.

Okay.

Thank you very much.

Thank you.

Our next question is from the line of Ed Aaron with RBC Capital Markets.

Please proceed with your question.

Thanks.

Good morning.

Thanks for taking my question.

Wanted to ask just about the tradeoff from promotional, in terms of promotional spending, whether you do it more from consumer marketing versus trade.

Some of your peers have started to shift those dollars more into trade.

Your numbers suggest a heavier focus on the marketing side.

You did hint at some expectations for higher merchandising spending for the fourth quarter.

I know that HMM allows you to do some of both, but I would just be curious to get your perspective on how you think about the tradeoffs between the shorter term profit you might get from higher trade spending versus the more sustainable, longer term benefits from focusing more on higher marketing, consumer marketing spending.

So, Ed, this is Ken.

And I think you've partly answered the question.

Our primary focus is on building baseline.

And we build baselines through effective advertising and sampling and the kind of innovation that really drives fundamental and sustainable category growth and you saw that again this quarter with very significant increases and effective increases in marketing support, not only in the US but very strong increases in our international markets as well.

So really the focus of the organization continues to be on very high quality, baseline driven top line growth.

As we've said, as we look at the competitive environment and monitor what's going on from a merchandising standpoint, we do want to be competitive and so as we've said in selected categories, we have increased some merchandising there to remain competitive.

It's selective.

It's tactical.

And designed really to just keep us competitive.

I would just add a couple of points on the merchandising.

It's more about the frequency that we're in the market as opposed to the depth as well.

That's important note to make.

The other is that on the advertising side, as we've been saying for the past year, we have kept our new product pipeline very robust and so much of that advertising is against new product launches which have been very successful more broadly.

I think that's a differentiator of some of our activity in the marketplace versus the broader market.

Thanks.

Just as a quick follow-up, Don, when you were talking about the increase in inventory, you mentioned that part of it was due to some sales weakness in certain parts of the business.

Were you referring only to soup, or was there anything else that might have caught you by surprise in the quarter?

Well, we mentioned soup and Green Giant shelf stable vegetables.

Those were the primary ones.

The inventory, that was a piece of it but we have also seen increasing grain pricing and we're also prepping for that.

So we're starting to see that pull through.

Great.

Thank you.

Thank you.

Our next question is from the line of David Palmer with UBS.

Please proceed with your question.

Thanks.

Hi, guys.

Good morning.

Good morning.

When we look at the scanner data for even the measured channels, seems like this is also true in some of the non-measured retailers, these retailer brands are an overall packaged food losing share now.

I was wondering as a leader in the space, what's the lesson here of this last year about what's going on with regard to brands versus the retailer brands?

Is this one of those sort of short-lived blips and you see this kind of turning in a few months' time, where retailer brands start to get to easier comparisons and they get momentum again?

What are some of the reasons for the ebb and flow on these shares?

Thanks.

So David, I think you're right.

We are seeing that growth moderate, and just to give you some perspective, over the last year, the last 52 weeks, retailer brands in aggregate in our categories were up a share point.

The last quarter they've been up about 20 basis points, and then in February, I think as you just alluded to, they were down slightly and you heard Jeff Harmening just comment that there's a slight decline as well in cereal.

And so I think part of it may be explained by a consumer who's a little bit more confident.

We wouldn't say we're out of the woods yet, but we are seeing some -- we think that is a sign of some increase in consumer confidence.

On the restaurant, the food away from home, just as another data point, we still see food away from home sales declining but at a rate that's moderating.

And so maybe we're seeing a few signs there that the consumer's a little bit more confident.

And so I think it could be a sign of improving confidence and for our part, you know, we have -- we've had very strong innovation on our business and so that's driving good performance in cereal, for example, where we're up and we're starting to see some private label decline.

So I think it's at least in part a combination of confidence and also good of competitive response by branded competitors in many of the categories.

You know, it's interesting about what you said about the food away from home.

We're seeing that too with February and March doing a lot better on food away from home.

Also when I talk to industry folks in the packaged food space in CPG, they're seeing a little bit better traction on that side in February and March, particularly versus a rough January.

I wonder if we often think about the give and take between these two channels and maybe the consumer environment feeling a little bit better would be better for multiple channels.

Any thoughts on that?

I think that could well be the case, although -- I mean, I would say we're in the very early stages of the recovery, and this is a case I think of two or three swallows not making a spring.

But we are encouraged by the moderating trends in food away from home and we think we're going to continue to have great opportunities in our categories in the grocery store.

Thanks for your thoughts.

Thank you.

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

Please proceed with your question.

Hi, good morning, everybody.

Hey, Eric.

Good morning, Eric.

Don, I guess my question is on the $48 million charge or whatever, however you want to clarify, in cost of goods, can you just help me understand that a little better?

Is that like kind of a year-to-date kind of catch-up on the change in how you're capitalizing these repairs or is this going forward, it's going to be a similar level of charges?

Just help me with that.

Sure.

Just as background, this change in the capitalization threshold has been on our radar screen all year.

We've been working on upgrade to our parts management system in the plant.

That gave us information that we needed to set the threshold at the right level.

As background, up until this change we had capitalized all spare parts regardless of the individual cost.

They were then expensed when they were put into service.

We now changed that capitalization rate to $500.

So any item that is less than that is expensed when purchased.

And our reason for doing this is because it really does help enhance what is already a strong capital discipline at our plant.

We think it's the right -- it puts the right balance if you will between the P&L, the balance sheet management in our operating plants.

And so what you saw in the quarter was the charge to the P&L of all the current inventory less than $500.

Okay.

So basically, just to break it down, because I'm just a simple guy, if somebody buys a hammer, before you would have capitalized it and now you're expensing it?

If you buy a replacement part for a machine that is less than $500, we would have capitalized that, in other words, inventoried it and then when it was actually put into service in the machine, in the line, we would have expensed it then.

Now we're saying as soon as you buy that piece, whether you put it in service or put it on the shelf, you expense it.

So the $48 million is basically a catch-up of what the inventory you had and now going forward it's going to be the less than $500 rule applies?

Correct.

Okay.

So it seems to me that that $48 million is kind of a like a one-time item and that's about I think Chris told me earlier, is about $0.09 a share?

Yes.

Okay.

All right.

And then my next question, I'll pass it on after that --

Eric, just to clarify.

We view this move similar to restructuring to put it pretty broadly in terms of changes that we make in our practices to better position ourselves going forward.

And again, this is one we believe that it enhances what is already a strong capital discipline in the plants, which is the reason we include it in our earnings, just like we do our restructuring.

Fair enough.

And then Ken, can you just -- you made some comments about the deflationary benefits to gross margins starting to anniversary in the fiscal fourth quarter and I'm just kind of wondering, one, can you talk either broadly or specifically year-to-date in terms of your gross margin expansion, how much has been the result of lower inputs and then does the extra week kind of play into how we should view the fourth quarter gross margin change as well?

Eric, that's a good detailed question and Don is happily going to jump in here.

Eric, just to clarify a few things.

We didn't see deflation in Q4 last year.

We just saw decelerating inflation in Q4.

Year-to-date we have seen -- year-to-date fiscal F 2010 we have seen deflation.

If you look at our COGS year-over-year on a year-to-date basis which is the best way to look at it, it is down from last year.

About half of that decline is due to mark-to-market which as you know runs through COGS.

About 40% is due to rate mix which is a combination of both the small bit of deflation we've seen and the strong HMM activities that we have in play and then the remaining piece, about 10%, is due to the divested businesses.

As we look at Q4, the extra week is not going to have a material impact on our margin percentage.

What's going to impact the margin percentage more is the fact that we're rolling over a quarter where we had a 500 basis point margin expansion because it was the first quarter we started to see the deceleration of our COGS inflation.

So the -- so can you just kind of frame -- I mean, is the -- if you've been running, I don't know what it's been, let's call it 400 basis points of gross margin improvement year-to-date, is the -- if roughly let's call it 20% or something is due to the inflation, is that -- does that completely go away or do you still get some benefits year-over-year?

Well, for the full year we're still expecting -- we're not expecting inflation for the full year, so we think it will be relatively -- as we go into Q4, we don't expect inflation to be a material factor.

But we will continue to see the impact of HMM and I think the comparison you're doing in terms of year-to-date versus last year, I guess what I would keep in mind is year-to-date we've been running 400 plus basis points better than a year ago.

We're starting to lap a quarter where we saw 500 plus basis point expansion.

Right.

So you kind of draw the line on those and you get a pretty good understanding of where the quarter will end.

Okay.

I'll pass it on.

Thank you.

Thank you.

Our next question is from the line of Andrew Lazar with Barclays Capital.

Please proceed with your question.

Good morning.

Hi, Andrew.

I guess just two things.

One, any way to get a sense of what the year-over-year shift was in sort of promotional spending as it would impact the top line?

I know obviously overall pricing or overall price mix was positive and I'm just trying to get a sense of how much even directionally was netted against that in terms of a year-over-year change in promotional spend.

We're giving each other puzzled looks, Andrew.

Maybe --

You know how you used to --

Maybe you could clarify the question.

Sure.

You used to break out the year-over-year shift in promotional spend as it was netted against the top line.

Just to get a sense of what the trade spend, either increase or decrease was year-over-year.

And you don't break that out specifically any more and a lot of food companies don't.

But I'm trying to get a sense of whether that was a meaningful change one way or the other to the top line on a year-over-year basis.

Last year I think our trade spend was a little bit more loaded to the front part of the year.

I guess as background, one of the things that we've been doing very practically over the last couple years is try to smooth our trade spend out so it's not as front loaded as it's historically been.

Last year was a little more front loaded than back loaded.

This year was probably reversed.

If you thing of our total spend and where it will fall, but we're talking about percentage points not 10 or 15 percentage point swings.

I hope that answers your question.

Maybe the other bit of perspective, Andrew, is that we do expect for 2010 our all-in cost per case on trade spend, it will be a little bit higher than 2009.

But it will still be less than 2008.

So we're talking about pretty modest moves here.

Got it.

And then on that one slide that Jeff was talking about in terms of the top 10 fastest turning cereals, it's an interesting slide.

It's pretty fascinating to me.

Obviously, Cheerios SKUs are the top five, top six out of the top seven.

I'm just trying to get a sense of if we were to look at that sort of statistic maybe a couple years ago, is it typical that you've got that many SKUs of one brand in the sort of the top ten?

Is that a more recent phenomenon having to do with people shifting to more of an all family brand.

I'm trying to get a sense of the sustainability because the growth obviously in that franchise in Cheerios has been great and that's really profitable within the context of a really profitable category.

So that's sort of what's behind the question.

If you looked a couple of years ago, Andrew, you would have seen Yellow Box Cheerios and Honey Nut Cheerios still at the top of the turns ranking.

That has not changed over time.

In fact, Honey Nut Cheerios in particular has been growing rapidly among a lot of different demographics which is the reason why it's the number one cereal in the entire category now.

What we didn't show, but what has changed to the positive for us over the past couple years is we have brands like Cinnamon Toast Crunch.

If I would have listed the top 15, you would have seen Cinnamon Toast Crunch, where you wouldn't have seen that a couple of years ago.

If I would have listed the top 25 you probably would have seen Lucky Charms and you probably wouldn't have seen that a couple years ago.

If the I listed a few more of the top SKUs you would have seen Fiber One and Multigrain Cheerios turning in the top third of the category.

While Honey Nut and Yellow Box have certainly stayed the same, and we think it's more than sustainable, what we're very pleased with is some of our other big equities we've really generated turns increases on those and have made those more productive and it's being noted by our Retail Partners as well as they look to allocate shelf space and it's really part of our strategy in growing our core businesses.

Something that I would add to that, Andrew, are some comments that Jeff made in his presentation on the broader dynamics that are going on in the category right now.

As big as the category is and as well developed in the US, there are really many trends that are favoring the continued development of the cereal category right now.

People are eating at home more.

The boomer demographic segment, as we all -- as more and more 50 plus, that is clearly driving some nice increases in cereal consumption and penetration and that's a trend that's going to be with us for a while.

So overall, as we look at the category right now, we see it as it having very healthy dynamics and of course as you just heard from Jeff, we're very well positioned from a brand standpoint to capitalize on all segments of this nicely growing category.

Thank you.

Thank you.

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

Please proceed with your question.

Thanks so much and good morning everybody.

Don, maybe you had some transactional expense or hedging costs in the quarter and I remember that -- I think it was almost a year ago, the next quarter, that you called out what it would be for the year.

Can you just remind us how much of that rolls off and as we look out at where rates are now, how much of that will you get back in the coming quarters once you lap it?

Certainly, Vincent.

We started the year with about -- we estimate about a $0.15 drag from foreign exchange, the majority of which was transaction.

The majority of that which was hedged.

As the years unfolded, that position, the translation piece has improved.

It was probably down to a $0.11 to $0.12 drag before Venezuela came along and added a couple cents back.

So we're kind of in the same ballpark where we started the year, maybe $0.01 or $0.02 better.

Those hedges were put on for our fiscal year.

We will give guidance in terms of the ForEx impact next year when we release our overall guidance in June or July I guess it will be.

Okay.

And maybe if I could ask one other question.

Was there any positive impact from all the blizzards and so forth on the east coast in February, maybe you're seeing it in March?

Can you just sort of help us understand if there was any impact there?

Vincent, not --

In terms of --

I'm not aware of any impact, really.

I mean, our categories, the penetration is so deep and consumers are in the grocery store so frequently, really on a weekly basis, to consume our products, that any blip that you might have seen over a one or two day period, they would have recovered those purchases very quickly so that really hasn't been a factor.

Yes, I was thinking more the other way.

I just remember reading about lots of empty shelves during those multiple weeks where there was really terrible weather so I thought maybe it would be a positive.

No.

Okay.

All right.

Thanks very much.

I'll pass it along.

Okay.

Thank you.

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

Please proceed with your question.

Hey, good morning, everyone.

Good morning, Ken.

You discussed alternative channel growth for cereal.

Can you talk about any notable growth in alternative channels for other categories?

Well, I think at last quarter's conversation, we discussed non-measured channel growth for all of our major categories and I'm just remembering what that slide said.

What it said is we're seeing very good growth across all of our categories in those non-measured channels.

Not just cereal and, everyone thinks of the big mass market channels that we're all very well aware of and obviously we work very hard on our relationship there and to make sure we're aligned with those strategies.

But I would also tell you that we're very, very focused on all those channels.

We have very close partnership with the club stores.

We see the dollar channel as clearly a rapidly growing channel with very good opportunities for parts of our portfolio.

We see other mass marketers increasing their focus on food and we think that that will be advantageous to us and so you're really talking about nearly 40% of the sort of retail universe right now with a variety of shapes and formats and we're focused on all of them very intently.

I forgot to mention drug stores, who are emerging now as an interesting growth opportunity for us.

So there's lots of opportunity there and we see good growth across our portfolio in those alternative or unmeasured channels and we see many sustainable growth opportunities there.

But no specific category that you'll see notable growth that we should be aware of?

No, it's good, solid growth across the portfolio.

Are there any categories or products that General Mills has yet to focus on in the last couple years that we should expect to see more energy put forth for 2010, 2011?

Maybe some more subtle products?

Well, I'd comment this way.

We seek to find product innovation and marketing messages that will allow us to increase consumer interest in our categories and drive growth.

Recently, over the last year, for example, we have a very robust Mexican food business under the Old El Paso brand, and we've advertised that during select periods of the year, during the last two or three years.

But we're finding marketing messages that resonate better with consumers and so we're accelerating our investment in that category now, as an example.

And we think that that's a very good growth category.

Another category where we've been experimenting with advertising is frozen vegetables, the green giant brand, where again we've been experimenting with advertising.

We have some very good messages now on the frozen being as good as fresh and the benefits and values of that category, and we're finding that advertising, coupled with some very good innovation, like, for instance, our Steamers product which we launched last year which is a microwave in the bag vegetable product which has become a very big business for us.

So nice innovation, combined with what we think are some really good advertising messages, are allowing us to steadily increase our investment in that category.

So those would be a couple that would come to mind, Ken.

Okay.

Great.

Just a housekeeping question real quick.

When you think about 2011, are you guys going to exclude or include the $0.09.

I didn't understand which way you guys were talking about it when we think about your growth algorithm.

Ken, this is Don.

We will include the $0.09 in spare parts you're talking about.

That is part of our underlying EPS.

Great.

Thank you.

Operator, we're up to the end of our hour.

But can we sneak one more question in here, please.

Certainly.

Our next question is from the line of Chris Growe with Stifel Nicholas.

Please proceed with your question.

Just made the cut.

Thank you.

I have just a couple questions for you.

I'll make it brief.

The first one I want to ask you is we've had a couple quarters now at least now where your pound volume has not been all that exciting but you've had strong unit growth.

And I guess I'd just like to get a better sense of how the pound volume I guess is being dragged down by maybe a little weaker performance in soup, I guess also canned vegetables.

Can you speak to that relationship perhaps in the quarter and maybe even year-to-date as well.

Chris, as we alluded to, some of the products that have performed below our expectations, especially more recently with soup and canned vegetables, you can imagine those are pretty heavy products.

Conversely we've had had very strong performance in cereal, as Jeff took us through today, a lighter product.

We do see some favorable mix pound to price mix in that tradeoff.

That's an example of some of the shifts or differences that we're seeing.

Is it possible to say how much maybe that was a weight on volume this quarter, by chance, or -- I know you make it up in the form of mix, to be fair; correct?

It's captured in our mix number for the quarter.

So perhaps revenue growth this quarter was a better metric to look at because of the way the -- what constituted the volume.

Absolutely.

The last couple quarters you've been able to give a little bit more of a detailed breakdown in the gross margin.

You've had an outsided improvement in gross margin, this quarter.

It was even better than the last couple when you back out the charge.

I just was curious if you could maybe give a little more color on how the mix or the unit volumes, maybe the lower input cost, how that's all helping the gross margin this quarter?

I think actually it's quite similar to what we've had in the previous two quarters or even three quarters if you go back to Q4 last year.

Very strong HMM, a little bit in this fiscal year, a little bit of deflation that's helping.

And then again, excluding any mark-to-market swings.

Those are the primary factors.

Obviously as the year's unfolded, we've had less of a price benefit, we saw it more last year as we really fully lap now any pricing action we took last year.

Actually, the mix has been pretty consistent across the quarters.

Okay.

And the last question I had for you, just a little bit more detail on the international profits this quarter.

By our kind of quick back of the envelope math, if you exclude the Venezuela charge and the divestitures, profits would have been up in the quarter?

Is that the right way to say it?

Yes.

Okay.

Okay.

Thank you.

Thank you.

Thanks, everybody.

If you have follow-ups, give a shout.

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

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

Thank you.