通用磨坊 (GIS) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the General Mills fiscal 2010 Q4 and full year 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) It is now my pleasure to turn the conference over to Ms.

Kris Wenker, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you, operator.

Good afternoon, everybody.

I'm here with Don Mulligan, our CFO, and he's going to discuss our fourth quarter and full year fiscal 2010 results, and then cover the key financial targets and assumptions for fiscal 2011.

We hope you'll join us on Thursday as well.

That's when Don, Ken Powell, and our other senior leaders will provide a detailed review of our 2011 plans.

That webcast will start Thursday morning at seven-forty five Central, so eight-forty five Eastern.

Our press release on fiscal 2010 results was issued over the wire services about a half hour ago.

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

We have put slides out on the web.

They supplement the prepared remarks for today.

And I'll remind you those remarks include forward-looking statements based on management's current views and assumptions.

The second slide lists factors that could cause our future results to be different than our current estimates.

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

Thanks, Kris, and hello, everyone.

Thanks for your interest in General Mills and for joining us this afternoon.

Fiscal 2010 was a terrific year for us.

We delivered high quality sales and earnings growth, well above the original targets we set for the year.

We generated more than $2 billion of cash flow and will return a significant portion of that to shareholders through share repurchases and dividends, while also strengthening our balance sheet.

We invested strongly in merchandising and consumer marketing efforts throughout the year, resulting in good fourth quarter sales growth and strong momentum, as we begin our new year.

It's hard to see our fourth quarter operating performance in the reported numbers.

The comparison includes one extra week of business in the final quarter of 2009.

We also divested some product lines last year.

So we'll provide some additional sales data on a comparable basis.

Please note that our comments and slides are on an as-reported basis unless otherwise noted, and our materials also reflect the recent two-for-one stock split .

Slide six summarizes our results.

Sales for the quarter totaled $3.6 billion, down 2%.

Segment operating profit was $606 million, with gross margin in line with last year excluding mark to market effects and a 10% increase in media spending.

Net earnings totaled $212 million, and diluted earnings per share was $0.31 as reported.

These reported results include several items affecting comparability.

Fourth quarter 2010 earnings include a net reduction of $0.05 per share relating to mark to market valuation of certain commodity positions.

We also recorded a $0.05 noncash tax charge related to the recently enacted healthcare legislation.

Excluding these items, earnings per share for the quarter would be $0.41.

In last year's fourth quarter, we recorded a $0.16 gain from mark to market valuation, which was partially offset by a loss on the divestiture of several bakeries and food service product lines.

Excluding these items affecting comparability from both years, diluted earnings per share declined only slightly in the fourth quarter.

That primarily reflects one less week in fiscal 2010.

That extra week contributed about $0.04 per share last year.

And this year, we recorded charges of about $0.04 per share in the fourth quarter related to debt refinancing activities.

That action reduced our debt maturing in 2012 by $400 million.

We ended the year with very strong top line results.

Slide eight shows fourth quarter sales growth as reported, and then on a comparable weeks basis.

US retail sales rose 5% on a comparable basis driven by strong increase in pound volume.

International sales grew 5% excluding the impact of the extra week.

This includes 3 points of favorable foreign exchange.

Volume growth drove the increase in sales on a constant currency basis.

Our bakeries and food service segment reported a 5% decline in net sales on a comparable basis, but this includes the impact of divestitures and index pricing tied to wheat markets that have been below year-ago levels.

Underlying performance in this business segment ranged quite good, as you'll see with our volume results.

Volume trends accelerated in the fourth quarter across all of our segments.

Slide 9 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 contributions to net sales was unchanged versus last year, with divested products reducing growth by 1 point.

The next slide shows pound volume growth on a comparable basis, excluding the impact of the extra week.

On this basis, US retail pound volume increased 8% for the quarter.

Pound volume for international was up 3%, despite a 2-point reduction from divestitures.

And our bakeries and food service segment, pound volume excluding divested products would have increased in the quarter, well ahead of overall industry trends.

On a reported basis, fourth quarter gross margin was 36.2%, down from last year, when we recorded a $170 million mark to market gain.

Excluding marked to market effects, gross margin matched year-ago levels.

As I mentioned earlier, we continue to reinvest to drive top line growth.

Media spending grew 10% in the fourth quarter.

That's on top of the double-digit increase in the period a year ago.

This investment contributed to our good sales growth in the quarter and helped us maintain our momentum as we enter 2011.

Slide 13 shows our segment operating profit margins for the quarter.

Following strong margin expansion through the first three quarters of this year, total segment margin declined in the fourth quarter.

Contextual increases in price promotion and a 14% increase in media spending resulted in a decline in US retail margins.

The international margin was down due to transactional foreign exchange effects.

And bakeries and food service segment margin increased, reflecting lower input costs and continued strong mix management.

After-tax earnings from joint ventures increased 25% to $15 million for the quarter, including favorable foreign exchange effects.

On a constant currency basis, fourth quarter sales for CPW grew 5% with good volume growth and favorable net price realization and mix.

Haagen-Dazs Japan sales declined at a double-digit rate due to the challenging economic environment.

Slide 15 summarizes results for 2010 in total.

Sales grew 1% as reported.

That's being pulled down by 3 points from divestitures and the extra week.

Segment operating profits grew 8%, including a 24% increase in media spending.

And diluted earnings per share, excluding certain items affecting comparability reached $2.30, up 16% from last year, and well ahead of our long-term growth levels.

We believe this represents very strong financial performance in a challenging operating environment.

Our growth was driven by broad-based sales gains across our businesses.

US retail sales grew 3%, led by strong growth in our snacks businesses and Big G cereals.

Dollar sales increased across all of our US divisions, including baking when you look at absolute dollars.

And that's with one less week of business.

Comparable week sales growth was even stronger.

Bakeries and food service sales trends were strong as well.

Slide 17 shows fiscal 2010 results for our key channels and brands.

We're outperforming food service and convenience store industry trends.

Sales to food service distributors were down just 2%, as reported.

And while convenience store food industry sales continue to decline, sales of our brand grew 3% in 2010.

Our consumer branded products are leading our growth.

Yogurt sales increased 1%.

Sales of cereal grew 4%.

And snack sales increased 6% in fiscal 2010.

And again, comparable week sales growth was even stronger.

This sales performance, combined with lower supply chain costs, and good productivity savings, led to a significant improvement in bakeries and food service operating profits.

The operating profit margin for this segment reached 14% in fiscal 2010, well above the double-digit target we've been working for the last few years.

2010 sales growth was strong across our international markets as well.

Excluding the impact of foreign currency, international net sales increased 3%.

Sales in Canada were up 2% before currency benefits, as we continued to drive growth in our key categories, resulting in share gains with cereal and grain snacks.

Asia-Pacific sales grew 9%, driven by good performance by Haagen-Dazs shops and Wanchai Ferry in China.

Sales in Europe were up 2%, led by growth for Nature Valley Granola Bars and Old El Paso.

And Latin America sales matched last year's levels despite loss of sales from divested product lines.

In total, our segment operating profit margin increased by 130 basis points in 2010 to 19.3% of sales.

Strong operating performance, effective cost savings initiatives, and lower input costs more than funded a 24% increase in media spending.

International margins were down, but that was due to foreign currency effects.

We saw good growth in both US retail and bakeries and food service.

Turning to the balance sheet, we paid down more than $600 million in debt in 2010, resulting in total debt at year end of $6.4 billion and a return to our targeted triple-B-plus stable credit rating.

Our operating cash flow to debt ratio improved to 34% and our fixed charge coverage improved to 6.4 times.

So we exited 2010 with a stronger balance sheet.

Our fourth quarter debt tender resulted in a $40 million pretax charge this year, but that will benefit us next year, when we're estimating a mid single-digit decline in interest expense.

Core working capital was up 3% versus last year.

Inventories essentially matched last year's levels.

Our receivables increased ahead of sales growth, due to sales timing shifts before currency translation.

Payables were slightly above last year's levels.

Our operations generated over $2 billion of cash in fiscal 2010, up almost 20% from last year, driven by our strong earnings growth.

We used some of that cash for capital investments.

Capital spending totaled $650 million for fiscal 2010, as we added manufacturing capacity in cereal, snack bars, and yogurt.

We also returned cash to shareholders through share repurchases and dividends.

Our average diluted shares outstanding decreased by 1% for the year.

And dividends per share were up 12% over those paid in 2009.

We will return more than $1.3 billion to shareholders in fiscal 2010.

And over the past five years, we returned more than $8 million to shareholders of General Mills through dividends and share repurchases.

We have delivered consistent quality growth against sales, segment operating profit, and earnings per share.

We expect fiscal 2011 to be another year of quality growth for General Mills.

Our 2011 plan calls for operating results in line with our long-term model.

We expect volume gains to drive low single-digit growth in net sales and segment operating profit to grow ahead of sales, despite renewed input cost inflation.

We're projecting an increase of 4 to 5% in our commodity and fuel costs next year, after a 3% decline in 2010.

Key drivers of our 2011 increases are energy, resin-based packaging and dairy.

Our corporate unallocated expense will increase next year, driven by noncash pension expense.

The increase in fiscal 2011 is driven by a decrease in the discount rate used to calculate pension expense, reflecting the low interest rate environment.

Our discount rate is a complex actuarial calculation, but it begins with bond yields.

And if you've been watching those rates over the past year, you've seen a pretty significant decline.

Slide 27 shows the average yield for 15-year double-A industrial bonds as an example.

The yield is down just over 100 basis points from last year.

The specific discount rate we used to calculate our pension expense will decrease from 7.5% in 2010 to 5.85% in 2011.

We don't believe the current low interest rate environment will last forever, but this discount rate decrease will drive an increase in expense of roughly $100 million in expense in noncash pension expense next year.

The funded status of our qualified plans are still quite healthy and we saw good double-digit return on plant assets for 2010.

Looking forward, we haven't changed our long-term return assumption and we aren't required to make any cash contributions to our plans in 2011.

So to sum up our financial targets for 2011, we're expecting to deliver strong sales and operating profit growth, in line with our long-term model.

We're targeting earnings per share of $2.46 to $2.48 before any marked to market effects.

That represents growth of 7 to 8%, from this year's adjusted EPS of $2.30.

And we'll continue to return strong levels of cash to our shareholders.

Just yesterday, we announced a 17% increase in our expected fiscal 2011 dividend rate to $1.12 per share.

And our Board approved a new 100 million share repurchase authorization.

Now, we don't give quarterly guidance, as you know, but I did take a look at the sell-side estimates posted out there for 2011.

It appears that you all do remember that we had an exceptionally strong start to 2010.

Our plan doesn't assume EPS growth for the first quarter, but the absolute level of earnings for the first quarter will be quite strong again.

It will put us nicely on track to achieve our full-year EPS target.

We'll share more on our plans for fiscal 2011 later this week.

I look forward to seeing some of you in Minneapolis tomorrow night and invite all of you to' join us via the webcast Thursday morning at seven-forty five Central to hear our plans for driving quality growth in 2011.

With that, I would be happy to answer your questions.

Operator, will you get us started,

(Operator Instructions) Our first question comes from the line of David Palmer with UBS.

Please proceed with your question.

Hey, Don.

Dave, how are you?

Good, good, thanks.

Just a quick question on the environment.

I know folks are wondering about why it seems so difficult just meeting a lot of the companies that we have seen lately, privately, they will say it's maybe the most difficult environment they have seen in a long time.

I don't know if you share the same sentiment about the environment.

What is different today, clearly we see protracted lack of inflation that's out there, at least in terms of retail prices and the lack of traffic at retail.

But in terms of a packaged food manufacturer, how is it different today?

And then maybe give the texture of what we see in the measured channels versus what you see across all channels?

Thanks.

Certainly.

I think, your view of the environment is going to be colored a little bitty think by the categories you play in and the position you have in those categories.

And what we see in our categories is while there is certainly some challenge on pricing, given the inflation, the deflationary environment that most of us have experienced in the past year.

What we also see is that traffic into our volume traffic, into our categories continues and as we bring new products, as we increase our brand support, we continue to see traffic in our categories, which you'll see when you look at our pound movement that I just spoke to, or if you look at our baseline growth as measured in Nielsen.

So it's a -- it is a challenging environment in terms of the deflationary aspects and certainly from a recession standpoint, some of the pressure on the consumer.

But as we look at our categories, we see opportunity to grow, and we've seen that growth, again, as we continue to play our game plan along, new products, bringing customer benefits to drive traffic into their stores.

And then the growth that we expect to see and the flexibility, I guess I should say, especially in pricing, as inflation begins to return as we talk about what we expect for 2011.

In terms of the split between and measured and non-measured, we continue to see more growth in non-measured channels, in club stores, and in Wal-Mart.

That's a continuation of a trend.

We see that in our numbers as well, the split between the Nielsen and the non-measured growth.

We don't see that difference necessarily changing as we look forward.

We certainly continue to expect to see growth intra additional channels, but we expect to see the non-measured continue to grow at a slightly more rapid rate, given the slightly different offering that they have for the consumer.

Is it your gut that by the second half of your fiscal year that you'll start to see net pricing realization and maybe not so much in the first half of your fiscal year?

Is that the general way it might play out?

Yes, I think that's a fair assessment.

As we look at our year, we think the rest of calendar 2010 is going to be a bit more like what you have seen for the last couple of quarters.

We think as people start seeing inflation, that will begin to change in the back part of our fiscal year.

That's what our plans would look like.

Thanks very much.

Our next question comes from the line of Terry Bivens.

Please proceed with your question.

Thank you, good afternoon, Don and Kris.

How are you?

Good, Terry.

Good, Terry.

My questions go to the gross margin.

I think certainly relative to what we were looking for, that's where we were a little bit surprised.

Two parts.

I think the price investment here, I hear what you say about the advertising, Don.

But it seems to us that maybe the price investment was a little bit steeper than we expected to get this kind of volume growth.

So the question would be, is this the kind of price investment, do you think, that we will see as we go into fiscal 2011?

And the other side of things was, I just wanted to ask you quickly about any possible mix effects here from selling, it looks like your canned veggies perked up a little bit, at least in the recent going, if there was any kind of negative mix benefit from that.

Just those two things, thank you.

Certainly.

A couple of things on the gross margin.

The largest dynamic in the quarter for the margin was clearly the fact that we went from a positive price mix last year, about 5%, as we still continue to see some carry-over pricing from earlier in 2009, to minus 3% this quarter, which was really a reflection of where inflation was going to a great extent.

I think the important thing also to understand is as we look at pricing, or price mix over an extended period of time, we have been, pretty restrained in that, and we've been able to because of HMM.

The past year, our gross margin has improved by 330 basis points.

Over two years, that's over 400, almost 450 basis points.

And that's largely driven by HMM pricing measured in Nielsen, for example, over those two years.

We've taken less than a percent of pricing versus peers, which are about 2% in actually retailer brands, which was closer to 5%.

So what you saw in the, in the fourth quarter was a bit of us making sure that we had our merchandise levels right, as we exited the year and entered the new year.

And that's something that we had anticipated as 2009 unfolded.

We've talked about that I think in an earlier meeting, when we looked at the environment.

We said it's probably going to get more promotional in the back half as everyone is seeing deflation.

We're not going to leave pricing, but we have to be in a certain price zone to be competitive.

That's what you saw us zero in the last half of the year.

As you look to next year, as I just mentioned to Dave, we don't -- we expect to see some pricing opportunity as the year unfolds, as inflation is being seen by our competitors and by our retailers through their retail brand.

So we would expect that complexion to change as fiscal 2011 unfolds.

Well, the fear among investors is clearly that higher promotional levels will be the rule of the day going forward.

So I guess what you're saying is, they showed up that way in the fourth quarter, but don't necessarily look at this as kind of a run rate sort of picture.

Is that a fair statement?

Yes, that's a fair statement.

And I think you'll probably get a, kind of much better feel for our broader plans on Thursday when you have a chance to hear from Ian and Chris and John and many of our division presidents, and our plan for next year is founded on the same kind of growth that drove us this year, which is around new products, ever more impactful advertising, and that's where we're going to be leaning into next year.

It's not going to be a price game.

One other--

Okay.

I'll pass -- I'm sorry.

Go ahead.

One other piece of contact that might be helpful, we usually give you a sight line to trade talks per case as you know for us, it had been coming down for several years.

We started the year this year with a goal to hold it flat.

At mid year, we told you we would have to make some tactical changes here.

We ended up, up 1%.

So it's a modest increase in cost per case and you can see we got volumes response for that, and the overall level as we look at next year, we see that trade environment probably moderating as the year goes on.

Yes, Terry, there's one other aspect, I think people might look at our fourth quarter in particular, is last year fourth quarter was one of our lighter quarters from a merchandising standpoint.

So there's a bit of a year-over-year comparison if you look at the quarter alone.

That's kind of the full year trend that Kris was alluding to, but as we think about F 2010 and as we think about F 2011 are probably more representative of where you'll see us go.

I'll pass it along.

Thank you.

And we'll see you on Thursday.

Great, thanks, Terry.

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

Please go ahead.

Thanks, good afternoon.

Hi, Ed.

Hoping you could just elaborate a little bit on the inflation outlook for 4% to 5%.

It's a bit higher than we were looking for, and just wondering how much of the year is hedged at this point, and then also just when you consider your productivity expectations for the year ahead, do you think you could see the modest gross margin expansion, or should we be careful about modeling for that?

Well, as far as inflation, many of the items that we saw favorably impacted this year are starting to reverse.

You see in the energy markets, as they flow through that, we'll see in resin packaging, we see it in the dairy market, a little bit in sugar as well.

Those are the key drivers as we look at the inflation.

The other one, quite honestly, as we look at our buying in 2010, the positions that we took played out quite well for us and we actually, as we then backed -- our position for 2010, there are many markets, many categories where we bought below market.

And so as you model us versus market, really you have to take our hedge positions probably favorably impacted on our 2010 costs, which then have a knockout effect in 2011.

That's how you get to the 4 and 5%.

As far as our hedge, we're about 50% hedged as we enter the year, so we're in pretty good line of sight on where that is.

It would be about half the year open.

Okay, thank you.

And then just briefly on the cereal category, obviously a lot of talk recently about the competitive pricing activity there.

Can you just maybe share an updated view on when that might ease up in that category specifically, because there's a couple of your competitors that have been promoting for what you might call company-specific reasons that one would hope would be short-lived, so just curious to get any perspective there.

Well, I guess I'll start with the fact that, we don't think there's anything wrong with the cereal category.

Pound volume, if you look at pound volume, it's up in the category.

Clearly,some competitors, like Ralcorp have been promotional.

They have publicly said they are going to stop some of the more inefficient spending they have seen, which we believe they will do.

We're fine in our position.

Our base lines are growing.

Our core brands are healthy.

Our new products are performing well.

Our share is up.

We feel very good about the category and our place in it.

Thank you.

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

Please proceed with your question.

Good afternoon, thank you.

The -- two questions.

First, I wanted to follow up on Terry's question.

Don, can you give us a sense to the extent you're comfortable what actually the mix was on the quarter versus price?

I don't have that, I don't have that discrete breakout for you in front of me, Jonathan.

I'll see if we can get it--

Do you kind of off the top of your head know whether it's positive or negative?

Just trying to get a sense of what the total price impact was across the company.

I don't have that number.

Okay, that's fine.

We can follow up.

Thank you.

And the second question I had relates to the 4 to 5% cost outlook.

Is there something -- when you're talking about you expect to have inflation, maybe in the second half of the year kind of come back in a little bit more broadly, are you talking about across all your inputs, or just the kind of dairy and fuel that are kind of driving your inflation, as you're guiding it this year?

You kind of alluded to expecting an improvement in the inflationary environment.

What we're kind of seeing is a deterioration in that environment, like input costs on a weighted average basis down fairly substantially since March.

So I guess what we're specifically referring to as far as expecting improved better or worse depending on whether you're buying or selling, I guess, increased inflation environment for the second half of your fiscal.

Yes, the 4 to 5% looked at our average at F 2011 versus the average for F 2010.

What we bought in F 2010 is based on integration of our positions that we would have taken earlier, early in calendar 2009.

Oh, I see.

If you look at kind of the 12 months of calendar, fiscal 2010 compared to the outlook for the for the markets for our fiscal 2011, you can see that those categories that I mentioned, energy, dairy, resin packaging, sugar, are up year-over-year.

Some of the grains are kind of -- there's a mixed bag, probably closer to neutral.

So we'll see that throughout the year.

What I mentioned about our expectation is that we'll probably see less promotion and maybe a little bit of pricing in the back part of the year.

That wasn't to infer our price -- our inflation necessarily is back loaded.

We just think that's when the pricing will be more, more likely to come through.

I see.

And would you make -- it seems awfully coincidental that you've seen an increase in promotional activity.

I know you called out Ralcorp as a driver, and they certainly seem to be more eager than others to try to resuscitate some of that Post volume.

But it seems the category more broadly has become more price-driven and your own merchandise costs per case have gone up, concomitant with that decline in commodities.

Do you think we need to see better, particularly grain commodity input environment to scare people out of some of this discounting?

No, I don't know if I would go there, but certainly if there's going to be deflation, as we and others have experienced, it's not surprising that in a recessionary environment, it's not surprising that some of that is going to be returned to the consumer in terms of some merchandise activity, promotional activity.

But in the long-term, we believe that the environment is going to be inflationary.

We're, again, projecting to see that start in 2011.

It's going to be -- this is an industry that has seen pricing, even when inflation has been relatively low, and it's not just driven by cost necessarily.

It's not just cost plus.

It's the benefits being brought to brands and the products and I think you'll continue to see that.

So this is I think more of a return to the norm than it is with the last two to three years has been, which has been very volatile with both costs and as a result, prices going up and down a little bit more sharply than we had seen historically.

Sure, thank you very much.

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

Please proceed with your question.

Good afternoon, everyone.

Hi, Alexia.

Hey, there.

So I just wanted to ask a couple of quick questions on marketing in I guess the uncertain nature of the retail environment.

On the marketing side, do you have rough guidance of how much you expect marketing spending to increase within the SG&A line this year?

Well, in line with sales is how I would tell you to think about advertising growth.

Great, thank you very much.

And then I guess, coming back to the question of the retail environment, a number of other packaged food companies have been talking about just how turbulent the retail environment is, particularly in the last couple of months.

Given that you're talking about maybe lower EPS growth in the front half of the year, would you say that this is a more uncertain year as you stand here today versus maybe where you have been over the last couple of years?

And if so, what are the real puts and takes?

What do you feel comfortable with?

What are the key risks?

And when might there be upside opportunities as well?

Well Alexia, we're in a very competitive environment.

So every year you go into as a CFO I always have some concerns about how the year's going to unfold.

But what I can tell you is coming out of what is three to four years now a very strong performance, we have tremendous momentum.

And that's not just in the financial results.

It's beyond that.

It's with the consumers in terms of our share position, our brand equity with the consumers.

It's certainly within our relationship with customers and the role that we play with them, which is reflected in everything that the category captaincies we earn, the distribution gains that we have, the kind of results we get in Cannondale surveys, for example.

And that's across all three of our business segments.

It takes different forms, but it's across USRO, bakeries and food service, and international.

And that's why as we showed you the split of businesses by division or by geography, international, or by segment within bakeries and food service, you see growth across all of our businesses.

And that, that momentum, which is earned overtime, is not easily reversed.

And that's what gives me confidence we come into the year that we're well positioned to deliver on our model.

Great.

Thank you very much.

I'll pass it on.

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

Please proceed with your question.

Hi.

Good afternoon, everybody.

Hi, Eric.

Are you guys there?

Yes.

Okay.

Just talked over each other.

We're here.

Okay.

I guess a couple of detailed questions.

First, so, just so I understand it, in the $0.41 excluding unusual items, you are including $0.04 of debt refinancing?

That's correct.

Okay.

And then you expect the benefit of the debt refinancing and what you pay down to kind of show up in interest expense in fiscal 2011?

Correct.

And a couple of things I would add to that.

One is we expect to see a reduction in our interest expense next year, because we will not have the $0.04 or $40 million charge in our numbers next year.

We will expect to see lower interest expense because we took out debt that was costing us 5.5% to 5.8%, and refinanced with CP, but the offset to that, if you recall, we did a 30-year bond offering at the end of May and that was for $500 million, at 5.4%.

That was offset the savings on the refinancing.

Essentially the way to think about it, is we had debt that had two years of maturity and we refinanced for 28 years at a slightly lower interest rate.

And we did that because interest rate environment is so attractive right now that we wanted to tap in and actually do our first-ever 30-year bond issue.

If you put it all together, Eric, and you model interest expense for next year down mid-single digits that should put you in the hunt.

But that's off of the -- that's including the $40 million roughly--

That's off of this year's as-reported 402, yes, sir.

Okay, all right.

And then I guess the second question is, has to do with the pension expense.

Bear with me on my pension accounting, because it's been a little while.

But so you lower your discount rate and therefore the present value of your future liabilities are greater, and therefore that's what's triggering the expense recognition, even though it's not a cash item, and you -- I think you said you didn't adjust your return on asset assumption.

So that, that part of it isn't changing.

But -- and you said I guess that your pension is funded sufficiently.

Is it a tax issue as to why you wouldn't contribute cash to offset the fact that the liabilities are now greater and you wouldn't have the expense running through the P&L?

Yes, it's a good question.

First of all, your macro view of the accounting is right.

If the discount rate essentially increases the liability, the present value of the future liabilities on today's books and triggers that higher noncash expense next year.

The reason we didn't fund it with cash quite honestly, is because it is being driven by abnormally and historically low discount rates, or interest rates.

And we expect in every major bank, expects long-term rates to be higher a year from now or two years from now, and as that interest rate increases, our discount rates increase.

The liability and the expense will decrease.

So if you will, the fact that we have a higher liability now is a little bit transitory in nature, as interest rates revert to more historically normal levels.

Okay, and so I guess maybe it's a question of whether it's tax efficient because you're buying, like -- you announced the other day a big dividend increase in $100 million share repo, which is billions of dollars over the next couple of years.

So I'm just trying to understand kind of how this use of cash is being determined and it wasn't, it didn't make sense to put it into the pension now as opposed to the dividend or the share repo.

Yes, I guess fundamentally, as I said, our pension -- as interest rates increase, our pension will be fully funded, and as we look at where we want to put cash, we think it's a higher return in buying GIS than there is putting cash into the pension.

Okay.

So that's kind of all the nonoperating questions.

Last on operating, I mean, you probably don't have access to this, but after market, your stock's trading down about 5%.

And so maybe that has to do with the difference between consensus and this roughly $0.10 a share of pension expense, but in terms of the gross margin you went from I think X that writeoff for the expense of hammers or wherever it was in the third quarter you had like 700 basis points of gross margin expansion and while, yes, you had the extra week, for this quarter to be basically flat, I mean it just seems, like how is that if cereal is doing well and all these other highest margin businesses are doing so well, it's just hard to bridge why there is such a change in the gross margin from the third quarter expansion to the fourth quarter being flat.

Well, if you remember, fourth quarter last year, margins expanded, Kris, check me on this, 450 points, 475 points.

So we are starting to lap when we start seeing real step-up in our gross margins.

It's a combination of inflation was decelerating at that point and we still had some of the pricing, residual pricing benefit from earlier in the year versus this quarter, where our deflation is lower, and we have some of that negative price mix that we talked about, because that is really some of the tactical promotional activity.

That's a major, that's a major driver between the two years.

Okay, all right.

We'll talk obviously over the next two days in more detail.

I'll pass it on.

Thanks.

Our next question comes from the line of Robert Moskow with Credit Suisse.

Please proceed with your question.

Hi.

I wanted to ask about the comment you made, Don, earlier, about how your category seemed to be performing pretty well in terms of overall sales growth.

I remember last year you gave a number on your category growth being pretty strong.

I think it was like 4.5%.

This year, I didn't see that number in the presentation.

Maybe we're going to see it tomorrow.

But do you have any idea how your -- what the growth rate is in your categories?

Because I think people like your stock because it's exposed to some good categories.

I don't have that number in front of me, Rob.

I'm confident if you look at us versus the food and beverage, you would see a higher growth rate.

I don't have the number top of mind for the comparison.

I'm trying to think back.

I think we had our USRO category consolidated for the Cagney time period, and I want to say growing 3-ish, does that seem about right?

This year or last year, which one?

This year at Cagney.

Sorry.

I have the fourth quarter numbers in my head, not so much, not so much category stuff.

Okay.

And let me drill down to one category--

Rob, I don't have the total food and beverage universe, but if you look at the last, last full year, our fiscal year, growth was around 2% in dollars, 2.5% in unit, and in the last -- this is all measured, so you have to obviously add up 2 points roughly to that to get the total universe.

And then in the last four weeks at least, kind of roughly the same, the same dollar growth, but unit's almost up 4% and that speaks to the effectiveness of the promotional activity.

Again, you add probably a couple of points to that and gets you to the total universe growth rate.

Maybe better if I followed up offline on this.

And then one other comment I noticed, you said that your sales growth is higher at Wal-Mart.

I've heard from a lot of food companies that in particular, they have been having trouble with this channel.

To what do you attribute your growth there?

I mean, there's even been a management change in the US just announced today.

Sounds like they are really struggling.

Well, our relationship with Wal-Mart remains very strong.

We've really seen that relationship develop over the last six or seven years, and it's focused on growing the categories and their business and helping them grow their food business, which is now obviously a majority of their sales here in the US.

And it's the formula that we've been using with all of our retail partners and that is bringing our category, our sales capabilities, category management, shopper insights to help drive category growth and drive shoppers into their store, bring events where they can work, and we have some events, whether it's back-to-school or the box tops event.

And with the focus on supporting our brands through new products, through brand investment, so we're driving baseline growth, which, again, is more profitable for us and for them.

And that formula has worked well at Wal-Mart for a number of years and works well across many of our retail partners.

Still growing well at Wal-Mart, okay.

Thank you.

Our next question comes from the line of Ken Zaslow with BMO.

Please proceed with your question.

Good afternoon, everyone.

Hello.

Hey, Ken.

Just two nonoperating questions.

One is when you look at your forecast, I'm assuming you're taking into account the current foreign exchange environment.

So I'm assuming that's just an easy yes question?

Yes.

The -- can you -- I'm not fully understanding the interest expense.

It seems like it would go down by more than mid single digit if you have that $25 million plus seems like another $40 million, and then just a lower debt base and lower interest expense.

Just, I'm sorry, I just didn't fully understand why it's only mid single digit down.

We have embedded in our interest expense this year is the $40 million for the debt tender for the refinancing.

Right.

That will recur next year.

Next year, we do plan to grow our debt, and we do plan for commercial paper rates to decrease as the year unfolds, which is essentially where the forward market is, so those two are going to increase our interest expense.

The net of all that is the single-digit decrease in total interest expense.

Okay, great.

And then just two questions.

One is, how do you see the private label gap changing both in cereal, as well as in your other categories, just kind of giving us -- have they reset to some extent?

Will they stay at these levels?

How do you see them both in cereal, as well as both your other categories?

In terms of their share, their--

Your price gap relative to private label across your categories.

Well, as I mentioned earlier, as we look at our categories on a two-year basis, our prices are less than a percent and private label is up almost 5%.

So you have seen that gap narrow.

One of the areas that we've been very focused on is ensuring that we have the right price gaps, whether it's private label versus our key branded competitors.

In most of our categories, we are largely where we want to be and we'll continue to make sure we're in that zone during 2011.

And then the second part is on the international front, can you talk about how you expect to see 2011 play out in terms of where you see the challenges, where you see that you're actually gaining share?

Just give us a little color to how the international -- I know we focus a little bit on cereal today, but if you can give us some international outlook as well, that would be helpful.

Yes, sure.

I got to go quick around the map.

Canada had a tremendously strong 2010.

The business in Canada from a category standpoint is a little bit narrower, but is probably the closest we have in the US in terms of multiple categories, being led this year by cereal and grain snacks, picking up share in both, I believe a full percentage point of share in cereal during the course of the year.

And the game plan there, again, is very similar to a company-wide basis, which is driving HMM and reinvesting back in the business, in brand advertising and new product launches.

And that's been just as successful in Canada as what we've seen in our larger US business.

China has been a tremendously strong performer for us as well.

We have two great lines of business there, between Haagen-Dazs and Wanchai Ferry, and emerging business in snacks, both in Bugles and Fruit Snacks, at a combination of both penetration in the core market that we've been in, as well as geographic expansion has continued to allow that business to grow at 20% plus on the top line and again, a at a profitable pace as well.

And that's going to -- and that continues unabated.

The economy in China continues to be robust.

And in Western Europe, it's clearly a tougher go.

The economy is much choppier.

But we did, as I showed you in 2010, we did drive sales growth on a constant currency basis in Europe.

So we feel good about that.

We feel good about the portfolio of businesses that we have and the brands that we have in Europe and we expect to drive growth again in 2011, in Europe, as well as the other markets I just talked about as well.

I talked earlier about what gives me confidence coming into the year.

It's the broad strength we have across our portfolio.

That's in the divisions in the US.

It's in the customer segments in our bakeries and food service business, and it's across our geographies international.

You wanted to think about sort of level of growth for the international segment for F 2011, you want to think about sales growth mid single-digit operating profit, double-digit.

Great.

Greatly appreciate it.

Thank you.

Our next question comes from the line of David Driscoll with Citi.

Please proceed with your question.

Thanks a lot, and good afternoon, everyone.

Hello.

Hi, David.

Congratulations on a very successful F 2010.

Certainly a number of questions here, though for F 2011 have been hit by many, but a couple of follow-ups.

First thing, is you guys laid out earlier this year the plan for, I believe it was, $4 billion in cost savings, in cost of goods sold over the next 10 years, $1 billion of the $4 billion in the current three-year period, F 2010, 2011 and 2012.

Don, can you tell us how we did in F 2010 on that metric?

And then also specifically, did we see a significant amount of cost saves in the fourth quarter?

Well in 2010, we did stay on track.

2011, we're going to continue on that track.

Our cost savings are pretty widespread, so not necessarily lumpy, we're going to see a big change from quarter to quarter.

I would say quarter four will be representative of what we saw in the prior three quarters.

Thanks.

Okay.

The specific question, yes.

And you're going to hear John Church sort of re-endorse those three and ten-year HMM goals on Thursday and you'll probably hear each of the operators talk a little bit about HMM and feeling good about it in their plans.

That is fundamental to our business model and the limits that we made in January remained very valid for us.

Today, we're on track to deliver them.

In this fourth quarter, and I apologize if you did say this.

I know you gave the inflation number, input cost and inflation number for the full year at I believe negative 3.

Can you say what it was for the quarter?

I know it was down.

Not as much as the full year, I don't believe.

Okay.

So now I'm going to go back to Terry's question on margins and I think Eric's question on margins.

So bring something together for me.

So if we don't have lumpy cost savings and in the fourth quarter we got cost savings like we've seen, if input cost inflation is somewhat deflationary, generally just stopping right there, I believe that that's been sort of the magic elixir for the food companies and we've seen really great gross margin improvements, but when we add on top of that, I think in the quarter your comparable volumes in US retail were up 8%.

So when I think of a number like that, I think that we should see very significant volume leverage across the manufacturing operations of the company and that generally leads to nice margin expansion.

So these components all seem extremely favorable, yet of course we didn't see margin expansion and I'm curious if you can take one more pass at this, apologies, I know you've answered this three times, but putting those factors together, what is it that I'm getting so wrong here that would lead to flattish margins?

Well, the primary reason is the, is the change in inflation, from one year to the other.

Decelerating last year, accelerating this year, and then the price mix movement as well, which again, we had carry-over benefit in Q4 last year, which helped us drive 450-plus basis point improvement in gross margin.

We had negative price mix this year.

Those are the primary drivers.

In addition to that, are there smaller things?

We mentioned capital projects that are under way.

Those come with some project expenses.

Those are going to come through the P&L as well.

That type of expense can -- that can be lumpy quarter to quarter, but the primary is what I mentioned earlier in terms of the dynamic between the large jump we saw in the large increase we saw in gross margin last year in the fourth quarter, because of the inflation pricing relationship versus our fourth quarter this year.

Is the pension expense outlook for F 2011, is that increase, is that included or excluded from your input costs inflation figure of 4 to 5%?

It's excluded.

It's outside of that.

Okay, all right.

Well, I'll save the rest of my questions for the analyst day thing, because I know we've got a good day coming up there.

There will be room for more.

On the swing in pension expense, nobody's quite put their finger on this, but I want to make sure.

You should have had income from pension and post retirement in this year, so we're talking about $100 million swing into next year.

Thanks for the clarification.

And I'll see you -- look forward to seeing you tomorrow.

Bye-bye.

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

Please proceed with your question.

Hi, good afternoon.

I just wanted to ask a couple of questions.

First off, and again, I hope this is not to the same gross margin question.

I'm kind of looking forward here.

In the period of reduced -- I'm sorry, increased promotional spending, one of the things that helped your gross margin earlier in 2010, fiscal 2010, was stronger throughput in the plans.

Should we assume that an improving volume trend in 2011 would be good for your gross margin?

Have you given a gross margin forecast for 2011?

Yes, it wouldn't be beneficial to the margin.

As we look at next year, with inflation being in that 4 to 5% range you see where the HMM benefit has been you see your way to basically comparable gross margins to what we had this year.

Okay.

On a full year basis.

Okay.

There was no -- I'm sure you're not going to give timing around the share repurchase authorization.

Do you have certain plans for the coming fiscal year that we should know about, that you could talk about, or is it meant to be built in over several years, or do you have any color there?

Yes, there was no termination date for the authorization, but our business model is based on buying back, reducing our share count by 2% a year.

That's what we expect to do in 2011.

Okay, and then my last question is just on the restructuring costs, one-time costs you put in the earnings.

Are those expected to be flat again, kind of $30 million?

Is that a good number to use?

Yes, for 2011?

Fiscal 2011, yes.

No, actually, they will be down in 2011, probably down in the single digits.

And that's really a combination of -- the primary reason is the fact as we look at the portfolio and the work that we've done over the past year, past four or five years quite honestly, we're very happy with our portfolio, and there isn't a lot that we see that needs to be peeled off or restructured at this point.

So we are budgeting for actually much smaller restructuring number in 2011.

So you're going to have that benefit coming through, as well as like the spare parts inventory, kind of benefit coming through as well, those would be incremental benefits to your EPS growth in the coming year, right?

Correct.

So we have a number of benefits and then we obviously have the pension offset, which allows us to deliver on model for the full year.

Okay.

Thank you.

We're a little bit over.

Let's take one more and then of course you'll have us all again on Thursday.

Our final question comes from the line of Bryan Spillane from Banc of America.

Please proceed with your question.

Hi.

Thanks for sneaking me in.

Just one question.

Corporate unallocated expense, I think if I calculated it right, was down year on year in the fourth quarter by about $30 million or so.

Can you just talk about what was, what was running through that line in the fourth quarter, and then if there's anything we should think about for fiscal 2011?

Yes, well that number is typically around on full year basis because what it does it, captures a lot of variances from what our chargeout rate is to the division, but if you look the full year, you'll see a similar dynamic where if you take out the mark to market, it's down about $25 million.

And the primary driver of that is that we had some corporate investments that were gains last year -- sorry, losses last year and gains this year.

So we had about $35 million in gains, in -- sorry, in losses in 2009.

And about $13 million in gains in 2010.

So about a $50 million, or $48 million swing that explains most of that.

We also had the recovery of our Argentine plant insurance settlement in 2009, which was $41 million.

So if you kind of net all of that out, you're essentially plat flat for the year, within $10 million or $15 million of being flat year-over-year.

And the gains on the corporate investments, those are like foreign exchange swaps, that type of thing?

No, they are typically small small holdings we may have in some strategic investments that we may have that are providing some capabilities for us and they provide capabilities for certain amount of time and then we'll monetize that investment.

Okay, all right.

Thank you.

Thank you, everybody.

Appreciate your time.

I'm sorry we're not getting through everybody here, but we're up to the hour.

So save those good questions, and we'll see you on Wednesday night, Thursday morning, if you're coming in.

Otherwise, we'll catch up on the webcast Thursday morning.

Thank you very much.

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

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