通用磨坊 (GIS) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the General Mills first quarter fiscal 2011 results and conference call.

During this presentation all participants are in a listen only mode.

Afterwards, we will conduct a question and answer session.

(Operator Instructions) As a reminder, today's conference is being recorded on Wednesday, September 22, 2010.

It is now my pleasure to turn the conference over to Ms Kris Wenker, Vice President Investor Relations at General Mills.

Please go ahead.

Thanks, Operator.

Good morning everybody.

While we were waiting for the call to start, we decided that we should say that the sun is shining, the Twins have clinched, and [Joe Mower's] MRI has come back good, so it's good here in Minneapolis today.

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

I'm going to turn the microphone over to them in just a minute, but first I've got to cover my usual housekeeping.

Our press release on first quarter results was issued over the wire services earlier this morning and it's also posted on our website if you still need a copy.

We've posted slides on the website too.

They supplement our prepared remarks for this morning and these remarks will include forward-looking statements based on managements 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 colleague starting with Don.

Thanks, Chris.

Let me add my congratulations to the Twins and thanks everyone for joining us this morning.

As you've seen the financial results released this morning, General Mills is off to a good start in fiscal 2011.

Despite a very difficult comparison with our strong quarter a year ago, we delivered solid results in line our expectations.

We recorded another quarter of net sales growth with volume gains across all three operating segments.

We continue to invest in our brands, with the 8% increase in advertising and ongoing product innovation.

In total, these results have us on track to deliver our full year sales and earnings targets for 2011.

Slide five summarizes our first quarter results.

Net sales increased 1% on a reported basis.

Segment operating profit declined 2% in the quarter reflecting increased advertising investment and higher input costs.

Net earnings totaled $472 million and diluted earnings per share increased to $0.70.

These results include a net increase related to mark-to-market valuation of certain commodity positions and grade inventories.

That added $0.06 per share earnings this quarter, compared to $0.02 reduction in earnings last year.

Excluding mark-to-market impact from both years, diluted EPS was $0.64 matching strong year ago performance.

Slide six details our net sales performance by segment.

US Retail posted another quarter of top line growth.

Net sales increased 2% on top of 6% growth in last years first quarter.

International sales were up slightly less than 1% as reported, but excluding the impact of unfavorable foreign exchange, net sales increased 4%.

Net sales in our Bakeries and Food Service segment also grew slightly despite continued weak industry trends.

Ken will be discussing the performance drivers for each segment in more detail.

Slide seven shows the components of our total sales growth.

Pound volume contributed two points of sales growth in the quarter.

Sales mix and net price realization were flat.

And foreign exchange reduced the sales growth rate by one percentage point.

We generated solid volume trends in each of our business segments.

US Retail volume increased 1% for the quarter with growth in multiple businesses.

Pound volume for International was up 4% with particularly strong performance in Europe and Asia and our Bakeries and Food Service segment, pound volume increased 3% and that includes the loss of two points of growth from a divested product line.

Slide nine outlines our first quarter gross margin performance over the last three years which reflects the large swings in commodity markets over that time.

You'll recall on a reported basis our gross margin includes the changes in the market value of grade inventories and commodity hedges we'll use in future periods.

So, we also provide our gross margin excluding these mark-to-market valuation changes to give you a site line on cost of goods sold for the current quarter.

In the first quarter reported gross margin was up as rising input costs increased the market value of our commodity position.

Excluding these mark-to-market effects, our gross margin was 41.1% down slightly from our strong performance a year ago when we benefited from lower input costs and particularly strong client operating leverage.

Note that our underlying gross margin is still well above the level from two years ago and we still estimate full year gross margin, excluding mark-to-market, will be comparable to last years 39.7%.

We continue to invest in our strong brands to drive top line growth.

As I mentioned earlier, our investment in media and advertising increased 8% in this year's first quarter and that's on top of double digit increases in each of the last two years.

Slide 11 shows our segment operating profit for the quarter.

Total segment profits declined slightly from strong year ago levels.

US Retail profit declined 3%, reflecting a 6% increase in media investment and higher input costs.

International profits declined 1% reflecting a 17% increase in media investment and Bakeries and Food Service profit increased 11% for the quarter, primarily due to good volume growth.

After-tax earnings from joint ventures increased 9% to $26 million for the quarter including favorable foreign exchange effects.

On a constant currency basis, CPW sales were up 3% in the quarter lead by growth from Cheerios, Nesquik, Fitness and Chocapic brands.

Constant currency sales for our Hagen Dazs joint venture in Japan were down reflecting the challenging economic environment in that market.

Completing our review of the income statement you see that interest expense declined 2% in the quarter.

This is a reflection of a reduction in our average debt level.

The effective tax rate for the quarter was 33.3%, 50 basis points below the same period a year ago.

Excluding mark-to-market effect, this quarters tax rate was 32.8%.

The full year, we still expect our effective tax rate excluding items affecting comparability, will be comparable to our 2010 rate of 33.4%.

And the average number of diluted shares outstanding was essentially unchanged for the quarter, but we did buy more than 21 million shares so we are well on our way to our target of reducing net shares outstanding by 2% for the year.

Switching to the balance sheet, core working capital declined 2% in the quarter as receivables inventories grew roughly in line with sales and payables increased due to higher grain prices.

We also returned significant cash to shareholders in the quarter through share repurchases and we paid dividends of $184 million, an 18% increase over the prior year.

Let me wrap up with a review of our 2011 guidance.

We still expect to deliver low single digit growth in net sales, in line with our long term goals.

In mid single digit growth, in segment operating profit, despite renewed input cost inflation.

We will continue to build our brands with strong levels of ongoing innovation and advertising support.

We expect to grow earnings at a high single digit rate and reach $2.46 to $2.48 per share before any mark-to-market effects.

In addition, we are now targeting modest improvement and return on capital from our 2010 base of 13.8%.

Back in June we told you our 2011 return on capital would be comparable to last years strong performance, however our good cash position allowed us to repurchase more shares in the first quarter than originally planned resulting in a modest increase in our returned capital guidance.

We remain on track for our goal of 15% return on capital by 2015.

With that I'll turn the microphone over to Ken for a review of our segment operating performance.

Ken?

Okay, well good morning everybody.

Thanks, Don.

Now as everybody knows, economic conditions remain relatively weak and consumer confidence is still pretty low, so it is a challenging time, but as we've said before it's still a great time to be in the food business.

Consumers are looking for value and food at home meets that need, so our brands continue to grow around the world and while June and July were fairly soft months in a number of categories, August trends picked up a bit.

In terms of General Mills results, we're anticipating that our near term financial performance will continue tracking in line with year ago levels and we expect sales and earnings trends will pick up at a measured pace as our fiscal year unfolds.

As Don just shared with you, we're pleased with our results for the first quarter and we feel good about the outlook for our businesses in 2011.

With the rest of our time today I'd like to share a brief operating update for each of our business segments.

I'll start with US Retail, where we're seeing growth on top of good prior year growth.

Net sales increased 2% for this segment in the first quarter on top of 6% sales growth in the year ago period and 12% growth the year before that.

Our growth was broad based with increases in most of our divisions.

Volume contributed one point of growth and price and mix was favorable in the quarter.

Big G continues to lead cereal category growth.

Share is up for the latest 12 months and the latest quarter.

First quarter growth was lead by double digit increases in retail sales for multi-grain Cheerios, continued good gains for the Fiber One franchise and Cinnamon Toast Crunch, and sales of new Chocolate Cheerios and Wheaties Fuel.

Now I know the big question about the category has been merchandising levels.

Merchandising activity increased in the quarter yet incremental sales and overall volumes were fairly soft.

We think this category performance is due in large part to a shift in merchandising support and in particular, display support to smaller brands during this period.

Share of display support was down four points in the first quarter for us and Kelloggs and was up for the other players in the category.

Promoting smaller brands results in fewer incremental sales for the category overall.

This increase in promotion against smaller brands, combined with the effects of a competitors recall significantly impacted category growth during the first quarter.

Big G's merchandising in August was quite good, as we planned, with back-to-school events around our box tops for education program.

We'll benefit from box tops in September as well and we're expecting good growth on our core brands during the second quarter, and we've got strong established and new item innovation planned for the second half, so we're expecting another year of good growth for Big G in 2011.

Now let's move to the soup aisle.

Ready-to-serve soup sales declined in the first quarter, but we saw improving trends in August which is encouraging as we head into soup season.

We're working to restore growth for Progresso this year by advertising the positive benefits of soup, working with our retail partners to improve the productivity of the shelf and introducing new varieties.

I shared an update on these efforts a few weeks ago at an industry conference.

I don't have a lot of additional data today, but I can give you an update on our distribution efforts.

Our Fix the Shelf message has been very well received with retailers and has resulted in increases in the number of Progresso items in distribution so far at 13 of our top 20 accounts, representing more than 60% of our business.

Retailers are still in the process of resetting their shelves, so it's too soon to see these increases reflected in Nielsen data, but we're encouraged by the August trends and early reads on our advertising and box top driven merchandising performance, and we have a strong line up of merchandising and marketing activities planned for October.

We're committed to leading growth in all of our US Retail categories.

The way to drive growth is to innovate and we've got a great line up of new items in market right now and we're beginning to see sales trends accelerate in a number of our categories which bodes well for continued growth.

Retail sales of Yoplait yogurt have accelerated in recent months.

Sales grew 5% in August driven by good growth on core items like Yoplait Light, Go-Gurt and fridge pack.

New items like Yoplait Splits, which builds on the successful indulgent platform we launched last year with Delights and Yoplait Greek style yogurt are also contributing to this good sales growth.

Our grain snacks business continues to grow at very solid rates.

Retail sales were up 7% in the first quarter in Nielsen measured outlets, leading to continued share growth.

Sales increased at an even stronger rate in non-measured channels.

We expect this good growth to continue driven by some great new items.

Consumers love our new Fiber One 90-calorie bars, Nature Valley granola thins and Golden Graham treat bars and frankly we're struggling to keep up with very high demand for these new items.

Pillsbury is the market share leader in refrigerated baked goods with two thirds of category sales.

We're lapping a period of very high share growth last year when our share increased by four points and this was driven by strong Pillsbury refrigerated cookie sales while a competitor was off the shelf due to a product recall.

Last years results also included sales from our perfect portions line which we exited last year, so we faced some tough comparisons in what is a relatively small quarter for this business.

As we head into the Fall, marketing and merchandising support for refrigerated baked goods are just now picking up.

In new Pillsbury Sweet Moments, which launched in July, should contribute to sales growth.

These refrigerated deserts are ultra convenient and they really taste great.

We've had terrific response from retailers and are on track to deliver year one retail sales of more than $50 million across all channels.

Refrigerated deserts are a very big category in Europe with sales of just over $1.5 billion in the UK for example.

We see tremendous opportunity to build this category here in the US as well.

Innovation is also driving great growth in the freezer case.

Yoplait Smoothie is very easy to prepare.

You just add milk and blend.

We've quickly gained strong national distribution and are projecting sales of $70 million in fiscal 2011 across all channels.

New healthy colors varieties contributed to 6% retail sales growth for Green Giant frozen vegetables in the first quarter, and we continue to see good growth in frozen entrees, a relatively new category for us.

We expanded our Wanchai Ferry offerings this year adding three new flavors to that line and we extended our frozen entree offerings to Italian flavors, introducing four new Macaroni Grill varieties.

Retail sales for these frozen entrees totaled more than $60 million over the last 12 months and we expect them to continue to grow at strong double digit pace.

Growth is picking up in our organic and natural categories as well.

Retail sales for our categories strengthened in the second half of 2010 and were up 6% in the first quarter of this year and sales for our products have been even stronger, including double digit gains across a number of our Cascadian Farm and Muir Glen product lines.

Sales for Larabar fruit and nut bars increased more than 80% and we've increased our presence -- as we've increased our presence in traditional retail outlets.

We've also added several new Larabar flavors this year and they are off to a great start.

So, we're encouraged by the strengthening sales trends we're seeing across a number of categories and we remain committed to leading category growth through innovation.

New products aren't the only way to innovate and we're working to drive growth by innovating across all aspects of our business.

We're enhancing our sales capabilities and finding new ways to partner with our customers.

We're creating value through HMM generating the fuel to increase our marketing efforts and reach consumers in new ways.

We're committed to driving growth for our categories and our leading brands.

US Retail is off to a good start and is on track to deliver another year of quality growth in 2011.

Let me shift gears to Bakeries and Food Service.

Our businesses continue to outperform weak food service industry trends.

Our sales to food service distributors increased 1% in the first quarter driven by our strong presence in the education channel with products like mini pancakes and Yoplait Parfait Pro, which is a convenient way for operators to make yogurt and granola parfaits.

Convenience store sales were up 15% driven by continued distribution gains and good new item performance.

We saw strong growth on our key consumer branded items too with double digit increases on snacks and yogurt.

The way we win in this segment is very similar to our approach in US Retail.

We partner with distributors and convenience store operators bringing them capabilities to drive growth in their categories and we innovate.

Our direct salesforce is an important strategic advantage for us in this area.

They help us work with food service distributors to improve their product offerings and streamline preparation, with items like the new mini blueberry biscuit for Burger King's breakfast menu announced earlier this month, and they enable us to quickly get new items on shelf in convenience stores like the Wheaties Fuel bars and Chex Mix Muddy Buddy snacks we launched this Summer.

Our focused mix management strategy is working well, contributing to a 170 basis point improvement in operating margin for Bakeries and Food Service in the quarter.

For the year in total, we're not counting on holding all of last years big gain, but we're still targeting a strong double digit margin.

We're outperforming industry trends in this very challenging food service environment and we're on track to deliver good performance in 2011.

Now let's move outside the US.

First quarter sales for our International segment grew 4% on a constant currency basis.

Constant currency sales in Canada were down 1% reflecting a challenging comparison to 12% growth in the year ago period and a competitive retail environment, but our cereal sales in Canada were strong, behind the successful launch of several new items resulting in continued market share increases in the quarter.

Sales in Latin America increased 4% lead by good growth in developing markets and price increases in Argentina and Venezuela.

Sales in Asia Pacific increased 7% and constant currency sales in Europe were up 6%.

That's a good start to the year for Europe where the economic conditions have been tough.

It's too early to declare economic victory, but we are starting to see some encouraging signs in a few markets, particularly France, which lead our growth in the first quarter.

Constant currency sales in the UK grew at a mid single digit pace driven by double digit growth on grain snacks, and sales in Germany and the Middle East and North Africa region were strong as well.

In terms of product platforms, Hagen Dazs stood out with sales increasing at a high single digit rate during the quarter.

Hagen Dazs sales were up in China too with good shop traffic in Shanghai due in part to the World Expo there.

Early sales of Hagen Dazs moon cakes, a popular gift given to celebrate the mid autumn festival, had been strong.

Wanchai Ferry sales continue to grow as well as we expand our frozen dumpling distribution to new cities and add new products like the frozen noodle line we introduced this year.

In total, constant currency sales for greater China increased at a double digit rate in the quarter driving strong emerging market growth for General Mills.

New products are fueling International sales too.

We recently launched Nature Valley in Australia and it contributed nicely to first quarter sales there and we added Banana Nut Cheerios to the cereal portfolio in Canada and that's been selling well.

I mentioned that Wanchai Ferry has entered a new segment with the introduction of frozen noodles expanding our presence in the rapidly growing frozen food category in China, and we've introduced a number of new items in European markets like crunchy and more Nature Valley bars in the UK.

These bars include fruit pieces and are contributing to the strong grain snacks growth I mentioned earlier.

Our International business is off to a good start this year and we're beginning to see improving consumer trends in some markets.

We have tremendous potential in international markets and we're on track to deliver mid single digit constant currency sales growth in 2011.

We expect our global platforms to be a driving force behind Company sales and profit growth in the years to come.

So, with our first quarter in the record books I'd characterize our fundamental expectations for fiscal 2011 as unchanged.

After a brief interlude of deflation in fiscal 2010, we're seeing input cost inflation return.

We're still assuming 4% to 5% inflation for the year and we're about 65% covered on our commodity and energy needs for fiscal 2011.

We have good HMM activities in place to help offset these rising input costs.

We continue to believe renewed moderate levels of inflation for the industry will gradually result in improved sales trends in our categories as promotion levels will likely ease in response to renewed cost pressure, but we see this as a relatively slow evolution in industry trends with sales and earnings growth accelerating at a measured pace as the year progresses.

In summary, the global operating environment is still quite challenging, but our food businesses are resilient and continue to demonstrate high quality growth.

We're pleased with the continued growth in volume and net sales across our worldwide businesses.

Consumer demand for our established brands remain strong and new products are making good contributions to our sales results.

This top line resilience coupled with our continuing focus on holistic margin management has us on track to deliver our sales and earnings targets for 2011.

So, now we would be very happy to answer some of your questions.

Operator, could you please get us going?

Absolutely, sir.

(Operator Instructions) Our first question comes from the line of Terry Bivens from JPMorgan.

Please proceed with your question.

Thanks and good morning, everyone.

Hi, Terry.

Good morning, Terry.

Ken?

Two things on the cereal business.

As we look at it, granted this is Nielsen data, but it does seem of late that General Mills has been doing more promotion than some of the competitors there and I guess my question is, is this kind of tactical?

Is it kind of a combination of box tops for education plus some support behind your new Wheaties and Cheerios brands or hopefully it's not something sustainable.

It sounds like you don't see that.

So, that would be kind of my first question.

Okay, well let me take your first one first.

Terry, we did have a very effective box tops promotion event at the end of the quarter there in August.

Box tops is a terrific platform.

It wasn't just on cereal.

It was across many of our brands because that's a cross-category vehicle for us as you know, and retailers love it because not only do our consumers clipping box top coupons, but many of our retailers are able to tie in with their local schools as part of this event.

So, it's really a terrific event and it resulted in very high quality merchandising for us and by that I mean retailers really like to display these items.

So, that's what you saw at the end of that quarter and box top is a great platform and we'll continue to use that program that we've developed internally over the last ten years, but fundamentally our outlook for Big G rests on the fact that our core brands continue to be strong, we have very good marketing programs across the top brands and we think that will drive steady gains and we have a couple of more new products that we think will be very good that we'll be launching in the third quarter.

So, we're quite optimistic about the outlook for Big G cereals here as we go forward into this year.

And just a quick follow.

You mentioned that there was more promotion of some of the smaller brands.

We also see some trends that some of the more profitable cereals for both yourself and Kelloggs seem to be among those languishing on a brand level analysis.

Is that something we should be concerned about going forward?

Have you detected any kind of down shift and I guess a shift into cheaper, less profitable cereals across the category?

Well, what we've seen, Terry, is across a couple of categories that you pointed out which is there was unusually heavy level of promotional support behind third and fourth brands in a number of categories this Summer, and I think the results are apparent that the lists that our retailers would have gotten from that activity would have been similar to what you get on another brand, but off a base that is very much smaller.

So, I think the lesson there is you just can't drive the category with those smaller brands and so as we look forward to our marketing and merchandising program here over the next couple of quarters, we're very confident that you'll see very good levels of support behind our high turning key brand.

Okay, great.

Thanks very much.

Thank you.

Thank you for your question, sir.

Continuing on our next question comes from the line of Chris Growe from Stifel Nicolaus.

Please proceed with your question.

Hi, good morning everyone.

Hi, Chris.

Just had a couple questions for you.

First Don, I was wondering within International, I know that you are anticipating a bit of a profit benefit from FX for the year.

Was that positive on the profit line for International this quarter?

Actually if you look at translation and transaction for the quarter it was essentially neutral across our business.

It was actually about a $0.03 drag in last years first quarter because of the transaction impact primarily, but this year it was about flat for the quarter.

As we look at the full year as we guided in July, we still expect a $0.02 to $0.03 favorability for the year.

And then I wanted to ask about your US Retail division.

I was surprised by the positive price mix in the quarter.

I imagine that mix was positive like if you could confirm that and then I just want to get a better feel for if it's really that promotional out there as we've heard from others, I would have thought you'd see more promotional spending out of General Mills this quarter.

I'm just trying to put that together from what I hear from other companies.

Do you have any comments on that, Ken or Don?

Well I'll take this one.

You see from the sales mix we did have a positive mix on the top line.

I'll tell you as we look at our gross margin, we didn't see a drag from mix.

We saw a slight positive from mix on our gross margin as well and I think this somewhat addresses Terry's question as well in terms of as the retailers actions from a promotional standpoint caused a drag to us and if you look at our total gross margin mix, the answer would be no.

Okay, and then can you give a feel for how much your promotional spending would have been up in the quarter in the US Retail Division?

On a cost per case basis versus last year, we're probably up $0.05, but actually we were down sequentially from Q4, a net 10.

Okay, and I had one last question just in relation to Bakery and Food Service.

With the wheat price volatility I'm just curious how that plays into your outlook for that division for the year for the milling business.

Is that, as some would argue, a positive for that division just given the volatility for that division in that business?

Chris, as we looked -- as we closed the first quarter, we didn't see any significant difference in what we call our grain merchandising earnings from previous year.

We feel good about how -- certainly how the segment performed in the quarter in total, but if you look at the full year outlook remains as it was at the beginning of the year.

Okay.

Thank you.

Thank you for your question.

Continuing on, our next question comes from the line of Eric Katzman from Deutsche Bank.

Please proceed with your question.

Hi, good morning, everybody.

Hi, Eric.

I guess maybe kind of following on to Chris' question a little bit more on the gross margin.

So, it's down 70 to 80 basis points, but you had positive mix which I guess isn't surprising given the high margin Big G snacks and yogurt businesses were up, so what else was working against the gross margin other than year ago?

Is it all inflation versus HMM and maybe you could break that out a little bit.

Eric, it's a good question.

We're obviously, last year lapping substantial margin expansion, gross margin expansion, we're 500 basis points and we are starting to see input cost inflation returning and plus, as I mentioned in the July meeting, as we put additional growth capital in place we are incurring certain project expenses related to those projects and those tend to be front loaded because we have those capacity projects already under way, so that will be a bit more of a drag in the first half than the second half.

From an HMM standpoint, very robust, remains on track, as we indicated to the levels we indicated in July there could be some timing between inflation and HMM at any given quarter, but at a full year basis we still feel pretty good about our HMM pipeline and where we're tracking.

I did mention that mix is probably slight favorable for the quarter as well, so as you add it all up, there's going to be some movements quarter to quarter.

In the first quarter what I'd highlight again, the return of inflation and some of the project expenses and some of the operating leverage that we touched on as well, but when we look at the full year, we still remain very confident we'll be able to deliver the 39.7 that we had last year.

Okay, and then I guess two questions for Ken if I can do that.

One, Ken, it continues to be almost -- and I guess comment on this, but a bifurcated kind of market out there.

Your small planted foods, which I assume is much higher price per unit, was up very strongly, but the mass market brands for across the industry are struggling, so maybe you could comment a little about what you see there and then just one follow-up.

Well, we're seeing what you're seeing.

We're seeing, first of all it looks like the trends are improving across a number of categories.

We are seeing a number of them that have been growing and so the category for frozen entrees up, yogurt category growing very strongly, snacks growing strongly, the organic category, which you pointed out, after being dead in its tracks in the early part of the recession coming back strongly now and so there are -- it is a mixed bag right now, but I guess what I would say generally is that it looks to us like the categories are starting to all move in a good direction as we said we saw our soup business started to pick up a little bit towards the end of the quarter.

So, our outlook is that as we move into the end of Summer and Fall and all of our programs go into play, we'll see those categories continue to improve.

And what I would add is I think what we've seen is if you bring meaningful benefit to the consumer and you support your brand you're going to see growth across your categories.

Yogurt is a good example where we've seen the Greek segment, which is certainly a higher priced item, drive growth both for the segment and for us as well.

So, there is certainly still some choppiness and some concern about consumer confidence, but what we have seen is that mass market is still there if you bring the right benefits and you support them correctly.

I guess kind of following up on your comment about the retailers willingness to push some of the smaller tertiary brands, I guess it was in cereal and other categories, that kind of flies against I guess a bit of logic and I know you had us to headquarters and we were taken into this room with this giant virtual reality computer screen and talking about how you were able to show the benefits on shelf.

Are the retailers just struggling so much that they're willing to take a short-term deal and kind of ignore the technology analysis of the category that you bring to the table, but it just seems like a strange development that the retailers would go with the smaller brands.

Well I think you make a lot of good points there and I think I don't want to speculate on how they think about their tactics at any given point in time, but I will tell you that we're out there telling our story and with our facts very, very clearly about the power of those big brands and categories to really drive traffic into their stores and to drive category momentum and we're pretty confident that you're going to see those big category moving brands kind of accelerate here as we move into the year.

Okay I'll pass it on, thank you.

Thank you for your question, sir.

Continuing on, our next question comes from the line of David Driscoll from Citi.

Please proceed with your question.

Great.

Thanks a lot.

Good morning everyone.

Good morning David.

Wanted just to follow-up on the gross margin question, Don.

So, what you were saying right there is that we are going to see HMM is back end loaded, so with margins down in the quarter, the reason why you can call out flat margins on the year is because of an acceleration in HMM in the final two quarters.

Is that the right way to look at it?

I wouldn't read that much into it.

I was just saying you aren't always going to have a perfect match for you to place in HMM in any given quarter.

HMM is simply back loaded.

I think the unique thing in the early part of the year you see in the first quarter in particular is the timing of our project expenses related to capital and capacity expansions which are front end loaded and then in the first quarter, we had particularly strong operating leverage last year and so we rolled over that as well, and that's again more of a single quarter issue.

Ken, one question for you on pricing and your methodology overall.

General Mills has, I think pretty much convinced us that they have a wonderful holistic margin management program to produce cost savings that would be at the top end of the peer group.

Would the plan then be with 5% inflation that simply if you can absorb it given your excellent levels of HMM, you would absorb it and you would not try to seek price increases or conversely, would the philosophy be you should price when and if you can price for the category strength that you have, so if you can see the nuances here, one would say you go with the strength of your categories.

The other would say no, if you have HMM, just use it up and allow the inflation to not pass on to the consumer.

What's the right way to look at General Mills?

Well, there are a couple of ways to look at it.

First of all, HMM stands for holistic margin management which is sort of a complete approach to margin management and -- but our goal with that program was to create a number of tools that we could use to help us manage margin growth over time, including, David, all of the things that you're very well aware of that we do in our plants and in our supply chain, but also mix has been a huge driver of margin management over the last several years.

The efficiency with which we execute our merchandising programs.

We want to hold those case rates as close as we had comparable year to year and we do that by really evaluating every promotion that we do and make sure that the tactics that we use are very efficient, but list price increases are also part of that and always have been.

So, we haven't taken that particular tool out of the tool box.

It's still there and our view is that as we see -- our belief as you know is that we're going to see inflation here of 4% to 5% a year.

We think that's sort of what we should expect on an ongoing basis in sort of a normal year and in that kind of a year, our goal would be to offset much or most of that with HMM or other techniques, but we would also be very confident in that kind of environment that we could take some pricing to get all the way to bright and we've been able, frankly, we've been able to do that going back decades and we think we're moving into that kind of environment where HMM and a little mix and efficiency all over and a little bit of pricing and you get to where you need to be.

Have you engaged in any conversations with the retailers about price increase announcements given the inflation?

No, and we don't, frankly even if we had, this is not the kind of thing we would be discussing with you.

As you know, we never talk about pricing perspectively.

I figured if it was already within the retail trade you might be willing to say it, but I appreciate that comment.

Thank you very much.

Thank you, sir for your question.

Continuing on, our next question comes from Vincent Andrews from Morgan Stanley Smith Barney.

Please proceed with your question.

Thank you and good morning, everyone.

Could you talk a little bit about the shelf space gains in soup and maybe in particular where you're sourcing it from, is it the smaller brands, is it the larger brands, is it from the sort of convenience for microwavable items or what are you seeing?

So, Vincent, thank you for that question.

Really, our analysis was that as we look at the category, really the top turning higher margin SKUs on the shelf, really from all manufactures, really the taste story ended of items in our line that would be products like our rich and hardy line, our vegetable classics, these really tend to be in the top third or the top quarter, that they had been squeezed a little bit over the last two or three years by a proliferation of health varieties from many manufactures and so what we've done, and those varieties are also very important.

For instance, our Progresso Light soups have been a tremendous contributor, but we just went and looked at the data and went in and shared that with our retail partners and said look, we think we're a little bit out of balance here and we ought to make sure that we've got the very top turning items in a good place on the shelf, and they've very much I think agreed with that point of view.

So, we've reset things and we've got as we pointed out in the presentation, a number of our taste top turning SKUs kind of in the mix here and we think that will be positive for the category.

We don't really know how it will shake out in terms of whether they expanded or where it comes from, but what we do know is that they like the idea of really returning the category to appropriate focus on taste SKUs.

And this is Don.

The only thing I'd add in terms of specifically within our set, the microwave soups are the ones that came out and then the retailers looked at their slower turning and I think we've shown you just as before about where Progresso sits in that and we tend to have higher portion of higher turning SKUs.

So, the combination of those two things is what gives us confidence of not only getting more distribution, but a healthier shelf set overall for the category.

If I could just ask a quick follow-up it would be on pantry loading and maybe I'm thinking more specifically to soup and maybe if you have comments broadly across the store that would be helpful too.

With the trends in June and July being weak and a pick up in August and we keep hearing anecdotal reports about how the consumer is doing another deload at home and some companies have commented on it.

Are you seeing that and is there any risk of the pick up in August was just sort of a reflection of drawdowns in June and July and sort of a slight refill in August, but it's not going to be sustainable?

Really the most concrete thing that where there is data that we can all look at and evaluate for June, July and August has to do with this merchandising comment that we've made to you, coupled with some other things in selected categories and we've already commented about significant recall in the cereal category which clearly had an impact on the category in July.

So, if you're talking about data, and information that's what we can support.

We also hear anecdotes about pantry loading or deloading, but we don't really have -- we can't tie it back to very solid data, so if we could, we would and if we ever do have it we will share it with you, but we're focusing right now on the things we can see.

Thank you very much.

I'll pass it along.

Thank you, sir.

Continuing on our next question comes from the line of Ken Zaslow from BMO Capital Markets.

Please proceed with your question.

Good morning everyone.

Good morning Ken.

Over the last 12 months General Mills has continued to gain market share and momentum in the mass merchandising channel.

I know there has been shift in consumers going to mass merchandisers.

Can you talk about where you see those trends going during this quarter and are you still seeing market share gains in those channels and if you could just give some anecdotal evidence?

Yes, well as you I think may have pointed out in your questions, there has been a gradual shift over many years to mass channels, whether it's super stores or club stores.

Those have been growing segments and we would expect to see that continue going forward, although at a moderated rate, but we think that's going to continue and we've had a high focus on those channels and have done well there.

So, that continues to be an area of focus and opportunity and not just super stores which are obviously important to us, but club stores have been an exciting growth area for the industry.

Dollar stores have been very, very high growth for the industry.

You see a number of seniors now, more and more seniors buying their food in pharmacies, the big mass pharmacy chains.

So, there's a lot of opportunity there and we also talk about C-stores which slowed down during the recession, but we're now starting to see some growth in convenience stores, so our objective here is to bring the right kind of resources and the right focus and innovation to all of our channels and that's served us very, very well.

It's resulted in good growth for us in many of these emerging channels.

Have you continued though to gain market share in these channels?

Because I think there was a point in time that it was pretty obvious last year that you did gain share, and I just --

We had good share gains there.

We had good share gains in our first quarter.

Ken, based on the best data we have, we can see two things.

One is the non-measured channels growing significantly faster than the measured channels, and second is gaining share in those non-measured channels whereas if the combination of the all channels if you will, the all universe we're confident we actually gained share overall, lost it in the Nielsen, but picked it up in the non-measured channel.

Great.

Thank you very much.

Thank you for your question, sir.

Continuing on, our next question comes from the line of Robert Moskow from Credit Suisse.

Please proceed with your question.

Hi.

Just have a couple questions.

Ken, I remember I think last year, there as a slide that put up that showed that you were under indexed in cereal in terms of distribution points compared to where you thought you should be, and I want to know if you could give us an update on if you're getting more share of the shelf, especially since Kelloggs has really gone through another round of rationalization at the shelf, and I wondered if you got the benefit of that.

And then secondarily, I wanted a little more color on your comment about you expect higher promotional price points to be gradual and track on commodity costs going up and you did make a point to emphasize gradual, which I think is probably the right thing to do.

Given the resets at retail, how long do you think it takes before certain categories you start to see higher price points?

Could we see it as soon as March or June or what do you think by gradual?

Okay, well Rob, let me answer the first question first.

I do remember sharing, I think Ian Friendly shared that data with you a year ago and this is good data that we have on our channels that shows that our Big G cereals are, versus their market share, are quite a bit under indexed in terms of share of distribution on the shelf and we think that's a very accurate data.

And what happens when you have that situation is I think it can result in higher out of stocks than you ought to have because you don't have the sort of staying power on the shelf and loss of important sales to our regional partners.

And so, as we've been out there telling that story and bringing good new products and with the strength of our brands, its been very persuasive and we're gaining distribution and there's quite a bit more to gain there.

I don't remember how big the gap was, but it was significant and my colleagues are giving me a piece of paper that says our share of shelf was up again in the first quarter.

So, we continue to make good progress on that and we think it's good for us, but we think it's also good for our retailers because it's just more holding power for them with fewer lost sales.

In terms of my comment on gradual, I think it sort of says very broadly speaking kind of from an economic point of view, we know that inflation is here, is back, and it's going to be 4%, 5% for us this year and I think you're probably hearing similar numbers from most everybody else and I think that we're rational in that as those signals are picked up and absorbed we're always going to -- they will be, the tendency will be to find ways to absorb that and we strongly believe that one of those will be a moderation in the merchandising environment.

So, when it happens is difficult to predict.

I think you all know that retail execution calendars around promotion takes a while, it can take six or eight months before they move from one planning cycle to another, so it can take some time, but we believe gradually you'll see a moderation.

Wish I could give you more details, but we'll see it happen gradually over time is the best we can do.

A follow-up for you for Don.

4% to 5% inflation, no change in your outlook, but corn is up 75% since you last gave the outlook and wheat is up even more.

Your name is General Mills, so is it just hedging that was good or you're not seeing those types of price inflation when you really look at the commodities that you buy?

Well, I think a couple things to keep in mind.

First off grains are less than 10% of our total spend, so our name may be General Mills, but we're not all grain based.

With that said we have seen a mix.

We are 65% hedged as Ken alluded to, so that is going to see us through some of these near term spikes and we are seeing some things come down too, resin packaging is down a bit from what we originally planned.

So, we see some offsets and it keeps us in that same 4% to 5% mix that we saw, that we guided to in July, so we haven't changed that number in total.

Okay, great.

Thank you very much.

And thank you.

Our next question comes from the line of Judy Hong from Goldman Sachs.

Please proceed with your question.

Thanks.

A couple of questions.

First, on the cereal side, you talked about Big G net sales being up 4% in the quarter.

If I look at the measure channel data, the category itself is still trending down about 4% to 5%, so even if we assume that you are gaining share, it seems like there is a pretty big gap between, at least in the measure channel data, what the category is doing and then what you are doing, so what you reported in terms of the sales.

So, is it just in the unmeasured channel you're doing that much better?

Is there some discrepancy between your shipments and what the retail take away number is for you is my first question.

Well, Judy, you kind of answered your own question.

We're doing well in the Nielsen measured channels and we're doing very well in the other channels and so there's good correlation between our consumer sales and our net sales.

We did very well in channels this quarter.

And Judy I mentioned earlier that we had some market share gains in the non-measured channels that more than offset the share loss in the Nielsen.

That was particularly so in Big G.

We had a particularly strong quarter in Big G in the non-measured channels with share gains and so that's what's helping drive our shipment numbers for the quarter.

So, do you have a sense of what the cereal category as a whole is doing if you look at the all channel data?

Yes, so the all channel we still see some negative trends in cereal and it's for the reasons that Ken took us through in terms of the promotional calendar and the stronger promotion behind the third and fourth brands.

Okay, and then Don?

I'm sorry and the competitive recall as well, we talked about both those items.

Yes, okay and then Don just in terms of your guidance obviously you've called out the first half being a more subdued, as you look out for the balance of the fiscal year 2011, it seems like you are expecting a pretty nice acceleration in the back half, so I know the comparisons are easier from a margin perspective.

Are there any other factors that you think are going to drive that acceleration in the back half of the year from an earnings perspective?

Judy, we came into the year knowing that the early portion would be a challenge.

We're seeing renewed inflation, we're seeing slower economic growth in the developed markets, but you hit the most important factor which is we faced our own tough comps and we're pleased where Q1 came in, it came in as we expected and as we communicated to you in July, but as we look forward those tough comps will continue.

So, we do expect our pantry results to track more in line with last years results in the near term.

With the full year still very much on the mark to what we communicated and so part of it is going to be rolling over the comps and part of it again as we communicated in July, is our expectation with inflation returning we will see some easing on the promotional side as the year unfolds, as our fiscal year unfolds.

Okay, thank you.

And thank you for your question.

Our next question comes from the line of --

We've got time for one more.

Perfect.

So, therefore our final question for today's call comes from the line of Robert Dickerson from Consumer Edge Research.

Please proceed with your question.

Hi.

Actually, I just saw in Q1 the amount that you reported in joint ventures from Hagen Dazs and CPW was up and I know at your analyst day you said you expect it down for the year.

I just want to confirm you expect it down for the year and that nothing has changed.

Obviously we're very pleased with how the joint ventures started our fiscal year, but we don't have any change in our guidance for the full year.

Okay, that's all.

All my other questions were asked.

Thanks.

Thank you.

We'll turn it back to our moderators for their concluding remarks.

I don't have a concluding remark other than if there were questions out there we didn't get to please give me a call and we'll try to get them answered.

Thanks very much.

Thank you, Ms Wenker.

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

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

Thank you once again.

Have a great week.