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Executives

Kris Wenker - Vice President, Investor Relations

Donal L. Mulligan - Chief Financial Officer, Executive Vice President

Ian R. Friendly - Executive Vice President, Chief Operating Officer - U.S. Retail

Kendall J. Powell - Chairman of the Board, Chief Executive Officer

Analysts

Chris Crowe - Stifel Nicolaus

Eric Katzman - Deutsche Bank

David Palmer - UBS

Analyst for Vincent Andrews - Morgan Stanley

Terry Bivens - J.P. Morgan

Ken Zaslow - BMO Capital Markets

Andrew Lazar - Barclays Capital

General Mills, Inc. (GIS) F1Q10 Earnings Call September 23, 2009 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the General Mills fiscal first quarter 2010 results conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Kris Wenker, Vice President of Investor Relations for General Mills. Please go ahead.

Kris Wenker

Thanks, Operator. Good morning, everybody. I am hear with Ken Powell, our CEO; Don Mulligan, our CFO; and Ian Friendly, Head of our U.S. Retail Business, and I am going to turn the microphone over to them in just a minute.

First, I need to cover my usual housekeeping items. Our press release on first quarter results was issued over the wire services earlier this morning. It’s also posted on our website if you still need a copy. We have posted slides on the website too. They supplement our prepared remarks this morning and these remarks will include forward-looking statements that are based on management’s current views and assumptions. The second slide in today’s presentation lists factors that could cause our future results to be different than our current estimates.

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

Donal L. Mulligan

Thanks, Kris and thanks to all of you who have joined us by webcast. As you have seen from our financial results released this morning, General Mills is off to a very strong start in fiscal 2010. Slide 4 summarizes our first quarter results. Net sales grew 1% on top of 14% sales growth in last year’s first quarter. Segment operating profit grew 21%. This reflects strong gross margin performance driven in part by recovery of margin that we gave up a year ago due to sharp input cost inflation. But excellent operating performance in our plant was also a key factor in reducing our cost of goods sold.

Net earnings totaled $421 million and diluted EPS increased to $1.25. These results include a net reduction related to mark-to-market valuation of certain commodity positions and grain inventories. That non-cash impact totaled $0.03 per share this quarter, less than the $0.17 reported last year. Excluding mark-to-market impact from both years, diluted EPS grew 33% to reach $1.28 per share.

These results significantly exceeded our expectations. We anticipated our Q1 input costs would be below year-ago levels. In fact, costs came in a bit better than our plan estimates. Our plan operating performance was also better than plan. This was a result of continued good sales levels, which created operating leverage in our facilities. Mix was favorable and our multi-year focus on continuous improvement and holistic margin management, or HMM, is generating accumulating efficiencies in our plants.

The net sales gain of 1% overall is consistent with our annual guidance. As you know, we are targeting reported sales comparable to 2009 levels. But I would characterize our top line results as a bit ahead of our first quarter expectations, particularly in U.S. retail, where growth was stronger than the low-single-digit increase we’re targeting for the full year. In addition, foreign exchange was a bit less of a drag in the quarter than plan.

We are going to reinvest a portion of this quarter’s strong earnings increase in additional 2010 consumer marketing initiatives to help us maintain our strong top line momentum. Even with that reinvestment, we now expect our full-year earnings to go well above our previous target. We’ve added $0.20 to our guidance, bringing the range up to $4.40 to $4.45 per share before any mark-to-market effects. This growth represents -- this represents growth of 11% and 12% from comparable earnings of $3.98 per share in fiscal 2009.

Let’s spend a few minutes taking a detailed look at our top line results. Our sales comparisons for this quarter was daunting. As you’ll recall, last year we posted double-digit increases in all three of our business segments. Slide 6 summarizes net sales results on an as-reported basis. U.S. retail sales rose 6%. Remember that Pop Secret was still in first quarter results last year so growth would have been even stronger adjusted for that divestiture. Ian will review the operating highlights for this business after my financial review.

International sales declined 4% as reported. Growth here was reduced by negative foreign exchange and product line divestitures in Brazil. You will hear more about our international businesses from Ken in a few minutes.

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

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

Slide 7 shows the components of our 1% increase in reported net sales. Pound volume matched year ago levels but included sales from divested product lines. Favorable sales mix and net price realization contributed three points of sales growth and foreign exchange reduced the growth rate by 2 percentage points.

We saw solid volume trends across our businesses, especially when you break out the impact of divestitures. Slide 8 shows our pound volume trends for the quarter by segment. Below the chart you see the impact of divested product lines in our reported results. Divestitures reduced pound volume for U.S. retail by one point, international volume by two points, and represented a 10 point volume reduction for our bakeries and food service segment. In total, divested businesses reduced pound volume growth by two points.

Our gross margin improved to 41.5% as reported and 41.9% including mark-to-market effects. This quarter included some moderating benefit from price actions take in F09 but we’ve now lapped a vast majority of those increases and don’t expect pricing to have as much of an impact for the remainder of the year.

Commodity and fuel costs were below year ago levels in the quarter, and I mentioned earlier that strong plant operating performance was a key driver of margin growth. A number of factors contributed here. Good sales and volume levels almost always translate into good operating leverage. As you already know, pound volume trends were pretty good for our businesses overall. More importantly at the plant level, physical case volume was up. Also, our mix was favorable and the work our teams are doing with continuous improvement in HMM is a gift that keeps on giving in terms of plant operating performance.

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

Projecting our gross margins effectively has enabled us to steadily increase our consumer marketing investment. Increased media spending for both traditional media and fast-growing online media vehicles has been driving the growth in our brand spending. In the first quarter media expense was up 16%.

Our 2010 plan already included double-digit increases in media spending for the year. We are now planning to reinvest on our first quarter earnings growth in additional media and consumer marketing programs. As always, we will maintain strong vigilance over the ROI associated with these initiatives and we expect our increased consumer spending to contribute to continuing sales momentum.

Slide 11 shows our segment operating profit results for the quarter. Total segment profits grew at a strong double-digit rate, reflecting terrific performance by our U.S. retail business, a more than doubling of profits for bakeries and food service segment. International profits declined as reported but once again that’s a reflection of negative foreign exchange translation and transaction effects. Excluding these factors, international operating profits increased at a double-digit rate.

Slide 12 summarizes the operating margin change by segment. The total segment operating profit margin for the quarter expanded by 370 basis points to 21.8%. That was driven by margin improvement of more than 300 basis points in U.S. retail and nearly 900 basis points for our food service segment.

After tax earnings from joint ventures totaled $24 million for the quarter. That’s below strong year-ago results due in part to negative foreign exchange impact. However, Häagen-Dazs Japan volumes were down in the period, reflecting the weak economic climate there. And while CPW sales grew at a constant currency basis, foreign exchange did pull down the reported sales.

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

Completing our review of the income statement, you see interest expense up 6% for the period. That’s a reflection of our actions last year to shift our mix of debt to include more fixed rate and more long term debt. Commercial paper rates have been a bit better than we planned, so we now think that our full-year interest expense will be comparable to 2009 levels. That’s better than the low-single-digit increase we projected in July.

The effective tax rate for the quarter was 33.8%, a point lower than the same period last year but in line with our estimate for the full year rate. And the average number of diluted shares outstanding was down 4% for the quarter. We remain on track to our target of reducing average shares outstanding in 2010 at a rate less than our long-term goal of 2%.

Let me comment briefly on the balance sheet at our core working capital trends. Core working capital grew roughly 6% in the quarter. That’s consistent with our usual seasonal pattern under which we increased working capital levels through the first part of the fiscal year and then see levels decline in the back half. For fiscal 2010 in total, our goal is to hold growth in working capital at or below the rate of our sales growth.

With that, let me quickly summarize today’s financial results. We saw good top line performance in the first quarter despite challenging prior year comparisons. Gross margin performance was excellent, fueled by our ongoing HMM initiatives, as well as recovery from prior year margin declines, driven by sharp input cost inflation.

We are continuing to invest to build our brands with ongoing product innovation and increasing levels of advertising support. Clearly it’s been a very strong start to the year. This momentum points to better than planned results, so we’ve increased our full-year EPS guidance to a range of $4.40 to $4.45. This performance would exceed our long-term growth targets, despite negative foreign exchange and one less week in the fiscal year, while still allowing us to reinvest back in the business and keep our momentum going.

With that, I will turn the microphone over to Ian Friendly for a review of the momentum we are seeing in our U.S. retail segment. Ian.

Ian R. Friendly

Thanks, Don and good morning, everyone. The U.S. retail business is off to a strong start in fiscal 2010. We coupled good volume growth with margin improvement. We are executing well against our proven business model and delivering strong fundamental growth. The same factors that have been driving our growth the past few years are still working well for us.

For one, we are an advantaged category. Over the latest 52 weeks, the categories where we compete are growing more than two times faster than food and beverage categories in total. We are seeing good growth across most of our categories, including high-single-digit sales increase for hot snacks, Mexican products, and dessert mixes, and these are growth rates in measured channels. Sales in non-measured channels are generally growing at a faster rate.

This category growth has sustained in recent months. Overall sales growth hasn’t slowed as we’ve lapped price increases because we’ve seen unit growth accelerate. Slide 20 shows the growth for our combined categories over the latest year, the latest quarter, and the latest month. Our categories continue to grow at a robust 4% rate in measured channels alone. And our brands continue to drive growth for our retail partners. General Mills has about a 3.5% share of total food and beverage sales in Nielsen measured channels, but our share of total growth across all food and beverage categories was higher than that in the most recent three months, so our overall share of industry sales was up. This increase was a result of the strong categories we compete in and the good performance of our brands.

The fundamentals of our brands remain healthy. Baseline, or non-promoted sales for our brands grew 2.5% in the first quarter on top of strong growth in the same period last year and our brands continue to gain distribution despite increased pressure to reduce items on store shelves. Our total points of distribution were up 3% in the latest quarter.

We remain firmly focused on innovation to drive growth for our categories and our brands. We have a number of new items in markets like new varieties of our Savorings frozen appetizers, Nature Valley Granola Nut Clusters, new Yoplait items and several new Cascadian Farm and [Nuor] Glen organic products.

We are offering consumers new benefits, like Betty Crocker gluten-free baking mixes, and we are delivering convenience with new [Wanchi Fairy] frozen entrees, ready in just 14 minutes.

We are also innovating on how we reach consumers. Increasingly, we are connecting with consumers online and on the go. We are offering coupons to consumers through their mobile phones. Betty Crocker, one of our oldest brands, is offering ideas and inspiration on her Facebook page. Our box tops for education program is using social media to support our products and help people earn more money for their schools through new blog outreach and YouTube videos, and FiberOne has created a series of webisodes that deliver our brand message in a fun entertaining way.

Our high quality brand delivers good value. Slide 26 showed the average non-promoted retail price per serving for a variety of our core products. Our brands continue to be very affordable choices for consumer.

So our sales strength in the quarter was driven by the fundamentals. Pricing did contribute but it wasn’t the biggest driver of our growth. In total, our net sales were up 6% with good momentum across our division, as shown on slide 27.

Let me share a few highlights. I’ll start with Big G. Our cereal division had a great first quarter. The U.S. cereal category remains vibrant. We continue to lead growth in the category and our share was up almost a point in the quarter. Our core established brands are performing well. Retail sales for the market-leading Cheerios franchise were up 4% in the first quarter in channels where we have data. Sales for the Cinnamon Toast Crunch and FiberOne franchises continue to post double-digit sales growth and Chex franchise sales increased strongly in the quarter with our gluten-free [news].

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

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

There’s plenty of opportunity for continued good growth in the U.S. cereal category. More than 90% of U.S. households buy cereal each year and the number of servings consumed annually is growing. Consumers increased their cereal consumption by almost a billion servings in 2008. We like the prospects for future growth in this category and Big G remains focused on leading category growth.

Let’s shift to the soup aisle where Progresso’s share of the ready-to-serve segment is up more than half-a-point over the latest 12 months. This includes good gains in our most recent quarter. We think this category is on trend with the consumer needs for taste, convenience, and value and we are looking forward to a good soup season this year. This category has historically grown with good innovation and we are trying to do our part. We are bringing the benefits of high fiber to the soup aisle. We introduced four new soups that provide 28% of the daily recommended fiber intake. We have seen great success with high fiber items in the cereal and grain snack aisles and we think this is some good health news for the soup category.

We are also supporting Progresso soup with some terrific new advertising. We have five new ads that just broke last week. You will see three of them on TV and the other two online. All the ads focus on the great taste of Progresso and show consumers calling into our culinary kitchen via their soup can phones. We are working to remind people about what’s good in soup and bring more consumers to the category.

Let’s shift to yogurt. Yoplait sales grew 4% in the first quarter, with particular strength in non-measured channel. We’ve seen heightened promotional activity in this category recently. The left side of slide 34 shows the changes in the level of merchandising during the last three months for Yoplait and the category. The right side of the page shows the percent discount for items being merchandised. Let’s look at the category trend. The percent of yogurt category volume that was merchandised in the first quarter increased to 41%, up four points from the same period last year. Category merch prices were hotter as well. The depth of discount for the category increased by 2 percentage points.

In contrast, merchandising activity for Yoplait increased at a rate lower than the category and we did not increase our discount level. We believe the U.S. yogurt category still has a lot of room to expand by bringing in new households and increasing usage by current consumers. And although price promotion has a role, we think the key to driving category growth is innovation.

Yoplait recently launched a number of new items. With our new frozen Yoplait smoothie, we just add milk and blend. Sales for this frozen item won't show up in the refrigerated yogurt category but it’s a great addition to the Yoplait brand.

In the refrigerated section, we introduced a reduced calorie version of our Yo-Plus probiotic yogurt. It has only 70 calories per serving and is a nice addition to this growing line.

And in July, we introduced Yoplait Delight in four indulgent flavors. This product has a thick creamy texture and a unique two-layer format. At just 100 calories per serving, it makes a great snack or dessert. First quarter volume exceeded our expectation and we are getting positive feedback from consumers.

We have some new Yoplait ads that just went on air as well, including a new weight management ad that targets Hispanic consumers. Yoplait has focused on this important demographic in the past but this is our first effort to build our light business with this growing group of consumers. We think our innovation and brand building efforts will result in the stronger sales growth for Yoplait and the yogurt category beginning in the second quarter. The U.S. yogurt market is still young relative to many markets around the world and as we look to the future, we see lots of opportunity to drive growth for the category by increasing U.S. per capita consumption.

I will turn now to Pillsbury, which was our fastest growing division in the first quarter. Net sales rose 12%. Pillsbury Toaster Strudel and Totino’s Hot Snacks partnered on a back-to-school program that drove strong double-digit retail sales growth. Pillsbury refrigerated cookie dough had a good quarter too. Sales benefited from a competitor’s recall but also reflected the launch of our new Simply Cookies product line. Overall refrigerated baked goods retail sales were up 8% in the first quarter.

This month we introduced some new Pillsbury advertising that builds on last year’s successful home calling campaign. We have several additional ads that we will introduce over the next few months and we are looking forward to a strong holiday baking season for Pillsbury.

As consumers make more meals at home, our dinner mixes offer great quality and convenience at a good value. We had strong orders on these businesses in the first quarter and we’ve got great merchandising lined up this fall that we think will drive good retail sales performance. Taco night also makes for a great family dinner. Retail sales of Old El Paso Mexican items are growing nicely, up 9% in the first quarter in channels where we have data.

Across our business we are supporting our brands with strong levels of media spending. In addition to the examples I’ve shown already, this month you will see new advertising for Bisquick around Pancake Morning. Hamburger Helper is on air with a spot featuring Beyonce and our support of hunger relief with Feeding America. And FiberOne bars are on TV for the first time.

In total, we are targeting a double-digit increase in media spending for U.S. retail in 2010.

Let me sum up my comments on U.S. retail. Our categories are growing and we’ve got an advantaged brand portfolio that is leading growth. For 2010 we are continuing to target low-single-digit growth in net sales. We have a strong innovation lineup and we plan to continue to support our brands with increased levels of consumer marketing. We will use HMM to fuel this investment and help us expand our margin. And we are planning for a mid-single-digit increase in operating profit in line with our long-term model.

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

Kendall J. Powell

Thanks, Ian and good morning to one and all. I appreciate your joining us on the call today and let me start my comments with a review of our bakeries and food service performance.

As you know, it’s a challenging environment for this business right now as consumers eat more at home but our bakeries and food service team is performing well. We have made significant changes to our business over the last few years, dramatically reducing the number of items we offer and consolidating our supply chain operation. We recently built an in-house sales force for the convenience store and food service distributor businesses that is helping drive differential performance for us.

Our sales for this segment totaled more than $400 million in the first quarter. About 60% of those sales were to bakeries and national restaurant accounts; 30% were to food service distributors; and just over 10% went to convenience stores.

We believe the last two channels I mentioned, distributors and convenience stores, are our best opportunities for profitable sustainable growth. Our sales to distributors were up 1% in the first quarter despite industry sales decline. Industry sales were down in convenience stores as well but our business grew 8% in the quarter, driven by distribution gains and new product innovation.

Higher margin branded products now generate more than 65% of our bakeries and food service sales and we expect that percentage to increase again this year. These products are branded either to the end consumer or to the food service operator. I’ll highlight results for a few key segments. Net sales for our cereal brands in these channels were up 6%; yogurt sales were up 12%; and sales of our snack brands were up 15%.

By focusing on the best channels and our higher margin products, we will continue to improve our mix. This is one of the factors that drove strong operating margin improvement in the first quarter. Segment operating profit more than doubled and as Don showed you earlier, operating margin improved significantly to 14.1% of sales. In addition to mix improvements, we also saw strong performance across our manufacturing and logistics operations and commodity costs came in below last year and better-than-planned expectations. Grain merchandising profits were up as well but neither the increase nor the overall profit level was out of the ordinary.

In 2010, we continue to expect that reported net sales and volume for this business will be below 2009 levels because of product line divestitures, lower prices on bakery flour, and continued weakness in overall food service industry sales. However, we expect to grow our share of industry sales in 2010 and our plans call for margin expansion in this segment, driven by productivity, better costs, and positive mix. And longer term, we still like our growth opportunities in the $0.5 trillion U.S. market for food away from home.

Outside the U.S., our international businesses continued to generate good growth. Slide 49 shows net sales for our geographic regions on a constant currency basis for the first quarter. In total, sales outside the U.S. were up 5% excluding the impact of foreign exchange, which reduced reported sales by 9 points. Our business in Canada was particularly strong, with sales up 12% on a constant currency basis. Cereal sales were up double-digit in the quarter with our Olympic promotion and the launch of several new items.

Grain snack sales were strong as well, including the introduction of new dark chocolate varieties of Nature Valley Granola Bars. Sales in Europe were down slightly in the quarter. We’re seeing good growth on grain snacks in the U.K. and Ole El Paso Mexican products in France but overall economic conditions in Western Europe remain challenging.

In Latin America, sales were up 10% with good growth from regional brands including Las El Pena Pasta in Argentina and [Diablitos] Sandwich Spread in Venezuela. And in the Asia-Pacific region, sales grew 6% with [Wanchi] Fairy Dim Sum items and Super Premium Ice Cream in our Häagen-Dazs shops contributing to good growth in Greater China.

For 2010 in total, we continue to target good performance for our international segment. Our brands are driving good growth with innovation and distribution gains. Our focused platforms have margins above the company average so as we grow these businesses, we will improve our overall margin. Holistic margin management is also contributing to margin gains and generating funds to fuel brand investment.

Foreign exchange headwinds will impact our reported results on both the translation and transaction basis in 2010, although a bit less than we originally planned. Overall, we are continuing to target mid-single-digit sales growth and double-digit operating profit growth on a constant currency basis.

Cereal partners worldwide, our joint venture with Nestle, posted a sales decline as reported but once again that was due to foreign exchange. As Don mentioned earlier, sales were up in the quarter before foreign exchange impacts. Our core brands, including Fitness, Nesquick, Cheerios and Choco-Pick are showing good growth. Choco-Pick Petite, which we launched earlier this year in France, is off to a strong start. And we are having good success with our whole grain advertising message.

As we look across geographies, it’s a bit of a mixed bag. Some markets like the Middle East, Asia, and Latin America are growing well for us. Other markets, especially Europe, are slower. But we continue to gain share across our combined markets and we believe the growth prospects for global cereal sales, and CPW in particular, are excellent.

Let me wrap up my comments and then we will take your questions. We focused intently on a business model that uses supply chain productivity, sales mix management, and other cost savings efforts to protect our margins from the pressure of rising input costs. This helps us limit price increases and also allows us to direct significant resources back into our business in the form of ongoing product innovation and increased consumer marketing support. This reinvestment fuels continued strong sales trends for our brands. That is helping us drive growth for our food categories in markets around the world. This market is working well, it’s sustainable, and so we are sticking with it.

For fiscal 2010, we still expect annual net sales to be comparable to 2009 levels as recorded. With our good margin expansion, we are now targeting segment operating profits to grow at a mid-single-digit rate. That’s up from the low-single-digit target we shared with you back in July. And we’ve raised our earnings per share guidance to $4.40 to $4.45 per share before any impact of mark-to-market valuation.

This EPS range represents growth of 11% to 12%, which is above our long-term model. Our focus on the fundamentals is driving high quality sustainable performance across our portfolio. We will stay firmly focused on executing our plan and extending our track record of strong performance.

So that concludes our prepared remarks and I will ask the Operator to open the lines up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Chris Crowe from Stifel Nicolaus. Please proceed.

Chris Crowe - Stifel Nicolaus

Very nice quarter. Good job on this first quarter here. I wanted to ask, and if you look at the first quarter, obviously that’s just tremendous gross margin performance. You obviously had some strong pricing coming through, particularly in U.S. retail and input costs were lower so I would just be curious -- it sounds like you had planned on costs being lower in this first quarter. Do you have that view now for the full year, that input costs would be lower?

Donal L. Mulligan

No, not for the full year -- we still expect low-single-digit inflation, a bit lower than we had originally thought but still on the plus side of the ledger. We did see lower input costs in the first quarter but as you referenced and as we said it, that was actually planned although they did come in a bit better than our expectations.

Chris Crowe - Stifel Nicolaus

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

Ian R. Friendly

Overall I wouldn’t characterize it that way. I think we are seeing a fairly normal level of competitiveness across most of our categories. As I said in my comments, we are seeing a little bit more competitive pressure in the yogurt category as dairy prices come down and our key competitor has discounted fairly heavily but we feel that’s pretty much manageable. Throughout the year we monitor always our trade and promotion and pricing activities and make adjustments. I wouldn’t characterize what we believe the go-forward to be anything atypical or uncharacteristic of the past.

Chris Crowe - Stifel Nicolaus

Okay. If I could just ask one final one -- in the food services division, the absence of those couple of divestitures, could you give an idea of what that contributed maybe to the margin or to the profits of the business?

Kendall J. Powell

I don’t know that we are giving that level of detail. I think we told you that we -- that it took out about, of that sales decline, 10 percentage points were from that divestiture and we don’t go into that level of detail on margin but I will tell you, Chris -- this is Ken -- that we’ve made multiple divestitures over the last four or five years. I think we’ve taken out over half of our plants now and it’s approaching over 60% of the SKUs, and all of this activity has been to get this business leaner and more focused on those higher margin branded businesses that go through the higher margin channels and I think the cumulative impact of all of that work over the past several years is -- it’s just really starting to pay off for us in fundamentally better margin profile for the overall business.

Chris Crowe - Stifel Nicolaus

Okay. Thank you for your time.

Operator

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

Eric Katzman - Deutsche Bank

Good morning, everybody. I guess a couple of quick questions -- one, how much do you think the fact that Nestle was off shelf helped the margin performance in U.S. retail with -- because I know the refrigerated dough business is a high margin business to begin with and then if your competitor is off-shelf, I have to imagine it was extremely good this quarter.

Ian R. Friendly

Yeah I would say overall of U.S. retail that effect was obviously muted. Within our Pillsbury refrigerated baked goods, it was -- I think we gained probably about four share points out of that. It was a factor. Certainly we had a more positive than expected Q1 in Pillsbury on that business as a result. We would have had good results though even without that so I would say it was obviously a tailwind in the quarter but not material as it relates to the total results.

Eric Katzman - Deutsche Bank

Okay. Thank you for that and then just as a follow-up to Chris’ question -- so Ken, to just understand, it’s been a long time since the Pillsbury acquisition and the food service business has always been an -- I’d say operated below expectations from the original plan but can we -- do you think we can start to model this kind of margin level going forward for that division? I mean, are we now with the latest divestitures at just a sustainable new level?

Kendall J. Powell

Well, I think this quarter, Eric, was for all the reasons Don mentioned, was particularly good. We were going up against very high input cost inflation a year ago and we have very significantly lower costs during this quarter in those effects and we also had substantial pricing during the first quarter in food service a year ago and so those effects will moderate over the course of the year. But we do think -- you know, our goal all along has been to get our food service business sustainably into double-digit margin territory and that continues to be what we are going to strive for. We’ve got a good shot at doing that this year and obviously as we continue to restructure the division and get it more focused, I think we are making very good headway at that sort of sustainable margin performance that you are describing.

Eric Katzman - Deutsche Bank

And then last and I’ll pass it on, Ken -- do you think, or maybe you could just kind of describe the -- kind of the state of relations with the retailers? You don’t have to get specific but obviously there’s a pressure to cut SKUs perhaps more than there has been historically. Some of the major packaged food -- or sorry, some of the major consumer product companies like Proctor lowered prices, which seemed pretty unusual. How do you describe across your categories and across the retail partners, how would you describe the situation?

Kendall J. Powell

Very, very positive, Eric -- we’re bringing them a very strong portfolio of leading brands -- number one or number two share brands in categories that they really care about. We are bringing them terrific innovation and Ian described some of that for you, and so we are certainly delivering on the -- our responsibility to help them drive their categories. We are also bringing them across the board a lot of capabilities. We are bringing them marketing and consumer insight capability that’s helped them with some of their programs. We’ve got a lot of focus on jointly trying to get logistic costs out of the system, so I would describe the relationship with our retail partners as very strong across the board. They like what our brands are doing for them. You know, we do know of course that SKU rationalization is something that they are focused on and as we said before, we think that that makes sense. That’s an appropriate strategy for them. We do that to ourselves and because we think that’s a good way to drive mix but even in this environment, distribution for our U.S. RO products during the first quarter increased by three percentage points and I think that just shows the overall strength of our brand portfolio.

Ian, would you want to comment?

Ian R. Friendly

Yeah, just two things to add to what Ken said is, as I mentioned in my remarks, we are driving very strong baseline sales growth by our reinvestment in our brands and not only is that the most profitable volume for us but that is the most profitable volume for our customers as well so we are driving business off the shelf in that kind of way ahead of our categories. That’s a win-win situation for everyone involved and I would just support the notion that Ken said in -- well, we have expanded our distribution in a world that rationalizes, it’s really the number one or number two brands that are creating growth that are going to win in that environment, so we like what we are doing.

The last thing I will mention is in the area you asked about, which was pricing. And if you just looked at Nielsen data for us in the last quarter, our prices now are effectively up 1% to 2%. I would say most of the branded manufacturers in our category are roughly the same and retail brand, that’s our customers brand, are up about a point higher than we are. So we’ve been very modest in our pricing and really using HMM as the first line of defense on what was inflation and now against driving our margins and keeping our pricing very well in line with the market.

Eric Katzman - Deutsche Bank

Thank you.

Operator

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

David Palmer - UBS

You mentioned your international cereal sales are up and that you are gaining share. I was wondering if you could perhaps give some big picture comments about the cereal category in Europe and perhaps other international -- how is the trend category growth wise and perhaps even branded share? Any sort of comments on that would be helpful in the economic environment.

Kendall J. Powell

Typically the cereal category outside the U.S. will grow 2%, 2% or 3% year over year. I would say the last year-and-a-half, it’s been closer to 1%, 1.5%. So it is down a little bit and I don’t know that I can right now give you too much detail on the mix of that, so we have seen it slow down a little bit but still growing and CPW is still getting good top line growth and from memory, the last time I looked at this, our share was up in seven or eight of our top 10 markets. So we are -- so there has been I think probably a little bit of an impact in this current economic environment on the cereal category outside the U.S. but again, still growing and still a category where when you look at the penetration of this category compared to what it is in the U.S., there is just huge upside to continue to grow it, grow penetration. I think we have decades of growth to look forward in the international cereal category and CPW, very well-positioned to continue to grow and continue to capitalize on that market. In fact, really two years ago the cereal category outside the U.S. became larger than the cereal category in the U.S., so that’s actually -- the international part of the market is the larger part of the global cereal market now. So it’s big and growing and very promising for us.

David Palmer - UBS

And just one quick one on yogurt in the U.S. -- in many ways that category seems like the perfect food, including value and it doesn’t seem obvious that that category overall would slow during tough economic times but it definitely does not have the growth that it did before and that’s obviously now a very high margin category for you at that scale. What do you think is the big picture for yogurt? Are we past -- is there a long curve playing out here where we are not going to see the growth of yester-year in that category?

Ian R. Friendly

I still think in yogurt, we’re in the early innings and I don’t think that story or that curve has run out at all. I do think that we need more innovation to drive the category and as I said earlier, I’m not sure that heavily discounting the product is a good long-term growth strategy for the category. We are going to focus our energies on innovation and our brand marketing support, which have increased substantially in yogurt, and I think we are seeing that now as the different months go by that yogurt will progressively better as a category.

The other part that you probably don’t have nearly as much visibility to is the channel side, which is substantial. And as you know, you don’t have Walmart in the Nielsen data, nor club stores or drug and discount, and particularly Walmart and Club are very, very big players in yogurt. Those categories and our business with them are growing tremendously and that isn’t entirely visible in the Nielsen data and there’s probably some channel shift going on there as well.

David Palmer - UBS

Thank you, guys.

Operator

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

Analyst for Vincent Andrews - Morgan Stanley

This is Jackie [Inglesby] for Vincent. First of all, congratulations on a great quarter. I just have a question on -- your COGS obviously came in very favorable relative to where we had thought. Is there a way to kind of think about how much of that might have been dairy related?

Donal L. Mulligan

Rather than break out individual components of it, if you look at our COGS year over year, it was down significantly. There’s a couple of major contributors. One is mark-to-market, the mark-to-market adjustment that we make each quarter contributed about $77 million of that swing. If you’ll recall, we had about a $91 million charge last year first quarter. This year it was only about $15 million or $14 million. So that’s about a third of that reduction.

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

Volume contributed a little over 10% and while volume was up, the divested lines actually had a higher cost per case, COGS cost per case, so that contributed to the reduction in COGS. And then finally FOREX had an impact to a couple percent, 2% or 3% in the reduction.

Analyst for Vincent Andrews - Morgan Stanley

Okay, great, thanks. And I guess on FX, you are now thinking that that’s going to come in a little -- as slightly less of a headwind than you had thought? You previously talked about $0.15 a share. Is there any update to that?

Donal L. Mulligan

In the guidance, we do have a plus of $0.02 or $0.03 versus our plan. If you remember in July when we gave our guidance, we said there was that $0.15 headwind. Two things to remember -- the majority of it was transaction and a large portion of that was hedged, so that is fixed and even as the dollar moves, we won't see any change from our plan rates in that portion of our foreign exchange. So the part that actually has any kind of variability to it is only a fraction of that $0.15. And as I said, given the recent movement in the dollar, we see $0.02 or $0.03 plus coming through for the full year versus our guidance in July, and that is obviously embedded in our current guidance.

Analyst for Vincent Andrews - Morgan Stanley

Okay, great and just one more quick one, if I could -- on bakery and foods service, you are obviously saying that sales are going to be lower year over year but that your margins are going to expand, so how is a good way for us to kind of think about operating profit growth in that segment?

Donal L. Mulligan

What we said in July and we can certainly expand on that now is that we will expect the sales to be down because the divested businesses and the indexed pricing on the bakery flour. We still expect margin expansion -- that is, we expect profit to decrease by less than sales. Given our strong first quarter and the momentum that we see in the business, we are even more bullish than that and that bullishness is also factored into our current guidance.

As Ken just mentioned, our goal has always been to return that business to a double-digit operating profit margin and we thought that was a couple of years out. We are going to strive to see if we can get there this year.

Analyst for Vincent Andrews - Morgan Stanley

Okay, great. Thank you so much. Congratulations again.

Operator

Your next question comes from the line of Terry Bivens from J.P. Morgan.

Terry Bivens - J.P. Morgan

Good morning, everyone. I guess this is for Ian -- Ian, if you look at U.S. cereal all channels, what do you put category growth at here?

Ian R. Friendly

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

Terry Bivens - J.P. Morgan

Okay -- five or six-ish maybe?

Ian R. Friendly

Around four to five is sort of where I would --

Terry Bivens - J.P. Morgan

Four to five, okay. And as you look at what appears to be pretty strong category growth, I guess the question would be where do you think you are sourcing most of your market share gains from?

Ian R. Friendly

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

Terry Bivens - J.P. Morgan

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

Ian R. Friendly

Well I think for the category primarily for the quarter, in cereal you interact with everyone but if you look at the total quarter, I think Kellogg’s is up slightly, Post was obviously down a great deal in the quarter, so I think they went through some pricing and some transitional issues logistically so for our first quarter, I think most of the people in cereal probably sourced to a disproportionate degree from Post. I don’t think that’s necessarily a long-term trend but that’s how that quarter played out.

Kendall J. Powell

Terry, you know, we don’t really think about it that way, you know, going after competitors to get share. I mean, we’re sourcing our share growth from the consumer and if you really -- if you look at, think back to Ian’s presentation, we really have I think as a result a very sound marketing execution brand by brand across our portfolio. You know, baseline growth on all the core brands -- I mean, it really is a case of building it up brand by brand, focus on execution, get the baselines going and that is leading to a couple of years now of very consistent share growth for us and I think as Ian said from the competitive standpoint, who’s up and who’s down in any given period, it depends largely on what they are doing. We just keep our focus on our brands and on the consumer.

Ian R. Friendly

The other thing I would just add to that, Terry, is I think the big story in cereal primarily is the vibrancy of the category and the consistency of the category’s growth. This is very good growth for cereal. It’s carried through as I mentioned, as we’ve lapped pricing now. It’s really good unit volume growth. Cereal as a category is very healthy and that’s a good story for us and probably all the players in the category.

Terry Bivens - J.P. Morgan

I couldn’t agree more there. I think there’s a very strong demographic that supports it as well -- baby boomers like myself, I guess. A question, a quick one on yogurt -- I know you didn’t want to quantify the profitability factor with Yoplait but it would seem that it was a pretty good contributor given what appears to be, you know, you stayed a little bit more rational there and obviously you are benefiting from lower input costs there. Is that a fair statement to say that that was a nice contributor to the U.S. retail performance?

Ian R. Friendly

It’s a very fair statement to say that yogurt was a nice contributor. I will tell you though that on our earnings side, it was very strong earnings growth really across all our divisions and so while yogurt was terrific, I can tell you there was pretty terrific performance across the board.

Terry Bivens - J.P. Morgan

Okay, very good. That’s it for me. Thank you very much.

Operator

Your next question comes from the line of Ken Zaslow from BMO Capital Markets.

Ken Zaslow - BMO Capital Markets

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

Kendall J. Powell

No, we’re going to -- we like that growth model that we have and we are going to -- we’ll stick with that. That’s a model that it’s our promise to shareholders that we are going to figure out a way to get them a double-digit return year-in and year-out, and that’s a combination of high-single-digit EPS coupled with a good dividend yield, so we like that model and we’ll stay with it. We are obviously pleased that we are doing better than that model this year but we’ll stay with it and we are very, very confident that that’s a sustainable model for us. And the reason that we are, Ken, goes back to the conversation that we just had with Terry Bivens -- our categories are just absolutely rock solid, they are doing very, very well, growing 4%. They are great categories that really respond to innovation and we’ve got great leading brands in those categories, so we really have a lot of confidence in our ability to sustain good consistent performance going forward.

Ken Zaslow - BMO Capital Markets

My second question, I know you only give it out once in the K every year, but can you discuss your ability to exceed your overall growth with your number one customer? And what are you doing to drive the outperformance relative to your other businesses? Obviously [more money]. I know you give it out in the 10-K.

Kendall J. Powell

I’m sorry, Ken -- what’s the question?

Ken Zaslow - BMO Capital Markets

In your 10-K, you always are able to provide your top customer and what the -- you could always back into what the growth is on the sales line of your top customer. Year after year, you guys do exceed your overall sales growth in that -- with that one customer. I’m just trying to figure out exactly what you are doing in that one channel that is really exceeding your underlying overall sales growth.

Kendall J. Powell

Well Ken, our commitment is we want to lead growth and drive growth with all of our retail partners and so we are bringing these great brands and all of our capabilities and all of our marketing initiative to all of our retail partners to help work in a coordinated way with their strategy and we really want to lead growth with all of them. Now it so happens that over the last several years, Walmart has been able to grow faster than many of our other retail partners and we’ve grown faster with them as well because of all the things that I just mentioned. But our commitment really is to lead that growth everywhere that we compete.

Ken Zaslow - BMO Capital Markets

Is there anything special that you do with them or is it just [inaudible]?

Kendall J. Powell

Well I mean, each customer has their own approach, their own -- and they focus on different things and our job is to partner with them in the ways that are most important to them to help drive growth in their categories. I don’t want to go into the details of Walmart’s strategy versus another person’s strategy but we think that we are doing a very good job now of really listening to our customers and aligning with their growth drivers and really delivering differential growth for them. And again, this is something we are trying to do across all of our customers.

Ken Zaslow - BMO Capital Markets

And my last question, can you give us some examples of some meaningful changes that you are doing in HMM? Just -- I know the lids and it was the old one -- if you can just give a litany of examples of what you are doing. I know that that they probably [inaudible] [each in of themselves] probably doesn’t add up to much but if you could just give us some ideas of exactly what you are doing, it would be very helpful?

Kendall J. Powell

Thanks for that question, Ken because HMM continues to be a very, very high focus for General Mills and a key driver of our performance, including this quarter and we all have our hands raised because we want to answer the question but I’ll give you -- I mean, one that I think is very interesting is that on the logistics side of our business this quarter, our fuel use -- and I’m not talking about the dollars that we spent on fuel. I’m talking about the gallons of fuel that we use, was down over 10% in a quarter where our volume was up. And the reason for that was because of a very high focus on HMM kind of thinking, so we improved our forecasting, we changed the way we are -- we coordinate and manage our trucks. We got a lot smarter and developed software and different techniques to fill those trucks better. And that sounds very mundane but actually being able to do those kinds of things enabled us to deliver goods much more efficiently, use less fuel, take trucks off the road, and drive costs out of that logistics system. So that’s just another example of how this very broad scale HMM effort continues to pay dividends for us.

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

Donal L. Mulligan

Ken, there’s difference facets of it. Ken alluded to one that was on the productivity side, as we call it, supply chain productivity, mix management continues to play a role. If you look at our Pillsbury business, not only is it contributing but from a mix standpoint, it’s growing faster than our overall business with its higher margin product line. But it’s done that consistently over the last several years as we’ve reallocated and redirected more of our innovation and advertising support behind RBG, our refrigerated baked goods business. As a consequence, over the last three years we’ve seen a 350 basis point improvement in our gross margin in our Pillsbury business here in the U.S. We have a similar -- we talk similarly on snacks, for example, where we’ve done some packaging redesigns in our fruit snacks business, which is taking costs out of the product but also driven some efficiencies in the manufacturing platforms and we’ve seen over a point-and-a-half growth in our gross margin in our snacks business.

So again, I think the key thing to take away is it’s broad based and the other thing is that we’ve talked about more recently is the expansion of HMM to international, where we are going to double our HMM contributions this year. We see it in our administrative costs, which are trending below our historical growth rates because we are applying those same value stream mapping tools and continuous improvement tools to our administrative processes you can see in savings there as well. So it really permeates the entire organization so there’s a -- you know, we can name a thousand examples and they in and of themselves, some of them are material and some of them are less significant but in aggregate, they are very meaningful to our results.

Ken Zaslow - BMO Capital Markets

Thank you very much.

Operator

Your next question comes from the line of Andrew Lazar from Barclays Capital.

Andrew Lazar - Barclays Capital

The first thing is just on plant efficiencies. Last year in fiscal ’09 you had very strong volumes for a lot of the year as well and I guess I just don’t remember hearing as much about plant efficiencies as I’m hearing sort of currently, so I’m trying to get a sense of maybe why that was or what has changed, what is different now that you seeing so much more that volume strength drive the plant efficiencies? And as part of that, how has case volume being ahead of tonnage helped your operating leverage? I just want to make sure I understand the dynamic of that.

Ian R. Friendly

I would say to answer the first part of your question is that indeed you are quite correct that we last year had very strong volume growth and this year have strong volume -- what is changing consistently is an integral part of HMM for us has been a continuous improvement effort in our plants and what those efforts have seemingly reached a very nice tipping point are starting to shine through and so what we are finding now is much better than expected plant performance and when you put volume leverage over that, it really rang through in the quarter and I expect it will ring through for the year. And so that -- it really is just operating smarter, all the principles of HMM and continuous improvement now really showing up in a meaningful, a very meaningful way in our plant operation, a differential from prior years.

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

As it relates to case volume, you know, what our plants really run on on volume isn’t pounds. For example, Green Giant canned vegetables, a very heavy product, so you can have that volume move and let’s say that’s down and a cereal case is up, you’d have a lot more cereal cases required on a weight basis. And so what we are seeing is as we also shift our mix typically to what is higher margin products for us, they tend to also be more case volume out the plant door and so you get that leverage. And in U.S. retail, our internal case volume was very close, just a little bit below our sales growth increase, so quite a bit above the pound volume statistics you heard. And so that’s providing extra leverage and that’s really what a factory runs on.

Andrew Lazar - Barclays Capital

Great. That’s helpful. Thank you and then just a last one, in thinking over the last quarter or so we’ve seen a bunch of food companies kind of raise their spending estimates about what they are spending back behind let’s say we’ll call it up-front costs, you know, the spending that they embed in their earnings to drive future productivity. And obviously with the kind of earnings upside that you have shown, you are going to spend some of that back as you talked about around marketing reinvestment and such. You are embedding I guess around $30 million or so of expected restructuring in the year. I’m just curious if you’ve looked at are there additional opportunities to use some more of this to drive productivity down the line? Obviously you are generating the productivity in a pretty big way, so is the spending behind HMM already at levels that you deem adequate? I’m just trying to get a sense of if you’ve kind of looked at that and how that analysis goes.

Donal L. Mulligan

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

The efficiencies that we are seeing and the gains that we are seeing in HMM because they are very broad-based, we don’t see requiring more up-front costs. What you have noticed is we have increased of our capital spending behind that and also capital spending behind our growth at our capacity, which we think is kind of the phase two benefit of HMM -- that is, we’ve seen the savings, we reinvested effectively, and now we are seeing the stronger top line growth. So HMM is, if you will, contributing a second wave of benefit -- now we are seeing it on the top line as well as in the middle of the P&L.

Andrew Lazar - Barclays Capital

Great. Okay, thanks very much. That’s helpful.

Kris Wenker

Everybody, I’m sorry but we are a little bit over time here and one of my speakers at least is booked heavily today so I apologize -- we’re going to have to cut it off there. I know there are other people with questions. Please give a shout.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everybody.

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