Kris Wenker - VP, IR Ken Powell - CEO Don Mulligan - CFO

Terry Bivens - JP Morgan Chris Growe - Stifel Nicolaus Eric Katzman - Deutsche Bank David Driscoll - Citi Vincent Andrews - Morgan Stanley Smith Barney Kenneth Zaslow - BMO Capital Markets Robert Moskow - Credit Suisse Judy Hong - Goldman Sachs Robert Dickerson - Consumer Edge Research

Welcome to the General Mills first quarter fiscal '11 results conference call. [Operator instructions.] It's 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 we should say that the sun is shining, the Twins have clinched, and Joe Mauer's MRI has come back good, so it's good here in Minneapolis today. I'm 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 issues over the wire services earlier this morning. 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 management's current views and assumptions. The second slide in today's presentation lists factors that could cause our future results to be different than our current estimates. And with that, I'll turn you over to my colleagues, starting with Don.

Thanks Kris. Let me add my congratulations to the Twins, and thanks everyone for joining us this morning. You've seen from our financial results release 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 with our expectations. We recorded another quarter of net sales growth, with volume gains across all three operating segments. We continued to invest in our brands, with an 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 5 summarizes our first quarter results. Net sales increased 1% on a reported basis. Segment operating profit declined 2% in the quarter, reflecting the 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 in grain inventories. That added $0.06 per shared earnings this quarter, compared to a $0.02 reduction in our earnings last year. Excluding mark-to-market impact from both years, diluted EPS was $0.64, matching strong year-ago performance. Slide 6 details our net sales performance by segment. U.S. retail posted another quarter of top-line growth. Net sales increased 2% on top of 6% growth in last year's 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 7 shows the components of our total sales growth. Pound-volume contributed 2 points of sales growth in the quarter. Sales mix and net price realization were flat, and foreign exchange reduced the sales growth rate by 1 percentage point. We generated solid volume trends in each of our business segments. U.S. 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 in our bakeries and food service segment pound-volume increased 3%. That includes the loss of 2 points of growth from a divested product line. Slide 9 outlines our first quarter gross margin performance over the last 3 years, which reflects the large swings in commodity markets over that time. You'll recall that on a reported basis our gross margin includes the changes in the market value of grain inventories and commodity hedges we will use in future periods. So we also provide our gross margin excluding these mark-to-market valuation changes to give you a sightline 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 positions. Excluding these mark-to-market effects, our gross margin was 41.1%, down slightly from our strong performance a year ago, when we benefitted from lower input costs and particularly strong plant operating leverage. Note that our underlying gross margin is still well above the level from 2 years ago, and we still estimate full-year gross margin, excluding mark-to-market, will be comparable to last year's 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 2 years. Slide 11 shows our segment operating profit for the quarter. Total segment profits declined slightly from strong year-ago levels. U.S. 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, led by growth from Cheerios, Nesquik, Fitness, and [unintelligible] brands. Constant currency sales for our Haagen-Dazs joint venture in Japan were down, reflecting the challenging economic environment in that market. Completing our review of the income statement, you'll 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 quarter's tax rate was 32.8%. For the full year we still expect our effective tax rate, excluding items affecting comparability, will be comparable to our 2010 rate of 33.4%. 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 about $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, and mid-single-digit growth in segment operating profits, 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 in 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 year's 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 return on capital guidance. We remain on track to our goal of 15% return on capital by 2015. With that, I'll turn the microphone over to Ken for 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. And 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 U.S. 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 1 point of growth, and pricing 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 led by double-digit increases in retail sales for Multigrain 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 categories 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. Shared display support was down 4 points in the first quarter for us and Kellogg's 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 competitor's 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 lineup of merchandising and marketing activities planned for October. We're committed to leading growth in all of our U.S. retailer categories. The way to drive growth is to innovate, and we've got a great lineup 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 very 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 4 points, and this was driven by strong Pillsbury refrigerated cookies sales while a competitor was off the shelf due to a product recall. Last year's results also included sales from our Perfect Portions line, which we exited last year. So we've 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. And new Pillsbury Sweet Moments, which launched in July, should contribute to sales growth. These refrigerated desserts 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 desserts are a very big category in Europe, with sales of just over $1.5 [billion] in the U.K. for example. We see tremendous opportunity to build this category here in the U.S. 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 3 new flavors to that line. And we extended our frozen entrée offerings to Italian flavors, introducing 4 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 ticking 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 Lara Bar fruit and nut bars increased more than 80%, as we've increased our presence in traditional retail outlets. We've also added several new Lara Bar flavors this year, and they're 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. U.S. 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 U.S. retail. We partner with distributors and convenience store operators, bringing them capabilities to drive growth for their categories, and we innovate. Our direct sales force 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 Buddies 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 year's big gains, 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 U.S. 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%, led 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. We are starting to see some encouraging signs in a few markets, particularly France, which led our growth in the first quarter. Constant-currency sales in the U.K. 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 regions were strong as well. In terms of product platforms, Haagen-Dazs stood out with sales increasing at a high-single-digit rate during the quarter. Haagen-Dazs sales were up in China too, with good shop traffic in Shanghai, due in part to the World Expo there. Early sales of Haagen-Dazs moon cakes, a popular gift given to celebrate the mid-autumn festival, have 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 added 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 U.K. 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 characterize our fundamental expectations for fiscal 2011 as unchanged. After a brief interlude of deflation in fiscal 2010, we're seeing input costs inflation return. We're still assuming 4-5% 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. 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 remains 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'd be very happy to answer some of your questions. Operator, could you please get us going?

Absolutely sir. [Operator instructions.] And our first question comes from the line of Terry Bivens from JP Morgan. Please proceed with your question. Terry Bivens - JP Morgan: 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 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 my first question.

Okay, 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 are consumers clipping these 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 Tops is a great platform. We'll continue to use that program that we've developed internally here over the last 10 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 more new products that we think will be very good, that we'll be launching here in the third quarter. So we're quite optimistic about the outlook for Big G cereals here as we go forward into this year.

Okay, 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 Kellogg's 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 downshift 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 is what 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. The lifts 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 much smaller. And 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 quarters, we're very confident that you'll see very good levels of support behind our high-turning key brands.

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. Chris Growe - Stifel Nicolaus: 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 year's first quarter, because of the transaction impact, primarily. But this year it was about flat for the quarter. And 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 U.S. retail division. I was surprised by the positive price mix in the quarter. I imagine that mix was positive. 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 with what I hear from other companies. Do you have any comments on that Ken or Don?

I'll take this one. You see from the sales mix we did have a positive mix on the top line. As we look at our gross margin we didn't see a drag from mix. We saw a slight positive from mix and our gross margin as well. I think that 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 U.S. retail division?

On a cost-per-case basis for us last year, we were probably up $0.05, but actually we were down sequentially from Q4 of F10.

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 in that business?

You know, Chris, 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 certainly about how the segment performed in the quarter in total. But as we look at the full-year outlook it remains as it was at the beginning of the year.

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. Eric Katzman - Deutsche Bank: I guess maybe kind of following on to Chris' question a little bit more on the gross margin. So it's down 70-80 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? Was it all inflation versus HMM? And maybe you could break that out a little bit.

It's a good question. You know, we're obviously, last year, lapping substantial gross margin expansion with 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 underway. So that will be a bit more of a drag in the first half than you'll see in the second half. From an HMM standpoint, very robust, remains on track to the levels we indicated in July. There could be some timing between inflation and HMM in any given quarter, but at a four-year basis we still feel very good about our HMM pipeline and where we're tracking. I did mention that mix was probably a slight favorable for the quarter as well. So as you add it all up there's going to be some movement quarter to quarter. In the first quarter what I'd highlight again the return of inflation, 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 that 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. I guess one, Ken, it continues to be almost - comment on this - a bifurcated market out there. Your Small Planet 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 I just have one followup.

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 is up, yogurt category growing very strongly, snacks growing strongly, the organic category, which you pointed out, after it being dead in its tracks in the early part of the recession, coming back strongly now. And so 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.

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. Yoplait, or 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's certainly still some choppiness and some concern about consumer confidence, but what we've seen is that that mass market is still there if you bring the right benefit and you support them correctly.

And then 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 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-team deal and ignore the technology and analysis of the category that you bring to the table? It just seems like a strange development that the retailers would go with the smaller brands.

Well, I think that you make a lot of good points there and I think that - and 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 in 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 accelerate here as we move into the year.

And 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. David Driscoll - Citi: Wanted just to follow up on the gross margin question, Don. So what you were saying right there was 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'm just saying that you're not always going to have a perfect match between inflation and HMM in any given quarter. I wouldn't say HMM is specifically back-loaded. I think the unique thing in the early part of the year that you see in the first quarter in particular is the timing of our project expenses related to capital and capacity expansions, which are front-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 a couple of ways to look at it. First of all, HMM stands for "holistic" margin management, which is a complete approach to margin management, 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 all 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 comparable year to year and we do that by really evaluating every promotion that we do and make sure that the tactics 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. Our view is that as we see - our belief as you know is that we're going to see inflation here at 4-5% a year. We think that's what we should expect on an ongoing basis in 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 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 this is not the kind of thing we'd be discussing with you. As you know we never talk about pricing prospectively.

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

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. Vincent Andrews - Morgan Stanley Smith Barney: 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 convenience or microwavable items? What are you seeing?

So Vincent, thank you for that question. And really, our analysis was that as we looked at the category really the top turning higher-margin SKUs on the shelf - from all manufacturers - really the taste-oriented items. In our line that would be products like our Rich and Hearty line, our Vegetable Classics, and these really tend to be in the top third or the top quarter. But they had been squeezed a little bit over the last two or three years by a proliferation of health varieties from many manufacturers. 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 very much agreed with that point of view, and so we've reset things and we've got, as we pointed out in the presentation, a number of our taste top-turning SKUs 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 expand it 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 Mitch, the only thing I'd add - in terms of soups it was in our set, the microwave soup, for the ones that came out. And then the retailers looked at their slower-turning and I think we've shown you statistics before about where Progresso sits in that, and we tend to have a higher portion of the higher-turning SKUs. And so the combination of those two things is what gives us confidence. Not only are we getting more distribution but it's a healthier shelf set overall for the category.

Okay, and if I could just ask a quick followup it would be on pantry loading. And maybe I'm thinking more specifically the soup, but maybe if you have comments broadly across the store that would be helpful too. With the trends in June and July of being weak, and then a pickup in August, and we keep hearing anecdotal reports about how the consumer's doing another de-load at home. And some companies have commented on it. Are you seeing that? And is there any risk that the pickup in August was just a reflection of draw-downs in June and July and then a slight refill in August but that it's not going to be sustainable?

The most concrete thing, where there's 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 a significant recall in the cereal category, which clearly had an impact on the category in July. So since you're talking about data and information, that's what we can support. We also hear anecdotes about pantry loading or de-loading, but we can't really tie it back to very solid data, and 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 that we can see.

Thank you sir. And continuing on, our next question comes from the line of Kenneth Zaslow from BMO Capital Markets. Please proceed with your question. Kenneth Zaslow - BMO Capital Markets: Over the last 12 months, General Mills has gained market share and momentum in the mass merchandizer channel. I know there's been a shift in consumers going to mass merchandizers. 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?

As you may have pointed out in your question there's 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 more and more seniors buying their food in pharmacies, the big mass pharmacy chains. And so there's a lot of opportunity there. And we also talk about C stores, which slowed down in 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 these, all of our channels. And that's served us very very well and has 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, I think last year, that you did gain share, and I'm just confirming that.

We had good share gains there in our first quarter.

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 then second is gaining share in those non-measured channels. Whereas if you look at the all-channels, if you will, the all-universe, we're confident we actually gained share overall. We lost it in the Nielsen but we picked it up in the non-measured channels.

Thanks for your question sir. Continuing on, our next question comes the line of Robert Moskow from Credit Suisse. Please proceed with your question. Robert Moskow - Credit Suisse: Just have a couple questions. Ken, I remember I think last year, there was a slide that you guys 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 wanted to know if you can give us an update on if you're getting more share of the shelf, especially since Kellogg's 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 how you expect higher promotional price points to be gradual and track on commodity costs going up. 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 Rob, let me answer the first question first, and 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 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, it's 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 here 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 also think it's good for our retailers because it's just more holding power for them and fewer lost sales. In terms of my comment on gradual, I think it says, very broadly speaking, from an economic point of view we know that inflation is here. It's back, and it's going to be 4% or 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 the tendency will be to find ways to absorb that, and we strongly believe that one of those will be a moderation in the merchandizing environment. And 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, eight months before they move from one planning cycle to another. So it can take some time, but we believe gradually you're going to 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 Don? Four to five percent inflation, no change in your outlook, but corn is up 75% since you last gave the outlook and wheat's up even more. Your name is General Mills, so is it just hedging that was good? Or you're not seeing that type 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's going to see us through some of those near-term spikes, and we've seen some things come down too. Resin packaging for example is probably down a bit from what we had 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.

And thank you. Our next question comes from the line of Judy Hong from Goldman Sachs. Please proceed with your question. Judy Hong - Goldman Sachs: 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 measured channel data the category itself is still trending down about 4% to 5% so even if we assume that you guys are gaining share, it seems like there's a pretty big gap between, at least in the measured channel data, what the category's doing and then what you guys are doing - what you guys reported in terms of net 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 takeaway number is for you guys is my first question?

Well Judy, you kind of answered your own question. We're doing well in Nielsen-measured channels and we're doing very well in the other channels. 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's. That was particularly so in Big G. We had a particularly strong quarter in Big G in the non-measured channels in 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 kind of look at the all-channel data?

For 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. And the competitive recall as well. We talked about both those items.

And then Don, just in terms of your guidance, obviously you've called out the first half being more subdued as you look out for the balance of the fiscal year '11. And 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?

You know, 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. We're pleased where Q1 came in. It came in as we expected, and approximately as we communicated to you in July. But as we look forward those tough comps will continue, so we do expect our financial results to track more in line with last year's results in the near term with the full year still very much on the mark to what we had communicated. 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 that with inflation returning we will see some easing on the promotional side as our fiscal year unfolds.

And thank you for your question. Our final question for today's call comes from the line of Robert Dickerson from Consumer Edge Research. Please proceed with your question. Robert Dickerson - Consumer Edge Research: I just had an easy question. I just saw in Q1 the amount that you reported in joint ventures from Haagen-Dazs and CPW was off by what your analyst base said you expected it down for the year. I just wanted to confirm that you still expect it down for the year and that nothing's changed?

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

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 try and get an answer. Thanks very much.