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Making the Brand

Erin Lash, CFA

Erin Swanson: Hi. My name is Erin Swanson. I am the consumer products Analyst here at Morningstar. In the packaged foods space, General Mills is one of the firms that we believe really stands out. And as part of our Morningstar Stocks Forum, we are pleased to welcome Chairman and CEO of General Mills, Ken Powell, to speak to us today about consumer trends and what is going on in the competitive landscape within the packaged foods space.

Thank you for joining us, Ken.

Ken Powell: Thank you for having us. Appreciate it.

Swanson: One of the topics I would like to talk about today is private label offerings. Obviously, private label offerings have been gaining share over the past couple of quarters within the food and beverage space. How have you guys dealt with this heightened demand, and what have you seen from a competitive standpoint?

Powell: Well first of all, Erin, I want to point out that, in aggregate, our brands have gained share over the last year as we have gone through this recession, even as private label brands have also gained share. And the reason we have gained share is because we have invested so much in innovation, in brand building, terrific new products, and refreshed traditional products.

And so, I think that is the lesson, and we see this around the world. Top brands like our brands, Cheerios, Fiber One, Progresso, Yoplait, top brands that are kept fresh and that innovate, prosper really in any kind of environment.

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We have seen this in Europe with our cereal business over, really, the last two decades. The U.K., known as a very intensively private labeled environment--we have grown our cereal business in that environment every year. Cheerios has been one of the top growers.

So I think it is all about keeping the brands fresh and innovating, and you will do well.

Swanson: How about when the economy recovers? Do you see that those consumers that have traded down to private label offerings, will they trade back up or will private label offerings maintain the share that they have gained?

Powell: Well, we are seeing private label growth slow down now in this environment. So we are seeing some of that shift already. The other, I think, big factor is how consumers are shifting some of their food consumption away from restaurants and towards grocery stores. And I think this is the other part of the trade down that we need to focus on.

And that shift from restaurants to grocery stores has given our categories a nice tailwind. And we think that that is going to continue.

Swanson: Unprecedented commodity cost has been another headwind for packaged food companies over the past couple of years. And obviously now, as commodity costs have moderated, it has been sort of a tailwind over the past quarter or so. Where do you see commodity costs going from here?

Powell: It is a great question. Our expectations--we are going to see moderate inflation out into the future. Really, this has been an important story and process for us. If you go back to the '80s and the '90s, commodity price inflation was quite low--1% to 2% a year. We were able to offset that relatively easily.

As we went into this decade, 2000, 2001, really the last eight or nine years, we saw inflation accelerate mid-single digit, 4% or 5%. The reasons for it are the reasons that you know--China, India, Brazil. I mean just global economic growth increased demand.

So then last year, of course, they peaked at 9% or 10% and coming back down this year. But our expectation is as global economic growth returns, we are going to see that inflation come back to 4% or 5%. That is really what we are planning on. And it is the real reason for why we have this very intense focus on productivity and elimination of waste that we call HMM that you have written about.

Swanson: Yep. Exactly. And obviously, we know that the economic environment in the U.S. has been challenging. But what are you seeing around the world in terms of the global economic environment relative to what we are seeing in our domestic market?

Powell: So I'd say it is mixed, depending. The Canadian economy has been better, and our business in Canada has been terrific. China, where we have a large business built around our Haagen-Dazs ice cream business and our frozen food business under the Wanchai Ferry brand, China has been spectacular for us. We believe China is going to be one of the engines that leads the world out of recession. And so a couple of really strongholds there.

Europe has been weaker, as you know, I think, for most manufacturers as consumers pull in, primarily in Spain, I think, which was hit hardest by the whole housing aspect of this crisis.

So Europe a little weaker for us, but we are seeing improvement there as well. And overall, this year we expect to see very solid growth from our international business, which has been a terrific growth driver for General Mills over the last seven or eight years.

Swanson: And lastly I wanted to talk about, General Mills has been a great steward of capital over the past several years. And I wanted to know what your priorities are for the substantial amount of cash that you generate.

Powell: They will be what they have been historically. So, we reinvest at around a 4% rate in our capital requirements and capacity requirements every year. And it is always lumpy, but it will stay at about that level.

We return a lot of cash to our shareholders through dividends, which grow and have grown consistently with earnings. I think about a 9% CGR over the last five years. So we are very committed to that dividend payout.

We buy back shares. We think that is also in the interests of our shareholders. We have reduced shares outstanding by about 2% compound over the last five years. So all of that is absolutely central to our model of creating value for our shareholders.

Now, I will also tell you that we are interested in the small acquisition, where we can buy a good brand and create value. And we are looking for interesting companies, really, around the world now to extend and accelerate our expansion globally, but also in the U.S.

So you might continue to see smaller bolt-on acquisitions from General Mills. I am sure you will. But it is very much that buy small and create value model that has historically been what we have done.

Swanson: Any particular categories that you would be more interested in than others?

Powell: Well, we are looking across...we think we are in great categories. So we are looking, really, across them. I would say we have quite an intense focus internationally right now, where we think we have an opportunity to really accelerate our growth. But again, we are looking both domestically and outside the U.S.

Swanson: Thank you so much for meeting with us today.

Powell: Thank you! Appreciate it.

Swanson: And my name is Erin Swanson. Thank you for joining us.