通用磨坊 (GIS) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the General Mills second-quarter F12 earnings results conference call.

During the presentation all participants will be in a listen-only mode.

Afterwards we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded, Tuesday, December 20, 2011.

I would now like to turn the conference over to Ms.

Kris Wenker, VP Investor Relations with General Mills.

Please go ahead, ma'am.

Thanks, operator.

Good morning, everybody.

I am here with Don Mulligan, our CFO, and Chris O'Leary, Executive Vice President and Head of our International Operations.

Ken Powell, our CEO, is traveling but he is participating by phone.

I am going to turn the call over to the three of them in just a minute, but first I will cover my usual housekeeping items.

Our press release on second-quarter results was issued over the wire services earlier this morning.

It's also posted on our website.

We have posted slides on the website, too, that supplement today's prepared remarks.

These remarks will include forward-looking statements that are based on management's current views and assumptions.

The second slide in today's packet lists factors that could cause our future results to be different than our current estimates.

Let me also observe here that we are going to conclude this call promptly on time because I know a number of you want to listen to ConAgra, so let's do one question per person please.

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

Thanks, Kris.

Hello, everyone.

Thanks for joining us this morning.

As you have seen from our financial results release this morning, General Mills continues to deliver solid performance in a tough operating environment.

We posted broad-based net sales growth, reflecting our international Yoplait acquisition and strong levels of price realization and new product activity across our base business.

Despite significant input cost pressure and a high single-digit increase in media investment, our earnings were generally in line with year-ago levels.

We expect to deliver strong sales earnings growth in the second half of the year.

So in total, General Mills is on track to deliver our full-year sales and earnings targets for 2012.

Slide five summarizes our results for the quarter.

Sales totaled $4.6 billion, up 14%.

Segment operating profit grew 2%.

Net earnings attributable to General Mills totaled $445 million and diluted earnings per share were $0.67 as reported.

These results include changes in the mark-to-market valuation of certain commodity positions, as well as integration expenses from the international Yoplait acquisition.

We are also lapping a net benefit from certain tax matters in the year-ago period.

Excluding these items, adjusted diluted EPS would be $0.76, in line with our year-ago performance.

Slide six shows the components of our net sales growth on an as-reported basis, which includes the full three months of results from Yoplait International.

Pound volume contributed 10 percentage points of growth in the quarter.

Sales mix and net price realization added 3 points of sales growth and foreign exchange added 1 percentage point to our sales growth rate.

So on an as-reported basis net sales increased 14%.

Excluding the impact of Yoplait International, net sales grew 6%.

Price mix drove this underlying performance contributing 10 points of sales growth.

As expected, pound volume was lower in the quarter, down 4 percentage points, and foreign exchange did not have a material impact on sales growth this quarter.

Slide seven details our net sales performance by segment.

US retail net sales grew 3%.

International had a great quarter, whether you look at it with or without Yoplait.

Sales as reported were up 55%.

Excluding Yoplait, our sales still increased at a double-digit rate.

And net sales in our Bakeries & Foodservice segment also increased strongly at 12%.

Slide eight outlines our second-quarter gross margin performance.

On a reported basis, gross margin declined to 34.5%.

Remember that this includes the mark-to-market changes in value for grain inventories and commodity hedges we will use in future periods.

Excluding these mark-to-market affects, our gross margin was 36.5%, down 300 basis points.

The addition of Yoplait International accounts for about 35% to 40% of that decline.

The remainder reflects higher input costs year-over-year for our base business.

As a reminder, our estimate for fiscal 2012 input cost inflation continues to be 10% to 11%.

Slide nine focuses on our media spending.

We invested strong levels in brand-building activities to drive sales growth.

Our second-quarter advertising and media expense increased 8%.

This includes the media investment for Yoplait International and a 3% increase in media expense for our base business.

Our end-market consumer pressure continues to grow as measured by GRP.

In the second quarter our US GRPs increased at a mid single-digit rate on top of a double-digit increase in the second quarter of 2011.

Slide 10 summarizes our segment operating profit for the quarter.

US Retail profit was 4% below year-ago levels, reflecting higher input costs and a 6% increase in media investment for this business segment.

International profit increased 50% with significant contributions from Yoplait and good growth from our base business.

And Bakeries & Foodservice profit grew 1% despite sharply higher input costs.

After-tax earnings from joint ventures declined $6 million in the quarter.

This was driven by higher input costs for CPW.

On a constant currency basis, CPW sales were up 3% led by growth from Nesquik and Chocapic brands.

Constant currency sales for Haagen-Dazs Japan declined 5%, reflecting the challenging economic conditions in that market.

Completing our review of the income statement, you see that interest expense increased 7% in the quarter due to increased levels of overall debt with the addition of Yoplait.

The effective tax rate for the quarter was 33.3%.

Excluding items affecting comparability in both periods, our tax rate was 33.7% compared to 33.5% a year ago.

Yoplait integration costs about $4 million did not have a material impact on earnings per share in the quarter.

And to remind you, these expenses fall in corporate unallocated items and are excluded from our calculation of adjusted diluted EPS.

Let me now turn to the balance sheet.

Slide 13 shows that core working capital declined 6% in the quarter, even with the inclusion of Yoplait International.

This was driven primarily by planned inventory reductions with some additional benefit from the timing of promotionals and payments.

First-half cash flow from operations totaled roughly $1.2 billion, nearly double the $600 million in the first half of 2011.

In addition to the decline in core working capital, changes in the fair value of open grain contracts and foreign currency hedging also contributed to the increase.

We expect growth in operating cash flow to remain strong in the second half as well.

Slide 15 summarizes our financial performance through the first half of the fiscal year.

Net sales were up 12% as reported and up 6% excluding Yoplait.

Despite significantly higher input costs and increased media investments, segment operating profit matched year-ago levels.

Net earnings attributable to General Mills totaled $850 million and diluted earnings per share were $1.28.

Excluding items affecting comparability, our adjusted earnings per share totaled $1.41 compared to $1.40 a year ago.

So with the first half completed we remain on track to deliver our 2012 targets.

In the second half of the year we expect to deliver double-digit growth in net sales with significant contributions from Yoplait International and strong levels of product innovation and consumer marketing support on our base business.

Gross margin as a percent of sales will remain below year-ago levels, reflecting the business mix shift to include Yoplait International and higher year-over-year input costs.

But we expect the magnitude of the margin decline for our base business to be less than in the first half.

We expect segment operating profit to be above year-ago levels in the second half, including a planned increase in advertising and media investment.

Adjusted diluted earnings per share are expected to grow at a high single-digit to low double-digit rate in the second half.

We expect growth will be faster in the fourth quarter than in the third.

And for 2012 in total we are reaffirming the guidance we provided this past summer.

We expect EPS to grow at a mid single-digit rate and reach $2.59 to $2.61 per share.

Our guidance excludes any mark-to-market effect in Yoplait integration costs.

I am now going to turn the microphone over to Chris O'Leary.

Chris?

Thanks, Don, and good morning, everyone.

I appreciate the opportunity to update you on General Mills' International business.

Last month marked the 10th anniversary of our acquisition of Pillsbury, which really opened the door for General Mills' expansion to international markets.

Remember that back in 2001 General Mills reported only $300 million in international sales and most of that was Canada.

The Pillsbury acquisition transformed our international profile.

We doubled our business in Canada and we picked up great brands like Haagen-Dazs, Wanchai Ferry, Old El Paso, and Green Giant that gave as a foundation to build on in many other markets.

Today we have a decade of growth under our belts.

Including pro forma sales estimates for Yoplait, our International net sales now exceed $4 billion.

It might surprise some of you that half of General Mills' total employees now work outside the United States.

We have 30 manufacturing locations outside the US and sales in over 100 countries.

With Yoplait included, our International segment generates 25% of General Mills' reported net sales.

Fiscal 2012 is shaping up to be another year of strong growth for our International business.

Through the first half of the year net sales and operating profit expanded by more than 40% on an as-reported basis and increased at double-digit rates in constant currency.

Now those figures obviously include strong contributions from Yoplait, but even if Yoplait is excluded our sales and profit are growing at double-digit rates.

Slide 20 shows the components of our International sales growth in the first half.

Sales as reported increased 43%.

The addition of Yoplait with the lower price per pound is the driver of the lower price and mix you see here.

Net sales excluding Yoplait were healthy as well, with pound volume, pricing and mix, and foreign exchange all contributing to net sales growth of 13% on the base business.

Slide 21 shows you our first-half sales growth by region.

On a constant currency basis we had double-digit sales increases in all four regions.

Let me give you some highlights for each of them.

In Canada, constant currency sales increased 24%, driven by cereal and the addition of Liberte yogurt business.

We are leading growth for the cereal category in Canada with great innovation.

We have the strongest new product lineup we have had in many years with the launches of Chocolate Cheerios, a Shredded Wheat variety of Fiber One, and two varieties of gluten-free Chex.

And with the recent approval from Canadian authorities to talk about the cholesterol fighting benefits of oat fiber in Cheerios, we are bringing established product news to a new market as well.

Our year-to-date performance has been terrific.

We have added 2 full share points so far this year.

We think this combination of innovation and health news will add up to a good year for our cereal business in Canada.

We are also seeing terrific performance on our Canadian yogurt business.

Liberte is the leading brand of organic and natural yogurt in Canada, and is the clear share leader in the fast-growing Greek segment.

Year-to-date net sales have increased at a double-digit rate and we have added 1.6 points of market share.

In Latin America, our constant currency sales are up 16% through the first half with contribution from both volume growth and pricing.

Our performance is being led by Nature Valley.

We were seeing distribution gains across multiple customer channels.

Year-to-date sales are up double digits.

Regional brand performance is also contributing to our sales growth.

We have added a premium pasta line to our La Saltena business in Argentina driving double-digit growth on this business.

We continue to deliver strong results in Europe.

First-half constant currency sales increased 80%, reflecting three months of Yoplait contribution and mid single-digit growth for our base business.

Across Europe Haagen-Dazs sales have increased at a mid single-digit rate and we have gained share in each of the three largest markets -- France, Spain, and the UK.

In France our recent launch of Haagen-Dazs Secret Sensations is exceeding expectations.

Consumer response to this product has been terrific.

We are rolling out Secret Sensations to more market across Europe in the back half of the year.

Our Nature Valley business in Europe is gaining household penetration through a combination of strong new product performance, retail distribution gains, and increased levels of consumer marketing support.

Led by our business in the UK, we continue to gain market share in the grain category and across Europe year-to-date Nature Valley sales have increased at a double-digit rate.

Old El Paso is leading the Mexican category in Europe.

We are attracting new consumers to the category with innovation like our extra mild fajita kit.

Year-to-date sales for this brand have increased at a high single-digit rate.

And we are certainly seeing strong contributions from Yoplait.

Our Europe sales have essentially doubled with the addition of this business.

While our UK share declined slightly in the first half, we are seeing terrific performance in France.

With increased product innovation and media investment on key brands like YOP, Perle de Lait, and Petits Filous we have added almost a full share point year-to-date.

So looking at our Europe business in total we are very pleased with performance this year.

Our growth in this region is significantly outpacing results for many of our multinational food peers.

The Yoplait acquisition gives us a great branded position in the important yogurt market.

Our categories of super premium ice cream, Mexican meals, and grain snacks are in relatively early stages of development in Europe, so we have great opportunities ahead to increase household penetration of our brands to drive future top-line growth.

Let me turn now to the Asia Pacific region where first-half constant currency sales increased 15%.

On Haagen-Dazs we continued to see strong sales growth in our stand-alone retail shops.

We expect to open roughly 60 new shops across the Asia/Pacific region in fiscal 2012.

We have also recently launched Secret Sensations in several Asian markets.

We are driving growth on Wanchai Ferry by expanding our product line and reaching new cities.

We are now in over 100 cities across Greater China and are entering new markets.

Strong distribution gains are driving double-digit growth on Nature Valley.

We have added chewy varieties in Australia and recently launched Nature Valley in South Korea.

We are seeing strength on regional brands as well.

Our recent acquisition of Pasta Master in Australia is exceeding our expectations, while in India our dry mix business is growing at double-digit rates led by Atta flour.

Innovation will continue to be a key driver of our Asia/Pacific growth, and to support those efforts we will break ground on a new R&D center in Shanghai in 2012.

Let me just briefly mention cereal partners worldwide; our joint venture with Nestle.

You will hear much more about our plans to grow our cereal business in markets around the world from Christi Strauss at the CAGNY Conference in February.

CPW has two decades of strong growth under its belt.

Today net sales exceed $2 billion and we have a combined 23 share of cereal category sales across over 130 markets worldwide.

And good growth is continuing in fiscal 2012.

We are building on our positive momentum from last year with first-half pound volume up 3% and net sales up 5% on a constant currency basis.

We are seeing improving trends in our established markets.

In the UK, our net sales grew at a mid single-digit rate outpacing category performance.

And in Australia CPW net sales increased high single-digit rates led by growth in Uncle Tobys hot oats cereal.

We will also continue to see good growth performance across developing and emerging cereal markets, including mid single-digit growth in Mexico and double-digit growth in Brazil and Turkey.

So for fiscal 2012 in total we expect CPW to show good sales and profit growth.

With that let me wrap up my comments on General Mills' International business segment.

Our 2012 results will build on a track record of strong performance.

In recent years net sales as reported have increased at a double-digit rate, twice the Company average during that time.

Our operating profit has been growing at a high single-digit rate.

Again, outpacing total company performance.

And the addition of the international Yoplait business significantly increases our scale outside the US.

Looking ahead to the next decade, we really like our prospects for increasing our sales and earnings in markets around the world.

I have seen some of you write that strong performance around the world starts with great people and we agree.

At the heart of our plans for future growth is a team of over 15,000 employees around the world.

Developing our global talent will remain a strategic priority for General Mills moving forward and is critically important to our continued success.

Our plans are focused on building five global platforms -- ready-to-eat cereal, super premium ice cream, convenient meals, healthy snacks, and yogurt.

We will drive sales growth in developed markets with core brand innovation.

Our categories are still developing in most markets, so significant household penetration opportunities lie ahead.

We will continue to increase scale in emerging markets, including continued strong levels of investment in China.

International has led company growth over the last decade, and with expected sales growth and operating margin expansion above the Company average we expect to lead growth in the years ahead.

On behalf of the entire International division at General Mills, thank you for your time this morning.

I will now pass the microphone to Ken.

Thanks, Chris, and good morning, everybody.

You just heard about the strong growth that we are seeing in our international businesses, so let me give you a quick update on our other two business segments beginning with Bakeries & Foodservice.

Through the first half of this year our sales in this segment are up 12%.

That growth has been led by price and mix, but pound volume also is up 1% year-to-date.

We are continuing to outperform foodservice industry trends by focusing on the most resilient customer channels.

Our sales with foodservice distributors grew 8%, driven by good performance on our hot breakfast products like Pillsbury mini pancakes and French toast.

Our sales in convenience stores were up 10% led by recent new product launches in the channel like Nature Valley Recharge bars and Fiber One Brownies.

And our good growth in bakeries and national restaurant accounts reflects particularly strong performance from in-store bakery items.

We continue to innovate for our foodservice customers and will launch a variety of new products in the second half.

For example, we are adding mini waffles to our successful hot breakfast line.

In convenience stores we will launch several new items, including Nature Valley Granola Thins and new Fruit Twists, which is a gluten-free snack.

We continue to expect good sales growth for Bakeries & Foodservice for fiscal 2012 in total.

We still expect a mid single-digit decline in segment operating profit as planned, because we are lapping particularly strong levels of grain merchandising earnings last year.

Turning to our US Retail segment, net sales were up 3% through the first half with price and mix contributing 9 points of growth.

As we mentioned in our press release, pound volume reduced net sales growth by 6 points, primarily reflecting lower shipments of heavier items such as flour, dessert mixes, canned vegetables, and yogurt.

However, on an equivalent case basis, volume was down just 2% through the first half.

Slide 34 shows consumer movement for our product lines across measured and non-tracked channels.

Retail dollars sales were up 3% with momentum growing in the second quarter across many of our largest categories.

In addition, our baseline or non-promoted dollars sales in Nielsen-measured outlets are for the fiscal year-to-date with particularly strong growth for grain snacks, baking products, and soup.

Our US cereal business continues to perform very well.

Our dollar share through the first half was 32% in measured outlets, matching year-ago levels.

We posted good sales on several of our largest established brands, including Honey Nut Cheerios, Chex, and Cinnamon Toast Crunch.

In addition, new 80 Calorie Fiber One, Cocoa Puffs Brownie Crunch, and Cascadian Farm French Vanilla Almond Granola are doing well.

These products will continue to be incremental contributors to our cereal business in the second half.

And we have more new cereal innovations coming.

Dulce de Leche is our latest addition to the Cheerios franchise.

This caramel-flavored cereal features a taste profile that is popular with Hispanic consumers, but we think it will have broad appeal.

This new cereal contains 19 grams of whole grain per serving and only 6 grams of sugar.

New Peanut Butter Multi Grain Cheerios contains 16 grams of whole grain and Frosted Toast Crunch builds on the success of our Cinnamon Toast Crunch line and offers 11 grams of whole grain per serving.

All three of these great tasting cereals will be arriving on store shelves in the next few weeks, so we expect Big G to show good sales growth in the second half of this year.

Our snacks business is a growth leader for the US Retail segment this year.

Grain snacks is a $1.8 billion category in Nielsen-measured outlets alone and it's growing at a mid single digit pace.

Our first-half growth led the category with retail sales up 20%.

Fiber One Brownies, launched in June, have been a big hit contributing to double-digit increase for the Fiber One snack franchise.

We also posted double-digit sales growth on our Cascadian Farm Organic snack bars.

We have got a great lineup of new products coming in the second half that should help keep this momentum going.

New Nature Valley Protein Bars contain 10 grams of protein and 5 grams of fiber per serving, great for consumers looking for added protein for energy or weight management.

And we are adding new flavors to our successful Granola Thins and Fiber One snack bar lines.

These items taste great and contain 90 calories or less per serving.

Now Lara Bars aren't a grain snack.

They are an all-natural fruit and nut based energy bar, and we will be expanding this line with new crunchy fruit and nut Uber bars.

Retail sales for the Lara Bar brand are up over 30% so far this year, so we are excited about building on this successful line.

Let me turn to yogurt where the US yogurt category shows sales up 8% through the first half driven by the Greek segment.

Yoplait is lagging that category performance and we saw volume declines for our original and light businesses in the quarter.

However, Yoplait Greek yogurt is gaining momentum with sales up 50% year-to-date as we benefit from additional manufacturing capacity and advertising support that began in August.

The kids' yogurt segment also is growing and Yoplait is leading that growth with strong performance from GoGurt.

Sales for that line are up double-digit due to a great ad campaign and effective Hispanic marketing initiatives.

And Mountain High yogurt was incremental to sales in the first half.

We have got some good innovation coming on Yoplait in the second half.

We will introduce Greek yogurt and granola parfaits and new flavors of our Greek yogurt in multipack formats.

We are also launching a new line of lactose-free Yoplait yogurt.

Studies show that around 15% of US consumers are lactose intolerant and the percentage is higher among the growing multicultural populations.

Dairy products that provide a lactose-free benefit are growing at a double-digit rate, so our retail customers recognize the increasing importance of this trend.

We think this is a good innovation for the Yoplait brand and will support this new line with couponing, digital advertising, and in-store sampling.

For consumers making weight loss part of their New Year's resolutions, we will be increasing our digital marketing efforts on Yoplait Light, including advertising on key weight management and health-oriented sites like Weight Watchers and Everyday Health.

As we have said before, 2012 is an investment year for Yoplait but we are seeing improving trends on many parts of our business and we expect that to continue in the second half.

We have got a number of convenient meal items that are doing well.

New Pillsbury Egg Scrambles and breakfast sandwiches are perfect for a fast, hot breakfast.

Launched last quarter, they have been exceeding our expectations and we project their combined year one retail sales in all channels will total more than $40 million.

Totino's Pizza Stuffers are another first-quarter launch that is exceeding expectations.

Year one retail sales for these heat-and-eat sandwiches should exceed $20 million in all channels.

Progresso soup had a very strong first half with retail sales increasing more than 6%, driven by pricing and compelling product news.

So far this year baseline, or non-promoted sales, are up to 8%.

We also had significant distribution gains in the quarter driven by retailer SKU rationalization in the soup aisle.

And our Old El Paso Mexican dinner kits posted good performance in the first half, too.

Retail sales grew 5% as they make for a fun and an economical family dinner.

So in total, US Retail is on track to meet our full-year targets of mid single-digit sales growth and low single-digit operating profit for this business segment.

Product innovation is a key growth driver for all of our businesses.

We launched more than 100 new products across our three business segments in the first half of fiscal 2012.

We will build on that success with more than 50 new products coming in the second half.

While the total number of new products launching this year is comparable to last year, we think the quality of our innovation is strong and new products will continue to drive incremental sales growth for us in the second half and beyond.

So to summarize today's update on General Mills, our first-half performance reflected strong sales growth driven by the Yoplait acquisition, price realization, and product innovation.

We expect to generate strong sales and EPS growth in the second half.

Our guidance calls for double-digit net sales growth and high single-digit to low double-digit growth in earnings per share over the last six months of the year.

We see several factors contributing to our second-half growth.

First, our net sales and operating profit will continue to reflect significant contributions from the Yoplait acquisition, and then across our base business our categories continue to grow.

The pricing action we announced in 2011 are now in the market.

We see the contraction in our gross margins moderating in the second half, and we have a strong lineup of innovation and marketing programs.

So we are on track to achieve our financial targets for the full year.

So thank you for your interest in General Mills this morning.

We would be very happy to answer your questions now.

Operator, can you please get us started?

(Operator Instructions) David Driscoll, Citi Investment Research.

Great.

Thank you very much and good morning.

I wanted to talk a little bit more, Ken, about the Greek yogurt segment in the United States and US yogurt overall.

We have done a lot of analysis on this market; the Greek segment looks like it has doubled in size in the last 12 months.

It's now about 25% of the US yogurt category.

General Mills, according to our numbers, has just about a 5% share and distribution points in our food, drug, and mass data look flattish, maybe even down slightly.

I guess the heart of the question here is what is your confidence level that you can really penetrate this market, the Greek yogurt segment?

And can you talk a little bit in more depth about your plans to do so?

How do you go up against Chobani, which looks like it has a fairly significant lead at this point?

So thanks for the question, David.

Obviously, your numbers on the impressive growth of this segment are -- we are aware of those.

The way we look at it is as follows.

First of all, the yogurt category is an enormous segment.

It's the second-largest segment we compete in and it's showing a tremendous growth right now, as you all know, driven by Greek.

So it's big and it's growing, so it's exciting.

We do not have our fair share of that segment or of the growth right now, and we are obviously very determined to get that.

We are very pleased with the performance that we have had from Yoplait Greek in the first half.

That has played out very much as we thought it would and so that product grew about 50%.

We now have more capacity and more advertising.

We are introducing extensions to that line, so we think that that will continue to grow very rapidly in the second half and we are pleased with that.

Beyond that the only thing I want to say is that I think that you are going to see a very high level of innovation in the yogurt category generally and in Greek yogurt specifically over the next six to 12 months.

I am certain that that will happen.

We have other initiatives that we are working on.

We are very committed to getting our fair share of that segment.

And while we are very pleased with Yoplait Greek and we believe that is going to continue to grow, again I think you will see a very high, continuing level of innovation in the category generally and in Greek yogurt.

We are very committed through that innovation to build and get our fair share of that segment.

One quick follow-up.

On yogurt, do you expect the original and light segments to grow in the second half or will they continue to decline?

When does the pressure abate in those big segments?

We are very committed to stabilizing the performance in those segments, and so we think that, for instance, the lactose-free product that we are launching that is a very good idea.

There are lots of consumers out there who need to avoid lactose.

We are the first player to really take that segment seriously in yogurt, so we think that that will help.

And we have other initiatives that we are working on on those core cup brands that we think will strengthen their appeal to consumers.

So we think that the performance will improve in the second half.

Thank you.

I will pass it along pursuant to the one question.

Thank you.

Andrew Lazar, Barclays Capital.

Good morning.

Just a quick follow-up on your comments on the distribution gains that you had in your soup business.

Just so I am clear on it, is the -- some of the SKU rationalization that you talked about that retailers have done has that taken away sort of shelf space from the overall soup category?

Or is it just kind of resulting in a shifting, if you will, competitively in space that you have been able to pick up?

Andrew, it wasn't so much of a -- I wouldn't describe it as a competitive shift.

Really I would describe it more as a focus on what are the top turners and making sure that they had good representation of those turners.

So just as an example, the Rich & Hearty portion of the Progresso line, which is -- these are really sort of full-flavor robust soups, think Italian Wedding and these kinds of products.

Those are very, very high turners.

And as we did our analysis of the category we saw the products that many of those, as an example, Rich & Hearty products, were underrepresented even though they continued to be very, very popular with consumers and very high turning.

Some of the space in the category had moved to some of the newer items, some of the simplicity items which turn but don't turn as well as some of the core items.

So I think what we are seeing is kind of a return to what are the top items; let's organize the category around turns.

And as they have done that we have certainly seen our performance improve.

We have gained a significant amount of distribution, for instance, around that Rich & Hearty line over the last three or four months.

Got it.

Great, thanks very much.

Eric Katzman, Deutsche Bank.

Good morning, everybody.

Happy Holidays.

I guess I wanted to kind of delve into the issue of the weight versus the units or volume.

And I guess not so much specifically, Ken, tracking it from General Mills' perspective, but kind of how do we think about that within the context of the consumer and the retailers?

Is that like an economic issue that consumers are going towards products that are maybe less expensive or less density?

Or how do I interpret that, because that is -- I don't remember you referencing that kind of differential in terms of your volume numbers.

So perhaps you could just go into that a bit more.

Eric, let me take a shot at it because I think it is complicated and a little bit confusing.

I will give you my take on it and then I suspect that Don will want to jump in.

We look at both weight -- literally gross weight, pounds, which is I think a common industry measure.

Obviously we also focus on units.

Units are what we produce in our plants and they are what consumers buy and they are what retailers sell.

So I think you have to keep in mind both measures.

As you look at our portfolio this year and the way it has performed -- apologize for going through this in a little bit of detail, but it might be worthwhile just to sort of run it down for you.

Cereal up 3% or 4%; that one is fine.

Grain way, way up.

Everything is working.

Our Pillsbury division everything is working pretty well there and good baseline on those core products.

Several of our core businesses in the meals division, so soup for instance, baselines and distribution, as we were just commenting, quite strong there.

Old El Paso quite strong.

In the meals division it's really the heavier products, which are canned vegetable and our frozen vegetable products, that are seeing bigger declines.

And they are seeing those declines because those products saw the highest inflation or very high inflation relative to the rest of our business.

And so high inflation, logically, corresponds to a bit tougher volume picture and these happen to be heavy products.

So I think it's a very logical link of inflation leading to a differential and elasticity on the volume in products that just happen to be heavy.

It's a very similar case in baking where those products -- flour, cake mix -- primarily wheat based and grain based, and as a result those products had differentially higher inflation and slightly bigger volume declines.

By the way, very much expected by us, given the work that we do around elasticity; they also happen to be heavy products.

Then yogurt with the issues that we have talked about there and yogurt is a heavier product.

So higher inflation leading to higher pricing for a couple of the segments and leading to bigger declines on products that happen to be heavier.

So hopefully that is somewhat helpful.

I think obviously consumers and our retail partners are focused on the unit sales and there we commented that those are down 2%.

What I would say there is that is very, very much in line with what we modeled and what we expected.

And so we are pretty much where we thought we would be given the level of inflation and the level of pricing that we took at the beginning of the year.

Don, would you add anything to that?

Well, I think you captured the drivers very well.

The only thing that I would add is that while this was a particularly wide gap between the units and the weight volume measures, we have had it before.

A couple of years ago, kind of in this -- it was either Q2 or Q3 during soup season we had a similar gap.

So it does happen from time to time and that is why we try to point it out.

Just to Ken's main point is it's the units that really matter from a retailer and a consumer standpoint and a leverage standpoint.

Don, does this then -- should we think about this reversing as some of the baked good products kind of fall off seasonally and that this reverses in the second half to get to your full-year view?

Yes, you will see less -- because those products are seasonal obviously it goes a little bit into our Q3 as well.

You will see a lessening of that impact in the back half, yes.

You will also, Eric, see us -- we will begin comping periods where -- remember we began taking our pricing in the early spring of last year in February.

So as we start comping the period where our pricing was really starting to hit retail then, as you said, we see that comp and the pressure should moderate here somewhat.

Okay.

Thank you, I will pass it on.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

So I wanted to ask about your plans for taking Yoplait into China.

I think I have seen reports over the last -- that Danone has decided to close one of its China plants on the yogurt side and most of the reports cite intense local competition as one of the reasons for that.

I know you have talked about wanting to take Yoplait into China, and I guess this may be a question for Chris, but how does that news affect the way that you think about entering that yogurt market in China and just making sure that you are using cash as wisely as possible as you do so?

Yes.

Chris, I think that one is yours.

Okay.

So thanks, Alexia, for that question.

The first thing I would say is yogurt is a big category in China.

It's about $4.5 billion, growing double-digit.

We clearly see that not stopping, so that is the first thing.

I think to succeed in China you need a combination of the right product and the right local team to execute against those plans.

As you know, we have a very strong team in China, some 4,000-plus employees, mainly local Chinese, who have done a great job on brands like Haagen-Dazs and Wanchai Ferry.

And with regards to the success of our [likely], we haven't announced plans to go into China but we are looking at it.

Yes, we have to be mindful of all the considerations to make it a successful launch.

So do we have the right product, do we have the dairy sourcing, do we have the right coal chain distribution system and relationships with the retailers?

So that is obviously all factored in.

I won't specifically comment on Danone's success or failure there.

Although I will say we have had tremendous success thus far in China in our other categories, and if we do launch yogurt it would be a very mindful, very planned for the launch.

One thing I would add to that Alexia is that I think one of the secrets to our strong success in China is that we have really proven out business models in small geography before we have expanded.

And so anything that we do there has been really proven out about the consumer reaction and dynamics and then expands.

So that has been a conservative model but it has worked very, very well for us.

Great.

Thank you very much.

I will pass it on in the interest of time.

Ken Zaslow, BMO Capital Markets.

Good morning, everyone.

Just on pricing, have you taken all the pricing that you are required to take to offset the higher commodity prices?

And is the implication that once February comes around that there will be a greater than your long-term growth in terms of the margin expansion opportunity, given that commodities have seemingly stabilized?

Can you just talk to that a little bit?

Don, will you take that one?

Sure.

Well, Ken, as you know, we don't talk prospectively about our pricing, but as we have been clear we began taking pricing last, really end of the third quarter but more in our fourth quarter of fiscal 2011 in anticipation of the inflation that we saw coming in 2012.

And so that pricing impact has built as this year has unfolded.

One of the reasons that we point to, better profit growth in the second half, is -- one of the factors will be that we will have that pricing fully in place.

But again, we are not going to talk prospectively about any pricing actions that we may or may not take.

Is there a point in time though with the commodities leveling off that you would actually -- how would, I guess, General Mills react to some potentially deflationary commodity environment if that comes out that year?

That is highly speculative and hypothetical at this point.

Again, as you know, when we look long term at input costs we expect them to average inflation in the mid single-digits based on world demand.

We haven't come off that and we certainly haven't given any specific guidance for F13 yet.

Great, thank you.

The thing I would add to that is, Ken, is remember we are only halfway through our fiscal year so we have got six months to go, which in these commodity markets has proven to be a lifetime over the last several years.

So what we will do for you around our June meeting, as we always do, is we will give you our best forecast of pricing, or beg your pardon, of inflation for our coming year.

And so we will do that about six months from now.

Great.

Thank you very much.

David Palmer, UBS.

Thanks, everybody.

Last inflation cycle General Mills' volume held up really well, probably the best in the industry, and that was in spite of a rapid price pass-through environment.

The domestic retail business has fallen off in terms of volume more this time.

Aside from yogurt, and we obviously talked a little bit about the weight of your products, why do you think the inflation cycle has been different for Mills in this inflation cycle?

And relatedly, I am wondering how volume might set up for fiscal 2013.

Do you think as input costs maybe abate somewhat you might be able to promote a little bit more than you have been doing and stabilize volume as you exit this year?

Thanks.

So the key factor going back to that last big cycle, David, is that if you will recall that was the period of time where we saw consumers move away in a pretty measurable way from food away from home.

So we saw quite a bit of downward adjustment in meals at restaurants, meals at home.

That volume ended up in the grocery store and gave us the cycle that you described, which was not only strong pricing in an inflationary environment but that volume tailwind that we got from food away from home.

So this go around we are seeing, so far this year anyway, really over the last 12 to 18 months we have seen that food away from home sector basically moving sideways.

So we are not getting nearly the same level of contribution from that kind of change, so I think that accounts for what we are seeing this time which is a more sort of classic response based on elasticity around price increases.

As we move into our next fiscal year, which again is six months down the road, we will comment more fully on how we see volume pricing, inflation, and that sort of thing then.

Thanks, Ken.

Eric Serotta, Wells Fargo.

Good morning, everyone.

Wanted to touch upon your inflation outlook.

Was a bit surprised that it didn't change much from the 10% that you spoke about previously, given the moderation in some commodities that we have seen.

Are you guys using options as one of the tools in your hedging?

And if so, why not a little bit of a pullback in the inflation that you are expecting?

Don, would you take that?

Sure.

Eric, our inflation expectations for the year have been pretty consistent since we first announced them last summer.

As we sit here today we are about 90% covered, and so we have a pretty good line of sight on where the year will come in from an inflation standpoint.

And as always we use a number of tools for that coverage, which gives us a pretty good line of sight on where the costs are going to come in.

To the extent we have any pullback, obviously that has been taken into account in our estimate.

But, again, for many of our core products, prices are still up year-over-year even on a spot basis.

Okay, thanks.

I will follow the rules and pass it on.

Chris Growe, Stifel Nicolaus.

Good morning.

I just wanted to ask you I guess a bit of a follow-up on Eric's question.

Your first half or second half cost inflation, I am not sure if you have talked about anymore.

I didn't catch it if you did.

But how much of a factor or how much less of a factor is cost inflation in the second half of the year versus the first half of the year?

Don, why don't you just keep it going?

What we talked about, Chris, is that we expect gross margin compression to improve or lessen the second half of the year.

There is a number of factors, one is sales growth.

We do expect volumes to improve in the back half.

We are talking about innovation; our (inaudible) will be up strongly and we are going to be rolling over software volume in last year's fourth quarter.

Our pricing will be fully in place, that will help.

We will have a little bit of plus from mix, but one of the other things that maybe isn't as apparent that I think is important to point out is our inventory management.

You see it very strongly in the cash flow.

We came into this year knowing our sales volumes would be down.

We took a very proactive stance in terms of how we managed our inventory and we brought our inventory units down as well, actually even slightly more than our sales volume has come down.

You see that in our cash flow where inventory has freed up about $300 million this year versus a year ago.

One of the impacts that has is you have less production units to absorb the manufacturing costs, so you have more costs to come into your P&L in the time you are bringing inventory down.

And we saw that in our first half.

As we look at our second half, we have really taken down the inventory to the levels that we wanted to so we will see less of that in the second half.

That was probably about a 70 basis point drag in our first-half gross margins that will not reappear in the second half.

It's about $30 million in total, so about $0.03 on our EPS.

So that will not reappear in the second half and so that is one of the reasons that we have confidence, again with sales growth and pricing in place, that we will have improved gross margins in the back half versus the first half.

Still down from a year ago because of that high inflation, but less compression than we saw in the first half.

In that second half, the Yoplait would still be roughly 100 basis point drag on gross margin?

Is that about right?

We will still have the same relative impact in the back half, correct.

Yoplait international.

Okay, thank you.

Ed Aaron, RBC Capital Markets.

Great, thanks.

Wanted to just ask a quick question on the yogurt business.

So for the -- to follow up on the US yogurt question from earlier, when do you expect that business to return to positive sales growth in the US?

We are very focused on returning that business to sales growth as we move into our next fiscal year.

Okay, so a fiscal 2013 event.

Then on Yoplait international, could you give us -- and I apologize if I missed this -- the comparable growth rate for that business in the quarter?

Chris, do you have that?

Say that again.

Could you repeat the question, please?

I was just wondering how fast Yoplait international grew in the quarter on a comparable basis.

I realize, of course, you didn't own it last year, but just wondering where that business is tracking from a growth perspective.

I can talk it through July/October, so is that close enough?

Yes, better than --

So anyway, the international side.

France has started growing over that time frame high single-digit; UK is growing low single-digit; the Liberte business in Canada is growing double digit.

So strong growth across two out of three segments.

Thank you very much.

Jonathan Feeney, Janney.

Good morning.

Thanks very much.

Just a quick one.

I wanted to -- considering a lot of I think the data you have given us on this call, the order presentations, I think certainly the Yoplait deal, it seems like a greater international focus has been happening at General Mills.

And I think that is indicative of the industry more broadly.

Can you talk -- as you look forward, I mean certainly you have -- your cash flow is generative, you have room to borrow.

Are international acquisitions rising in importance to General Mills as sort of the domestic environment?

Certainly it doesn't become impossible to fix, but maybe a little bit more challenging and a little bit more elastic in certain spots at the moment?

Well, I would make a couple comments on that Jon.

First of all, we love our US business and, you know, we think we are in great categories.

We clearly are in great categories.

Where we have an issue right now in yogurt, but it happens to be in a category that is absolutely terrific, and we will figure out how to, through innovation, how to re-accelerate our growth in that category.

We just love the outlook for healthy snacking in the US.

We think the cereal category is terrific.

We are getting great performance out of our Pillsbury brands.

These really tried-and-true businesses that just keep knocking it out, very high margin, and so we really like the business in the US.

As we have said on many previous calls, we are always looking for businesses that we might tuck into that US business, because we think that the profile of the business is so good.

Obviously we live in an era of tremendous international expansion and, as you pointed out in your question, we are trying to capture that prove these steps that we have taken.

As we said many times before, we are looking for other ways to build and gain scale internationally.

So I think the answer is, yes, we are always looking.

Now is a great time, as you said, and we will continue to do that.

But the priority hasn't really changed recently in the past six months?

Not really.

We are really looking for ways to capitalize on the opportunities that we see, both in the US market, which as I said we think is terrific, and also outside the US.

So we are really kind of broad-minded in the way we are looking.

Okay, thank you very much.

We are going to stop there so that ConAgra can start on time.

If you have follow-up questions, please give me a shout.

Happy Holidays, everybody.

Thank you, 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.