通用磨坊 (GIS) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the General Mills fiscal 2012 third-quarter 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 Wednesday, March 21, 2012.

I would now like to turn the conference over to Kris Wenker, Vice President of Investor Relations.

Please go ahead.

Thanks, operator.

Good morning, everybody.

I'm here with Don Mulligan, our CFO; John Machuzick, Senior Vice President and Head of our Bakeries and Foodservice business; and Ken Powell, our Chairman and CEO.

I'll turn the call over to them in just a minute.

First I'm going to cover my usual housekeeping items.

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

It's also posted on our website if you still need a copy.

We've got slides out on the website too that supplement today's prepared remarks and these remarks will include forward-looking statements that are based on management's current views and assumptions.

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

And with all that I'll turn you over to my colleagues beginning with Don.

Thanks, Kris, and hello, everyone.

Thanks for joining us this morning.

As you see from our press release, third-quarter performance was consistent with the guidelines we provided on February 17.

We delivered sales growth in each of our three operating segments with strong net price realization across our base business and good contributions from the international Yoplait business acquired last July.

The quarter also included strong contributions from new products and an 8% increase in advertising investment.

Earnings were generally in line with year-ago levels due to this year's significant input cost pressure.

Slide 5 summarizes our results for the quarter.

Sales totaled $4.1 billion, up 13%.

Segment operating profit increased 1%.

Net earnings attributable to General Mills totaled $392 million and diluted earnings per share were $0.58 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.

Excluding these items adjusted diluted earnings per share totaled $0.55 for the quarter, one penny below year ago results.

Slide 6 shows the components of our net sales growth.

On an as reported basis, including Yoplait International, net sales increased 13%.

Pound volume contributed 10 percentage points of growth in the quarter and net price realization and mix added 3 points of sales growth.

Foreign-exchange did not have a material effect on sales growth rate this quarter.

Excluding the Yoplait acquisition, net sales grew 5%.

As expected, pound volume was lower in the quarter, down 3 percentage points.

Price and mix contributed 8 points of sales growth.

As I mentioned a moment ago, all three of our business segments contributed to this quarter's sales increased -- US retail net sales grew 4%; international sales were up 51% led by international Yoplait acquisition.

But excluding Yoplait international sales still increased at a high-single-digit rate.

And net sales for our bakeries and foodservice segment rose 6%.

Slide 8 outlines our third-quarter gross margin performance.

On a reported basis, gross margins declined to 36.6%.

This includes the impact of mark-to-market changes and the value of our grain inventories and commodity hedges we'll use in future periods.

Excluding mark-to-market effects our gross margin declined 280 basis points in the quarter.

The addition of Yoplait International to our business mix accounts for roughly a third of that decline.

The remainder reflects margin contraction for our base business, primarily due to higher input costs and lower US retail volumes.

Looking at the full-year, our original plans for 2012 assumed a 100 basis point contraction in gross margin for the base business with the addition of Yoplait International further reducing gross margin this year.

We currently expect fiscal 2012 gross margins will be in total roughly 250 basis points below the prior-year excluding mark-to-market effects in both periods.

Slide 9 summarizes our segment operating profit for the quarter.

US retail profit declined 4% reflecting higher input costs, lower volume and increased media investment.

International profit increased 40% led by strong contributions from Yoplait.

And bakeries and foodservice profit matched year-ago levels despite sharply higher input costs and a difficult comparison to strong grain merchandising earnings a year ago.

In total, segment operating profit rose 1% to reach $675 million.

After-tax earnings from joint ventures rose sharply in the quarter.

Mid-net sales growth and the lapping of a tax restructuring charge at Cereal Partners Worldwide last year contributed to the earnings increase.

On a constant currency basis, CPW sales were up 7% led by growth from the Nesquik and Chocapic brands.

Constant currency sales for Haagen-Dazs Japan increased 3%.

In the fourth quarter we expect joint venture profits will fall below stronger year-ago levels.

And for the full-year we now expect after-tax earnings from joint ventures will be down from 2011 levels.

Earnings for Haagen-Dazs Japan will be below year-ago levels due to the difficult economic environment in Japan following the earthquake and tsunami a year ago.

That being said, recovery for this business is running a bit ahead of our plans.

CPW earnings will also be below year-ago levels due to a one-time adjustment to tax reserve related to prior years and earlier phasing of expenses for new manufacturing capacity in emerging markets including Malaysia, Turkey, South Africa and Brazil.

CPW volume and sales growth in the underlying business remains strong.

Completing our review of the income statement, corporate unallocated expenses, excluding mark-to-market effects, were slightly lower in the quarter.

This year's total includes $4 million of one-time integration costs for Yoplait.

Last year's total included an $11 million charge to increase an environmental reserve.

Interest expense increased 13% in the quarter driven by increased level of overall debt with the addition of Yoplait and the pre-funding of our February bond maturity.

The effective tax rate for the quarter was 32.7% as reported.

Excluding items affecting comparability the tax rate was 32.0% this year compared to 31.6% a year ago.

We now expect our full-year tax rate to be roughly 32% excluding items affecting comparability.

Turning to the balance sheet, slide 12 shows the components of core working capital.

In a quarter where net sales increased 13% our core working capital declined 4% as our focus on inventory reduction drove improved working capital efficiency.

Increased levels of accounts receivable and accounts payable, primarily from the Yoplait acquisition, were largely offsetting in the quarter.

Year to date cash flow from operations totaled roughly $1.7 billion, a 33% increase versus the first nine months of 2011.

Plant inventory reductions, changes in the market value of open grain contracts and foreign currency hedges, and the timing of consumer marketing accruals all contributed to the increase.

Slide 14 summarizes our financial performance through the first nine months of the year.

Net sales increased 12% as reported and grew 6% excluding the Yoplait acquisition.

Despite significantly higher input costs and an 8% increase in media expense, segment operating profit matched year-ago levels.

These year-to-date results include solid contributions from our international Yoplait acquisition.

And our adjusted diluted earnings per share totaled $1.96, in line with year-ago performance.

As we communicated last month, our third-quarter results reflected weak volumes -- weak sales and volume trends across US food categories in measured channels.

Slide 15 shows that across the 25 categories where we compete consumer retail sales growth in non-measured channels continued at a strong pace in the third quarter.

However, consumer takeaway in measured channels moderated.

We believe reduced trade merchandising activity was a key driver of the performance in measured outlets.

In the third quarter, measured channel merchandise volume declined 7% across our categories as food manufacturers increased promoted price points.

We expect volume trends to moderate across US food categories in the months ahead as consumers adjust to the new price points.

Turning to the fourth quarter, we expect to achieve good sales and EPS growth.

The sales growth will reflect strong net price realization across our base business and incremental sales from the Yoplait acquisition.

We have a higher level of new product activity in the market and we have increased media support behind our brands.

Our rate of gross margin decline is expected to moderate in the fourth quarter.

Our tax rate will be lower and effective cost management is expected to keep fourth quarter corporate unallocated expenses below year-ago levels.

And so for fiscal 2012 in total we are tracking somewhat behind our original profit target, but the year is unfolding largely as we outlined last summer.

We expect to deliver double-digit growth in net sales with significant contributions from Yoplait International, strong levels of product news and innovation, and increased levels of consumer marketing support.

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

We expect segment operating profit will be above year-ago levels including increased media investment.

Operating profits will include solid contributions from Yoplait International.

And we expect to deliver EPS of $2.53 to $2.55 per share.

As a reminder, this guidance excludes mark-to-market effects and Yoplait integration costs.

In my remarks this morning I've given some perspective on trends for US food at home.

Now I'd like to turn the call over to John Machuzick who will discuss the trends for food away from home and the performance of our bakeries and foodservice business.

John?

Thanks, Don, and good morning, everyone.

I'm pleased to be here to review our bakery and foodservice businesses.

There are three key points I'd like to make this morning.

First, while there are some bright spots in the US foodservice industry, the overall environment remains challenging as we continue to deal with a cautious consumer.

Second, we've been outperforming the industry in recent years and we're building stronger share positions for our brands.

And third, we're driving this good performance by focusing on the channels that show the most promising growth and by innovating on many of our branded product lines.

Let me say a bit more on each of these points.

I'll start with the foodservice industry environment.

I know some of you are wondering about a potential rebound in the restaurant industry given good calendar year-end results posted by a few of the major quick service restaurant chains.

The commercial restaurant channel has posted modest sales growth over the past several months, but traffic growth is still quite low.

And remember, these growth levels are off of historic lows.

The fact remains that consumers are still cautious given a slow economy and rising gas prices, so the foodservice industry is still facing some headwinds.

Technomics projects that the foodservice industry will post nominal growth of a little less than 3% in calendar 2012.

This would be a slight improvement over last year.

The majority of this growth is expected to be price driven.

As you can see on slide 21, real growth, which strips away the impact of price inflation, is expected to be essentially flat in 2012.

However, there are channels that are expected to post growth, including quick serve restaurants, schools, lodging, hospitals and convenience stores.

It's these channels where we've been focusing our efforts.

As we discussed at the beginning of the fiscal year, our annual plan called for pricing driven net sales growth above our long-term model, which calls for low-single-digit growth.

And we targeted a mid-single-digit decline in segment operating profit because of significant cost inflation and the fact that we were comparing against record grain merchandising earnings last year.

We remain broadly on track to meet these goals this year.

Net sales for our bakery and foodservice segment grew 6% in the third quarter driven by pricing with volume essentially flat.

For the year to date, our sales are up 10% with volume matching year-ago levels.

This performance is well ahead of the industry and, as you can see on slide 23, we posted good growth in all three sectors of our business.

Segment operating profit was essentially flat to last year in the quarter and was down 5% for the year to date due to increased input costs and the lapping of last year's higher grain merchandising earnings.

Let me describe how we're levering our brands in some of the growing foodservice channels.

We work with a number of the largest quick serve restaurant chains providing customized products from pizza crusts to yogurt to cinnamon rolls.

We're also partnering with key accounts to build their menus for breakfast which continues to be the fastest-growing day part for restaurants.

We see this channel is a good growth opportunity for us because many national accounts are increasingly receptive to offering customers well-known consumer branded products.

Breakfast programs in K-12 schools have been growing at a 5% compound rate over the past three calendar years.

Our business in this channel is outpacing that growth.

Recent legislation for the K-12 school nutrition program recommends more whole grains at breakfast.

This new guideline doesn't go into effect until 2013 but it represents an opportunity for us to continue to expand our offerings in schools.

We are already the cereal category leader in school breakfast programs.

All of our Big G cereals contain more whole grain than any other single ingredient.

In addition, our line of hot breakfast items has been a big hit in schools with sales nearly doubling so far this year.

These Pillsbury branded products are easy for the operators to prepare, they can be heated and served right in the package for the kids, and they contain between 16 and 24 grams of whole grain per serving.

And we're also seeing good performance on Trix yogurt in K-12 schools with a reformulated product that contains no artificial colors or flavors.

College enrollment in the US has been increasing at a 4% compound rate over the past three years, so this is another attractive channel for growth.

College students like cereal and four out of the top five cereals in college and university cafeterias are General Mills products with Lucky Charms having the highest cereal penetration on campuses.

Yogurt also is a key business driver in this channel.

This includes yogurt parfaits which have become increasingly popular in foodservice outlets.

Our Yoplait Parfait Pro pouches give operators a fast and easy way to make layered yogurt parfaits.

This product has contributed double-digit compound growth on our bulk yogurt business over the past three years and we've got much more yogurt innovation coming this summer.

In convenience stores, our snack sales have been increasing at a 13% rate over the past four years.

We've been growing distribution on existing snack lines like Chex mix and we've developed unique items for these outlets such as our line of Betty Crocker dessert snack bars and Wheaties FUEL bars.

We're working on more new snack items to continue to leverage this growing food outlet.

So across the fastest-growing foodservice channels we're focusing on our great portfolio of brands.

For the year to date across all foodservice channels sales of our Big G cereals have grown at a 4% rate, yogurt sales are up 3%, and our snack sales are up 13%.

In addition to these strong brands, we also bring strong sales capabilities to our customers.

Back in 2008 we began converting our foodservice sales force from broker to direct.

Today our national sales force represents 90% of our sales in away-from-home channels.

Our sales people are bringing unique consumer insights and category management capabilities to our customers.

We believe this gives us a strong competitive advantage and our customers seem to agree.

In 2011 we received Supplier of the Year awards from 13 of our customers who were ranked number three in the most recent Kantar PoweRanking for foodservice sales.

By focusing on growing channels and branded product innovation we've been increasing the profitability of our business.

Over the past five years our operating profit has grown at a 19% compound growth rate.

Our profit margin has expanded by 900 basis points to reach a level very near General Mills' corporate average.

As I said earlier, in fiscal 2012 our operating profit and margins will decline somewhat reflecting the impact of lower grain merchandising earnings and sharply higher input cost inflation.

But over the long term, we expect sales to grow at a low-single-digit compound rate and our operating profit should grow faster than sales.

We like the long-term growth prospects we see for this business.

While Technomics' industry projections to 2015 show a modest shift to more food eaten at home, US food away from home will still generate over $0.5 trillion in total sales and that's a good growth market for General Mills and our brands.

In summary, the team of people in General Mills' brands on the go division is generating strong results.

We're outperforming the foodservice industry on the strength of our products and execution in growing channels and with nine months under our belt we're on pace to deliver our full-year sales and profit targets.

The foodservice industry continues to be challenging but we're encouraged by current trends in the channels where we compete and we see good opportunities for future growth.

As the US economic outlook brightens we expect foodservice industry sales trends to accelerate.

We think we're well-positioned in the right channels with solid brands to leverage that growth.

With that, I'll turn the call over to Ken Powell.

Thanks, John, and good morning, everybody.

You just heard about the very good results that John Machuzick and his team are posting in our bakeries and foodservice segment.

I'm going to review performance in our other two business segments beginning with international.

As Chris O'Leary told you on the second-quarter earnings call, our international segment is performing quite well this year.

Slide 34 shows constant currency sales growth rates for the latest quarter.

In total, international net sales were up 53%.

Sales in Canada grew 37% led by cereal, Old El Paso Mexican products, and the addition of Liberte yogurt.

In Latin America sales were up 12%.

Net sales more than doubled in Europe reflecting the addition of Yoplait yogurt and high-single-digit sales growth on our base business.

And in the Asia-Pacific region, sales grew 15% with good contributions from China and Australia.

We're performing well in many of our established markets.

Despite continued economic challenges in Western Europe we're posting good growth across our base business.

For example in the UK, sales in constant currency are up 7% year-to-date with particularly strong growth on Nature Valley granola bars.

In France, constant currency sales are up 16% so far this year on the strength of Haagen-Dazs Secret Sensations and increased in-store marketing on Old El Paso dinner kits.

In addition, Yoplait yogurt continues to perform well in both these markets.

In the UK retail sales for Yoplait are up 2% year to date with modest share gains.

And in France Yoplait sales are growing at an 11% pace, adding a point of share so far this year.

We're doing well in emerging markets too.

On a constant currency basis our sales in China are up 19% so far this year, led by Haagen-Dazs and Wanchai Ferry.

In India our business is much smaller, but we'll open a total of six Haagen-Dazs shops in this market by year end.

Multigrain Atta flower and Nature Valley granola bars are also performing well, contributing to 16% sales growth in India so far this year.

In total, our international business is on track for another year of good growth in sales and operating profit.

Our base business is doing well and the integration of Yoplait International has proceeded smoothly.

Turning to US retail, net sales grew 4% in the third quarter driven by net price realization and mix.

Through nine months net sales are up 3% in total with growth in five of seven divisions.

Slide 38 shows our consumer movement across measured and non-track channels combined.

As you can see, we are generating good growth in the majority of our categories.

We've driven this growth with a steady stream of product news and innovation across our brands.

For example, our cereal business has posted share gains over the past several years as we continue to bring product news to the category, and this year is no different.

Our dollar share has increased, up a half a share point in the third quarter alone.

We're seeing good growth across our cereal portfolio.

Established brands such as Cinnamon Toast Crunch, Honey Nut Cheerios and the Chex franchise are posting solid retail sales growth so far this year.

And we've had good contributions from new products too, including Fiber One 80 calorie cereal, a new flavor of Cascadian Farm granola, and Dulce de Leche Cheerios and Frosted Toast Crunch launched in January.

And we launched Peanut Butter MultiGrain Cheerios in January as well.

This new cereal is off to a very strong start.

In less than three months it holds nearly 1 point of dollar share, making it the single biggest new cereal among 17 new launches in the category in January.

Innovation is driving growth for our grain snacks too.

Over the years we've added new varieties to our snack bars driving good sales and share gains.

We've kept that growth momentum going this year with several distinctive new items.

Nature Valley Thins contain just 90 calories or less per serving.

Fiber One brownies have been a terrific success.

They're on track to reach $120 million in year one retail sales.

And for consumers looking for added protein for energy or weight management, Nature Valley protein bars contain 10 grams of protein and 5 grams of fiber per serving.

Innovation also contributed to a good soup season for Progresso.

New flavors and strong advertising have fueled a 2% sales gain for Progresso in measured channels fiscal year to date, including 6% baseline growth.

We've increased prices through a reduction in promotional spending and we'll work to keep the momentum going with more product news coming this summer.

We're bringing innovation to our yogurt business too.

In the kid segment we have new flavor combinations of Go-Gurt value packs and a reformulated Trix yogurt with no artificial colors or flavors.

In the adult segment we've launched Greek yogurt parfaits, new flavors of Greek multi-packs and a four flavor line of lactose-free Yoplait.

We're bringing news to many different segments of the US yogurt market and we're supporting these various initiatives with distinctive advertising messages.

Our current TV campaigns are generating an 18% increase in gross rating points across our adult core top line so far this year.

And we'll have lots more yogurt innovation to talk to consumers about this summer.

In total, it's been a very good year for product innovation across our US retail business.

We're bringing new products to all parts of the store from the freezer case to the dairy section to the center aisle.

And several of our new introductions, like Peanut Butter MultiGrain Cheerios, Fiber One brownies and Yoplait light granola parfaits, are among the most successful new items in the industry this past year.

Let me touch on one final US retail business.

As you know, natural and organic foods are a fast growing category.

Net sales for our Small Planet foods division have grown at a 14% compound rate over the past five years and net sales are up double digits again so far this year.

In calendar 2008 we added Larabar to the Small Planet Foods portfolio.

Sales for these all-natural fruit and nut bars have been growing by more than 30% over the past two years as we've added -- as we've expanded distribution beyond natural and organic stores to other retail outlets.

In January, we added Uber Bars to this line.

They are in a phased launch and will be broadly available by this summer.

And just last month we added the Food Should Taste Good line to our portfolio.

Sales for natural salty snacks are growing at a double-digit pace, so we see great opportunities for this line of tortilla and sweet potato chips.

Traditional grocery stores currently account for just 25% of retail distribution for this brand, so we're excited about the prospects for expanding availability for these great tasting snacks.

We are continuing to support all of our brands with strong levels of consumer marketing investment.

For the year to date, our media spending is up 5% across US retail and we've been increasing the gross rating points for our TV ads as well, up 3% year to date.

We'll finish up the year with another quarter of good brand building events.

It's Pillsbury Bake-Off season and this year the winner of the 45th annual Pillsbury Bake-Off contest will be announced live next week on a special broadcast of The Martha Stewart Show.

Que Rica Vida, one of the largest Hispanic marketing platforms in the US, is currently hosting a music giveaway event including in-store and online promotions.

Consumers get free music download codes when they purchase select General Mills products.

This event culminates in the chance to win a trip to Univision's annual concert in New York City this May.

And March Madness is in full swing again this year with Betty's Brackets on BettyCrocker.com.

Consumers can vote online for their favorite party food recipes.

So for our US retail business in total, we've got good momentum on many of our established businesses, our new products are performing well and we're investing across the portfolio with increased marketing support.

We expect this business segment to show continued good sales growth and improved profit performance in the final quarter of the year.

So I'd wrap up this morning's General Mills update this way -- fiscal 2012 has presented a particularly challenging operating environment with commodity inflation the highest we've seen in 30 years and more than double the average annual rate we expect to see going forward.

In addition, slow economic recovery has kept many consumer budgets under pressure.

These factors caused us to plan fiscal 2012 with a rate of EPS growth below our long-term model.

And as you know, last month, we revised our EPS guidance to a level behind our original target.

In this environment, we've made strategic choices that increased our worldwide sales base and strengthened our portfolio.

We made acquisitions that expanded our participation in two fast-growing food categories, yogurt and natural and organic foods.

We've sustained a high level of new product activity across all three of our business segments and we increased advertising and media investments along with sales.

As a result of these actions, General Mills is on pace to report record level net sales and adjusted diluted EPS for 2012 in total.

And we believe our actions have positioned the Company well for continued growth in 2013 and beyond.

So thanks to all of you for your interest in General Mills.

We'd now be very happy to take your questions.

Operator, would you please get us started?

(Operator Instructions).

Ed Aaron, RBC Capital Markets.

Great, good morning.

Thanks for taking the question.

Your earnings release was really I guess the first meaningful data point that we've seen since CAGNY.

And I just wanted to get your sense on current trends and whether you're seeing anything in the marketplace that would kind of validate your view that the volumes are going to moderate as you cycle over some of the lower levels of merchandising activity?

I would say we've seen -- we saw a little bit of improvement in February and generally our belief is that as we, in the months ahead, lap all the pricing that we took and our merchandising levels moderate, as those two things happen we believe as well that consumer demand will stabilize and will moderate and that coupled with our ongoing investment in innovation and brand building will get us back on a trend line that's more to our liking.

And then just a quick follow-up, the US sales -- the US retail numbers outperformed the measured channel data by a pretty meaningful margin in the quarter.

Was that entirely because of your non-measured channel performance or were there maybe some unique dynamics with respect to timing of shipments and inventory changes?

It was primarily due to very good gains in non-measured channels.

I will tell you also know that, as we commented, we shipped a number of very good new products in the third quarter.

We commented on a couple of the cereals and some of the yogurts, the Nature Valley protein bar -- so we had a good slug of new products and as retailers build inventory on those items those help those sales gains.

Great, I'll pass it on.

Thanks for taking the question.

Matthew Grainger, Morgan Stanley.

Good morning, everyone.

Thanks for the question.

So I understand the inflationary headwinds you're facing are still quite high, but I was still a bit surprised by the degree of gross margin contraction year over year in the quarter.

Is there any additional color you can give on mix dynamics across the portfolio that may have exacerbated that?

And just to follow-up on CAGNY, I think there you said you expected inflation to -- you expected input costs to be inflationary but below the levels we saw in fiscal '12 during fiscal '13.

Is there any additional detail you can give there or any change in your internal expectation since that time?

Matt, this is Don.

On the latter question, I'll just reaffirm what we said at CAGNY -- we expect it to be lower.

We obviously saw extremely high inflation; we are exceeding extremely high inflation this year, so we would expect it to moderate.

We'll obviously have a clearer picture for you when we give you our F'13 guidance more fully this summer.

As far as Q3, there were a couple of dynamics at play.

As you can imagine, the volume, as we said, came in a little lighter than we expected in USRO that had two impacts on us.

One is a bit of deleveraging in the plants, but also from a mix standpoint USRO is, from a segment standpoint, is our highest margin business.

So that ends up being a bit of a negative mix to us as well.

And then lastly, as I noted in our working capital, we continue to work down our inventories and that had an impact on our gross margins -- a planned impact, but one that externally may not be fully modeled, of probably about 30 basis points in the quarter.

So I think those three factors were the ones that would have probably varied from what may have been externally modeled for our gross margin.

Okay.

And do you anticipate continuing to work down inventories any further from where we stand today or are we pretty much at what you would consider the appropriate level?

Yes, we're at the levels that we targeted.

So as we look at Q4, one of the reasons that we are confident that we'll see less contraction in Q4, one of three or four reasons is the fact that we'll have less inventory reduction, hence less of that negative absorption in our gross margin.

Okay, great.

Thanks for the additional detail.

Ken Goldman, JPMorgan.

On the Greek yogurt side, I realize, I appreciate you previously had some supply issues, but I'm a little surprised to see by this point that your ACV, at least in measured channels, is still down year on year by a healthy amount.

So I'm wondering, Ken, if you can comment on why your distribution isn't better by this point, especially given your strong relationships with retailers.

And I'm hoping you can shed some light on a progression you made with Greek this quarter.

And I guess my main question is how close are we to the point at which you say, you know what, maybe what we're doing with Greek isn't working.

We've invested in capacity.

Maybe we should think about perhaps changing course and doing something a little bit different in terms of strategy.

Thank you for the question.

So, our Yoplait Greek product, sales in the latest quarter are up nearly 50%.

Our distribution for that product I believe is flat across all channels.

And so, I don't want to comment now on your data point, maybe we can come back to you on that.

But we're expanding turns on that product, we're expanding capacity, we've begun to advertise it, we're adding new items.

As I said, we've added a parfait product now.

We're adding more varieties of the 4 ounce four pack to that line and that particular product is doing very, very well.

So that product continues to grow and we're going to continue to support it because it's working for us.

Having said that, as I've said before, there are more -- many more ways, we believe, to innovate in the Greek yogurt segment and I will very much look forward to sharing those innovation and new product details with you when we get together in June.

But there's quite a bit more innovation that will be coming from us on that front.

Thank you.

Robert Moskow, Credit Suisse.

Hi, thank you.

Ken, I published a note yesterday just kind of analyzing headcount trends at food companies and General Mills has been growing very steadily over the last few years about 6% a year.

Most of your peers are cutting back in recognition of tougher economic times and, as you say, a tougher category sales environment.

And I'm just wondering, investing in the Company is always a good thing and you have plenty of areas for reinvestment.

But at what point do you have to take a look at your corporate structure or other elements of your cost structure and say maybe it's time to slow down in light of where the consumer is?

Rob, I did read that note and thank you for the question.

As the folks who have been so focused on HMM and CI and all those kind of disciplines for five or six years, I think the first thing I want to assure you is you said is it time to take a look at these costs.

I will tell you we are constantly looking at all of these costs, and Don will comment here in just a minute.

But we're very focused on admin expense particularly in the US.

That has grown -- we'll talk about the detail that you need to understand in that, but sort of on a like-for-like basis that has grown at less than the rate of sales the last three or four years, in the last two years it's been flat.

So we're very, very diligent on all of that stuff for just the reasons that you highlighted.

And I think you also commented on R&D spending which has varied for us over the last five or six years between kind of low- and mid-single-digit rates of increase.

I will tell you that that is wonderfully high returning investments in all ways.

We get great new product innovation out of that investment.

We get very creative HMM ideas.

So that's a very high returning spend for General Mills and we're very committed to sustaining growth in that area.

I think the third area is the advertising area and here over the last four or five years we've grown at a rate higher than our rate of sales growth.

And we did that because it was clear that we really were behind our peer competitive set and we just wanted to get that spending level up to the right range.

As we've said a few times now, we believe we're pretty much in that zone now.

And as we go forward, we would expect our rate of increase in ad spending to moderate and really to be more in line with -- much more in line with our rate of sales growth.

So that's a few comments.

I think, Don, you might want to jump in with some more texture.

Yes, and Rob, first off, I thought your piece was very good yesterday.

We all read it with interest.

And I particularly appreciate when you looked at our SG&A you commented that we're investing in the right things and I think that's very true.

And I think Ken hit on some of those with R&D and our advertising.

Let me focus on our admin expenses, so the SG&A less those two items.

To Ken's point, if you look over the last three years and you strip out the marked increase we've had in our pension expense because of the drop in interest rates, our underlying admin expense has been essentially flat over those three years.

It's been a focus of ours to ensure that we're thinking about where we're putting our investment and we've taken a lot of internal actions -- HMM variety actions against admin just as we have done in our plants for a number of years.

So I'd assure you that that is getting a focus.

In terms of headcount itself, it has increased; it's increased because we've been building our international business.

Our US headcount actually over the last three years is essentially flat and that includes some investments we've made in headcount in John's area, for example, to build an internal sales force where we've added over 300 people to move from a broker to an internal sales force that not only do we think is more effective, as John outlined for us this morning, but we also know is cost beneficial to us versus the broker network that we had previously.

So rest assured that is getting a focus and the results are coming through over the last couple of years.

And I really appreciate all the detail.

Thank you very much.

And I guess what you could say is, look, if the consumer does come back to you and gets used to these higher promoted price points, all these investments could put you in a better spot compared to your competition because you have been putting more into it.

Is that (multiple speakers)?

I think that's very fair.

I mean our belief is that we -- I mean, clearly it's been a tough year.

We've had very, very high inflation across the industry which led to unusually high levels of price increases which led to volume elasticity and declines that we've seen.

And so it's been challenging, but this is the highest inflation that I've seen in my career at General Mills.

And our strong belief going forward is that it will moderate, clearly moderate from that.

And as we see inflation come down there's much less pricing come through.

We have stability and -- more or less stability in consumer prices, stability in the promotional environment and we strongly believe then that volume will stabilize there, unit volume will stabilize.

And those will all be good things.

And then, as you said, then it's up to us to make our own way by doing the things that grow our categories and we know what those are.

It's good brand building, it's the good innovation ideas that come out of our R&D teams and that's how we grow categories and that's why we've stayed so true to that course during a very volatile period of time.

Great, thank you so much.

I'll follow up later.

Andrew Lazar, Barclays Capital.

Good morning, everyone.

In the release you had mentioned that Big G cereal volume was actually up year over year and I think that's the first time in at least a couple quarters where the volume piece I think was up year over year.

So I'm just trying to get a sense if that's more related to just that it was a somewhat easier comparison with last year or obviously some of the greater level of innovation you talked about in the third quarter going forward.

What I'm trying to get a sense of is how sustainable is perhaps a somewhat positive sort of volume picture in cereal.

And what piece of that is anything that you're seeing potentially more positively in the category or not.

I'm trying to get your sense on that.

Andrew, thanks for the question.

I mean the category is unfolding as we thought it would this year, some pound decline overall.

But across all channels we're going to see sales growth of about 3% this year on a $10 billion category.

So all things being equal, we feel pretty good about the way the category dynamics are unfolding and, as I said, we expect prices to stabilize here as we go forward.

In this quarter, as I said, we had some very good new products that we shipped which helped the units and volume and that was good.

But I have to say, really if you look at us over the last four or five years we've had steady increases in performance, very consistent increases in market share and we're driving that primarily through good innovation across a number of brands.

And so, whether it's the Cheerios franchise or the Chex franchise which I think, as you know, appeals to folks who are looking for gluten-free products, that's growing at a high rate.

We have good performance on our kid brands.

So we really have a very strong portfolio there.

We've had very good innovation.

Those brands continue to respond and we're quite positive on the outlook for the category because of all the brand news and the nutrition innovation that we're bringing.

So while the third quarter had a new product boost long-term we continue to feel very good about our innovation and what we can do in that category.

Got it.

And are you seeing some of the other large players in this space kind of doing more of the right thing at least directionally at this stage relative to the last few years?

Because that's -- one of the questions I think that comes up a lot more now is, hey, has the category structurally changed and is it just kind of X growth going forward because of either -- whatever it is -- other breakfast options or less relevance with consumers?

And I'm trying to parse how much of that is just that some key category players weren't engaged and kind of doing the right thing around innovation the last couple years versus if there's really been some shift that your data suggests that there is?

Yes, well -- I mean there have been kind of some wobbles and some volatilities in the different competitive dynamics over the last three years, as you're very well aware, Andrew.

And it appears that we've worked our way through those.

It looks to us like we're all -- the merchandising side is stable.

The volume weakness that we've seen or decline that we've seen was expected and, as we've seen in most of the categories, is clearly related to the pricing and the increase in merch price points that we had to take this year.

So we think that that's a one-off situation.

As John commented in his remarks, while there is some growth in quick serve restaurants, trust me, we calculate those numbers and we study those interactions and I will tell you that that is not -- that's not where our volume is going.

I think we're just suffering a little bit from the pricing that we saw this year and we're optimistic that as we see that stabilize and knowing the kind of innovation that we're going to bring going forward we expect that category to continue to show good growth for us.

Thanks, Ken.

Eric Katzman, Deutsche Bank.

Hi, good morning, everybody.

Okay, a couple questions.

I guess, Don, can you comment on international in terms of profitability and why it swung so much sequentially from the second quarter down?

Yes, it was primarily timing of advertising.

Media investment in the quarter was up over 30% in international and that's going to swing quarter to quarter, but that was the main driver.

The underlying growth trends from a volume and a sales standpoint, we're still very pleased with the momentum we have in that business.

So I mean, what -- with Yoplait now so impactful to the business, that segment, what's the right margin to think about for that business?

Is it 11%, is it 9%?

I really -- I'm kind of looking for some guidance as to what is the right longer-term profitability for that segment and then think about things quarter to quarter depending upon what you do.

That segment has been generating pre-Yoplait margin in the low double digits.

We've mentioned that over time we believe that those will continue to expand as we invest in core categories and geographies that we're in and as we grow businesses that have higher average margins whether that is Haagen-Dazs, Nature Valley, obviously the cereal businesses in the geographies that we run directly.

And that will continue to drive it.

What we've also said is that the Yoplait business has low-double-digit margins.

And so, in the near term it's going to be fairly profit margin neutral.

But over time we're going to have plans to grow that business as well and as those plans unfold we'll give you a line of sight on the margin impact.

Okay, and then to Ken, I guess one of the things that I kind of derived from CAGNY was increasing competition against Hamburger Helper and its various line extensions.

I mean, it seems as if I guess Kraft or Grocery Co.

is now going to come after you.

How do we think about that?

Because I assume that given you've got the bulk of the share in that category you guys developed it, it's a very high margin business for you.

Why shouldn't I worry about Kraft and others kind of tackling that as the prototypical recession type of product?

That is a very good and stable business for us.

We're seeing some fall off this year from sort of minor lines that we have launched over the last couple of years that we let fall away so we have lost some share there and that's also a brand where just as we've adjusted and moderated merch price points here as the year has gone on where we've seen some fall off, I mean, our advertising for that brand.

And so, it continues to work well.

So we think sort of the fundamental consumer proposition continues to be very strong and we've got good opportunities to innovate and continue to expand within that range.

And I think it's just a question of kind of refining, making sure we've got the value proposition right as we go forward and that the consumer brand building element also is working for us which we think it is.

So I think fundamentally we think that that brand will stay on track and it's just -- we've struggled a bit this year with the volatility in list and merchandising price points.

Okay.

All right, I'll pass it on.

Thanks.

David Palmer, UBS.

Good morning, everyone.

John, first, congratulations to you and your team for what you've achieved in the last few years.

Obviously a tough restaurant industry and you've done better than peers.

So congrats for that.

Ken, both you and John mentioned that Yoplait would add some innovation the summer.

And it doesn't sound like you're going to tell us today exactly what that is.

But I'm hoping that perhaps you could characterize what you might have in store for that brand.

And the reason I'm digging for this is that Chobani continues to move across the country, they're expanding capacity we hear on the West Coast.

So they certainly remain a threat, looming.

So my hope for Yoplait is that you could introduce a new platform that could perhaps seize the news from the Greek segment, that major competitor, and bend the trend in market share.

Thanks.

So, listen.

I very much appreciate your impatience here.

We like to tell our customers about our innovation before we tell you guys, and so that's always what hinders us a little bit.

So we'll be -- obviously we'll have full detail for you in June.

What I will say is that we have a very comprehensive lineup of innovation across all segments of our yogurt business including our kid business, our core cup business, our Greek product lines and other innovation as well and those innovations will come over the course of the full calendar year but beginning this summer.

So we've been very hard at work obviously for all the obvious reasons on our yogurt innovation pipeline and we'll be very pleased to share it with you in June, and not just on the retail side of the business but, as we mentioned, we've got good ideas that are going to be going into the foodservice side as well.

So it will be very comprehensive across all segments.

And would you say that you'll have a new distinct platform for us at that time or (multiple speakers)?

We always try to make them as distinctive as possible and these are all products that we test and evaluate with consumers and we work hard to get the proposition right.

And we think we've got -- we think we have some very, very good ideas coming here that will allow us to continue to build our Greek business and to build our share in that segment.

And clearly our goal is to stabilize and return the entire Yoplait business to growth.

We clearly need to do that and we're very, very focused on that.

It's a core goal of ours and so we think we've got the broad innovation approach that we're going to need in order to do that in our next fiscal year, it's a primary objective.

Thank you very much.

Ken Zaslow, BMO Capital Markets.

Hey, good morning, everyone.

Can you talk about the further opportunity you have in alternative channels?

I know that's been obviously a plus on the retail side, but could you talk about what the opportunities would be by which channels you expect greater penetration in and what product types that might be still under-penetrated that you find there to be opportunities?

So, Ken, thank you for the question.

When you talk about alternative channels, can you be a little bit more specific about the kind of channels you're thinking of?

I mean I think I know, but maybe you can clarify.

Yes, like either mass merchandise, dollar stores, convenience stores drugstores, anything outside of the supermarket channels where basically outside of the IRR data because obviously that is where you guys have kind of closed the gap or exceeded expectations a little bit on the sales line just because you had the alternative channel.

So trying to figure out is there more room to go, which channels, and what product types you think are still a little bit under-penetrated by you guys that we might be able to see a little growth in 2013?

So let me start, and then I am going to ask John Machuzick to add some commentary, as well.

I mean, basically, the sectors you mentioned, whether it is mass, or dollar stores or convenience stores, you know what I will tell you is that we are highly focused on all those channels for growth.

And highly focused means that we dedicate a significant number of human resources to those channels.

We build very strong relationships at the top of those companies and all the way down through all of their various buying and merchandising levels.

And we have built those businesses strongly.

And as you said, these are growing channels, and we see very significant opportunities for continued growth.

And so without attempting to go into the numbers, I mean, I think I can tell you that in most of those different sectors we have very solid growth rates.

And we are also, because of the quality of our sales force and the kind of resources that we are putting in there, the important thing is that we are developing very strong insights about how their customer base might work, whether it is a mass store, or a dollar store or a drugstore.

The consumers that go into those stores all have different behaviors and are looking for different things, particularly when they are looking for food products.

And we are getting very, very smart about what it is that they are looking for.

And as a result, we are bringing them insight, and we have become a very trusted partner in those channels, and we are getting good growth there.

So it is very important to us.

John, I think has a very, very unique window into C stores, and he is going to comment on that as well.

Ken, I think there is a lot of runway still available in the convenience store channel.

We've had 48 months consecutively of share growth and double-digit volume gains in that segment.

And strengthening our sales organization, the capabilities that we bring to that sector of customers like we have done for years and years on the retail side is a big advantage for us.

I think there is plenty of room in our existing categories to continue to grow there.

I think there is new adjacencies that are opportunities in that segment.

I think there is also a foodservice business that is a big opportunity and is growing in the convenience store channel that we can bring more innovation and growth to.

On the foodservice side, all you have to do is look around and there is lots of places where our friends aren't yet in the foodservice space.

We are growing our penetration with our customers.

We have more control over the focused efforts that our sales organization have against our brands.

And there remains lots and lots of opportunity in that area.

As I mentioned in my remarks, there is a growing acceptability of branded products in the restaurant area that we think is another emerging area for growth also.

And are there any product types that may not be fully penetrated -- certain alternative channels I guess is the other that might be an opportunity?

Are you saying are there other product types or --?

No, of your products.

Are there certain products -- obviously cereal, but just going through the portfolio that may not have been as much focused in alternative channels that might lead to another level of growth maybe in 2013 or is everything equally focused upon?

Well, I mean we've got good focus on cereal and baking products and some of our snack products.

But I mean we see -- as these channels grow and many of them using food as a way to drive traffic because obviously people are going to need food once a week and the purchase cycle for some of the drug products may be longer than that.

So they're using food to drive traffic and they're very interested in expanding their portfolio.

And so we're helping them think through that whole assortment issue, but there are many opportunities for us to move into that.

I guess I would add that the other opportunity that we have is there are a number of products today that start out in alternative or particularly in natural channels.

And so, we commented on the success of Larabar in the natural channels sector, the very strong success of Food Should Taste Good.

And as those products gain scale in those channels we then have the opportunity to move them in the other direction, move them into the more mainstream channels.

And so you have products that develop in different parts of the retail environment and then we can take them and study them and move them around into different places.

And it's not just from the traditional to the alternative, it can be from alternative to traditional.

And so we have -- really we have many alternatives across our portfolio to drive growth through building distribution.

Great, I appreciate it.

Thank you very much.

Operator, let's make one last question in here before we're out of time.

Jason English, Goldman Sachs.

Hey guys, thanks for squeezing me in.

A quick question on -- or a couple of quick questions on Yoplait abroad, the European acquisition.

Can you comment on like-for-like growth, both top- and bottom-line for the business?

I think those were contained in Ken's remarks, Jason, where in the UK from a consumer standpoint we-re seeing low-single-digit growth and in France high-single-digit growth.

So we're holding share in the UK, we're actually gaining almost a full point of share in France.

Well, so far I'm looking through the first three quarters and it looks like you've had slightly north of $700 million of sales contribution from Yoplait.

Are you expecting, whether it be seasonal factors or something else, for a big fourth quarter or are we just going to be tracking below I think the $1.2 billion guidance you guys had early on?

For the 10 months we're still in the zone that we expect to be in.

It will add 8 to 9 points to our growth rate a quarter as it has for the last two.

We expect to see the same in the fourth quarter (multiple speakers).

We've only got 10 months in this year, Jason.

But wasn't that the $1.2 billion guidance?

Didn't that account for only 10 of the 12 months?

Yes.

Okay.

And on the bottom line, I'm looking at the minority interest line on your consolidated income statement, it's not meaningfully higher (multiple speakers).

Jason, sorry, just one thing.

That is US dollar value.

The euro is weaker today than when we started the year, so there's probably a little bit of a headwind from a translation standpoint.

So in euros we're tracking -- so when I was saying we're tracking as we expected, that's in local currency, but there will be a little bit of a diminution when we translate to US dollars.

Sure.

It looks like around a 4% headwind right now.

On the profit line, minority interest, looking at the subtraction on the consolidated income statement, it's not meaningfully different, it's up year on year as a subtraction, but not substantially.

It looks to me like the profitability of the business isn't as high as we thought.

Is that true?

Are there other things going on there?

And if it is true, is this maybe a year of investment as you prime the business for acceleration next year?

No, actually the business has performed on both top and bottom line as we expected.

When you look at that NCI line, remember first off it's after-tax; second, it also includes the impact of the integration costs which we capture in our corporate items.

But is obviously then netted off -- our partner's share of that is netted off in NCI.

No, the underlying profitability, that low-double-digit margin is coming in just as we expected.

Great, that's helpful.

Thanks a lot, guys.

I'm sorry, we're out of time.

I know there are some people still in queue.

Give me a shout if I can be of help and thanks for your time today.

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

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

Have a great day, everyone.