通用磨坊 (GIS) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the General Mills fiscal 2013 results first quarter 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 today, Wednesday, September 19, 2012.

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

Please go ahead, madam.

Thanks operator.

Good morning everybody.

I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Jon Nudi, who is President of our US Snacks division.

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

First I've got to cover my usual housekeeping items.

Our press release on first quarter results was issued over the wire services earlier this morning and it's also posted on our website.

We've posted slides on our 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 presentation lists factors that could cause our future results to be different than our current estimates.

One last note from me, we provided a data page with historical sales and growth rates for our newly organized US retail divisions and International regions.

You can find that data page under the investor section of our website.

With that I'll turn you over to my colleagues, starting with Don.

Thanks, Kris.

Hello everyone.

Thank you for joining us this morning.

Slide 4 summarizes our results for the quarter.

Sales totaled $4.1 billion, up 5%, and segment operating profit increased 6% to $769 million.

These results were led by our International segment including contributions from acquired businesses.

Net earnings totaled $549 million, and diluted earnings per share were $0.82 as reported.

These results include a net increase in the mark-to-market valuation of certain commodity positions and grain inventories along with a one time tax benefit and restructuring charges.

Excluding these items affecting comparability, our adjusted diluted EPS would be $0.66.

This was a bit better than we planned thanks to strong International performance that benefited operating profit and contributed to a lower underlying tax rate.

Slide 5 shows the components of our net sales growth.

On an as reported basis, net sales increased 5% with growth driven by acquisitions.

Pound volume contributed 9 points of growth in the quarter, sales mix and net price realization subtracted 2 points of sales growth and foreign exchange also reduced net sales by 2 points.

Excluding acquisitions, net sales were 1% below year-ago levels as reported, and up 1% in constant currency.

Slide 6 details net sales performance for our newly organized US retail divisions.

In total, net sales declined 1%, including the impact of merchandising spending to support new items launches and sharper price points on certain established products.

Pound volume was 2% lower in the quarter.

This was a sequential improvement from the previous quarter and it included steady improvement through the last three months.

Sales for our Bakeries and Food Service segment declined 2% in the first quarter.

Pound volume was up 2%, but that growth was offset by negative price realization and mix.

Hot breakfast items, snacks and baking mixes led our sales performance in the quarter.

As shown on slide 8, our first quarter International net sales grew 36% on a constant currency basis with growth across all four regions.

In Canada, sales increased 28% including the acquired Liberte Yogurt business.

Sales for the region combining Europe, Australia and New Zealand increased 51%.

This top line performance reflects the addition of Yoplait International and good gains by Nature Valley in the UK, Haagen-Dazs in France and Old El Paso in Australia.

Sales in the Asia Pacific region increased 20% led by China.

In Latin America, constant currency sales increased 20%.

This was before Yoki which will begin contributing to General Mills' sales and operating profits in our second quarter.

Excluding acquisitions, International constant currency sales increased at an 8% rate in Q1.

In the first quarter our underlying gross margin declined 40 basis points to 38.2%.

This excludes the impact of mark-to-market valuation for certain grain inventories and commodity hedges we'll use in future periods.

The addition of Yoplait International accounts for the majority of the underlying gross margin decline.

The remainder reflects higher input costs.

While grain costs have gone up this summer we're still estimating 2% to 3% inflation for General Mills in fiscal 2013, well below last year's 10% inflation rate and we're now roughly 75% covered on our commodity needs for the fiscal year.

Slide 10 shows our first quarter operating profit growth split out by segment.

US retail profit was 2% below year-ago levels, mirroring the volume trend.

Advertising expense was down 13% in the quarter, as our marketing spending was weighted towards promotional activity this period.

International profit increased 56%.

That includes incremental contributions from Yoplait and a 17% increase in advertising spending.

Excluding acquisitions, profits still increased at a double-digit rate.

Bakeries and Food Service profit grew 10% in the quarter reflecting pound volume growth and higher grain merchandising earnings.

After tax earnings from joint ventures were lower in the quarter.

Primarily reflecting input cost inflation and unfavorable foreign exchange for CPW.

On a constant currency basis, CPW sales increased 1%, with double-digit sales growth in emerging markets largely offset by category weakness in Western Europe.

Constant currency sales for Haagen-Dazs Japan grew 4% led by new products and distribution gains.

Completing our review of the income statement, corporate unallocated expenses excluding mark-to-market effects were up $11 million in the quarter, primarily due to higher pension expense.

The effective tax rate for the quarter was 22.7% as reported, well below last year, due to a one time non-cash tax benefit from the restructuring of a subsidiary which resulted in a reduction of deferred tax liabilities.

Excluding items affecting comparability, our tax rate was 31.4% this year, compared to 32.4% a year ago.

We still see our full year underlying tax rate running about 33%.

Average diluted shares outstanding were essentially flat in the quarter.

For the full year we continue to target a net reduction in average diluted shares outstanding.

Turning to the balance sheet.

Let me first answer a likely question.

The large increase in cash on our balance sheet is the funding for Yoki.

We funded $851 million of the $940 million purchase price with cash.

Since we report our Brazil business on a one month lag, this cash was still reflected on our balance sheet at the end of the quarter.

With the Yoki acquisition closed, and the maturity of a long-term debt note earlier this month, our cash balance today has returned to a more normalized level.

In a quarter where net sales increased 5% our core working capital declined 4%.

Our working capital efficiency continues to translate into improved operating cash flow.

Over the last five years, our operating cash flow has increased at a 7% compound rate.

And growth in operating cash flow accelerated to 11% this quarter.

So with the first quarter completed we're on track to achieve our 2013 targets.

We expect to deliver mid single digit growth in net sales and segment operating profit on the base business with Yoki Brazil and Yoplait Canada contributing nine months of incremental sales and profits this year.

We expect to generate adjusted diluted earnings per share of approximately $2.65.

As reminder, our EPS guidance excludes mark-to-market effects, restructuring expense, acquisition integration cost and this quarter's one time tax benefit.

With that, I'll turn the microphone over to Jon for an update on our US Snacks business.

Jon?

Thanks Don.

Hello everybody.

It's a pleasure to be on the call this morning.

It seems that there's been a lot of investor interest in snack businesses lately so I'd like to give you an update on our US Snacks portfolio and the growth that we're seeing on our brands.

US consumers are snacking more than ever.

Consumers have changed what they grab for a quick refuel.

Instead of mindless munching, consumers are increasingly looking for options that provide real nutritional benefits.

It's no wonder that better-for-you snacks is the fastest growing segment in the snacks category.

We define this segment using a variety of Nielsen measured categories.

Retail sales increased 6% in fiscal 2012, to reach nearly $30 billion.

We see plenty of room for continued growth in this segment.

Reported net sales for our Snacks division have grown at an 8% compound rate over the past three years and were up 15% in fiscal 2012, so we're gaining share in this better-for-you segment.

Our Snacks portfolio is split into three distinct categories, grain, fruit and savory snacks as shown on slide 18.

In fiscal 2012 these three segments generated $1.6 billion in reported net sales.

We have a strong presence in traditional grocery stores where our pound volume grew 3% last year.

But the image majority of our Snacks volume is sold in the faster grown nontraditional food outlets such as mass merchandisers, club and dollar stores.

For example, club stores represent our largest nontraditional channel.

Our pound volume grew 8% there last year as our larger mega packs represent value to club store consumers.

We continue to bring product news and strong innovation to this channel.

Small store formats like dollar stores are a growth channel too.

Here we offer smaller packages at an attractive dollar price point that introduces new consumers to our brands.

Our regular size packages also sell well in these outlets making this our fastest growing channel with pound volume up 9% last year.

General Mills is the market leader in the $900 million fruit snacks category.

Category sales are growing at a 3% pace in the latest 12 months driven by increasing popularity of fruit snacks with all family appeal.

Last year we saw heightened competition from value players in this segment resulting in a share decline for us.

We expect to post renewed sales and share growth this year with a solid lineup of new products, including Mott's Fruit Snacks that appeal to kids and adults alike.

Our Mott's Medleys are made with real fruit and vegetable juice and provide 100% of the daily value of vitamin C with just 80 calories per serving.

We just launched this line and it's off to a great start.

The savory snacks category generates more than $2 billion in annual retail sales and has grown at a 9% rate over the past year.

We just launched several new flavors of our very popular Chex Mix.

We introduced a new product line, Pillsbury Baguette Chips.

These are made from baked bread.

They're great by themselves or with your favorite dip.

Of course, grain snack bars is our largest and fastest growing business.

We created this category back in 1975 with the launch of Nature Valley granola bars.

Today, the category generates $3 billion in retail sales and it's growing at a 5% annual rate.

Our sales are well outpacing the category, driving solid market share gains for us.

As you can see on slide 21, our dollar share of the category has increased 10 points over the past five years and through the first quarter of fiscal 2013, we've gained another full point of share.

We're growing our sales and the category by innovating.

We kept the original Nature Valley crunchy bars growing and we've added new flavors and formats.

In 2006 we launched the very successful Fiber One snack bar line and that unlocked a whole new level of market growth.

In fiscal 2012 we further expanded the Fiber One line with the introduction of 90-calorie brownies.

In one year, just two brownie flavors generated more than $100 million in retail sales.

To put that into context, one industry benchmark sets a standard of $15 million for successful new product introduction.

We're currently launching a 90-calorie chocolate chip cookie that's off to a terrific start.

We're also just launching new Fiber One Chewy Bars, available in kid friendly flavors like chocolate and peanut butter and jelly.

At just 100 calories per bar, they have the nutrition that moms love including 20% of the daily value of fiber and 10% of the daily value of calcium.

When it comes to grain snacks, Nature Valley continues to be our flagship brand.

Our newest variety is Nature Valley Protein Bars, which contain 10 grams of protein in each bar.

They contributed double-digit retail sales growth for the brand in fiscal 2012.

They're on track to be as big as Fiber One brownies in year one retail sales.

We have new flavors and formats of Nature Valley bars coming throughout the year, and we expect the brand to continue to lead our Snacks portfolio.

I've been talking specifically about our US Snacks division.

Of course, General Mills' Snacks business is much broader than this.

In small foods we market Cascadian Farm organic granola bars along with Larabars and Uber bars, which are great tasting, natural nutrition bar options.

Their retail sales have been growing at a double digit rate.

Food Should Taste Good chips have been a great addition to our natural foods offerings.

Our snacks are growing nicely in food service outlets too.

Net sales were up 11% in the first quarter driven by new product introductions and distribution gains at convenience stores and we're just beginning to tap into the possibilities for our snacks internationally.

Our US portfolio is an innovation pipeline for our international markets.

For example, the Nature Valley brand is available in nearly 80 markets around the world but we see many opportunities to expand our other snack brands into more international markets as the global middle class continues to expand and we gain scale in more emerging markets worldwide.

To summarize my comments this morning, the future is bright for General Mills' US Snacks division as consumers are snacking more and increasingly seeking out better-for-you options.

We're building on our history of innovation with solid new product introductions across our three product platforms.

We're also leveraging our strong brands in fast growing nontraditional food outlets which should drive sales and profit growth in the US and around the world in fiscal 2013 and beyond.

Thank you for your time this morning.

I'll now turn the call over to Ken Powell.

Thanks, Jon and good morning everybody.

You just heard about the terrific innovation that Jon and his team have going in our US Snacks business.

So I want to give you a quick summary of the business trends and the innovation that we're seeing elsewhere at General Mills.

Across our US retail categories, we're seeing pricing moderate and volume improve as we begin to lap last year's significant price increases.

As Don mentioned earlier, we still expect inflation in 2013, but at a rate well below the 10% we experienced in 2012.

So we do anticipate a more stable food price environment for consumers as we go forward.

We're seeing improving trends for our business as well.

In the first quarter, General Mills US retail pound volume declined 2% and demonstrated sequential improvement over last year.

Underlying gross margin for General Mills showed sequential improvement as well.

And we expect both our volume and gross margin trends to continue to improve in the remaining nine months of the year.

Our confidence reflects the fact that our categories are on trend with consumer demand for great tasting, healthy and convenient foods, all at a good value.

Because they're on trend, our categories are growing.

Each of our 10 largest categories generates at least $2 billion in annual retail sales.

And with combined sales of over $40 billion, even low single digit growth on this sales base is significant.

We're innovating to drive growth for our brands and our categories.

Let me give you a few examples.

The gluten free benefit of our Chex cereals continues to resonate with consumers.

Sales of new Apple Cinnamon Chex are off to a strong start.

We're reaching consumers with both traditional and digital advertising.

In combination, these activities drove a 23% retail sales gain for Chex in the first quarter.

Multi Grain Cheerios continues to post strong gains including the new peanut butter variety.

First quarter retail sales increased 19% and Cascadian Farm is the number one granola brand in America, organic or otherwise.

We've just added an ancient grains variety and increased marketing support, helping to drive an 11% increase in retail sales this quarter.

For our cereal business in total, we experienced a rare decline in sales this quarter as merchandising levels were below the year-ago period, but we expect our growth momentum to resume in the second quarter, and we continue to expect sales and earnings growth for Big G in 2013 in total.

The first quarter sales decline for our US yogurt business overall masks some good progress made in this period.

Our Greek yogurt business turned in a good performance, led by our multi pack items.

Our Greek retail sales increased 85%, and we picked up nearly a full point of market share in the Greek segment this quarter.

As you know, our 2013 plans for Greek yogurt are just getting started.

New Yoplait Greek 100-calorie yogurt is just starting to hit store shelves across the country and while it's early days, we're very pleased with the initial reaction to this product.

We're just now activating our fully integrated marketing campaign and dedicated advertising behind this new line.

We've sharpened our merchandise price points on our core cup products.

Customer feedback has been very positive and broad-based execution is planned throughout the coming months.

While it's still early, volume trends on this key business are improving.

Across our US yogurt business in total, we launched 35 new items in the first quarter.

These new items have been well accepted by our customers and shipments are building.

In addition to Yoplait Greek 100, this includes expanded distribution of our Mountain High brand and the beginning of a phased US roll-out of Liberte.

So as we move into the second quarter, we're excited about our innovation and marketing plans in US yogurt.

Other first quarter highlights included good growth from Progresso.

We've launched new flavors of Progresso Lights and continue to focus our advertising on the great taste of our ready to serve soups.

And our new Recipe Starters sauces have enjoyed good customer orders to date.

In total, first quarter retail sales for Progresso increased 14%, and we added 3 points of market share in the ready to serve segment.

On our Totino's hot snacks business, a significant increase in media investment and distribution gains drove growth across our product line.

A combination of strong in-store merchandising support, digital media and contributions from new products drove market share gains on our Pillsbury refrigerated dough items, and Green Giant Seasoned Steamers are the latest addition to our frozen vegetable portfolio.

We'll begin to activate support for this seasonal business in the second quarter of the year.

In total, we launched over 70 US retail new products in the first quarter alone.

Account acceptance of these new items is in total above our expectations.

And we've got more innovation to come later in the year.

As we told you in July, our plans call for points of distribution to decline through the first quarter of 2013, largely reflecting the timing of our new product launches.

We expect improved distribution trends over the remaining nine months of the year and look to achieve distribution growth for the year in total.

As our new items reach good store level distribution, we'll be activating our media and marketing campaigns against these businesses.

We're ramping up activity behind our seasonal items such as soup, baking products and frozen vegetables and we continue to improve the efficiency and impact of our advertising dollars with targeted investments in digital and multicultural media.

We also have a variety of second quarter merchandising events planned to drive customer and consumer excitement.

We're expanding our Save Lids To Save Lives program which benefits breast cancer research.

Starting this month, more than 20 General Mills brands will carry pink lids on over 400 million packages.

This program extends to our Bakeries and Food Services business too.

We're partnering with sororities across the country to increase breast cancer awareness on campus.

In total General Mills will donate $0.10 for every lid redeemed, up to a maximum total donation of $2.5 million.

We also continue to expand our successful Box Tops For Education program.

Since the inception of this program, we've raised over $475 million for schools across the country.

These are just a few of the merchandising programs we have planned in the months ahead.

And with continued strong levels of marketing support and product innovation, we're excited about our prospects for growth in US retail over the balance of 2013.

Let me turn to our International segment.

In the first quarter, we delivered good performance in Europe.

Yogurt is our largest business there.

Fueled by sales of new variety of Calin, a functional yogurt high in calcium and higher levels of advertising across our yogurt portfolio, retail sales increased at a mid-single digit rate in the quarter and we added roughly a half a point of market share.

Our Europe yogurt results now include Ireland where we reacquired the Yoplait license in May.

Haagen-Dazs had a good quarter in Europe too.

Retail sales increased at a double-digit rate.

Our Secret Sensations product was a huge hit in 2012 so we've introduced it into new markets with a new flavor and a new package size in 2013.

We've also launched new varieties of pints and mini cups and integrated our marketing efforts across Haagen-Dazs shops and retail outlets.

For our Europe business in total, we're pleased with our performance.

Our growth in this region continues to outpace results for many of our multinational food peers.

We now have a great branded position in the important European yogurt market.

And our other key categories of super premium ice cream, Mexican meals and grain snacks are all 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.

In Canada, yogurt is a $1.4 billion category and over the last five years sales have been growing at a 7% rate.

In our Canadian yogurt business, we're increasing household penetration on our Liberte brand with distribution gains, new products and television advertising for the first time in Liberte's history.

And earlier this month, General Mills assumed the Canada Yoplait business from the previous licensee.

We're planning significant levels of investment behind the Yoplait brand in Canada including new product innovation, improvements on established products, and increased advertising.

Together, our Liberte and Yoplait brands hold a 35% share of category sales in Canada.

With Yoplait added to our business, we're projecting well over $1 billion of retail sales in Canada this fiscal year, making us the fourth largest food manufacturer in the country.

As you know, we're also working to expand our business in emerging markets.

We have a large business today in greater China and we continue to see robust growth there.

First quarter sales in constant currency grew at a strong double digit rate.

This performance is being led by Haagen-Dazs and our line of Wanchai Ferry frozen dim sum items.

While the overall Chinese economy may be slowing a bit, the demand for branded consumer food products continues to expand.

Increasing numbers of Chinese consumers want foods that offer quality, convenience, nutrition, and taste, all at a good value.

For our business in China, we're seeing robust growth in both existing and new cities.

So we expect demand for our products to remain strong in this important market.

Our growth in India is being driven by our new whole wheat and premium varieties of Pillsbury Atta flour, Haagen-Dazs Secret Sensations and contributions from our recent acquisition of Parampara Foods branded meal starters.

In Brazil, the acquisition of Yoki makes us very excited about our growth prospects.

Yoki products are quite popular with Brazilian consumers and hold leading market share positions in growing categories and our integration efforts are off to a great start.

Given Yoki's terrific breadth and scale, we're integrating General Mills Brazilian employees, products and systems into the Yoki business.

We're just one month in and we're already invoicing our customers as a combined Company.

And the combination of Yoki and General Mills makes us the 15th largest food Company in Brazil, significantly expanding our scale in this important market.

We'll look forward to reporting back to you on the growth of this business starting in the second quarter.

So with that, let me summarize today's General Mills update.

Our first quarter performance was broadly in line with our expectations.

Volume and gross margin trends are improving and we launched over 100 new products.

In the second quarter, we'll support both our established and new items with strong levels of media and merchandising.

And both Yoplait Canada and Yoki will begin to contribute to our net sales and operating profit.

For the full year, we're on track to deliver our sales and profit targets.

More broadly, we see our business portfolio better positioned than ever to deliver balanced global growth for shareholders in the years ahead.

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

With this, I'm going to open the call for questions.

Operator, would you please get us started?

Thank you.

(Operator Instructions)

Bryan Spillane, Bank of America-Merrill Lynch.

Hi.

Good morning.

Ken, just a question.

You had a lot of new product innovation come through in the first quarter.

So I guess just two questions related to that.

First, was there any impact in terms of sales shift, meaning was there any inventory build or anything that would have sort of inflated sales a little bit more in the first quarter?

And then second, just early in terms of consumer uptake, consumer receptivity to the new product innovation.

Good morning, Bryan, thank you.

We started to ship most of those products in August and so you would have seen some build during August but I would say kind of progressively over that month, but I would say some build, but not a lot and occurring late in the quarter.

In terms of the consumer uptake, it's very early days but it looks like, for instance Progresso Recipe Starters looks like that's going to be good, it's off to a good start.

Obviously, the soup season is in front us, but our customers certainly like that product so we feel good about that one.

The cereals I think went in very well.

Got high levels of distribution, and we think that those will do well, and as we've said to you before, we'll have number of other and additional new cereals coming in January, so we feel pretty good about our new cereal lineup for the year.

All the yogurt items went in and it's early days for those but they're gaining distribution well.

Early returns on Yoplait Greek 100 is that that is developing very nicely.

We're quite pleased with how that one is going and that's really before the marketing impact really starts to hit on that new item.

So we like what we're seeing on that one as well.

And then Liberte is just starting a regional roll and so it's very early days on that and we'll report -- we'll give you more in Q2 on Liberte.

But generally, we feel quite good about how our new products are going in.

Thank you.

Ed Aaron, RBC Capital Markets.

Great.

Thanks for taking the question.

Just trying to get a better sense of kind of when and to what extent we should really start to see the traction build from the innovation and marketing initiatives that you've talked about.

Is it realistic to expect positive growth in your yogurt sales this quarter on both a reported and retail basis?

Well, our goal for the year is sales growth in Yoplait.

We'll see accelerating performance, improving performance as we go into the second quarter.

We have all these new items on-shelf.

We turn on the advertising and the consumer activity, so that will really begin to hit in the second quarter and we'll continue that in the third quarter, and so our goal would be to see sales growth there.

Thanks.

And then just one other one if I could.

You said a couple weeks ago that you still expected Q1 to be down in terms of EPS and it came in a bit better on International.

Did you not have maybe the visibility on that international performance at that point in time or am I just maybe being too literal about your comments at back-to-school.

A couple things broke favorably, two or three things broke favorably in the quarter that we don't get visibility until the end.

International had a strong quarter across a number of markets, China was a significant contributor for example.

But as you can imagine you're closing the books across 25 different markets and if they all break a little favorable it adds up, and that's really what happened in International.

So the broad strength of that business played through.

Then the other piece you saw in the tax rate, some of that was favorably impacted by International from an earnings mix standpoint.

But as you also understand, tax rate can be a little bit volatile just in terms of how you close out open audits and we have audits across states and different countries.

We closed those out during the course of the year.

We had some favorable audit closures in the first quarter that benefited the rate as well that again you don't have visibility to until those are settled.

So those are really the two big factors as you look at the first quarter.

And those two together contributed $0.03 or $0.04 to the bottom line.

Thank you.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

Hi, can I just make sure that I understand the mid-single-digit sales and operating profit growth guidance on the base business for the full year.

I'm assuming that that excludes acquisitions.

What I'm trying to understand is what the numbers were on an excluding acquisitions basis this quarter.

It looks as though organic sales growth was down a little bit this quarter.

And excluding the acquisitions, it looks as though operating profit may have been fairly flat although that's less clear, even with the decline in the advertising spending and the shipments of new products.

If that's right and maybe you can confirm that, then where does the acceleration in the top and bottom line come from for the rest of the year.

Are there particular levers, commodity cost inflation that's going to become more favorable going forward?

Thank you.

Alexia, just to clarify.

The mid-single digit sales operating profit is for our business as we entered the year, so it excludes Yoki, it excludes Yoplait Canada but it does include Yoplait International in total.

The reason we see it accelerating during the year is a couple of things.

As we said before and as Ken pointed to some data this morning, in the US as we see prices lap our increases in the industry's from last year.

We expect volume to stabilize and solidify.

We're starting to see that in the categories, so that will benefit us as the year unfolds.

Second is, as you point to, we do expect some deceleration of inflation, although I would caution that with the current drought and movement, there is some more pressure than we had originally anticipated come into the year.

That will play through in the latter part of the year.

We still are in that 2% to 3% range of inflation.

But obviously a bit more pressure given where the markets have moved over the last couple of months.

And then we expect to see continued strength in International as we alluded to, not only did it grow quite nicely in the first quarter on as reported basis.

But if you strip out acquisitions, top line grew 8% on a constant currency basis and so that provides continued momentum as the year unfolds.

And our Bakeries and Food Service business started the year well, 2% volume growth, 10% profit growth.

And that business again has some really solid momentum in some key customer and product line segments that we will benefit from as the year unfolds as well.

Great.

And then maybe the quick follow-up.

Could I ask about how you're seeing the category promotional dynamics in cereals changing.

It looks as though Post's price per pound has come down quite a bit in the last couple of months and how are you responding to that?

Yes, I mean, there's always movements quarter-to-quarter, Alexia.

I think the point that we want to make is for a variety of reasons.

Our pressure was quite a bit below what it was a year ago and this is all about timing really and promotional timing and we knew it was going to be low in June and July, and it was.

And so that will restore itself and rebalance as we move into the second, third and fourth quarters of the year.

So ours was low and our merch volume as a results was low year-over-year due to timing issues and that will be -- that will work itself back to a normal promotional profile here as we go into the next three quarters.

Great.

Thank you very much.

I'll pass it on.

Andrew Lazar, Barclays.

Good morning.

Good to see volumes for your categories and for General Mills starting to as you pointed out sequentially improve as pricing has kind of moderated.

I know there was a lot of discussion over the last couple quarters about the mystery about why volumes in general had been as weak as they were for the industry, and there were probably a lot of different reasons that were discussed, but the biggest one that most food companies talked about was just the pricing and that combined with the difficult consumer backdrop.

Based on what you're starting to see at least in some of your key categories, it sounds like you're basically getting at the latter point which is, it seems like it was primarily the pricing and as that moderates volumes sort of starts to come back.

Does that seem now with what you now see like the most realistic and sensible explanation for what we've seen these last couple quarters for the industry?

So, Andrew, I think as you know, that is our premise.

And we talked about that quite a bit at our year-end meeting in July and our view is that, okay, we're only a quarter in but based on the data we're seeing, our view is that that is -- the data is confirming our premise on what happened and what the outlook is going forward.

Clearly, last year with very high inflation in the industry, over 10% for us, and all the pricing, there's no doubt that that was the biggest single factor and consumers responded as we predicted they would with lower unit volume of sales.

So I think we had a chart in our presentation this morning that demonstrated very clearly that as we begin to sequentially lap that period of time, we're seeing the price comparisons moderate and the unit volumes improve for our category, and we are seeing that as well in our business.

Now, this is not a perfect science and I think it will -- but our belief, our strong belief is that we're going to continue to see that sort of stabilization in consumer prices and recovery of demand as we progress throughout the year.

I appreciate that color.

And then just a quick follow-up.

Don, I apologize if I didn't get this right.

Did you mention at the outset that for overall corporate General Mills that organic sales were up 1% in the quarter, and if I got that wrong I apologize?

For overall 1% on a constant currency basis, minus 1 as reported.

We had a larger than usual drag from Forex this quarter.

Thanks very much.

Jason English, Goldman Sachs.

Hey, guys, thanks for the question.

I want to go back to the full year guidance of mid-single digit sales growth.

Thanks for the color on kind of what that encompasses.

I was thinking about that, your base business comment suggesting purely organic, and correct me if I'm wrong, but that does include the M&A contribution in the first quarter from Yoplait International?

Correct.

So if I were to strip that out and just think about sort of organic for the full year, can you give us any color on what you expect organic to be for the full year?

The only thing I'd size for you is that Yoplait International is about $1.2 billion in sales, we've got another couple months of it this year versus last year.

If I calculate right kind of based on International, looks like it's going to add around 1.5 points to the full year, so kind of thinking organically if I could think about mid single digits as 4 to 6, take out 1.5, I'm kind of now at 2.5 to 4.5 type range, am I way off base with that line of thinking?

I don't have my calculator in front of me to check your math, but it is obviously going to be a contributor.

I couldn't confirm the 1.5 points.

So on drivers of that, kind of getting back to Alexia's question and building on Andrew's there, you had about 1 point in the first quarter.

I think Ken mentioned that he's expecting pricing to be I think more stable which I'm interpreting to be kind of flattish as we progress through the year.

That's quite a bit of volume acceleration.

Where are you expecting to get that volume acceleration and what gives you the confidence that it's going to come through?

I think, Jason, as we continue to see these consumer prices moderate, we do expect volume to improve continuously over the course of the year.

So we are expecting that broadly across the portfolio.

We have a number of new products that we're going to be launching, as you know, and the early returns on those is that they're going to be good contributors.

So we are expecting our volume and sales trends to improve somewhat in US retail over the course of the year and we're very much expecting that to happen.

The other thing I would add, Jason, is as we talked in the first quarter, we saw 2% volume growth in brands on the go or Bakeries and Food Service, excuse me, offset by some index pricing that will unfold differently as the year unfolds, that will be additive to sales at the volume we feel good about.

International has consistently driven low single digit volume growth.

Again in the first quarter, as we said, 8% constant currency growth.

While we focus on pricing in the US, let's not lose sight of the fact that we still get pricing in International markets, again, more in developed markets, in the developing than the developed markets, but we're getting pricing in so there will be some continued benefit in International from pricing that we'll see as the year unfolds.

So really what we're talking about is turning our US RO business from what was negative 4% and 5% growth last year for volume up to flat and slightly positive as the year unfolds.

Thanks for the incremental color.

One last housekeeping question.

The interest expense was a little bit lighter than I thought this quarter, and it's probably just a mathematical error on my part, but it sounds like the balance sheet moved around a little bit post the end of this quarter.

Can you update us on our expectation for interest expense for the full year?

We expect interest expense to be up low single digits inclusive of obviously the acquisition of Yoki.

Obviously we're getting a little benefit from the lower short-term rates.

I think as probably everybody is because we think they'll stay low for a while and you might have seen a touch of that come through in the first quarter.

Great.

Thanks a lot, guys.

I'll pass it on.

Eric Katzman, Deutsche Bank.

Thanks.

Good morning, everybody.

A couple of questions.

I guess following up on the Alexia, Andrew, Jason theme, isn't the fact that the promotion was more aggressive in the first quarter one of the reasons why the core sales were a bit lower and you kind of expect that to moderate and that's what's also going to be a contributor to sales?

Eric, maybe to clarify a little bit, when you say the promotion was more aggressive, are you talking about category promotion or competitive?

I thought you said, Ken, that you had -- you cut back on advertising which is an SG&A item but you promoted more aggressively which limited your net pricing contribution in the fiscal first quarter.

Right?

Yes.

Okay.

So -- go ahead.

I mean, what I would say is actually in yogurt, for instance, we promoted more aggressively in the first quarter.

We saw that -- we saw sequential improvement in core movement over the course of the quarter and we think that those core brands will continue to improve as we get uptake on that activity.

And then we'll add new products to that and we think that that combination will lead to continued improvement in our yogurt business.

In our cereal business, for instance, as I said, our merchandising activity was light compared to year-ago and that led to merch volume declines.

And so we'll see a more normal level of merchandising in cereal as we go over the -- into the second and third quarters and that will we believe result in strengthening volume in that business.

So it's really, Eric, in the first quarter there were a number of moving parts on the merchandising front.

As we move into the second quarter, we expect solid levels of merchandising, good levels of new products, and that in combination is going to lead to stronger unit volume.

Okay.

Second question.

Now that we have all outlet data theoretically that's supposed to be a bit better kind of indication on consumption.

And yet, for like US retail, the IRI Nielsen data actually showed some pretty significant weakness in your business.

I got a bunch of calls from investors worried about your results for the quarter based on that.

And yet your volume was only down a little bit, a couple of points, much better than I think the IRI or Nielsen data showed.

What is the difference?

Maybe this gets back to Bryan's question initially.

Well, I think some of it is just the timing of shipments of new products and so some pipeline building in the latter few weeks of the quarter.

And some of it I think, Eric, is merchandising pressure across some of our categories in the first quarter which was not where we wanted it to be and so we saw weaker incremental volume for merchandising in those categories and we expect that to -- we expect that balance to be restored as we move into the second and third quarter.

Okay.

And then last question, Don.

On Yoki, you had -- now you've acquired the business.

Can you give us maybe a little bit more color on the -- kind of the mix impact from that?

When Yoplait was brought in, the mix shift in International segment was a massive negative.

How does Yoki impact the segment's mix and also is there any adjustment to assumed goodwill and the P&L effect of that with it coming through?

Yes, we'll obviously give more color when we close Q2 and we have a quarter of results in our books but let me give you a little bit of flavor now.

As we talked before, Yoki is about a $0.5 billion business.

It will be in our results for three quarters of the year.

It does drive a low double digit operating margin.

Now, that is on a -- if you will, on an operating basis.

We will have some depreciation step-up, inventory step-up, some transaction costs this year, some intangible -- small bit of intangible amortization as well that will be a drag on the results, non-cash drag, but a drag on the reported results.

And that combined with obviously the acquisition cost is what leads to the EPS dilution expectation of $0.02 to $0.03.

But from an operating standpoint you can think about it as a $500 million business that drives low double-digit cash margins for us.

As far as kind of within the P&L, as you can imagine, it's an emerging market business.

Its delivered margin, gross margin excuse me is lower than our Company average and so you will see some dilution.

Again, we'll give more quantification of that when we release Q2.

And its products I assume, are they a negative mix driver again in the segment, just like Yoplait was?

Negative mix in what respect?

In that I guess like if you've had, I don't know, a 20% negative mix swing as you've reported International, including Yoplait International.

Price?

Price mix.

That's a good question.

I don't have an answer off the top on that one.

Maybe Kris --

have to follow-up on that one.

Thanks.

I'll pass it on.

Ken Goldman, JPMorgan.

Hi, good morning.

We're seeing at least anecdotally on shelf some of your larger competitors in Greek discounting somewhat heavily right now.

First of all, is that putting some more pressure on you if you're seeing the same thing?

And second, are you doing anything maybe to counter that?

I realize you're putting in a lot of new products and so forth.

But doesn't that put a little bit more pressure on you or maybe not -- is that not really the way to look at it given you have so many new products on the shelf and maybe you'll disrupt the category a little bit.

I'm just curious how you think about pricing in Greek right now and what's happening.

So, Ken, I think that our expectation for the Greek segment as it really becomes mainstream and there's capacity and scale and everybody -- we're all kind of focusing on productivity and all the stuff that we do really well.

Our expectation is that those prices will come down over time and I think that we're seeing that.

I think that's sort of natural in a way, almost inevitable.

Having said that, we love those -- typically, over $1 price point on average for Greek, they look really good to us, especially compared to many other yogurt prices which kind of $0.50, $0.60, $0.70.

So we like the price point.

We think that now being deeply into it with multiple product offerings and more to come, we think that's going to be a good business model for us and whether it's $0.99 or $1.09 or whatever it is, we think we can do just fine with that.

Thanks.

And then one more.

You dropped advertising and media spending by 7% this year and that was on top of I think a 7% increase a year ago.

So just using simple math for a second, your dollar ad spending is essentially flat over the last two years but your sales are up 15% over that same time.

I realize it's just one quarter and you're taking ad spending up again shortly.

Still, that's a quarter of the year where you deemphasized ad spending pretty heavily.

Is that something maybe we should expect more of going forward where you're a little more strategic from quarter to quarter and whether you're putting money into deals versus consumer marketing, or is this sort of a one off where maybe it just happened to be with the timing of when the new products were.

There were a lot of moving parts in that question.

Let me -- it's a good question and I understand the intent behind it.

Let me sort of -- let me make a first comment.

The sales increases over the last couple years largely driven by that kind of inflation driven pricing, so I just think that it's important to keep that in mind.

Stepping back a bit, I think the larger context for us on advertising is that we've increased our levels very, very significantly over the last several years.

I think we're up close to 50%, I think some of the tracking services have us now as the largest advertiser in the industry, and we have very, very solid shares of voice in the vast majority of our categories, and in many cases they're increasing.

So we're very committed to advertising.

It drives our business.

I think as we said several times over the last year, our goal at these levels is to kind of in line with sales or be roughly at this level.

And you're right, as we enter a period where there's the merchandising environment is very dynamic, as we saw in the first quarter this year, we do want to make sure that we're paying very close attention to what we need to do to be in the right value zone in terms of price point and merchandising.

I think it's really important for us to do that, given the mindset of the consumer these days.

So we are going to be making tactical tradeoffs there.

But I will tell you, having said that, our advertising is and will be at very, very high levels and very competitive, very strong share of voice.

But we want to keep that value component, we want to be focused on that as well and make sure that our products are in the right zone.

Thanks very much.

Priya Ohri-Gupta, Barclays.

Good morning.

Thanks for the question.

Wanted to see if your thought process was still consistent around the increase in the quarter and whether you're planning to term a portion of that out by coming to the markets?

And what that percentage of the one, one increase could be.

Thanks for the question.

We did see obviously a marked increase in our commercial paper balance over the term, given that we were prepping for the Yoki acquisition.

We do expect to term it out.

Whether it will be later this calendar year or early next calendar is still to be determined.

But either way, we will be in the market sometime during this fiscal year to a fairly sizable amount.

Okay.

Should we assume that the bulk of that gets turned out or should we still anticipate some of it gets paid down over the course of this year?

It will get paid down.

It's not all going to be termed out.

We will absolutely pay down the debt, a portion of the debt.

As we said when we announced Yoki, our plan, as we did with Yoplait, as we will with Yoki, is that we're going to finance this at our normal capital structure mix, which is a combination of cash and debt, so you will see the debt being paid down over the course of the year.

Okay.

That's helpful.

Lastly, as you think about the M&A environment, just broadly, can you speak to what sorts of assets are available at this point in time and sort of has that number decreased and how are valuations looking?

We continue to be very active in looking.

We've obviously done some pretty sizable, and even not sizable, strategic deals in terms of our businesses, whether it's Yoplait, Yoki, which got us good positions in the category and in a certain critical geography, and with Food Should Taste Good in the US, which put us in a very different position in a category, and particularly around a channel and a consumer need.

So we like what we've done to date.

They all help grow our business in key platforms and certainly help accelerate our business, our growth as well.

So we'll continue to look as we've talked before.

Emerging markets is a focus for us.

We have a great organically growing business in China.

We now have an equally sizable business in Brazil with a similar growth profile.

But there are other emerging markets where we have small footprints, India, for example, that we look to, we'd be looking to increase our size.

In the US, and more broadly developed markets, John outlined a compelling case for better-for-you snacking and that's an area that's of intense interest to us, and it's where we've added some businesses over the last couple years and we'll continue to look in that area.

Thank you very much.

Robert Moskow, Credit Suisse.

Hi.

Thanks for the question.

Don, you mentioned more pressure coming from the drought on your cost side in the back half of the year.

Can I understand like you're talking about the cost I guess of the 2012 calendar year crop.

Does that cost of the crop being higher flow through into your fiscal '14 as well, because you kind of have to wait for next year's crop before you can get kind of a lower cost of grain?

Maybe I'm overstating the impact because I know your grain is only 5% to 10% of your cost.

I'm just trying to figure out if the drought will flow through into fiscal '14.

It's a good question, Robert, and I'll give you some thoughts and I think Don wants to jump in as well.

And I think the short answer now is it's something that we have to be thinking about because we will -- with the drought in grains like clearly corn, we'll exit the year with very low stocks and so very low stocks would signal that even more volatility than usual in the corn crop, depending on how it starts to develop.

It's too early to say.

We kind of have to see how things go around the world and just how the harvest begins to develop as we go into F'14.

We'll have to watch that very, very closely.

Don, I don't know if you would add anything to that.

As I mentioned, we had 75% coverage this year so to the extent we have an impact, as I mentioned, it would be as the year unfolds in the back part of the year, which is putting a little bit of pressure on that part of the year but within the range that we anticipated.

Obviously we're not going to give F'14 guidance but I think that Ken touched on a couple of the dynamics that we'd contemplate.

The only thing I wanted to jump in on is, Rob, thank you for remembering, it's a 5% to 10% of our inputs.

That's usually something I have to remind the market of.

Okay, let me ask a quick follow up if I could.

Meals are up I think only 2%, but Progresso was up much more than that.

Can you talk about what's down in meals and when do you think you'll lap those comparisons?

So soup, as you said, we had very strong start to the year in soup.

We've got a good proposition there with very good innovation and very good marketing, and so we have good momentum there.

Mexican food is progressing, is doing okay.

Our issue is skillet meals, helpers which are down right now.

We think we know what we have to do to correct what's happening in that business and that's an issue of the right value for the consumer and the right marketing message.

We don't think we're all the way to bright frankly on either one of those things right now.

But we think we know what we have to do to stabilize and restore momentum on that business, and obviously that's something that we're going to be focusing on here as we move into the balance of the year.

Okay.

Thank you.

We are up to time at this point.

So I think I'll just say those of you who are in queue I'm sorry we didn't get to you.

If I can be of help, please give me a call.

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

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