通用磨坊 (GIS) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the second-quarter 2013 earnings 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, December 19, 2012.

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

Please go ahead.

Thanks, operator.

Good morning, everybody.

So it's the week before Christmas and our numbers are good.

More on that in a moment, but first if I could, I want to make sure you've gone to our website.

We put slides there that shed some additional light on the progress we've made through the six months to date.

Our release is there too.

If you found them, that's great.

We do plan to make comments on the future today.

Slide 2 lists risk factors that could get in our way.

Let me now turn you over to Don, Ian and Ken.

I wish the happiest of holidays to you, your family and friends.

Thanks, Kris.

Good morning, everybody.

I'll second those holiday greetings, but I will keep my remarks to prose today.

Thank you for joining us.

As you see in slide 4, our second-quarter results are summarized there.

Net sales grew 6% to nearly $4.9 billion.

New businesses, particularly Yoki in Brazil and Yoplait Canada contributed 4 points of net sales growth in the quarter.

Segment operating profit grew faster than sales, up 10%, reflecting a higher gross margin and a 3% decrease in advertising and media expense in the period.

All three of our business segments posted operating profit gains.

Net earnings totaled $542 million and diluted earnings per share were $0.82, as reported.

Excluding certain items affecting comparability, our adjusted diluted EPS would be $0.86, up 13% from last year's second quarter.

Slide 5 shows the components of our net sales growth.

Pound volume contributed 7 percentage points of growth in the quarter.

That is primarily the addition of Yoki and Yoplait Canada.

Sales mix and net price realizations subtracted 1 point of sales growth.

Foreign exchange had no impact on sales growth for the Company in total.

Slide 6 shows net sales growth by segment.

For US Retail, pound volume and net sales grew 2% in the quarter.

This performance was led by our Snacks, Small Planet Foods and Meals divisions.

Net sales of our Bakeries & Foodservice business declined 1% with pound volume down 2% due to lower bakery flour sales.

These sales declines on indexed price items offset gains on cereal, snacks and frozen breakfast items.

The International segment net sales rose 19%, as reported, and 22% on a constant currency basis with good growth across all four geographic regions.

While these results do include contributions from Yoki and Yoplait Canada, our established businesses also performed well.

Excluding new businesses and foreign exchange, International sales increased 4% in the quarter.

Our gross margin improved 120 basis points in the second quarter, as reported.

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

Slide 7 also shows that excluding these effects, underlying gross margin improved 20 basis points, primarily due to lower levels of input cost inflation, HMM and good plant operating performance.

We expect our input cost inflation rate to tick up in the second half reflecting the impact of this summer's drought.

So we expect to be at the high end of our 2% to 3% inflation estimate for the full year.

We are now roughly 90% covered on our commodity needs for fiscal 2013.

Slide 8 shows second-quarter profit growth by operating segment.

US Retail posted a 9% increase driven primarily by lower input cost inflation and consumer marketing expenses below year-ago levels.

The International profit increased 4% in the quarter.

This includes an expense of $17 million associated with the transition of the Yoplait yogurt license in Canada.

Remember that this investment was built into our fiscal 2013 guidance.

Excluding this expense, International operating profit would have increased 17% in the quarter.

In Bakeries & Foodservice, profit grew 24% reflecting lower wheat cost year-over-year, favorable mix and increased grain merchandising earnings.

Earnings from joint ventures increased 14% in the second quarter to $33 million after-tax.

On a constant currency basis, CPW sales increased 3% with strong performance in the emerging markets partially offset by category softness in southwestern Europe.

Constant currency sales for Haagen-Dazs Japan grew 5% led by new products.

Completing our review of the income statement, corporate unallocated expenses, excluding mark-to-market effects, were $79 million.

That is above last year's second quarter primarily due to increased pension expense.

The effective tax rate for the quarter was 32.6%, as reported.

Excluding items affecting comparability, the effective tax rate was 32.8% compared to 33.7% a year ago.

This primarily reflects the timing of tax expense for the year.

We are still estimating our full-year underlying tax rate at about 33%.

Turning to the balance sheet, slide 11 shows that core working capital increased 8% in the quarter.

The majority of the increase is the addition of Yoki.

Excluding the impact of Yoki, core working capital grew modestly in the quarter at a rate less than sales growth.

Through the first half, cash flow from operations exceeded $1.3 billion, a 14% increase over last year.

Capital expenditures totaled $264 million through the first half, generally matching year-ago levels.

We expect full-year capital spending to be comparable to last year as well.

We are returning more cash to shareholders this year.

Through the first half, we have paid $434 million in dividends.

That is up 9% over last year reflecting our dividend increase.

We also repurchased approximately 12 million shares of common stock for a total of $479 million.

That is more than twice the value of share repurchases in last year's first half.

In the second quarter, average diluted shares outstanding decreased by approximately 1 million shares and for the full year, we continue to target a net reduction in average diluted shares outstanding.

Slide 13 summarizes our financial performance through the first half of the fiscal year.

Net sales grew 5%.

Segment operating profit grew faster than sales, up 8%.

Net earnings attributable to General Mills totaled more than $1 billion and diluted earnings per share were $1.64.

Excluding items affecting comparability, our adjusted earnings per share totaled $1.52, up 8% from a year ago.

These first-half results are ahead of consensus expectations and a bit ahead of our plans too.

This good start puts us firmly on track to achieve our key financial targets for fiscal 2013.

For the full year, we expect to deliver mid-single-digit growth in net sales, including growth for our established businesses and contributions from new businesses.

We expect operating profit to grow at a mid-single-digit rate too.

We now expect input cost inflation of 3% for the year, including some impact from this summer's drought in the second half.

We're also anticipating possible currency devaluation in Venezuela.

Including these factors, we are raising our EPS guidance a bit to a range of $2.65 to $2.67 per share.

That is on an adjusted basis excluding certain items affecting comparability.

With that, I'll turn the microphone over to Ian Friendly.

Ian?

Thanks, Don, and good morning, everyone.

I appreciate the chance to give you an update on our US Retail segment.

Our top-line trends improved in the second quarter.

Pound volume stabilized in September and October and increased at a mid-single-digit rate in November.

Net sales for the quarter increased 2%.

The acquisition of Food Should Taste Good, combined with solid established business performance, drove double-digit growth in our Small Planet Foods division.

Sales for our Snacks division also increased at a double-digit rate, led by strong product innovation.

Progresso soup and sauces paced growth in our Meals division.

Sales for our Frozen Foods division matched year-ago levels while Baking and Big G division sales declined modestly.

And while US yogurt sales declined, clearly the rate of decline is moderating.

I will provide you with more details on that in a few minutes.

As shown on slide 17, our second-quarter US Retail performance reflected good sequential improvement.

Volume, net sales and segment operating profit performance all improved versus the first quarter.

We've got a number of great initiatives in the market right now with more planned for the back half of the year.

I will highlight a few examples starting with some of our seasonal favorites.

The holidays are in full swing and we are hoping consumers bake up some favorite treats.

On our refrigerated dough business, our Let the Making Begin campaign is designed to inspire consumers.

Response has been terrific.

Baseline sales have increased for both Pillsbury crescent rolls and biscuits since we launched this campaign in October and we added over half a point of marketshare in November.

And Betty Crocker is back with her red hot holiday trends.

Tips for making a perfect 18 layer velvet cake, hidden surprise cookies and many other recipes are available online at BettyCrocker.com.

This campaign helped drive over a full point of Desserts marketshare growth in November.

Soup season is underway too and Progresso sales are growing.

Our new line of recipe starter sauces is off to a good start.

However, the primary driver of our year-to-date performance is our core ready-to-serve soup business.

We have added points of distribution and we have increased investment behind our taste-focused advertising.

In total, first-half Progresso retail sales increased 7% and we added 1.5 points of marketshare in the ready-to-serve segment, including half a share point in the second quarter.

Progresso has some great marketing and merchandising events planned for the second half of the year.

We are partnering with both Weight Watchers and the Biggest Loser TV show to help consumers shed those extra holiday pounds.

Our plans include strong advertising and in-store merchandising, as well as product placement in an upcoming Biggest Loser episode.

With the holidays here, consumers are making party mix snacks with our Chex cereals.

This year, we are sharing recipes for the microwave, so these snacks are ready in just minutes.

We are supporting this annual campaign with a strong combination of digital media and in-store merchandising.

And on top of this party mix activity, Chex gluten-free positioning continues to drive growth.

In total, first-half retail sales for the Chex franchise rose 14%.

We have got a strong second-half innovation lineup for our cereal business.

I will start with Cheerios, the largest franchise in the US cereal category, with a 13% share of total category sales.

Honey Nut Cheerios is the single largest brand in the cereal aisle.

We are expanding it in January with the launch of a medley crunch variety.

This new cereal has the heart health benefit and great taste consumers expect from Honey Nut Cheerios.

It also has a great texture with Os, clusters and flakes.

We think this is a terrific addition to the Cheerios franchise.

Slide 22 highlights our Cascadian Farm organic cereals.

First-half retail sales for this line increased 13%.

Cascadian Farm is the number one granola brand in America, organic or otherwise.

The Ancient Grains variety we launched in June is off to a good start and next month, we are adding a berry cobbler variety.

We're adding new varieties of our other popular cereal brands too.

Fiber One 80 Calorie chocolate cereal offers consumers 35% of the adult daily value of fiber and great chocolate taste at just 80 calories per serving.

And new Peanut Butter Toast Crunch builds on the success of our Cinnamon Toast Crunch franchise.

Now I'm sure you noticed that our first-half cereal net sales and marketshare were below year-ago levels.

Other players in the category had more merchandising activity in the first half of the year.

We've got more merchandising planned for the second half, including introductory support for our new items.

With a great lineup of new products and strong levels of marketing support behind new and established brands, we remain very excited about our US cereal business and we expect sales growth for Big G in the second half of this year.

Turning to the yogurt aisle, we are encouraged by recent trends on our Greek business.

Yoplait Greek 100 calorie yogurt was launched in August.

Distribution is ramping up nicely and all six SKUs are turning in the top third of the total yogurt category.

Our marketing campaign and dedicated advertising are now in market and on air and we are pleased with the initial results.

In fact, Yoplait's share in each of the most recent two months was 9% of Greek segment sales.

It is still early days for US Greek yogurt and we expect to earn our fair share of this market segment over time.

At the same time we are gaining share in Greek, we continue to see signs of stabilization for Yoplait original and Yoplait light yogurt, what we call our core cup business.

Remember that we improved these products and our merchandise price points are now better aligned with competitive levels.

As shown on slide 26, we are seeing a nice improvement in core cup unit volume turns as a result.

We have also launched innovative new items.

Fruplait has two times the fruit of original Yoplait, while Simplait is made from just six all-natural ingredients.

We have more new products coming in the second half to keep this momentum going.

We are launching new flavors of Yoplait Greek 100.

New Yoplait Pro-Force brings a combination of higher protein and great taste to the kids segment and we are bringing a new level of fun to the leading brand in the kids segment with Go-GURT's Twisted.

Our second-half plans also include regional expansion of Liberte Mediterranee, an indulging yogurt with higher fat content and the addition of Liberte Greek.

We'll support both productlines with a combination of digital and billboard advertising, along with product sampling efforts.

So we expect to see increasing momentum across our US yogurt business in the second half of this year.

In grain snacks, we continue to lead category growth with great product innovation and we plan to build on that record in the second half.

Slide 28 highlights several examples.

We'll be expanding our Fiber One franchise with the launch of Fiber One Protein bars.

They have at least 6 grams of protein per serving and 20% of the adult daily value for fiber at 140 calories or less per bar.

We are adding new varieties to our Nature Valley and Cascadian Farm productlines.

We are also launching Green Giant vegetable chips.

These chips contain at least 16 grams of whole grain per serving and with flavors like multigrain sweet potato and roasted vegetable zesty cheddar, they really taste terrific.

We continue to see strong performance by our natural and organic snacks.

First-half retail sales for Larabar, all natural fruit and nut bars, increased at a double-digit pace and we gained marketshare in the health and nutrition bars category.

In January, we are adding a cappuccino flavor to the Larabar lineup.

Our new Food Should Taste Good business is also doing great.

We have focused on expanding distribution for these great-tasting snacks.

Fiscal year-to-date shipments are up double digits.

By leveraging General Mills' sales and supply chain, we expect continuing distribution gains for this business over the balance of the year.

Across our US Retail business, we have strong levels of marketing and in-store merchandising supporting our brands.

As we have discussed with you before, our spending this year is weighted toward in-store merchandising.

This promotional support is designed to drive awareness and trial for all of our new products.

We have sharpened our merchandise price points for certain productlines based on competitive merchandising levels in those categories.

These actions are working for us.

Our US advertising expense is below strong year-ago levels through the first half and we now expect our media expense to be down for the year in total.

This is due in part to this year's tactical shift on merchandising.

It also reflects ongoing cost discipline, which helps us lower media expense while maintaining very competitive media pressure against the consumer.

In fact, as we looked at Kantar measured media spending across our US categories over the latest 12 months available, our tracked advertising dollars are up and at a rate well above the 1% growth in ad spending across our categories overall.

So our share of voice with the consumer has been growing.

Across all of US Retail, we are launching over 100 new products in 2013, but it's not just quantity that matters.

We are excited about the quality of our new product lineup.

So we like our prospects for growth in US Retail over the balance of 2013.

With that, let me wrap up my overview of General Mills US Retail business.

We are encouraged by the recent trends we see in the operating environment.

Across the US food and beverage industry, volumes have improved as pricing has moderated.

We have terrific product innovation in market and we are supporting our brands with strong levels of in-store merchandising, advertising and other consumer-directed marketing.

We are on track to meet our low single-digit sales growth target in 2013 and are continuing HMM initiatives and cost management discipline of protecting our margin.

So we expect our operating profit to grow faster than sales for the year.

Thank you for your time this morning.

I will now pass the microphone over to Ken.

Thanks, Ian.

Good morning, everyone.

You just heard Ian describe some of the product innovation and marketing efforts we have underway in US Retail and I want to give you now an update on the other two segments, starting with Bakeries & Foodservice.

As you can see on slide 34, net sales for this segment are down 2% through the first half.

That is primarily due to negative price realization.

We had lower bakery flour prices in the first half.

However, first-half operating profit is up 18% driven by lower wheat costs in our cost of goods, favorable mix and grain merchandising earnings.

This 18% profit growth builds on a strong track record of earnings growth for this segment.

Over the past five years, segment operating profit has grown at a 14% compound rate.

Grain merchandising activities have played a part, but primarily this growth reflects our strategy of focusing on the most profitable products in the fastest-growing food-service channels and we continue to follow this winning strategy in fiscal 2013.

For example, our sales to US convenience stores are captured in this business segment.

We have a great lineup of new snack products hitting C-store shelves, including Nature Valley Protein bars, Gardetto's snack crackers and Betty Crocker Dessert Bites.

We are launching Yoplait Greek 100 yogurt in a variety of food-service outlets and we recently introduced a Greek version of Yoplait ParfaitPro.

As you can see on slide 36, this product gives food-service operators an easy way to prepare layered yogurt parfaits.

Sales for Yoplait ParfaitPro have been growing nicely and the addition of a Greek variety will keep the momentum going.

Sales for our frozen breakfast products are increasing at a double-digit pace led by our line of Pillsbury breakfast items in school cafeterias and we recently introduced a mini cinnamon roll in Burger King restaurants nationwide.

Turning to our International segment, first-half net sales are up 22% as reported, including new businesses.

Segment operating profit is up 24%, including a 3% increase in media spending.

On a constant currency basis, first-half International sales are up 28%.

We are posting good growth across all of our geographic regions.

Sales in Canada are up 21%, reflecting the addition of the Liberte and Yoplait yogurt businesses.

In Europe, sales grew 23% with good performance on the Yoplait, Haagen-Dazs and Nature Valley brands.

In the Asia-Pacific region, our business in China is showing 13% constant currency sales growth.

And in Latin America, sales have doubled year-to-date reflecting the addition of Yoki.

So let me say a bit more about each of these regions.

In Canada, we are excited about the growth opportunities for yogurt.

Category sales are up 9%, so far this fiscal year.

Our Liberte and Yoplait brands combined represent one-third of this $1.4 billion market.

We assumed the license for Yoplait in Canada in September.

In the short term, we did experience some disruption in the business as the previous licensee transitioned to co-pack Yoplait while also launching their own yogurt product.

Now that much of that disruption is behind us, we are launching our first innovation in the market with a 50 calorie Greek yogurt offering, the first of its kind in the Canadian market.

Liberte yogurt continues to perform well.

The brand now holds a 10% dollar share of the yogurt category, gaining nearly 2 points of share year-to-date with retail sales up 35%.

We'll invest behind both the Yoplait and Liberte brands with increased advertising and new product introductions in the second half.

Our yogurt business in Europe is also performing well.

In France, we have launched new varieties of Calin.

This is a yogurt high in calcium and we've introduced a Greek style line extension.

We have expanded these products to the UK market too and we are supporting both new and established yogurt products with higher levels of advertising.

In total, our year-to-date retail sales in both markets have increased at a mid-single digit rate.

Also in Europe, we are seeing good growth on Haagen-Dazs.

Year-to-date retail sales are up 15% on this business.

Nature Valley snack bars are growing nicely too.

Retail sales are up 33% so far this year and this includes the recent launch of Sweet and Nutty bars in the UK.

We see great opportunities to increase household penetration for our brands in Europe and we continue to like our growth prospects in this region.

In China, we are on track to deliver another year of double-digit sales growth.

Our Haagen-Dazs team just completed a terrific mooncake event.

In total, net sales for Haagen-Dazs are up 20% through the first half of the year.

Sales for Wanchai Ferry frozen foods are up 6% year-to-date.

We are increasing distribution on existing products and expanding into high-growth segments like wonton, mantu and frozen noodles.

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

For our business, we are seeing good growth in both existing and new cities.

In Latin America, the highlight is certainly our Yoki acquisition.

Our new brands have strong positions in Brazil with the Kitano and Yoki brands in more than 70% of Brazilian households.

We are posting double-digit sales growth in some of our largest categories, including popcorn, seasonings and side dishes.

Let me also say a quick word about our Cereal Partners Worldwide joint venture.

Through the first half, constant currency net sales were up 2%.

We are leveraging our large core brands like Chocapic and Cheerios and we recently launched Chocolate Cheerios in the UK.

The cereal category is posting growth in markets around the world.

While there is some category softness in southwestern Europe, sales in other established markets like the UK and Mexico are up and the category is growing even faster in emerging markets in Latin America and Asia.

CPW holds a 23% value share of the cereal category outside of North America and we continue to like the growth prospects we see for this venture.

So with that, let me summarize today's update on fiscal 2013.

We had a good second quarter and first half, fueled by strong operating profit gains across all three segments of our business.

As we look ahead to the second half of the year, we have incorporated a bit more input cost inflation and an expectation of currency devaluation in Venezuela and that is built into our outlook.

Our second-half plans also include a very good slate of new product introductions and robust marketing and in-store merchandising plans designed to support both new and established products.

Our full-year EPS guidance is up a bit to a range of $2.65 to $2.67 for fiscal 2013.

Let me briefly shift from talking about the fiscal year to the calendar year.

As we get ready to ring in calendar 2013, the operating environment and more broadly, the global economic environment, present a great deal of uncertainty.

But, to be frank, 2012, the calendar year just ending, was no walk in the park either and yet, our brands and our business continue to grow.

As shown on slide 46, over the last four quarters, our sales grew with contributions from established productlines and new businesses.

Our sales outside the US grew even faster, consistent with our strategy of expanding our business in developed and emerging international markets.

Our operating profit increased 7% to exceed $3 billion and our earnings per share grew despite headwinds ranging from sharply higher input costs to low interest rates and the resulting impact on calculated pension expense.

Our operations generated more than $2.5 billion of cash over the past four quarters and a 23% increase from the prior year.

Cash returned to shareholders through dividends and share repurchases grew 21% to exceed $1.4 billion.

And we generated an 11% total return to shareholders over this same time period.

So as I have said before, in challenging times, it's good to be in the food business and we are committed to generating another good year of growth for our business and to create value for our shareholders again in calendar 2013.

So that concludes our prepared remarks this morning.

So operator, I will ask you to open the line for questions.

(Operator Instructions).

Andrew Lazar, Barclays.

Good morning, everyone.

I'm sorry upfront, I can't pose my question in a more creative, poetic form, but I will give this a shot.

You are forgiven.

Yes, I just wanted to touch briefly on sort of the price mix outlook for US Retail as we go into the second half.

Could you repeat that, Andrew?

You --

Sure.

I wanted to touch on price mix for US Retail in the second half.

Pricing was flat in the second quarter, down sequentially from up 1 in the first quarter, I believe, and obviously you are lapping some pricing and you've got your increased focus on some key price points in certain categories that you've discussed.

Would you anticipate price remaining flattish in this segment in the fiscal second half as you still have inflation to deal with?

Or is there a concern or plan that price mix could turn even modestly deflationary given the positive volume response you are seeing in response to your strategy?

Hi, Andrew.

It's Ian.

I think over the entire portfolio, we would expect it more to be relatively stable over the second half.

There may be some select categories where it will be modestly down, primarily in categories where our merchandising efforts are more back-half-loaded, but I think the general trend for us would be relatively flat.

Got it.

Okay.

And it's hard to say, but your anticipation of kind of what you are seeing more broadly in this space around -- as the industry starts to lap some of the pricing, we are seeing volumes come back a bit, which is probably nice to see on a bunch of different fronts.

But so far, would your anticipation be that the industry is still likely going to have some inflation?

That there is a general sort of rational behavior as best you can tell?

I know it changes a lot by category.

Yes, what we are seeing still is a, I think over the entire category through December and what I expect in the second half as well is very modest, but inflationary trends, both on the consumer prices as we see it so far.

And also as you look at input prices, I think some of the impact of the drought will, obviously, weigh on all competitors' minds as we look at what can be done in the market.

So I think stability to very, very modest inflation is probably a decent outlook.

Great.

Thanks very much.

Eric Katzman, Deutsche Bank.

Hi, good morning.

Happy holidays to everybody.

A couple of questions.

I guess, first one, I will lob this one into Don.

A number of your competitors have changed their pension accounting to mark-to-market.

And that has been pretty materially beneficial to their reported earnings.

I recognize it is not necessarily a cash item near term, but do you have any estimate on what if General Mills were to go to a mark-to-market approach what that would do to your -- roughly what that would do to your reported EPS?

No -- Eric, I appreciate the question.

I don't have any figure for you in that regard.

We are very satisfied with our pension accounting.

We try to be very clear externally in terms of what is moving that expense number and, obviously, make clear, as you alluded to, that it is a non-cash number and so we will continue to provide that clarity, but we have no plans at this time to change our reporting practices.

Okay.

And then with the -- I guess then to switch over to just Yoki for a second.

With the devalue or with the Brazilian real depreciation and I guess maybe the expectation of Venezuela now devaluing that you have put in, are you -- I guess how much of a drag between the Yoki dilution and then the deval, how much of a drag is that on earnings this fiscal year?

Well, let's separate the two because, with Yoki, it would strictly be translation.

And our total expectations for foreign exchange is year-to-date it has been relatively neutral on EPS and we don't see that necessarily changing as the year unfolds for our total portfolio.

Venezuela is a different issue.

Because of the accounting treatment for a hyperinflationary country like Venezuela, there is a balance sheet implication as well and so as we have seen consensus analysts' estimates of what that devaluation will be, it is estimated in the range of 45 to 50 from the studies -- 45% to 50% from the studies we have seen, and it is again expected to happen sometime in early calendar 2013.

We've estimated the impact to us and factored that into our outlook and it will be a couple of cents drag on our EPS this fiscal year.

And so no -- I don't know, maybe I missed this, but no change to what Yoki's dilution was initially expected?

No.

Okay.

And then last question and I will pass it on.

I guess to Ian, you noted that the yogurt I guess retail sales were down 5% and yet you had a fair amount of positive commentary and slides that showed improvement.

Is the difference between what I assume is better volume?

You took a price cut on core Yoplait.

Is that why the dollar sales are down?

Indirectly, Eric.

The thing that we restored was merchandising at our traditional price points on Yoplait.

So it wasn't a price list reduction, but effectively on our core cup business, it is getting our prices back in line with the competitive set.

And so as you noted, that has an impact on the dollar side and a very positive impact on the unit side.

Okay, so a couple of points basically subtracting from promotion from the sales, but volume was -- was volume flat or up in yogurt?

Could you say?

I could tell you it got progressively better in yogurt and as I showed on the chart, our turns, which is net of distribution, our turns became nicely positive on our core cup business.

Okay, all right.

I will pass it on.

Thank you.

David Driscoll, Citi Research.

Great, thanks a lot.

Good morning, everyone.

Wanted to ask a little bit more about US volume trends.

You guys have a lot of categories and a lot of insight into the US grocery market.

When you think about the year-ago period where we had such a warm winter, and maybe the effect on the soup operation, are you seeing evidence that would suggest that we will continue to see a real positive trend line in terms of the progression of volumes maybe for the next couple of quarters?

Part of it being related to the year-ago winter; maybe another part of it simply related to how weak volumes were across US grocery over the past maybe five or six quarters?

So any thoughts there would be helpful.

Hey, David.

It's Ken.

So, Ian says I get to start this one.

So it wasn't -- I mean the weather last year was certainly or likely a factor for soup sales because we know that that is a little bit weather-related.

But, by far, the dominant factor over last year was the pricing that we began to take early in the calendar year, which had all the effects that you are very well aware of.

We had high inflation.

We took very significant price increases and that resulted in a volume impact across many of our categories.

And so that was I think the big event of our last fiscal year and as we adjust those prices tactically, as we said in the presentation, really to restore the gap where it needed to be restored, we are seeing those businesses respond as we thought that they would.

We are seeing baseline strengthen and we are getting the merchandising lift as well.

So it is really more about the pricing and inflation dynamic of the last two years that is driving the fundamental trends in our categories.

Then just one follow-up on cereal.

Could you comment on your strategies in terms of -- historically, I think General Mills has been very, very good at introducing cereals that really had high value to them.

You're really not focused on competing at the low end of the market.

Just given where some of your competitors have gone, is there any need for you to rethink that strategy given the consumer environment, what your competitors are doing or do you still want to really put the new products out there that are margin positive to the cereal franchise?

Is that still the core of how we should think of General Mills?

I think our strategy hasn't been so much a high-priced one.

It's been in the value-added area, but cereal overall represents such a good value to the consumer.

I think it really gets down to are the benefits relevant, but, again, you look at the price point of our various Cheerios extensions, I think you would see that they are very competitive within the category.

So we don't look at that lens.

I don't view that we need to be in ultra-discounted cereal products, but, at all times, we're very cognizant of making sure our new cereals represent a good value and in line with the rest of the category.

We are not really trying to stretch it up either.

I suppose, Ian, the only thing I know is that the average price of the General Mills cereal portfolio is the highest of the major cereal producers.

So I always think of you as much more of a value-added cereal maker.

I am just trying to assess if there was any change in the strategy given the (multiple speakers).

Not really.

That has always been true and some of that has to do with, historically, with portfolio makeup because we were in a bit light -- because a lot of our portfolio is Cheerios, which is based -- and puff products, which those analyses tend to be done on a weight basis, and so in general, it has always shown us to be a bit more higher priced per ounce.

But I would say that is a historical legacy, not anything we are trying to push one way or the other.

Okay, thank you.

Matthew Grainger, Morgan Stanley.

Hi, good morning, everyone.

Happy holidays.

So for Don, I guess, just a few questions or clarifications on the full-year outlook.

You mentioned mid-single-digit sales growth for the full year.

And when you've talked about that in the past, you characterized it as being excluding Yoki and Yoplait Canada.

Is that still intended to be a base business sales growth number or overall?

And I guess the second question would just be when we think about the favorability to numbers in the second quarter, can you give us any more granularity on perhaps what surprise to the upside versus your original expectations and given that you are not raising or expanding the range that much for the full year, what are some of the headwinds beyond Venezuela and inflation that we should take into account?

Is it lower gross margin than perhaps we may be thinking of or just the phasing of marketing spend?

Sure, I will touch on both of those.

Sales first.

The sales guidance is all-in.

If you look at our trends year-to-date and then look at the balance of the year, we see our full-year expectations at mid-single digits for total Company sales.

As far as our performance in the first half, as we mentioned, we did slightly outperform our plan.

A few factors drove that.

Clearly, the International momentum that we have seen has been and continues to be very robust.

Our Bakeries & Foodservice business, particularly the mix of products and channels that we are selling, was favorable to our expectations.

Across the Company, we knew it was going to be a challenging year and I think everybody has just kind of made sure from an expense standpoint we have managed that appropriately.

That has had some benefit.

And then interest rates and tax rates have played in our favor.

Interest rates because of the market, tax rates because of some timing of discrete items that we have every year that we have baked into our full-year forecast, but some of the favorable items hit earlier in the year that we had anticipated.

So those are a number of factors that ended up accumulating to a favorable result in the first half.

In the second half, we have noted a couple things.

One, inflation will be higher than our original expectations.

That is backloaded because we had some hedge positions that covered us in the front half.

But the drought cost from last summer we will start seeing coming through in the second half, so you will see gross margin -- we will see some gross margin pressure.

Tax rates, again, we are -- we had, from a phasing standpoint, had some variability in the first half that will normalize in the second half and still we will get to our 33% tax rate for the full year and then, as I mentioned, the devaluation of the Bolivar, which will be a couple cent drag in the back half as well.

So kind of take that all into consideration.

That gives us confidence to increase our guidance by the -- increase the range up to plus $0.02 from our original guidance.

Okay, thanks.

And just two really quick follow-ups.

If the sales number is all-in, does that imply that International is lower than your original expectations or that the acquisitions are less incremental?

And then on the interest expense, is this quarter's number sort of a run rate going forward?

I wouldn't point to any one area.

Certainly the new businesses that we are bringing in are coming in just as we planned, so I certainly wouldn't highlight those.

It's a tough environment, and we have set some we thought were reasonable sales plans.

We are delivering largely against those, but we are -- so it's a little bit short of the top line, but we are ensuring that the bottom line comes in.

That is what I would say about there.

In terms of interest rates, we came in the year assuming that all-in they would be up a bit.

It is likely that, on a full-year basis, our interest expense will be down a little bit year-over-year.

And again, that is attributable to both the timing of any long-term issue we do, as well as the marketplace rates.

Okay, great.

Thanks, everyone.

Jason English, Goldman Sachs.

Hey, good morning, folks.

Thanks for the question.

Innovation, I wanted to talk quickly on innovation.

You have brought a very large slate to the market recently and you're highlighting some new items that are going to come in January, many of which look fairly compelling.

I think in the past, you have talked about innovation as a percentage of your sales on a rolling three-year basis.

Can you update us on where you stand for that metric now and how it has been trending recently?

Yes, this is Ian, Jason.

As it relates to at least the US portfolio, and I don't think it is too different for the Company, but I will let Ken comment on that.

We target somewhere between -- on an annual basis -- 4.5% to 5%.

So we typically talk on an annual, but if you want to do three year, you could multiply that out.

And we are right on track with that.

In fact, I would say our percent of business that comes from new products has been pretty strong and robust for us and so that is generally where we want to be.

And, Ken, I don't know if there is a statistic you want to quote for the --?

No, 4% to 5% is what we target, and we think we will be very much in that range, Jason.

We are also very focused on -- another metric for us is incrementality, so we want to make sure that we are launching products that are bringing new consumers into their franchise and we are -- we have steadily improved that number.

Margin is another key metric for us and we want to make sure that the business model is sound for all the new products that we are launching.

And so we have very good metrics and discipline about the quality of the new products that we launched and we are very much in their range.

And as you said, we are pleased with what we launched in the first half.

We like what we have got in the second half.

We think the new cereals, Honey Nut Medley Crunch, we think will be very good.

The new Fiber One product we think is good.

We are very happy that we are going to be bringing two more new flavors to Yoplait Greek 100.

As you heard Ian mentioned, that is off to quite a nice start and consumers love variety in the yogurt category, so we are getting back to them as quickly as we can and so it offers them variety.

It will also give us increased visibility and holding power at the shelf, so that becomes a virtuous cycle for us.

So we are generally pleased with our new product performance so far this year and have -- we will be continuing the momentum here as we go into the second half.

Just to make sure I understand that metric, does that only account for the contribution from the current year initiatives or does it also account for the leakage from any erosion on last year's launches as you lap them?

It's really our -- the launch -- it accounts for the launches in that year.

It also does account, Jason, for erosion, so it is a net impact, not the total impact.

Yes, it is an incremental number and with erosion, if you wanted to cume it over a three-year period, it would be in the low double digits.

It is going to be 4% to 5% a year, and if you do it over three years, it is going to be in that kind of 11%, 12% range.

Okay.

Thanks, guys.

I will pass it on.

Chris Growe, Stifel Nicolaus.

Thank you.

Good morning.

I just had two questions for you.

The first one if I could ask maybe of Ian on the Yoplait business.

I wanted to ask about -- you have really stabilized the marketshare.

That's as we track it from IRI or Nielsen and you've certainly had some good developments on core cup and good developments on Greek.

So I wanted to ask if you expect your sequential marketshare to continue to grow, especially as more of these products go into the market.

And then related to that, do you foresee Yoplait sales growing for the year in fiscal '13?

Yes, well, thank you for that.

And I suppose I should switch my data to IRI data because I -- at least from my standpoint, we haven't quite stabilized our share yet, but thank you for that.

But it is getting -- what you said is quite true; it is getting sequentially better and I expect it in the back half to continue to get sequentially better.

It's a very volatile category.

I think the jury is out.

We will have to look in May to see if -- for the year how it all nets out.

I would expect that every period in the back half gets better.

As I shared in my remarks, our Greek business seems to be really gaining nice traction and our core business is stabilizing well.

So I am guardedly optimistic around our share in the back half, but I think we are still kind of progressing from what had been a more challenging place.

And if I could follow on (multiple speakers) --

And the good news -- sorry, Chris -- the other good thing that is important and hard to predict in some ways is all of this activity by us and competitors is a great stimulant for a very vibrant category growth and so that will be the other variable in all of this is how quick the yogurt category grows, which I would expect should be pretty good.

Okay.

And just a quick follow-up for that, Ian, would be that would you expect the progress you are making in Greek with a lot of the new products, as well as the progress in core cup, any one of those to be the bigger driver of your sequential share progress?

Is one opportunity bigger than the other?

Well, in the case of core cup, I think it is more about stabilizing because that has been losing share.

As Greek came to the market, it had to come from something and it came from the largest player, which was our core cup business.

So stabilizing that I think prevents the minus and I think the plus comes from the innovation, which is largely in the Greek category, although not entirely.

All right, okay.

And then a quick follow-up, Don, for you.

Can you say what inflation was year-to-date just to give a little perspective on the degree of inflation for the second half?

We can kind of back into that then roughly.

Is that possible to talk about that?

It would be a little bit below our full-year projections in the first half.

Okay.

Not tremendously below, but slightly below.

Okay.

Okay, that's helpful.

Thank you.

Robert Moskow, Credit Suisse.

Hi, it's actually Rachel in for Rob.

So my question is on the soup and cereal categories, which seem to have been more rational in recent months with innovation and less promotion.

So what is your visibility on that into 2013?

Do you think we have found new equilibrium here where there could be more category and volume growth?

Well, this is Ian.

On the -- let me separate those two.

We are delighted with the soup category.

Our business is strong.

We focus fairly hard on part of the category, the growing part of the category, the ready-to-serve part of the category, and we do think it is pretty rational and it is about providing consumers great tasting product and benefits.

And we do think it's fairly rational in how it is playing out, and we are seeing a lot of strength in our business.

So very pleased with that part of the soup category.

Cereal is also, I would say, largely rational.

It was a bit more promotional in the first half in terms of frequency of promotion, but I wouldn't characterize it as irrational.

And as I said earlier, I think given the cost structure of the grain complex from the drought last year, I think it will remain highly rational in the back half, and it is good to see I think the major competitors bringing good innovation to market and competing largely on that basis.

That's good to hear.

And then just as a follow-up, I was curious to hear your strategy on the frozen food category.

It seems to have been challenging for competitors and then for frozen pizza in particular.

So with that category, on one hand, there is frozen vegetables, which have more of a health and wellness aspect and then there is frozen pizza, which has the benefit of targeting value seekers.

So on which end of the spectrum would you say that you guys are planning to focus?

I think, in frozen, it is such a big area of activity; it has been a part that has been slower at retail this past year, to be fair, across frozen.

But you really have to almost look at it segment by segment to talk about what is going on.

I think you characterized it reasonably well.

For us, the vegetable part is a very big category, a bit lower growth, but the innovation when it comes through helps a lot and it is very much on trend, which is a good thing.

Other parts, pizza, we are the leading seller in terms of volume of pizza in the category.

We compete in just one part of it, and it is on the value side, which is kind of in sync with the times.

And then we have other kind of very targeted things like frozen hot snacks, which we had a terrific first half on and so that just got down to good items, good marketing that resonate with the consumer.

I don't know if there is a category trend on it.

Great, thank you.

Ken Zaslow, BMO.

Hey, good morning, everyone, and happy holidays.

Ian, I had a question just on the cereal category.

When you look at like a Lucky Charms, and not getting to particular, you put some advertising spend behind it.

It looked like it moved very substantially on that, so I guess my question is how do you decide on which cereal brands to support because it seems like when you do support them, you actually get movement and maybe if you supported or got more advertising dollars behind it, there would be more brands that moved because Lucky Charms seems to be moving nicely with a little brand support.

Well, the cereal category has always been highly responsive to consumer marketing support and good ideas, as trite as that might sound, and that is kind of what we look at.

We do a lot of upfront research, we do a lot of in-market experimentation and analysis and we try and put our money behind our best ideas.

And it is a brand-by-brand kind of activity and you are quite right.

We are seeing some very nice progress on a variety of our brands around great consumer ideas and when we have them, we do put the pedal to the metal without a doubt.

But is there room for you to put more advertising dollars behind more brands?

Like almost not reactivate certain brands, but really -- because Lucky Charms is not a brand that had innovation as much, but more -- it seems like there was more advertising behind it and it seems like there might be opportunity to do it with more brands is kind of --

There is.

We, in the past -- we, a few years ago, put advertising behind multigrain Cheerios after many years and saw that thing take off like a rocket.

The Lucky Charms story has also got something to do with finding additional targets.

So advertising, a lot of these previously kid-targeted brands also to the adult consumption, which they have very high levels of adult consumption is true on Lucky Charms, true on Cinnamon Toast.

And so yes, I think there are certainly many opportunities to add consumer support in the cereal category on different brands behind good ideas.

So, Ken, I will just -- since several people have -- or a few people have asked about strategy in the cereal category and differentiation, I mean they are very good questions, and we like them and they go to the heart of what we are all about.

We have a highly differentiated line of great brands and they are -- we know that they are responsive to advertising and the good ideas and that is why our strategy really is so focused on capitalizing on that innovation, strengthening it, figuring out fresh new ways to talk about it because, as you point out, there are many examples in the category all the time of brands that have had fresh messages and they really respond.

So you are on the right point and that is what we are very focused on doing.

Great, thank you.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

Happy holidays.

Okay, so just a couple more follow-ups.

On baking mixes, it is not a segment that we focus on very much, but this is obviously an important quarter for baking mixes with the holiday season.

Could you maybe talk a little bit about what is going on in terms of price, volume and share dynamics there and what the outlook might be?

Yes, we -- our baking mix business is so far off to a really good start to the season.

It is still for parts of the portfolio kind of midway in the season, and we had a really good November.

I think you can see that in the data.

And as I said in my prepared remarks around both -- our refrigerated dough business has been very responsive to the Let the Making Begin campaign and our dry mixes also had a very good response to the marketing.

So so far, so good.

We like what we are seeing, and it seems to be going well.

And then a quick follow-up on cereals.

I have noticed a few articles about consumer concern about GMOs in I guess some of your larger brands.

Is that having any major impact on cereal sales at the moment in your view?

We haven't seen anything really on the consumer side related to that.

Okay, thanks very much.

Can we sneak one more question in here before we run out of time?

Certainly.

Ed Aaron, RBC Capital Markets.

Hi, great.

Thanks for fitting me in.

I wanted to ask on cereal, so I can understand why the year would be kind of more back-half-weighted just given the cadence of your merchandising programs.

But I think you said on the last quarter that Big G you thought would be up in Q2.

Was there a surprise this quarter relative to your expectations?

So would you attribute that more to category weakness or to competitive activity?

Yes, I would say there was a little bit of a surprise in our Q2, not a lot, Ed.

We expected Q1 to be down, which we, I think, talked about at the beginning of the year.

We thought more of our promotional plan would start showing up throughout Q2.

It started showing up largely toward the end of Q2, and going here into December and so we are seeing cereal, as I commented, sequentially pick up, but we didn't quite get all that we expected.

And again, had a lot to do with just higher levels of competitive -- certain competitive frequencies in that particular quarter.

It will all, I think, come out in the year.

Primarily some of that stuff was pushed into December and into the back half for us, so it will be a different flow than we anticipated, but I would anticipate that by year-end, it will pretty much be where we thought.

Thanks.

And then my follow-up question on International, I think you mentioned that organic growth internationally was up 4%, which I think is maybe a little bit lower than where you have been running.

Do I have that right?

If so, which businesses or markets might have contributed to some sequential slowing there?

I do think it is a little bit behind.

Yes, the 4% that we reported in the quarter is not materially off where we were last year in the same mid-single-digit range.

But to the extent there is any slowing, it is just on the margin.

Thank you.

Thanks, everybody.

If there is still questions out there, please give me a call and I will try to get them answered for you.

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

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