通用磨坊 (GIS) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the first-quarter fiscal-2014 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, September 18, 2013.

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

Please go ahead.

Thanks, operator.

Good morning, everybody.

I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Jim Murphy, President of our Big G Cereal Division.

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

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

Our press release on first-quarter results was issued over the wire services earlier this morning, and it's also posted on our website, if you still need a copy.

We've posted slides on the website also.

They supplement today's prepared remarks.

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

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

And with that, I will turn you over to my colleagues, starting with Don.

Thanks, Kris, and hello, everyone.

Thank you for joining us today.

As you've seen from our press release this morning, General Mills is off to a good start in fiscal 2014.

Slide 4 summarizes our results for the first quarter.

Sales totaled $4.4 billion, up 8%.

Segment operating profit increased 6% to $812 million.

That includes a 7% increase in advertising investment.

Net earnings totaled $459 million.

And diluted earnings per share were $0.70, as reported.

These results are below year-ago levels that included an $82-million increase in the mark-to-market valuation of certain commodity positions, and a one-time tax benefit.

Excluding items affecting comparability, our adjusted diluted EPS would be $0.70, a 6% increase versus last year.

Slide 5 shows the components of our net sales growth.

On an as-reported basis, net sales increased 8%, including strong contributions from new businesses, and three months of incremental contribution from new products, and three months of incremental contribution from new businesses, primarily Yoplait Canada and Yoki in Brazil.

Pound volume contributed 8 percentage points of growth in the quarter.

Sales mix and net price realization added 1 point of sales growth.

And foreign exchange reduced net sales by 1 percentage point.

Excluding 5 points of growth from new businesses, net sales were 3% above year-ago levels.

Slide 6 details net sales performance for our US retail business.

In total, net sales increased 4%, led by our snacks, natural and organic, baking and cereal businesses.

Introductory shipments of new products helped drive these sales increases.

Jim and Ken will talk more about this innovation in a few minutes.

Sales for our convenience stores and foodservice segment declined 1% in the first quarter.

That's consistent with our expectations.

Remember, we're continuing to focus our product mix.

Priority platforms, including baking mixes, cereal, yogurt, snacks and frozen breakfast posted solid sales growth in the quarter.

Slide 8 summarizes first-quarter international net sales on a constant-currency basis.

Sales grew 25% overall, led by Latin America, where sales increased nearly 200%.

This includes strong contributions from Yoki, and double-digit growth on our base business.

In Canada, sales increased 21%, led by incremental contributions from Yoplait.

Sales for the Europe region declined 3%, reflecting the difficult operating environment there.

And sales in the Asia Pacific region increased 13%, led by double-digit growth in China.

Slide 9 shows our gross margin was 36.9% on both a reported and underlying basis in the first quarter.

Excluding mark-to-market effects, our gross margin declined 130 basis points.

The addition of Yoplait Canada and Yoki account for roughly half of that decline.

And the other half reflects higher input costs.

We are now 60% covered on our commodity needs for fiscal 2014.

And we're still estimating 3% supply-chain inflation for the year in total, with first-half inflation rate expected to be higher than the second half.

We continue to invest in consumer marketing to drive top-line growth.

As shown on Slide 10, our investment in media and advertising increased 7% in the first quarter, led by double-digit increases in media spending for US yogurt, and our international segment.

Slide 11 outlines our segment operating profit results for the quarter.

Total segment operating profit increased 6% to $812 million despite higher input costs, a foreign exchange headwind, and the increased advertising investment.

US retail profit increased 6%.

International profit matched strong year-ago levels, which increased 56%, and convenience stores and foodservice profit increased 10%.

After-tax earnings from joint ventures grew 4% to $24 million in the quarter, reflecting sales gains and strong levels of holistic margin management for cereal partners worldwide.

On a constant-currency basis, CPW sales increased 1%, with growth in the UK and Asia largely offset by category weakness in Southwest Europe.

Constant-currency sales for Haagen-Dazs Japan matched strong year-ago levels.

Completing our review of the income statement, corporate unallocated expenses, excluding mark-to-market effects, were up $12 million in the quarter.

The effective tax rate for the quarter was 32.3%, as reported.

Excluding items affecting comparability, the tax rate was 32.2% this year compared to 31.4% a year ago.

And average diluted shares outstanding declined 1% in the quarter.

For the full year, we continue to target a 2% net reduction in average diluted shares outstanding.

Turning to the balance sheet, slide 14 shows that our core working capital declined 2% despite the addition of new businesses, driven by our focus on inventory reduction.

Accounts payable and accounts receivable were largely offsetting in the quarter.

So, with the first quarter completed, we remain on track to achieve our 2014 targets.

We expect to deliver low-single-digit growth in net sales, fueled by product news and innovation across our base business, and incremental contributions from new businesses.

We expect operating profit to grow faster than sales, reflecting a robust pipeline of productivity initiatives, and stronger profit contributions from new businesses.

And we expect operating profit margin expansion in each of our three business segments.

And we expect to deliver high-single-digit growth in adjusted diluted earnings per share to a range of $2.87 to $2.90.

With that, I'll turn the microphone over to Jim Murphy.

Murph?

Thanks, Don, and hello, everybody.

It's great to be with you on the call this morning, and talk about the strong growth opportunities we see for our US cereal business.

Let me begin by reminding everyone why over 90% of US households buy cereal.

First and foremost, it tastes terrific, and offers consumers of all ages a wide variety of flavor and texture choices.

It's obviously quick and easy to make, and it's affordable.

In fact, at around $0.50 a serving -- that's including the milk -- cereal beats most other breakfast choices on price.

Cereal's lower in calories than most breakfast options, and it's a very nutrient-dense food choice.

In fact, fortified cereals provide more iron, folic acid, zinc and B vitamins than any other conventional breakfast food.

Plus, there's all that whole grain and fiber.

The fact is, ready-to-eat breakfast cereal, even your favorite pre-sweetened variety, more than holds its own in a side-by-side comparison with other nutritious foods.

Slide 18 shows the nutrition side panel for a bowl of Cocoa Puffs was skim milk.

This great tasting breakfast is just 150 calories.

Those of you who count calories know that's a tough number to beat.

It's got no trans fat, no cholesterol, and very little sodium.

On sugar, well, take a look at your favorite brand of regular fruit-flavored Greek yogurt, and I'll bet you the number on that label is higher.

Protein is 1 gram for Cocoa Puffs alone, but 5 grams including the milk.

And when you get to the listing of vitamins and minerals, cereal beats most breakfast food competition hands down.

With credentials like these, it's no wonder consumers love cereal, and buy a lot of it.

As I mentioned earlier, over 90% of US households purchase cereal each year.

And on average, they buy a box nearly every other week.

That's one of the highest purchase rates across categories in the center store.

Cereal household penetration and buy rate is even higher in Hispanic households, one of the fastest growing segments of the US population.

Over the last three decades, cereal retail sales have nearly tripled, reaching $9.4 billion today.

One of the consumer behaviors powering this long-term growth is the fact that many more people eat breakfast than skip it.

Breakfast is truly a growth market.

The number of breakfast occasions increases as the US population expands.

Breakfast at home is growing, and today represents over 80% of all breakfast occasions.

And cereal is the most popular breakfast food at home by far, featured in a commanding 32% of these morning meals.

General Mills has led the US cereal category growth over the past five years, and we've added a full point of market share.

We're off to a solid start in 2014 with sales and market share growth in the first quarter.

So, we like the growth at the breakfast occasion.

Demographics trends favor cereal consumption as we look ahead, and General Mills has performed well.

Yet, I've seen some analyst reports question the future prospects for the US cereal category, and I understand why.

Category unit volume has declined over the last three years, but we see three primary factors behind this recent trend.

First, we believe that any food category's growth is the result of the collective innovation that branded players bring to that category.

And, frankly, there hasn't been enough new product innovation from the branded manufacturers.

Second, there hasn't been enough product news behind the big category established brands.

And, finally, there hasn't been enough consumer-directed advertising supporting this big category.

These are not structural issues.

These are issues of innovation and execution.

In Big G, we are taking specific steps to drive growth for our cereal business in fiscal '14 and beyond.

Our plans include core brand renovation that is relevant to consumers.

We're launching a strong slate of differential new product innovation.

And we're investing to develop innovative marketing ideas that bring increased consumer excitement to cereal.

It's really a simple formula, but it works.

Where we are bringing relevant product news and innovation to market, we are seeing the sales growth.

There is perhaps no better example of the power of product news and renovation than on our Chex business.

In 2010, we repositioned this brand as gluten-free.

Retail sales have increased at a double-digit rate since.

And Chex grew another 7% in the first quarter, including contributions from a new vanilla variety.

Cheerios is the biggest franchise in the US cereal category, by far.

Today, one out of every eight boxes of cereal sold in the US is a variety of Cheerios, and Honey Nut Cheerios is America's top-selling cereal brand.

We're supporting Honey Nut with increased levels of advertising, including a new campaign with the rapper, Nelly, called Must be the Honey.

Early response to this ad has been just fantastic, with over 10,000 mentions on social media in just the first week.

First-quarter retail sales of our Honey Nut Cheerios franchise increased 4%.

We've also launched new advertising on the original yellow-box Cheerios.

This advertising reminds consumers about the heart-health benefits and their emotional connection to this great brand.

Baseline sales trends are responding, with an improved run rate of 260 basis points in the last six months.

We're supporting this momentum in the second quarter with our Send Cheer to Teachers promotion.

You can thank your favorite teacher with a clip-out postcard from specially marked boxes.

There is more opportunity across this iconic Cheerios franchise, and our news and innovation pipeline is full.

I am extremely confident that this franchise will see broad-based growth going forward.

Lucky Charms, another consumer favorite, turns 50 years old this year, but the brand isn't showing its age.

Retail sales in the first quarter grew 11%.

Part of this growth reflects success of new advertising directed to adults who, as it turns out, account for nearly half the consumption of Lucky Charms.

We have big plans for Lucky's birthday.

We'll be celebrating with 50 days of surprises, culminating on St.

Patrick's Day.

Let's talk about the Breakfast of Champions.

For those of you who weren't able to draft Adrian Peterson on your fantasy football team, now you can have him on your breakfast table in three ways.

And we're partnering with Blippar to bring AP to life.

Just download the Blippar app, point your smartphone at the Wheaties box, and see what happens.

And just in time for Halloween, our Monster cereals are back.

This year, the Count Boo Berry and Franken Berry are joined by two friends not seen in over 20 years, Yummy Mummy and Fruit Brute.

Initial shipments of the Monster cereals are well ahead of last year's pace.

And this just illustrates the power of cereal in pop culture.

I've been talking a lot about established brands, but our 2014 plans also include great tasting new product innovation.

Honey Nut Cheerios Medley Crunch continues to be the single biggest launch in the category this calendar year.

Our new Hershey's Cookies 'n Creme cereal is off to a great start.

It's turning in the top third of the total categories, and outperforming other new items in the chocolate segment.

This great taste comes with solid health credentials, too, including 100% whole gain and no trans fats.

I also believe it will be important to bring new benefits to the category to drive growth.

Our Nature Valley Protein Granola delivers 10 grams of protein per serving.

That's more than twice the cereal category average.

With two varieties -- oats and honey, and oats and dark chocolate -- this product tastes terrific.

After only three months in market, it's already among the top-turning granola items.

And our new BFast breakfast shake provides busy consumers with the balanced nutrition of a bowl of cereal and milk in a convenient, shelf-stable drink.

Distribution on this product is just getting started.

And we're leveraging both in-store and grassroots sampling events to drive product trial and awareness.

In total, we're very excited about our new product lineup this year.

We have additional new cereals scheduled for the launch in second half.

New products certainly play an important role in driving category growth, but so does advertising.

In recent years, measured media spending for total food and beverage is up modestly.

Cereal category advertising has declined during that same period, so cereal has lost some share of voice.

However, we've maintained strong levels of ad support in our cereal brands.

Over the last two years, our cereal spending in measured media has increased 6%, and today represents 41% of total category measured spending.

So, our share of voice is up, and well above our 31% share of category dollar sales.

Meanwhile, our share of the cereal shelf is well below our share of category sales.

So, we're working with retailers to expand our cereal distribution.

In the first quarter, our share of distribution grew 80 basis points.

At the same time, we're staying very disciplined about the sizes and flavors we're launching in the category.

As a result, our velocities or turns on the shelf have outpaced the category average and our branded competitors.

That trend continued in the first quarter of 2014.

So, our products play a very important role in driving sales growth in the cereal category.

To wrap up my remarks this morning, we are very bullish on the US cereal category.

Consumers love cereal for all the good reasons that I outlined for you today.

In recent years, the collective product news and innovation from branded cereal manufacturers has not been sufficient to drive category growth.

We've got plans to drive sales and profit growth for our cereal business in 2014, with product news and established brands, a strong new product lineup, and effective marketing and merchandising initiatives.

Thank you for your time this morning.

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

Thank you, Jim, and good morning to one and all.

You just heard about the terrific innovation plans we have in our US cereal business.

So, I'll give you a quick summary of the innovation we're seeing elsewhere in the Company.

But first, let me offer a few observations on input cost trends, and the general pricing and promotional environment.

We've noted that year-over-year declines in spot prices for certain commodities, notably corn and wheat, have prompted some questions about the potential for broad-based deflation in input costs.

At General Mills, we buy and manage a very broad basket of commodities.

So, while some spot prices, like grains, are down, others, like dairy, are up.

All-in, we still expect inflation of roughly 3% across our supply chain costs for the fiscal year that will end next May.

And longer term, we continue to believe that the trend on food industry input costs will be inflationary, driven by rising global demand for food and energy.

In terms of industry volume and pricing trends, we're seeing balanced growth across the 25 categories where we compete.

That's true for the most recent quarter as well.

This growth is modest, but it's nonetheless growth.

We're working to fuel sales increases in our categories with higher levels of product marketing and innovation.

And Jim shared several cereal examples with you just a few minutes ago.

I'll cover the other key categories, starting with yogurt.

In the US, sales for our Greek yogurt business continued to significantly outpace the segment.

Our momentum started with the highly successful launch of Yoplait Greek 100 last summer.

Year-one retail sales for this reduced-calorie line reached $150 million, making this the single largest new product launch in Yoplait in the last two decades.

We're building on this momentum with the first-quarter launch of Yoplait Greek blended yogurt.

Advertising for this new line focuses on its winning taste profile.

And we're continuing the regional expansion of Liberte Greek.

In total, our first-quarter Greek yogurt sales grew nearly 100%, more than double the growth rate of the segment.

And we're innovating beyond Greek, too, including new advertising and marketing initiatives behind our core cup business.

Over the last two quarters, our US yogurt net sales are up slightly, with faster growth in unit sales.

We're continuing to make steady progress on this key business.

And we expect to report further progress in the coming quarters.

Our US snack businesses are off to a terrific start this year.

Led by strong sales of Nature Valley Soft-Baked Oatmeal Squares and Fiber One Protein Bars, first-quarter retail sales for our grain snacks business increased 8%.

And we added over 3 points of market share.

Larabar sales increased at a double-digit pace in the quarter, led by strong sales of our new ALT protein bars.

And our hot snack sales were up 4% in the quarter, led by the new line of Totino's Bold Rolls.

In dry dinners, we're seeing steady improvement in baseline trends, as we ramp up distribution of new items, and begin to activate our marketing plans.

We've launched new flavors of Progresso soup, and continue to focus our advertising on the great taste of these ready-to-serve varieties.

First-quarter retail sales increased 3% above strong year-ago levels.

And in refrigerated dough, new gluten-free batters and strong sales of Grands biscuits drove first-quarter retail sales up 5%.

In total, we're launching over 100 new US retail products in the first half of 2014, with more to come later in the year.

This increased level of innovation reflects the benefits of the new organization structure we put in place last year.

Our level of new product activity is up across our portfolio, including a significant increase in our newly created Baking Products and Frozen Foods divisions.

As our new items reach good store-level distribution, we'll be activating the media and marketing campaigns for 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 increased investments in targeted digital and multi-cultural 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 25 General Mills brands will carry pink lids on over 340 million packages.

In total, General Mills will donate $0.10 for every lid redeemed, up to a maximum total donation of $1.5 million.

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

Since the inception of this program, we've raised over $525 million for schools across the country.

Turning to our US business in away-from-home channels, total net sales declined slightly in the quarter, as Don showed you.

But we delivered net sales growth across our key product platforms in the first quarter.

Operating profit for this segment grew 10%, reflecting this branded product strength, as well as good grain merchandising performance.

Let me turn to our international business with a few comments on each region.

I'll begin with Canada where yogurt is our newest business.

We are a leading player in the Greek yogurt segment.

And just last month we added new Yoplait Yopa!

to our lineup.

Yopa!

offers the high-protein, no-fat benefits of traditional Greek yogurt in great-tasting flavors like Strawberry Cheesecake and Mango Tango.

We're supporting this product with a comprehensive marketing campaign that features Canadian Greek actress, Nia Vardalos.

Today, our Yoplait and Liberte brands account for 30% of Canadian yogurt category sales.

In Europe, first-quarter sales in constant currency declined 3%, reflecting the tough operating environment in the region.

Our results did include strong performance from new products, including Haagen-Dazs Secret Sensations and Old El Paso Mexican Rice Kits.

In yogurt, our UK launch of Liberte Greek is off to a solid start.

And we're expanding our Calin line of yogurts into drinkable varieties in both the UK and France.

Our largest business in the Asia Pacific region is Greater China, where we continue to see robust growth.

First-quarter sales in constant currency grew at a strong double-digit rate, led by Haagen-Dazs and our line of Wanchai Ferry frozen dim sum items.

The overall Chinese economy may be slowing a bit, but the demand for branded consumer food products continues to expand, as increasing numbers of Chinese consumers want foods that offer quality, convenience, nutrition and taste, all at a good value.

And in Latin America, the Yoki business has just completed its first year with General Mills.

New Yoki Kit Facil dinner kits are off to a very strong start in Brazil.

We're also introducing new flavors of popcorn, soups and beverages.

And we're prioritizing the top 100 Yoki products that should be in every grocery store across Brazil.

In total, we are very pleased with Yoki's performance.

Retail sales in Brazil increased nearly 20% during the first year.

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

We're off to a solid start in 2014.

We delivered net sales and profit growth on our base business, with incremental contributions from new businesses.

Our first-quarter results have us on track to achieve our annual sales and profit targets.

We continue to be excited about the year.

We have more impactful advertising, and increased levels of innovation in market right now, with additional efforts planned for the remainder of the year.

We see a manageable level of input cost inflation this year.

And our categories are showing modest, balanced growth.

Ultimately, we believe our categories and the strength of our brands are a source of competitive advantage for General Mills.

We like our prospects for increasing sales and earnings in 2014 and longer term.

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

With that, I would like to open the call for questions.

Operator, please get us going.

(Operator Instructions)

Matthew Grainger of Morgan Stanley.

Hi, good morning, everyone.

Just to delve into the US retail sales growth a bit more, I think it's clear that you made some progress here in the first quarter.

And we did see some sequential improvement.

But the 4% growth does seem like it benefited from a few factors, like new product shipments and mix.

So, as we're thinking about modeling out that segment over the coming quarters, and just how the operating environment is evolving, I just wanted to get your thoughts on whether there was an inventory benefit here in the first quarter that we should take into account and expect to normalize over the next quarter or two.

And how should we think about the balance between price mix and volume across the coming quarter?

Should we expect to see, I assume, this type of mix benefit persisting beyond the first quarter?

Matthew, this is Ken.

Thank you for the question.

And you partly answered it.

It is, in fact -- we did ship lots of new products over the course of the quarter.

And, as all of you know, it takes awhile for those to move through the channel and start to get counted at retail.

So that's part of the gap that you mentioned.

You talked about mix.

You also mentioned inventory.

And I do want to remind all of you that first quarter a year ago our merchandising pressure was quite a bit below average.

And our inventories as a result, our retail inventories, were low.

So, as we've normalized merchandising we've seen the inventories normalize behind that.

So, you identified some factors in the first quarter.

You also, as you note, we're quite pleased generally with the overall effort in the first quarter.

We like the new products.

We're seeing some good trends across some important categories and we're encouraged by that.

Going forward, I think we're looking for growth in low single digits.

And it's always a little bit of all three.

It's a little bit of volume, maybe a bit of price and a bit of mix.

And we do expect that, Matthew, to normalize here versus some of the year over year comps in Q1.

We expect to see that normalize as we go forward.

Don, I don't know if you'd want to add anything to that?

I think you captured it well.

Low single digits is still our guidance for US sales and there's going to be a bit of volume, some mix.

We saw that in the first quarter with cereal grain, our natural and organic products driving that sales growth.

They have a positive mix benefit for us and we expect that to continue as the year unfolds.

Okay.

And then just with respect to quantifying, to the extent we can, the impact of those dynamics in the second quarter.

With the inventory benefit that you may have seen here in the first quarter, would you expect second-quarter sales to be generally in line with your full-year targets or toward the lower end of that range?

Matt, we're not going to give quarterly guidance.

We'll just reaffirm that we expect low single-digit sales growth with the mix of all those items to play out for the balance of the year.

Okay, great.

Thanks both.

Bryan Spillane of Bank of America Merrill Lynch.

Hi, good morning, everyone.

Question on the US cereal business.

Two things.

Relative to the debate that's going on at the market about the health of the category, and some of the current concerns that we hear about, can you talk a little bit about the effectiveness or the efficacy of merchandising, especially investing in price to drive lift?

I think there's some concern that maybe weak start, category volumes have been so soft the last few years that we get into the temptation to begin to try to invest in price in order to drive some lift.

So just your thoughts on where consumers are in terms of price, if that's going to be a motivating factor.

And then, second, just in terms of maybe demographic cohorts.

If you could just talk a little bit about how you think your brands are doing, and maybe the category is, with kids, with families, with low-income consumers.

Just trying to get a sense of whether there's maybe a demographic cohort in the market that may need to be addressed more definitively than maybe others.

Thanks.

Yes, thanks, Bryan.

This is Jim.

In commenting on the merchandising, I said it in my prepared remarks, but product news and innovation and investment on the consumer side is what's going to drive this category.

The temptation to increase merchandising in order to do that is not an effective and not an efficient way to grow the category long term.

And so we believe that the product news innovation and investment from the branded players needs to increase in order to make this category growth healthily in the future.

To your second question on demographics, we see that the families, the mainstream families who are after taste and branded value and fun in the breakfast occasion, are strongest consumers right now.

And it manifests itself through the strength of our all family brands.

I mentioned it in my remarks.

Things like Lucky Charms and Honey Nut Cheerios that appeal to everybody in the family are very strong right now.

And so we don't see a weak spot really across the demographics.

In fact, Hispanics, as I said, consume more cereal than anybody, and that's a growth driver for us in the future.

So, demographically, cereal has got a lot of tail winds, actually, going for it.

And what about -- just following up on that -- just aging boomers?

Is there anything different, any difference in terms of the category dynamic with maybe people 50-plus?

Actually, they over-index, as well.

The two groups of consumers that over-index are the families with young kids and the 55-plus crowd.

So, as we look at that, that is a demographic tail wind, as I mentioned, for the cereal category going forward.

And from your perspective there's no change to that?

No.

Okay, thank you.

Eric Katzman of Deutsche Bank.

Hi, good morning, everybody.

I'm glad Bryan included the 50-plus in the aging boomers.

I'm almost there.

I want to talk about the deflation comments you made, Ken.

It seems like, with emerging markets slowing down, less ethanol input from grain, and stocks-to-use ratio is going up, that we could be in for a period of time where there are lower inputs.

So I want to push back against that a bit.

Obviously inflation is a tough one to predict overall but I want to push back against that a little bit.

And then related to that, we've heard that Walmart went to 200 suppliers asking for 2% price cuts across the board, and that Dollar General was already lining up behind them on the back of this deflation thesis.

And so maybe react to that.

And then I think I have a follow-up question for Jim on cereal.

Okay, Eric, thank you for the questions.

For your first question, our premise on how the global economy is going to evolve is that we're going to continue to see globalization, economic growth, and particularly in emerging markets.

And, by the way, while many of you have commented on the softening in emerging market economies overall, I do want to point out that our business continues to be very strong in emerging markets.

We had a very strong quarter in China.

And we're seeing terrific growth in Brazil.

And I think the reason is that we are selling center of plate very basic everyday food items to these consumers.

We're selling dim sum and egg rolls in China that are being consumed every night.

When you think of our product line in Brazil, it's a very middle class product line.

Think of the equivalent of Helpers in the US.

That captures, I think, the positioning of our brands in Brazil.

So, very well targeted.

These consumers continue to have growing disposable income.

And we're seeing tremendous growth in emerging markets and we think that's going to continue.

And we think we're going to continue to see growing global demand for these basic commodities.

Now, in terms of your comment on stocks, every year is a new year when it comes to the harvest.

And so you won't see us predicting anything there other than that every year is a new year.

This year it looks like it's going to be a better harvest and we may see stocks improve.

But it's one year at a time on that one.

And I think, as we all know, volatility is what we should expect there.

In terms of your comment on Walmart, we haven't heard anything about that.

That would be new to us.

In fact, I was visiting at Walmart within the past several weeks and I will tell you that we had a very good conversation about innovation.

And what we can do to make sure that we've got high levels because of the belief that innovation drives traffic and it drives excitement in our categories.

So, we haven't heard anything about your comment on 200 suppliers and all that stuff.

So, anyway, thank you for the question.

I think you've got a follow-up for Don or Jim?

Jim actually.

On slide 34, I'm just trying to understand.

I know that your share of category has been in the low 30%s for a period of time.

But I'm just trying to understand, the share of distribution points is, call it, a third lower or a fourth lower.

Is that because the other competitors are just, whatever -- throwing allowance money or merchandising money at the retailer to keep their distribution?

How long has this relationship between share of dollars versus share of distribution points been so skewed for you?

And what are you doing to change that?

It's really, the key factor is that our SKUs are just that much bigger and more efficient and productive in the category.

And so we're constantly reminding our retail partners of this fact.

And this has really been the case for quite some time.

If you think about it, we have some of the biggest, most productive SKUs on Honey Nut Cheerios and yellow box Cheerios and the like in the category.

The challenge is to get the proper facings on those big SKUs in the category so that they don't run out of stock on them.

But there's always the temptation to take a new SKU in the category and put it on the shelf.

And it's a constant battle with the retailers and a reminder of the retailers to go back to more productive shelf sets.

Having said that, we've made a lot of progress here just in Q1.

We're up 80 basis points, as I mentioned in my remarks.

And so I think our story, and the facts that we bring to our partners, is starting to resonate at an increasing rate.

And you probably could expect that this gap starts to narrow over the course of time.

Okay, thanks, I'll pass it on.

Ken Zaslow of BMO.

Hi good morning, everyone.

Jim, I have just two questions as I look through your presentation.

One is, it seems like General Mills is broadening the efforts across your cereal brands, like including Wheaties which may not have been as focused, as well as the Monsters cereals.

So, is there a change in what you're doing across the portfolio?

Are you pulling levers on products that you not normally have done before?

And then my second question is, how have you reacted and can you talk about the new entrants into the categories, the competitors, like a KIND or something like that?

Can you talk about those two issues?

Sure.

First, on the pulling levers on some brands that we haven't supported as much over the recent past, that's absolutely true.

We see a lot of upside for supporting brands like Wheaties and Total and the like.

And we're doing it, and we're doing it with different marketing vehicles.

So, it's not the standard TV plan.

You're going to see a lot more in the social space, as an example.

So, yes, that is upside for us.

We have a lot of brands that are between half a share point and a point that we can continue to increase the spending behind good marketing ideas.

So, that's the answer to your first question.

And then on the second question, I think that there is an emerging segment within the category where Cascadian Farms and our new Nature Valley protein granola fit -- we call it the Nature Space -- that is growing at quite a nice clip.

It's still small relatively and it's still relatively less productive than the mainstream.

But, nonetheless, we think we have two terrific brands to capitalize on that trend in Cascadian Farms on the organic side and now Nature Valley, which I think is going to be a really strong brand in the cereal category, operating in that type of a space of natural ingredients you can see.

Just going back to the first question, what drove the change though?

What happened that all of a sudden you say -- look, we can now focus on these brands?

Just to me these brands have been around for a long time.

What created that change?

We've been experimenting with marketing ideas, and when we find one we like, we press down on it.

Wheaties is a good example.

Monsters is another great example.

And we've got more in the pipeline on these smaller brands.

In this new era of marketing you can try a lot of ideas for very little money and really experiment with them.

And we're doing that quite effectively now.

And we're finding, we're unlocking growth on some of these brands we haven't marketed for awhile.

One general comment, Ken -- and I'm looking at Jim here to see if he would agree -- but I think that the whole digital and social space opens up some opportunities to innovate that maybe we didn't have five years ago.

We can really micro target with the Monsters thing in a way, as Jim said in his presentation, capitalizing on pop culture.

So those kinds of media I think create some new opportunities.

And we're trying to get better muscles in those areas.

And we are, and it seems to be working for us.

Great.

I appreciate it, thank you.

Chris Growe of Stifel.

Hi, good morning.

I had two questions for you, if I could.

The first one in relation to US retail.

The price mix contribution was strong in the quarter.

It sounds like mix was a major driver of that.

I wanted to also understand the degree to which promotion was a bit of a drag against that, or just understand the scope of how you're increasing promotions here early in the year.

It sounds like they're being very surgical, if that's the right term to use.

I'm not sure I fully understand your question.

Let me repeat.

There was a difference in the level of promotion year over year.

So, first quarter last year -- I don't know if you recall this, Chris -- but we came out a little bit light.

And, really, over the course of our year, our self criticism was that our promotional plan was not really balanced the right way.

And so this year, we have a very balanced plan, a very steady pressure over the course of the year.

And the comparison in the first quarter is that there's more pressure in comparison to that quarter a year ago.

So that would have been a bit of a drag against the overall price mix contribution in US retail, meaning that mix was maybe even a little stronger in the quarter.

Do you follow that?

Yes, Chris.

This is Don.

That is correct.

And, to your point, it was, if you remember, the promotional timing was particularly centered in cereal and grain snacks where we felt we were light a year ago, and more normalized this year.

As I mentioned earlier, those are two of our highest revenue per pound categories.

So, as we've seen those sales grow this year higher than the -- the volume grow higher than the US RO average, that is highly favorable to our mix, to our revenue mix.

Okay, that makes sense.

Thank you.

And then the final question I had for you is just on the international division.

I had booked in a little stronger increase in profit this quarter.

So I just want to understand.

Obviously you had a big increase in marketing.

That had to be one factor.

Any other factors we should be aware of, whether it be Europe being a little softer, that would have weighed on the growth this quarter?

And just understand how we look for the rest of the year in that division.

Yes, Chris, our international profit actually came in right where we expected.

It matched year-ago levels, which were up 56% over the year before.

The higher net sales obviously drove some profit growth.

We had three items that offset that.

You mentioned one which is the 15% increase in our media support.

We did have higher input cost inflation, particularly dairy in Europe.

And then we had a foreign exchange drag.

Importantly, our new businesses did contribute as expected.

And we continue to expect international's full-year constant currency sales growth to be high single digits, and operating profit to grow faster.

So, we haven't had any change to our full-year expectations for that segment.

And is there any -- to your FX assumptions for the year -- is it any worse or better as a result of the first quarter?

Yes, they are a little worse, probably $0.01 or $0.02 worse.

That's factored into our reaffirmed guidance.

Okay, great, thank you.

Robert Moskow of Credit Suisse.

Hi, thank you.

This is more of a technical question on the Nielsen data that you're presenting.

The volume, or I guess the unit volume, that you showed is very consistent with the Nielsen data we're getting.

But the unit pricing that you're showing, which is positive versus year ago for the Company on a Nielsen basis, is very different from the Nielsen data that we get.

And I wanted to know, as you saw all of these monthly reports from the sell side showing your unit pricing down, what do you think the discrepancy was?

We saw unit pricing down in just about every category and I guess it was not reflective?

First of all, I think your comment on units is we are --

The category.

Yes.

Rob, the numbers we show are category numbers, not General Mills numbers.

If you're referring to, I think it's slide maybe 39 in the deck, the one that Ken showed.

Right.

We show volume and pricing for fiscal '13 annual and fiscal '14 first quarter.

Those are category numbers.

Right.

Okay.

So, your unit pricing is -- you're pricing below those categories then?

Or your pricing is below the category pricing?

Yes, and that's the merchandising phase that we talked about a minute ago.

Okay, I see.

Can you give us a sense of the duration of the merchandising then?

Is that something to expect throughout the year or is this like a comparison issue versus year ago?

It's primarily a comparison issue versus a year ago in the quarter.

All right, that's my question.

Thanks.

Ken Goldman of JPMorgan.

Hi, thank you for the question.

As I look at RTE cereal as a whole, velocities, at least in Nielsen, do seem to be coming down across the board.

And I realize you've highlighted some of the issues behind this.

But I wanted to ask whether velocities are off enough where retailers, especially maybe some that you recently visited, Ken, might start thinking about maybe some accelerated SKU rationalization in the category.

There does seem to be a large number of tail brands in cereal that may or may not be doing well.

So, just curious if you're hearing anything about the potential for trade-incented rationalization, if you will, when shelves reset next year.

Or are we just not at that point at all?

Yes, this is Jim.

Thanks for the question, Ken.

There are a couple things I would say.

One is retailers know how important this category is to driving traffic to their store.

It is still nearly a $10 billion category.

And, as you know, a lot of retailers are trying to figure out how to draw traffic to their center stores.

And cereal still remains strategically incredibly important for them.

The second thing I would say is even the tail of cereal on a SKU basis generates a lot more productivity than a number of different categories within the center store.

We haven't heard a lot of noise about retailers questioning the space that they allocate to cereal, or questioning the strategic importance of it.

That's very helpful.

Can I ask a very quick follow-up?

Just, Jim, what are you hearing on not just your brands but across the category, the current levels of inventory among some of your larger retailers?

We've seen a higher level of deloading across all packaged food lately.

I'm just curious how that's affecting things for the category as a whole.

I think we're following the general trend of the entire food complex.

I think you've heard that the retailers are reducing inventory modestly across the entire store and cereal is part of that.

That's helpful, thank you.

David Driscoll of Citigroup.

Thank you.

Good morning, everyone.

Jim, just wanted to continue on some of the cereal questions.

I'd like you to maybe respond to, or give me your thoughts on, when we look at overall food, we see that volumes are down in the aggregate of more than 100-plus categories that we track.

You pointed towards some specific factors -- category marketing spending being below the '11 levels, new product introductions being down.

But I don't believe you made any mention of just simply overall volume softness across the United States.

Is that absent for a particular reason?

Do you not believe that that has an effect here, and that these isolated, the category marketing spending in new products are really the lion's share drivers of these issues?

So, maybe if you could just respond to that, please.

David, this is Ken.

Let me jump in first and then I think Jim wants to make some comments.

Because I think you do raise an important point.

Jim, I think, is very properly focused on the cereal category and what we know drives it, which is innovation and brand building.

And we're seeing that be effective.

As you go back the last couple of years, though, there are some larger macro factors that did have an impact across categories.

And that, of course, was, going back two years ago, the pricing that all of us took in response to exceptionally high levels of inflation.

For us it was over 10%.

Which really knocked a lot of categories off the rails going back several years ago.

And, really, it took us last year to see those categories strengthen as we got price points right and we saw consumers stabilize and come back to the category.

So, I think you're right.

There was a larger macro factor.

We believe primarily triggered by inflation and the pricing that went along with that.

However, we see that starting to recede here in the rear view mirror.

We're seeing consumers a little healthier.

And so we're very focused on the innovation and renovation that we know will continue to propel those categories.

I don't know, Jim, if you want to --.

I think Ken said it well, and I think I've said everything in my prepared remarks of what I think is going to drive this category back to growth again.

I have unwavering faith that cereal is an adaptable category and will meet the changing needs of consumer at breakfast.

And what's going to be done through product news and innovation and investing behind those great ideas.

I appreciate those comments.

And, Ken, I really appreciate your follow-up on that because it seems to me that it's just impossible to explain this gigantic category in the absence of the context of the environment.

A follow-up on SG&A, if I can.

Impressive performance here.

SG&A as a percent of sales down about 70 basis points, I think.

Can you guys just comment on -- this was not marketing related.

Marketing was up nicely.

What drove this and what's the sustainability of it throughout this year and maybe beyond that?

David, you're right.

The media spending was up.

That actually drove up SG&A.

The balance of our SG&A was benefited from -- we continue to apply our HMM practices against our admin expenses.

And we're also seeing the benefit of the restructuring actions that we took in the fourth quarter of fiscal '12 played out through this quarter, as well.

So, we're at a sustainable level of spend in our SG&A.

This is a good run rate as a percent of sales, more or less?

Yes, that's a fair run rate.

Thank you.

Diane Geissler of CLSA.

Good morning.

I wanted to ask Jim a couple questions about the cereal category.

Can you tell me, what does your research say about actual consumption of cereal by consumers?

What I'm trying to get at here is how much of it is consumed at breakfast as breakfast; what's consumed outside that daypart?

And, then, what do you make of the increased competition from away-from-home channels?

It's become a big focus for a lot of the restaurant chains because it's one of the dayparts that they're under-indexed on, and so everybody is rolling out breakfast.

And I'm just curious about how you see that as a competitive threat.

Thanks, Diane.

Let me just address the daypart issue first.

Over 90% of cereal is consumed at breakfast currently.

We see it as actually a growth opportunity for us because we know that there is behavior out there that consumers eat cereal beyond breakfast, as well.

But it's still, the fact is, that most of it is consumed during that daypart.

And we think it's a growth opportunity, frankly, to start marketing against that.

The second part of your question is really the quick serve restaurants and the advent of breakfast.

And they've spent a lot of money on it, as you know.

And many of the big QSRs have picked up breakfast as a growth platform.

Having said that, breakfast at home is growing.

And so it's not really, in our view, taking a lot of occasions away.

It's basically, I think, and our research suggests, that it's really going after those who have skipped breakfast in the past, predominantly.

And we're picking up as many of those skippers as they are.

And so I think they are both actually growing.

Okay, terrific.

Thank you.

Andrew Lazar of Barclays.

Thanks, everyone, good morning.

Just a quick one, Don, and then just a quick one for Jim.

Don, I think you'd said that you still expected -- or maybe this is a week or so ago -- gross margins to be up maybe a little bit for the year as a whole even though you started off with them being down in the first quarter about 130 basis points.

Is that still the case?

And just your sense on what gives you the confidence around the visibility there.

Yes, our expectations for gross margins are unchanged from the guidance we gave in July that we reaffirmed at your conference a couple weeks ago, Andrew.

As I mentioned in my comments, we expect and have seen inflation is going to be higher in the first half of the year.

And then we'll also begin to lap the comparisons on Yoplait Canada and Yoki starting next quarter.

So that, combined with increased savings from HMM as the year unfolds, gives us confidence we're going to see improving margins as fiscal '14 plays out.

Great, thanks for that.

And then, Jim, you guys obviously have a long and rich history of data and a knowledge base around the overall cereal category, over a long period of time.

And I'm just curious, as you look at all of that data, I assume you come up with periods of time where there may be several years in a row where the category overall in cereal isn't behaving the way you want it to for various reasons.

But, as you look back, can you come up with similar time frames where you had these category issues that have been typically, invariably been solved through the things you're talking about, whether it's brand building, innovation, what-not from all of the category players?

What I'm trying to get at, is there anything really different here structurally now than maybe what you've seen in past periods like this?

Thanks for the question, Andrew.

In fact, the answer is no to that.

And if you look at the long history of cereal, let's just go back, say, 30 years, as I mentioned in my remarks cereal has put on over $6 billion in sales over that time period.

Grown at about an average rate of dollar sales at about 3% compound annually over that time period.

But it hasn't been 3% every year, as you mentioned.

In my 21 years at General Mills, I've seen growth in the cereal category written off a couple different times.

And I'll just bring up a couple examples.

The first one is when bagels became a phenomenon in the US, and everyone was going to move to bagels and no one was going to eat cereal any more.

And then, lo and behold, we innovated on cereal and brought some new taste varieties and new textures into the category, and the category rebounded.

The second time was when Atkins Diet craze came along.

And, again, everyone was going to move away from carbohydrates at that point.

And then we brought whole grain news to the category, we brought fiber news to the category.

We tend to be able to innovate our way out of this.

And so the answer, the short answer, is no, I don't see anything different about this time period than I saw the first two time periods around.

But it's incumbent upon the branded manufacturers to bring the news and adapt in this highly adaptable category.

Okay, thanks for that.

Appreciate it.

All right, we are to the end of the hour here so I've got to let my speakers go.

I'm sure there are some folks maybe still in queue.

Give us a shout if we can be of help.

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