通用磨坊 (GIS) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the General Mills second-quarter fiscal 2014 earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded Wednesday, December 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 am here with Ken Powell, our Chairman and CEO; Don Mulligan, our CFO; and Ian Friendly, Chief Operating Officer for our U.S. Retail segment.

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

First, I am going to cover my usual housekeeping items.

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

It is also posted on the Web if you need a copy and you can find slides on our website that supplement this morning's presentation.

Our remarks will include forward-looking statements that are based on management's current views and assumptions and the second slide lists factors that could cause our future results to be different than our current estimates.

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

Thanks, Kris.

Good morning and happy holidays to everyone.

Thank you for joining us today.

This year's second quarter did not include the week of Thanksgiving, while last year's results included the holiday.

You will see some impact of that timing shift in our reported results, which are summarized on slide 4. Net sales totaled $4.9 billion, essentially flat to last year.

We have now anniversaried the additions of Yoki and Yoplait Canada last year, so these results largely reflect base business performance.

Segment operating profit totaled $920 million.

This is 4% below year-ago results; they grew 10%.

In addition to this tough comparison, higher input costs were a headwind in the quarter.

Net earnings totaled $550 million and diluted earnings per share were $0.84, as reported, up 2% from last year.

Adjusted diluted earnings per share, which exclude certain items affecting comparability, declined 3% to $0.83 per share.

Remember that last year's adjusted diluted EPS grew a robust 13%.

Slide 5 shows the components of our second-quarter net sales growth.

Pound volume essentially matched year-ago levels despite the Thanksgiving shift and a slowdown seen across the food and beverage industry in developed markets during the second quarter.

Sales mix and net price realization added 1 point of sales growth, and foreign exchange reduced net sales by 1 percentage point.

Slide 6 shows second-quarter net sales results by segment.

For U.S. Retail, net sales declined 1% overall, with gains in our Snacks, Small Planet Foods and Big G divisions, offset by declines in our remaining divisions.

Excluding the impact of the Thanksgiving holiday shift, we estimate U.S. Retail net sales would have been roughly flat.

International segment sales grew 2%, as reported, and 5% on a constant currency basis.

Results for the quarter were particular strong in Latin America and Canada, fueled by year-over-year growth for our Yoki and Yoplait businesses.

Net sales for our Convenience Stores & Foodservice segment were down 2% in the quarter reflecting price declines on indexed priced items.

Slide 7 shows the second-quarter gross margin, excluding mark-to-market effects, declined 100 basis points.

This is primarily due to higher input costs and unfavorable mix.

We are continuing to estimate 3% in supply chain inflation for the full year.

Second-half inflation is expected to be lower than the first half.

At the end of the second quarter, we were roughly 70% covered on our commodity needs for the full fiscal year.

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

U.S. Retail profit declined 6% driven by higher inflation and a comparison to strong year-ago profit that grew 9%.

International profit increased 10% despite unfavorable foreign exchange rates and a fraud-related asset loss of approximately $12 million in the quarter.

Convenience Stores & Foodservice profit was down 12% from year-ago profits that grew 24%.

Second-quarter after-tax earnings from joint ventures totaled $26 million on a reported basis.

On a constant currency basis, after-tax JV earnings were down $4 million driven by increased consumer marketing investments by CPW.

Constant currency net sales for CPW increased 2% with growth in Asia and Latin America partially offset by category weakness in Europe.

Constant currency net sales for Haagen-Dazs Japan grew 11% led by core mini cup growth and strong new product performance, including the launch of our new [Crunchy Crunch stick bars].

Slide 10 summarizes other key income statement items for the second quarter.

Corporate unallocated expenses, excluding mark-to-market effects, declined $9 million in the quarter.

Second-quarter interest expense decreased $7 million driven by a shift in mix of debt that lowered our average interest rate.

During the quarter, we issued a $500 million euro bond, our first non-US dollar-denominated bond in over 25 years.

As we analyzed our current debt mix and future requirements, we now expect full-year interest expense to be slightly lower than 2013 levels.

The effective tax rate for the quarter was 33.3%, as reported.

Excluding items affecting comparability, the tax rate was 33.2% compared to 32.8% a year ago.

We are still estimating our full-year underlying tax rate will be comparable to last year's rate of 32.4%.

Turning to the balance sheet, slide 11 shows the components of core working capital.

In the second quarter, our core working capital declined 7% versus a year ago driven by an increase in our accounts payable balance and we continue to see positive results from our inventory reduction efforts.

Slide 12 summarizes our financial performance through the first half of the fiscal year.

Net sales grew 4% to more than $9 billion.

Pound volume contributed 4 points of growth.

Net price realization and mix added 1 point and foreign exchange reduced sales growth by 1 point in the first half.

Segment operating profit was essentially flat to last year, over $1.7 billion, reflecting input cost inflation, foreign exchange headwinds and a difficult comparison to last year's 8% growth.

Additionally, media spending for the first half increased 2%.

Net earnings attributable to General Mills totaled just over $1 billion and diluted earnings per share were $1.54.

Excluding items affecting comparability, our adjusted diluted earnings per share totaled $1.53, up 1% from a year ago.

The next three slides provide more detail on our first-half net sales by segment, starting with our U.S. Retail segment on slide 13.

In total, net sales for U.S. Retail increased 1% in the first half, led by our Snacks, Small Planet Foods, Big G Cereals and Baking divisions.

Sales of our Convenience Stores & Foodservice segment declined 1% in the first six months of the year.

Remember, that is consistent with our expectations for this segment in 2014.

We continue to focus on product mix in this business with good results.

Net sales on our priority platforms, including snacks, cereal, yogurt, and frozen breakfast, are up 6% in the first half.

Slide 15 summarizes our international net sales results on a constant currency basis through the first half.

Sales grew 13% overall led by Canada where constant currency sales increased 11%, including incremental contributions from Yoplait during the first quarter.

In Latin America, sales grew nearly 75%, including three incremental months from Yoki in the first quarter, but we also saw excellent growth from Yoki in the second quarter and double-digit growth from our other businesses in the region.

Sales for the Europe region declined 2% reflecting the tough operating environment there.

In constant currency, sales in the Asia/Pacific region increased 8% led by double-digit growth in China.

Let's now turn to cash flow results.

On slide 16, you can see the cash flow from operations exceeded $1 billion through the first half.

This was down from last year, largely due to changes in trade promotion accruals and the timing of payments to vendors.

Even so, we anticipate operating cash flow will grow at a low single digit rate for the full year.

Capital expenditures totaled $269 million through six months, roughly comparable to last year.

We are leveraging our robust cash flow to increase our cash returns to shareholders this year.

Through the first half, we paid $490 million in dividends reflecting the 15% increase per share that went in effect in August.

This was our 115th consecutive year of dividend payments without reduction or interruption.

We also repurchased approximately 18 million shares of common stock this year for a total of $864 million.

Average diluted earnings per share outstanding through the first half were down 2% from the prior year.

Our outlook for the second half of fiscal 2014 is summarized on slide 17.

We expect low single digit net sales growth driven in part by an excellent slate of new products that Ian and Ken will discuss shortly.

We are not expecting that the softness across the food and bev industry in Q2 will improve in the second half of the year.

We expect foreign exchange will continue to dampen net sales growth in the second half, but we are seeing good growth in our December shipments due in part to the Thanksgiving holiday shift.

We anticipate mid to high single-digit growth in segment operating profit in the second half, helped by lower levels of input cost inflation and easier comparisons than we had in the first half.

Our second-half forecast includes an assumption of continued foreign exchange headwinds.

We have also considered a possible currency devaluation in Venezuela when modeling our second half.

We are forecasting double-digit growth in adjusted diluted earnings per share for the second half with the strongest growth coming in the fourth quarter.

For the full year, we still expect adjusted diluted earnings per share to be in the range of $2.87 to $2.90, although a devaluation of the Venezuelan bolivar could likely put us at the low end of that range.

With that, I will turn the microphone over to Ian.

Thanks, Don, and good morning, everyone.

I appreciate the opportunity to give you an update on our U.S. Retail segment.

As we look across the 25 categories where we compete, trends mirror the broader US food and beverage industry.

Growth has slowed a bit.

Slide 19 shows you that, for these categories, unit volume is essentially comparable to last year and pricing is up modestly.

This is a challenging environment, but it is an improvement from 2012 when sharp commodity inflation resulted in above-average food price increases across the grocery store.

We believe today's more stable in-store environment allows product news and consumer marketing to be effective.

In US cereal, category sales remain soft.

Although we did see some improvement in the latest months, we have led growth in this category for several years and we have gained shares through the first half of fiscal 2014.

We plan to drive growth in the second half with continuing product news and innovation.

We brought protein to the cereal aisle in June with Nature Valley Protein Granola.

It has 10 grams of protein per serving.

That is more than twice the cereal category average.

Performance on these cereals is exceeding expectations and we will add a cranberry almond flavor next month.

In total, this line is expected to generate more than $30 million in year one sales.

We have more innovation coming in January.

We are launching two varieties of Fiber One protein cereal.

They provide the unique combination of 10 grams of protein and 20% of the daily value of fiber per serving and they taste great.

New Chocolate Toast Crunch extends our Cinnamon Toast Crunch franchise, which posted 4% retail sales growth through the first half.

We are introducing a dark chocolate version of Multigrain Cheerios with 14 grams of whole grain per serving.

And our newest Cascadian Farms organic cereal is Graham Crunch.

We expect our cereal business to show continued sales growth in the second half of this year.

We are supporting our cereals with strong levels of consumer-directed marketing and advertising, including traditional TV, digital media and Hispanic-focused advertising.

For the first time in 18 years, General Mills will be on the air during the Super Bowl with a spot for Cheerios.

In yogurt, our retail sales in Nielsen-measured outlets has been improving.

Through the first half, retail sales are within 2% of last year's and we expect our sales momentum to improve in the second half of the fiscal year as distribution on Yoplait Greek products continues to build and we launch a variety of new items.

Greek yogurt is still leading category growth.

We launched Yoplait Greek Blended yogurts last quarter and they are off to a good start.

We will add several new flavors to this line next month.

Yoplait Greek 100 reduced-calorie yogurt, launched roughly 18 months ago, gained nearly 4 points of share in the Greek segment through the first half.

We are extending this line with new apple pie and strawberry cheesecake flavors.

Retail sales growth for our Yoplait Greek products in total continues to outpace the Greek segment.

We are also expanding distribution on these lines and increasing our unit turns, as you can see on slide 25.

Our core cup business trends are improving.

Base unit sales on Yoplait Original turned positive in the second quarter driven in part by increased levels of advertising.

This includes our Swap a Snack campaign reminding consumers that yogurt can be a great-tasting and better-for-you snack option.

We have been posting good distribution growth on Liberte yogurt and we have plenty of headspace to grow this brand across the US.

Next month, we will add new flavors to our Greek and Mediterranee offerings and we are updating our packaging giving the brand a fresh contemporary look.

Fueled by our innovation and marketing plans, we continue to expect renewed sales growth for our US yogurt business in fiscal 2014.

In Snacks, we continue to lead growth in the $3 billion grain snacks category.

Over the past five years, we have added almost 10 points of marketshare and we are up nearly 4 more share points through the first half of this fiscal year with retail sales up 11%.

The driver of this strong performance is terrific product innovation with items like Fiber One lemon bars, Nature Valley soft baked oatmeal squares and Greek yogurt protein bars all launched in the first half of the year.

We plan to keep this momentum going with more innovation in the second half.

Fiber One grain snacks are growing at a 14% pace so far this year building on double-digit growth over the past couple years.

Next month, we will introduce Fiber One meal bars.

These great-tasting bars contain 10 grams of protein and 9 grams of fiber.

We think they will appeal to weight-conscious consumers looking for a quick and nutritious meal replacement.

Nature Valley grain snacks also are growing at a double-digit pace.

Next month, we are launching breakfast biscuits shown on slide 30.

With at least 26 grams of whole grain per serving, they offer long-lasting energy to get through that mid-morning slump.

If your taste runs to savory snacks, you will like our new Green Giant sweet potato fries and cheddar veggie puffs, extending this line of better-for-you snacks.

We're adding popcorn to Chex Mix, giving consumers a lighter snacking alternative.

And we will introduce Fiber One all-family fruit snacks with just 70 calories per serving.

We have been adding some great natural and organic items to our snacking portfolio too, driving double-digit retail sales growth across traditional and natural and organic channels combined.

In January, we will introduce new flavors of our successful Uber fruit and nut bars.

We are bringing some zesty flavors to Food Should Taste Good chips with guacamole and falafel varieties.

And Cascadian Farms is launching protein granola bars.

We expect these new items will contribute to continued good growth for our Small Planet Foods division.

Growth of the $2 billion dinner mix category has paused in recent months and we have given up share through the first half.

Our Helper mixes compete in the add-to-meat segment of this big category and in this segment, Helpers are gaining dollar share driven by new Chicken Helper and Ultimate Helper varieties launched this past summer.

In the second half, we will introduce new flavors of Ultimate Chicken Helpers and we are kicking it up a notch with a line of new Bold Helpers in firehouse chili, crispy buffalo chicken and chipotle chicken enchilada flavors.

Ready-to-serve soup is another convenient meal option and our Progresso brand continues to lead growth with this category.

Our dollar share is up more than half a point year-to-date.

Our new varieties are performing well, including the line of Tetra Pak Artisan Soups currently available on the East Coast.

We are building our leading position in the Mexican food aisles.

Sales and marketshare for Old El Paso are up led by new Stand 'N Stuff soft tortillas.

In the second quarter, we launched Old El Paso in the freezer case and early results for these multi-serve frozen entrees are positive.

Finally, baking season is in full swing and we have got some solid marketing initiatives going on in our Pillsbury dough and Betty Crocker dessert mixes.

Year-to-date through the first week of December, we posted share gains on our refrigerated dough business and we have strong levels of advertising and in-store merchandising lined up for the rest of the holiday season.

So we like the outlook for this business.

Across all of U.S. Retail, we will launch more than 50 new products in the back half of the year.

That is on top of the more than 100 items launched in the first half, but it is not just quantity, it is quality that matters and we think we have a strong lineup of product innovation that will contribute to good growth for U.S. Retail in 2014.

We are supporting our new and established products with strong levels of consumer marketing.

Through the first half, our advertising spending is up 1%, in line with sales growth.

Across our key categories, our share of voice continues to exceed our share of category sales.

We are also leveraging the strong capabilities of our dedicated US salesforce.

We believe this team gives us a competitive advantage in the marketplace and our retail partners seem to agree.

In the latest Kantar PoweRanking survey, we were recognized by retailers as one of the top suppliers in the CPG industry overall and we received the top ranking for best salesforce and best supply chain management.

We also continue to benefit from holistic margin management initiatives.

For example, through our practice of conducting in-depth reviews after a major product launch, we identified ways to optimize production of Nature Valley protein bars that reduced ingredient waste and still delivered 10 grams of protein per bar.

It's disciplines like this that will help our segment operating profit grow faster than sales.

So in summary, our U.S. Retail businesses continue to face a challenging operating environment, but we believe our categories and our leading brands are well-positioned for growth.

We have some great product innovation in the marketplace now with more coming in the second half.

We are supporting our brands with strong levels of advertising and consumer-directed marketing.

With the year half complete, we remain on track to achieve our goals of low single digit sales growth in fiscal 2014 with the segment operating profit growing faster than sales.

Thank you for your time this morning.

I will now pass it over to Ken.

Okay, well, thanks, Ian, and good morning to all of you.

Ian just described the product innovation and marketing efforts we have underway in U.S. Retail.

Let me give you an update on our other two segments, starting with Convenience Stores & Foodservice.

So through the first half, pound volume and net sales for our C Store & Foodservice segment declined 1%.

Segment operating profit declined 3% reflecting a difficult comparison against last year's first half when operating profit increased 18%.

As you can see on slide 43, our Foodservice business has been posting good operating profit growth over the past several years.

We expect to generate operating profit growth and margin expansion again in 2014 as we continue to focus on our higher-margin priority business platforms.

This includes Snacks where net sales are growing at a 3% pace for the first half driven by strong performance in Convenience Stores.

We have been expanding distribution of our salty snacks in this channel and next month we will introduce new Chex chips in zesty flavors like wasabi and cheddar jalapeno.

Our good performance in this channel was recognized in the Advantage Group's most recent annual ranking of consumer product sales teams in convenience stores.

We moved up to the number 4 position overall.

Net sales for yogurts are up 13% in foodservice outlets on good performance from Yoplait Greek products and ParfaitPro yogurt.

We will be introducing ParfaitPro Max, a larger size version of this convenient way for foodservice operators to make yogurt parfaits.

And our frozen breakfast products are performing well in foodservice channels with net sales growing by double digits through the first half.

We have some great new innovation coming with Old El Paso Fold 'N Go breakfast tortillas.

These individually wrapped, heat-and-serve filled tortillas will be available in K-12 schools.

We continue to focus on the fastest growing channels in the foodservice industry.

On slide 45, you see that for calendar 2014 industry sources project food and beverage sales and convenience stores will grow at a mid-single digit pace.

In education channels, school breakfast and lunch programs are projected to drive 2% growth next year while colleges and universities are expected to grow even faster.

And the healthcare industry, including hospitals and senior living facilities, should post around 5% nominal growth next year.

So we believe we are well-positioned with the right products in the right channels to continue good growth for our foodservice business.

Turning to our International segment, first-half net sales were up 10%, as reported and segment operating profit grew 5%.

The slower rate of profit growth reflects our change of business mix, along with inflation and foreign exchange headwinds.

On a constant currency basis, first-half operating profit would be up by double digits.

Let me give you a few regional highlights.

As Don showed you earlier, first-half constant currency net sales grew 11% in Canada driven by good performance on Yoplait and Liberte yogurt.

We lapped our acquisition of Yoplait in the first quarter and since then retail sales for Yoplait and Liberte combined increased 8% while the category grew 2%.

In the second half, we will bring news to the category as we expand our recent launch of Yopa!

Greek yogurt with several new flavors.

We will have new flavors of reduced-calorie Source Greek yogurt, too and Yoplait will be joining in on our partnership with the Canadian Olympic team in February with on-package, in-store and digital promotions.

Food and beverage trends in Western Europe are soft right now and our first-half constant currency sales decline reflects that environment, but we have bright spots, including growth on Yoplait yogurt and Haagen-Dazs shops in France and Old El Paso Mexican products in the UK.

We are bringing some good innovation to our categories across Europe.

In France, we recently launched a beverage version of Calin yogurt, which promotes bone strength.

In the UK, Liberte Greek yogurt recently hit the dairy case.

We will introduce new flavors of Haagen-Dazs ice cream, including champagne truffle pints and chocolate caramel cones in shops.

First-half net sales in China grew by double digits on a constant currency basis led by Haagen-Dazs ice cream with sales up 12%.

Changing regulations on public sector gifting did have an impact on our Haagen-Dazs mooncake business during the mid-autumn festival season, but we were able to offset that with good growth on our retail products and in our shops where sales grew at a high single digit rate through the first half.

We remain on track to open 70 new shops in China in 2014.

Net sales for Wanchai Ferry grew 13% through the first half.

We had some good product innovation, particularly a line of mushroom dumplings from the Yunnan plateau and we recently launched a [tongwong] variety with a colorful filling and a translucent wrapper just in time for Chinese New Year.

In total, we remain on track to deliver double-digit sales growth in China in 2014.

In Brazil, we celebrated the one-year anniversary of our Yoki acquisition.

We like the growth we are seeing in our categories and our Yoki brands are outpacing category growth.

We are launching new flavors of many core products, including popcorn, soups and regional variations of our market-leading farofa side dishes.

We see great prospects for future growth in the Latin America region.

So for our International segment in total, we expect to post high single digit constant currency sales growth for fiscal 2014 with operating profit growing faster than sales.

Let me also say a word about Cereal Partners Worldwide.

Through the first half of the year, constant currency net sales grew 1%.

As you can see on slide 51, global cereal category sales are still growing overall with strong increases in Latin America and Asia, softness in Central Europe and the UK and declines in Southwest Europe.

CPW was seeing softness in Southwest Europe, too, but we posted good net sales growth through the first half of the year in the UK and we had strong growth in many emerging markets, including Russia, Brazil and Indonesia.

Our performance is driven by good growth on many of our established brands and we are bringing news to the category with product innovation, including new Fitness Fibre, a fruit-filled cereal we recently launched in select markets.

So to summarize our comments today, the second quarter was a difficult comparison to strong prior-year results for our businesses.

In addition, the period included the highest quarterly input cost inflation we expect to see this fiscal year.

And food and beverage industry sales in the US and other developed markets slowed a bit during the quarter.

Even so, our bottom-line results through the first half of the year are broadly consistent with our plans.

As we enter the second half of fiscal 2014, we expect our earnings growth to accelerate from first-half levels.

We like our 2014 innovation and marketing plans, which include a strong slate of new items being introduced in the second half of the year.

We expect our rate of input cost inflation to ease in the second half and last year's growth was weighted toward the first half making our second-half comparisons easier.

For fiscal 2014 in total, our plans call for another year of healthy growth with increased cash returns to our shareholders.

So that concludes our prepared remarks.

I will now ask the operator to open the line and the call for questions.

(Operator Instructions).

David Palmer, RBC Capital Markets.

Good morning, guys.

Can you hear me okay?

Yes, you are loud and clear, David.

Good morning.

Good morning.

Just a quick question first on your different segments.

Snacking and Baking seems to have been a good area of growth for the Company.

We wonder if that momentum can continue into the second half of the fiscal year.

It sounds like you have some more innovation on the Snacking side, but in Baking in particular, do you see that momentum continuing?

And then secondly, on the breakfast-oriented categories, that is an area that one would hope for improvement.

It sounds like you have some innovation there, but we didn't get a lot of specifics on cereal.

Are you prepared to talk a little bit about what exactly is going on there on that breakfast side in terms of innovation into the second half?

Thanks.

Good.

David, this is Ian.

I think we see and continue to see extremely strong momentum on all our Snacking businesses, and I don't see anything that is going to change that.

And when I look at our innovation lineup for the back half, and that division has our highest percent of volume coming from innovation, it is a very innovation-driven category, I am really quite excited about the prospects for that business, so I think it is strong.

Our Baking businesses are not quite as vibrant and high-growth as Snacking, but they are well-positioned and again, we have very good momentum.

There was a little bit of a seasonal shift this year in terms of when Thanksgiving fell, so that will show up more for those businesses in our Q3, but we really like -- the millennials seem to be back into being bakers and the so we think that is good for our future on that business as well.

As it relates to your question about the breakfast-oriented categories, or specifically cereal, I shared with you some of the innovation that we have coming.

We think we have a very strong back half.

We are gaining share in cereal, but we have also got to stimulate some category growth in cereal and that is going to come from what Jim Murphy said to all of you on the last call.

It is going to come from brand -- news on the core renovation and core renovation on the base business and I am really excited about what we will be having in the future on that and I mentioned the Super Bowl event, which we -- is not just an advertising idea; it is surrounded by, as all of you know, a lot of social media.

It is surrounded by a lot of promotions and work with our customers.

It is going to be a big event for us.

And then we have to bring good innovation to the marketplace and I think these -- particularly what we are seeing great success on is these ones that bring protein as people are looking for -- a lot of the competitive set outside the breakfast cereal category is bringing this fullness benefit or protein benefit to consumers.

People like it in cereal, too, and so as we added that to Nature Valley and we will be adding that to Fiber One, and that -- that, while it is not selling yet, sung into our customers in a very strong way.

We think those are the kinds of things that are going to get people back to the category and consuming cereal just a bit more often.

As we talk to consumers, they love the cereal category.

No one is rejecting cereal, it is just we are losing maybe that one extra morning a week where they are consuming something else.

And so if we can give them that alternative, we can get them back.

Thanks, Ian.

Robert Moskow, Credit Suisse.

Hi, thank you.

I think this question is going to be for Ian, but when I look at Yoplait sales, your shipments for the first half imply that second-quarter shipments were actually down versus year ago, and I think they were flat in first quarter.

So can you help me understand why would shipments be down in second quarter when it looks like your retail sales are getting less bad?

And then also could you delve a little bit into why the distribution -- the pace of distribution on blended yogurt has been a little slow?

Thanks.

Yes, thanks, Rob.

Sometimes, in any given category, in a given quarter, the specific -- the shipment and movement can move around.

In our yogurt category, they tend to, over time, move very much in sequence.

So I think what you will see in movement and shipments will be pretty similar.

As it relates to the question on distribution on the new Yoplait Greek Blended, what we saw in our second quarter, which is when we launched it, is different reset times by different customers and some of them really aren't till January.

And so as we bring some of our new items, we will also be seeing our Yoplait Blended come out and format.

So I think you will see that even through the data that will come out in December and into January continue to grow as we catch up with different customers' timing on shelf resets.

Okay.

I will pass it on.

Thanks.

Yes, and just to clarify, reported net sales for Yoplait would be down 1% for both the second quarter and the first six months.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

Can I ask about the pace of innovation between the first half and the second half?

I seem to remember last quarter you talked about benefits from new product launches in many of the U.S. Retail segment.

So are we expecting to see an acceleration in the pace of innovation in the back half?

Which segments will that be focused in?

Thank you.

Hi, Alexia.

This is Ian.

I will comment on U.S. Retail and then perhaps Ken or Don will comment on the other segments, but for us in our first half, the amount of volume that we were getting from innovation was quite a bit higher than the prior year and the prior year was quite strong, too.

And I will tell you that while those products that were launched will carry over, they were of a stronger character than the prior year and the amount that I spoke about in my remarks that we are launching here in the second half is also quite a bit stronger than the prior year.

So this should be a very good year for us in innovation overall in U.S. Retail and I really like our new product lineup.

So the only thing I would add -- the only thing I would add to that, Alexia, or maybe underscores that we have a very high -- a very high focus on innovation, quality and percent of volume from innovation across the Company.

And as Ian said, that has increased sequentially over the last three or four years, and typically, the first quarter for us is the bigger period where we launch typically 100 plus.

We have been strengthening the third quarter.

We've got some very good launches coming here in January.

Outside the US, I would say expansion of Greek is an important opportunity for us, so we continue to perform very well in the Greek segment in Canada with both the Liberte brand and Yoplait varieties of Greek yogurt and those are performing well, and we have recently launched Liberte Greek, and as you know, we like that Liberte brand.

We have launched that into the UK where we think there is going to be a significant Greek yogurt opportunity just as there has been in the US and so we are well-positioned there with European capacity and lots of capability.

So that Greek opportunity, we believe, is going to exist in many markets around the world and we are positioned to capitalize on it.

Great, and one quick follow-up.

Are you seeing any impact of the reduction in the snack food spending program?

We haven't yet, Alexia, but I think you have heard from many of our competitors in the food space and we would echo what they say.

There is going to be something there.

It will be a headwind when it happens and so it will be a one-time headwind and then we will move past it.

And as we like to remind all of you, this is food and people are going to keep eating and so we will find a way through those reductions.

Great.

Thank you very much.

I will pass it on.

Matthew Grainger, Morgan Stanley.

Hi, good morning.

Don, just two financial -- some modeling questions.

One, can you talk a bit more about the discrete drivers of the decline in adjusted gross margin year-on-year and whether there was any impact from inventory timing or other factors besides just pure inflation and mix?

Given the first-half pressures, is it still realistic to think about seeing flattish or slight gross margin expansion for the full year?

Sure, in the second quarter, as I mentioned in our remarks, we saw our highest -- what we expect to be our highest inflation of the year.

That was the major driver.

We also did see some segment mix negative in the quarter.

So those were the two primary factors and the segment mix essentially is the fact that International, which has slightly lower gross margins than our U.S. Retail business grew faster.

In terms of the full year, we expect inflation to decelerate as the year goes on and if you recall last year, fourth quarter in F13 was actually our highest inflation quarter of that year.

So we expect that to help our gross margin in the second half, particularly in the fourth quarter.

The mix issue will continue to be a bit of a headwind.

So as we look at the year now, we are seeing our gross margins for the full year being more flattish to last year and I think that is a safe modeling assumption.

Okay, thanks, Don.

And just with respect to interest expense, obviously, some favorability on a sequential basis there as a result of the refinancing.

Is it fair to assume that $69 million, $70 million level is a good run rate to think about going forward?

Well, we expect to see inflation -- or sorry -- interest expense tick up versus last year in the back half because we are going to term out some additional commercial paper.

We have some maturities later in calendar 2014.

So our plans would be to term out some of our CP.

We do still expect, as I mentioned in my comments, for interest expense now to be below last year, but only slightly.

So as you think about the back half, it is probably going to be a tickup actually verse on a year-over-year basis.

Okay, great.

All right.

Thank you, everyone.

Diane Geissler, CLSA.

Good morning.

I wanted to ask about your comments regarding the gifting in China and its impact on your Haagen-Dazs business.

Could you -- is there any way to quantify that?

And then I just -- how many stores do you have open?

I think you said you were opening 70 this year, but could you just give me a ballpark on how many you have in China right now?

So I am looking wildly at my peers to have someone remind me of how many stores we have.

It is around 300 right now across China, mostly concentrated, Diane, on the East Coast and in the Tier 1 cities, although we are expanding our store count pretty rapidly.

As I said, we will open 70 this year primarily in more interior and tier 2 cities.

The same-store sales growth for Haagen-Dazs shops in China continues to be robust, quite strong, high single digits.

So we are very encouraged by that performance and we have growing retail sales through traditional grocers for Haagen-Dazs and we also have a nice foodservice business for Haagen-Dazs across China.

So the fundamentals of that business are quite good.

The mooncake sort of festival sales, these are sort of online or phone-in orders or people asking us to prepare gifts that they could give family and friends is something that -- this is an area that is just coming under more scrutiny from a government policy standpoint in China.

So there has been stronger guidelines on officials buying and distributing those gifts and that has had an impact on our sales.

I think we are going to be down mid-single digits this year.

So it is a headwind, but not something that we think we will be able to overcome as the full year unfolds.

Okay, great.

And then just a follow-up on the International piece.

I think, Don, you mentioned that you had a fraud-related asset loss.

Could you provide a little bit of color on that?

Yes, but only just a little.

We had a $12 million fraud-related asset loss in our International supply chain.

It involved an outside party.

Because the investigation is ongoing, we don't really have a lot of additional information to add at this time.

Do you feel like you have reserved -- obviously, probably you feel like you've reserved adequately for that, but is the investigation -- is there a potential further loss if you -- the further you get in the investigation or do you think you have captured it all?

We believe that we have adequately reserved for our exposure.

Okay.

All right, great.

Thank you.

Ken Zaslow, BMO Capital Markets.

Hey, good morning, everyone.

For the last four years, General Mills generated EPS growth a little bit below your long-term growth algorithm.

Look, I understand the challenges across the industry, but I guess what I am trying to figure out is what steps can you take to actually reinvigorate it and do you feel like there is a confidence level that you can actually reestablish it?

Just as a side part to this, have you been more challenged to deploy capital in marketing or acquisitions or CapEx to get to that higher historical rate of return?

Well, Ken, let me start and then if Ken and Ian want to add.

Let me just be clear on our projections for the year.

We gave a pretty, I think, specific guidance on what we expect for the second half.

We are not banking on industry trends to improve, but given the very compelling new product lineup that Ian overviewed and a similar one in International and continued strong brand support, we expect to see sales growth tick up a bit in the second half, and that, combined with the easing inflation that I mentioned, continued admin cost controls, share repurchase, a little favorable tax phasing for the year, we expect second half to see mid to high single digit operating profit growth and high single digit EPS growth.

Now for the full year, then, double digit EPS growth -- thank you -- but for the full year, what I want to make clear is, on a constant currency basis, we still expect to be very much on model.

Sales will grow low single digit, operating profit mid-single digit and EPS high single digits.

Now where we land specifically will depend on ForEx because that could -- based on today's trends and if there is a devaluation in Venezuela, it could take up to 2 points off what our planned growth was going into the year, so I just want to make sure that everyone is clear.

The underlying business is performing generally in line with what we expected in a more difficult environment.

The other thing I want to be clear on is that we don't intend to cut good marketing and merchandising programs or any business-building activities because of this ForEx strike, so we are going to continue to deliver against those.

As far as cash flows, as I mentioned, we expect operating cash flow, and I would extend that to free cash flow, to grow verse last year because working capital will reverse and be a cash contributor for the full year.

So our plan to increase our cash return to shareholders through dividends and share repurchase remain fully on track.

So I just don't want people to get diverted by the ForEx that we are seeing and really focus -- the underlying business is performing generally in line with what we expected for the year in a tougher environment.

So what I would add to that, Ken, is our approach remains very much the same.

We are very focused on developing solid top-line growth on model performance and we do that with new product innovation.

As we have already talked earlier in the call, we have a very high focus on that and we like our trends there.

We like the quality of new items and the quantity that we have introduced over the last several years and we have an increasing focus and emphasis in that area inside the Company.

Core brand renovation continues to be -- and brand-building continues to be very critical to us and as Don said, we are committed to high levels of consumer brand-building to drive those core brands.

International expansion, of course, continues to be an opportunity for us.

So the whole top-line-focused innovation brand-building nexus is crucial for us, but I would also want to just remind you that margin expansion continues to be a very, very high focus for us.

We didn't talk about HMM a whole lot on this call, but that continues to be a very important focus for us across the Company.

We have more opportunities to engage there internationally at Yoki, which we just acquired and that focus on HMM frees up resources for us to invest in the points that you made in your question and the innovation and renovation that leads to growth.

So we are very focused on the fundamentals that will drive our brands and our categories.

So it's fair to say that 2015 should be, again, at least in line with your long-term growth targets?

Absolutely.

That is our focus, that is our model and we will be very, very intently focused on delivering another on-model performance in F15.

Now, obviously, we will have a lot more to say about the characteristics of that year when we see you in June -- inflation, all of the outlook, those kinds of things.

But we think that the developed markets are going to continue to improve here.

It is challenging right now, but they will get better and we are sure we will see more opportunities as we get closer to next year.

Great.

I appreciate it.

Thank you.

Ken Goldman, JPMorgan.

Hi, good morning, everyone.

20 years ago, like many packaged food companies, you were diversified into retail.

Now this has changed.

Most food companies don't have anything meaningful in retail, but one notable exception is General Mills with the Haagen-Dazs stores.

It is obviously a great business, but I am just curious if it wouldn't be even more valuable under the umbrella of a company that maybe focuses more on retail as a core competence.

So I do appreciate the synergies there that you get, but I am hoping you can talk a bit about whether you've considered divesting the business, just the retail side that I am sure there is high demand for, given that it is not necessarily your core competence anymore?

Well, Ken, let me just maybe make a few comments.

Retail is an important part of the Haagen-Dazs marketing model.

We do have shops in a number of countries around the world in Western Europe and we have, of course, as you have seen and know, a well-developed shop network in China.

I will tell you that we have developed a high, but very focused capability in that area.

We really know how those shops work.

We know a lot about what real estate works for them.

We know very well how to train and operate those shops and we -- that is a centralized capability for us that we apply around the world.

So we have gotten very good at that.

And as you highlighted, that shop visibility and shop network and innovation that we offer through those shops are a key part of the brand development model for Haagen-Dazs.

And so we look at it very much as an asset, very much as kind of a capability that enhances the image of the brand and there is no question that the shops have helped us build out the equity in multiple markets around the world.

We have just opened over the last year and a half as an example about a dozen shops in India and that is providing the basis for brand visibility, brand recognition for future retail sales.

So I understand your point, but I guess what I would say is this is a very focused initiative for us.

We have been doing it for many years.

We are very good at it and it is a critical part of -- and it is kind of an outstanding part of the marketing mix for that whole Haagen-Dazs brand experience.

I just had a couple of points just to emphasize Ken's point is that where we own the shops and run them are in the -- are largely in the markets where we are still building the brand and we don't want to outsource that to anybody.

That said, if you look across our entire network, more shops are franchised than owned and so we do see an opportunity from a capital allocation standpoint to have partners help build the brand and typically once we get to a point where retail sales are larger than the shop sales, it opens up the avenue for franchising.

That's very helpful.

Thank you.

Eric Katzman, Deutsche Bank.

Hi, good morning, everybody.

So I guess, Ken, my question really more from an industry statesman perspective is I have really been surprised and I guess a bit disappointed in the industry's, the senior management's inability to really quantify why volumes across the industry are so weak.

You have got restaurant sales are weak, private label has been losing share, so it is not like the consumer has been rolling over.

So what do you think is going on out there?

Are the retailers capturing more consumers with their prepared fresh items because it is a bit disconcerting when so many categories across the store are down?

So, Eric, thanks for the question and I will give you my thoughts.

I think part of it is just income stagnation in developed markets around the world.

You basically have flat or even slightly down incomes in a number of countries in Western Europe.

In the US, we had the payroll tax hit.

We have political -- very visible political debates around budgets, I think, that worry consumers.

We talked a little bit about SNAP.

So I think that you have a reality of slower no income growth in developed markets, but I think -- and as you see the economy shows some signs of growth, in the US anyway, what is benefiting right now at this stage in the cycle is other things.

And so consumers are buying cars and they are improving their houses, and maybe they are buying a few more homes.

So there are certain sectors that are developing at this early stage, but for personal -- for consumer products, as you have noted, the categories are slower growth right now.

We are going to move past that stage.

We're going to have population growth.

We will continue to have population growth in the US.

There are many good opportunities for us to find growth out there.

We talked a little bit about snacks, or Ian commented on snacking behaviors.

Yogurt continues to be a great opportunity.

So we are going to find those opportunities.

We think income is going to continue to develop for consumers in Western markets, and as that happens, we will see a little more growth.

And we are going to be ready to capitalize on that with good categories and brands and with the right kind of innovation.

But right now, I just think that income growth -- income is a factor for consumers and what disposable income they have, they are spending in other areas.

Okay.

And if I could also just follow up, I think last quarter I asked you about pricing coming down at Walmart, and you were very clear that you had just been there and said, no, we are not seeing that at all.

But I am kind of -- when I look at some of the comments of your peers, many of them have talked about more aggressive promotion, price discounts in the market.

How do you see that trend developing?

Did your promotion pick up in the quarter, and maybe was an offset to the fact that advertising was down.

Maybe you could expand on that.

Yes.

So, Eric, I will let Ian jump in here as well.

But look, I will just say that generally we are seeing price stability across our categories.

And where we see -- where there are differences, I think we were down in some -- our promotion was up a little bit in some categories in the first half.

That is solely because our promotion was lighter in the first half of last year.

So you get into year-over-year comp issues.

But over the course of the year for us, we expect our permission to be very balanced and very consistent.

And we are not really seeing any promotional trends out there that worry us.

Okay, you see quarter-to- quarter variability, but I would not overly focus on that.

So we are seeing stability there and, frankly, our focus really, as I have said, is we are looking for baseline and quality top-line opportunities for growth, which is always going to be about renovation, innovation.

That is really our focus here.

We don't see worrying things in the merchandising environment in general.

And as for private label, hard to comment.

They are down a little bit.

They are down more in some areas.

I think one aspect of private label is that we have had, even though we have had more moderate inflation this past year, you look back over the last 5 years we have had quite significant inflation.

And they have less room to work with.

And I think if you study the gap, the price gap between private label and brands over the last 5 years, you will see that that has gradually closed some.

And I think that that is kind of a reality for the private-label business right now.

Okay.

Eric, this is Ian.

I would just say the promotional environment, again, in any given category can heat up or slow down, but overall we are not seeing any major changes in trend in the promotional environment.

Our consumer support levels are roughly, in the U.S. Retail segment, in line with sales a year ago.

We are not using funds there to fund the promotional environment.

And roughly, I don't see competitors doing much of that either.

So there was no doubt an industrywide slowdown in our Q2 across the food categories, but I wouldn't say that that is promotionally-led.

Okay.

All right.

Best to you and your families for the holidays.

Yes, you too, Eric.

Thanks a lot.

Operator, can we sneak one last one in here?

Chris Growe, Stifel.

Thank you for making time there.

Good morning.

I had two questions for you and I think both kind of directed towards Ian.

The first was to understand, in the U.S. Retail division, I think you just spoke about promotional spending overall, that price mix line has been positive and you had a very strong performance in Q1.

I want to understand -- I assume -- I believe that is mix improvement that is occurring within the business.

Is that new product-driven?

Is that a sustainable level of mix improvement occurring that we saw here in Q2 for the remainder of the year?

Yes, it's not -- our new products often times are positive in that regard, but there is also some fundamental shifts -- a very big part of our portfolio on both a unit and dollar basis is the yogurt category.

And if you look at what a cup of Greek yogurt costs relative to a cup of $0.60 Yoplait on average yogurt, it is a huge mix change within the category.

So for every cup of Greek we sell, it is not quite twice the price of a regular cup, but getting there, and so that I don't see changing actually a whole lot going forward in our business.

In some of the other categories, it really can get down to the ebbs and flows of which products are selling at the time.

For example, fairly instrumental in some of our businesses this year was canned vegetables and sometimes we sell them harder in the first half, sometimes we sell them harder in the second half and so that will weigh into mix as well.

Okay.

And then the second question was in relation to Yoplait and just to understand the dynamic that has been going on in that category and where General Mills stands today and particularly where Yoplait stands around shelf space, particularly for the base, the non-Greek business and then we have seen some collapsing of the price gap between Greek and conventional, if you will and I am just curious if that has any effect as well on the non-Greek business.

Yes, we are seeing improvement, but we are not all the way to bright yet obviously on the core business.

As I had mentioned in my remarks, we are starting to see growth again in Yoplait Original, the stuff that is in the red cup.

The business that is still being impacted by the Greek trend significantly is our Yoplait Light and we have some news planned on that, but a lot of people who are switching to Greek are diet managers and they are -- in a good way, I suppose, they are buying our Yoplait Greek 100, but it has affected our Original.

So we still see some impact on that business, but we are starting to see distribution get the rate of reduction, let's say, not as significant and so we think that that business will stabilize.

Your comment on the pricing on Greek, it has come down a little bit, maybe 5% across the category over the year.

I would say that was somewhat expected.

We have talked about in the past we knew by virtually everyone in the industry that there was a fair amount of capacity coming onstream and that is about what we would have thought.

I think Greek (inaudible) coming to on average somewhere between $1.00 and $1.10 is probably where it will rest.

I will remind everyone that while we talk about deflation overall, the dairy markets have been highly inflationary, up significant double digits and that Greek yogurt uses 3 times the amount of dairy or milk than a regular yogurt.

And so there is a bit of a governor in there in terms of a very high cost of goods impact from dairy markets.

So I don't think we are going to see too much more as it relates to Greek pricing coming down.

But we like it where it's at.

I think it does help, as you asked, a little bit to make sure that the value of our core business looks good and I continue -- the last I will just say, the yogurt market is up 9%.

That is -- for a category the size of yogurt to be up 9% is truly significant and that is being driven by Greek trends and that consumers are finding benefits in the category.

There will be a lot of innovation coming at the category in this next year and I think it is going to continue to be a very, very strong category.

Okay, well, thank you and thanks for the perspective on that and happy holidays.

You too.

Thanks, everybody.

I know there are still people in queue.

Give me a call and we will try and help you out.

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

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

Have a good day, everyone.