通用磨坊 (GIS) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the third-quarter F'14 earnings conference call.

During the presentation all participants will be in listen-only mode.

Afterwards we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded Wednesday, March 19, 2014.

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

Please go ahead, ma'am.

Thanks, operator.

Good morning, everybody.

I am here this morning with Ken Powell, our Chairman and CEO; Don Mulligan, our CFO; and Ann Simonds, Senior Vice President and President of our Baking Products division.

Before I turn the call over to them I will cover my usual housekeeping items.

Our press release on third-quarter results was issued over the wire services earlier this morning; it is also posted on the website if you need it.

You can find slides on the 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 in today's presentation 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 to everyone, thank you for joining us today.

As we noted in our preliminary release last week, several factors restrained our third-quarter operating performance.

Severe winter weather resulted in weak sales trends across the food industry and our categories.

Foreign-exchange was a headwind; we made significant incremental investments in our US yogurt business in the quarter including advertising, sampling and in-store merchandising.

Early response is encouraging and Ken will share the details with you in a few moments.

And finally, our comparisons in this quarter were difficult.

We are lapping double-digit gains in adjusted segment operating profit and adjusted diluted earnings per share a year ago.

Our third-quarter results are summarized on slide 5. As a reminder, we are now excluding Venezuela currency devaluation from total adjusted segment operating profit and adjusted diluted EPS.

That affects last year's third and fourth quarters and will likely impact this year's fourth quarter.

In the third quarter net sales totaled nearly $4.4 billion, 1% below last year.

On a constant currency basis net sales in the quarter matched year-ago levels.

Adjusted segment operating profit totaled $690 million, 10% below year-ago results.

Net earnings grew 3% to $411 million reflecting good control of administrative expenses and favorable mark-to-market effects.

Diluted earnings per share were $0.64 as reported, up 7% from last year.

Adjusted diluted EPS totaled $0.62, down from $0.66 a year ago.

Slide 6 shows the components of our third-quarter net sales growth.

As I mentioned, foreign-exchange reduced net sales growth by 1 point, (inaudible) volume was 1% below year-ago levels, and sales mix and net price realization added 1 point of sales growth.

Slide 7 shows third-quarter net sales results by segment.

For US retail net sales declined 2% overall, with gains in our Frozen Foods, Small Planet Foods and Big G divisions offset by declines in our remaining divisions.

Pound volume for US retail was down 1%.

International segment sales grew 2% as reported and 7% on a constant currency basis.

Pound volume was down 1%.

All four regions achieved constant currency net sales gains with double-digit growth in Latin America and Asia Pacific.

Net sales of our convenience stores and foodservice segment were down 7% in the quarter.

Pound volume declined 3% due in part to winter weather that closed schools, business, cafeterias, restaurants and hotels around the country.

Price realization also was lower reflecting lower indexed prices on certain product lines.

Slide 8 shows the third-quarter gross margin, excluding mark-to-market effects, declined 80 basis points.

This is primarily due to unfavorable mix and higher promotional spending in US retail, plus some weather-related disruption costs in our supply chain.

For the fourth quarter we expect input inflation will be well below year-ago levels and that will help drive strong expansion in our underlying gross margin.

Our full year estimate for input cost inflation continues to be 3%, that is despite the higher dairy inflation we are seeing.

Slide 9 shows our third-quarter profit growth by operating segment.

Comparisons were tough across the board.

US retail profit declined 11%; roughly two-thirds of the decline reflects the impact of dairy inflation and incremental merchandising and marketing investments in our US yogurt business.

International profit increased 1% excluding the Venezuela currency devaluation last year.

On a constant currency basis international profit grew at a mid-single-digit rate.

Convenience stores and foodservice profit was down 17% reflecting the weather-related sales declines.

Third-quarter after-tax earnings from joint ventures totaled $23 million on a reported basis; on a constant currency basis JV earnings grew at a double-digit rate fueled by net sales growth of 1% for CPW and 13% for Haagen Dazs Japan.

Slide 11 summarizes other key income statement items for the third quarter.

Interest expense was 1% below last year.

We continue to expect full year interest expense will be slightly below last year.

The effective tax rate for the quarter was 33.8% as reported.

Excluding the items affecting comparability the tax rate was 33.6% compared to 30.5% a year ago.

For the full year we still expect our underlying tax rate to be roughly comparable to last years.

Finally, average diluted shares outstanding for the quarter were 4% below last year's level.

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

In the third-quarter our core working capital declined 8% 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 13 summarizes our financial performance through nine months.

Net sales grew 2% to $13.6 billion including 2 points of growth from new businesses.

Of our reported net sales growth of 2% pound volume contributed 2 points, net price realization and mix added 1 point, and foreign-exchange reduced sales growth by one point.

Adjusted segment operating profit was over $2.4 billion, 3% below last year.

Net earnings attributable to General Mills totaled over $1.4 billion and diluted earnings per share were $2.18.

Adjusted diluted earnings per share were down 1% to $2.15.

The next three slides provide more detail on our nine-month results by segment starting with US retail.

In total, net sales for use retail were flat in the first six months.

Nine months.

Nine months, thank you.

This includes sales gains of 8% in Small Planet Foods, 5% in Snacks and 2% in Big G cereal.

Year to date segment operating profit is down 3%.

Sales for our convenience stores and foodservice segment are down 3% through the first nine months with segment operating profit 7% below last year.

Constant currency international sales are up 11% year to date led by Latin America, where constant currency sales are up 50%.

That includes three incremental months of Yoki in the first quarter.

But even without that incremental boost sales would be up double digits.

In the Asia-Pacific region sales increased 10% led by double-digit growth in China.

Sales for the Canada region are up 8% including incremental contributions from Yoplait and the first quarter.

In constant currency sales in Europe declined 1% reflecting a difficult operating environment they are.

International segment operating profit is up 8% on a reported basis.

Excluding all currency effects international profit grew at a high-single-digit rate in the first nine months of the year.

Let's turn to cash flow results.

On slide 17 you can see that cash flow from operations in the first nine months exceeded $1.7 billion.

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

We anticipate fourth-quarter operating cash flow will be up significantly over last year driven by strong net earnings growth, normalize working capital trends and no pension contribution.

We anticipate that full year operating cash flow will meet or exceed last year's strong results.

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

We have purchased 29 million shares thus far this year and for the full year we expect our average diluted shares outstanding will be roughly 3% below last year's levels.

Last week we announced a dividend increase of 8% payable on May 1, which will result in a 17% increase in dividends per share for the full fiscal year.

Our outlook for fiscal 2014 is summarized on slide 19.

In the fourth quarter we expect input cost inflation will be below last year's level which, combined with continued HMM delivery, should result in significant gross margin expansion.

Our underlying tax rate and diluted shares outstanding will both be significantly lower than last year.

As a result we expect to deliver robust double-digit growth in adjusted diluted earnings per share in the fourth quarter.

For the full year we expect adjusted diluted earnings per share in the range of $2.87 to $2.90.

I will now pass the microphone to Ann Simonds; Ann has managed our Baking Products division to strong results over the last two years including good retail sales growth in the latest quarter.

Baking Products is a key product platform for General Mills in the US and her division has been a leader in developing successful digital marketing capabilities within our US retail business.

But I will let Ann tell you all about that.

Ann.

Thank you, Don, and good morning to everyone.

It is a pleasure to be on the call today to give you an update on our Baking Products business and how we are growing this portfolio of iconic brands.

Internally we call our Baking Products division, Mill City, which is a tribute to the Minneapolis milling heritage of General Mills and Pillsbury.

This division generates $2.5 billion in annual retail sales making us the largest branded baking business in the US with nearly a 50% share of our Baking Products categories combined.

Refrigerated baked goods generate over half our sales and Pillsbury is the leading brand in this $2 billion category.

We're also home to the Immaculate baking brand, which includes organic, gluten-free and non-GMO project verified dough products.

Betty Crocker is the leading brand in the $1.8 billion dessert mix category combined with the Bisquick brand baking mixes generate more than one third of our division sales.

Gold Medal flour, General Mills oldest consumer brand, rounds out our sales.

With all of our Baking Products in one division we're leveraging our extensive baking knowledge and driving efficiencies across R&D, manufacturing and marketing.

These efficiencies, along with our market-leading positions, put our division's profitability well above the Company average.

We like the gross profit (inaudible) for our business, dessert mixes and refrigerated dough enjoy high household penetration rates and people shop these categories nearly every month because baking is on trend, that is particularly true with growing consumer groups in the US.

Millennials are a great demographic for us.

As Ken described last month at the CAGNY conference, this is the generation that is starting families; they like to Cook and bake.

They are willing to try new things and they are also developing am interest and scratch baking, but keep in mind, for many of them their definition of scratch includes the use of baking mixes to spark their creativity.

Boomer households are downsizing, but they still like baked goods, they are looking for smaller package sizes, we have introduced a variety of small pouch baking mixes and five count packages of fresh to appeal to these consumers.

The growing Hispanic population represents a great opportunity for our products.

Hispanic moms like to bake for their families and it is a tradition to have bread with an evening meal.

But refrigerated dough is not familiar to them.

So in our advertising and packaging we are showing them how to use Pillsbury dough particularly biscuits to complement a meal.

We are seeing increased household penetration for refrigerated baked goods among these consumers.

In the third quarter retail sales for our business grew 4% overall competitive price promotion led to a decline in retail sales for our dessert mixes, but retail sales for our refrigerated baked goods grew 6% and sales for gold medal flour were up 15% as we sharpened our price points on this leading brand.

For the year to date our market share of refrigerated dough is 70% and growing.

This performance is led by sweet rolls and biscuits?

We are showing consumers creative new ways to use our biscuit dough from crusts for single serve pizzas to pockets for sloppy Joes.

And we are bringing new products innovation to our category.

We launched Hershey's baking mixes and frostings earlier this year giving consumers an affordably priced line of premium products.

We are working to bring news for our baking categories your round not just around the winter holiday season.

For example, our Pillsbury place and bake cookies in Easter shapes are in stores right now.

Seasonal products like these contribute to good year-round sales growth and they are highly incremental to our regular business.

According to the NPD group, 30% of households are trying to limit gluten in their diet.

Formulating great tasting gluten-free baked goods is a challenge, but we are doing it.

We launched our first Betty Crocker gluten free dessert mixes back in 2010.

In 2011 we introduced a gluten-free version of Bisquick baking mix and this year we added sugar cookies and rice flour to the Betty Crocker line, contributing to 23% retail sales growth for our gluten-free mixes so far this year.

We also introduced our first gluten-free fresh dough products this year.

More than 60% of the sales are incremental to the refrigerated dough category.

So watch for more varieties to come.

As Ken noted at CAGNY, we support our business with strong levels of advertising.

Over the past five years General Mills' US media investment has grown at an 8% compound rate.

While we are the fourth largest US food and beverage Company based on Nielsen measured sales we are the second largest food and beverage advertiser.

Since 2008 our US media spending has grown nearly 50% and the mix has changed.

TV advertising is still the largest part of our advertising budget, but we have significantly increased our use of digital media.

Digital media and communication technologies align particularly well on baking businesses.

That is because our consumers have always had an interest in recipes, cookbooks and sharing food ideas.

So the Mill City division pioneered an initiative inside General Mills to look at the future of marketing and build our capabilities to reach consumers in an increasingly networked world.

While TV is still a significant part of our budget too, our use of digital media is growing at a strong double-digit rate and it now represents more than a third of our total media spending.

Let me give you some examples.

We know consumers are putting their grocery lists on their smartphones, they're looking online for recipes and they're watching cooking videos on YouTube.

The goal of our digital initiatives is to be on the right mobile device at the right time with the right message and we have some well known equities to leverage.

For example, Betty Crocker's Big Red Cookbook is one of the best-selling cookbooks of all time.

Today this cookbook is a platform to connect with consumers.

It can be loaded as an app onto smartphones and tablets.

We also include baking tips and shopping lists that are right there with you when you are in the grocery store.

BettyCrocker.com is one of the top 10 most frequently visited food websites in the US.

We are working to increase that frequency by providing changing and compelling content.

We also customize the experience for consumers.

If you sign up as a Betty Crocker -- as a member of BettyCrocker.com you will receive recipes, entertaining ideas and even coupons that are based on what you look at online and what you buy.

I hope some of you will give it a try.

Through this membership feature we have developed a robust consumer database that database helps us identify and act on consumer trends.

For example, once we saw the increasing popularity of cronuts, a cross between a crescent and a doughnut, we were able to quickly develop a recipe for them using our crescent roll dough and send it out to our members.

Our digital media also helps us better target our marketing, which increases the likelihood our message gets seen and makes the most efficient use of our media spending.

When we send an email to our members we generally see an increase in traffic to our sites and we see our recipes and product ideas expand to social media outlets such as Pinterest, giving us even broader exposure.

While BettyCrocker.com appeals to aspirational bakers, Pillsbury.com is all about quick and easy preparation.

We know that site traffic spikes between 3 pm and 4 pm as people start to think about dinner.

So we are giving consumers from a time crunch millennial to a Hispanic consumer unfamiliar with refrigerated dough new and simple ways to use our products to make an evening meal.

Starting in January visitors to our Pillsbury site receive a weekly video on a new use for one of our dough products.

This site gets 40 million visitors per year and we expect that will continue to rise as we add more video in addition to our daily content.

Our Pillsbury website also features recipes from the Pillsbury Bake Off, which is another unique part of our marketing mix.

This is the country's largest amateur baking contest and one in four consumers has tried a bake-off recipe.

We continually update the contest to keep it contemporary.

For example, in 2013 for the first time consumers could vote to select the finalist.

The bake-off is a great platform to showcase our products and a great opportunity to partner with retailers to drive growth.

We work with retailers to develop ads, in-store promotions, even customize web pages that feature contest finalists from the retailer's area and the recipes.

I will wrap up my comments this morning with these three key points.

Consumers are interested in baking and our products are on trend with the needs of growing consumer groups, boomers, millennials and Hispanic families.

We hold the leading brands in the $4 billion US baking category and we are supporting these brands with unique marketing mix that includes increased use of digital assets.

We continue to innovate in our categories providing great quality and value and we are bringing news to the baking aisle and refrigerated case year-round.

I appreciate your interest this morning and with that I will turn it over to Ken.

So, thanks, Ann, and thanks to you and your great team for these very strong product and marketing initiatives.

And good morning to one and all, all of you on the webcast.

As you can see, our Baking Products business is a terrific platform for sales and profit growth in our US retail segment.

Now as Don mentioned earlier, our US results for the third quarter reflect actions we've taken on our yogurt business.

Now let me give you some details.

The US yogurt category wasn't immune to the food industry slowdown this winter.

After posting 9% retail sales growth through the first half of the fiscal year, retail sales for the yogurt category grew just 3% in our third quarter.

Retail sales for our yogurt business in total declined in the quarter.

But during this period we put our foot down on the gas pedal with incremental investments in this business and here is what we have done.

We launched 16 new product SKUs in January, that is twice the number we launched this time a year ago.

We increased our merchandising support; this included introductory trade funds to generate feature and display on all of those new products.

And we matched competitive merchandise price points on Greek.

In January we announced Yoplait Greeks taste superiority over the leading blueberry Greek yogurt.

And we launched the Greek taste off.

As part of that announcement we began a sampling program that will ultimately reach stores that account for nearly half of total retail volume.

We supported this news with incremental TV advertising and we opened up a pop-up store in New York City so consumers could judge for themselves the superior taste of Yoplait Greek.

We are already seeing benefits from these efforts.

Since January our churns on great varieties have increased and we have gained dollar share nearly every week versus last year, reaching more than 10% of the Greek segment in the most recent period.

In addition, original style Yoplait has returned to growth.

Retail dollar sales are up on Yoplait original for virtually every week in the calendar year to date on the strength of our family targeted snacking campaign and distribution for this line is growing again too.

We still have work to do on Yoplait light, but turns for that line are now positive and we've been gaining share in this segment.

For the third quarter the combination of weak category sales, our increased marketing and merchandising investments and higher dairy input costs reduced sales and profitability for this business.

Our reported net sales for Yoplait were down 8% reflecting lower volume and the increased merchandising.

But our sales trends in the marketplace our improving and we will keep our foot on the gas to fuel momentum in this business.

Let's turn to cereal, where our business is growing.

Big G net sales were up 1% in the third quarter and 2% fiscal year to date.

We are gaining share in the category, up 3/10 of a point so far this year.

We've seen good performance from many of our established brands like Lucky Charms and Cinnamon Toast Crunch.

And our new products launched in January that received good early consumer response.

We believe that product news and innovation combined with high levels of effective advertising will bring consumers to the category.

And so far this year that formula seems to be working for us.

New products are contributing to strong growth on our grain snacks business.

We launched Nature Valley breakfast biscuits and Fiber One meal replacement bars in January.

They are helping to drive 10% retail sales growth so far this year and we have gained a full 4 points of dollar share.

We are also seeing good growth on Totino's.

Retail sales for pizza are up 5% so far this year, due to good merchandising execution and distribution gains.

And retail sales for Totino's pizza rolls are up 6%, including new bold rolls launched this past summer.

Turning to convenient meals, Progresso's share of ready-to-serve soup is growing.

We recently announced a partnership with the Mayo Clinic promoting our Heart Healthy soups.

The convenience and great taste of Old El Paso Mexican Foods are driving good growth for this brand.

Sprint.

Fiscal year to date, retail sales are up 4% and we've gained 0.5 point of dollar share as we promote the fresh aspects of these dinner tips.

And in the freezer case, Old El Paso entrees launched last September are on track to deliver $50 million in retail sales in their first year.

Finally, our natural and organic products continue to perform well.

Cascadian Farm cereals are up 1% in natural and traditional grocery outlets combined.

And our snack business is growing nicely as we've recently introduced new varieties of Food Should Taste Good chips, chips and crackers, Uber Bars and Cascadian Farm protein granola bars.

For the US retail segment in total, we expect category top-line trends to improve gradually as the calendar year unfolds, and we expect to show a strong profit increase in the fourth quarter.

Turning to our convenience stores and foodservice business, Don outlined the drivers of our overall sales and profit decline.

However, we're seeing growth in several of our key product platforms.

Net sales for our snack items are up 4% fiscal year to date, on good performance in convenience stores.

Net sales for yogurt increased 10%, due in part to continued good performance on Yoplait Parfait Pro.

And net sales for our frozen breakfast products are up 23% so far this year.

Our international businesses continue to post solid results.

Through the first 9 months, net sales and segment operating profit are both up 8%, with good growth in both developed and emerging markets.

On a constant currency basis, excluding both foreign-exchange and last year's Venezuelan currency devaluation, net sales are up 11% fiscal year to date and operating profit has increased at a high-single-digit rate.

In Europe our constant currency net sales are down 1% year to date; we have some good new product introductions just entering this region.

We're introducing Old El Paso stand and stuff tacos in France and the UK.

And new Haagen-Dazs triple sensation ice cream treats are launching in the UK this spring.

In Canada our grain snacks are performing well and our Liberte and Yoplait product line continue to drive growth in the Greek segment with a combined 35% share.

Constant currency net sales in China are up 13% so far this year fueled by Haagen-Dazs ice cream and Wanchai Ferry Frozen Foods.

And we're having a good year in Latin America.

In Brazil we are now launching a line of baking mixes cobranded with Yoki and Betty Crocker.

We think these sweet snacks will be another good platform for us in this growing market.

And one quick word on Cereal Partners Worldwide.

Constant currency net sales for CPW are up 1% so far this year.

We are seeing growth on many core brands including Lion in Europe, Chocapic in Asia and Shreddies in the UK.

And CPW recently launched a variety of new products in Europe, Asia and Australia.

So our international businesses continued to post good performance in developed and emerging markets.

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

It was a tough third quarter reflecting some clear external headwinds along with our actions to increase marketing and merchandising investment in US yogurt.

We expect strong earnings growth in the fourth quarter and the drivers of that growth are relatively straightforward.

We see lower input cost inflation, a lower tax rate and a lower average share count in the period.

For 2014 in total our guidance for adjusted diluted earnings per share is a range of $2.87 to $2.90.

We are getting there differently than we planned, top-line trends in developed markets have been softer than anticipated, but we've offset that with good administrative cost control, lower interest expense and increased share repurchase.

And we are delivering the robust cash returns to shareholders that we outlined for fiscal 2014 with a dividend increase of 17% and strong share repurchase activity.

So I will leave it there and we will now open the call to your questions.

Operator, would you please get us going?

(Operator Instructions).

Andrew Lazar, Barclays.

Just two questions for me.

I guess first, Ken, of the three main drivers you mentioned around lower yogurt profitability in the quarter, increased dairy costs, trade promotions for the new products and some price matching in Greek and in the consumer spending, I was hoping you could dimensionalize them for us a bit.

Was one much larger an impact than the others or were they all about equal?

So, thank you -- thanks, Andrew, I will just -- I mean it was basically a third, a third, a third.

Don, do you want to put a finer point on it?

No, he doesn't.

So significant dairy inflation.

We did get those merchandising price points in line and there has been a good increase in consumer spending.

And that spending is all about taste, Andrew.

It is very taste oriented advertising and it is a lot of sampling.

We want to get these products in people's mouths because we know that they perform very, very well and people like them.

So think a third, a third, a third.

Okay, and then on its conference call last week Post mentioned that it expects the ready-to-eat cereal category growth will return to a single-digit rate of growth in 2015.

And they are basing that on a lot of the actions taken by the two leaders in the category to bring consumers back in.

And they also thought that many of the more recent demand shocks in the category are sort of nearer to the end than the beginning.

And I guess -- I mean most of their comments are really based on what you and others do as opposed to them.

But I guess I just wanted to get some thoughts on if you shared that level of optimism about 15 for cereal or maybe their comments are a bit premature at this stage.

So we certainly share their optimism on the outlook for the cereal category, Andrew, which is a great category in response to innovation.

I would also share the view that for instance as you look at the growth of Greek yogurt, as an example, I mean I think that that is still growing but that growth is starting to taper.

And to the degree there has been some interaction there -- I mean that also is potentially something to monitor closely.

So -- but, we would love to see it return to growth in 2015.

As we have said, we think that the recipe is all about core brand renovation and good new products and good levels of advertising and we are very focused on doing that.

And we think that we are hearing -- we are hearing good messaging from the other leaders in the category that they are focused on that as well.

And so, we think as those things continue to increase and we continue to see the level of renovation strengthen in the category, consumers are going to come back in.

We are very confident that that will happen.

And that is why we are focused on those kinds of activities.

Thanks very much, everyone.

David Palmer, RBC.

You mentioned the weather drag in the quarter specifically in the last couple months.

Just looking at the scatter data, it looks like some of the home meal oriented categories improved presumably because people were eating more at home.

Could you just talk about what you are seeing with the weather and exactly what you meant by that?

I would be happy to, David.

I have to say I didn't -- could you just repeat the last -- you were -- it wasn't exactly clear.

You said your data showed what?

Yes, there were a lot of the home meal oriented categories; it looked like they improved in the last couple scatter periods.

Okay, yes.

Presumably because people were eating more at home and, as you know, restaurants were suffering over those same two months.

And so it seemed logical that people were eating more at home.

So just wondering what you were seeing in terms of a net impact to your business.

Yes, okay, thank you.

So let me give you a few data points and facts on this.

First of all, our categories over the three months of the quarter actually declined sequentially and were -- basically February for us the categories were flat.

So we were seeing softening of retail purchases as well.

Now as we have gone into the most recent periods, which I think is the data that you referenced you saw, we are seeing those categories start to recover, although I have to say from a pretty low basis.

But as the weather improves we are seeing those categories recover.

Just in terms of the nature of the weather impact, basically on our side it really disrupted plant operations and logistics.

So we had -- we lost 62 days of production, which would be 3% or 4%, which hasn't happened in a long time to us.

So think decades.

And that would be the result of people not being able to get into work safely or not having inputs arrive.

So there was that impact, there is an even greater logistics impact as trucks couldn't move and the rail system becomes less efficient.

And that -- and those things combined basically, as Don said, those combine to add cost to the quarter.

And then on the retail side, I mean we will let the retailers give you all the detail there, but I think basically it is just fewer trips for all the obvious reasons -- fewer trips to restaurants and then of course in schools and universities which were closed they're just serving fewer meals in cafeterias and those sales are clearly lost.

So it is a combination of logistics and plant factors which added to cost and consumers staying at home and probably drawing down a bit from their own pantries and which slowed down the industry.

Don, anything that you would add on that?

Sounds good.

Okay, so does that give you a bit of texture, David?

That is helpful.

I mean just one separate last question here.

Just on the M&A front, I haven't heard you talk about acquisitions lately.

I'm wondering is that something that you are still continuing to look for deals and is that (inaudible) from that angle or are you looking more international still with regard to acquisitions?

Yes, David, we are still looking to see how we can continue to refine and evolve our portfolio and our focus areas haven't changed.

Emerging markets, obviously our move in Brazil was very instrumental in that respect about a year and a half ago.

So we continue to look and, as we have said before, we are interested in expanding our businesses and getting a larger footprint particularly in Indonesia and India.

And then within the developed markets particularly in the US, the area of the Better for You snacking, we have made some moves over the last couple years in that regard, remains a point of interest.

But as we said a year ago F-14 was not going to be a year of acquisitions and that is how it is playing out.

But we will continue to look and share news as it becomes relevant.

Thanks so much.

Matthew Grainger, Morgan Stanley.

Ken, you mentioned an expectation that US food industry volume should improve going forward.

How much of that is just related to some of the extraordinary factors like weather that impacted Q3, and how much is an expectation of a tangible improvement in consumption?

And with respect to the inflation outlook and a number of commodities not necessarily grain but a number of commodities moving higher, what is the risk that more selective price increases across the industry could limit the likelihood of that volume improvement playing out?

So, in terms of the development of our categories, Matthew, I think it is going to be both the points that you mentioned.

I mean in the short term we are coming off of a very severe winter and we are already seeing our categories strengthen a little bit as we get through that.

And as we have said in the past, while the economy is improving slowly and incomes are strengthening slowly, they are improving.

And we think that as incomes continue to grow and consumers gain confidence that will be a positive sign for our category.

I mean the one other near-term headwind I think is the -- are the snap reductions that took place over the course of last year and I think will continue to impact us a little bit this year.

I mean that was clearly adding some purchasing power to consumers when it comes to food.

So that would be a bit of a headwind.

But in general we see the economy strengthening and that will support our categories.

In terms of inflation, it is always a mixed bag, some things are up and some are down, for us grains have moderated significantly.

As everyone knows, dairy costs have been significantly higher.

On balance though, as we said -- as we have said the last couple of times, we see the inflation environment manageable at this point.

We will be able to offset the inflation that we see with our productivity efforts and we would expect pricing to remain relatively stable in the near-term.

The only thing I would add, Matt, is the recent jump in some certain commodities and some of the headline news that has made, as we've talked about before, as we look forward for inflation, we assume that we will see the same kind of inflation we saw over the last six or eight years, which is in that 4% and 5% range.

And I don't think that anyone is projecting something different than that as we go forward.

And from an industry standpoint I think we have shown the ability to -- certainly from our standpoint we've shown the ability to offset that through productivity and mix management in our HMM activities.

And just to add one final thought triggered by Don's comment, the whole oat controversy.

I mean in fact there is -- we had a great harvest in the northern oat growing region this year we just couldn't get it to market because of the logistics disruptions that I mentioned over the winter.

But in fact -- so that is a short-term spike in oat costs and those should moderate here going forward.

Okay.

I have to admit I think I need to get up to speed on the oat controversy.

I think it has already passed you by.

Okay, all right, well no need then.

And then just one follow-up on Yoplait.

I appreciate that the share trends of retail are improving, but based on this step down that we are seeing in sort of implied third-quarter shipments even though there is new products coming out, it seems -- it looks like you are working down in imbalance and new products and inventories that is been going on for the past two quarters.

Where do inventories stand now and are we sort of at the point where we should expect to see shipments align a bit better with consumption going forward.

Well, consumption was ahead of shipments in the quarter and I think what I will say to you is maybe just -- and eventually those things -- I mean those things always come into line especially after a short shelf product life like yogurt.

But what we have been seeing over the -- really over now several months really since December we have seen -- for Yoplait in total we are seeing our distribution expand, which is a very good sign.

As I said, we are seeing Yoplait original now growing on an absolute basis.

It is very significant to us that Yoplait light turns are now positive because positive turns are, if you will, the precondition for being able to expand distribution.

And we are able to maintain that turn strength ultimately we will get that franchise growing on an absolute basis as well.

And as I said, we are very pleased with the early trends that we are seeing across all of our Yoplait Greek products which include Yoplait Greek 100 and now Greek blended and lots of flavors, formats, multipacks.

And so we are -- as you say, there is still more to do but we feel we are quite a bit ahead today where we were six months ago and we like the direction that the business is going in.

Thanks again, everyone.

Thilo Wrede, Jeffries.

Ken, at CAGNY you made a comment that you would see growth out there in the packaged food industry, but you have to work harder to get that growth.

Are these measures that you have taken on Yoplait Greek, are those an example for how you worked harder?

And if so, does that mean that you might expect these measures to categories like cereal and what would that mean for margins going forward?

Well, we are in a -- for yogurt we have reached a point where we have the right product portfolio, as I just mentioned, it is a very broad and consumer focused portfolio and the products are very high quality and we have the distribution that we needed and critically we have the manufacturing capacity that we need.

And so it is the perfect time for us to really go out and drive trial on these products through as I mentioned strong advertising and sampling.

So it is a good time to really focus and build that business.

In cereal, we are going to work harder there.

Our focus we already have high levels of trial generating advertising and consumer focused support in cereal business.

There our focus is on the renovation of brands, often by bringing important health news to them and we see that work well for us and we've commented, for instance, on the success of gluten-free brands or taste improvements or new products.

And so, it is very much an innovation focus in categories like cereal.

So I think that the way it plays out will vary by category.

But we just think in a time where the consumer is a little bit stretched we just believe that the way forward is through innovation and renovation and strong communication of our benefits.

And when we get that right we see it work across all of our categories and that is really the focus for us.

And what does it mean in terms of margin pressure for the next 12 months?

Well, margins, as I mentioned earlier, we are expecting manageable levels of inflation.

I think as you all know, we have very disciplined productivity programs and so I'm not going to comment today on what our margins will look like over the next 12 months.

But I will say among our peers we have been among the very best over the last five years of maintaining or expanding margins because of our productivity disciplines and certainly we will keep that mindset going forward.

What I would add to that, Thilo, is there are some product lines we launched that are margin accretive on a dollar basis but may be margin dilutive on a percentage basis.

Greek yogurt is a good example of that where from a per serving basis we actually make a bit more penny profit on Greek, but the -- because of the higher price point is actually slightly margin diluted on the gross margin line but it is obviously dollar accretive.

So most tradeoffs that we are willing to make, we also then look at our operating margins and there is a couple of factors that can come into play there.

One is we obviously have a very strong control on our admin expenses, if you look at our SG&A for the year it is flat year to date and I expect it to be flat or even slightly down on a full-year basis.

So that is part of managing those margins as well.

The other, and Ann touched on this, is in our digital marketing.

As we go to market digitally we see strong returns there and that helps manage our margins as well.

Okay, great.

Thank you very much.

Robert Moskow, Credit Suisse.

Hi, this is Clay Crumbliss on for Rob.

Just a question on yogurt in China.

Can you talk about the investment that you are making there?

Maybe quantify it and then talk about that business in terms of kind of how big you think it can be in year one?

Yes, Clay, this is Don.

We are not going to quantify how much we are putting into the market but we are making a substantial move to tap into what we think is a very attractive yogurt market, one that already is relatively large but we think is an opportunity for Yoplait to have a leading role.

And I think that is all we are really ready to share at this point in time.

Okay, that's it.

Thank you.

David Driscoll, Citi.

Good morning, this is Cornell Burnette in with a few questions for David.

How is everything?

Hey, we are good.

Hi, Cornell, how are you?

Okay, great.

Great.

Just wanted to touch on the fact that the full year EPS guidance would imply something like 40% fourth-quarter growth and it seems a lot of that will come from margin expansion.

And I think that signals that you are transitioning into a more favorable cost environment as you indicated in the press release.

How should we think about this going forward?

As the rest of calendar 2014 plays out should we expect to see similar favorability in the types of cost that you're experiencing on a year-over-year basis?

Cornell, this is Don.

Let me take you through Q4, we touched on some points that I just want to make sure that are clear because essentially all of our EPS growth is in the fourth quarter.

So I think it is important for investors to understand how we get there.

And they are I think very visible and one of the primary ones will be the gross margin expansion.

To your point we expect a deceleration of inflation, we still expect inflation but decelerating in the fourth quarter, which is very different than a year ago when we were seeing accelerating inflation.

So we will have pretty significant margin expansion and obviously our HMM activities will continue to be very robust.

The quarterly tax rate for the full year, we expect our tax rate to be comparable to last year.

And if you look over the last several years we have consistently held or dropped our -- you'll see a decrease in our tax rate on an annual basis.

But quarter to quarter it can vary quite significantly.

And last year's fourth quarter is actually a higher tax rate year -- tax rate quarter.

So we will have favorability on our tax line.

And then I mention the share count, we have been accumulating shares as the year has gone on, 1% reduction in Q1, 2% in Q2, 4% reduction in Q3.

So you can kind of expand from there what Q4 could be.

So those factors will come through.

But importantly, we are not banking on accelerated sales growth.

Frankly, we expect our sales growth to be about the same as it has been year to date.

So it is really based on those middle of the P&L factors that will get us that substantial EPS gain in the fourth quarter and have us deliver the full year as we -- in the same range that we talked about back in July.

As far as what it means going forward, obviously we are not in a position today to give F'15 guidance for inflation or any portion of our financials.

But I guess I would just caution you is based on the question that Matt asked earlier, inflation is a tough thing to project.

Everyone was asking us if we were going to see deflation a few months ago.

And now there's been a turn in some markets and people are asking us if we are going to see accelerated inflation next year.

So I just would just caution not to get ahead of ourselves in terms of what our inflation expectations are.

But we will be very clear what they are when we release our results in the fourth quarter.

We give 2015 guidance in June.

Okay, very good.

And just one last quick question if I may.

Moving on to yogurt, obviously you were negatively impacted by some inflation in dairy.

Should we be expecting any price increases in yogurt from you in the near future?

And what have you seen in terms of your competitors in the market in terms of pricing?

So we don't really -- I mean we never talk about possible or prospective pricing increases.

I mean I will comment that we have seen, as you all know, dairy inflation over the last year primarily driven by increased demand for dry powdered milk and primarily in Asia and particularly in China.

And so -- and that demand really is driving the market.

I think the herds shrank a little bit earlier in the economic crisis.

But those things have a way of adjusting and we are not seeing it yet, but the prices are unusually high now and we expect that they will moderate over time.

Okay, thank you.

Ken Zaslow, BMO Capital Markets.

Just a couple follow-ups to some of those questions.

One is when you think about next year, and I know you are not going to give guidance, but are you using your base earnings of $2.87 to $2.90 or are you using a number including Venezuela when you think about the growth rate?

We are going to use $2.87 to the $2.90.

I mean part of the reason to take out Venezuela is the re-measurement impact of Venezuela, it is a one-time non-cash event that we don't think is representative of our underlying earnings profile.

Okay.

And then I believe that, Ken, it has been four years you have been a little bit below your long-term growth algorithm.

Do you see material headwinds to derail you for another year or two or do you think things are actually becoming a little bit more normalized, if that is a good way to use the word?

I would say that things are slowly improving.

And our comment at CAGNY was that we are -- for next year we are affirming our growth model.

But we continue to see slow improvement with an emphasis on slow.

And I think we've been saying that consistently and our predictions have been accurate over the last several years.

Okay, and then a follow-up.

On the Yoplait side of it, do you think that the competitive environment has structurally compressed the margins for that business?

Or do you think it will be able to return to the margins of the last couple years once you get through this period of time of getting your market share where you want it to be?

Can you talk about that?

Well, I think the inflation that was commented on has -- I mean that is the critical factor that has compressed the margins.

And those are -- there is always volatility in those input costs.

But that has been the key issue.

Obviously our mix has changed and is changing quite significantly as the category migrates to Greek.

But as Don said, we like the price point of Greek yogurt.

So they are $1 or more and so we like that a lot.

On a percentage basis the margins are a bit lower, but certainly overall on an absolute basis we think that those margins are just fine.

So I think the key thing will be to work our way through this inflation which we will eventually do and we will see margin strengthen as we do that.

Okay, and my last question for Don is -- you mentioned that your working capital -- you are a busy doing a lot of effort on your working capital.

But this quarter your working capital actually cost you cash but you said it was going to normalize in the fourth quarter.

Can you just explain?

I just didn't understand it.

Yes, there is -- breakout the working capital in two components.

The core working capital that I highlighted on one of our slides is the bulk of it.

And that was down 8% and that will be down for the full year as it has been for the last three to four years, so that will be a cash contributor.

You also have accruals and payment timings for our trade, for our tax, for our advertising.

Those were negative this period, this quarter.

Those will normalize as the year unfolds.

So you will see pretty strong cash flow, cash inflow from working capital in our fourth quarter.

Great, I appreciate it.

Thank you.

And for the full year we still expect working capital in total to be a cash contributor for us.

Perfect, thank you.

[Johnny English], Goldman Sachs.

Hey, good morning, folks, Jason here.

A couple questions.

First, you are abstaining from giving us an outlook for next year right now.

You have in the past around this time felt comfortable giving us at least a bit of a glimpse into the forward.

So my question is, why not now?

What is preventing you from giving us that outlook?

Jason, we don't historically give guidance until June.

We did it on a one-off basis last year because we were coming through a period of pretty significant change in terms of portfolio to a couple of large deals.

We also had some operating headwinds that meant that we were off model from an earnings, the bottom-line earnings and a cash return to shareholders standpoint.

And the last piece was very strategically decided because we had some strategic M&A that we wanted to do.

So last year we made a point of noting that we would be back on model both from an earnings and a cash return standpoint in F'14.

But that was a one-time view to the future that we thought was important for the market.

But historically and every other year we have given guidance in June and that is what our practice will be this year as well.

Thanks, I just really looked over the last couple years with CAGNY and then obviously the 3Q, but that is helpful.

On cereal, net sales looked pretty strong for you so far this year, I think you said up around 1% or 2% -- or around 2% for the year to date, around 1% this quarter.

Clearly consumption is not tracking there.

So my question is, on inventory are you just coming off a very low base, so is this sort of rebuilt to normalized levels?

Or is there risk that we get a [deload] at some point in the future?

So some of it, Jason, is shipments of new products, we launched three more here in January and those always expand inventory.

As you have observed, we also have had good share gains, about 30 basis points over the nine months of the year so far.

And really over 40 basis points of share improvement in Q3.

But you are right, our shipments are a little bit ahead of sales right now and I would expect those to come in line over time.

Okay, and last question and I will pass it on.

Yoplait, congratulations on some of the early read success on the Greek side.

And it is encouraging to hear about some of the turns on light.

When we look at your aggregate yogurt portfolio the turn rate has been decelerating since something around now down 10% and down 6% the prior 12 weeks and down 3% the 12 weeks before then.

In light of some of the strength you're seeing, I guess where is the big offset that is causing velocity to decline so rapidly?

Well, so there were two areas that have been declining over the last several -- really over the last period of time, light which continues to decline, although at a rate less than the light segment, that one continues to decline overall, although, as I said, Jason -- and largely because of distribution loss.

But as I said, where it is a distribution we have seen the turns reverse now and those are growing now which again sets up a case for us to hold and then expand distribution.

We also had an uncharacteristic decline in our kid business over the last couple of quarters and that has been a good grower for us all the way through and we attribute that to our own variability in execution.

We don't feel we had the right kind of kid oriented promotions on Go-GURT, and that is easily correctable.

So those are the two soft spots.

And we think those are both reversible and we like the trends on Yoplait original and Greek, as we said.

Thanks a lot.

Makes sense.

Can we sneak one more in, operator?

Certainly.

Bryan Spillane, Bank of America.

Just under the wire, thanks.

So just two follow ups, quick ones.

Don, as you went through the fourth quarter sort of drivers which is really helpful, if I am looking at it correctly, it looks like for the full year it gets you to the low end of a mid-single-digit operating profit growth, am I looking at that correctly?

Operating profit growth will be -- we ended the year with guidance of mid-single-digit, given what we are coming off of in the third quarter, I think we will probably be a touch below that for the full year.

Okay, that is helpful.

And then just in terms of this year getting to the earnings growth in a way that was a little bit different than what you were projecting at the start of the year.

Looking forward does it -- as we start to try to model going forward, and just assuming that we are in the algorithm for next year, does it put more burden on -- I guess on operating profit growth because now we are comping against really good cost control and SG&A, we are comping against a lower share count, we are comping against the tax rate being flat.

I'm just trying to get a better understanding of just to get back on the algorithm, do some of the other line items to the P&L get more burden next year in terms of trying to get there?

I don't know if I would say more burden.

It certainly depends on us getting back on model on the operating side, sales and SOP growth.

So you say we got -- we are getting to the bottom line number this year but were not getting at it the way we intended at the beginning of the year.

Next year we intend to build a plan that gets us there from -- starting from the top line, working through SOP all the way down to EPS.

Okay, great.

Thank you.

(Multiple speakers) segment operating profit just in case.

All right, I think we are over time, everybody.

So if there is someone left in queue, apologies, give us a call and we will try and help you out.

And this does conclude the Q&A session.

I would like to turn the call back over to Kris Wenker.

We are good.

Call me if you need me.

Thanks much.

Thank you.

Ladies and gentlemen, this does conclude the conference for today.

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