通用磨坊 (GIS) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the First-Quarter Earnings Call Joint presentation.

(Operator Instructions)

As a reminder, this conference is being recorded, Wednesday, September 17, 2014.

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

Please go ahead, ma'am.

Thanks, operator.

Good morning, everybody.

I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and John Church, Executive Vice President of our Global Supply Chain, and I'll turn the call over to them in just a minute.

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

It's also posted on our website, if you need a copy.

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.

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

One last housekeeping item, beginning this quarter, we've reclassified the balance sheet remeasurement impact from hyper-inflationary economy.

Out of international segment operating profit, and into unallocated corporate items.

The last slides in today's material will give you prior-year results consistent with the new presentation.

So with that, I'll turn you over to my colleagues, beginning with Don.

Thanks, Kris, and good morning to everyone.

Thank you for joining us today.

Slide 4 summarizes our results for the first quarter.

Net sales totaled $4.3 billion, down 1% in constant currency.

Segment operating profits totaled $690 million, 15% below prior year, due to results in our US retail segment, where lower volume and higher merchandising expense depressed net sales and margin.

Net earnings declined 25% to $345 million, and diluted earnings-per-share were $0.55 as reported.

These results include mark-to-market valuation effects and restructuring expense.

Excluding these items affecting comparability, adjusted diluted EPS was $0.61 compared to $0.70 a year ago.

This was a 13% decline on a constant currency basis.

Slide 5 shows the components of total Company net sales growth.

As reported, net sales declined 2% due to lower pound volume.

Mix and net price realization added 1 point of sales growth, that was offset by foreign exchange which reduced sales growth by 1 percentage point.

US retail net sales for the first-quarter were 5% below last year, reflecting week industry trends, along with higher trade merchandising expense for us in this period.

Our pound volume was down 2%, primarily driven by declines in meals and baking products.

We saw pound volume growth in our Snacks, Small Planet Foods, and Yoplait divisions for the quarter.

The higher merchandising expense reflects several factors.

We launched 145 new products across US retail, almost 20% above last year's number.

We're experiencing less effectiveness for merchandising programs.

This is an issue we and others in the industry have noted previously.

And we had a difficult comparison.

Last year's first-quarter had the lowest quarterly trade expense of the year.

It's important to note, however, that the increased trade expense in the quarter does not reflect greater depth of discount.

Merchandising frequency was up in the quarter, but depth of discount was actually less than the prior year.

We expect year-to-year differences in merchandising expense phasing to have less impact on subsequent quarters in FY15.

Through our convenience stores and food service segment, net sales increased 1% in the first-quarter, led by our high-margin priority platforms.

In total, these six platforms, yogurt, frozen breakfast, snacks, biscuits, cereal, and mixes posted combined net sales growth of 4%.

Favorable product and channel mix combined with lower input costs help to drive an 18% increase in segment operating profit in the quarter.

Slide 10 summarizes first-quarter results for our international segment.

Constant currency net sales grew 6% overall.

Sales in Canada declined 2%.

Excluding some small exits and additions of business lines, sales would have been up modestly in the quarter.

Latin American sales increased 20%, driven by another quarter of a strong double-digit growth in Brazil.

In the Asia-Pacific region, sales increased 4% led by greater China and Korea.

And sales for our Europe region also increased 4%, with good growth in both the UK and France.

Slide 11 details our segment operating profit results in the first-quarter.

The total operating profit decline was driven by US retail's results.

International profit was 16% above year-ago levels, and up 17% on a constant currency basis.

And convenience stores and food service profit increased a robust 18%.

After tax earnings from joint ventures totaled $26 million in the quarter, up 5% in constant currency.

CPW sales were 1% below year-ago levels in constant currency, with growth in Brazil, Chile, and Southeast Asia, offset by category weakness in Western Europe.

Constant currency sales for Haagen-Dazs Japan grew 3%.

Completing our review of the income statement, corporate unallocated expense, excluding mark-to-market effects, were down $3 million in the quarter.

During the first quarter, we approved a plan to combine certain Yoplait and General Mills operational facilities in our international segment to increase efficiencies and reduce costs.

We expect to incur approximately $15 million of net expense related to these actions, and we booked $14 million of this amount in restructuring charges in the first-quarter.

In a moment, John Church will update you on our plans to increase efficiency and reduce costs across our North American supply chain network.

This initiative will result in additional restructuring charges this year.

All of our 2015 restructuring charges will be excluded from adjusted diluted EPS.

The effective tax rate for the quarter was 31.8%, as reported.

Excluding items affecting comparability, the tax rate was 32.3% this year, compared to 32.2% a year ago.

And average diluted shares outstanding declined 5% in the quarter.

For the full year, we continue to target a 3% to 4% net reduction in average diluted shares outstanding.

Turning to the balance sheet, slide 14 shows our core working capital declined 6% versus last year's first-quarter, driven by improvements in accounts payable.

Operating cash flow totaled $329 million in the quarter, below last year's results due to lower net earnings.

We invested $149 million in fixed assets, and we returned more than $700 million to shareholders through dividends and share repurchases.

Last week, we were pleased to announce plans to acquire Annie's, a leading company in the US natural and organic industry.

We've offer to buy Annie's for $46 per share in cash.

We plan to fund the acquisition with debt.

So this transaction is not expected to have any impact on our FY15 share repurchase plans.

We do expect the Annie's transaction to be accretive to our earnings in the first 12 months after closing, excluding certain purchase accounting adjustments and transaction integration expenses.

Our offer is subject to the tender of the majority of Annie's shares, and of certain other customer closing conditions, including regulatory approval.

We expect the transaction to close later this calendar year.

Our key financial targets for full-year FY15 have not changed.

We expect mid-single-digit growth in constant currency net sales, including the benefit of the 53rd week.

We're also targeting mid-single digit growth in constant currency segment operating profit.

We plan to reinvest the benefits of the 53rd week in growth driving activities.

On the bottom line, we expect adjusted diluted EPS to grow at a high single-digit rate in constant currency from the base of $2.82 per share achieved in FY14.

And with that, I'll turn the microphone over to John Church.

John?

Thanks, Don.

Hello, everybody.

It's great to be with you on the call this morning to talk about General Mills' approach to continuously improving our global supply chain.

Our supply chain strategy is centered on the engagement of our 25,000 supply chain employees around the world.

We lead that engagement with safety.

In our products, and in operations.

We protect our consumers and our people by establishing systems and processes that ensure the reliability of our operations.

Our supply chain helps grow our business, with customer service excellence and increasingly by partnering with customers to drive out waste in our combined value chains.

And we prioritize return on capital by reducing inventory levels, creating capacity through operational improvements, and by extending payment terms.

Additionally, return on capital is driven by our long-standing practice of a Holistic Margin Management, or HMM.

HMM has been a defining characteristic of General Mills for nearly 10 years now.

HMM has a mindset of looking at our end-to-end processes to identify costs that are not valued by our customers or our consumers, those costs are waste.

We find ways to reduce or eliminate waste from our process, allowing us to deliver more value to the consumer.

HMM is truly holistic.

In encompasses cost of goods savings, mix, and pricing.

We also work to drive waste out of our marketing programs and our admin processes.

The savings we realized through HMM are used to offset inflation and provide fuel to our brand building efforts.

We believe demand driven increases in input costs will be a reality for our business for the foreseeable future.

We expect inflation to average 4% to 5% per year.

We're currently estimating input cost inflation of 3% in FY15, and we are roughly 55% covered for the year at this point.

Clearly, the demand for HMM to offset inflation is not subsiding.

We're continuing to deliver strong HMM levels each year.

Back in FY10, we set a goal of achieving a cumulative $4 billion in COGS HMM through FY20.

I'm pleased to say that we're already half way to our goal.

We're targeting another year of strong HMM delivery in 2015, with more than $400 million in COGS HMM in this year's plan.

I have great confidence that by the time we get to 2020, we will have met or possibly exceeded our $4 billion dollar goal.

Our HMM plans for 2015 include contributions from all areas of our supply chain.

We're taking the same expertise we've developed in our internal supply chain to our external partners through an initiative we call GEOS, or General Mills end-to-end optimization solutions.

By broadening our HMM scope up and down the value chain to suppliers and customers, we expect GEOS to deliver an incremental $10 million in savings for General Mills this year.

In international, we've reengineered our factory in Pouso Alegre, Brazil.

We've streamlined a number of ingredients that we use in the facility, going from six types of salt to two types of salt, for example.

We've improved production scheduling by removing small volume SKUs that created significant changeover downtime, and we automated many of the packaging systems.

In total, these initiatives will save more than $5 million annually for our Brazil business.

And we're globalizing our sourcing capabilities, allowing us to leverage purchasing scale and expertise across our domestic and international businesses on inputs like packaging, sugar, fruit, and cocoa.

These efforts are expected to deliver $10 million in savings this year.

Our HMM efforts have enabled us to hold our overall gross margin relatively steady in recent years, despite inflation and volatility in our input costs.

In fact, our reported gross margin in FY14 is in line with the levels from 2008 and 2009.

That's despite adding Yoki and Yoplait international, two substantial businesses with lower than Company average gross margins, and it's despite cumulative input cost inflation of 30% over that time.

We are confident that HMM will be an ongoing source of cost savings and efficiency for our supply chain.

But we have also launched a review of our North American manufacturing and distribution network to look for additional opportunities to reduce cost.

This effort, which we've named Project Century, has the objectives of streamlining and simplifying our North American operations and positioning our supply chain for future growth.

We're relocating production to make our network simpler and more responsive, and we'll capture cost savings in the process.

We're targeting $100 million in cumulative cost savings by FY17, with material savings realized in beginning of FY16.

We'll be announcing specific actions related to Project Century in the very near future.

I'm confident this initiative will increase our efficiency, generating more fuel that we can use to reinvest behind our brands and fund future growth initiatives.

Thank you for your time this morning.

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

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

I'll begin my remarks by acknowledging that the operating environment in several of our markets has grown more challenging.

For our US convenience stores and food service business, I'd say trends are stable.

We're seeing a low single-digit nominal growth in our channels.

US retail industry trends are a bit weaker.

Last year, we saw aggregate retail sales for our US categories increase 0.5% in Nielsen measured outlets.

In the latest quarter, measured sales for our categories declined 1%.

International developed markets were a bit softer too.

Retail sales for our categories were flat in both Canada and Europe in the first-quarter, after growing at low single-digit rates last year.

In emerging markets, we're still seeing sales growth for our businesses but the pace of growth in China did slow a bit this quarter.

So with that as a backdrop, let me give you an update on performance in each of our three business segments.

For US retail, Don told you our pound volume in the quarter was down 2%.

And three businesses really drove that decline, dessert mixes, meal products, and frozen vegetables.

Competitive dynamics in these categories were particularly difficult, and if you follow Nielsen or IRI you've seen that reflected in our market share results.

We're tactically adjusting our plans to make sure we're competitive in these categories, and I expect these actions will result in improved sales trends in the coming months.

We did make good progress on the US priorities that Jeff Harmening outlined at our Investor Day back in July.

And those were: continuing to lead performance in US cereal, returning US yogurt to growth, and maintaining strong snacks momentum.

I'll give you some details on each of these starting with cereal.

The US cereal category continues to be challenged with the retail sales, including our estimate of non-measured channels, down 4% in the first-quarter.

We believe that returning to cereal category to growth will require more product news, better innovation, and increased investment behind consumer directed marketing from all the branded players.

We are working hard across each of these areas.

For instance, consumers love great tasting cereals.

We renovated Cinnamon Toast Crunch this year, adding more cinnamon taste, and retail sales for this brand were up 7% in the quarter.

Today's consumers are seeking more protein options for breakfast.

We introduced two flavors of Cheerios Protein in June.

It's still early, but the initial results are encouraging.

This new line reached a nearly 1% market share in August.

We continue to increase our media investment.

For example, Honey Nut Cheerios, the largest brand in the category, recently launched a great new advertising campaign featuring Usher.

In total, our cereal market share was up 30 basis points to 31% in the quarter.

Our second priority for US retail is to renew sales momentum for our US yogurt business.

And we did that in the first-quarter, with net sales up 1%, retail sales up 3%, and market share up 0.5 point.

Yoplait Greek and Greek 100 remain key growth drivers for this business.

This quarter, our share in the Greek segment was up 240 basis points versus last year, and retail sales for original Yoplait were up 12% in the first-quarter.

We have some exciting product news coming in the second half of the year to keep this momentum going.

We still have work to do on our Yoplait Light business.

It was the most directly impacted by the growth of Greek yogurt over the past few years.

We recently removed aspartame from this line, and we're connecting with consumers behind a new a Outsmart Temptation campaign.

So, some good progress on yogurt this quarter.

And our US Snacks division is off to a nice start.

New Fiber One streusel bars and new Nature Valley items are helping to drive 6% retail sales growth for our grain snacks business.

We've picked up almost 3 additional share points, increasing our leading position in grain snacks to nearly 44% of the category.

In Fruit Snacks, continued investment behind our Motts and Fiber One lines led to retail sales growth of 5%, and a 2 point share increase in the first-quarter.

Our natural and organic snacks also are doing well.

Retail sales across Larabar nutrition bars, Food should Taste Good savory snacks, and Cascadian Farm granola bars were up a combined 17% in the first-quarter.

This reflects growth on core established products, as well as strong new innovations like Larabar Renola.

A grain-free granola, and Food Should Taste Good gluten-free brown rice crackers.

Cascadian Farm recently launched a Bee Friendlier campaign to raise awareness and money for bee colony research.

As part of the campaign, we're selling a limited addition Buzz Crunch honey almond cereal.

The acquisition of Annie's will significantly expand our presence in the US branded, organic, and natural food industry.

Where sales have been growing at a 12% compound rate over the last 10 years.

Annie's competes in a number of attractive food categories, with particular strength in convenient meals and snacks.

Two of General Mills' priority platforms.

Consumers know and trust Annie's purpose driven culture and authentic brand.

We believe that combining the Annie's product portfolio and go-to-market capabilities with the General Mills' supply chain, sales, and marketing resources will accelerate the growth of our organic and natural food business.

Two other US retail businesses deserve a quick mention.

Retail sales for Totino's Pizza were up 7% in the quarter, and sales for Totino's Pizza Rolls grew more than 3%.

The brand posted share gains of roughly 1 point in both categories.

For Old El Paso Mexican products, new burrito bowls in the freezer case and Flavor Blasted taco shells in the shelf stable Mexican aisle, helped drive retail sales growth of 7% in the first-quarter.

Slide 35 shows our first-quarter market share results in key US retail categories.

In total, consumer takeaway was better than our net sales results in the quarter.

And we recorded market share increases in categories representing two-thirds of our Nielsen measured sales.

Let's shift to our convenience and food service segment, where are six priority platforms lead top line growth.

Net sales for yogurt increased 34%, due to good growth from our Yoplait Greek and Parfait Pro lines.

As well as the July introduction of Yoplait Go-Gurt as an option in McDonald's Happy Meals.

Sales for our snacks business were up 6%, led by expansion of Chex Chips and good growth on Nature Valley.

Finally, we saw double-digit net sales growth in frozen breakfast, where we're leveraging a full line of heat-and-eat whole grain breakfast offerings for K through 12 schools.

For our international business, the Europe and Australasia region posted mid-single-digit net sales growth in constant currency in the first-quarter.

It was a good Summer for Haagen-Dazs, with retail sales up 5%, fueled by our new Triple Sensations line.

Old El Paso's line of Stand 'N Stuff tortillas and dinner kits is off to a great start around the region.

Retail sales for the brand were up 12% in the latest quarter.

And Yoplait continues to grow, led by Liberte Greek style yogurt in the UK and Yopa!

high-protein yogurt in France.

Yoplait's year-to-date category share is up almost a full point in both markets.

Turning to our Asia-Pacific region, constant currency net sales for Haagen-Dazs increased 9%.

This was driven by unique to Asia varieties like classic milk and blueberries and cream, and by continued retail expansion into new cities in China.

Sales of Wanchai Ferry frozen dim sum also increased in the first-quarter, thanks to expanded distribution, as well as new flavors of dumplings.

There is a slowdown in the macro environment in China.

Which, combined with government-driven changes in gifting policy, is having some impact on our business there.

Despite these factors, our first-quarter constant currency sales in Greater China grew at a mid-single-digit rate.

With an exciting lineup of new products coming in the second half, we expect Greater China sales growth to strengthen in the remainder of the year.

In Latin America, constant currency net sales increased by 20% in the first-quarter.

Powered by another quarter of strong results in Brazil.

Yoki's Festa Junina merchandising event, which coincided with the World Soccer Championship this year, was a great success.

A great deal of credit goes to the Yoki sales force, who secured a record number of in-store displays during this period.

As a result, constant currency net sales for Yoki popcorn, already the market leader with over 70% share, increased by more than 30% in the quarter.

And though it's still early, our launch of Betty Crocker dessert mixes in Brazil are off to a good start, with positive consumer and retailer feedback.

We have plenty of activity coming in the second-quarter.

Soup season is fast approaching, and our distribution is up thanks to new items like cream-based light soups, and great tasting traditional soups.

We're increasing our media support this quarter, leveraging Weight Watchers digital media and a taste-focused national TV campaign.

We have great plans for the baking season too.

We're launching 11 seasonal items, such as candy corn and gingerbread cookies.

We're increasing TV support for Betty Crocker, and we'll continue to engage consumers through our digital media efforts.

And we have exciting plans for our international business.

We've quickly gained distribution on Old El Paso Stand 'N Stuff tortillas throughout our Europe region, and we're now turning on TV support in the UK, France, and Australia.

We're continuing strong media support for Liberte Greek yogurt in the UK and Yopa!

in France, and we're launching four new Yopa!

items to extend our range.

In the Asia-Pacific region, we're introducing new varieties of Betty Crocker mixes in the Middle East, and a Belgian chocolate macadamia nut flavor of Haagen-Dazs for our retail business in Greater China.

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

The operating environment for food and beverage companies remains quite challenging, and trends weakened for some markets in the latest quarter.

However, we have not changed our 2015 growth targets.

We expect mid-single-digit growth in net sales and segment operating profit on a constant currency basis, and high single-digit constant currency growth in adjusted diluted EPS.

We continue to see strong opportunities for our brands.

Our number one priority is to find those opportunities and leverage them to accelerate our top line growth.

And finally, as John shared, we're maintaining our strong HMM discipline.

And we're initiating new projects to further boost our efficiency and sharpen our focus.

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

Now let's open the call for questions.

Operator, will you get us going?

(Operator Instructions)

Ken Goldman, JPMorgan.

Thank you.

Good morning, everyone.

Hey, Ken.

I have a bit of a general question.

What do you think has to happen for the food industry to get out of, to me, what seems to be a fairly self-destructive pattern of heavy promotional spending right now?

Do we just need -- and this is really across a lot of categories -- I'm just curious, does someone just have to say enough is enough?

I'm willing to lose volume in order to restore some I guess price rationality?

Or are you just getting so much pressure, you being in the industry, from larger retailers to fund deal backs that even if you want to be more rational, it might be a little difficult at the current time?

So Ken, it's Ken Powell, and thank you for the question.

I would say that we have, albeit Q1 aside and we can talk in more detail about how that played out and the comparison of this quarter to a year ago, and some of the plumbing around that.

But I would say, in general, as we look at price points, as we look at promotional discounts, and this sort of thing, we have maintained fairly steady levels there across our categories.

But to your general comment on what's it going to take industry wide, I think all the roads lead to higher levels of innovation.

Continuing to focus on brand renovation, making sure that we have the right level of messaging behind our core brands, and new products.

I think ultimately, innovation and capitalizing on consumer trends is what gets us to higher levels of growth.

And the reason we're so certain of that is because we see that when we get that formula right, we get a very market response from consumers.

We talked a little bit about some of the cereal changes in Cinnamon Toast Crunch, Lucky Charms last quarter, we're seeing the response very rapidly this quarter.

We have developed now over the last year and a half and launched very good varieties of Greek yogurt, as an example.

And have supported those with very effective marketing campaigns, and it's very satisfying now for us to see those products gain traction.

We've changed the formulation and the positioning of a core Yoplait original, and that brand was up double-digit this quarter.

So behind consumer targeted initiatives.

So, ultimately, the answer to question which I think is the right question is innovation, core renovation, strong consumer communication, that will get us where we need to be.

Great.

Thank you, Ken.

Chris Growe, Stifel.

Hello.

Good morning.

Hey, Chris.

Good morning, Chris.

I just have -- I had two questions if I could.

The first one would be to just to better understand, and maybe this is getting a bit more into the detail you were talking about there, Ken.

But within US retail, to see sales down 5% and the measure channel data showing flat up a little bit, down a little bit somewhere in the neighborhood.

So I just wanted to better understand maybe it is the promotional spending year-over-year, and that comparison that is the major driver of the gap if you will on sales being reported the consumption and reported sales.

Can you offer a little more color on that?

Yes, Chris, this is Don.

It really goes back to the point that Ken touched on and I went into in terms of the phasing of our merchandising.

As we talked about in June or July in our Investor Day, we've seen a drop in merchandising effectiveness.

We, General Mills, we the industry, have seen that.

And it does take some time to reset the plans.

And so we knew as the year unfolded, that our merchandising expense, whether you look at it as a percentage of sales or cost per sale sold case, will come down on a year-over-year comparisons.

But it's going to take a couple of quarters to work it through.

So that's one of the reasons that we signaled that we expected lower profit in the first quarter versus last year, while we still see full-year growth in the high single-digits.

Okay.

And then maybe a question for, Don, you or for John, about the cost savings coming through this year.

So with a little softer sales in the first-quarter, I know you've kept your guidance in place for the year.

Do you now expect a heavier degree of cost savings?

And maybe along those lines, if you could -- I know we have $400 million I think of HMM savings, $40 million of overhead savings.

Are there any Project Century savings then that come through this year?

Minimal Project Century.

As John said, we're going to be starting that effort this year.

We'll see significant savings starting in FY16.

We're not banking on a great deal this year.

It's mostly going to come through our overhead efforts.

And obviously, there's the ongoing both HMM efforts that we see within our COGS, within our overhead expenses.

Plus when you start a year like we have, everyone's tightening their belts a bit from an admin standpoint.

The one thing I would note is that we did see growth in our media support.

So that's one area, because we have good ideas to drive growth in some of our key segments and some of our key platforms where we haven't cut back.

Where we're doing it is really in overhead and some of those project areas we discussed.

But we're still targeting the $40 million for this year, and it will be something larger in FY16.

Would you expect the gross margin to grow this year, Don?

Yes.

Okay.

Thank you.

We still expect it to grow modestly.

Okay.

Thank you.

Robert Moskow, Credit Suisse.

Hello.

I guess two questions.

I guess I was little unclear as to why US retail profits will get better during the course of the year.

I think, Don, you said that it's taking some time to adjust your promotional spending tactics.

So maybe just a little more detail on why was the spending so high in the first-quarter?

You mentioned frequency.

Were you just having very frequent deals, and now you won't for the rest of the year, and therefore, the profits will be stronger?

Just a little more clarity there.

And then secondly, on the restructuring program, I haven't seen anywhere how much the program is going to cost in terms of cash cost or hit the P&L.

Could you give us some help there?

Sure.

Let me start with the USRO profit first, and then I'll frame up the Q1.

If you think about the profit decline in the first quarter for USRO, about half of that was because of the trade phasing and the merchandising effectiveness we talked about.

There was another probably third of from negative mix product mix, and then a bit from volume.

As I said, we didn't -- we held our media investment behind some of the good ideas that Ken took us through.

So as the year unfolds, we expect a couple of things to happen.

First, our price mix will improve as the merchandising effectiveness evens out, and our trade spend phasing rebalances versus last year.

Again, as we try to highlight not only is there a merchandise effectiveness opportunity for us, we also set absolutely lower trade spend in our first-quarter last year versus the balance of that year and this year the phasing is a really in the reverse of that.

So that'll be the first thing.

Second, is we do expect volumes to improve.

When we look at the phasing of last year's volume growth, the comps get easier as the year unfolds.

So we expect that to improve.

And then we expect the mix as well not to be as negative in the first-quarter -- as it was in the first quarter.

So that -- and again, strong overhead control.

And the some of the benefit of that $40 million in overhead savings will accrue to our US retail business.

So those are the factors that give us confidence that we're going to see better profit as the year unfolds.

In terms of the restructuring charges, as I hope you understand, we want to make sure that we inform everybody internally on what those changes are before we start talking about numbers.

Either terms of positions, or dollars.

What I will tell you is that there will be some severance and some fixed asset write-offs, probably about half of it will be non-cash when we do give you the figures.

Rob, let me just jump in and add a couple of comments to your first question, which had to do with rest of the year.

So I think Don explained well that we expect to see a reduction or elimination of these negatives that we saw in Q1.

Coupled with that, there are a number of positives I think that are going to continue to work for us.

First of all, as we say, we have good marketing initiatives, and we're planning an increase in consumer-directed marketing this year.

Second of all, yogurt, which has been a drag for the last couple years, is going to be a positive as we go forward.

We're quite encouraged by what we're seeing there.

And then, we feel -- we like the start, in spite of the comment that we made about China, we do like our start in international.

Especially in Canada and Western Europe, which are our biggest markets.

We like what's happening there, and we also like what we're seeing in that convenience and food service business, which is off to a very strong start.

So we see a number of positives that are going to continue to press for us here over the course of the year.

And then, as Don said, we have very good control of costs and overheads, better than planned, and that will continue.

So I think those are kind of the way we're looking at the balance of the year.

But is it fair to say that the US retail mid-single-digit profit growth maybe you're going to be a little bit below that.

But it could be made up for by stronger international and convenience stores, or are you maintaining the segment guidance for the year?

Yes, Rob.

I think it's fair to say that there's probably going to be a mix shift if you look at how the year started for us.

We said we were going to be down in the first-quarter.

We were.

We actually, on the bottom line, weren't materially off our own internal plan.

But we did have some favorable results in convenience, and food service, and international, offset by some weaker than planned results in USRO.

I think those trends will probably have some impact on our full-year outlook for those businesses.

Okay.

Thank you.

Eric Katzman, General Mills.

Eric, welcome to the team.

I have a buy recommendation on it, but I wouldn't go that far.

(laughter)

Okay.

Let's talk a little bit about sales to start.

So you've got Annie's, but currency is more of a headwind.

So where do you think dollar reported sales, given the -- in addition the promotion in the first quarter miss, where do you see dollar reported sales coming in using all of the things, including M&A?

Well with M&A, it depends obviously when we close Annie's.

What I would tell you is that we signaled that there was a couple cent headwind from a ForEx standpoint on EPS, so let's say round that round that to a 1%.

You can probably apply that same percent on our net sales if you go look at the reported numbers.

Annie's is a $200 million, it will be more than that by the time we close given its growth rate million dollar business.

And we are projecting to close that this calendar year, so we'll probably get roughly half a year of sales from that business as well.

So add $100 million for Annie's or more, and take off about 1% from ForEx.

On top of the mid single-digit guidance that we've given you on constant currency, that will probably land you in the ballpark.

Okay.

And then I guess the second question has to go with the new products.

It seemed like you were really emphasizing all the new product launches, both in your last call and at the analyst day.

Ken, you made that point that this year is really all about growth.

Is this first quarter US retail, albeit in a very tough environment, were the new products not as successful as you would have hoped initially?

Or was it just promotion on the core that overwhelmed what is the new product success?

Maybe you could kind of parse that out a bit.

We like our new products, lineup, which I commented on in my remarks.

Cheerios Protein is off to a very strong start.

The snack products, strudel, the Nature Valley products have been good.

We think the soups, the light cream soups, will be very good.

The OEP products that we've launched, Old El Paso, I beg your pardon, Chris.

Those flavored shells will be quite good.

As we go down that -- our US retail portfolio, we feel very good about those.

They include service -- convenience and food service business is entirely driven by new product innovation, whether it's Go-Gurt and McDonald's or new varieties of Greek, new chips, new offerings to K-12.

So we like the innovation there.

And we have good innovation across Haagen-Dazs, and Old El Paso in Europe.

So the new products are very much important for us in part of the mix.

The issue in Q1 is primarily the trade and the merchandising impact.

Which, as we said, will normalize as the year goes forward.

And those new product contributions I think will be more visible.

And, Eric, what I would say also, is Ken shared the chart on our market share performance.

And while the categories aren't growing at the rate that we had maybe originally planned, our competitive situation is pretty strong.

We have two-thirds of our -- we're growing share in two-thirds of our category sales, and so I think that would not happen without some meaningful contributions from our new products.

Maybe one other point.

Eric, maybe one other detail here to make, but it's worth pointing out.

We did see, particularly in our desert mix business this Summer, Betty Crocker mixes, we saw a very competitive promotional environment there.

And if you watch our shares, you saw that business down quite a bit.

And as to a lesser extent, vegetables.

And so, I think there was some competitiveness issues there.

And as we tactically adjust, if you will, and head into the Fall and Winter baking season, which is where we concentrate our program, we would expect those businesses which were a volume drag also in Q1 again to become more of a contributor.

Okay.

If I could just ask one more.

In the restructuring, did you consider getting out of any brands or businesses as opposed to capacity and labor?

With the industry and everything that's going on, were there -- was something more along the brand or lines considered for sale as you look at what can grow in this changing consumer environment?

And I'll pass it on.

Thanks.

Thanks, Eric.

So we are continually looking and reviewing our portfolio and the categories that we're competing in.

And so the answer to your question is, that's an ongoing process, and obviously, nothing to talk about or report.

But we are constantly reviewing our portfolio.

Bryan Spillane, Bank of America.

Hello.

Good morning, everyone.

Morning, Brian.

I just wanted to follow-up on one comment that you had made, Don, and then I had a question just around merchandising.

Don, I think you might have said previously in response to one of the other questions that the first-quarter bottom line came in relatively close to where your internal forecasts were.

Is that right?

Yes.

The EPS.

Correct.

Okay.

And then on the -- in terms of the merchandising, I guess one question I would have maybe just going forward, it just seems like you've got a lot going on.

You've launched 145 new products in the first-quarter.

You're going to be changing some of the merchandising tactics on the some of your other brands.

But is the lack of lift or the efficiency of the merchandising, and maybe this is a more general question, is it tied at all to there's just generally -- most of your -- the industry is trying to do more.

Trying to merchandise more or launch new products to try to stimulate demand, and retailers just can't execute all of that merchandising effectively.

So it's sort of dilutes the intent just simply because they're trying to do too much.

So Brian, you've kind of summarized a number of comments that we made in June on the merchandising environment.

And there is more merchandising and promotional offers now, seeking what is a limited display space in the store.

And that is an environment where, I think as your question points out, quality can suffer.

You see more off-shelf pricing.

You see more ads without an end aisle, or you see lots of products at the end of the aisle.

So there is lots of activity seeking a relatively limited space.

And that's why, for us, it's important first of all, that we focus very much on how we execute these events and the brands that we promote.

And do everything we can to make sure that they're must have promotions, and that there are other consumer things that accompany them to make them appealing.

So our execution is very important for us in this environment.

And as well as, just constantly looking at what did we do?

Did it work?

What was the ROI?

And if something didn't work or a tactic doesn't work, to apply the same HMMs stuff that we do in the rest of the business.

Apply those and get rid of that promotion, and try something else.

So it is an ongoing process of review, and evaluation, and making sure the execution as at the highest level because it is a very competitive environment out there as you point out with your question.

But fair to say that as you describe changing merchandising tactics, it's to address that specific dynamic.

Really trying to hone in on the general inefficiencies, and provide retailers with programs that should be more efficient and maybe take a higher priority.

Very much so.

And also just to highlight, it's very much about that.

It's certainly not about depth of discount or anything like that.

We think that those are -- it's not about going in that direction.

It's all about the execution of the entire program.

Okay.

Thank you.

Ken Zaslow, BMO Capital Markets.

Good morning, everyone.

Good morning, Ken.

Just two questions.

One is, how do you assess the opportunities for Annie's?

What you envision to size it?

Where do you see this brand going?

And how large do you think it could be?

The margin structure, I know they've had some issues internally.

So can you give a little bit of color on that?

Yes, I'd love to.

Obviously, we think it's a terrific equity.

It's a very -- a unique equity in that organic space, it's an all family equity.

It's moms buying organic products for herself and for her family and the kids, which is a very attractive positioning within the organic space.

As you know, they've had consistent very strong growth, and we think that the brand is very flexible and very expandable, given that broad positioning and gatekeeper target.

So we really like the positioning.

And the reason we bought it is because of that flexibility and the growth opportunity.

There are also some business model opportunities that I think will result from the combination of Annie's with General Mills.

First of all, we just have more salesforce capacity that we can bring to Annie's, and that means that we're very confident that we can continue to increase the distribution of those brands.

And that's a good opportunity for us.

There are numerous margin expansion opportunities with Annie's.

Everything, Ken, from the sourcing, and how ingredients are brought in, to the logistics, and how we reach customers.

All of the other internal supply chain HMM things.

We think there are many opportunities here and we've actually jointly discussed these opportunities with Annie's management.

And they're quite excited by those opportunities.

And then again, there will just be some cost savings that we can capture as the corporate entity Annie's becomes part of General Mills.

One other thing that I'd like to add.

They have terrific marketing and sales capability, particularly as it relates to the natural and organic channel.

They really focus there.

And that is going to be an opportunity for the entire General Mills natural and organic portfolio.

We think that they can really help us accelerate the growth of our existing portfolio brands.

So anyway, I'm not going to tell you -- how high is up?

We're awfully excited by that brand, and what we can do to help it grow faster and more profitably.

And what Annie's can do to help us with the rest of our natural and organic portfolio.

We think it's going to be a really good combination.

And you're not planning to make it more mainstream like one of your competitors did with a organic type of brand as well.

Or -- it's going to still have its panache of being focused on the organic channels, and you're not trying to make it mainstream and make it more of a General Mills type of product.

Is that fair?

Yes.

No, that's very fair.

And we learned that lesson about 15 years ago when we first acquired Small Planet Foods.

And we have -- we learn a tremendous amount from these various natural and organic companies that we've acquired over the years.

We've been very good I think about leaving them alone.

Let them do that thing.

We'll retain Annie's headquarters in Berkeley.

These are very talented people.

They've built a really good brand.

And the key is, just to figure out where we have capabilities that can really help them and bring them those capabilities.

Which they're actually eager to have, to accelerate the growth of this thing.

Great.

I appreciate it.

Thank you.

John Baumgartner, Wells Fargo.

Thanks for the question.

Ken, you mentioned the slowdown in China.

But the economic news out of Brazil and Europe hasn't really been too hot recently either.

So I guess, given that, what's your confidence in terms of your guidance?

And maybe this consumer frugality we're here seeing here in North America doesn't take root more deeply in these geographies where you are still seeing growth?

Yes.

So the situation in China I think is partly macro economic, and partly and I think very specifically related to government policies around the gifting and entertainment and these sorts of things.

That has a very direct impact on some of our channels, our gifting programs through our Haagen-Dazs cafes, for an example.

So there's a very specific impact.

In Brazil, even with the economic slowdown, we're seeing consumer food sales, not just in our categories but broadly across the industry, continue to be pretty solid.

And obviously, we're participating in that.

And also I would say, John, that our products are very well targeted to, if you will, the solid working and middle-class in Brazil.

So our price points are good.

These are very much everyday products for most consumers.

And so we think that they're very well positioned to be resilient, even during a period of some slowdown in Brazil.

Yes.

The other thing, John, I'd add in Brazil, is that one of the consumer behaviors we've seen is a shift to the smaller mom-and-pop stores.

And one of the real strong capabilities that we acquired with Yoki was a national sales force that was deeply ingrained in those channels, and we think that's playing to our advantage today as well.

Great.

Thanks, Don.

Thanks, Ken.

David Driscoll, Citi.

Good morning.

Hello, David.

Morning, David.

Hello.

Just wanted to ask a little bit more about the US retail profit performance.

Specifically, Don, I wanted to ask, you cited here unfavorable price realization mix and lower volumes as the contributing factors to the $155 million decline.

Notably absent in these comments is comments about gross inflation and/or productivity savings in the quarter.

Can you talk about this a little bit?

Obviously, it must have been positive, but I'm curious about the magnitude of it and the pacing of these programs throughout the year.

David as we -- as John reiterated today, we still expect 3% inflation for the year.

We think it's fairly evenly distributed during the year, so we don't necessarily see any unique quarterly phasing.

HMM, our productivity savings from HMM are similar.

So one of the reasons that we remain confident in guiding to a higher gross margin is because with inflation at 3% and HMM productivity savings over $400 million, we look at that as a net offset at least.

And part of that came through in the first-quarter, which is why it really wasn't a contributing factor on year-over-year.

But the productivity would be more back half loaded than front half loaded?

No.

Not materially.

Final question.

Just, Ken, you make a really important statement in the press release where you say, and you've said it in your prepared script, but you'd knowledge the US market conditions are more challenging than expected.

You said the quarter came out EPS wise where you expected and you maintained guidance.

So there's just -- I'd just like you to connect the dots for me.

If everything is more difficult, but yet EPS comes out as expected, I feel like I'm getting a little bit of both here.

I'm getting that your plan is coming out as advertised.

But then you're making the statement that no, watch out.

The environment is tougher.

I feel like we should be worried about the guidance, but I'd like you to comment on what this comment means and how confident you are in the full-year numbers.

Well, it means that we are staying with our guidance because that's the way the business looks to us right now as we look forward.

But we do acknowledge that the environment is more challenging.

So there's some risk around that profile.

But we do think, because of the factors that we talked about earlier in the call, which is that we -- the trade which was a primary issue this quarter -- the trade will normalize.

Some of the bigger volume drags will strengthen.

Coupled again, with the positive momentum that we have in a number of areas of the business.

Those factors all combined, and then again on the -- with well-controlled on the cost side.

We are guiding to our full-year guidance for the year, and that we will recover there as we go through the next three quarters.

I think the wild card is the categories.

And we don't know whether they're going to be a headwind, a tailwind, or neutral.

I think that's the unknown right now.

We're encouraged somewhat by what we're seeing over the last several weeks.

They seem to be strengthening.

But whether that's going to be a headwind or a tailwind remains to be seen.

But in any event, our job is to execute around innovation, and core brand renovation, and make sure we've got strong consumer programs, and drive the business that way.

And that's our plan.

We like the plans that we have, and that's why we feel confident right now about maintaining guidance.

And David, what I would add to that is, as I said, we came close to our internal plan on EPS.

But the mix was very different.

We obviously did not plan for the full year for international or for convenience and food service to be growing mid teens in profit.

So, there's some puts and takes in the first-quarter that some came toward us and somewhat against us.

The overriding one that we're going to be working on and watching as the year unfolds is the USRO topline volume growth.

Because we do expect that to go from a negative in the first-quarter to a positive while we're working through the merchandising effectiveness.

So any caution around the category performance, the industry performance, really reflects that area for us.

And that is where the -- that's where our key focus is right now as we think about the rest of the year and our financial performance.

Thank you.

Very helpful.

Okay, thank you.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

Hey, Alexia.

Hello.

So two questions.

First of all on advertising, which I don't think has come up yet.

Was your advertising spending up or down year-on-year in this quarter?

And are you seeing any deterioration in the effectiveness of advertising as a lot of companies are saying with respect to merchandising?

So that's the first question.

And then the second one with respect to acquisitions, you've obviously announced Annie's this past week.

Is that it for the time being?

Do you have an appetite for more potentially in the near future?

And if so, which direction would that be?

Could it be more in the natural area?

Could it be more looking overseas?

And what sort of scale might you be thinking about as you think about your acquisition strategy?

Thank you.

Yes.

So Alexia, our advertising in Q1 in the US was up --

It's up 1% total --

Okay, I'm getting it.

So flat in the US, and up 1% overall for the Company.

And, of course, you're always monitoring the effectiveness of advertising programs.

But we have some very good performance behind advertising.

We think that the revised and renovated positioning for Yoplait core cup around the snacking benefits of that product, which we are running quite a bit, has been highly effective.

And one of the reasons why we're seeing resurging growth there.

Obviously, we've been communicating a lot about the product reformulations in Big G, and we commented on the growth in Cinnamon Toast Crunch.

So again, we're always evaluating and monitoring the effectiveness of advertising.

But when we have something -- when we have a good product change or something new to say and we say it to the right people, it seems to work well for us.

On M&A, I'll let Don jump in on that.

Yes.

Alexia, Annie's obviously hit center plate for us in terms of the kind of businesses that we're looking for here in the US, which is around the natural organic better for you areas.

We've done smaller acquisitions, this is the largest one in that space.

And we feel good about that.

And our focus outside the US remains on emerging markets.

As we talked before Indonesia, India, finding that next leg if you will to add to what we have in China, and what we've purchased in Brazil.

It remains on our focus, and those will be -- the US ones could be on the smaller side.

We've done small to large ones.

Internationally there could be a mix as well.

Although, if we go into a country like Indonesia, similar to our entry into Brazil, we want to look for something with some size and capabilities to bring -- that has size and capabilities, as well as strong brands.

Great.

Thank you very much.

I'll pass it on.

Operator, we're out of time here.

So I think I'm going to have to apologize to anybody who's left in queue.

If you got questions, please give me a call.

Thanks very much for your time today.

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.