通用磨坊 (GIS) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the fiscal 2015 third-quarter earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded Wednesday, March 18, 2015.

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

Please go ahead.

Thanks, operator.

Good morning, everyone.

I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Bethany Quam, who is President of our Convenience Stores and Foodservice segment.

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

You can also find slides on our website that supplement this morning's remarks.

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

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

Thanks, Kris, and good morning, everybody.

Thank you for joining us today.

Slide 4 summarizes our results for the third quarter.

Net sales totaled $4.4 billion, down 1% due to foreign currency effects.

On a constant currency basis we posted 3% growth in net sales.

Segment operating profit totaled $698 million, up 1% as reported and up 3% in constant currency.

Net earnings decreased 16% to $343 million and diluted earnings per share were $0.56 as reported.

These reported results include $0.07 per share of restructuring and project related charges, a $0.05 decline in mark-to-market valuation of certain commodity positions, $0.01 of acquisition integrated costs and a $0.01 charge related to Venezuela currency devaluation.

Excluding these items affecting comparability adjusted diluted EPS was $0.70, up 13% from $0.62 a year ago.

Constant currency adjusted diluted EPS increased 15%.

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

Pound volume reduced sales by 1 percentage point while mix and net price realization added 4 points of sales growth.

Foreign-exchange was a 4 point drag on reported net sales growth.

The Annie's acquisition contributed 1 point of volume growth and 1 point of seals growth in the quarter.

Let's turn to segment results.

Slide 6 summarizes US retail performance.

Net sales were up 1% led by double-digit gains in snacks and yogurt.

Net sales for our serial business essentially matched last year's level while Meals and Baking Products were lower for the period.

Annie's sales, which are included in the Snacks and Meals totals, contributed 2 points of net sales growth for the segment.

US Retail operating profit increased 1% in the quarter to $521 million.

We continue to see excellent growth in our Convenience Stores and Foodservice segment.

As you can see on slide 7, net sales in the quarter increased 6% and segment operating profit was up a robust 11%.

Our six focused platforms are leading this growth with strong double-digit net sales gains in Frozen Breakfast, Yogurt and Cereal.

Bethany will give you a detailed update in a moment.

Slide 8 third-quarter International results on a constant currency basis.

Net sales grew 6% on overall with growth in all four geographic regions.

In Latin America net sales increased 20% driven by inflation linked pricing in Argentina and Venezuela.

Sales for the Asia-Pacific region were up 4% led by double-digit growth in the Middle East and India.

Net sales in Canada increased 4% and constant currency sales in Europe were 3% above last year led by another strong quarter of growth for Old El Paso.

Slide 9 shows that third-quarter adjusted gross margin declined 90 basis points.

This is primarily due to higher supply chain cost and unfavorable mix.

We are now roughly 95% covered on our commodity needs for the full year.

In the fourth quarter we expect adjusted gross margin will roughly match last year's levels, reflecting the impact of lower trade expense and moderating input cost inflation.

SG&A expense as a percent of sales declined 110 basis points in the quarter.

Our combined investment in R&D, advertising and media was lower in the period.

However, excluding those items, as well as Annie's integration costs and Venezuela currency devaluation, SG&A as a percent of sales was still below prior year as we started to see savings flow-through from project catalysts and our expense policy changes.

We expect SG&A, excluding media and R&D, to be down as a percent of sales for the full year.

After-tax earnings from joint ventures totaled $13 million in the quarter compared to $23 million last year.

The decrease was primarily due to a $4 million asset impairment charge for CPW's South Africa business and unfavorable foreign-exchange.

In addition, third-quarter constant currency net sales for CPW were down 3% versus cluster reflecting continued challenging category conditions in western Europe.

In contrast, Haagen-Dazs Japan posted constant currency net sales growth of 7% behind good results for core mini cups and multi packs.

For the full year we now expect after-tax JV earnings to below last year due to the asset impairment charge and foreign-exchange.

Slide 12 summarizes a few other income statement details.

We incurred $74 million in restructuring and project-related charges in the quarter.

On February 12 the Venezuelan government instituted a new foreign-exchange market mechanism.

We booked a charge of $7 million in the third quarter associated with balance sheet re-measurement of our Venezuelan business.

Excluding those items, as well as mark-to-market affects and Annie's integration costs, corporate unallocated expenses decreased 24% in the quarter.

That primarily reflects lower corporate overhead expense and increased pension income.

Net interest expense was 6% fun above last year due to higher debt levels, partially offset by a lower average interest rate.

The effective tax rate for the quarter was 25.5% as reported.

Excluding items affecting comparability the tax rate was 27.5% this year compared to 33.6% a year ago.

The lower tax rate in the quarter was driven by the effect of new US tax legislation, certain favorable discrete tax items and changes in earnings mix by country.

We now expect our full year adjusted effective tax rate to be 100 basis points lower than last year's due primarily to favorable earnings mix by country.

Turning to the balance sheet, slide 13 that shows that our core working capital declined 9% versus last year's third quarter driven by improvements in payables and receivables.

This is the eighth consecutive quarter that we reduced our core working capital versus the prior year.

Cash flow from operations totaled $1.6 billion for the first nine months.

This was down from last year reflecting lower net earnings.

However, we expect our full year operating cash flow, including cash restructuring charges, to be comparable to last year's levels including the 53rd week and the addition of Annie's.

Capital expenditure -- capital expenditures totaled $491 million through nine months.

We continue to estimate full-year capital expenditure of $750 million, including the incremental spending related to Project Century.

We paid a $750 million in dividends and spent nearly $1.2 billion to repurchase shares thus far this year.

We have been highly efficient in cash generation in recent years.

Since the beginning of fiscal 2011 we have converted 97% of our net earnings into free cash flow.

And we're disciplined about returning that cash to shareholders.

Slide 15 shows that we have returned almost $10 billion to shareholders in the last five years, which represents more than 100% of our free cash flow during that time.

We are maintaining this commitment to strong cash returns.

Last week our Board approved a 7% increase in our quarterly dividend rate to $0.44 per share.

Slide 16 provides a brief update on our productivity and cost savings initiatives.

Our ongoing focus on holistic margin management, or HMM, continues to generate savings.

We are on track to deliver more than $400 million in HMM savings this year and $4 billion in cumulative savings over the course of this decade.

We're also making good progress on the new cost saving initiatives we announced earlier this year.

We have reached the necessary labor agreements on plant closures related to Project Century, actions associated with Project Catalyst are largely completed, and we are making good progress implementing changes to our overhead-related policies and practices.

We are on pace to meet or exceed the $40 million in cost savings targeted for fiscal 2015.

And we're still targeting more than $350 million in savings by fiscal 2017, above and beyond the ongoing HMM savings I referenced a moment ago.

We have included a table in today's press release footnotes and in the appendix of today's slides that summarizes these project costs and savings.

For the fourth quarter of 2015 we anticipate net sales will grow at a high-single-digit rate in constant currency, including the benefit of Annie's and the 53rd week.

This combination of sales growth, savings from HMM and our recent cost savings projects, the lower tax rate and lower shares outstanding should result in double-digit constant currency growth in adjusted diluted EPS for the quarter.

For the full year we continue to forecast low-single-digit growth in net sales, a low-single-digit decline in segment operating profit, and low-single-digit growth in adjusted diluted EPS, all in constant currency.

Now our strongest operating performance this year is coming from the team in our Convenience Stores and Foodservice segment.

To tell you more about that I will turn the microphone over to Bethany.

Thanks, Don, and good morning.

I am pleased to give you an update on our Convenience Stores and Foodservice segment.

On slide 19 you see that US consumers spend more than $1.3 trillion every year on food and beverages.

Nearly half of that is food eaten away from home.

In recent years, as unemployment has moderated and consumer confidence has slowly improved, Food Away From Home as captured an increasing share of food spending.

Technomic is forecasting this share to hold steady in the years immediately ahead.

So you can see this is a great market for our US Foods brands.

Now when you think of Foodservice you probably think first about restaurants, but our business is much broader than that.

We sell to multiple channels from schools to healthcare to Convenience Stores.

These are some of the fastest-growing channels within the Foodservice industry.

In total General Mills delivers products to more than 1 million US locations where people eat food away from home.

Over the past 10 years we have taken many actions to sharpen our portfolio, focusing on the highest margin businesses and divesting lower margin performers, things like bread concentrates and frozen pie shells.

Since fiscal 2005 we have turned our number of SKUs by 65%.

We've also streamlined our supply chain network and now operate just eight high-performing manufacturing facilities.

And we are reaping the benefits of a direct sales force that is solely focused on our product line.

The result of our actions is a portfolio that is leveraging our Company's well-known consumer brands.

More than 80% of our sales come from products that are branded to consumers or the Foodservice operator.

As we have transformed our portfolio and divested businesses, our overall sales trend has been essentially flat over the past several years.

However, net sales are up 4% through the third quarter of this year and we expect to deliver mid-single-digit sales growth for 2015.

Where you see the most significant impact of our portfolio focus and our restructuring work is in our profit growth.

From the low point of the financial crisis in 2008 segment operating profit has increased at a 10% compound rate and it is up another 14% fiscal year to date.

We've also generated strong growth in our profit margin over time.

Today our profit margin is in the mid-teens and close to the Company overall margin.

So today we are focused on six key product platforms: Snacks, Cereal, Yogurt, Frozen Breakfasts, Biscuits and Baking Mixes.

These six platforms combined generate nearly $900 million in sales, or close to half of our total segment sales.

But more importantly, these platforms account for two-thirds of our segment operating profits.

Net sales for these six focus platforms have been increasing at a 4% compound rate over the past five years and so far for this fiscal year sales are up 9%.

Now let me give you a couple examples of how we are putting the consumer first to drive new growth on these platforms.

Yoplait is a leading yogurt brand in Foodservice and net sales are growing at a double-digit pace so far this fiscal year.

Go-GURT as a choice in McDonald's Happy Meals is contributing to this growth.

But so also is our Yoplait Parfait Pro.

This is a great example of how we find new growth by being consumer and customer first.

Consumers like yogurt parfaits, they are a fresh convenient way to buy yogurt in the perimeter of stores and consumers love the combination of yogurt and fruit.

But making layered parfaits was time-consuming for Foodservice operators and generated a lot of waste when yogurt was scooped out of large tops.

We solved this issue by putting yogurt in an easy to dispense bag so it can be piped directly into glasses quickly and easily with little mess and waste.

Our frozen breakfast products are growing at a double-digit rate.

K-12 schools serve more than 13 million breakfasts each and every day.

And cafeteria operators are looking for options that can be easily and neatly eaten in classrooms.

We developed a line of Pillsbury frozen breakfast items that are heated right in the bag and meet the nutritional requirements for school meals.

We recently have added cream cheese filled mini bagels to this line and they are performing very well.

We also introduced a breakfast item under the old El Paso brand.

Now our Cereal business is growing in schools too.

Last year participation in school breakfast increased 5% and is up 50% over the past 10 years.

Cereal is a key school breakfast offering and General Mills is the Cereal share leader in K-12 schools with our gold pack offerings as it is nutritious, easy to serve and a good value.

We recently added gluten-free Cinnamon Chex to our offerings.

And on college campuses our bulk serial is a growth driver, with particularly good performance on granola.

In total net sales for our Cereals are up 6% so far this year.

Now you've heard us say that Snacks are the new meal and consumers are buying new Snacks in a variety of outlets, from school cafeterias to hotel lobbies to Convenience Stores.

Sales for our Snacks are up 9% so far this fiscal year led by strong performance in schools were our Cereal bars and Simply Chex snacks meet the new Smart Snack regulations that call for less fat and sugar and more whole grains, fruits, vegetables and protein.

We're also bringing innovation to Convenience Stores where 60% of all food purchased is eaten right in the car.

We're introducing Chex Mix Hot Salty Snacks and gluten-free Nature Valley Nut Bars as C-store consumers are also seeking better for you snack options.

We also have a small but growing natural and organic Snacks business led by Food Should Taste Good and Larabar.

These brands are posting good performance on college campuses and in business and industry outlets and we're excited about the opportunities ahead for Annie's Snack items in Foodservice.

This brand is a great fit for colleges and universities as well as K-12 schools.

The good growth we are posting across all of our platforms is due in part to the strong capabilities that we bring to our customer.

This starts with our national sales force.

Having a dedicated sales force gives us direct access to Foodservice operators and distributors where we gain insights into how they use our products and focus attention onto our brands.

We use those insights to develop new products and creative solutions to meet the needs of our operators and the consumer which in turn drives new growth for us.

So I hope I've given you a good sense of the strength of our Convenience Stores and Foodservice business and the growth opportunities we see ahead.

Now to summarize, we have made great strides in transforming our portfolio and we believe we are well-positioned to drive growth in this large Foodservice market.

We are focusing on six key product platforms within the fastest growing channels in the industry.

And with our branded portfolio and strong sales execution we've posted good performance in recent years and we will have another strong year in fiscal 2015.

We expect to deliver on our planet with mid-single-digit net sales growth and will do a little bit better than our plan with the double-digit segment operating profit growth.

We are excited about the prospects we see ahead for our Convenience Stores and Foodservice segment.

With that I will turn it over to Ken Powell.

Thanks, Bethany, and good morning to everybody.

We think our Convenience Stores and Foodservice business is an underappreciated source of sales and profit growth for our brands in the US.

You will hear more about this business and the new growth we see ahead at our Investor Day in July.

So now let me give you an update on our two operating segments -- our other two operating segments, starting with US Retail.

Third-quarter net sales performance for US Retail showed a clear inflexion from our first half trends.

Annie's contributed to Snacks and Meals results and the base Snacks and Meals businesses, Yogurt and Cereal, all posted sequential improvement in net sales growth rates in the quarter.

We have a broad portfolio of US Retail categories and it is a rare year when all of them are growing share.

As you see in slide 34, Dessert Mixes and Frozen Vegetables are two categories where we are seeing more significant share declines this year and we have work to do to fix these businesses.

But we are gaining share in our priority categories of Snacks, Yogurt and Cereal.

And our year-to-date share is up in categories representing over two-thirds of our measured sales.

Our innovation and marketing focus is on putting the consumer first to drive new growth.

Nowhere has this been more successful than in our US Yogurt business where investment in Core Brand renovation, new products and consumer marketing has driven strong performance this year.

This strength is broad-based with growth across almost all of our segments.

More and more consumers are discovering the great taste of our Greek Yogurts.

Retail sales for our Greek varieties were up 43% in the third quarter, behind the continued success of the Yoplait Greek 100 and the introduction of new Greek 100 Whips which are off to a good start.

We recently removed all artificial colors and flavors from our kid yogurts and we introduced new items featuring movie equities like Star Wars and Frozen.

We are seeing 7% growth for this business.

And retail sales for original style Yoplait increased 17% in the quarter.

We are now rolling out a 25% sugar reduction across the entire Yoplait original line.

We expect this news will help generate more good growth for Yoplait.

Consumer first renovation, innovation and investment have returned our overall US yogurt business to sales and profit growth.

We are now the fastest-growing of the major yogurt manufacturers and we are gaining share at an accelerating pace, including more than 2 points of share growth last month.

Our Cereal business is following a similar playbook.

We are investing in core brand renovation, innovation and consumer marketing to keep our Cereal brands relevant with evolving consumer preferences.

We continue to see strong growth for our granola Cereals which are on trend with consumer interest and less processed food.

Retail sales for our Nature Valley, Cascadian Farm and Chex granolas increased by 26% last quarter.

Our protein Cereal varieties also enjoyed excellent growth with retail sales more than double last year's level.

And great taste will always be a driver of growth for Cereal.

For example, Cinnamon Toast Crunch posted another quarter of strong growth and we've had very positive consumer response to the re-launch of French Toast Crunch in January.

Combined retail sales for these Cereals increased by 13% in the quarter and dollar share rose to nearly 4.5% of category sales.

So we saw pockets of good growth in the third quarter and our total Cereal net sales essentially matched year ago levels.

But our goal is to grow our Cereal sales, so we have more work to do.

At CAGNY we announced that we are embarking on a broad investment plan designed to renovate our Big G portfolio for today's consumers.

Gluten-free Cheerios is the first step in this plan.

We are taking 88% of the Cheerios franchise, which equates to 11% of the total Cereal category, gluten-free.

It is important to note that this is a processing change, not a reformulation.

Oats are the primary ingredient in Cheerios and they are naturally gluten-free.

But trace amounts of wheat, barley and rye find their way into the oat supply chain in the fields or in shipping.

One of our engineers developed a mechanism for sorting out those other grains leaving us with pure oats.

So consumers will be able to joy enjoy the same great tasting Cheerios that they love with the added benefit of knowing that they are gluten-free.

With nearly 30% of US consumers expressing an interest in gluten-free foods we think this change is a big deal.

We know some consumers have turned away from Cereal to seek gluten-free options at breakfast and we think that having the largest franchise in the category gluten-free gives them a reason to return to the category.

Our retail customers are certainly excited about this news.

Consumers will start to see gluten-free Cheerios packages on shelf in the first quarter of fiscal 2016.

We are leading performance in the US Cereal category, gaining almost 2 points of share over the last eight years.

Our investment in wellness renovation is designed to foster new growth in 2016 and beyond.

I mentioned that gluten-free Cheerios is the first step in this plan; we will tell you more when we outline our fiscal 2016 plan this summer.

Our Snack business continues to deliver on consumer's interest in convenience, great taste and better for you alternatives.

Our grain Snacks posted 4% retail sales growth in the quarter led by Fiber One Streusel and Nature Valley Nut Crisp, new products.

Continued distribution gains and investment in sampling and digital marketing for Larabar helped deliver double-digit retail sales growth for nutrition bars.

And Chex Mix and Gardetto's posted 3% retail sales growth behind large size varieties.

Over in the frozen aisle Totino's Hot Snacks business continues to perform well with retail sales up 4% in the third quarter.

This brand has found success with innovation like new Blasted Crust pizza rolls and by leveraging digital media to target millennial consumers with messaging focused on convenience, value and great taste.

At CAGNY we mentioned our goal of building our Natural and Organic food business to $1 billion in sales by fiscal 2020.

This portfolio includes Annie's, Cascadian Farm, Larabar, Food Should Taste Good, Muir Glen, Mountain High, Immaculate Baking and Liberte.

Sales for these brands across US Retail and Convenience Stores and Foodservice segments totaled more than $160 million in the third quarter, up 60% versus last year including the addition of Annie's.

But even without Annie's, net sales for the rest of our natural and organic brands increased at a double-digit rate.

We are making good progress on the Annie's integration.

We have consolidated our natural channel sales support with Annie's broker.

We are bringing our HMM process to the Annie's team to build out a multi-year productivity pipeline and we're actively working on the next new category launch for the Annie's brand.

The leader of Annie's, John Foraker, and the rest of the team continue to run the Annie's business out of the Berkeley, California office and we're excited about the future growth prospects for our combined Natural and Organic Food portfolio.

So let's turn it now to results for our international segment.

Our Europe region posted another quarter of growth with constant currency net sales up 3%.

Retail sales for Old El Paso increased double-digits thanks to continued strong performance on our Stand 'N Stuff tortilla innovation.

Haagen-Dazs retail sales were down 1% in the quarter.

We are introducing a new premium line of Haagen-Dazs stick bars in France in the fourth quarter giving as a strong offering in the largest segment of the category, handheld ice cream treats.

And third-quarter retail sales for Yoplait increased 1% including 4% growth in France where our Yopa!

high-protein yogurt has established a leadership position in the Greek style yogurt segment.

In Canada third-quarter constant currency net sales were up 4%.

Retail sales for yogurt increased 1% with good growth of Liberte's extra creamy Greek line launched earlier this year.

Cereal retail sales were flat to last year and we saw particularly good performance on Cinnamon Toast Crunch and EDGE Protein Cereal.

Our Old El Paso and Snacks businesses continue to deliver strong results in retail sales thanks to innovation like Old El Paso Restaurante Kits and Fiber One Delights snack bars.

Net sales in Latin America were up 20% in constant currency including low-single-digit growth in Brazil.

We saw strong double-digit growth for La Saltena in Argentina.

A new advertising campaign drove growth on Yoki meals and new Nature Valley Fruteria and Fiber One Snacks helped Mexico sales increase double-digit.

In our Asia-Pacific region constant currency net sales increased 4% in the quarter.

We saw strong double-digit sales growth in the Middle East thanks to the launch of our new Betty Crocker ready to eat cookie bars as well as new Haagen-Dazs varieties like mango raspberry.

In Greater China constant currency net sales were down low-single-digits driven primarily by low sales for Snacks in Haagen-Dazs shops.

Our shop sales have been impacted by the government's extension of gift card redemption terms from one to three years.

We will lap this change at the end of the fiscal year.

We did see nice growth in our Wanchai Ferry (inaudible) business in the third quarter due in part to new innovative flavors in forms of crystal tangyuan launched just in time for the Chinese New Year.

So I will close our remarks this morning by reiterating the message we shared at CAGNY -- the key to delivering new growth for our business is to put the consumer first.

We do that by renovating our established brands to meet current consumer needs by innovating to create new products that consumers love and by investing in strong consumer marketing messages delivered with the right vehicles to meet consumers where they are.

Where we are doing this well today we are seeing new growth.

In US Retail I have shared examples including the renewed growth of original style Yoplait, the success of new protein rich Cereal varieties and the great marketing on Totino's Hot Snacks.

Bethany gave you a look at the new growth we are driving on our brands in US away from home channels and we are seeing consumer first efforts drive growth across our international developed and emerging markets.

We are developing plans for fiscal 2016 that are designed to build on this momentum and expand the impact of our consumer first strategic focus.

And we will provide details on those plans on our fourth-quarter earnings call.

So that concludes our prepared remarks.

I will ask the operator to open up the call for questions.

(Operator Instructions).

David Palmer, RBC Capital Markets.

Two questions, first, Annie's when it was independent had concepts tested a variety of categories that moms would be open to having an Annie's version of that category.

How broad do you think Annie's can go?

Do think this brand can be in almost any of your Meals or Snacks categories from soup to toaster pastries?

Good morning, David, this is Ken.

So you are right, they -- that team -- that Annie's team had been working quite hard over the years to identify other areas where the brand could be extended.

And I think one of the many benefits of the combination that we are seeing as we move through the integration is to see how General Mills innovation and formulation and manufacturing capability complements so well the desires of the Annie's team to extend the brand into new areas.

Prior to the combination it was very difficult for them to go into some of these areas because they are technically difficult.

And so, we think that the combination of the two companies is really going to open up the scope for expansion into new areas.

I think some of you have read about we showed a line of soups at the recent Natural Foods conference, and so that was a very high priority area for Annie's.

But they were really unable to find the right way to do that.

Obviously we have lots of capability in that area and we will be launching that line of product this summer.

I will tell you there are a number of other very high potential areas that the brand could be extended to and we will talk more about those when we review our plan with you in June.

And then second and lastly, you talked about changes in how you are going to bring products to market and how you are going to be working on your innovation pipeline, perhaps bringing products to a select group of retail stores, listening to the consumer more.

I'm wondering if that is a fundamental change that you are going to be making broadly across your entire pipeline or is this more of a select type of thing.

Could you give us a sense of how much of a fundamental change you are making on your innovation as a Company?

Thanks.

Okay, so -- and, David, is the question with respect primarily to Annie's or it is a general question about innovation across the Company or --?

I was thinking that perhaps this was something of a learning you got from perhaps some of the more entrepreneurial businesses that you have acquired and how they were doing things.

But perhaps this was being brought as a best practice to your overall Company.

I am wondering if this is -- how broad that is and how much more of a local market testing, tinkering approach, consumer-centric approach you are taking in your overall business, or if that is more specific to some of these smaller brands.

Thanks.

Okay.

Thank you, David.

And so the answer to the question is that really over the last half dozen years we have been looking very closely at the entrepreneurs that we compete with, the smaller companies that we compete with, and we have studied in detail how those kinds of small companies develop and bring their products to markets.

And we have learned a lot from doing that.

And I would say a couple of the key lessons that we have learned is that the entrepreneurs who develop those products are very, very, very close to the ultimate consumer who will buy the product, sometimes the consumer is themselves or family members.

And so that learning has really underscored our desire to put our marketeers and our consumer research specialists in the homes of the people who will be buying our products.

This is so-called consumer empathy.

We think it is really, really important and in many ways it is replacing big and broad-scale tests that we used to do, which in a way moves our marketeers out of the process and distances the consumer from them.

So we have got a very high premium on getting our folks right next to the consumers who are going to buy these new products.

The other area where we have really focused is rapid prototyping of the idea so that we can get a tangible representation of a new product in front of consumers very early in the process and learn directly from the consumer very rapidly.

And these are lessons that we are learning from these small companies.

And when you do them the right way the result is you go fast, you make decisions rapidly, you are very connected to the consumer and so you are more on target more often.

So I could go on for another 20 minutes, I won't.

But we have changed quite a bit the approach that we take to new product development, very much learning from small companies and entrepreneurs.

Thank you.

Alexia Howard, Bernstein.

So can I just ask two questions?

The first one is around the negative mix that you mentioned on the gross margin.

Could you just help us out to understand what product categories are causing that negative mix shift, what is growing, what is shrinking?

Thank you.

Sure, Alexia, this is Don.

The mix with yogurt was actually -- Bethany's business in C&F is a lower gross margin business, but obviously doesn't have the same kind of advertising support.

So from an operating profit standpoint it is still very competitive with the rest of our businesses.

Those would be the two that I would point out in the quarter.

Okay, great.

And then CAGNY, you were referring to the long-term earnings growth algorithm.

I mean it seems as though you have been pushing really hard on the cost-cutting front this year with the $400 million in savings.

You've got a lot of innovation coming to the pipeline.

Your advertising spend is being cut a little bit it seems.

And at the moment the volumes are still down on an underlying basis.

So I guess the question becomes as we look out over the next couple of years, how confident are you in that there is a return path to that long-term earnings growth algorithm?

And really just what do you think pulls you around the corner back onto that?

Thank you very much, I will pass it on.

Thanks, Alexia.

So we very much believe in the long-term growth model that we outlined at CAGNY.

And even in a period where our category is a little bit softer, I mean the reason that we continue to believe very strongly in that model is because where we effectively are meeting the consumer where they are at today with the right kind of innovation, we see very striking growth.

And so, for us it is a question of continuing to focus very much on the consumer, bring the right pipeline of innovation and restore the growth momentum on our businesses.

And we have given you a number of great examples of how that is working for us this morning.

The Convenience and Foodservice success that Bethany outlined for you is almost entirely driven by innovation that has resulted from a very high focus on the consumers in that channel.

We have talked at length about yogurt and when you look back over the last couple of years the renovation and innovation that we've brought to that product line, it is not surprising that we are now seeing very good growth.

So we just intend to apply those principles where we have businesses that are not growing to our satisfaction.

And we think as we do that we will return our businesses to on model performance.

Thank you very much.

I will pass it on.

David Driscoll, Citi Research.

Two quick questions.

First on dairy, was just curious how stable are yogurt prices given the decline in dairy costs and how price sensitive do you see the yogurt category?

Yes, the pricing in yogurt, looking at the US in particular, has been very stable.

We made -- about a year ago we made some tactical price moves, but since that time it has been very stable even with the move in dairy.

So we think that is a very rationally priced category right now.

Okay, and then just -- go ahead.

Well, I would just that I think consumers are still very focused on value in this economy.

And so, as Don just said, the prices have been stable through periods of higher dairy prices and periods of lower dairy prices.

I think the industry as a whole has worked very hard to maintain relatively stable prices.

Back in November you guys called out kind of three issues that affected your year -- just kind of overall slowdown in category growth, the baking mix and kind of frozen vegetable promotional issues and I think some inventory destocking.

Can you just give us a quick update on those three factors and how they are trending today?

Okay, I will start, David, and I am sure Don will want to jump in.

But in terms of the category momentum, it is a little better on our core categories.

I know you guys have your own data, but as we look at the Nielsen -- the Cereal category, if you look at the last 12 months, was down around 4%; last quarter last, three months it has been down around 2%, this is on a dollar basis.

It is still down but that is a little better.

Obviously we have more to go, but we believe we are seeing some moderation there.

The yogurt category last 12 was up 3%, that is accelerating as we look at the last three months, it is up a little over 4% so we like that.

The Snack category on the last 12-month basis was actually down a little bit, I think 0.5%.

That has turned over the last three months to be I think up between 1% and 2%.

So in our core categories we are seeing some positive momentum and we like that, but still more to go, particularly in the Cereal category where we are very focused and we have a very good pipeline of innovation coming.

On the baking mix issue, there really are two components for us there.

One is that we launched a very extensive line of Hershey's branded products a year ago and there was lots of pipeline build around that launch.

Some of those items have done well and sustained, but as we have lapped what was a fairly big launch, we have just been down versus that launch.

And then as we have said, there are some promotional pricing issues selectively in that category and we continue to position ourselves to address those.

So that is still very much a work in progress.

And your last -- I think your last point was what, David?

Inventory destocking by retailers.

Oh inventory, yes.

I think it's -- we don't really see that -- it was down a little, I think there was some destocking.

It might have been up a little bit this quarter.

I mean it's -- at the end of the day, over any 12-month period sales through stores and our deliveries match very, very closely.

And so, we don't really overly focus on that.

And, David, just to -- we have -- since we changed our guidance in November we have held to it.

Obviously there are some puts and takes, Ken touched on a couple of those.

But the couple things I would highlight is we have had some businesses that have performed better, Bethany's Convenience Stores and Foodservice business has continued to strengthen as the year unfolded.

Our US yogurt business as Ken over viewed has performed better as the year has played out.

Our developed markets internationally, Europe has continued to be strong.

We've seen a little bit of rebound in Canada, as you saw in the sales numbers this quarter.

The Annie's acquisition has come in as expected.

Our tax rate has improved a bit and that is really due to the earnings mix internationally, so that is something that we think we will sustain.

On the downside, as we said, the emerging markets have tempered the growth a little bit, plus we had some service issues in our Brazil business.

So that has been a little bit more of a headwind than we expected.

And on the gross margin it has been a little -- it took a little longer than we expected to pull back on all the trade spending, but we have been seeing that and you saw that come through in our price mix this quarter.

And quite honestly, the Forex movement has hurt us a little bit from a transaction standpoint on our gross margin a little bit more than anticipated.

So again, there's puts and takes, but if you list them there is a lot of positives to look out as the year has played out.

Very thorough.

Thank you.

Jason English, Goldman Sachs.

I think you guys touched on this a little bit, but I was hoping you could go a little bit deeper on gross margins.

I think for most of us who are modeling this it has been an area of disappointment this year particularly as we look at some of the input cost trends out there.

So maybe you could talk a little bit about what you are seeing from just a raw input cost aside from some of the investment you are making whether it be a process or product.

And then touch a little bit more deeply in terms of the portfolio mix issues that you referenced in the press release.

What is driving some of the compression and how enduring that may be?

Well, Jason, it is a very fair question given that gross margin hasn't performed the way we expected -- hasn't played out the way we expected this year.

A couple of factors, I will dial through them.

Trade in terms of pulling back on some of the innovation trade that we started talking about last summer has taken a little bit longer than we anticipated.

But as I mentioned, we are starting to see the positive impact of that as we look at our price mix this quarter.

But that has been a drag as the year has unfolded.

Mix as I alluded to, the growth in our yogurt business has been very encouraging, but it is slightly dilutive from a gross margin standpoint.

As is the C&F business.

We have seen negative volumes in our US business and so there has been some deleverage there.

And then a smaller piece would be the FX and the translation impact.

But the first three are the primary drivers as the year unfolds.

It is not higher inflation.

As a matter of fact, as the year plays out we think our inflation, by the time we close the books, could actually round down to 2% versus the 3% we had been tracking.

And HMM is very much on track.

So those two pieces we feel good about.

I think what is important to remember also is that we are undertaking a large Project Century to optimize our North American supply chain.

None of those benefits have been played through yet in our gross margin.

We would expect to start seeing some of those in FY16.

Thank you for that, that is helpful.

And I want to ask another question somewhat related but not in a big way.

And it stems from some of the press reports out there.

And I don't (inaudible) about potentially divesting Green Giant.

I don't expect you to comment specifically on Green Giant.

But I would like just to ask a question more broadly about how you are thinking about your portfolio.

You have got some on balance growth, some high-margin businesses are anchoring you down, some lower margin businesses are driving your growth.

You talked about that on (technical difficulty) margins.

You've clearly been trying to accelerate some of the growth of some of the lower margin stuff because it is where the growth is and you have demonstrated a willingness to sort of buy in to transform the portfolio.

Are you willing to examine some of that maybe high profitable -- high cash generative assets that don't have much growth, they are potentially growth anchors, and consider unwinding them or divesting them on a go-forward?

Jason, I think the only thing to say is what we have said in the past, which is that we do continually review the portfolio looking for opportunities to strengthen or alter.

And so we are constantly doing that and I don't really think that I would have anything to add to that.

Okay, thanks a lot, guys.

I will pass it on.

Robert Moskow, Credit Suisse.

I know you don't want to talk about fiscal 2016 yet, but the trends in gross margin do continue to fall below our expectations.

But you have this big shelf of savings coming through also.

So I guess can we think conceptually about fiscal 2016 being a stabilization year for gross margin?

Or should we think, boy, there is a lot a product renovation you still have to do, shifting the mix still has an impact and is there another year of potential erosion ahead?

And then secondly, the SG&A savings, how big can those savings be for fiscal 2016?

I know you have quantified some of it, but can you give us a sense for 2016?

Well, first of all, Rob, we will give you -- as we always do, we will give you a good level of detail on what we are anticipating for inflation and HMM and these sorts of things when we meet with you in June.

And so --

July.

-- or July, I beg your pardon.

I stand corrected.

So we will come onto that then.

We have given you I think several times now how we expect the savings from our various projects to accumulate over the next three years and I think every time we see you we update those.

Those will be quite significant in FY16, both from the restructuring side, administratively and we will start to see supply chain savings come through as well.

And we have given you those numbers and actually updated them I think a couple of times, so those are going to start to come through.

So -- and will be positive.

So I guess the way I would leave it is just to say we will give you a good level of detail here in a couple of months.

Okay.

I mean there is some you have quantified already, but then there is other projects you have added on top.

So I wanted to know if there was going to be more.

Can you just say is the going to be more savings on top of what you have already quantified (technical difficulty)?

Yes, Rob, we have already provided an overview of the three Project Century, Project Catalyst and the other overhead policy and practices changes that we are making.

And those well accumulate to more than $350 million in savings by FY17, $260 million to $280 million next year.

And that is obviously an increase from the $40 million plus that we will get this year.

And you will have another year of HMM next year.

Yes, as Kris mentioned, we've have another year of HMM on top of that.

Okay, thank you.

Eric Katzman, Deutsche Bank.

I guess one kind of management question and then one specific -- why don't we deal with the specific one first.

If I look at -- Don, if I look at corporate expense -- unallocated corporate over time, this quarter was the lowest you have had in many years.

And even if I look at the last couple of quarters you are kind of on a run rate basis let's say, I don't know, $150 million call it.

And that is well below what you have been reporting.

So I know it is a tough number two forecast, but is there -- how should we think about that kind of going forward?

With the impact of the restructuring action, which I assume has some impact on unallocated corporate, not just the segments.

Yes.

Well, last year I think if you strip out the mark-to-market and other items made comparable was around $250 million in corporate unallocated.

This year we will kind of zero in around that same level.

And you are seeing the benefit -- we will starting the benefit this year of Project Catalyst.

In both years you saw the impact of lower incentive payment given the performance.

So assuming we get back to the performance we expect I would hope actually corporate items would go up a little bit, but you would see it being paid for by higher operating profit as well.

Okay.

All right.

And then I don't know if I asked this, Ken, the last time, but I am just trying to understand why we should be comfortable with Small Planet Foods being basically broken up and put into the various other let's say conventional food segments.

I mean -- isn't the --?

Yes, yes, no, you did ask that.

Okay.

But it is okay.

At least I am consistent.

Yes.

It is okay.

Actually I think you have asked it twice.

But --.

That's how worried I am.

It is a good question and the reason that we made that change, first of all, remember we have been selling, marketing and learning about these categories for 10 years now, over 10 years.

And what we noticed for particularly the snacking area, I think products like Larabar and Food Should Taste Good, we were coming in to see some of these large major customers -- we were coming in with a Snack presentation and an overview and thoughts on grocery snacks two to three times depending on what the product was.

And these products are -- they are growing, they are -- I wouldn't necessarily say yet that they are mainstream, but they are certainly in the process of mainstreaming.

And so, our belief is that we are better off going in and telling the Snack story once with all of our brands, whether they are Nature Valley or Food Should Taste Good or Larabar, getting our sort of holistic view of that category and how it is going to grow one time, one story to these customers.

And what we are seeing in the early days of that is very positive.

So, for instance, Larabar had a terrific quarter.

And so, I guess I would tell you we really believe that this is the right approach and don't worry about it.

I will also tell you that we have some centralized marketing capability around these natural and organic Snacks that we have retained because they use sort of in many ways a different and more person-to-person marketing model and we have maintained that capability so that exists centrally for all those brands to call on.

I will also tell you that Annie's has a very powerful natural channel sales capability that is unique and differential to what General Mills had.

And so, while we will be using our divisional structure in our centralized US Retail sales focus to expand distribution into traditional channels, all of the products that I mentioned in my remarks, Larabar, Food Should Taste Good, Immaculate Baking, we are going to funnel the selling for those brands to the natural channels through Annie's.

And that is -- so there are a number of ways to -- and there is great synergy there and they are very, very good at that channel and our growth will accelerate in that channel as a result.

So there is a little bit of detail and texture behind what we have done, but we are doing these to accelerate sales and accelerate our impact with retailers.

And the early signs so far are quite positive on it.

Okay, thank you.

I will pass it on.

Operator, can we sneak one last question in here?

Todd Duvick, Wells Fargo.

Don, I guess this is probably for you.

The way we calculate it, your leverage is a little elevated compared to where it has been and I know Annie's probably added to that.

But can you talk broadly about your leverage where you are today and if you maintain a target leverage range and also a target credit rating?

Yes, happy to, Todd.

That is something that obviously we look at very rigorously.

And we are a little above are targeted leverage ratio.

It's driven primarily, as you know, by Annie's.

We do expect that as we go into FY16 to improve.

Our target ratio is probably a turn or two lower than where we are today.

And our target credit rating is a BBB+.

We're pleased that we are a notch above that from Moody's perspective, but we have been maintaining that same guidance in terms of the leverage and the credit rating for a number of years now and that has not changed.

Okay, that's helpful.

And then with respect to your short-term debt balance, it is also elevated.

Should we expect to see you in the market terming out a portion of that?

And I guess related to that, do you have kind of a target in terms of how much floating rate debt you have versus fixed-rate debt?

Yes, we would typically look at floating to be say a third -- 30% to 35% of our mix, and we will be terming out some of that debt certainly over the coming months.

Okay, very good.

Thank you.

You're welcome.

Thanks everybody.

If there are folks still in queue, sorry we didn't get to you.

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

Thank you.

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

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