通用磨坊 (GIS) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the General Mills second-quarter 2016 earnings call.

(Operator Instructions).

As a reminder, this conference is being recorded Thursday, December 17, 2015.

I would now like to turn the conference over to Jeff Siemon, Director of Investor Relations.

Please go ahead, sir.

Thanks, Melody and good morning, everybody.

I'm here with Ken Powell, our CEO; Don Mulligan, our CFO and Chris O'Leary, Chief Operating Officer for our International segment.

I will turn the call over to them in just a minute, but first let me cover my usual housekeeping items.

Our press release on second-quarter results was issued over the wire services earlier this morning and it's also posted on our website.

You can find our slides on the website that supplement this morning's presentation.

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

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

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

Thanks, Jeff.

Good morning and happy holidays to everyone.

Thank you for joining us today.

As noted in our press release, General Mills' first-half financial results were in line with our expectations.

After a strong first quarter, constant currency net sales declined low single digits in the second quarter due in part to the divestiture of our North American Green Giant business.

We delivered another quarter of margin expansion helping drive a mid-single digit increase in constant currency adjusted diluted earnings per share.

We are increasing our cost-savings targets to $500 million by fiscal 2018 driven by incremental savings from Project Century.

And we are updating our full-year fiscal 2016 growth targets to include the impact of the Green Giant sale.

Excluding the Green Giant impact, we remain on track to deliver our original fiscal 2016 growth goals.

Slide 5 summarizes our results for the second quarter.

Net sales totaled $4.4 billion, down 6% as reported and down 2% in constant currency.

Total segment operating profit totaled $839 million, 2% above the prior year on a constant currency basis.

Net earnings increased 53% to $530 million and diluted earnings per share were $0.87 as reported.

These results include a one-time gain of $199 million related to the Green Giant divestiture, $99 million of restructuring and project-related expenses, as well as mark-to-market valuation effects.

Excluding these items affecting comparability, adjusted diluted EPS was $0.82, up 2% from last year's second quarter.

Constant currency adjusted diluted EPS increased 5% compared to a year ago.

Slide 6 shows the components of total Company net sales growth.

Pound volume reduced sales by 3 percentage points.

Positive sales mix and net price realization increased sales by 1 point while foreign exchange reduced sales by 4 points.

The Annie's acquisitions and the Green Giant divestiture combined to reduce pound volume by 2 points and net sales growth by 1 point for the second quarter.

Turning to our segment results, slide 7 summarizes US retail performance.

After posting 4% net sales growth in the first quarter, US retail net sales decreased 4% in the second quarter, driven by lower merchandise volume and the net impact of acquisitions and divestitures.

Second-quarter net sales were down 1% in the snacks and baking products operating units and declined at a mid-single digit rate in the remaining units.

Year-to-date sales were flat to last year with growth in cereal and snacks.

In our convenient stores and foodservice segment, net sales declined 4% in the second quarter.

Our six priority platforms posted combined net sales growth of 3% for the quarter with the strongest growth in frozen meals and yogurt.

Net sales declined in the remainder of the business driven by the exit of some low margin businesses in the fourth quarter of last year, as well as market index pricing on bakery flour.

Slide 9 summarizes our second-quarter international segment net sales results on a constant currency basis.

Net sales grew 3% overall led by Latin America where sales grew 17% driven by Mexico and Argentina.

Brazil posted low single-digit sales growth in the quarter.

Canada sales were up 3%.

Net sales in the Asia-Pacific region increased 2%, including double-digit growth in India.

And in Europe, sales were down 2% with good growth in Haagen-Dazs offset by declines in Old El Paso as we lapped the highly successful launch of Stand 'N Stuff taco shells last year.

For the first six months, constant currency net sales in Europe are up 2%.

Slide 10 shows the second-quarter adjusted gross margin, excluding certain items, increased 60 basis points.

This was primarily due to our productivity efforts offsetting low input cost inflation.

This marks the third consecutive quarter we've delivered adjusted gross margin expansion.

And we continue to estimate 2% input cost inflation for the full year.

Turning to slide 11, total segment operating profit increased 2% in constant currency.

US retail profit declined 3% in the second quarter due to lower sales, including the impact of acquisitions and divestitures.

This was partially offset by benefit from our cost-savings initiatives and lower media expense.

Through six months, US retail segment operating profit is up 15% versus prior year.

Constant currency international profit increased 19% in the second quarter, primarily driven by favorable price realization and lower input costs.

And convenience stores and foodservice profit was up 7% thanks to our cost-savings efforts.

After-tax earnings from joint ventures totaled $23 million in the second quarter, down 6% in constant currency, due to lower volume for Haagen-Dazs Japan.

Second-quarter constant currency net sales increased 1% for CPW and declined 10% for Haagen-Dazs Japan driven by reduced new product activity.

For the first half, constant currency after-tax JV earnings increased 5% and that's on top of a 9% constant currency growth in the first half of F2015.

Turning to slide 13, corporate unallocated expenses, excluding restructuring and project-related charges and mark-to-market valuation effects, decreased by $6 million in the quarter.

We recorded a one-time gain of $199 million related to the Green Giant divestiture.

We incurred $99 million in restructuring and project-related charges in the quarter.

Net interest expense decreased 5% from the prior year due to lower average interest rate and lower debt levels.

We continue to expect interest expense to be down mid-single digits for the full year.

The effective tax rate for the quarter was 37.4% as reported, nearly 6 points above last year due to the tax impacts of the Green Giant divestiture.

Excluding this and other items affecting comparability, the tax rate was 32.3% this year compared to 33.5% a year ago.

We continue to expect our full-year tax rate to be comparable to last year.

And average diluted shares outstanding declined 1% in the quarter, in line with our full-year expectations.

Now I will turn to our first-half financial performance.

We posted constant currency growth across all of our key metrics.

Net sales were up 1%, segment operating profit increased 12% and adjusted diluted EPS grew 18% compared to a year ago.

Slide 15 shows our core working capital declined 38% versus last year's second quarter.

This was driven primarily by the elimination of Green Giant inventory and continued working capital efficiency gains.

We've now reduced core working capital year-over-year for 11 consecutive quarters.

On slide 16, you can see that cash flow from operations totaled nearly $1.2 billion through the first half, 34% above last year, primarily due to lower working capital and higher net earnings.

Capital expenditures totaled $294 million through six months.

Through the first half, we returned more than $1 billion in cash to shareholders through dividends and share repurchases.

Slide 17 provides an update of our cost-savings initiatives.

We are on track to deliver $400 million in cost of goods HMM savings in fiscal 2016 and we continue to make good progress on our incremental cost-savings initiatives.

Taken together, these initiatives remain on track to deliver between $285 million and $310 million in annual savings this fiscal year.

In the first half of fiscal 2016, we announced plans to close 4 additional factories as part of Project Century, our new shift to streamline our supply chain network.

As a result, we are increasing our fiscal 2017 savings targets from $400 million to $450 million and we are establishing a $500 million savings target for fiscal 2018.

Slide 18 summarizes the impact of the Green Giant divestiture on constant currency net sales and earnings for fiscal 2016 and 2017.

For fiscal 2016, we expect the Green Giant sale will reduce net sales and segment operating profit by approximately 2 points each and we expect a $0.07 negative impact to adjusted diluted EPS.

We expect an additional 1 point reduction in net sales and segment operating profit in fiscal 2017, as well as a $0.03 reduction in 2017 adjusted diluted EPS.

Slide 19 provides a summary of our 2016 constant currency sales and earnings guidance, which includes the impact of the Green Giant divestiture.

To be clear, the Green Giant divestiture is the only material change to this guidance.

Our original guidance called for flat net sales, low single-digit growth in segment operating profit and mid-single digit growth in adjusted diluted EPS.

Adjusted for the impact of Green Giant, we now expect net sales to be down low single digits, total segment operating profit to be flat to last year and adjusted diluted earnings per share to grow at a low single digit rate.

Current exchange rates remain a $0.09 headwind to full-year adjusted diluted EPS growth in 2016.

And with that, I will turn the microphone over to Chris O'Leary.

Chris.

Thanks, Don and good morning, everyone.

I am pleased to give you an update on the performance of our international segment so far this year.

Our international businesses generated more than $5 billion in net sales and have been growing at a 14% compound rate over the past five years.

While acquisitions have contributed to our results during this time period, our base business grew at a mid-single digit rate thanks to Consumer First product innovation and renovation.

Our segment operating profit grew at a 20% compound rate over that same five-year period and our operating profit margin increased by 250 basis points.

Keep in mind these figures include the impact of foreign exchange, which has generally been a headwind for us during this time period.

There's a lot to like in our international business; just over 60% of our sales are in developed markets and we have posted strong growth here in recent quarters.

In emerging markets, we are feeling the impact of slowing economies in Brazil and China, but sales in our Latin America and Asia-Pacific regions are still growing nicely in constant currency.

Through the first half of fiscal 2016, international net sales declined 12% and operating profit declined 10% reflecting significant foreign exchange headwinds.

On a constant currency basis, net sales increased 4% and segment operating profit grew 8%.

Let me give you a little more detail on what is driving our growth across our four regions.

In Canada, solid execution on the fundamentals is the primary driver of 4% constant currency net sales growth in the first half.

In cereal, we launched Chocolate Lucky Charms this year as a new flavor choice for a brand with strong nostalgia appeal with millennials.

Cinnamon Chex is a gluten-free option with no artificial colors or flavors.

We recently introduced Nature Valley Muesli and Cheerios Plus, which features protein-sliced almonds and granola clusters.

This focus on Consumer First innovation has helped our cereal business gain nearly half a point of marketshare so far this year.

Retail sales for our snacks are growing at a double-digit pace and we've gained more than 3 points of share on the strength of new grain snack product launches like Nature Valley Nut & Seed bars and Fiber One Crumble bars.

First-half retail sales for our yogurt business matched year-ago levels.

We are driving growth on our Liberte line and recently introduced a Greek yogurt seeds variety similar to the Plenti product here in the US.

And our kid yogurt business is growing on the strength of Yop beverages featuring the Minions.

Retail sales for Yoplait Source declined in the first half as consumers shifted away from weight management options.

We are working with retailers to implement the most effective shelf sets given changing consumer dynamics and we expect to drive improved yogurt retail sales performance in the back half of the year.

Innovation is driving our results in Europe with constant currency net sales up 2% so far this year.

Haagen-Dazs is leading that growth.

First-half retail sales increased 16% on the strength of superpremium stick bars launched in France this summer.

These high-quality bars have had great visibility in stores as retailers leveraged the well-known Haagen-Dazs brand.

We will continue supporting the line with advertising and promotions and we'll add two new flavors in the second half.

For Old El Paso Mexican foods, first-half retail sales matched results in the same period last year when sales grew 15% with the highly successful launch of Stand 'N Stuff tortillas.

We have more Stand 'N Stuff varieties coming in the second half, including whole-wheat tortillas and crispy chicken dinner kits.

Old El Paso Restaurante dinner kits, which first launched in Canada, are our most recent introduction in Europe.

These high-quality kits give consumers an easy way to make a restaurant-quality Mexican meal at home.

We've been supporting the line with advertising and strong levels of in-store promotions to drive trial and we'll be launching three flavors of Restaurante salsas later this year.

So we like our performance so far this year in developed markets and we have more innovation and product news coming in the back half.

In emerging markets, we continue to experience headwinds in Brazil and China, but we are seeing strong growth in markets like Mexico, Central America, India and the Middle East.

In Latin America, constant currency net sales grew 9% through the first half.

In Brazil, consumers are pressured and competition is high, so we are leveraging our strong national sales organization to drive in-store visibility.

Net sales in Brazil returned to growth in the second quarter behind good product news.

New Yoki ready-to-eat popcorn is performing well and we are growing our Kitano seasonings business with good advertising, updated packaging and marketing support in the stores.

Outside of Brazil, we are seeing growth in the rest of Latin America.

Constant currency net sales in Mexico are up double digits through the first half of the year led by excellent performance on Nature Valley bars and newly launched Fiber One grain snacks.

In the Asia-Pacific region, constant currency net sales were up 2% through the first half, slower than our usual rate of growth due to a more challenging consumer environment in China.

Net sales for our Wanchai Ferry dumplings business declined in the first half as some consumers traded down to more value-priced options.

But where we provided a strong consumer benefit, we've seen good results.

For example, our new [Veggie Plus] dumplings are on trend with Chinese consumers' desires for better-for-you options.

This line contains more vegetables and lean meat and it offers first-to-market innovation with colored dough wrappers infused with natural vegetable juices.

And our [Calyen] products continue to perform well.

We are bringing new varieties, including rainbow-colored wrappers, to this line of dim sum in the second half of the year in time for Chinese New Year.

Net sales for Haagen-Dazs ice cream in China are up 2% through the first half, led by strong sales execution at retail.

We also introduced frozen yogurt in our shops.

We've position this yogurt as an everyday light indulgence and have had positive response from consumers looking for healthier sweet treats.

We are bringing more news to our shops in the second half with a great Ice on Fire promotion running now and rose-themed ice cream creations planned for Valentine's Day.

Yoplait Yogurt in China is building off of a good start this summer and our marketshare in Shanghai exceeded 8% last month.

We are seeing particularly good performance on our premium Perle de lait line as Chinese consumers appreciate its high quality, unique packaging and thick texture not typically seen in yogurts in China.

Last month, we added a new coconut flavor to the line.

We have a number of marketing activities planned for the second half of the year to continue to drive trial, including advertising, more sampling and channel-specific promotions.

So we continue to like the growth prospects we see for Yoplait in China.

In total, first-half net sales for our business in China were down 1% in constant currency.

While we have a variety of consumer-focused news planned and expect some improvement for the second half, we expect conditions to remain challenging in the near term.

Outside of China, the remainder of our Asia-Pacific region has posted strong double-digit growth so far this year.

We are driving these results in Asia, the Middle East and Africa on the popularity of sweet snacking options, which is a $30 billion category in this market.

First-half sales for Haagen-Dazs ice cream grew 9% in constant currency driven by new on-trend fruit-flavored varieties launched this summer.

We have been seeing increased distribution for our line of Betty Crocker cookie cakes, our first ready-to-eat sweet snack in the Middle East.

And we've generated strong double-digit net sales growth so far this year in India thanks to distribution gains on Pillsbury cake mixes and new chocolate spreads in value-priced sachet packages.

We expect double-digit sales growth to continue in the second half in the EMEA region as we see great opportunities for our sweet snacks in this fast-growing market.

So we are pleased with our overall performance in our international regions.

We have driven excellent results in developed markets.

We are focused on delivering improvement in Brazil and China and we expect continued strong growth in the rest of our emerging markets in the second half.

We are also committed to expanding our international segment's profit margin.

Let me give you a quick update on our recent restructuring efforts.

Project Compass is our initiative to restructure our international businesses to increase organizational effectiveness and reduce administrative expense.

We are in the process of folding Yoplait international operations into our European regions to increase efficiency and optimize our resources.

In total, Project Compass remains on track to deliver $45 million to $50 million in cost savings.

We also recently expanded the scope of Project Century beyond North America.

We've announced closure of our pasta plant in New Zealand and the proposed closure of a facility in the UK subject to Work Councils approval.

Savings from these plant closures and Project Compass are included in the Companywide $500 million cost-savings goals that Don referenced earlier.

These initiatives are incremental to our ongoing HMM efforts and put us on track to exceed our goal of 150 basis points of operating margin expansion by 2020.

I will share more details at the CAGNY conference in February.

So let me summarize my comments this morning.

Consumer First renovation and innovation efforts are driving growth across all our geographic regions through the first half of the year with particularly good performance in developed markets.

Brazil and China are challenging, but stable and we are posting strong growth in the rest of our emerging markets.

And we will drive margin expansion through continued HMM productivity efforts and the restructuring initiatives I have just described.

Thank you for your time this morning.

I will now turn the call over to Ken.

Okay, well, good morning, everybody and thank you, Chris, for that review of our international business.

So I'm going to spend a few minutes now providing an update on our other two segments starting with US retail.

Our US retail net sales and segment operating profit performance are in line with our expectations through the first half of fiscal 2016.

Net sales totaled $5.3 billion matching prior-year levels.

Year-to-date segment operating profit is up a robust 15% driven by lower promotional and SG&A expenses.

Retail sales for our aggregate categories in the US are up 1% in the first half of fiscal 2016 after being flat in 2015.

This improvement has been driven by better unit volume performance and we continue to see positive net price realization across our categories.

The largest driver of improved performance has been in cereal where category declines of 3% in fiscal 2015 have moderated to less than 1% thus far this year.

We like the improvement we are seeing in our categories in the US, but our retail sales performance did not keep pace in the first half.

We are encouraged by the early returns we are seeing on our snacks and cereal renovation news, but those gains were more than offset by lower merchandising levels in the first half.

Part of that was driven by our continued effort to reduce inefficient trade spending and we are making progress.

Our lifts were up in the first half and outpaced our categories.

The other factor driving lower merchandising was a broad-based reduction in display across our customer base, a situation which was particularly acute at a large customer.

In yogurt, the decline in dairy prices this year has coincided with increased competitive activity.

This led to reduced merchandising and lower marketshare for Yoplait in the first half.

We are working to increase our competitiveness while maintaining profitability in the category in the second half.

Turning to our other large businesses, we've seen improved retail sales results for our meals and baking businesses thus far this year thanks to solid execution.

Let me now share with you some of our first-half highlights and examples of how we will strengthen our retail sales performance in the second half.

Our top priority in US retail this year is to drive growth in cereal and our net sales are up 1% year-to-date.

The launch of gluten-free Cheerios is an important component of our cereal growth plan and we are encouraged by the results thus far.

After baseline declines in recent quarters, gluten-free Cheerios varieties posted baseline sales growth in the grocery channel once we turned on advertising support in September.

We saw a minor slowdown the week of the recall and since then, baselines have returned to growth.

To keep the momentum going, we are adding incremental media support on gluten-free in the second half and we have another gluten-free merchandising event planned in the third quarter.

We've also seen continued strong results on Cinnamon Toast Crunch this year.

Our More Cinnamon renovation drove a 9% increase in retail sales last year and retail sales are up another 7% in the first half of 2016.

Earlier this year, we announced our plan to remove artificial flavors, colors and high fructose corn syrup from all Big G cereals by 2017.

Nearly 80% of our brands will meet that claim by January.

We will begin marketing this renovation news in the third quarter with an in-store merchandising event, TV support, coupons and digital advertising.

We will expand the Nature Valley brand in the second half with five new great-tasting cereals.

These launches add to the current Nature Valley breakfast portfolio that includes protein granola, granola bites, muesli and hot oatmeal.

We also have a great slate of movie equity promotions planned for the second half.

We are executing Star Wars merchandising events with customers in December and January featuring limited edition Star Wars packaging and in-pack premiums in your favorite Big G cereals.

Later in fiscal 2016, we'll launch a Batman and Superman promotion featuring two new cereals and more in-store merchandising activities.

These new cereals feature high-impact foil-embossed packaging and unique flavors, which should appeal to teenage and millennial consumers.

And we are increasing our US cereal media investment in the second half behind some great campaigns.

In total, we expect our renovation, innovation and investment plans will drive improved retail sales performance for our cereal business in the second half of fiscal 2016.

Our grain snacks business has a long track record of growing marketshare and our share was up again in the first half, but our retail sales growth slowed due to the lower merchandising levels I mentioned earlier.

Our plan to strengthen retail sales performance starts with core brand renovation.

We've reformulated our Nature Valley Crunchy Bar line in the second quarter to make the product easier to bite.

We turned on TV support for this news last month and baseline sales have responded positively.

We continue to bring compelling innovation to our grain snacks business.

We launched Fiber One Cheesecake in the first half and it's already a top turning item in the category.

Next month, we are capitalizing on growing consumer interest in alternative nut butters with the launch of Nature Valley Nut Butter Biscuits and we are introducing a line of kid-focused grain snacks leveraging movie equities.

We are supporting our second-half renovation and innovation news with a mix of television and digital advertising featuring new campaigns for both Nature Valley and Fiber One and we have a strong second-half merchandising plan in place.

So overall, we feel we have a good slate of news in grain snacks in the second half and the right level of mix and support.

We expect momentum to build on this business as we move through the third and fourth quarters of 2016.

I mentioned earlier that competitive activity had a negative impact on our first-half US yogurt sales and share.

We have a stronger plan in the back half to drive improved retail sales results.

Our merchandising support is increasing in the second half, including a One Up Your Cup event, which gives consumers snacking ideas to make the Yoplait Yogurt they love even better.

We will advertise behind One Up Your Cup in another Yoplait campaign highlighting milk, fruit, cultures and of course, great taste.

We have two significant new product launches rolling out next month too.

We will expand our Plenti Greek yogurt line with six new Plenti oatmeal varieties that combine oatmeal and Greek yogurt to bring consumers a more satiating morning snack.

In addition, we are bringing Annie's to the yogurt category with a new family-focused line of organic yogurts made with whole milk and real fruits.

Our natural and organic portfolio continues to grow nicely.

Annie's has grown retail sales and share in each of its core categories year-to-date and we've extended the brand into organic soup, cookies and yogurt categories.

Jeff Harmening will share news on our next Annie's category expansion at the CAGNY conference in February.

In addition to Annie's, we continue to see growth in our existing natural and organic portfolio.

Our Cascadian Farm organic grain bars business has grown retail sales 18% and retail sales for our Cascadian Farm organic cereal business are up 8%.

So let me briefly share a few additional US retail highlights.

The soup season is now in full swing and we are gaining share through improved merchandising performance.

On dessert mixes, our goal for the year was to improve our value to consumers by better matching competitive price levels.

We are seeing results so far.

Our dollar share has stabilized and unit share has increased by more than a point.

Retail sales for Old El Paso increased 1% in the first half led by the shells, refried beans and seasoning businesses.

And in Totino's hot snacks, we are launching crispier crust pizza rolls renovation in the second half to strengthen our number one market position.

So in total, we expect our US retail business to deliver improved retail sales performance in the second half driven by increased investment on key renovation news, an excellent lineup of Consumer First innovation and a higher level of merchandising support.

Turning to our convenience stores and foodservice segment, our first-half net sales were down 2% driven by the exit of some custom mix businesses and the impact of index pricing on our bakery flour business.

However, our focused six platforms continue to perform well, posting 5% net sales growth.

First-half segment operating profit was in line with last year and this performance is in comparison to 15% profit growth in the year-ago period.

Our frozen meals platform, which combines our successful frozen breakfast products and our more recent entry into K-12 school lunches, led first-half performance.

Net sales increased at a strong double-digit rate driven by the expansion of our Mini Bagel innovation.

We are seeing continued strong performance from our snacks platform with net sales up low single digits year-to-date driven by Bugles and Chex Mix growth in the convenience store channel.

Our cereal platform also generated low single digit growth led by bowl pack varieties.

And our yogurt platform posted mid-single digit growth in the first half fueled by good performance in Greek and Parfait Pro.

In total, we expect segment net sales and operating profit growth to improve in the second half driven by continued good growth on our focused six platforms and continued cost savings.

So let me close by summarizing this morning's remarks.

We posted growth in constant currency net sales, segment operating profit and adjusted diluted earnings per share in the first half.

We have a solid plan to strengthen retail sales in the second half with innovation and renovation news, as well as additional consumer and merchandising support.

We are now targeting $500 million in cost savings by fiscal 2018 and we've adjusted our fiscal 2016 guidance for the Green Giant divestiture.

Excluding the impact of Green Giant, we remain on track to deliver the growth goals we laid out at the beginning of the year.

So with that, I will open the call for questions.

Operator, please will you get us started?

(Operator Instructions).

Chris Growe, Stifel.

Good morning.

I just had two quick questions for you.

I wanted to ask first, in relation to the retail -- your US retail sales performance, do you expect growth in the second half of the year for that business?

And I guess in relation to that I just want to get a sense of where inventory stands.

Is that going to be an affect on your reported sales growth in the second half as you see it today?

Yes, so it will improve.

We expect it to be flat in the second half, Chris, behind the activity that I talked about, which we can go into in later questions, but there's quite a bit more renovation, new products in the second half.

And so based on that, there's more promotional -- event-oriented promotional activity and there's also stronger media support.

So we do expect that consumer movement to improve in the second half based on the phasing of our activities.

And Chris, just to confirm, Ken was referring to comparable sales.

Obviously, in US retail, the second half will suffer from not having Green Giant and not having the 53rd week, so as you are modeling it.

Sure.

That's great.

And just a quick question then on yogurt.

It sounds like it's gotten a little bit more competitive in that category.

Is it a matter of getting your key price points lower?

And I was curious if that's true across Greek, as well as conventional.

Is there one that's getting a little bit more aggressive in terms of price competition?

It's a little bit of both.

It's some price point adjustment and some frequency.

We've found, as the promotional environment got a little hotter in the first half and as you heard in response to lower milk prices, there was just an increase in the pace of activity.

Frankly, just because of the timing of when various things can happen, we were blocked out of certain windows.

And so as we moved forward to adjust our price points and adjust our frequency both on Greek, Chris, and a little bit on core cup as well, we know that our promotional frequency and quality will be improved in the second half.

The other thing I would mention, Chris, is just given the dairy prices and that has more benefit to the Greek business that uses more milk, it was a SKU to promotions focused on Greek and clearly, our share in Greek is not as high as in the traditional yogurt, so as that evens up in the second half of the year, we think that we will get a greater share of the merchandising windows in yogurt in the back half.

I see.

That makes sense, okay.

Thanks so much for your time and happy holidays.

Andrew Lazar, Barclays.

Good morning, everybody.

Just two quick things from me.

One is, at your Analyst Day in Boston, I think you mentioned that General Mills would look to reinvest roughly one-half of the incremental cost saves that you would generate this year.

And I am just trying to get a little update.

Is that the pace that the Company is tracking at and if so, I guess, are you getting the return through the first half on that reinvestment that you would've expected?

Yes, Andrew.

I think we remain largely on pace for that same kind of mix of reinvestment.

As Ken alluded to, some of the planned merchandising in the first half didn't happen.

We will see that in the second half.

So I would say we are probably a little lighter in some of that reinvestment in the first half of the year.

And as we said, we opened the year with a stronger profit performance than we expected in the first quarter and that holds through the first half.

And so we will see I think a greater portion than planned of our reinvestment in the back half and I think you'll see that in advertising.

You will see it in merchandising and you will see it in improved top-line performance as well.

Okay.

Andrew, maybe just to build on that a bit, our media spend was down in the first half and will be in the US and will be flat in the second half.

Our merchandising spending was down low single digits in the first half; will be up mid-single digits in the second half.

So there is a significant phasing component to the way the year was planned and will unfold and we expect to see those second-half activities give us a good return and some stronger consumer movement.

That's a great point.

Let me just build on that a little bit on advertising because I'm sure the minus 15 in the quarter might have popped to some folks and what I would say is quarterly advertising expense can be variable.

It was minus 10 for the first half.

Remember, that includes the forex impact and as you can see on sales, forex has been about a 5-point impact.

So in constant currency, advertising is not down as much as it would look on a reported basis.

Now it was planned to be down due to forex, but also because of some choices we've made on our value-oriented brands.

As Ken alluded to, it will be up in the back half on a comparable basis and even on a reported basis, we expect it to be about flat.

That's taking into account forex and the 53rd week and it will clearly be up on our priority businesses in the US, cereal, yogurt, across Chris's businesses in international and we expect for the full year that advertising will move in line with sales growth.

And again, up on the full year on those priority businesses.

Thank you for that.

And then I think on the last call, you had mentioned gross margin expansion for the full year of roughly 50 to 100 basis points was probably a reasonable place to land.

Any significant changes one way or the other on that expectation based on what you saw in the second quarter?

Yes, first half came in 170 basis points better.

We obviously lapped some things in the first quarter on merch from F2015.

We will continue to see expansion in the second half.

It will be less than in the first half.

We'll still benefit from strong HMM, but we will begin lapping some of the merchandising -- the inefficient merchandising we took out last year.

And as we said, we phased some of our merchandising to the second half of this year.

And inflation will increase in the second half from the first half.

So that range of 50 to 100 is still the right guidance I would say coming out of the first quarter, but frankly we are probably moving more toward the high end of that range.

Okay.

Thanks very much.

David Palmer, RBC.

Thanks.

Two questions.

First, scanner data looks to be pointing to a decline in promotion and merchandising activity in your cereal business.

And back in the summer, we could have imagined a lot more activity behind the gluten-free repositioning for Cheerios and I realize that Walmart itself might be part of this change, but was the lower promotion activity always the plan, or was there perhaps a change of course a little bit after the recall?

Any color would be helpful.

Thanks for that, David.

So yes, lower cereal promotion was part of the plan.

We do have, as you said, the gluten-free renovation, which is very important news for us, which came on into the second quarter and that will continue very strongly into the second half.

We have a couple more events, but lower promotion was planned.

We had fewer new products in the first quarter compared to some important new product launches a year ago and so there was less merchandising activity there.

I would say the thing that we anticipated, but came at us a little bit harder was a decline in promotion in our largest customer.

And I think you are well aware of a clean store initiative and just trying to get their stores more focused on the most important merchandising activities.

We anticipated that.

The impact was a little more than we expected and so that resulted in significantly less display there and also we anticipated this as well, but a little more than we thought, just adjustment of inventory as they moved towards that policy.

So that was an area that we did expect, but was a little more deeper impact than we had planned for.

And related to the gluten-free reformulation, if you look at some -- I'm sure you see panel data that gives you some insight in terms of trial and repeat and awareness on gluten-free and maybe the uptake, is this working out like you would have thought and if it's different at all from the consumer response perspective, that would be helpful?

Thank you.

Sure.

Yes, the consumer response has been very positive.

The baseline turns -- so full-price, non-promoted, sort of just true core baseline turns have been up very nicely through the first three months of that period.

Even with that one-week impact from the recall, they are up between 3% and 4%.

So we are quite pleased with how that has worked out for us so far.

Obviously the recall was a stumble, but the fundamental consumer reaction is in line, if not a little bit better than we anticipated at this point and we are going to continue to support that initiative quite heavily in the second half with more merchandising events and continued very good advertising.

Thank you.

Robert Moskow, Credit Suisse.

Hi, thank you.

Wanted to know if you could help us tease out the gross margin expansion a little bit more.

60 basis points in the quarter, but it also was a pretty easy comp to a year ago.

And I wanted to get a sense of what were the cost saves component of that 60 basis points and how much was the easy comp.

And then also is there any kind of dilution to gross margin or accretion that we should expect because of Green Giant divestiture?

Yes, Rob, as I said, the inflation flow this year is a little bit reversed from last year.

It was higher in the first half last year and then decelerated as the year went on.

This year is kind of the reverse of that, so we are certainly benefiting this year in the first half from lower inflation.

Our productivity, the $400 million, tends to be fairly stable throughout the year, so there's not really a phasing to the productivity savings.

So the result we are seeing this year is that we are seeing greater net inflation, if you will, productivity less inflation that we saw a year ago.

And as I said, we are rolling over the merchandising changes that we implemented starting in the second half of last year.

So as the year unfolds, we will start lapping that piece of it.

We will start seeing inflation accelerate a bit in the back half.

Green Giant was a lower gross margin business.

Its operating margin was actually fine, but it's lower gross margin business, so that will have a little bit of an accretive impact on our business as the year unfolds.

And there's been a lot of work at our international business and actually if you look in the quarter, international was a significant contributor to our gross margin expansion.

And, Chris, I don't know if you want to add a few words on what we are doing from a margin standpoint on our international business?

Yes, obviously, it's a combination of good, strong HMM efforts focusing on product mix, obviously, developed markets growing faster and emerging is contributing to part of that mix effort, but it's really just solid execution against the fundamentals.

Okay.

And then maybe just is there any kind of dilution in these numbers for all the reformulation and ingredient upgrades that are going on?

Don, is there a way to quantify that?

Yes, part of our reinvestment, it was a smaller piece of our reinvestment, but the other thing you have to take into effect, Rob, we've talked about that you drive a little bit of volume in the businesses from those reformulations and you can see gross margin expansion.

I think that you've heard Jeff Harmening talk before about our experience with Cinnamon Toast Crunch where, as we increase the cinnamon content, we did see a higher cost per unit on a variable basis, but given the volume increases and sales increases that were high single to double digits, you leverage the fixed plant and you see gross margin expansion.

So really it is a case-by-case basis, but while we do see reinvestment, we oftentimes don't see a gross margin percentage impact because of the leverage that you get on the plants.

The only thing I would add to that is those margin moves around product renovation, they are, obviously, there, but in the context of our ongoing HMM programs and the restructuring initiatives we have underway and the zero-based focus we have on administrative spending, they are relatively minor in the larger picture and that sort of explains our conviction around our gross margin expansion goals.

I'm willing to try cinnamon Yoplait if you want to give it a shot.

Thanks.

Eric Katzman, Deutsche Bank.

Good morning.

Happy holidays, everybody.

Couple of questions, I guess.

Why don't we start with the earnings-per-share guidance, Don.

I just want to be clear.

So if we start with the $2.86 base and we go, let's say, up 1% to 3% and then adjust for the currency headwinds, you're getting to like a $2.80 to $2.86 kind of range let's say and I guess I am not following because I think consensus was kind of closer to $2.90 or so going into this earnings report.

And you had already, I guess, given a heads-up as to the $0.05 to $0.07 dilution from Green Giant.

So I am wondering -- you can't control consensus -- but I am wondering is there something that investors or the analyst community was getting wrong because it's not a huge difference, but it seems like there's maybe a nickel or so of difference between what you are saying is no change versus where the analyst community was.

I will start with just reaffirming your point that I can't control the consensus.

I can try to influence it, but I can't control it.

We started the year with mid-single digit expectations and our underlying business is going to deliver that.

We have seen the $0.09 forex headwind.

I think we started the year with $0.04, so we saw that increase as the year unfolded.

I'm assuming that the consensus has that factored in appropriately.

We gave a range of $0.05 to $0.07 for Green Giant for this year and it ends up being $0.07.

Again, I don't know, in the $2.90, if people were using $0.05 or $0.07.

So I don't know what people's assumptions were or inputs were on those two measures.

And then I think the other thing, frankly, we had a strong first quarter and I think people might have gotten ahead of what the full year was going to look like.

And as we said at the end of the first quarter, we had three quarters to go.

We saw the business performing as we expected and we are still on track to deliver what we said back in July.

Okay.

Thanks for that.

And then, I guess, again a full-year question maybe for Ken.

Do you expect in terms of your volume -- will volume, do you think -- can that be flat this year?

Is that part of -- I know you don't always get into the details of your top line other than the consolidated number, but can we start with all this rampup of merchandising in the second half, new products, you are talking about the categories maybe being a little better in some cases?

Does your forecast assume that volume is flat this year?

Yes.

Flat-ish, yes.

And then -- thanks for that.

And then I guess the last question is maybe just on yogurt from both the US and a global perspective.

It seems like the Company, after struggling with the Greek phenomenon, there's just so many brands that you are going to market with now and I'm just wondering if that is part of the issue here, that you got Annie's, you've got Plenti, you got Yoplait, you've got Liberte -- I can't keep track of all of them anymore -- and I am just wondering if that's -- do you think that that's part of the issue, that you don't have the scale you used to when it was just basically Yoplait?

No, I will come onto your brand comment in just a second.

I think the issue is, in the first half, is primarily this change in the merchandising context in the category.

That's clearly what happened driven by these dramatic declines in milk prices.

And as you know very, very well, we want to be in the zone on promotion, but that's not how we try to win.

But we did see ourselves lagging the market there and we are going to adjust very carefully as we move into the second half and our performance will strengthen.

But that was clearly the reason for what happened in the category in the first half and will beyond that.

To your comment on the brand portfolio we have now, that's a really good thing.

You should like that.

We've got great core cup equity obviously in Yoplait.

We've come on very effectively over the last couple of years with our Greek varieties, but actually products like Liberte, which have a different positioning and naturalness and this sort of thing, they are participating in another high-growth segment of the market now and they are doing really well.

And the organic sector of the yogurt market is growing double-digit and Annie's is a fantastic brand to put into that segment and that was a long-held desire of Annie's when it was an independent company, but they didn't have the capability.

So actually, the fact that we have brands tailored to different consumers in different segments, some of which are very high growth, that's a tailwind for us right now.

We like that.

Okay.

All right, thank you for that.

Happy holidays again.

Matthew Grainger, Morgan Stanley.

Good morning, everyone.

Just on the international business, I guess a broader question on the portfolio, but given some of your recent steps to optimize the US portfolio with Green Giant, the addition of Annie's, just wanted to get your expectations for bolt-on M&A going forward and specifically how you are thinking about the emerging markets portion of your business.

We've seen your key competitor become more opportunistic and talk about the attractiveness of making a few acquisitions recently when sentiment and valuations are a bit lower.

So just curious how you are assessing that dynamic.

Sure.

Just a reminder, internationally, we focus on five global platforms -- cereal, ice cream, yogurt, meals and snacking -- and you know we've been focusing our efforts on emerging markets, first China, Brazil and then EMEA trying to broaden out our footprint.

With regard to bolt-on acquisitions, we are open to that and looking for that.

The thing -- the key difference between our businesses in the emerging world versus US and Canada is we are not very broad, so we believe we can find the right bolt-on acquisitions because our strategy has been to build first and foremost infrastructure and pipes in places like China, Brazil and India and then to start filling it out with those platforms.

So I think we are looking.

It is part of our strategy, but then obviously we can't control the pace because it's really what's available and what we like.

Okay.

So, Chris, from your perspective, has anything changed in terms of the quality of assets available, or the expectations of sellers?

No, I wouldn't say fundamentally, no.

Obviously, the environment is changing, but I wouldn't say there's a sea change of difference out there, but we continue to mine.

Okay.

And Chris, actually, I wanted to see if you could provide a bit more detail on the margin progress in international.

I know you touched on this, but constant currency profits were up nearly 20%, margins were the highest for a discrete quarter that they've been in years and you mentioned favorable mix, but can you talk about, within the sub regions maybe where you are seeing more progress on the margin side versus where you are investing more heavily and given the margins that we saw this quarter, is that potentially indicative of a stepup in absolute margins now that the cost savings are starting to come through?

Well, I will get into much more detail in February.

Suffice it to say, we are focused on this.

We had a 19% growth in the quarter.

You've got to remember there's also favorable dairy in there and there's a bunch of factors in there, but we are focused on this and we've got more levers now that we are firing on.

We've got HMM, we've got Century, we've got Compass, which will start flowing through.

So I will give more details when I see you guys in CAGNY.

All right.

Look forward to it.

Thanks.

Ken Goldman, JPMorgan.

Thanks for the question.

Ken, on the first-quarter call, Rob Moskow asked if we should, I think, expect a pretty sharp uptick in the next few months in terms of Nielsen, top line and you said, yes, that's what you expect to see.

And you cited back-to-school falling in 2Q, you talked about the solid lineup of merchandising on soup, baking and meals and a whole bunch of things.

And the message that I took away and the message that I think a lot of investors took away was that things were going to get incrementally better on the top line in 2Q because of timing, not the opposite.

So I'm just trying to reconcile what those words say with what I'm taking away today, which is that the timing actually hurts you in 2Q for a couple of items.

Maybe I just misunderstood what was said previously.

Yes, no, I think -- thanks for the question, Ken.

And just to your point on soup and baking, we shouldn't lose the plot that those are doing what we wanted them to do and going to have a good soup season there and the baking business has substantially improved.

And in cereal and snacks, we did, of course, have some good news in the second quarter particularly gluten-free Cheerios, which has been very important news.

And as I said, there, the baseline movement has been very much what we expected and we really like how that is developing and so that's been really good.

The story for us in the second quarter is that our merchandising just didn't have the total impact that we had planned for it to have.

So I would say event by event, as we bring more focus and precision to our merchandising, our lifts were actually a little bit higher than we had planned, but just the frequency and the overall quantity was less than we thought with some very particular and deep reductions in our largest customer.

And so that we did not anticipate and that caused the underperformance in the second quarter versus what we might have expected -- fully expected.

And just the continuing intense promotional environment in yogurt.

And so as we've said now, we believe that we have addressed those as we go into the second half and as a result, performance will improve.

That's helpful.

Can I ask a very quick follow-up?

The warm weather, RTS soup data don't look so great right now.

Is that properly reflecting what you are seeing?

I know you are not really talking necessarily about 3Q, but just a general sense, soup sales, are they disappointing to you right now?

Well, I think you put your finger on it.

That's very much -- cold winters tend to be good for us and so far, it's been an unusually warm season and we think that that's a key factor with the overall market right now.

But that said, in the last quarter, our retail movement was still up and we gained shared.

So yes, we would like to see the category move a little bit better, but we are pleased that the effectiveness of our programs are working.

Thank you so much.

Melody, I think that's probably all the time we have.

Okay, thank you.

Okay, well, I know we didn't get to everyone's questions, so I am on the phone all day, so please feel free to give me a call if you have follow-ups.

Thanks very much, everyone.

Ladies and gentlemen, that does conclude today's conference call.

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