通用磨坊 (GIS) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the fourth-quarter year-end FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, June 29, 2016.

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

Please go ahead.

Thanks, Tina, and good morning, everyone.

I'm here with Ken Powell, our CEO, and Don Mulligan, our CFO, and I'll turn the call over to them in just a minute.

We also have here Chris O'Leary, who runs our International business and Jeff Harmening, who today, leads US Retail.

They'll be available during Q&A at the end of the call.

Our press release on fourth quarter and year-end results was issued over the wire services early this morning, though admittedly not as early as we wanted.

We had some issues with our press release service IT and so thanks, for bearing with us this morning.

We apologize and obviously, I will be available if we don't get to everyone's questions at the end of the call.

The release is also posted on our website and you can find slides on the website that supplement this morning's presentation.

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

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

One additional housekeeping item.

Beginning in FY17, we'll report net sales growth on an organic basis, which we define as net sales adjusted for the impact of foreign currency translation, as well as acquisitions, divestitures and a 53rd week, when applicable.

We'll do this at the segment and total Company level in order to provide you with better visibility to the underlying performance of our businesses.

The FY17 net sales growth guidance Don will provide today, will be stated on an organic basis.

And for reference, we posted three years of organic net sales growth history on our website.

With that, let me briefly turn you over to Ken for a few words before Don reviews our 2016 financial performance.

Thanks, Jeff.

I just wanted to make a brief acknowledgement before we begin.

Many of you saw the announcement last week that we have promoted Jeff Harmening to the role of President and Chief Operating Officer of General Mills with responsibility for Global Operations.

Many of you know Jeff as a seasoned trusted leader with a wide range of General Mills experience in the US and internationally.

He's been central to our efforts to embed Consumer First across the organization and has successfully led our US Retail organization through important changes that we've made in recent years.

I have confidence that Jeff is the right person to lead Global Operations and look forward to continuing to partner with him to drive growth and return to our shareholders.

With that, I'll let Don get back to the business at hand.

Thanks, Ken, and good morning to all.

FY16 was an important step forward for General Mills.

We're encouraged by the traction we saw in our Consumer First initiatives on many important businesses, our operating performance strengthened as we returned to growth in organic sales and segment operating profit, made good progress on margin expansion and exceeded our adjusted diluted EPS guidance.

We took important strategic actions during the year to reshape our portfolio for growth, including the divestiture of the Green Giant business in North America, significant category expansion to the Annie's brand, the launch of Yoplait in China and the acquisitions of EPIC Provisions meat snacks in the US and the Carolina Yogurt business in Brazil.

But we didn't hit the market everywhere.

We were disappointed in our performance in US Yogurt and our China results, excluding the Yoplait launch, finished below our expectations as the external environment in that market remains challenging.

We also experienced merchandising headwinds at a large US customer, which we should lap after the first quarter of FY17.

As noted in this morning's press release, we're building on successes in FY16 to increase our FY18 cost savings target and accelerate and increase our adjusted operating profit margin goal.

Our cost savings initiatives, which include projects Century, Catalyst and Compass and further administrative cost savings from zero-based budgeting, generated $350 million in total annual savings in FY16, ahead of our original target.

We have good visibility to continue strong cost savings over the next two years, and as a result, we're increasing our total annual savings target to $600 million by FY18, up from the previous target of $500 million.

We're also implementing further efforts to optimize our spending, reduce complexity, and streamline our operations to drive profitable growth, which will result in accelerated margin expansion.

We now expect to achieve an adjusted operating profit margin of 20% by FY18, up from the previous target of 18% by FY20.

This new target represents an increase of 400 basis points over FY15 levels.

Now, let's review FY16 results, beginning on slide 6. Remember, this quarter's results were negatively impacted by foreign exchange, the Green Giant divestiture and the comparison to the 53rd week a year ago.

We also aligned the Yoplait Europe business with our fiscal calendar, which caused us to report an extra month for that business in the quarter.

Net sales totaled $3.9 billion, down 9% as reported and down 8% in constant currency, driven by the impact of divestitures and the 53rd week comparison.

Segment operating profit totaled $654 million, down 18% on a constant currency basis, reflecting our highest quarter of input cost inflation as well as the items I mentioned earlier.

Net earnings more than doubled to $380 million, and diluted earnings per share were $0.62 as reported.

Adjusted diluted EPS, which excludes certain items affecting comparability, were $0.66, down 12% from last year's fourth quarter and down 11% in constant currency.

Slide 7 shows the components of total Company net sales growth.

Organic net sales grew 1% in the quarter, driven by pound volume growth.

Foreign currency translation reduced net sales growth by 1 point, the 53rd week reduced net sales growth by 6 points and the net impact of acquisitions and divestitures reduced net sales growth by 3 points in the fourth quarter.

Slide 8 summarizes our results for the full year.

Net sales totaled $16.6 billion, down 6% as reported, and down 2% in constant currency.

Full year net sales increased modestly on an organic basis.

Total segment operating profit totaled $3 billion, up 1% in constant currency.

Net earnings increased 39% to $1.7 billion and diluted EPS was $2.77 as reported.

Adjusted diluted EPS was $2.92, up 2% from FY15.

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

Turning to our segment results.

Slide 9 summarizes US Retail performance.

Full year net sales were down 5%, including a 2 point decline from the net impact of the Green Giant sale and the Annie's and EPIC acquisitions.

The 53rd week comparison reduced annual net sales growth by an additional 1 point.

Excluding the extra week last year, our Cereal operating unit posted net sales growth in 2016.

Segment operating profit increased 1% for the full year and operating profit margin increased 120 basis points to nearly 22%.

In the Convenience and Foodservice segment, our six focus platforms posted 5% net sales growth in FY16, with the strongest performance coming from frozen meals.

This is the third consecutive year, our six focus platforms have grown at a mid single-digit rate or better.

Full year segment net sales declined 4% driven by market index pricing on bakery flour and the exit of low margin businesses in late FY15.

Full year segment operating profit was up 7% driven by favorable product mix and our cost savings efforts.

Slide 11 summarizes our International segment net sales results stated in constant currency.

For the full-year, International net sales grew 3% including increases of 12% in Latin America, 3% in Europe, and 1% in Asia-Pacific.

Canada net sales declined 4% but were up low single-digits, excluding the divestiture of Green Giant.

In total, the net impact of acquisitions and divestitures and the impact of one less week, reduced full year net sales growth as reported by 2 points.

Constant currency International segment operating profit declined 3% in FY16, primarily due to currency driven inflation on imported products in certain markets, the impact of the Green Giant divestiture and the difference in weeks.

As I said earlier, we made good progress on expanding margins in FY16.

Full year adjusted gross margin increased 90 basis points driven by cost savings initiatives, more than offsetting modest input cost inflation, which totaled 2% for the full year.

After tax earnings from joint ventures totaled $88 million in FY16, up 12% in constant currency, primarily due to favorable input cost and volume growth for Haagen-Dazs Japan.

Both JVs contributed to this strong profit growth.

On a constant currency basis, net sales for Cereal partners worldwide were flat to last year, with first half declines offset by growth in the second half.

Haagen-Dazs Japan constant currency net sales increased 5% for the full-year, driven by excellent results on new products.

Slide 14 shows that our core working capital declined 41% versus last year's fourth quarter, primarily due to continued operational improvements across our businesses, plus the one-time benefit of the Green Giant divestiture.

This is the 13th consecutive quarter we've reduced our core working capital versus the prior year.

Full year operating cash flow was $2.6 billion, up 3% versus last year.

Capital expenditures totaled $729 million.

Full year free cash flow was $1.9 billion, up 4% versus last year as we converted 104% of our adjusted after tax earnings to free cash, ahead of our long-term goal of 95%.

We paid $1.1 billion in dividends in 2016, and dividends per share were $1.78, up 7% from last year.

Net share repurchases totaled $435 million and we reduced average net shares outstanding by 1%, in line with our guidance.

Slide 16 highlights our key assumptions for FY17.

We expect to drive organic net sales growth of low single-digits for our growth businesses, which represent three-fourths of our portfolio.

That growth will be offset by mid single-digit organic declines on the remainder of our portfolio where we're prioritising profitable volume.

The Green Giant divestiture will reduce net sales by about 1 point and EPS by approximately $0.03.

We expect to deliver $380 million of cost of goods HMM, which will more than offset cost inflation of 2%.

We'll deliver an incremental $150 million of cost savings in FY17 from previously announced projects, which will bring the total annual savings figure to $500 million.

Finally, on slide 17 you can see a summary of our FY17 guidance.

We expect organic net sales growth to be in the range between down 2% and flat, reflecting the actions we're taking to reduce unprofitable volume on certain businesses.

Adjusted gross margin is targeted to be up 150 basis points driven by our margin expansion initiatives.

Media investment is expected to be down by single digits.

We project total segment operating profit will increase 6% to 8% on a constant currency basis, and we expect our adjusted operating margin, operating profit margin, will be 150 basis points above the 16.8% we delivered in FY16.

Interest expense is expected to be flat to last year, reflecting relatively stable rate environment, higher debt levels and changes in mix of debt.

We expect our adjusted tax rate to be up 100 basis points due to the phasing of foreign tax credits and favorable FY16 settlements.

We plan to continue returning cash to shareholders through share repurchases.

For FY17, we're targeting a net reduction of 1% to 2% in average diluted shares outstanding.

And we expect adjusted diluted EPS to be up between 6% and 8% in constant currency.

We estimate foreign currency will be a $0.01 to $0.02 headwind to full year adjusted diluted EPS growth in 2017.

Although I'll note that this figure does include the recent fluctuations in the British pound.

Finally, we expect 2017 first quarter adjusted diluted EPS will be below last year's first quarter that grew 36% in constant currency.

We expect to post adjusted diluted EPS growth in each of the remaining three quarters of 2017.

With that, I'll turn the call over to Ken.

Okay.

Well, thanks, Don and once again, good morning to all of you.

FY16 was an important step forward for our business.

Our Consumer First renovation and innovation news gained traction on a number of businesses, though we have work to do in certain areas to improve our trends.

We reshaped our portfolio with strategic acquisitions and divestitures and we strengthened our business model and drove a significant increase in our profit margin.

Let me share some 2016 highlights across our businesses, starting with US Cereal.

The US Cereal category has improved considerably since last year, returning to growth in the fourth quarter of FY16.

Importantly, this improvement is being driven by stronger renovation and innovation aligned with current consumer interests, supported by effective marketing investment.

And General Mills has been a key contributor to the category turnaround.

Our Cereal business has consistently strengthened throughout the year, with retail sales up 3% in the fourth quarter, and as Don mentioned, full year net sales for our Cereal business grew in FY16 on an organic basis.

Consumer First renovation has been critical to our renewed growth.

We launched gluten free Cheerios last summer to address the needs of the many consumers who are reducing or eliminating their you gluten intake.

After declining 8% in FY15, retail sales on our renovated Cheerios varieties, which make up roughly 90% of the Cheerios franchise, increased 5% in the second half of 2016.

We also announced that we're removing artificial colors and flavors from our Cereal line.

75% of our cereals met this claim by January, and at that time, we began advertising behind seven newly renovated cereals, including Trix, Golden Grahams and Reese's Puffs.

I'm very happy to say consumers are responding.

These seven varieties posted 8% retail sales growth in the back half of the year, compared to 6% declines in 2015.

And much of that growth has come from full priced baseline sales.

Sales of our Nature Valley bars strengthened throughout the year as our product renovation news gained traction.

We made our crunchy bars easier to bite addressing our top consumer complaint.

We also told consumers about our gluten free options and reminded them that Nature Valley bars are free from artificial colors and flavors.

Retail sales grew 4% in the second half of FY16, including 5% growth in the fourth quarter.

Larabar has posted consistent double-digit growth since we acquired the business eight years ago.

We continue to look for ways to expand penetration beyond its current consumer base and accelerate the brand's growth.

To that end, Larabar launched its first ever TV campaign in January, and together with strong in-store merchandising and distribution support, the business has grown 40% in Nielsen measured channels.

We'll continue this support in FY17.

Net sales for our natural and organic portfolio, which includes Larabar, were up double-digit in 2016.

In January, we expanded our portfolio with the addition of EPIC Provisions meat snacks.

We now have a portfolio of nine brands that generate $750 million in pro forma net sales in 2016, and we are well on our way to achieving our goal of $1 billion in net sales by 2019.

Now, FY16 was a disappointing year for our US Yogurt top line and share.

Dairy deflation sparked increased competition and we were not as aggressive in reinvesting this favorability.

In addition, our marketing and innovation efforts underperformed our expectations.

However, we were able to improve our profitability through record level HMM and spending discipline.

We remain very committed to winning in the US Yogurt category and we recognize that we have work to do to improve our performance and I'll share more details on these plans in just a moment.

We posted good performance in 2016 during the soup and baking seasons.

We grew ready-to-serve soup market share by 2 points during the soup season, thanks to successful merchandising, product renovation news and good advertising.

Our Pillsbury refrigerated dough business had a good baking season with growth in retail sales and market share up 1.8 points.

These results were driven by distribution gains on our top selling products.

We grew market share for our dessert mixes during the key baking season by aligning our prices more closely with our competition.

Turning to our Convenience Stores & Foodservice segment, we saw another year of good growth in 2016 for our focused six platforms with net sales up 5%.

Frozen meals led our performance, posting strong double-digit net sales growth behind our K through 12 meals, led by mini bagels, one of our biggest product launches in recent history.

We continued to see strong performance on our cereal bowl packs and these helped drive mid single-digit net sales growth for our Cereal business in 2016 and net sales for our Yogurt business were up on the strength of Yoplait, ParfaitPro and our kid yogurts.

Now let's turn to our International segment and our Developed Market businesses.

We posted low single-digit retail sales growth in Canada in FY16.

Growth on our Snacks and Old El Paso businesses there was fueled by Consumer First innovation, including Nature Valley Nut & Seed Crisps and Old El Paso Stand N Stuff Tacos.

Retail sales in our Europe region were also up low single-digit behind the success of our Haagen-Dazs stick bars launched in France, and innovation driven growth on Old El Paso.

In Emerging Markets, constant currency Latin American net sales were up 12% in 2016, driven by good performance on seasonings, inflation driven pricing and our acquisition of Carolina Yogurt.

Yoplait in Shanghai, achieved 10% share in the latest quarter and has helped offset a slowdown in Haagen-Dazs shop performance in China, driven by challenging economic conditions.

Finally, net sales in India were up double-digit behind innovation and geographic expansion.

CPW, our 50/50 joint venture with Nestle, exited FY16 with momentum posting 3% net sales growth in the fourth quarter.

This performance was driven by product innovation and renovation, including good growth on its line of gluten free cereal.

For the year, CPW constant currency net sales matched year-ago results, while profits grew double-digit.

So overall in FY16, we made important progress to strengthen our business model and improve momentum on a number of business lines.

In FY17, our plan is to build on last year's successes while maintaining our strategic focus on Consumer First.

We're sharpening the way we think about our portfolio by being more choiceful about our level of investments and expectations for growth across our businesses resulting in focused growth and strong margin expansion in 2017.

We're taking a strategic approach to define growth and foundation portfolio roles for our business in 2017, taking into consideration category and brand strength, competitive dynamics and relative return on investment.

Our growth businesses include Cereal, snack bars, our natural and organic brands, Yogurt, Totino's and Old El Paso, and all of these within US Retail.

Then the focus six platforms in our Convenience Stores & Foodservice segment and finally, all of our international markets are included in the growth classification.

For most of these growth businesses, we are building off positive net sales momentum from 2015.

In some cases, for example, US Yogurt and China, we see strong long-term growth potential, but we need to improve our current trajectory.

In total, these growth businesses make up approximately 75% of our net sales and a similar proportion of operating profit and we expect them to grow at a low single-digit rate in FY17.

Our second group of businesses is no less critical to the success of our Company, but play a different role.

They're part of the foundation of our business and deliver strong, consistent profit that helps fund top line growth initiative and return cash to shareholders.

In aggregate, their top line growth prospects are not as robust as the first group, so we'll be very selective in our growth investments, focusing where we have strong ROI.

These foundation businesses make up the remaining 25% of our net sales and consist primarily of refrigerated dough, desserts, and soup in US Retail, as well as bakery, flour and frozen dough products in our Convenience Stores & Foodservice segment.

We expect 2017 net sales on these businesses to decline mid single-digit as we reduce unprofitable volume and drive improved margin.

Now, let me share an overview of our FY17 plans across our portfolio, beginning with our US business.

We exited 2016 with good momentum on both US Cereal and Snack Bars, and we plan to drive growth on these businesses again in 2017.

We'll continue our renovation efforts by converting two more Cheerios varieties to gluten free and by removing artificial colors and flavors from five additional Cereals.

We're also launching a number of exciting new cereals, including three varieties of Annie's cereals and two varieties of Tiny Toast, which are hitting shelves now.

To support these efforts, we have a strong media plan in place with Cereal investment up mid single-digit.

And we're focused on optimizing merchandising and driving positive net price realization for our Cereal business.

We have a good lineup of news on our Snack Bars business as well.

We're renovating the packaging on Nature Valley bars, launching new flavors of our popular Nature Valley Nut Butter Biscuits and introducing Nature Valley backpacker, oatmeal snacks geared toward school aged kids.

On Larabar, we plan to extend our strong performance into FY17, with continued media and in-store support.

We also have a full slate of plans for Annie's, our largest natural and organic business.

We posted double-digit growth on distribution of our core products last year, and we plan to continue to leverage the strength of our US Retail sales force to drive double-digit distribution growth in 2017.

We will also benefit from a full year of category expansion in Soup, Yogurt and Cereal and we have even more Annie's news that Jeff Harmening will tell you about at our Investor Day event in two weeks.

We believe in the long-term growth opportunity in US Yogurt however, it will take us some time to restore top line growth as we shift our portfolio toward faster growing segments like Greek, Organic and Kids.

This month, we're rolling out new Greek Whips, a full calorie version of our successful Greek 100 Whips product.

We'll expand our presence in the fast growing organic segment by launching Annie's tubes and large size yogurts and by converting Liberte to a premium organic line and we have a strong lineup of kid Yogurt news, which we'll share at Investor Day.

We'll also improve the effectiveness of our consumer messaging by refocusing on all family snacking and we'll increase our merchandising competitiveness in 2017, securing more display at competitive price points.

Some of this will be funded by shifting dollars out of consumer investment where we have by far the highest share of voice in the category.

Given our current rate of decline, we expect full year FY17 net sales to be down, but we expect our losses to moderate as we move through the year.

Let me also touch on a few of our foundation businesses in US Retail including Soup, Refrigerated Dough and Dessert Mix.

Here we are reducing low ROI trade and consumer investment and reducing complexity by optimizing our SKU assortment.

Even so, we will continue to bring important news to consumers in 2017.

For example, on Progresso soup, we're moving our entire line to antibiotic free chicken, a first for a mainstream soup brand.

On Pillsbury Refrigerated Dough, we're launching new shelf ready packaging that will increase the productivity of the aisle for our retail customers and the shopability of the aisle for our consumers.

And on Betty Crocker, we're relaunching our brownie mix to give consumers more premium ingredients and flavor variety.

Turning to Convenience Stores & Foodservice, we'll continue growth for our focus six platforms in 2017, with Frozen Meals and Snacks leading the way.

We're expanding distribution of Pillsbury pancakes and bagels in schools, leveraging our no artificial colors and flavors renovation.

And we'll continue to grow distribution for our Snacks in Convenience Stores, leveraging the Nature Valley news from US Retail, but also bringing channel specific news like Chex Mix hot and spicy renovation.

In Canada, we're changing our Yoplait Source messaging, repositioning it from a diet product to great tasting Yogurt made with real fruit and no added sugar.

We will also bring gluten free Cheerios news to Canada in 2017 and scaling up the rollout of Annie's to capitalize on the sizable natural and organic segment in this market.

In Europe, we'll introduce new flavors of Haagen-Dazs stick bars and extend the line to markets beyond France.

We're also introducing Old El Paso Stand N Stuff minis targeting younger consumers as well as the appetizer location.

And we're launching Panier Extra, a premium positioned fruit on the bottom Greek style yogurt.

We have exciting news planned for Emerging Markets in 2017 as well.

In Brazil, we're launching new Yoki popcorn products, supporting our new Carolina Yogurt business and executing pricing and managing mix to maintain our margins.

In China, we plan to build on our successful Yoplait launch in Shanghai and just this month, we introduced Yoplait in Beijing.

We also plan to innovate on our Haagen-Dazs mooncake line, launching rose-shaped varieties.

In India, we'll drive strong growth for our Pillsbury business through increased distribution and new product launches in sweet snacks and meals including new cakes and pizza mixes.

Finally, in Mexico, we'll leverage digital support, in-store marketing and event sampling to expand our successful Nature Valley franchise.

Now as Don mentioned earlier, we see a number of opportunities to accelerate our margin expansion efforts over the next few years.

We'll continue to benefit from HMM and our previously announced cost saving projects and we're taking additional actions to further expand our margins.

These include sharpening the focus of our trade and consumer investments between our growth and foundation businesses, reducing complexity by streamlining our SKUs and generating more profitable mix and delivering additional savings from our supply chain and our zero-based budgeting practices.

And in total, these efforts will help us drive our adjusted operating profit margin to 20% by FY18.

We expect our efforts to drive focused growth in margin expansion will result in FY17 organic net sales growth to range between flat and down 2% with 150 basis point improvement in adjusted operating profit margin and 6% to 8% growth in constant currency adjusted diluted EPS.

Now, looking ahead to FY18, we expect modest growth in organic net sales as we maintain positive momentum on many growth businesses and see improvement in others, such as US Yogurt and China.

The full benefit of our margin expansion efforts will help drive adjusted operating profit margin to 20% and will generate a low double-digit increase in constant currency adjusted diluted EPS in 2018.

So let me close today by summarizing our key messages.

We made important progress to return our business to growth in organic sales and operating profit in 2016.

We strengthened our portfolio through acquisitions and divestitures, as well as category and market expansions.

We're taking clear action across the portfolio to drive focused growth, margin expansion and strong returns in FY17 and FY18.

And these efforts will set the stage for sustainable, long-term growth and value creation for General Mills shareholders.

So that concludes our prepared remarks this morning.

So Operator, you can open the call up for questions.

(Operator Instructions)

Our first question comes from Andrew Lazar, Barclays.

Please go ahead.

Good morning, everybody.

Good morning, Andrew.

Hello.

If we think about the -- I think in FY16, you talked about $350 million in savings and I think it led to a little less than 100 basis points of operating margin expansion.

I think over the next two years, you'll be on incremental savings of about $250 million, but obviously, you're looking for a very significant step-up, 300 basis points or so, in operating margin expansion.

So I guess -- that's despite obviously some organic sales decline perhaps in aggregate over the next two years.

So I guess the question is really where does that incremental margin expansion come from that you're projecting?

I'm assuming it's the work that's being done around this portfolio segmentation.

You get a sense of what I'm looking for.

Andrew, this is Don.

You're right, as we look forward, we'll get additional benefit from the projects we have in place and obviously underlying HMM will continue as we look at both 2017 and 2018.

What you'll see in 2018, is it's really going to be the full year benefit of the initiatives that we're going to get started in place.

We started in 2016, we're going to get partial benefit in 2017, and even greater benefit in 2018.

Whether that is sharpening our practices on trade efficiency, but more importantly as we look at SKU rationalization, as we look at the portfolio as you mentioned more rigorously, there's a mix benefit to us as well.

And so you'll see that come through in 2017, and even more so as we go into 2018.

Got it.

Quickly, just I know this past year, you shifted the strategy a little bit on some of the brands that were going to take on a little bit more of a value orientation.

And I guess, did you learn some things from that effort that presumably made you a lot more comfortable with going much more all-in on this portfolio segmentation strategy?

Andrew, this is Jeff Harmening.

The answer is yes, we did.

And we turned around our baking business and we stabilized our share in Betty Crocker.

We also grew share in our Pillsbury refrigerated business despite the fact that our merchandising was down mid single-digits.

We got the value right in desserts and we found that by optimizing some trade in Pillsbury, we could actually still grow share and profitability of that business.

At the same time, we also found that when we focused our consumer spending on areas that had the highest returns, things like Cereal and Snacking, we also found out we like the returns we got there.

So we learned a lot in FY16 that has informed how we look at FY17 and beyond.

Thank you, everybody.

Thank you.

Our next question comes from Bryan Spillane of Bank of America.

Please go ahead.

Hey, good morning everyone.

I guess one of the questions that we have seen this morning I think is just around the plans for consumer spend and trade spend going forward.

And seems like, sounds like your ad spend or consumer spend will be down in 2017, not sure where it will be for 2018.

But just how we should think about getting to sustainable sales growth while it sounds like maybe some of the consumer spend may be coming down even from where it was in 2016?

Well, as we look at our US portfolio, what I would tell you is that in our advertising spend in aggregate will be down a little bit.

But I will also say that we focused our advertising spending and it will actually grow on the areas we think have the highest returns and highest possibilities for growth.

If you think about Cereal for example, or bars or natural and organic.

We really replaced our bets on the area where we think we have the best opportunities for growth.

Even if advertising is down a little bit, we believe that we've refocused the spending that we do have in areas that are going to work harder for us.

The other thing that I will tell you is that we feel great about our renovation efforts.

We saw the benefits of those starting in the back half of this year, whether it was gluten free on Cheerios or the taste improvement on Nature Valley or no, no, no in Cereal, those things really only started in the back half of this year.

So, those will carry forward to next year as well as some more renovation, which I'll talk in more detail about in a couple of weeks.

Our renovation efforts will carryover and we feel very positive about those.

We also think we have a better new product lineup next year.

Despite the fact that our consumer spending will be down a little bit as well as our trade, we feel like we're putting the spending in the right places, our renovation is working and we have increased levels of new product innovation.

Bryan, this is Don.

Just to add some other context to that to quantify it to Jeff's point.

When we look at where we're investing this year, Cereal, bars, our media spending behind those businesses will be up mid single-digits.

Natural and organic will be up strong double-digits.

Our International business will be up low single-digits in this media spend.

Where we're talking about our growth opportunities, we are seeing increased investment.

The other thing not to lose sight of is that we also have investment going back into the product.

It's not always just in the media line.

Ken mentioned about our renovation in Soup, for example.

Obviously the full year benefit of gluten and no, no, no on Cereal will have a top line benefit.

But as we talked about in F16, there were some product costs related to that as well.

So we invest back, it's sharpening where we're investing back on the media and it's also continuing to invest back in our products.

Thank you.

That's very helpful.

Thank you.

Our next question comes from Chris Growe of Stifel.

Please go ahead.

Hello, good morning.

I just wanted to ask, there's some very compelling margin targets now for FY18, but certainly over that time, revenue growth's going to be relatively soft.

I guess I want to understand as you come out of this and the growth brands grow at a faster rate and foundation brands go down, is the intention then to get back on we'll call it algorithm for top line growth?

That there's some one-time reset costs to the top line that occur over the next couple years?

That's just a question for you, if you could, please.

The answer to the questions is, yes.

There is an element of one-time adjustment in that promotion spending and that will happen over 12 months to 18 months.

But once we have removed that volume from the business, the intention is to very much looking for stability.

As we said, we're going to continue to invest in those businesses, continue to bring innovation.

There's is this one-time adjustment as we go through a very thoughtful analysis of all of the promotional spending and remove the parts that really aren't delivering a return.

Don, if you want to add anything?

I think the way to think about it, Chris, Ken hit on the right themes.

Our growth businesses, that 75% of our portfolio that we expect to grow low single-digits in 2017, we expect that rate to accelerate slightly because we expect our US Yogurt business to be improving as we get out of 2018 into 2019.

China and Emerging Markets more broadly.

China and Brazil, we expect to strengthen as well.

So those businesses we both have a strong base today but we have very strong plans in place and reasons to believe that we'll see some slight acceleration in the growth.

And then to Ken's point, the foundation business is really the stable core.

If you think about those brands, they're large, high share, scaled businesses, primarily here in the US or entirely here in the US.

But they also, they are receptive and reactive to targeted investments, and as Ken said, we'll continue to do that.

And so while there may be a one-time step down over the next year to 18 months, we do expect those brands to stabilize over time.

And as a result, as we get through 2018 into 2019, we fully expect to be back on what I'd call a more normal operating model, which would be driven by low single-digit sales growth as a start point.

And just a quick follow-up to that, Don.

In terms of the foundation brands, they are important to your portfolio from a cash flow standpoint certainly and the margin profile.

Are they candidates for divestiture?

Is that the way we should think about those?

Or is it more about better managing those brands?

Just trying to get a sense of where you stand on that?

The fact that we've been more intentional in our portfolio doesn't change our position on potential divestitures.

We needed to review our portfolio and assess whether a business can drive more value to shareholders via a divestiture, but it's a high bar.

As we said today, those foundation brands are very profitable, cash generative and quite honestly, generally have a low tax basis.

So they're very much core.

As Ken said, they are no less important to our future financial returns and shareholder returns than our growth brands.

They just have a different role.

Thank you for the color there.

Thank you.

Our next he question comes from Ken Goldman, JPMorgan.

Please go ahead.

Hello, good morning everyone.

International volumes quite high this period.

I think you benefited -- if you said this, forgive me -- but from an accounting shift in Yoplait Europe?

Just curious if you can size that benefit for the quarter for us?

Is it reasonable for us to model an equal headwind this upcoming quarter?

Just wondering if we can get a little color on that?

Sure, Ken.

Jeff Siemon noted on (technical difficulties).

Including quarter history for our businesses this past year.

What you'll see is in the quarter, Q4, International had 10% organic sales growth.

About 6 points of that was because of the shift from Yoplait in Europe.

Think about underlying at 4%, which is very much in line with what the full year was for International.

Think of that mid single-digit organic sales growth is where International performed, both for the full year and in the quarter.

Okay.

And then switching subjects on Yogurt in the US.

I get the challenges that traditional Yogurt might have as a category versus Greek in a deflationary dairy environment.

But I'm less sure what's been driving some of Mill's Yogurt share losses within traditional, at least that's what our read of Nielsen data would suggest.

Maybe Mill's traditional is losing some share the known traditional.

I'm just curious if you could talk a little bit about the plan to turn that around?

So this is Jeff Harmening.

What I would say is that in general, the Yogurt category is growing and we think it's going to grow and despite recent challenges, we think we can grow in it as well.

Specifically, our plans in the upcoming year, I think the recipe for Yogurt is very similar to what the recipe has been for Cereal to get it back to growth, which is improved renovation and innovation.

Specifically on the brands that you talked about, our Yoplait Light business has really been challenged.

Our original Yogurt business hasn't been too bad, but our Yoplait light business has been challenged as has been our merchandising.

Importantly, as we look at this coming year, what we need to do is we need to get back to the right merchandising plan, which we will do.

We'll shift some spending out of consumer spending into merchandising to make sure we get the right merchandising plan on traditional.

And we also need to make sure that we're renovating our core traditional businesses just the same way we have in Big G and you'll see a lot more of that this coming year.

As well as dialing up the innovation on things like organic.

Great.

Thanks so much.

Thank you.

Our next question comes from Alexia Howard of Bernstein.

Please go ahead.

Good morning, everyone.

One of the themes that's coming through really strongly is the ever-escalating pace of change here and the amount of disruption that's going on in the industry.

I'm thinking about the faster and faster pace of cost cutting, lots of renovation, lots of innovation, competitive dynamics changing in yogurts, retailers doing different things.

How do you avoid or minimize execution risk here and how are you changing your incentive structure maybe to reflect some of that?

Thank you and I have a follow-up.

Okay.

Well, thanks, Alexia for the question and the observation, which I think is spot on, as we would say.

And we said many times that the pace of change in our industry now is as fast as we've seen it in many, many years.

And that's really the reason why we really have changed so many things about our approach within our businesses around the world, our super high focus on Consumer First, just to acknowledge how rapidly consumers are changing their values around food.

We have to make sure that we stay even with that.

And we appreciate that your observation that our pace of bringing innovation and renovation to the market is accelerating, because that's been our goal.

We really feel that's the right thing to do in this environment.

So agree with your observation.

We're very focused on keeping our organization here, we're on our toes, we're very focused on the consumer.

We want to bring the right kind of innovation at a higher pace, because that's appropriate.

And we're very, very focused as you said, on execution in that environment and we feel good about the way -- particularly the way we executed our innovation last year.

Our incentive -- let me just make this comment on incentive for our operating units who are kind of the tip of the spear for all this innovation.

Their incentive reflects very much the dual mandate that we talked about at CAGNY and we've talked about here today.

We're focused on both growth and return.

And our operating units are incented on growth and return.

And both the growth businesses and the foundation businesses are incented that way.

So while our growth targets may be more modest on the foundation businesses, it's just as important to the Company that they hit their targets as the growth guys do.

So everyone is aligned with this dual approach that we've talked about and we think that we're going to benefit from that.

I don't know if anyone else would want to jump in on that.

No, everyone's happy with my answer to the question.

I guess we'll go on to your follow-up.

A quick follow-up on the GMO labeling.

I know we've now got the new Federal proposal that came in last week.

I think Campbell's has said that they're planning to do on pack labeling.

There's obviously the option to do everything via QR codes.

Just wondering what your plans are for that or maybe it's too early to tell?

Thank you.

Well, I think it's probably a bit early to tell, but as you've noted, it's really out of our hands and it's in Congress right now and it's in the hands of the Senate.

And I think as you may have heard us say in the past, Alexia, there's been a lot of debate and at this point, General Mills is for whatever bill can get 60 votes in the Senate.

And we think that bill will be -- will certainly have the preemption that we need so that we get out of this state by state thing and it's going to allow a variety of options for how to label, as you noted.

But we just have to see how that's going to play out over the next period of time.

Thank you.

I'll pass it on.

Obviously if it happens, we'll be very relieved because the prospect of multi-state regulation was going to be very costly for the industry and very confusing for consumers.

Thank you very much.

I'll pass it on.

Thank you.

Our next question comes from Robert Moskow of Credit Suisse.

Please go ahead.

Hello, there.

Thank you.

I guess I had two quicker questions.

Can you help us quantify the mix benefit of this growth in foundation strategy?

Are the growth brands maybe 100, 200 basis points higher in terms of gross margin or price mix or something like that?

And then Jeff Harmening, a question about Annie's.

You mentioned that you're leveraging the US Retail sales force more aggressively.

I think there were some execution issues last year or last fall as you tried to leverage that more aggressively.

What have you learned since then and are you happy with how the US Retail sales force is pushing Annie's and how is it working differently?

Thanks.

I'll take the mix question.

As soon as you said can you quantify it, everyone looked at me.

So I'll take the mix question, then I'll pass it to Jeff.

The way to think about it is not necessarily so much between the growth and the foundation, because actually they're about the same margins sitting here today.

And again, that just speaks to the underlying strength of the foundation businesses as well.

So it's not so much the mix between the two groups of brands, it's really within businesses, our SKU rationalization is driving variable mix, the trade strategy.

As we see more baseline sales versus promoted sales and Ken alluded to how that is one of the key sources of turning around our Cereal business this year, that's what's really providing the mix benefit for us both in 2016 and as we go into 2017.

On Annie's, we're thrilled with the performance of that business and we're going to accelerate that growth in FY17.

And we see accelerated growth from Annie's in this fiscal year and on the backs of distribution, which has been consistent throughout the year, distribution growth, as well as improved merchandising as the year has gone on.

And we'll keep doing those things with the Annie's business.

There's lots of distribution we can get.

We can keep doing better merchandising.

We'll add on top of that expansion into categories that we think are really viable for Annie's, namely Yogurt and Cereal.

In terms of what we learned earlier in the year, what I would tell you is that with any integration, there are things that don't go perfectly.

But there's nothing that hasn't been rectified and at the beginning of our year, really it was our merchandising plans.

It didn't come together the way we wanted them to.

We were gaining good distribution.

But we have seen that change in the back half of the year and our sales forces is executing really well, both on the natural and organic channel and in traditional retail against our organic brands right now.

So Don, just to make sure I understand, so there's no real difference between the mix profile or gross margin profile of the two parts of the business?

No, the operating margin on both our growth and foundation businesses are very similar.

Okay.

Thank you.

Thank you.

Our next question comes from Kenneth Zaslow of BMO Capital Markets.

Please go ahead.

Good morning, everyone.

Can you just talk about the growth that you've had in the reformulation, the success that you've had, to my understanding is it because of the first mover advantage?

Because you were ahead of your other peers.

And is there a potential that if other competitors actually come along with the reformulation, will that go away or will that actually be better as the consumer becomes more aware of it?

And how do you think of the sustainability of the opportunity from the reformulation of your products?

I think -- two separate questions, I think.

I think they have been successful because we follow what the consumers wanted.

And whether that's more taste on Cinnamon Toast Crunch or gluten free on Cheerios or more icing on Toaster Strudel, I think the success we've had has been (technical difficulties).

Whether it's execution on the product front we feel good about or improved marketing we feel good about.

And doing that with brands that people trust.

You can generate important news that consumers care about on brands they trust and the results are usually pretty good.

In terms of you how long this can last, I guess I would go back the best example we have is Chex in Cereal, where we grew that business on the back of gluten free for double-digits for like five years in a row.

So we believe that the long lasting impacts of getting the products right for renovation, we believe they're long-lasting.

And its tied back to the combination of what consumers want, really good marketing and brands that people really care about.

I would just maybe add added detail or two.

First of all, Ken, oats are kind of a core ingredient for many of our products, not only cereal, but also bars.

And oats are naturally gluten free, as an example.

So now that we've figured out the technology for how to purify our oat stream, there is quite a bit of intellectual property in that process and so we think we probably do have some insulation there and that's good.

And then to your point on first mover advantage, I think that's probably true as well.

We're pleased that the organization now is both as Jeff said, understanding these consumer wants and then responding at an ever faster pace so that we're out there quickly.

We think that's a very healthy sign for our organization.

And just a quick follow-up.

What is the key market or the key driver behind the creation of Tiny Toast?

I'm trying to figure out how that fits within the portfolio and why there's a need for a new brand?

What is it suiting?

I'll leave it at that.

Well, Tiny Toast, it fits a consumer need of having cereal that people love.

It just tastes great.

It's a very whimsical product, very whimsical name, whimsical marketing and it fits the niche for teens.

We think it's a good cereal for teens and it just tastes really, really good.

We've seen success with Cinnamon Toast Crunch and sometimes people want gluten free and no artificial colors and flavors and sometimes they just want stuff that tastes good and that's where Tiny Toast fits in.

Great.

Thank you.

Thank you.

And our next question comes from John Baumgartner of Wells Fargo.

Please go ahead.

Good morning.

Thanks for the question.

Don, I'd like to ask in terms of your updated margin targets for FY18, if you can speak to how profitability should progress for your International operations as you kind of build scale and how much of that factors into the guidance increase?

Is there any explicit updated margin target for the International segment as well?

Thanks.

Nothing specific for International today, but what I would tell you is International will participate in the margin expansion as well.

Much of what you see is the change in the focus on the portfolio really relates more to our US RO business which started the journey this year and is doing it in a sharper fashion as we go into 2017.

So that's where you'll see the most direct change I think versus prior expectations.

But International will continue to see margin expansion for the reasons we've talked about before, whether it's productivity outstripping inflation, the mix management and the underlying growth of the businesses, particularly in Emerging Markets, strengthening return to their more historical growth rates.

Thanks, Don.

Thank you.

Our next question comes from --

Sorry, Tina, I think we probably have time for one more.

So maybe if we can get one additional in before we close down here.

Perfect.

We have a question from David Driscoll of Citigroup.

Please go ahead.

Great.

Thank you.

And thanks for squeezing me in, guys.

So two questions.

The first one is on the cost savings.

Can you talk a little bit more about how you get to the $600 million and then what learnings allowed you to upgrade the savings target?

And then the big one here is, is it substantially likely that we should expect you to be able to upgrade this target even further in light of trends within the sector?

As far as our cost savings going from the $500 million to $600 million, this is not the first time we've increased those as we've seen further opportunity.

And what I would say is, as we've worked through Century and Compass and Catalyst and implementing ZBB across the business, we've seen slightly better savings in virtually every one of those initiatives, but I'd particularly point to Century and ZBB.

As we streamline our manufacturing footprint, our ability to find HMM and find savings has increased even beyond what we thought it would.

And then ZBB, we have been learning as we've gone and as we both expanded within the US, and then as we go forward, expanded more formally through our International business, we see further upside there as well.

So it's really been a matter of each project we've tackled has generated a bit more savings and given us clear visibility in terms of what the final prize will be.

As far as future margin targets, we just gave you a fresh set today.

So we're focused on delivering those.

We think they're the right targets for us.

We think they will set us apart from a competitive standpoint and that's what we're focused on right now.

And again, I think it goes back to the earlier question.

We've been very, very focused on execution of these projects and executing them well and we feel that we've done that across the enterprise.

And these initiatives, I would say we're gaining increasing confidence in our ability to do them well.

One final question for me, Ken, on the portfolio segmentation.

I've always viewed the Company as one that was discerning between low growth and higher growth businesses and where you should put investments or not.

I'd like you to respond to this.

When you put out something like segmentation data, I kind of think you always did this.

I don't think this is brand new inside of General Mills.

I think it might be you new in terms of how you're presenting it to us today, and maybe there's an intensity that's higher.

But I just want to get your response to that kind of a statement because it's not been my judgment over the years that you just weren't segmenting your portfolio.

So how would you grade the difference with this kind of discussion today and slides and the deck and comments in the press release about segmentation?

So I think it's a good observation.

This is not something that we discovered a couple weeks ago.

And I think as you heard from some of the other comments, much of the work and how we're approaching this is building on initiatives and things that we've been trying and developing over the last year or two.

And we just concluded after seeing the results and seeing the effectiveness of this work that it would be helpful.

Frankly, it helps us a lot internally to be much more declarative and intentional about the role that we want different businesses to play.

We just decided, I can't remember what your word, what your term was, but just to be more declarative and much more intentional about how we were going to pursue these initiatives.

I think you used the word intensity.

Even higher focus, we think that's very good for us inside the business and it's also very helpful I think for investors to understand how we're looking at it.

It is as you said a build with more specifics.

I don't know if anyone -- no, we're good.

Okay.

Thank you guys.

I think that's all the time we have this morning.

So before we close everyone, just remind you our Investor Day event coming up two weeks from today and we welcome you to listen to the webcast beginning at 10:00 AM Eastern, or if you can join us in New York, please send us an RSVP so we can make sure to include you.

I'll be available all day if we didn't get to your question, please give me a call.

With that, I think we'll wrap up.

Thanks very much.

Have a great day.

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 all lines.

Thank you and have a good day.