通用磨坊 (GIS) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the General Mills quarter-three FY17 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Tuesday, March 21, 2017.

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

Please go ahead, sir.

Thanks, Kelly, and good morning to everyone.

I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Jeff Harmening, our President and COO.

I'll turn you over to them in a minute, but first let me cover our usual housekeeping items.

Our press release on third-quarter results was issued over the wire services earlier this morning, and you can find this release, and a copy of the slides that supplement our remarks this morning on our Investor Relations website.

I'll remind you that 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 Ken.

Okay.

Well, thank you, Jeff, and good morning to one and all.

I'll cover the key headlines for the third quarter.

Our third-quarter results finished in line with our expectations, and keep us on track to deliver the guidance we updated last month.

Our net sales declined, due primarily to gaps in pricing and promotional activity in key US businesses, and our cost savings efforts helped us expand our adjusted operating profit margin and drive growth in adjusted diluted EPS.

We are highly focused on improving our top-line growth trend.

We've added support in the fourth quarter to strengthen key business lines, and we're pursuing global growth priorities that will further improve our sales trends beyond FY17.

Jeff Harmening shared those priorities with you in our presentation at the CAGNY conference last month, and we'll come back to them when we discuss our FY18 business plans in June.

We are also reaffirming our full-year guidance today.

So with that, let me turn things over to Don to provide more detail on our financial performance.

Thanks, Ken, and good morning, everyone.

Slide 6 summarizes our third-quarter FY17 financial results.

Net sales totaled $3.8 billion, down 5% as reported and on an organic basis.

Total segment operating profit totaled $662 million, down 2% in constant currency.

Net earnings decreased 1%, to $358 million, and diluted earnings per share were $0.61 as reported.

Adjusted diluted EPS, which excludes certain items affecting comparability, was $0.72.

Constant-currency adjusted diluted EPS increased 8% compared to last year's results.

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

Organic pound volume reduced net sales growth by 7 points.

It was partially offset by 2 points of positive mix and net price realization.

Neither foreign currency translation, nor the net impact of acquisitions and divestitures had a material impact on net sales growth.

Before turning to our financial results by segment, let me briefly review our new segment reporting structure, which was highlighted in this morning's press release.

Starting this quarter, we are reporting under four business segments, aligned with the new global organizational structure we announced in December.

We've combined our US retail and Canada businesses into a North America Retail segment, due to their similar product portfolio and go-to-market structure.

North America Retail is our largest segment, representing roughly two-thirds of Company net sales, and thanks in large part to that scale, it's also our most profitable segment, with FY16 operating margin at 22%.

Our Convenience Stores and Foodservice segment, which is unchanged from previous structure, contributed 12% of total net sales -- total Company net sales and posted a 20% operating profit margin last year.

Our two International segments, Europe and Australia, and Asia and Latin America represented 12% and 10% of FY16 net sales, respectively.

In these two segments, we have less operational scale, we're investing for growth, and we don't benefit from our higher-margin cereal business, which is captured in the results of our Cereal Partners Worldwide joint venture.

As a result, profitability in these segments is lower.

And due to their smaller scale, we expect more volatility in quarterly results, which you'll see in our third-quarter numbers.

Slide 9 summarizes our third-quarter results across the new operating segments.

North America Retail posted high single-digit declines in organic net sales in constant-currency segment operating profit.

Convenience Stores and Foodservice net sales declined 1%, while operating profit grew 3%.

The Europe and Australia segment delivered 2% organic net sales growth, and 39% constant-currency growth and operating profit.

And, finally, organic net sales for Asia and Latin America declined 2%, while segment operating profit increased to $10 million, from $2.5 million a year ago.

Turning to joint venture results, CPW net sales grew 4% in constant currency, with growth across all regions.

Haagen-Dazs Japan constant-currency net sales declined 5%, primarily due to the comparison against last year's third quarter, which grew 22% behind the successful relaunch of Hana Mochi.

Combined after-tax net earnings from joint ventures totaled $11 million in the third quarter, down 35% in constant currency due to an asset write-off for CPW, and lower volume for Haagen-Dazs Japan.

Year to date, constant-currency net sales for CPW and Haagen-Dazs Japan have grown 3% and 5%, respectively.

And constant-currency combined after-tax earnings from joint ventures is down 3%.

Third-quarter adjusted gross margin was up 20 basis points, with benefits from holistic margin management and our other cost-savings initiatives more than offsetting the impact of volume deleverage and modest input cost inflation.

For the full year, we continue to expect deliver $380 million of cost of goods sold HMM savings, which will more than offset our expectation of 2% inflation.

Adjusted operating profit margins increased 100 basis points in the quarter, driven by higher adjusted gross margins, and a 9% reduction in SG&A.

Slide 12 summarizes other noteworthy income statement items in the quarter.

We incurred $106 million in restructuring and project-related charges in the quarter, including $28 million recorded in cost of sales.

Corporate unallocated expenses, excluding certain items affecting comparability decreased by $22 million, a bit faster paced versus prior periods, reflecting our cost-savings initiatives plus a reduction in our incentive accrual.

Net interest expense decreased 1% from the prior year.

We continue to expect full-year interest expense will be roughly flat to last year.

The effective tax rate for the quarter was 23% as reported.

Excluding items affecting comparability, the tax rate was 24.7% compared to 30.8% last year, driven by favorable impacts of recent French tax legislation, and a number of small discrete tax items that occurred during the quarter.

We estimate our full-year adjusted effective tax rate will be 29%, in line with the updated guidance we communicated in February.

Average diluted shares outstanding declined 3% in the quarter, and we continue to expect a 2% reduction for the full year.

Turning to our nine-month financial performance, net sales were down 5% on a organic basis.

Segment operating profit declined 2% in constant currency, and adjusted diluted EPS was up 4% in constant currency.

Turning to the balance sheet, our quarterly core working capital increased year over year for the first time since FY13, due to the impact of late-quarter volume shortfalls on domestic inventory, partially offset by continued improvements in accounts payable.

We expect core working capital to improve in Q4, and be a source of cash for the full year, primarily behind further benefits from payables.

Nine-month operating cash flow was $1.6 billion, down 16% from a year ago, driven by non-core working capital items including changes in trade and advertising accruals, as well as changes in taxes payable, primarily related to capital gains on the Green Giant divestiture in FY16.

We expect to drive significant growth in operating cash flow in the fourth quarter behind higher net earnings and working capital improvements.

Year-to-date capital investments totaled $475 million.

And through the first nine months of the year, we returned $2.5 billion to shareholders through dividends and net share repurchases.

Slide 16 summarizes our fourth-quarter outlook.

We expect modest improvement in organic net sales trends, driven by the trade and consumer support we've added at key businesses in North America retail, as well as the continued growth in Europe, China, and our Focus 6 platforms in Convenience and Foodservice.

We also see significant margin expansion due to favorable mix, in comparison to margin contraction in last year's fourth quarter, and continued benefit from strong cost savings behind HMM, our global restructuring actions, and zero-based budgeting.

Two final comments on the quarter.

Net sales growth in Europe and Australia segment will be negatively impacted by the comparison to a year-ago period, which included an extra month of results for Yoplait Europe, as we align that business to our fiscal calendar.

And note that in this year's fourth quarter, our Asia and Latin America segment will benefit from an extra month of reported results for Brazil as we align that business's calendar to our fiscal year.

At the total Company level, the combination of these two impacts will be a modest headwind to our fourth-quarter organic net sales growth.

On a full year basis, the impact is immaterial.

With those fourth-quarter expectations, we are reaffirming the FY17 full-year guidance we communicated in February.

Specifically, we expect organic net sales to decline approximately 4% for the year.

Constant-currency total segment operating profit is expected to be in the range of down 1% to up 1%.

We expect our FY17 adjusted operating profit margin to finish at 18% or higher, which translates to at least 120 basis points of expansion versus last year.

And adjusted diluted earnings per share are expected to grow between 5% and 7% in constant currency.

We expect foreign currency translation will have a minimal impact to the full-year diluted EPS results.

Now I'll turn it over to Jeff to provide more color on our operating performance.

Thanks, Don, and good morning, everyone.

As Ken described, our third-quarter results were in line with our expectations.

Improved top-line performance on our Convenience Stores and Foodservice, and Europe and Australia segments, and growth on our core business in China were offset by declines in our North America Retail segment driven largely by yogurt, soup, and refrigerated dough.

Let me provide a little more detail regarding our third-quarter segment performance and our outlook for the remaining year.

For our North America Retail segment, organic net sales declined 8% in the quarter.

Cereal net sales were down 1%, an improvement over first-half net sales results.

Net sales for US snacks were down 4%, driven by declines in Fiber One.

In our US meals and baking unit, net sales declined 10%, as we didn't have competitive levels of promotion activity on soup and refrigerated baking products during their key seasons in the third quarter.

Declines on US yogurt sales were led by light and Greek varieties, as well as a widening gap from promotional levels between us and our competition.

And constant-currency net sales in Canada declined by 1% in the quarter.

Constant-currency segment operating profit decreased 7% in the quarter, driven by volume declines that were partially offset by our cost-savings initiatives.

As we look ahead to the fourth quarter, we've added support to strengthen key businesses, improve our momentum, and better position our brands as we head into FY18.

Globally, our cereal business is improving.

It's growing in Canada, Cereal Partners Worldwide, and in US foodservice outlets.

In our US retail cereal business, we're adding support in the fourth quarter behind taste and wellness news that is working.

That includes taste news on Lucky Charms and Cocoa Puffs whose retail sales are increasing at low- and mid-single-digit rates so far this year.

We're also adding media support behind gluten-free messaging on our Cheerios franchise, including new Very Berry Cheerios that launched in January, and are off to a good start.

And we continue to support our whole-grain message on a variety of our cereal brands.

In US snacks, Nature Valley has gained nearly 2 points of dollar share so far this year in the grain-snacks category, as the new products we've launched, such as Granola Cups, and a new flavor of Nut Butter Biscuits hit shelves in January.

And we're increasing media support in the fourth quarter behind the Nature Valley brand.

We also continue to post strong growth on Larabar.

Year to date, retail sales are up 44% in Nielsen-measured outlets, thanks to broadening consumer awareness and expanded distribution across mainstream channels.

In fact, household penetration for Larabar has grown 30% in the past year, as we've found new ways to reach consumers, including targeted TV advertising.

We're also seeing good growth on EPIC Natural Meat snacks, with retail sales more than doubling so far this year on good innovation and strong distribution gains, and we see considerable opportunity to expand household penetration on this growing brand.

As we've previously discussed, we have work to do to reposition our US yogurt portfolio into faster growing, more premium yogurt segments.

We'll do that through core renovation on our existing lines, and innovating on the emerging segments in the yogurt category.

We've recently renovated a significant portion of our core yogurt business, including a complete reformulation and relaunch of Yoplait Greek 100, which now has more protein, less sugar, and a significantly improved texture and taste.

We've also refreshed packaging on our original-style Yoplait, and we are adjusting the pack size of Go-GURT to deliver more value to the consumer.

On the innovation front, we're capitalizing on increased consumer interest in snacking with the recent launches of Yoplait Dippers, Yoplait Custard, and a new regional yogurt drink that gets us into the fast-growing beverage segment.

The natural and organic yogurt segment is growing by double digits, and we're strengthening our position in this space by a building distribution on our Liberte, Annie's, and Mountain High Yogurt varieties.

And we're starting to see consumers looking for a more simple, better-tasting yogurts that feel more artisanal.

This summer, we'll launch a new line here that leverages our French heritage to bring an entirely new yogurt taste and texture to the US market.

Within our meals and baking operating unit, we continue to post solid results on Old El Paso, with retail sales up 4% so far this year on the strength of our innovation and brand messaging.

In the fourth quarter, we'll be providing additional consumer support with a Cinco De Mayo event that includes TV advertising and social media marketing efforts.

Totino's frozen hot snacks continue to grow, as we have taken a strong consumer-first approach on this brand, with innovative campaigns using digital assets that resonate with Totino's consumers.

Our fourth-quarter activities include additional media support and a tie-in with the Mass Effects video game released this month.

And we're also putting support behind refrigerated baked goods, with in-store promotions as well as new recipes and coupons on digital outlets for the Easter season.

Our natural and organic portfolio continued to drive double-digit sales growth.

And as we reframe our view to capture all of North America business, our natural and organic brands will generate more than $1 billion in net sales in FY17.

Annie's is our largest brand, and retail sales are increasing nearly 40% so far this year in US Nielsen-measured outlets.

We continue to gain distribution on Annie's established businesses, including macaroni and cheese, fruit snacks, and cracker lines that were in the market when we acquired the brand.

Year to date, retail sales for those categories combined are up 18%.

And as you know, we've also introduced this brand into new categories, with ready-to-eat popcorn being our latest addition to the portfolio.

In the fourth quarter, we'll increase our promotion activity with in-store and consumer events tied to Easter and Earth Day.

Turning to Canada, our fourth-quarter plans build on the solid year-to-date growth we've seen on Old El Paso, grain snacks, cereal, and Liberte yogurt, and we're very excited about the recent launch of Annie's into this market.

Early consumer response to Annie's has been very positive, and there is still plenty of runway for growth here.

We're also celebrating Canada's 150th anniversary next quarter with limited-edition maple-flavored Cheerios, along with a variety of online and in-store promotion events to mark this milestone.

So, in total, we expect to see improvement in top-line performance in the fourth quarter for our North America Retail segment, driven by increased contributions from our product innovation and core renovation efforts, and increased consumer and trade support on key businesses like cereal, snacks, Old El Paso Mexican products and Totino's hot snacks.

And we expect to post good segment operating profit growth in the fourth quarter, as we start to realize benefits from our recent global restructuring, and we lap double-digit profit declines in the US business a year ago.

Turning to our Convenience Stores and Foodservice segment, organic net sales declined 1% in the quarter.

However, our Focus 6 platforms posted 2% net sales growth led by cereal, yogurt, and biscuits.

We saw good growth on bowl-pack cereals in K through12 schools, as our no-artificial-colors-and-flavors messaging continues to be popular with cafeteria operators.

Yoplait Parfait Pro is driving growth on our yogurt business, and pricing actions we have taken on biscuits drove high single-digit sales growth in the quarter.

Segment operating profit increased 3% in the quarter, primarily driven by benefits from cost-savings initiatives and lower input costs.

Our net sales trajectory for this segment has improved each quarter this year.

In the fourth quarter, we expect to post growth on our Focus 6 platforms, led by cereal, yogurt, and biscuits.

We'll also benefit from increased distribution on our frozen-bread products and in-store bakeries, and we expect to reduce headwind from bakery flour index pricing in the fourth quarter.

Now let's turn to our International segments.

In Europe and Australia, organic net sales increased 2% in the quarter, led by good growth on Old El Paso, Haagen-Dazs, and Nature Valley and Fiber One snack bars.

Here, too, we've seen improved top-line trends in each of the last two quarters after a slow start to the year.

Third-quarter segment operating profit increased nearly 40% on a constant-currency basis, primarily driven by favorable mix and cost savings.

A large driver of our improving performance in Europe has been our Haagen-Dazs business.

We've been expanding our very successful stick bars into markets across Europe, and we're supporting the brand with strong marketing initiatives, such as our partnership with Wimbledon that expands brand awareness.

We've also launched Haagen-Dazs in Australia this year, and have already secured a 40% dollar share of the super-premium ice cream category there.

We'll continue that momentum in the fourth quarter by introducing new stick bar flavors, and launching new mini stick bars in markets across Europe.

We're also relaunching Haagen-Dazs in the UK with stick bars, mini cups, and new, more contemporary packaging and marketing communications.

So we're seeing good trends in our portfolio in these developed markets.

In the Asia and Latin America segment, organic net sales declined 2% in the quarter, reflecting macroeconomic challenges in Latin America, and the restructuring of our snacks business in China.

Segment operating profit increased to $10 million, from $2 million a year ago.

China is our largest market in this segment, and we're seeing good growth on our core businesses there.

We're posting mid-single-digit sales growth on Haagen-Dazs and Wanchai Ferry so far this year, and Yoplait Yogurt is growing at a triple-digit rate driven by continued penetration gains in Shanghai and our expansion into Beijing.

We expect performance momentum on these brands to continue into the fourth quarter.

We've seen same-store sales return to growth on our Haagen-Dazs shops, and we recently launched new flavors for our retail channels, including toffee and mochi, and fruit and flower ice cream varieties.

On Wanchai Ferry, a strong promotional plan on core pork and shrimp dumplings, along with a new line of dumplings for kids will contribute to growth in the quarter, too.

In Latin America, the operating environment remains challenging, but we expect to see performance improve in the fourth quarter behind an expanded promotional plan for Festa Junina, an annual celebration that starts at the beginning of the Brazilian winter.

We'll also see continued distribution gains on Carolina yogurt, including our new, renovated Greek-yogurt line, which is receiving good early feedback from consumers.

So, as we look across our entire portfolio, we expect modest improvement in our top-line trends in the fourth quarter, due to increased consumer and trade support on key brands across our US businesses, as well as continued growth in Europe, China, and on our Focus 6 platforms in the Convenience Stores and Foodservice segment.

We also expect to generate significant operating margin expansion, driven by mix, strong cost savings, and a favorable comparison versus last year's fourth quarter.

And with that, I'll turn it over to Ken for some closing comments.

All right.

Well, thanks, Jeff.

So, to summarize our comments this morning, our third-quarter results were in line with our expectations, and keep us on track to deliver the guidance we updated last month.

We're highly focused on improving our top-line performance.

We've added support in the fourth quarter to strengthen key businesses, and we'll look to further improve our sales trends beyond FY17.

Our plans for next year will balance strong product news behind our global growth priorities, refined levels of investment across our categories, and continued margin expansion.

So I'll close this morning by reiterating our commitment to our shareholder return model, which consists of balanced top-line growth and margin expansion, combined with disciplined cash conversion, and cash returns.

That's the formula we believe will generate top-tier returns for General Mills shareholders over the long term.

Now we'll turn it over to Q&A.

Operator, you can go ahead, and get us started.

Thank you, sir.

(Operator Instructions)

Our first question comes from Andrew Lazar with Barclays.

Good morning, everybody.

Good morning, Andrew.

Good morning, Andrew.

I think, as of the fiscal second quarter, you were looking for full year gross margin expansion, in a sort of 100 to 120 basis point range.

I'm trying to get a sense, if that's still what is embedded in your thinking, when you're thinking about the overall operating margin expansion for the year?

I know, you've got an easier gross margin comp, and you mentioned mix, and things of that nature.

I'm just trying to get a sense, if that's still reasonable, or if more of the operating margin expansion for the full year at this point, comes from the SG&A side, just given some of the volume deleverage?

Yes, Andrew, this is Don.

Yes, as we look at the full year, again we still expect to drive operating profit margin expansion of 120 basis points, plus a greater portion of that will come from SG&A than we originally anticipated.

Our gross margin expansion will probably be in the 50 to100 basis point range, versus the 100-plus that we talked about earlier and it is for the factors that you referenced, a bit more volume deleverage, in particular.

But importantly, as we go into Q4 as you also referenced, we have every expectation of seeing significant margin expansion, particularly given the fact that we see a bit more modest deflation outlook, versus what we saw a year ago in the fourth quarter, and last year's fourth quarter, we saw some significant margin contraction.

So we expect an improved margin performance in the fourth quarter.

But for the full year, we expect gross margins to be more -- expand more in the 50 to 100 basis point range.

Thanks for that.

Just a quick one then, on just the growth versus sort of foundation strategy.

We're a couple of quarters into it now, and I know it's always tough to gauge at the start of something like this, when you're reallocating resources around to different brands and categories and such, what sort of impacts will be.

But maybe, if there's just a -- or maybe a key learning or two, from the first couple of quarters of undergoing this process, and maybe what it means for how you view that rubric kind of going forward?

So Andrew, this is Jeff.

What I would say is that, we're satisfied with our strategy on growth versus foundation brands.

And we, I mean, the brands we set for growth, we think are the right ones, and the foundation ones as well.

And how we are managing those, we feel fine with that.

I mean, the challenge for us is, and we've talked about this a little bit, is that as we look at this year, it's not really growth versus foundation for us.

It's just in some key categories, we haven't had the promotion mix right, and we haven't been as competitive in pricing as we could have been.

So yogurt, which is a growth brand for us, as well as refrigerated baked goods and soup.

And so, it's really a matter of our price competitiveness, as well as our innovation on yogurt, and getting back to the innovation -- level of innovation on yogurt, that we feel are going to [more] competitive, and can get us back to growth on that business.

So as we look at our strategy on growth and the foundation, we're satisfied with that, as well as the brands we have in kind of in each bucket, but it really is our promotion competitiveness on some of our biggest businesses.

Thank you.

Our next question comes from David Driscoll with Citi.

Great.

Thank you, and good morning.

Good morning, David.

Good morning, David.

I wanted to ask first about the Pillsbury and Progresso, and the brands, and just kind of your assessment of the brands at this stage?

Volumes in our AOC plus C data were down 20% and 16%, respectively, for those two brands.

So the question is, if after the season is over, how significant is the damage to those brands, given -- there's no other word to say here, staggering declines in the volumes?

Would just like to understand, kind of what you do going forward, and is this something that we have to think, has really impacted these brands on a more permanent basis?

Or is there something that you could call out, that would be more transitory, regarding the trends on those two brands?

So David, this is Jeff.

Look, I think, it's a fair question, given the declines we've seen in the brands.

But I will tell you there is nothing wrong with either the Pillsbury or the Progresso brand.

In fact, we grew those two businesses a year ago and so, it is clearly transitory.

And with refrigerated baked goods, we took a significant amount of pricing, and we paid the price for taking more than we should have and you see it in our pricing versus competition.

You particularly see it, as retail brands, private label, has filled the promotional void that we left and so, for us on our refrigerated baked goods, for refrigerated baked goods, it really is getting back to being price competitive, and we think we'll have a much better year, next year than we had in 2017.

And on Progresso as well.

I mean, we were out merchandised this year on our Progresso brand, and our price points weren't particularly good, and we didn't probably execute the way that we wanted to.

And so, there's nothing wrong with either of those brands, although I can understand that how you would think that, given the volume declines.

But it really is transitory.

They're both great brands, and we think we can improve performance on both of them.

My second question is on the cost reduction efforts.

Do you believe that the cost reductions and these programs are in whole or in part to blame for the significant revenue problems that the Company is having?

And then, if you could just give some detail, why or why not, I think people would greatly appreciate that.

So as we, look, the biggest challenge we've had this year with our retail sales have been two-fold, and it really has been the pricing, and the price discrepancies we've had in our biggest categories, as well as our innovation on yogurt.

And the need to get back to fundamentally strong levels of innovation.

Those are the two biggest drivers by far.

Now we have gone through, about as much organizational change one could go through in the last three years, and so does that have an impact?

I suppose that it does.

And you look at our results in Europe, for example, where we had an independent Yoplait organization, and an independent General Mills organization, we put them together, and you've seen our first quarter results in Europe weren't what we wanted, but that we've been getting better and better, as the quarter has progressed.

And I think, part of that is due to the fact that we put the organizational change we've undergone

And North America, has probably been to a lesser extent the issues, although we have changed quite a bit with our supply chain.

And from time to time, we've had service challenges, especially in the first quarter of this past year.

But those things are behind us now.

And so, as we look ahead, I wouldn't expect any impact from our cost savings initiatives.

And frankly, over the last year, even though we've had some, the vast majority of our challenges have been due to the pricing we've had in the marketplace, and innovation on Yogurt.

So just one fast follow-up.

Do these issues on the revenue line, and whatever connection it has to the cost reduction program, does it make you fundamentally more nervous, or wanting to move in a slower fashion on future cost reductions?

Well, look, I mean, most of the big supply chain restructuring we have behind us now.

We've already implemented ZBB.

The cost savings initiatives that we see in front of us, things like going to global sourcing and things like that, aren't going to have an impact on how we execute in the marketplace.

And so, but I would say a lot of the big organization changes, that we think could have an impact commercially, we're not going to see going forward.

And as I've said, even though there's been a lot of change, that's not -- I really don't think that's the primary driver of our performance this year.

Thank you.

Our next question comes from Chris Growe with Stifel Nicolaus.

Hi, good morning.

Good morning, Chris.

Just had a question for you, if I could.

As you're putting more support back behind the business in the fourth quarter, is it investment more transitory, short-term, kind of reacting to the current environment?

Or are you treating some of these, in particular the foundation brands, a little differently than you thought, when you implemented that strategy?

So I'm thinking like soup and baked goods?

[Did] you have to get a little more aggressive behind those, and therefore less margin improvement than you expected from those categories?

Well, as we look at the fourth quarter, Chris, the --we're putting more emphasis behind our cereal and snack brands, first and foremost, and then a little bit behind Old El Paso.

And because if we like the marketing efforts we have on all those brands, we've seen good results on Nature Valley and snacks, and we like what we have on gluten free and Cheerios and Lucky Charms and so forth.

We're also adding a little bit back to our Pillsbury business on Easter, which is later this year.

So Easter is in April, as opposed to March, and so we won't see the results on that until April.

So we are adding a little bit back to our refrigerated baked goods.

What I would say is that, we're not going to add a ton back on soup, because the soup season is kind of over.

And after Easter, the baking season is over until next fall.

We expect good margin improvement on soup and on refrigerated baked goods, but we also have to make sure we're supporting those businesses properly.

as well.

And we've had significant volume deleverage this year which has partially offset some of the cost savings that we've had.

And so, our expectation is that we go forward, that we'll continue to grow margin in those brands, but we'll do it with a little bit less deleverage, and a little bit more support.

Chris, I guess, what I would add is as we've talked about, we have a couple of opportunities in front of us.

One is to get sharper on price, and as we do that, we think that will have long-term benefits, so you'd expect that to continue, and stronger support behind some of our best marketing ideas.

And we've said before, as we look at our media investment for the back half of the year, excluding US yogurt which we said we were right-sizing, the other growth businesses will see an increase in media in the back half and that's been consistent since we decided to put money back, more money back into the business in December.

So again, we're going to we're expecting good returns on that, and we continue to expect to support our brands, as we go forward beyond the fourth quarter.

Okay.

Thanks for the color.

Then if I could ask a quick overall question.

Some of the recent IRI and Nielsen data has been very weak, for General Mills, and for the industry overall.

I just want to get a sense of, was this a factor that obviously that weighed on your third quarter performance?

Are there any unique factors that are worth considering, in relation to that weakness in the data we're seeing broadly in the industry?

So as we -- we're obviously seeing the same trends for the industry.

If you look at where the food and beverage industry is now versus a year ago, there's about a 4 point difference from where it was then, to where it is now.

So sales were up about a 1.5 point this quarter a year ago, and now it's down 2.

About half of that is due to pricing and so, you've seen deflationary pricing across food and beverage over the past quarter, and so as we think about that 4 point gap, half of that is pricing.

And so, the unit volume is really about 2 points, and there's not one factor that impacts it.

Although, they're -- certainly, there's movement towards the perimeter of the store, and there's even more deflation in categories like meat and dairy.

But also you see growth, significant growth and increasing growth in channels that aren't measured by Nielsen.

And e-commerce is certainly one of those, which is growing at between 35% and 50% this year, and is probably up to 1.5% of total food and beverage sales.

And so, without doubt, there is increased growth in channels, as not measured by Nielsen.

Okay.

Thank you for the time today.

Our next question comes from Jason English with Goldman Sachs.

Hey, good morning, guys.

Thank you for letting me ask a question.

Back to the topline, I hear your message loud and clear, that maybe from a support and execution perspective, you were a bit off kilter.

But when we try to dissect the data, roughly three-quarters of your measured declines appear attributable to distribution losses and they seem pretty broad-based, across a number of different categories, not just the problem children that you're pointing to.

So I was hoping you could give us some color on, what do you think is contributing to the drop in gross distribution, or total distribution points?

Sequentially, it looks like it's still falling, your velocity is still falling, despite the survivor bias in that data.

So the data would suggest, like we still have a lot of room to go, before we can find a floor there.

But you guys obviously see a lot more granularity there than we do, and you understand what's going on a little bit better.

So I was hoping you could give us a little more context, a little more color that hopefully leads us to some visibility, of when we could find that support level on distribution?

So as we look at distribution, our distribution is down in our US business this year.

And a fair amount of that was planned, as we did some SKU rationalization in Pillsbury and Progresso and the part that's down more, certainly is in our yogurt business.

But also as we look at it, we've got to -- even though our distribution is down, we've replaced a lot of slower turning SKUs, with faster turning SKUs, and we've called those our priority 450.

And so, our P450 SKUs are actually up.

And so, even of our distribution is down in a few categories, the level of distribution on our highest turning, highest velocity SKUs is actually growing.

And so, for that reason, distribution is not really the contributing cause to our decline this year.

It may be a little bit in yogurt, but that we expected.

But for the rest of our businesses, really distribution declines are not the driving force.

It really is more about our price competitiveness, and the marketplace support we've had.

Okay.

That's helpful.

And one other, a more housekeeping oriented question, then I'll pass it on to others in queue.

The year is not quite shaping up as you expected, at the onset.

Is it safe to presume, that there's been some incentive compensation adjustments that have accompanied the shortfall?

And if so, can you give us a sense of magnitude as we think into next year, sort of how much cost may be deferred into next year, assuming a reset?

Yes, Jason, as I said in my script, part of the savings you're seeing in the quarter is our incentive reduction, which obviously, we reset after our December earnings reduction, and reset again this quarter.

It's probably going to be about a $40 million savings in the year, a reduction in expense in the year, which obviously will factor into our planning for next year.

Thank you, guys, very much.

I'll pass it on.

Our next question comes from Ken Goldman with JPMorgan.

Hey, good morning, it's actually Josh on for Ken.

I was hoping you could help us out, just a comment around added support.

I know you've talked a bit about the trade spending, and getting better on price points, and obviously some increased advertising around a bunch of brands in the fourth quarter.

But I guess, can you talk about how much of the added support, you are putting in the market?

Or at least try to give us a sense of that magnitude?

And then, as a follow-up, I think you've -- I guess, obviously today you haven't provided much of an update on 2018, but I believe last time you gave guidance, you had said to expect modest growth in 2018.

I guess, does that still hold?

And if so, how much of it do you think depends on a positive response from some of this added support?

So Josh, this is Jeff, a couple points on the fourth quarter, and then 2018.

On the fourth quarter, we are adding support.

It will mostly hit in April and May, and that's partially due to the timing of Easter when we've added back some support for our baking business.

But also when we left the second quarter, by the time you can get merchandising and advertising back into the marketplace, it's going to be mostly seen in April and May.

So our improvement in the fourth quarter will mostly be April and May.

I think also importantly that, even though we're adding support in the fourth quarter, our merchandising levels are still going to be down.

They just won't be down as far as they were before.

So it's not as if, we'll go to one end of the ship to the other in terms of pricing support, whether that's in cereal, or whether that's in snacks, or whether that's in other places.

So while we are adding support in April and May, our merchandising will still be down.

It just won't be down as much as it has been in the last quarter.

And then, as Ken said in his remarks, we'll give increased guidance and thoughts in June, when we deliver our fourth quarter results for 2018.

Got it.

Thank you.

I had to try on 2018.

And then, on -- Don, I was hoping to ask just on the inventory build in the quarter.

I know a year ago, there were some issues just around with the Green Giant sale, but I guess, in terms of the increase -- was there anything else?

I guess, was Green Giant an issue, were there any timing factors, anything you could help with that?

Thanks.

No, it was really the fact that we had a production set for the plants, and volume fell a little short as the quarter unfolded and obviously, those products ended up in inventory, they'll be sold through into the fourth quarter.

The only thing to keep in mind about Green Giant is actually on the tax side.

Last year, we had a -- we paid a capital gains tax on that divestiture, and that was an outflow in Q4.

So if you think about our free cash flow generation, one of the reasons to be confident that we'll accelerate in the fourth quarter is the fact that we will be rolling over that outflow from a year ago.

But Green Giant didn't have an impact, a material impact on inventory.

Thanks very much.

Our next question comes from Rob Dickerson from Deutsche Bank.

Thank you very much.

So just to go -- obviously back to the topline again, it's the main topic of the day.

If I just looked at Q4 organic sales, and I think about the year of guidance around down 4%, because there's no FX impact.

And I think about, kind of comparing it to your stacked basis, relative to Q3, I mean, it seems like sales kind of imply for Q4, organic sales are down 2.5% to 3%, let's say, which is I guess, a decent sizeable improvement relative to what we're seeing in Q3, if we include the year ago comparison.

I'm just curious, was the -- with the increased, let's say, pricing support in April/May as you just mentioned, obviously there's still a lot of competition, what's really the hope here, what's the core driver of that acceleration in Q4?

I mean, it sounds like it's basically volume, but it might not be volume coming from Yogurt per se, it might be coming from some of the other pressured categories.

So any color you have there?

So I mean, look, I think you're in the right ballpark, in terms of the improvement we expect to see for the fourth quarter for sales.

So I think you're in the -- your math is pretty good on, about what we expect to see.

What I would tell you is that, if you look at our businesses outside the US retail.

So for convenience and foodservice and for Europe, we continue to look for good performance there, as well as our business in China.

So we feel good about our performance in those areas.

And then, when it comes to our US business, you are right in assuming -- we are not assuming a turnaround in our yogurt business in the fourth quarter.

We think the businesses that will get better in the fourth quarter in April and May in particular, are going to be our cereal business and our snacks business, and with continued good growth from Old El Paso and Totino's, because that's where we put more of the pressure.

Whether it's a little bit of pricing pressure, or as importantly if not more so, some of our consumer marketing pressure, because we feel like we've had -- we have good ideas, and cereal.

We have good ideas on Nature Valley, as well as Old El Paso and Totino's.

And we think we can drive those businesses better by spending some more marketing support behind those key businesses.

So that's where we really expect to see the growth and improvement in the fourth quarter.

Rob, this is Jeff Siemon.

I'd add that the weighting of our business shifts -- as you go into the fourth quarter, you move away from the big winter season businesses like soup and refrigerated dough, where we've seen the largest -- some of the largest declines.

So just from a portion of portfolio standpoint, those declines will become less a portion of our business as we get into the fourth quarter.

Okay, great.

That's very helpful.

And then just second question, on cost savings.

I believe you've had this $4 billion HMM target out for many years.

As we approach that target, I'm curious -- if I just think about what the implied savings are in HMM left, if we just assume that you actually hit that target, it seems like there would be some decent step down year-over-year, over the next few years in HMM.

But what my sense is, is maybe that's not true?

It sounds like maybe there's a decent probability that you'd exceed that $4 billion cost savings target, and cost savings over the next few years would be a bit higher than what's implied?

Is that about right?

Yes, I think your sense is good.

We certainly don't expect any slowdown in the annual HMM contributions.

And so, given that there is a good likelihood we'll exceed that $4 billion for the decade.

Okay, great.

Thanks, I'll pass it on.

Our next question comes from Ken Zaslow with Bank of Montreal.

Hey, good morning, everyone.

Hey, good morning.

Good morning, Ken.

So just two questions.

One, is there a way to, or what are the steps, I guess, to improve your promotional activity going forward, that you won't end up in this situation in 2018, 2019 and 2020 or going forward?

How do I think about that, and what steps can you take to change, how you do the promotional spending?

And the second thing is, to what extent have you seen changes in your personnel at the key personnel level, at the brand management level?

And can you talk about how you're doing that as well, so maybe there's some shifting of personnel, that we would see some changes in activity at that level?

Well, I'm looking at the pricing.

I mean, I think we've been pretty good at pricing for awhile, and we've been -- we've just basically worked within the context of the marketplace.

And this year, we were just priced way higher than the market, so we didn't really anticipate as well as we could have, I suppose, the market dynamics.

And what I would tell you is that as we said, maybe a quarter ago, we have improved our strategic revenue management capability, and we're still improving that.

We brought in resources from outside of the Company to help us with that, and I think that's going to -- that is certainly going to help us as we look ahead.

And so, we've strengthened our capability there, and I think we'll continue to strengthen our capability there.

And in terms of answering the question on personnel, we feel like we've got the right personnel in the right place.

We've got segment leads who are good at driving growth, whether that's in North America here, or whether that's in Europe or Asia.

And we've added an [SBU] on Haagen-Dazs and yogurt, and so we feel really good about the talent that we have in place, that can drive our business across our segments.

And Ken, the only thing that I would add on the promotional side, is thinking about adding back promotional dollars, it is about frequency more than depth.

So it's really, as we look back over the course of the year, it's we have missed some windows that we would have typically have gotten, and putting money back about re-earning some of those windows.

So it's about frequency, strategy, not just depth.

Great.

And again, the only thing I'm trying to figure out is -- yes, I agree your history has been there.

I just can't figure out exactly what went wrong, and why it won't happen again, but --

Sorry, Ken, we're breaking up a little bit but.

Okay.

Well maybe we'll move on to the next question.

Our next question comes from Alexia Howard with Bernstein.

Good morning, everyone.

Good morning, Alexia.

Hi.

So can I ask about the retailer environment, because it seems to me that even as recently as December, I think on last earnings call you were talking about wanting to pull back on ineffective promotional activity?

Obviously, that's been harder to gauge, given your comments today.

And now you're going in the other direction, and reinvesting back in promotions.

Can you comment on, how hostile are the retailers being, in pushing for incremental reinvestment back in pricing?

It seems to me that Walmart and others are worried about competition from hard discounters.

So the retailer environment is getting tougher, private label share gains are picking up, distribution trends as Jason mentioned earlier seem to be coming down.

Maybe just some commentary on that?

Thank you, and I'll pass it on in the interest of time.

Yes, Alexia, some fair observations.

But what I would tell you is that as we look ahead, we'll be -- we're not going to be increasing our level of promotion in the fourth quarter.

Our level of promotion will still be down year-over-year, it will be just down a lot less than it was before and so, while we are adding back spending, we're not going from one side to the other.

In terms of the retail environment, what I would say is, it's always been competitive, and it is right now.

In fact, private label shares in our categories are actually down, and they're down in almost all of our category year-on-year.

And so, as we look at the private label impact, actually for us, it's not really -- at least in our categories it's not increasing, the private label shares are actually declining.

And while retailers are competitive, they've always been competitive, and we don't feel like it's any more competitive environment with regard to retail than it has in years past.

Its always been that way, and we remain -- they don't feel particularly hostile to us, and we've got good relationships with all of our major retail customers, and that's been unchanged.

Thank you very much.

I'll pass it on.

Our next question comes from Bryan Spillane with Bank of America Merrill Lynch.

Hey, good morning, everybody.

Good morning, Brian.

Just one question for me.

I guess, as an outsider looking in, it looks -- it just seems like in 2017, one of the things that maybe didn't exist within the plans, or at least the guidance that you gave to the Street, was just not enough flexibility to deal with some of what was going on at retail with merchandising and price point.

So can you just talk about 2018, 2019?

You've got margin goals out there, just whether or not you feel like you've got enough flexibility, giving what the environment it is today, to sort of do what you need to do, and still hit those margin goals?

Or just how you would think about that, if you continue to face this kind of volatility?

Thank you.

Well, Brian as we went into the year, we went in with a certain expectation on volumes.

And as that did eventually, we were able to pull certain levers, but clearly even the magnitude of the top line miss was hard to contain it, from a profit standpoint.

That said, we'll still have a line of sight to hold level on SOP, drive our EPS growth, and drive a 100 points of margin expansion.

So there's a lot of things that we had planned for the year that will still come through.

But clearly, as we're sitting here now, with sales expectations of minus 4[%], 200 to 300 basis points lower than coming into the year, it's hard to contain that in a given fiscal year.

Okay.

Maybe I think we've got time for one additional question, operator, if you wouldn't mind?

Certainly.

Our last question comes from Stephen Strycula with UBS.

Hi, good morning.

A two part question.

First, would be a question on snacking, it was a little bit softer in the quarter.

Just wondering, what's going on in the snacking category?

Sounds like you're going to put a little bit more incremental spend in the back half, or in the fourth quarter.

Just curious as we are anniversarying the cleaner aisle initiative?

And then, the second part would be, with respect to the unit volume declines we've seen on a year-over-year basis, and some of the categories where maybe there are wider price gaps, how do we think about the recapture of that unit share?

Were these like bad promotions that you're divorcing yourselves from, or are these like unit volumes that you want to recapture ultimately in the, call it, back half of calendar 2017?

Thank you.

So on the snacking question, we have two businesses that we see in the US.

We have two businesses we feel really good about, and we added support behind that, so Nature Valley is the biggest one.

It's our biggest snacks bar business, and we've gained share on that, and we like our marketing on that.

So we're going to add support because that's our biggest business, and we like what that's doing.

And Larabar has also been growing.

The challenge we had in the third quarter is really behind our Fiber One business, and our Fiber One business has been declining, and we're working to improve that.

But we won't get back to growth on Fiber One, certainly in the fourth quarter.

And so, what we're doing is we're going to place more bets on things that are working well in our snacks business.

And we feel confident can improve our snacks performance in the fourth quarter.

As far as recapturing unit volume, it really depends category by category, is what I would tell you, in that in cereal we don't think we're far off.

So there's not a lot of volume to be recaptured.

I mean, we -- we're only down 1% this quarter.

And so, while we would like to grow, it wasn't too bad.

And we think actually as importantly as trade spending in cereal is really actually marketing spending, because we feel good about our ideas.

I contrast that with refrigerated baked goods, where we feel like we really have to add some money back to our merchandising, as we look at the back half of 2017, to make sure that our merchandising is in the right place, because we lost a lot during merchandising.

So it really does depend category by category, and that's how we'll look at it as we head into next year.

All right.

Thank you.

Okay, Kelly, I think that's all the time we have.

So everyone, thanks so much for the questions.

And I'll be on the phone all day, if you want to reach out and have additional follow-ups.

So thanks again.

Have a great day.

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

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