通用磨坊 (GIS) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the General Mills Quarter 4 Fiscal 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, June 28, 2017.

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

Please go ahead, sir.

Thanks, Nelson, and good morning to everyone.

I'm here with Jeff Harmening, our new CEO; and Don Mulligan, our CFO.

Also here is Ken Powell, our current Chairman and former CEO, who will share a few remarks in a moment.

Before I turn the call over to them, let me cover our usual housekeeping items.

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

I'll remind you that 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 lists factors that could cause our future results to be different than our current estimates.

Now before we get to our usual earnings commentary, I'd like to turn the call over Ken Powell, who last month, wrapped up 10 years leading General Mills as CEO and who's continuing on as the Chairman of the Board for an interim period.

We don't have time this morning to cover all of Ken's accomplishments over the past 10 years, nor would he want us to, so we'll stick to just one that is near and dear to our hearts: shareholder return.

During Ken's tenure as CEO, total return for General Mills shareholders grew at an 11% compound rate, 350 basis points ahead of the broader market.

So as a shareholder and an employee, I'd like to say thank you for your leadership, Ken, and congratulations.

Well, thanks, Jeff, and good morning to all of you.

First of all, let me say what a great honor it's been to serve General Mills as CEO during the past 10 years.

This is a great company with an outstanding culture of integrity, a powerful mission, a steadfast commitment to shareholders and a never-ending focus on serving our consumers.

And it really has been an honor for me to serve such a terrific organization, and I look forward to continuing to serve as Chair of the board.

I'm pleased with how General Mills has evolved over the past decade.

We're far more global.

We've added many on-trend brands to the portfolio.

We have a much leaner operating structure.

And we've made many important strides in our commitment to the environment and sustainability.

And all the while, we've continued to attract and retain the best talent in our industry thanks to our strong values and our performance culture.

As I look at General Mills today, it's clear that we compete in a challenging era, where the pace of change is greater than ever.

And to win in this environment, it is absolutely imperative that we deliver innovation-driven top line growth.

And you will see that from Jeff and Don as they take you through our presentation this morning, and you will hear more detail at our Investor Day event on July 12.

And finally, I want to thank our investors and the analyst community for your commitment to our industry and for your candid and constructive engagement with General Mills management.

We appreciate everything you do.

And I know that Jeff and his team look forward to working closely with you in the years ahead.

So with that, I'll turn the call over to Jeff Harmening.

Thank you, Ken, and thank you for your leadership and your service to General Mills, and thanks for providing outstanding guidance and mentorship to me over the years.

I'm honored to be taking the reins, and I'm excited to write the next chapter of a book that spans a 150-year history of this great company.

I'm looking forward to continuing the track record of value creation that both you and your predecessors have delivered for General Mills shareholders.

Now let's turn back to the business of this morning's call.

Fiscal '17 was a year of significant change for General Mills.

We implemented a new global organization structure, continued our journey to become a truly global food company.

We also accelerated some important cost-savings efforts to improve our efficiency.

These efforts went according to plan, and we're happy with those results.

But it's clear some actions did not go according to plan.

We've pulled back too-far investment in some key categories, and our overall execution was not up to our normal standards.

Our sales and profits suffered as a result.

Still, we were able to deliver 6% constant-currency growth in adjusted diluting earnings per share, and we returned $2.7 billion in cash to our shareholders.

As we look forward, our top priority for fiscal '18 is to make significant strides toward returning our business to sustainable top line growth.

Our plans call for investment and product news and innovation to accelerate growth for businesses where we have positive momentum and to improve those that are underperforming.

We'll also increase investment in capabilities, like e-commerce and strategic revenue management, which are critical for growth today and will be in the future.

With the biggest changes to our global structure and our supply chain now behind us, we expect to get back to executional excellence this year.

These efforts will help us to deliver 200 to 300 basis point improvement in our net sales trends in 2018 compared to our 200 -- 2017 results.

On the bottom line, we expect profit and earnings per share growth to reflect strong cost savings, partially offset by volume declines and investments I just mentioned.

We've made significant progress to expand our adjusted operating profit margin over the past 2 years.

We continue to see opportunities for future margin expansion, including an increase in adjusted operating profit margin in fiscal 2018.

But we will moderate the pace of expansion as we invest to restore top line growth.

Looking forward, we're focused on delivering a balance of sales growth and margin expansion along with strong cash conversion and cash returns to create top-tier returns for our shareholders.

With that as a backdrop, let me turn it over to Don to review our fiscal 2017 financials and provide details on our 2018 guidance.

Thanks, Jeff, and good morning, everyone.

Let's jump right into our fiscal '17 financial performance starting with fourth quarter results summarized on Slide 9.

Net sales totaled $3.8 billion, down 3% on a reported and organic basis.

Total segment operating profit totaled $673 million, up 4% in constant currency.

Net earnings increased 8% to $409 million, and diluted earnings per share were $0.69 as reported.

Adjusted diluted EPS, which excludes certain items affecting comparability, was $0.73.

Constant currency adjusted diluted EPS increased 14% versus a year ago.

Slide 10 shows the components of total company net sales growth in the quarter.

Organic [pound] volume reduced net sales growth by 7 points and was partially offset by 4 points of positive mix and net price realization.

Now let me turn to full year fiscal '17 financial results.

Net sales totaled $15.6 billion, down 6% as reported and down 4% on an organic basis.

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

Net earnings decreased 2% to $1.7 billion, and diluted earnings per share were $2.77 as reported.

Adjusted diluted EPS was $3.08, up 6% in constant currency.

For our North America Retail segment, organic net sales declined 4% in the fourth quarter, an improvement over the third quarter trend as we saw a bit better performance in measured and nonmeasured channels.

Full year organic net sales were down 5%.

At the operating unit level, U.S. Snacks posted net sales growth of 1% in the fourth quarter, an improvement over last quarter led by growth in -- on Annie's, Nature Valley and Lärabar, which offset declines on Fiber One.

Cereal net sales were down 1% in the quarter with growth on Lucky Charms, Cinnamon Toast Crunch and Cheerios, offset by declines on Chex and Kix.

U.S. Meals & Baking.

Net sales decreased 1% in the quarter with growth on Totino's hot snacks offset by declines on Pillsbury refrigerated dough.

The full year net sales decline for U.S. Meals & Baking was due to the divestiture of Green Giant business in fiscal '16 as well as declines on soup and refrigerated dough.

Canada constant-currency net sales increased 2% in the quarter with growth on Old El Paso and Betty Crocker.

Full year Canada current -- constant currency net sales declined 2% due entirely to the Green Giant divestiture.

U.S. Yogurt net sales declined 22% in the quarter and 18% for the full year.

Constant-currency segment operating profit growth increased 9% in the fourth quarter behind benefits from net price realization and reduced media expense.

Full year constant-currency operating profit declined 2%, reflecting the impact of the Green Giant divestiture.

Fourth quarter organic net sales for our Convenience Stores and Foodservice segment were comparable to last year.

This is the third consecutive quarter of sequential improvement.

Full year segment organic net sales declined 3% with 2% growth on our Focus 6 Platforms, led by mid-single-digit growth on cereal and yogurt, offset by market index pricing on bakery flour and declines on frozen dough products.

Segment operating profit grew 6% for the full year driven by lower input costs and benefits from our cost-savings efforts.

In Europe and Australia, organic net sales decreased 9% in the quarter and 4% for the full year.

But remember that last year's fourth quarter included an extra month of results for Yoplait Europe as we aligned that business to our fiscal calendar.

Excluding that difference, organic net sales would have been up low single digits in the quarter, led by growth on Häagen-Dazs and Nature Valley.

Constant-currency segment operating profit declined 26% in the fourth quarter and 9% for the fiscal year, impacted by the difference in reporting periods.

Excluding the extra period, Europe and Australia operating profit was down mid-single digits for the full year due to currency-driven inflation on imported products in the U.K.

In our Asia and Latin America segment, organic net sales grew 8% in the fourth quarter, including a double-digit percentage benefit from an extra month of results in Brazil as we aligned that business to our fiscal calendar.

Good growth in China and India was offset by the continued challenging environment in Latin America.

Full year organic net sales increased 3%.

Segment operating profit declined $5 million in the quarter, reflecting higher SG&A expense.

For the full year, segment operating profit increased to $84 million from $69 million a year ago.

Turning to full year joint venture results on Slide 16.

CPW's fiscal '17 net sales grew 3% in constant currency with growth across all regions.

Häagen-Dazs Japan constant-currency net sales increased 8% for the full year, driven by continued momentum on recent innovation.

Combined after-tax earnings from joint ventures totaled $85 million for the year, down $3 million versus last year primarily due to unfavorable foreign currency and an asset writeoff for CPW, which were partially offset by volume gains on Häagen-Dazs Japan.

Constant-currency after-tax earnings were down $5 million.

We delivered on our cost-saving goals for the year with cost of goods sold HMM savings totaling $390 million and aggregate savings from our previously announced projects totaling $540 million.

These cost savings more than offset inflation, which rounded down to 1% for the full year and helped drive strong margin expansion.

Full year fiscal '17 adjusted gross margin was up 50 basis points, and adjusted operating profit margin increased 130 basis points to 18.1% of net sales.

Turning to the balance sheet.

Our quarterly core working capital increased 9% year-over-year as the timing of receivables and higher inventory balances were partially offset by continued progress on accounts payable.

Despite the increase in core working capital this fiscal year-end, we've made significant progress in reducing core working capital over the last 5 years.

Since 2012, while net sales are up mid-single digits, we've driven core working capital down by over 50%.

And importantly, we expect our receivables and inventory balances to normalize in fiscal '18.

In addition, we still see opportunities for further benefits from payables, which, together, should drive down our core working capital this year.

Full year operating cash flow was $2.3 billion, down 12% from a year ago, driven by the higher core working capital balance, changes in income taxes payable and lower incentive trade and advertising accruals.

Fiscal '17 capital investments totaled $684 million.

As a result, full year free cash flow is $1.6 billion or 60 -- or 86% of our adjusted after-tax earnings.

Over the last 3 years, our cumulative free cash flow represents 97% of adjusted after-tax earnings, above our 95% conversion target.

And we expect fiscal '18 cash conversion to be above that 95% as well.

We paid $1.1 billion in dividends in fiscal '17.

And dividends per share were $1.92, up 8% from last year.

Net share repurchases totaled $1.5 billion.

And we reduced average diluted shares outstanding by 2% for the full year.

Slide 20 highlights our key assumptions for fiscal '18.

Industry trends in the U.S. in the last few quarters have been challenging, and we're not planning for a significant turnaround in those trends this year.

We expect our organic net sales trends will steadily improve from the first quarter to the second and improve again in the back half.

We estimate we'll deliver cost of goods sold HMM savings of approximately $390 million, which will more than offset input cost inflation of 3%.

And we'll generate $700 million of savings from our previously announced projects or roughly $160 million above fiscal '17 levels.

Finally on Slide 21, you can see a summary of our fiscal 2018 guidance.

We expect organic net sales to decline between 1% and 2%.

We plan to increase media investment for the year.

We project total segment operating profit to be in a range between flat and up 1% on a constant-currency basis.

As Jeff mentioned upfront, we plan to expand our adjusted operating profit margin in fiscal '18.

We expect both interest expense and our adjusted tax rate to be in line with fiscal '17 level.

We're targeting a net reduction of 1% to 2% in average diluted shares outstanding.

We expect full year adjusted diluted earnings per share to be up between 1% and 2% in constant currency with EPS down in the first half, reflecting lower sales and the phasing of our cost-savings initiatives and brand investments.

EPS will be up in the second half as sales trends improve.

We estimate foreign currency will be a $0.01 headwind to full year adjusted diluted EPS in 2018.

And finally, as I mentioned earlier, we're targeting to convert more than 95% of our adjusted after-tax earnings to free cash flow this year.

Now I'll turn it over to Jeff to provide more color on our fiscal '18 plans.

Thanks, Don.

As we enter fiscal '18, it is critical that we improve our top line performance across our businesses but especially here in the U.S. We began to see some improvement in our U.S. Retail sales trends in the fourth quarter of fiscal '17.

While our yogurt declines continued in the quarter, as we expected, we saw about 1.5 points improvement in retail sales trends on the remainder of our businesses with the best results in May driven by strong merchandising execution and lower price gaps.

And we expect to drive further improvement over the course of fiscal 2018.

As we shift our focus to 2018, we remain committed to our Consumer First strategy and our growth and foundation segmentation.

But we know we need to make some executional changes to improve our top line performance.

For example, we're leveraging our new global organization structure to make global prioritization decisions on our biggest growth platform, such as Häagen-Dazs ice cream, snack bars and Natural and Organic.

We're investing in our brands with increased media spending and a higher level of new product innovation.

And we'll be in the zone on promotions and merchandising on key seasonal businesses like soup and refrigerated dough.

And we'll leverage our capabilities to win with growing channels and customers in the U.S. and around the world.

As I mentioned, our new global structure is allowing us to make global prioritization decisions.

For fiscal 2018, we've identified 4 global priorities that are most critical to improve our top line growth trends.

First, we plan to grow our global cereal platform, including CPW, behind compelling product news, innovation and advertising investment.

Second, we expect to improve our U.S. Yogurt performance through fundamental innovation.

Third, we'll invest to drive differential growth across several global platforms where we have good top line momentum already.

And fourth, we'll manage our foundation brands with appropriate levels of investment.

Now let me walk you through each of these priorities in a little more detail to give you a better picture of our plans for fiscal 2018.

There are 4 pieces to our global cereal platform.

In fiscal '17, we grew net sales for Cereal Partners Worldwide and our Convenience Stores and Foodservice business.

And we grew market share for our Canadian cereal business, while our retail -- our U.S. Retail Cereal net sales were down 3%.

Our focus in fiscal '18 is to improve our U.S. Retail performance while continuing to grow in the other 3 areas.

We'll do that by investing behind wellness and taste news, which are 2 trends driving growth in cereal globally.

Our U.S. Cereal portfolio is advantaged when it comes to wellness.

Our entire line has whole grain as the #1 ingredient.

We've removed artificial flavors and colors from almost every product.

And we have the largest gluten-free portfolio in the category.

In fiscal '18, we're going to leverage our wellness advantage by investing behind a new campaign across the Big G franchise, called Good Starts with G. We're using TV and digital media to highlight our great taste from real ingredients, our whole grain, our fiber content and our large gluten-free portfolio.

For the digital component, we're using precision targeting to tailor our messages to individual consumers with an emphasis on Hispanic families and empty-nesters.

Wellness news was a key driver of CPW's growth last year.

This year, we're increasing our media investment and wellness campaigns, like Whole Grain Number 1, which is helping raising awareness of our cereal's wholesome ingredients in markets around the world.

We're also investing behind Cheerios campaigns that highlight the good ingredients we used, the wellness benefits consumers receive and the causes they support by buying our products.

In the U.S., that includes our most recent Cheerios campaign, called Good Goes Round.

And in Canada, we'll continue to support our effort to Bring Back the Bees.

Wellness news is also working on our foodservice cereal business with net sales up mid-single digits last year, driven by our K-12 schools and college and universities.

We'll leverage our gluten-free news and our market-leading granola portfolio to drive further growth in these channels in fiscal 2018.

It's also important to note that great taste is also helping to drive growth in cereal.

So in fiscal '18, we'll invest behind taste news across our U.S. and international brands.

For instance, on Lucky Charms, taste news is all about the marshmallows.

We drove 3% retail sales growth on Lucky Charms in the U.S. this past year.

And we have an even stronger plan for fiscal '18 with 4 quarters of marshmallow news.

In our first quarter promotion, we're offering a limited number of lucky consumers a chance to win Lucky Charms Holy Grail, a box of Lucky Charms with only marshmallows.

Sadly, General Mills employees are not eligible to win.

The popularity of Reese's Puffs continued in fiscal '17, delivering 7% retail sales growth in the U.S. Reese's Puffs consumers love chocolate and peanut butter flavor and really love the connection to their favorite sweet snack, so we're investing in consumer messaging in 2018 to tap into that Reese's brand love.

Cinnamon Toast Crunch has delivered 6% compound retail sales growth over the past 3 years, so we're going to build on the success with a significant expansion of our Toast Crunch portfolio.

We're introducing 3 new flavors -- strawberry, blueberry and apple cinnamon -- that deliver exceptional taste.

And we'll invest in TV and digital advertising coupons and in-store merchandising to generate awareness for the expanded franchise.

And finally, our taste cereals in CPW are also driving growth, and we'll look to extend that success in fiscal '18.

For example, we'll expand our recent launch of Lion Wild into new geographies and channels.

So by investing in our wellness and taste news and increasing our level of new product innovation, we believe that we can generate growth for our global cereal portfolio in fiscal 2018.

We continue to believe that U.S. Yogurt is an attractive growth category but per capita consumption still well below levels in Western Europe and Canada.

We helped build the category over the last 4 decades by bringing fundamental innovation that introduced new benefits and expanded yogurt's consumer base.

For instance, we developed blended yogurts that improved the taste profile of the category.

We've led the development of the light segment with Yoplait Light targeted toward weight managers.

And we led the kid segment by creating Go-Gurt yogurt in a tube.

But we were late to respond as Greek yogurt developed early in this decade, and our sales have suffered as a result.

It is clear that our path to returning our U.S. Yogurt unit to growth is to get back to leading fundamental innovation that helps build new segments and bring new consumers to the category.

So let me introduce to you Oui by Yoplait.

This is a new style of yogurt to the U.S. market and has its roots in our French heritage.

We use a traditional French recipe with whole milk and real fruit and flavors carefully cultured in glass jars over an 8-hour period.

The resulting product is delicate and smooth and satisfies consumers' growing interest in yogurts that deliver remarkable taste with just a few simple ingredients.

We've created a full line of 8 delicious flavors, and we're leveraging our scale to deliver our product at a price point that is premium but affordable.

We're supporting this launch with a full surround of TV and digital advertising as well as in-store sampling.

Oui by Yoplait will lead the development of an emerging yogurt segment, which we call Simply Better.

This is an important step in improving our U.S. yogurt performance, reshaping our portfolio and helping the category return to growth.

These products will begin shipping this week, so look for them soon in your local stores.

In addition to building new yogurt segments, we're expanding our portfolio into fast-growing emerging segments in the category.

One of this is organic yogurts.

We've entered this segment last year with Annie's and Liberté.

These products are performing well on shelf.

And we're focusing on continuing to build distribution in 2018.

And we'll expand our portfolio with innovation on Annie's in the back half of the year.

We also see an opportunity to drive growth with yogurt products that target the snacking occasion.

This year, we're expanding our yogurt snacking portfolio by launching 6 flavors of Yoplait Mix-ins, which bring a fun snacking option to the taste-oriented consumer who loves traditional Yoplait yogurt.

We're excited about these initiatives, but they will only represent a portion of the news and innovation pipeline that we've developed for U.S. Yogurt.

We'll talk more about some more initiatives at Investor Day and throughout the year.

Our third global priority centers on 4 global platforms where we see differential growth opportunities.

They are Häagen-Dazs ice cream; snack bars, primarily under Nature Valley, Fiber One and Lärabar brands; Old El Paso Mexican foods; and our platform of Natural and Organic brands in North America.

Collectively, these platforms represent roughly $4 billion in net sales, and we see great prospects for growth for fiscal '18.

On Häagen-Dazs, we have a leading super-premium brand in the large and fast-growing global ice cream category.

And we have excellent manufacturing and distribution scale.

We see considerable opportunity for Häagen-Dazs to grow penetration through new occasions, to expand existing product line through innovation and to enter into new geographies.

The impulse segment is the largest and one of the fastest-growing segments in the ice cream category, and we just recently entered with our line of stick bars.

Their performance helped drive double-digit retail sales growth in Europe last year.

In fiscal '18, we plan to aggressively expand stick bar distribution around the world, and we've launched new mini stick bars to continue our growth.

We also continue to innovate in our core cup and pint lines.

We're rolling out a host of new products this year, like Mini Cups in the U.K. and fruit and flower flavors in Asia.

And we have incremental growth opportunities for Häagen-Dazs through geographic expansion.

Last year, we launched a brand in Australia, one of the highest ice cream consumption markets in the world.

It's off to a great start.

And we'll continue to expand the brand's awareness and distribution presence in fiscal '18.

Turning to snack bars.

We see tremendous opportunities for growth on our brands, both in the U.S. and internationally.

In fiscal '18, we're increasing our innovation levels on Nature Valley and U.S. Retail outlets with plans to launch more than 20 new items.

We're getting behind coconut, one of the fast-growing flavors in snack bars, with our launch of toasted coconut Sweet and Salty Nut bars and coconut butter Nature Valley biscuit sandwiches.

We also recently brought Nature Valley Granola Cups to Convenience Stores and Foodservice channels, and they're off to a great start.

And we're supporting all of this activity with a double-digit increase in media on the brand.

We're also extending our long track record of growth on Lärabar.

We're launching a crunchy line of Lärabar Nut & Seed bars.

And we're also bringing news to the highly incremental Lärabar Bites line with 2 new flavors: caramel sea salt and chocolate hazelnut.

We're increasing our Lärabar consumer investment double digits, and we're targeting a 30% increase in distribution this year.

The snack bar categories in Europe and Australia is also large, so we're pursuing the same innovation-led strategy in Europe that made us market leaders in the U.S. Innovation on Fiber One and renovation on our Nature Valley Protein lines drove strong double-digit retail sales growth on snack bars in Europe this year.

This year, we're borrowing another highly successful U.S. innovation by launching Nature Valley nut butter biscuits, which will hit shelves in the U.K. this fall.

Retail sales for Old El Paso grew in the U.S., Canada and Europe last year, driven by great innovation and marketing that highlights the brand's convenience, taste and connection to fresh ingredients.

Our Stand 'N Stuff innovation has led growth for the brand, and we're continuing to innovate on this platform, finding new ways to create new eating occasions.

We launched Stand 'N Stuff Minis in Europe last year to help consumers create taco appetizers.

And this year, we're introducing Stand 'N Stuff Mini kits to help consumers create taco tastings with a variety of sauces and ingredients included in the kits.

We're also supporting the brand around the world with strong levels of media.

Our net sales for our North America Natural & Organic portfolio, including our fast-growing Liberté brand in Canada, have already reached more than $1 billion, and there's still room to grow.

For example, Annie's, our largest Natural & Organic brand, grew penetration almost 60% last year, entered 4 new categories nationally and grew distribution by double digits.

Yet, at only 16% household penetration, significant upside remains.

We have a broad set of plans in fiscal '18 across our Natural & Organic platform.

I already mentioned our plans on Lärabar and our U.S. yogurt brands.

On Annie's, we're growing in snacks, including our recent entry into ready-to-eat popcorn, and we'll continue this rollout in fiscal '18.

In Canada, we're launching Liberté crunch, which combines crunchy inclusions with Liberté's market-leading Greek yogurts.

Net sales for our EPIC Provisions brand of natural meat snacks doubled last year.

We recently launched jerky sticks and expanded into salty snacks, and we're continuing to grow distribution for this on-trend brand.

In total, we are excited about the differential growth platforms, and our segments have put sufficient resources behind them to accelerate their growth in fiscal 2018.

Our fourth priority is managing our foundation brands with appropriate levels of investment.

We missed the mark last year on our promotional spending on soup and refrigerated dough.

So on fiscal '18 is to be -- our goal is to be in the zone on pricing during the key season.

We're not looking to win on price, and we won't go back to the levels of investment from 2 years ago, but we know we need to be more competitive this year.

In addition, we'll continue to invest in targeted consumer news where we see strong returns.

This fall, we're launching a line of organic soups under the Progresso brand, combining our organic expertise with Progresso's top soup flavors.

And we're taking refrigerated dough out of the can with 2 new varieties of Pillsbury pizza dough.

In addition to our 4 global growth priorities, I mentioned that we're investing in capabilities and focused on winning with growing channels and customers in 2018.

One example of this is e-commerce.

We have a strong e-commerce team who is invested in tools and capabilities and secured strategic partnerships with leading e-commerce retailers.

As a result, our e-commerce sales grew 62% in the U.S. last year, 32% globally.

And our market shares online over index versus our market shares in bricks and mortar.

Shawn O'Grady will provide more details on our e-commerce capabilities globally at our Investor Day in 2 weeks.

So let me close today's remarks by summarizing our key messages.

Fiscal '17 was a challenging year, but we finished the fourth quarter in line with our expectations with organic net sales improvement in 3 of our 4 operating segments.

In fiscal '18, we're investing in our brands and capabilities to significantly improve our top line growth trends.

We are moderating the pace of margin expansion as we focus on top line improvement.

And we remain committed to our Consumer First strategy and our shareholder return model, which balances sales growth and margin expansion with a disciplined focus on cash.

With that, we'll open up the call for questions.

Operator, can you please get us started?

(Operator Instructions) Our first question comes from the line of Andrew Lazar with Barclays.

And congratulations, again, Ken.

Thanks, Andrew.

Sure.

Two quick questions from me, if I could.

I guess, first off, I want to go back to the outlook for '18.

I think you discussed not assuming category trends that will differ much, or they'll be similar to what you saw in fiscal '17.

And so I'm trying to get a sense if that's based on just a thought process that that's where trends are now.

And is there -- I guess, what I'm getting at is, is there an understanding by, let's say, General Mills or even the industry as a whole of maybe what's caused this more significant downshift in industry category trends through the beginning of this calendar year?

Or is that expectation now based on a more, let's say, databased understanding of, hey, this is really the underlying rate of where category growth is going to be for the foreseeable future?

That'd be the first one.

So Andrew, what I would say is that our assumptions for category growth are based on our projections as we look forward and wanting to make sure that we're reasonable on our assumptions as we look for growth in fiscal '18.

And our 200 to 300 basis point improvement in our sales trend is really on -- predicated on being more competitive in the categories that we're in and not expecting our categories to improve dramatically.

So it really is a reflection of our belief that we need to get back to competitiveness in the markets where we're in.

But it's not predicated on markets improving dramatically.

And we just wanted to make sure that we were sufficiently conservative, I suppose, on our estimates on that and clear that our main focus really is to get back to competitive in the markets where we're in.

Okay.

And the FY '18 organic sales guidance seems prudent given the year we're coming off of.

I guess, we've had some questions about whether -- in 2018, whether that's the year perhaps maybe to promise less in the way of actual earnings growth given the need for more reinvestment what's expected to be somewhat of a back-half loaded year from an earnings growth standpoint and still likely negative volume leverage on the P&L.

So perhaps you can just talk us through a little bit more of your thinking along these lines and sort of what bridges to the EPS growth given.

And I think you also have, if I'm not mistaken, a -- maybe a $40 million incentive comp headwind as well that you may have mentioned on the last quarter.

So I'm just trying get a sense of how all that comes together and gives you the comfort that you can do what you need to do to get back to top line growth even in the context of delivering some earnings growth.

Let me take the first part of the question and talk a little bit about top line growth and how that relates to earnings.

And then I'll turn it over to Don to talk about how that reflects back to EPS.

But on the top line growth, we feel good about our ability to generate the top line growth we've suggested.

And it's really based on a few key elements that I touched on.

One is, certainly, that our media expense is going to grow this year, whereas, it was down double digits last year.

And our new product innovation is going to be higher.

And we're going to be in the zone on pricing for some key brands.

I would also say that we weren't very pleased with our execution this past year.

And we're highly confident that we're going to be able to execute well this year because we had our plan set later in the year.

So on the top line, we're convinced that we can deliver the 200 to 300 basis points improvement that we see.

Having said that, to the extent that we find opportunities that have a high return, as the year unfolds, we will certainly be glad to reinvest and to continue to try to grow our top line further than that if we see that there are good opportunities that deliver a good return.

On the operating profit side, I mean, top line certainly is our top goal, but we're also committed to continuing to deliver margin expansion.

And the plan that we laid out reflects that.

And we've got very good HMM as we have for the past decade.

We have some other sources of cost efficiency, which you see coming through.

So we're remaining disciplined on the cost side and making sure that we have enough media and trade and innovation support to improve the business the way we look at.

How that -- and then how that translates into EPS, I'll let Don take that from there.

Yes, yes.

So Andrew, as we talked about on the call, there's a -- several things contributing to profit improvement next year.

HMM at $390 million will exceed our inflation, even though inflation will be elevated in F '18 versus F '17 at 3%.

And we have another $160 million in cost savings -- incremental cost savings coming through.

In addition, while our price mix will be less of a contributor in '18 than in '17, it will still be a positive contributor.

So we have those 3 positives.

It will be offset by volume declines still in the year, and that will be particularly felt in the early part of the year.

In Q1, for example, we expect our organic sales to closely mirror what we saw in '17, for example.

And then we'll see investment.

And investment will span a number of areas.

We've talked about media being up, and that will certainly be one.

But we're also investing in things like taking Yoplait to more cities in China to expanding our Häagen-Dazs sticks -- stick bar business, geographic expansion in Europe, building capabilities like e-commerce and SRM and getting started on our process transformation work.

So -- and these will -- they won't all show up in media, and I want to make that clear.

While media will be up, many of these investments will be seen in COGS or in SG&A.

But that will be -- that is embedded in the guidance.

And then as you mentioned, incentive, which I think next year is going to be about a $45 million to $50 million drag.

So the combination of those things allow us to be comfortable with the flat to plus 1 SOP.

The EPS will expand a bit more because it will benefit from the share reduction of 1% or 2%, and that's really the biggest driver between SOP growth and EPS growth next year.

Our next question comes from the line of Ken Goldman with JPMorgan.

Ken, best wishes from me as well.

Thanks, Ken.

Question, I guess, for both you and Jeff.

Initially, one of the reasons behind driving cost savings was to generate fuel that would be reinvested in the business and push revenues even higher, sort of generating that virtuous cycle.

So in a way, these are -- this was a sort of symbiotic pursuit, to pursue sales growth and margin expansion at the same time.

And I think it's still the case.

But the way you're talking about these goals now where the company needs to balance the effort to grow margin versus growing sales, that's slightly different, right.

It almost implies that the goals are somewhat mutually exclusive, in a sense.

So I'm just curious.

Am I reading that right?

Has something changed?

And if so, why is it harder for the company than thought to drive this virtuous cycle with cost savings really sparking investments and driving that top line?

It's little bit different wording from you guys than what it used to be.

I'm just trying to sort of figure it out a little bit.

Yes, Ken.

This is Jeff.

So thanks for the question.

What I would say is that, on the -- we're still dedicated to both growth on the top line and becoming more efficient.

And we do not think they're mutually exclusive.

So this coming year, I mean, our intent is to grow our top line by 200 to 300 basis points while continuing to still grow our margins.

So I want to be clear to everyone that we still intend to do that.

What you see is that when we talk about the muted margin growth, it really is a reflection primarily of pricing and the pricing that we were hoping to get this past year.

But in this current environment, it's really challenging.

And so as we look at our cost-savings initiatives, whether they're HMM or other initiatives, we feel great about those and great about our ability to lever those.

The thing that has really changed from a year ago is that we were anticipating that we could generate more pricing in the current environment, and that has -- pricing has certainly deteriorated over the past year, and the pricing environment wasn't what we anticipated.

And so what you hear from us, really, is that our strategy is basically the same.

We don't think that there's a dichotomy between choosing growth or margins but that our ability to take pricing has impacted our ability to generate the margins we had originally anticipated.

We're still proud of that margin growth we've generated over the past few years, 200 basis points of margin growth.

And we'll continue that margin growth journey.

But that's really the big difference.

And we know -- and we also know, I suppose, that really getting back to supporting our brands the way we need to is going to be important on our top line growth to create the virtuous cycle that we're looking for.

That is helpful.

And then quick follow-up from me.

And I know you touched on this a little bit, but just to get a little more color.

Your sales in North America Retail this past quarter, yes, they were meaningfully higher than what the scanner data would have suggested.

Can you just walk us through, again, some of the drivers of that gap?

Again, I know it's not exact, but just helping us out directionally would be appreciated.

Yes.

I -- look, I appreciate you asked that question.

I'm guessing that there are others on the line who probably have the same one.

So we saw about a 3-point gap in our sales between our movement and our RNS in North America here in the last quarter.

And the most important thing I want to leave you with is that only about 10% of that gap is shipments ahead of consumption.

And of that, that was primarily cereal for June merchandising.

And yes, we ended the year in 2017 about the same place we did the prior year, so there's not a big inventory buildup, but then it begs the question, okay, then, what's rest of the 90%?

And the -- 40 -- about 40% of that is growth in nonmeasured channels that are not contained in Nielsen.

And we've seen an acceleration in growth.

I've told you we feel good about our e-commerce business.

And certainly, we're growing well there.

And so our growth in unmeasured channels has increased to about a 100 to 150 basis point gap between what we had seen before.

So that's about 40% of the difference that you see.

And the other 50% is not so intuitive, but it's really important in that the pounds gap was only about 1.5 points.

And that's because there's -- the price mix in Nielsen is different than what we see in our business.

And there's -- and probably that is due to some margin compression on the part of retailers, and -- so as they compete in the marketplace.

And so that's not so intuitive, but I guess it's important to note.

So on a pound basis, that really covers the other 50%.

Our next question comes from the line of David Driscoll with Citi.

And Ken, I'd like to wish you all the best.

And congratulations on retirement.

Thanks a lot.

Okay.

So want to just get into -- in a little bit of follow-ups from, I think, what Andrew was asking about, but I want to take it in a slightly different direction.

When you think about the fiscal '17 organic revenue and volume declines of negative 4% and negative 7%, respectively, how much of this is self-inflicted, if I can use that phrase, versus broader industry trends?

And I feel like that's still not entirely clear.

You made many statements about the execution wasn't what you want.

But I'm trying to get a sense here of do you think half of the problems that have happened on the top line are something that were generated internally by decisions the company made?

And a follow-up, if I may.

Look, I would say, David, it's a good question.

Look, I think that, certainly, more than half of the deficiencies we saw were due to the decisions that we made and the execution that we saw.

And you see that primarily in our soup and refrigerated dough businesses and how much market share we lost this past year, whereas, in the year before, we actually gained share in both of those categories.

And it's really hard for innovation and other ideas to work when your pricing is so off.

And I would say that the reductions we made in spending in yogurt, which we had anticipated, were certainly part of the challenge as well.

The part that was not necessarily self-inflicted but we're going to work to correct this next year, was our innovation in yogurt we know we've needed to improve.

And so as we look at this past year, certainly, more than 50% of our challenge were things that, we think, are entirely fixable.

In fact, we think the vast majority are entirely fixable this year to make us more competitive.

And the environment itself, yes, it was a little more challenging in F '17 than the years before.

It's about 1.5 point less than it was than the year before in terms of the market.

And we're expecting the F '18 categories to be about the same as F '17.

But honestly, we think the vast majority of our challenges are correctable, both in the U.S. and other places as well.

Well, I think that's really good to hear.

My follow-up would just simply be then when we look at the guidance and it's negative revenue growth on top of the negative revenue growth, the self-inflicted items would seemingly be things that would turn into -- and I apologize, people don't like this phrase, but easy comps and then just the ability to see a rebound in some of these categories.

[Because we] feel like that's in the forecast, would you agree with the idea that your -- last year, it doesn't -- didn't go so well, so you need to set out a forecast here that's extremely reasonable and gives you a cushion here kind of day 1?

Is that -- I don't know how you'd like to phrase it, but from the outside perspective, we're trying to judge the degree of difficulty of hitting the forecast laid out today.

Well, the -- a couple things.

I mean, our -- I mean, certainly, our comps are easier, especially in the second and third quarter.

But we actually don't allow that as a reason to get back to growth here in the building here in Minneapolis.

So while it may be true, what we focus on are the fundamental actions we're going to take.

And Jon Nudi and his team have done a great job putting together a plan that we're highly confident in.

And in terms of the -- have we set a mark we can hit?

Yes, look, we've given guidance that we're confident that we can hit.

And look, and to the extent that we can exceed it, we will certainly try to exceed it.

But what we don't want to do is try to jump out of our shoes with outrageous category expectation from the beginning.

We'd rather to make sure that we have category assumptions and growth assumptions that are reasonable and build on those.

And that's what we've done on this plan, both on the earnings side and on the growth side.

The only thing that I would add, David, is that there is momentum we got to take into consideration, too.

As you saw F '17 unfold, we saw some negative momentum in Q2 and Q3.

We'd be -- and turning that in Q4, but it doesn't turn overnight.

And so we'll continue to see that momentum improve as the year unfolds.

That's why I indicated earlier, Q1, we don't expect to see a lot better performance than in Q4, but we expect Q2 to be even better and second half to be better still.

So our expectation is that we exit F '18 on much better footing than we are today.

And certainly, that will help us get to that guidance.

Our next question comes from the line of Jason English with Goldman Sachs.

And let me echo the sentiment to Ken.

Ken, congratulations.

Best wishes.

Thanks, Jason.

Yes, thank you.

All right, back to the issues at hand.

You mentioned sort of the current pricing environment.

And obviously, there's been a lot of consternation around that of late with some of the pressure we're seeing on private label, some of the pressure we're seeing in retail margins, et cetera.

But it contrasts with your results.

I mean, your -- the price -- the pricing that you've achieved in North America is, frankly, impressive in this environment.

Can you unpack that a bit for us?

How much was mix?

How much was real pricing?

How much was trade?

And give us a little more context in terms of what you're seeing and what you expect on the forward.

Yes, Jason, I appreciate the positive comments on our pricing.

As we said, we got a little ahead of ourselves in some cases and hurt on the volume side.

But we are pleased that where we did get the pricing in place, it was an important contributor this year, this year being '17.

I won't bring up precisely the price and mix, but one of the things that you see in the pricing is that as we did less merchandising and we had more baseline, it was a positive mix from that standpoint.

And it was also a positive mix from a product and a category standpoint that helped as the year unfolded.

Looking forward, we still expect to see price mix benefit in F '17.

North America will -- it's F '18, thank you, Jeff, in F' 18.

As I said, for the total company, it'll be less than in '17.

And it's really driven by North America.

We expect it to be positive but lower.

And as Jeff alluded to, it's really about getting in the right zone on some key brands and particularly Pillsbury and Progresso.

But we expect the other segments, actually, to be up on price mix in F '18.

Our Convenience and Foodservice business will see a stronger bakery flour pricing as that recovers.

(inaudible) we're going to be pricing for some higher inflation, which includes the Brexit impact in the U.K. and higher dairy inflation.

And obviously, in Asia, LatAm have a lot of emerging market inflation that we come -- that comes through in pricing.

So we expect price mix to still be a contributor in '18, albeit at a slightly lower level than we saw on '17.

That's helpful.

And then one other sort of really high-level question, and it pertains to you, but it also pertains to the industry at-large because the pattern is pretty pervasive.

But speaking to you, specifically, over the last 5 or 6 years, advertising media spend shrunk by around 30%.

Over that same duration, your North America Retail volume shrunk by nearly 20%.

Is there a relationship there?

Or I guess, why shouldn't we believe there's a relationship there?

And if we do underwrite the view of this relationship, shouldn't there be a need for the industry at-large, including yourselves, to really pull back a lot more money into really getting back to nurturing the brands here?

Well, Jason, that's a good question.

I am -- I'm not -- although I'm not going to speak on behalf of the industry, let me talk about us.

And of course, there's a need to make sure that we nurture the brand.

And I think that's a really good point.

And that's exactly what we're going to be doing in F '18.

And that's why our media spending is up a little bit.

But there's a lot of ways to nurture brands and to grow them.

I mean, it's also why we have to have our pricing into the zone because a lot of media spending, if your pricing isn't in the right place, doesn't really work.

And that's why our innovation is going to grow.

That's why we're building capability in e-commerce and strategic revenue management.

So I think you're right on the point that we need to make sure that we continue to nurture our brands.

Media is one element but so is getting our pricing right, making sure our innovation is on point.

And that's where our Consumer First strategy is important.

And that's why we're continuing to build our capabilities, especially in e-commerce.

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

I guess, just 2 quick -- 2 follow-ups, I guess, to some of the previous questions and, I guess, first, just to Jason English's question about spending.

So there's a reinvestment in 2018.

Should we think of that as sort of being a base level of spending that you'll grow off of in '19 and beyond?

Or is it more episodic?

You're kind of increasing spending this year, but you won't have to maintain those levels going forward?

Yes, Bryan, I think you should think about this as the former -- I think that -- as we think about our investment and you've -- Jason, and I think you're referring to media, but we would say it more broadly, is we expect our investment behind our brands to go at or ahead of our sales levels.

And you're seeing that in F '18.

And I think as you model us for '19 and '20.

You should assume the same.

Okay.

And then, I guess, a second just to follow up, I think, it was to Ken Goldman's question -- response to Ken Goldman's question earlier.

Jeff, you talked about how in that gap to the Nielsen data that 50% of it is maybe retailer margin.

Why wouldn't we be concerned that, that doesn't become an issue maybe for the manufacturers or for General Mills?

If there's a need for the retailer to be investing in price, I guess, or spending more and the retail trends aren't very good, right, the store traffic isn't good, why wouldn't we have to maybe be concerned that there may be a need for more investment at retail?

Well, I can only -- forecasting ahead of what's going to happen was always a tricky business.

I mean, for me, the -- look, retail has always been competitive.

And even if this past quarter, we saw a tick-up in the competitive activity, I mean, I guess, I would always say that, for decades, I mean, the retail grocery industry has been really competitive.

And I assume it will be really competitive going forward.

And the ways -- the way that we win is through great brands, well-articulated through marketing and great product innovation.

And I think that as long as we continue to do that, we'll see success.

I mean, we've been doing it on Häagen-Dazs, and we've seen success.

We've done it on Lucky Charms this year and we saw success.

We've done it on Old El Paso and we saw success.

We've done it on Annie's and we saw success.

So even though it wasn't the year we wanted and some businesses didn't work the way we wanted, I will say that we have a number of businesses around the world that met or exceeded expectations.

And the similarity among all of them is that we've got great brands.

We've got great products.

We invested behind them.

And we innovated as well.

That's the combination.

I think as long as we do that, then we'll like the results we see.

Our next question comes from the line of Chris Growe with Stifel.

I'll just offer my congratulations to you, as well, Ken.

Wish you all the best there.

Chris, thank you.

It's been a pleasure.

Sure.

I'll just make it quick here.

I just had -- wanted to ask, and we've all kind of asked this in some form, but as you think about the pressure against the consumer this year, whether it's merchandising activity or obviously some increase in media expense, how much of that broadly growing in fiscal '18?

It's going to be up as a percentage of the sales, it sounds like.

How much -- can you give a little more quantification on how much that could be growing this year?

Well, Chris, I'm not going to, I guess, quantify it for you.

But again, as I elicited to Andrew's question, we have some margin improvement pluses coming through in HMM over inflation, in the cost projects and in price mix and even offsetting some of that with volume declines.

I mean, there's still a pretty significant gap between that and the earnings expectations we have for the year.

And that gap is really filled by the investments that we expect to be making.

Okay.

And then just from a high-level standpoint.

There's been a lot of discussion about the Amazon, Whole Foods potential acquisition and merger.

And certainly, a lot of questions from investors about what they could mean for your company.

I know one of the things you're doing is investing in e-commerce this year.

So not an in-depth question here, but just to understand kind of what that means to you and kind of the preparation of General Mills and kind of where they stand in preparation for an increase in e-commerce sales as that occurs here in the near future.

Thanks for that question, Chris.

I mean, obviously, it's one that's on the minds of a lot of people these days and has been for us for a long time.

I think with regard to e-commerce, I think there's a couple of key things on a high level to keep in mind.

And the first is that where we've engaged in e-commerce, whether it's here in the U.S., our sales online have broadly outperformed our sales in the store.

And so we feel good about our ability to win in e-commerce environment.

The second is that e-commerce is going to be broad across many customers.

It's not just going to be one customer, even though a lot to talk about the Amazon and Whole Foods deal, I mean, all of our major customers have e-commerce components.

As we -- and as we have experienced around the world, there are a variety of customers who participate in e-commerce.

And so it's not just going to be just one winner.

The third is that we have -- we've got great relationships, specifically with Amazon.

And we've got great relationships with Whole Foods.

In fact, some people will probably be surprised to know that we were actually vendor of the year for 2 years in a row with Whole Foods.

And we have a -- our e-commerce growth has been -- we've been really pleased with it.

And our growth in Natural & Organic, we're really pleased with it.

And so if those are 2 trends that are going to continue, we feel like we've done our job so far.

But look, that's going to continue to evolve, and though we're satisfied what we've done so far, we're going to keep evolving as the marketplace evolves.

So we feel like we're pretty well positioned.

Are the investments you're making, say, this year going to put you in a position where you're ready to accelerate your -- the growth in e-commerce?

Is this an ongoing sort of rate of investment for General Mills?

Well, I think that the -- Chris, I think that the growth in e-commerce especially here in the U.S. but -- is going to accelerate.

And so to the extent that accelerates, then we'll accelerate our investment broadly in e-commerce but really with the growth of the e-commerce business.

And -- but we see growth in e-commerce here in the U.S. It's really prevalent in China and Korea.

I mean, that's where we see the highest penetration of e-commerce in food and growth.

So we expect that channel to continue to grow.

Great.

I know we didn't get to everyone, so please, I'm around all day.

Give me a ring and happy to answer any additional questions.

Thanks so much for your time this morning.

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

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