General Mills, Inc.
Q1 2017 Earnings Call Transcript

Published: 21 Sep 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the General Mills Quarter One Fiscal 2017 Earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star, zero. As a reminder, this conference is being recorded Wednesday, September 21, 2016. I would now like to turn the conference over to Jeff Siemon, Finance Director, Investor Relations. Please go ahead.

[Jeff Siemon:]

Thank you, Jennifer, and good morning everyone. I’m here with Ken Powell, our CEO, and Don Mulligan, our CFO. We also have Jeff Harmening in here, our President and COO, and he’ll be available during the Q&A at the end of the call. Our press release on first quarter results was issued over the wire services earlier this morning and it’s also posted on our website. You can also find slides on our website that supplement this morning’s presentation. I’ll remind you that our remarks this morning will include forward-looking statements that are based on management’s current views and assumptions, and the second slide in today’s presentation lists factors that could cause our future results to be different than our current estimates. With that, I’ll turn you over to my colleagues, beginning with Don.

[Don Mulligan:]

Thanks Jeff, and good morning everyone. Thank you for joining us today to discuss our first quarter fiscal ’17 results. General Mills’ performance in the first quarter was mixed. We made good progress against our 2017 adjusted operating profit margin and adjusted diluted EPS goals, but as Ken will tell you, our organic net sales results did not meet our expectations. We expect our sales growth to improve in the balance of the year as we see continued growth in certain businesses and as we execute a number of consumer first actions across our portfolio. We’ll also lap easier net sales comps in the remainder of the year. Over the course of our remarks this morning, we’ll note the businesses that saw particularly challenging comparisons this quarter. On the bottom line, we continue to progress towards our 20% adjusted operating profit margin goal, and we announced further margin expansion initiatives in July. We are reaffirming full-year fiscal ’17 growth targets today. Let me review our performance in the quarter. Slide 5 summarizes first quarter fiscal ’17 financial results. Net sales totaled $3.9 billion, down 7% as reported. Organic net sales declined 4%. Total segment operating profit totaled $787 million, down 4% on a constant currency basis. Recall that in last year’s first quarter, our total segment operating profit increased 23% in constant currency. Net earnings decreased 4% to $409 million and diluted earnings per share were $0.67 as reported. Adjusted diluted EPS, which excludes certain items affecting comparability, was $0.78. Constant currency adjusted diluted EPS decreased 1% compared to last year’s results that grew 36%. Slide 6 shows the components of total company net sales growth. Organic net sales declined 4% in the quarter, driven by lower organic pound volume growth, partially offset by two points of positive organic sales mix and net price realization. Foreign currency translation reduced net sales growth by one point, and the net impact of acquisitions and divestitures reduced net sales growth by an additional two points in the quarter. Turning to first quarter segment results, total U.S. retail net sales declined 8%. The snacks operating unit posted 2% net sales growth driven by excellent performance on Annie’s and Larabar. This was offset by declines in the other operating units. Organic net sales were down 5% from year-ago levels that were up 1%. The difference between reported and organic net sales results in U.S. retail primarily reflects the divestiture of Green Giant in fiscal ’16. In our convenience stores and food service segment, net sales declined 7% in the first quarter. Net sales in our Focus 6 businesses were down 1% versus last year primarily due to slower trends in convenience store channel, timing of customer orders for back to school, and a comparison against 9% growth a year ago. Yogurt, cereal, and biscuits posted the strongest growth in the Focus 6 platforms. Net sales declined 12% on our non-Focus 6 businesses driven by market index pricing on bakery flour. Slide 9 summarizes our international segment net sales results in constant currency and on an organic basis. At the region level, constant currency net sales in Latin America grew 3% driven by strong snacks performance in Brazil and benefits from pricing. Net sales in the Asia Pacific region increased 1% in constant currency, reflecting low-single-digit growth in China. Canada sales were down 2% in constant currency. Excluding the Green Giant divestiture, constant currency net sales in Canada were up low-single digits. In Europe, sales were down 6% as we lapped 7% growth in last year’s first quarter behind the Haagen Dazs stick bar launch and good growth from Yoplait’s 50th anniversary news. On an organic basis, first quarter international segment net sales declined 1%. First quarter adjusted gross margin decreased 30 basis points from last year’s results that were up 290 basis points. For the full year, we continue to target $380 million of cost of goods sold HMM, which will more than offset our expectations of 2% input cost inflation. For the first quarter, adjusted operating profit margin expanded 80 basis points to 19.2% due in part to double-digit reductions in media spending on our foundation businesses and in U.S. yogurt, as well as incremental benefits from our cost savings initiatives, including zero-base budgeting. Slide 11 details our segment operating profit results in the first quarter. As I mentioned, total segment operating profit was down 4% in constant currency. U.S. retail segment operating profit declined 6% from year-ago levels that were up 38%. Constant currency international profit declined 11% due to currency driven inflation on products imported to Canada and the U.K. Convenience stores and food service profit was up 16% driven by lower input costs, higher grain merchandising earnings, and a comparison against a 9% decline in last year’s first quarter. Combined after-tax earnings from joint ventures totaled $24 million in the quarter, down 10% in constant currency primarily due to unfavorable mix and higher promotional expense as well as a comparison to a 16% growth in last year’s first quarter. CPW net sales grew 1% in constant currency with good gains in the Latin America and Asia, Africa and Middle East regions. Haagen Dazs Japan constant currency sales essentially matched year-ago results - they were up 9%. Slide 13 summarizes other noteworthy income statement items in the quarter. We incurred $86 million in restructuring and project-related charges in the quarter, including $27 million recorded in cost of sales. Corporate unallocated expenses, excluding certain items affecting comparability, decreased by $14 million in the quarter. Net interest expense decreased 2% from the prior year. We continue to expect full-year interest expense will be flat to last year. The effective tax rate for the quarter was 30.9% as reported. Excluding items affecting comparability, the tax rate was 31.4%, 90 basis points below last year due to discrete state tax benefits and favorable impacts of U.S. federal tax legislation passed in fiscal ’16. We continue to expect our full-year tax rate will be 100 basis points higher than last year due to foreign tax credits and favorable settlements. Average diluted shares outstanding declined 1% in the quarter, in line with our full-year expectation of a 1% to 2% reduction. Turning to the balance sheet, Slide 14 shows that our core working capital decreased 33% versus last year’s first quarter, primarily due to continued operational improvements across our businesses as well as the impact of the Green Giant divestiture. First quarter operating cash flow was $299 million, down from $431 million a year ago, largely driven by timing of payables. Capital investments in the quarter totaled $154 million. We remain on track to grow full year free cash flow mid-single digits, in line with our original guidance. We returned $627 million to shareholders through dividends and net share repurchases in the first quarter. We continue to make progress on our margin expansion goal. In July, we announced a number of new restructuring actions that will further support this effort. We plan to close our soup factory in Vineland, New Jersey in order to eliminate excess capacity in our U.S. retail supply chain. We expect this action will be completed by the end of fiscal ’19. Additionally, we are eliminating excess capacity and exiting unprofitable businesses in our international segment. In Brazil, we’ll close one of our snacks manufacturing facilities and we’ll cease production operations on certain snacks and meals products at another facility. We’re also restructuring our snacks business in China and have plans to stop production on certain underperforming products in that market. We expect these actions to be completed by the end of fiscal ’17. Our progress on margin expansion in the first quarter gives us increased confidence that we can achieve our goal of 20% adjusted operating profit margin by fiscal ’18. As we outlined in our investor day presentation in July, we see our margin expansion coming in three primary areas. First, we expect cost of goods sold HMM to outpace input cost inflation in fiscal ’17. Second, we now expect to deliver $620 million in savings from the administrative and supply chain restructuring initiatives we’ve announced to date, as well as the implementation of zero-base budgeting. This represents an incremental $270 million of savings over the next two years. Third, we’re implementing a number of additional initiatives, including trade and consumer spending efficiency, SKU optimization, and further savings from our supply chain and our ZBB efforts. We estimate the previously announced cost savings projects and the other new initiatives will combine to generate about 75% of our margin expansion in fiscal ’17 and ’18 in roughly equal measure, with the balance coming from our cost of goods HMM savings exceeding input cost inflation in fiscal ’17. Let me close my portion of our remarks by reiterating that we are reaffirming the fiscal ’17 guidance we outlined in June, namely we expect organic net sales growth to be between flat and down 2%; we’re targeting total segment operating profit growth of 6 to 8% on a constant currency basis with adjusted operating profit margin expansion of 150 basis points, and we expect adjusted diluted EPS will be up between 6 and 8% in constant currency. We also now expect foreign currency translation will be a $0.02 headwind to full-year diluted EPS results. With that, I’ll turn you over to Ken.

[Ken Powell:]

Okay, well thank you, Don, and good morning everyone. As Don described, we made god progress in the first quarter on our operating profit margin and adjusted diluted earnings per share goals; however, our net sales performance did not meet our expectations due to the challenging macro environment, a difficult year-over-year comparison, and a slower start to the year on certain businesses. We’re taking action to improve our net sales performance going forward, leveraging our consumer first focus. At the same time, we have a number of encouraging examples across our global portfolio where our efforts to adapt to evolving consumer interests are driving positive results. Let me share with you examples of the areas where we’re focused on driving improvement and the businesses leading our first quarter performance in each of our segments, starting with U.S. retail. There has been a good deal of discussion about retail sales trends in our industry recently. We have seen total U.S. food and beverage retail sales slow over the last few quarters. Units have held stable, but net price appreciation has decelerated from adding two points of growth a year ago to adding less than 50 basis points of growth in our first quarter. Nielsen data shows deflation in certain sections on the perimeter of the store, including dairy and meat, but we are seeing good price discipline in the vast majority of our categories where average unit prices are up a little more than 2%. Performance for our U.S. retail businesses in the first quarter was mixed. We had a slower start than we planned on Yoplait, Fiber One bars, and in our cereal business, and we’re working to improve our performance in these categories going forward with innovation, renovation and good messaging. Retail sales for our foundation businesses were generally in line with our expectations; however, we saw double-digit net sales declines on Progresso soup driven by lower customer inventory levels, and our natural and organic businesses are driving excellent growth on core categories and with new innovation. Let me share some more details on each of these businesses. We continue to see challenging trends on our U.S. yogurt business driven primarily by significant declines on our Yoplait Light and Greek 100 product lines. Consumers of traditional light yogurts are pivoting away from this segment in favor of products that provide more satiety like Greek yogurts. That said, there are a number of deeply loyal consumers who are committed to this segment and to our products, so we plan to continue serving these loyal consumers and will leverage our category management efforts to ensure that Yoplait Light remains the leading option within the light segment of the shelf. On Greek 100, we were the first to market in the light Greek segment and built a strong early position; however, with significant competition in this segment, our products have become less differentiated, so we’re looking to change that by rolling out a significant product improvement over the next few months. Our reformulated line of Yoplait Greek 100 products will contain up to 40% more protein but are still only 100 calories and contain just nine grams of sugar, and we have dramatically improved the taste of these products while adding more protein, which is not an easy thing to do. Our new Yoplait Greek 100 products will be on shelf in time for weight management season in January. We have yogurt renovation plans beyond Greek 100. In fact, by the end of the year, we will have renovated 60% of our yogurt portfolio. So far, we’ve made changes to our entire kid portfolio, including new packaging and a whole milk formula on our Yoplait kids line, larger multipacks and kid equity cups, and new sizes and fresh packaging on GoGurt yogurt in a tube. We’re also rolling out new packaging on our original style Yoplait yogurt as well. The improved visuals better communicate the great taste of our product and writing a flash on the front of the package to remind consumers that original style Yoplait contains six grams of protein. Our testing shows these changes drive increased consumer purchases, so we’re looking forward to getting this news on shelf in the second half of the year. We also have a strong slate of innovation rolling out in the first half in organic, beverages and Greek, which are the three fastest growing segments in the category. We entered the organic segment with Annie’s and Liberte in the first quarter. Our Annie’s product is a kid-targeted yogurt made from whole milk that comes in a range of flavors and formats, including cups, tubes, and large-sized tubs. Liberte, which is a leading brand in Canada but has a small presence in the U.S., has been re-launched as a premium organic line of yogurts targeted to adults. These launches are just rolling out to the market now, and although it’s still early, we’re seeing good distribution gains and strong early response from consumers. The yogurt beverage segment is growing double digits, and we’ve introduced Yoplait Licuado and Smoothies to capitalize on this trend. These are highly successful products for our Yoplait franchisee in Mexico, so we’re targeting this launch to cities with large Hispanic populations with plans to expand geographically in future quarters. Within Greek, we’ve added to our successful Greek 100 Whips line with more indulgent, higher calorie Greek Whips varieties that rolled out in the first quarter, and we have additional yogurt launches slated for the second half targeted toward the dessert and snacking occasions, which are also seeing good growth. We’re highly focused on improving our U.S. yogurt performance, and we believe that renovation and innovation are the keys to getting this business back to growth. That’s why we have such a broad set of initiatives this year, from strengthening our existing platforms with renovation on kid and original style Yoplait, new Greek Whips, and a significant product improvement on Greek 100, to building new segments in organic, beverages, desserts and snacking. About half of these initiatives are in market now and they will build over the course of the year. The remainder will come to market by January and should drive further improvement for our U.S. yogurt business in the back half of this year. Don mentioned that our U.S. cereal net sales were down 4% in the first quarter. Part of that decline was driven by a reduction in customer inventory levels as our retail sales in Nielsen measured outlets were only down 2%. But when looking at our cereal performance on a rolling 12-month basis, we’ve seen marked improvement from our trends a year ago with our latest 12-month retail sales down just under 1%. When we include non-measured channels, we’d estimate that performance would be closer to flat. We think we can continue to drive improvement in our cereal business by putting the consumer first and consistently delivering on their needs with innovation and renovation, just as we’ve been doing. We continue to be encouraged by the performance from our two largest renovation initiatives, gluten-free Cheerios and no artificial colors or flavors news. Gluten-free Cheerios posted its fourth consecutive quarter of growth with retail sales up 2% in the first quarter. Similarly, the products we featured in our no artificial colors and flavors campaign have posted consistent growth since we began airing that advertising in January. Retail sales for these cereals were up another 3% in the quarter, so we like the traction we’ve gotten on our cereal renovation efforts and we’re also encouraged by the early results we’re seeing on cereal innovation, like Nature Valley and Annie’s, that is targeted squarely towards current consumer interests. Annie’s cereals are certified organic and come in three varieties that kids will like

[Operator:]

[Operator instructions] Our first question comes from the line of Matthew Grainger with Morgan Stanley. Please proceed with your question.

[Matthew Grainger:]

Hi, good morning everyone. Thanks for the question.

[Ken Powell:]

Hi Matt.

[Matthew Grainger:]

Hi. I wanted to ask two questions about yogurt. One, Ken or Jeff, could you address the broader category level trends you’re seeing in the weight management segment of the category, I guess particularly in Greek, because it seems as if the Greek 100 re-launch is a major component of your strategy to improve sales this year, and just wondering given all of the structural headwinds we’ve seen with some of the other categories with the weight management proposition around them, whether it’s cereal or core cup, is that something you’re seeing now bleeding into Greek as well, or is the issue really just one of competition? Then I guess a related question for Don, you talked about double-digit reductions in media spending on yogurt. Just curious if that’s an issue of timing or whether you’re seeing a lower return profile that makes you comfortable pulling back there.

[Jeff Harmening:]

So this is Jeff, and let me take on both of those questions and Don can follow up as needed on the second one that you asked. On the first one, as we look at broader category trends in yogurt and specifically in weight management, consumers are looking for in yogurt what they’re looking for across categories, which is a satiety benefit and ways to keep them fuller for longer. That’s the fundamental difference we see between our Greek 100 offering and why we’re renovating that and what we see in Yoplait Light, which are our two entries into this market. So that’s why you see us renovating Greek 100 as we are, adding 40% more protein and making it taste better at the same time, because we know consumers are looking for satiety. Greek 100 can give them that, but they’ll only do it if the product tastes really good, so the bar is pretty high. So that’s why we have a high degree of confidence in the renovation efforts we’re looking for on Greek 100 and why Yoplait Light--you know, we’ll be the leader in the light segment, but we don’t see that turning around in the same way that we see Greek 100 turning around. So that’s why you see us doing that. As it relates to spending, I’d mentioned this in our Q4 update that we’ll be taking our advertising down on yogurt this year and increasing our trade spending, because on our advertising, we weren’t seeing the returns that we wanted to see, and we way over-index on the category on advertising spending relative to our competition. So while we are reducing our advertising spending, we will still have more than our fair share of weight in advertising in the category, so we saw an opportunity to do that, which I also mentioned, as I said, in June.

[Matthew Grainger:]

Okay, thanks. So given the breadth of new product activity that you have coming in the back half of the year, you’re comfortable that--so your ability to educate consumers on the relative benefits of all of those new offerings is going to be possible in the context of lower advertising?

[Jeff Harmening:]

Yes, I do. We plan to advertise our new offerings, and one of the things that’s very clear about most of our categories, and is especially true about yogurt, is that innovation and whether that innovation takes the form of new products or whether that innovation takes the form of improving what you currently have, innovation clearly drives the yogurt category. When we get that right, which we think we have, by the way, on Annie’s and Liberte and what we see with our drinks, we know that that can move the needle and we’re looking forward to doing more of that in the second half.

[Matthew Grainger:]

Okay, great. Thank you, Jeff.

[Operator:]

Our next question comes from the line of Kenneth Zaslow with BMO Capital Markets. Please go ahead.

[Kenneth Zaslow:]

Hey, good morning everyone.

[Ken Powell:]

Morning Ken.

[Kenneth Zaslow:]

My question kind of goes more to operating leverage, favorable operating leverage. So in the quarter, your sales were below expectations but your operating profit was where you wanted it to be. If you are able to hit your sales growth targets which you didn’t hit in the first quarter, how does that affect your operating leverage, and is there more upside to the outlook given that you have 75% of your savings that are already done for 2018, versus if you get more volume, is there some more favorable operating leverage? Can you talk about how that kind of plays through in the income statement?

[Don Mulligan:]

Yes Ken, this is Don. You know, in the quarter what we saw was a couple things that allowed us to bring in the profit. One was we had very strong plant and manufacturing performance. As we referenced, our media was down double digits for the quarter, which is ahead of what our full-year guidance had been. We had some favorable timing in below-the-line items - our corporate items, our tax lines, interest as I mentioned, and those will even out as the year unfolds. Our focus is on delivering the year. I’ll touch a little bit on media because Jeff touched on it or talked about it with Yoplait. Given that we were coming out of the quarter with media spending down double digits, we now expect media to be down double digits for the full year - that’s a little bit lower than we had originally anticipated. The reductions will be in the same places - the foundation businesses and U.S. yogurt, and will continue to increase in our growth businesses. But that’s the reality of coming in a little light on our top line in the first quarter. Now that all said, we continue to look for, and as you point out, we believe our strong margin performance will help provide the fuel to reinvest in high return ideas as the year unfolds, so as Jeff alluded to, whether it’s in yogurt or other businesses, as we launch new products and as we see traction on those new products, we believe some of the cost savings initiatives we have, some of the operating leverage we’re going to be able to generate will help us fund those ideas as the year unfolds.

[Kenneth Zaslow:]

So if you didn’t get the volume growth, you would probably not spend as much and you’d still get the savings. Is that the--? And if you get the volume growth that you expect, you’ll reinvest to keep the momentum going - is that a fair assessment?

[Don Mulligan:]

We have very good line of sight to the cost savings that we’ve talked about, we started talking about in June and July. We are certainly going to make sure that we invest behind the ideas that are gaining traction with consumers.

[Kenneth Zaslow:]

Great, I appreciate it. Thank you.

[Operator:]

Our next question comes from the line of David Driscoll with Citigroup. Please proceed with your question.

[David Driscoll:]

Great, thank you, and good morning everyone. Just wanted to maybe simplify this slightly. So sales are down a lot, you said they were down more than what you expected in the quarter. Can you guys just categorize for me how you feel about the different factors, whether it’s environment, just a tough environment, the tough comps that you faced in the year-ago period, or the specific category problems that you have in certain General Mills brands, i.e. yogurt and others? How do you grade those different factors in trying to just say big picture, what happened to sales in this quarter?

[Jeff Harmening:]

Well David, this is Jeff. I think as we--as Ken started out his comments, the macro environment is tough. It’s tough globally, but our focus really is on what we control. One of the things that we’ve seen time and again is that when we focus on the things that we can control, we can have a lot of success. Gluten-free is a great example of that in the cereal category. So as we look at our first quarter, there are some things that we need to improve in our yogurt business really around innovation and renovation, and we feel like that’s up to us regardless of the macro environment. We like some things that we’re seeing in cereal despite the fact that it was down 4% in the first quarter. We think that we can probably spend more against initiatives that are working well, like gluten-free and Cheerios, and we really like our innovation coming up in snacks in the second half of this year. So what I would tell you is that yes, the macro environment does play a piece, but we are laser-focused on the things within our control and feel good about our ability to improve our top line trends, both here in the U.S. and globally.

[David Driscoll:]

Just to follow up here, can you give us some comments on second quarter revenue expectations? I think that--you know, your comments at back-to-school were disturbing to a lot of people, and the stock has been a significant underperformer, so I’d rather not go through a repeat of this if second quarter revenues are going to be something well below where the consensus has been modeling. You normally don’t give this stuff, but in light of what’s happened in the quarter, would you be willing to give us some guidance right there on that one? Then just one final tack-on to all this top line stuff, did the SRM play any factor in the first quarter? Was any of the volume decline here, quote-unquote, the elimination of unprofitable volume? Thank you.

[Don Mulligan:]

David, let me give you some insights into the balance of the year. We do expect Q2 to be better than Q1 from an organic sales growth standpoint, and we expect the second half to be better than Q2. A couple of factors to take into account as you think about the Q1 to Q2 movements, and we talked about these in the script but it may be good just to consolidate them all, first is the comps. Again, our F16 Q1 organic sales growth was the highest of the year at plus-2, and all segments showed growth and we had particular strength in Europe behind Haagen Dazs and Yoplait. In Q2, we’ll begin lapping negative organic growth, which was driven to a large extent by reduced merchandising on cereal and snacks at one of our large U.S. customers, so first is the comps will ease for some very specific reasons. Second, we expect even better price appreciation in Q2 versus Q1. Q1, we had two points of price mix appreciation, and we expect even more. In Q2, we start seeing the benefit of SRM, the trade optimization actions that we’re taking in our foundation businesses in the U.S. We expect to see continued pricing benefits in Brazil, and we expect lower drag from the bakery flour pricing in our convenience stores and food service business, so the second factor is we think pricing will improve, our price mix appreciation will improve in the second quarter. Pipeline plays a bit of a role. We mentioned that we saw the consumer off take ahead of shipments for U.S. cereal. We also saw it for soup. We also had some inventory reductions in a large customer in our C&F business, and we don’t expect any of those to recur in Q2. Lastly and the most important factor, of course, is the positive impact of all the consumer first initiatives that Ken and Jeff have talked about. So we expect Q2 to be better than Q1, we expect the second half to be better than the first half, and we expect the full year to come in between our flat and minus-2 guidance that we initiated back in June.

[Ken Powell:]

The SKU impact--

[Don Mulligan:]

Oh, I’m sorry. The SKU impact, there might have been some minor impact in the first quarter, but I wouldn’t attribute a lot of the reduction in the first quarter to SKU rationalization.

[David Driscoll:]

Thank you for all the color.

[Operator:]

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

[Chris Growe:]

Hi, good morning. Thank you. Just had a quick question for you, two questions if I could. The first one, in relation to both the convenience store and food service division and international, you did have some unique factors but that organic growth was down in the quarter. Do you expect organic growth to be up or to grow in those two divisions for the year?

[Ken Powell:]

We certainly expect organic growth in international, and for food service, we’ll see that improve. It’ll really somewhat depend on bakery flour pricing. We certainly expect improved performance in that low to mid-single digit range for our Focus 6, which is very consistent with what we’ve seen over the last handful of years, but it’s always tough to call that segment in total because of the bakery flour pricing. [Indiscernible] is we certainly expect stronger performance and positive organic growth in the Focus 6.

[Chris Growe:]

Okay, and then I had kind of a two-point question, if I could. First is do you expect your gross margin to be up roughly 150 basis points for the year? I do see your target of operating margin being up that much. Maybe relate to that or in addition--go ahead, sorry Don.

[Don Mulligan:]

Yes, we do.

[Chris Growe:]

Okay. So kind of related to that, with media spending being down more than you expected, I guess I wanted to be clear, does some of that spending shift to promotion? We heard that certainly in yogurt, for example. Is that just true savings for the company, or is it being redirected to other areas like trade promotion?

[Jeff Harmening:]

Well, there are two answers to that. For our U.S. business, our marketing spending is going to be down for the year, and the only place we’ve really shifted to more trade spending is in yogurt. Otherwise for our foundation businesses as well as for cereal and snacks, we look to price appreciation and strategic revenue management to help us out on that. The place where there really is a timing shift is international, where our media spending was down in the first quarter, and that really is a matter of timing. We like our initiatives in our international group and we see our spending in media up in the last three quarters.

[Chris Growe:]

Okay, thank you.

[Operator:]

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

[Jason English:]

Hey, good morning folks. Thank you for the question. Two questions - first, a housekeeping item. Can you give us what the performance was in U.S. retail for your foundation versus growth portfolios this quarter?

[Jeff Siemon:]

The foundation businesses were--in U.S. retail specifically were minus-2%--sorry, this is Jeff Siemon talking, Jason. Then--yes, minus-2, and that’s really fully attributable to yogurt. It was up modestly excluding yogurt--sorry, growth businesses, I apologize, Jason. Foundation businesses were down 8%, driven primarily by soup which was, as Don said, saw some deliveries trail Nielsen off take, and mid-single digit declines in baking product units, as you saw in Don’s slide.

[Jason English:]

Thank you, that’s really helpful. Now thinking about the forward, it’s pretty clear from the prepared remarks that you’re banking on a lot of price realization to help get some of the acceleration. It stands a bit in contrast to what we’re seeing from the industry at large - you know, grocers talking about deflationary pressure, promotions sort of ticking back up in the industry overall, and some conjecture that given the market share battles happen at grocers, there’s going to be a fair amount of pressure put on manufacturers to help fund some of that. So I was hoping that you could just give us some context of what you’re seeing in the industry overall, what gives you confidence on the ability to deploy some of these initiatives, and maybe in line with that context, how the retailers have received the direction and early indications of the path you’re going down so far.

[Jeff Harmening:]

Jason, this is Jeff, and I think that’s an excellent question. I think it’s also a really important one, so let me start big picture and work our way back to the category initiatives you talked about. Big picture, we see in Nielsen data and certainly I have heard from a lot of our retailers over the last month in my direct conversation with them, is that we see prices deflationary, or the inflation reducing in the store over the course of the last quarter or so. As we look, and Ken shared with you earlier, as we look at the items in grocery that contain the UPC code, we have about half a percent growth - I think it’s 0.4%. A big portion of that is really reduction in egg pricing from a year ago, so if you strip out the pricing on eggs, it’s about 1% inflation, which is pretty consistent with the last couple of quarters. So we had the flu last year and the price of eggs was really high, and it’s a lot lower now, so that accounts for a lot I’ve also heard from a lot of retailers about deflation in other parts non-UPC, so the perimeter of the store in things like dairy and meat, but what we’re seeing in our categories really is about 2.5% price appreciation in the first quarter, and that’s what we’re seeing in our Nielsen in our categories as well. So as we look--and we’ve seen quite good price discipline in the vast majority of our categories, and there’s no reason for us to think that that won’t continue going forward. Certainly as we look to our SRM initiatives, we’re gaining increased confidence that those are going to be effective. When we talk to retailers about our pricing and what we’re going to do with our foundation brands, we find a pretty receptive audience, to be honest, and the first fact is that 75% of our business is growth and 25% foundational, so we start with that. Within the foundational brands, our retailers are looking for a little bit of inflation, so to the extent that they see deflation in some areas, a little bit of inflation in other areas isn’t such a bad thing. They key to that really is to bring some level of investment to the category in other forms, so I’ve talked about it before but it’s really important in that Progresso is going to be about antibiotic-free chicken and on Pillsbury, it’s a new shelf set, as well as improving the quality of our products, so we’re making investments in other ways and our retailers are really receptive to that. So we’re not just milking these businesses but managing for cash, the really foundation businesses, and when we see good opportunities for investment in things other than pricing, we’re doing those.

[Don Mulligan:]

Jason, one other thing I’ll add to it. You made a comment that we’re banking a lot on pricing. I just don’t want it to be overplayed. As we look at our Q1 to Q2 improvement in organic sales growth, it’s about equal parts pricing and volume, so it’s not just relying on the pricing lever. As we get to the back half, it’s actually more driven by volume improvement in the back half. So pricing plays a role, but I don’t want you to overestimate the role of pricing.

[Jason English:]

Thank you, that’s helpful. Appreciate the color. I’ll pass it on.

[Operator:]

Our next question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

[Andrew Lazar:]

Morning everybody. With the strategic revenue management actions, which I think you said were primarily in cereal but that could be over the foundation brands as well that you talked about this morning, I guess typically that means there’s a willingness to trade off a bit of less profitable volume for better profitability, which makes sense. I guess my question is whether General Mills’ capacity utilization in those categories in which some of these actions are likely to be most pronounced, maybe is at a level that can handle some of the potential volume consequences of such a strategy on things like overhead absorption and such, or I guess could there be a need at some point for maybe further supply chain actions in addition to what you’ve announced already and discussed earlier on the call?

[Jeff Harmening:]

Andrew, this is Jeff. A couple of points. To address your first question about where we’re going to work on strategic revenue management, it really started in cereal and we’re fast following in the rest of our categories in the U.S. as well, in fact all of North America we’re looking at it. So it’s a capability that we’re developing broadly, and yes, cereal has been the farthest ahead but it’s fast following to the rest of our categories, and you’ll soon see that. As regards to capacity, we have made the moves in pricing and strategic revenue management with an eye toward capacity as we look forward, so clearly if there are additional capacity--if there’s additional capacity, we’ll remove that if we need to optimize our supply chain. You see that with soup, for example, in this last quarter where we saw an opportunity to improve the profitability and viability of our soup business by closing our Vineland plant. So to the extent we see opportunities like that, whether it’s here or other parts of the world, we’ll certainly take advantage of that; but our capacity utilization decisions that we’ve announced already have been made with an eye toward the actions that we’re taking now.

[Andrew Lazar:]

Great, thank you.

[Operator:]

Our next question comes from the line of Michael Lavery with CLSA. Please proceed with your question.

[Michael Lavery:]

Morning. You mentioned, I think, about 10 yogurt innovations and renovations in your slides and remarks, and just was wondering if you could give us a sense of how much you’ve revealed versus what you may still have yet to communicate. I know you’ve talked a lot about different plans and some things are coming in the second half. If there more to come, or is this essentially what your year’s plans are going to look like? I know sometimes for competitive reasons, obviously, you don’t want to say those are, but just maybe kind of a sense of where we are in the pacing of what’s been revealed

[Jeff Harmening:]

I appreciate your sensitivity on that. You know, what I would tell you is that kind of the quantity of what we’re going to share, I think we’ve probably already revealed. But in terms of the specifics, and I think we haven’t talked about snacking, what we’re going to do in the second half of the year, and desserts, we haven’t talked about what those are. We’ve said we’re going to come with something but we haven’t mentioned the specifics of that, so we’ll do that at a later date. But there are two more initiatives coming in the second half of the year which we’ve just let you know about, which leads into the 10, I think that you articulated. Then we’ve also got a good pipeline as we look at F18, which is why we have confidence that we can improve our business in the back half of ’17 and also again in F18, because we have a pipeline of offerings that we really like.

[Michael Lavery:]

Just related to that, I guess two questions I’d love to understand a little bit better. One is where do you see the biggest opportunities and how do they compare to each other, and then how do you communicate that to the trade in terms of where your focus is, or is it just several equally sized or interesting opportunities, especially with your shift from media to trade spending? How do you manage that in terms of your go-to-market with the customers?

[Jeff Harmening:]

So in terms of our biggest opportunities, let me--I guess the question is probably U.S.-related--

[Don Mulligan:]

And yogurt.

[Michael Lavery:]

U.S. yogurt, yes, specifically. Right.

[Jeff Harmening:]

U.S. yogurt related. We’ve talked to our retailers about what we’re brining now, and we’re starting to have discussions about our pipeline of innovation. I can tell you, and I just sat down with a few last week, they’re excited about what we’re bringing, they really are, and they believe in the vision of the category that we have. They know that we have been a growth leader in this category for 40 years and that we intend to be for another 40, but right now we’re struggling, so they know all of that. What I would tell you is that they see a lot of innovation in the yogurt category, and the yogurt CAGR is so big and has so many different segments, it can have multiple layers of innovation, they just can’t be competing with each other. So Annie’s yogurt, for example, doesn’t really compete with Liberte, even though they’re both organic, because one is geared towards adults and one is mom with kids. Greek 100 is yet again in the weight management area, so the key to the innovation is making sure that you have innovation that’s meaningful and that you’re bringing in different segments so they're not overlapping. But the category is big enough now in yogurt to withstand a lot of innovation as long as it’s strong.

[Michael Lavery:]

How do you manage the sales execution risk, I guess, as part of it? You just have so much on your plate at once, typically the more focused you can give execution instructions to sales, the better they can go out and block and tackle. How do you handle it in a different situation like this?

[Jeff Harmening:]

Well, I think the first key for us is we have the best sales force in the industry, so they’re capable of handling multiple initiatives at the same time. We’re very focused with them on what our priorities are, and they know that yogurt is one of our growth priorities, so I have no reason to doubt that we won’t be excellent in our execution of our new products in yogurt in the second half, just as we have been with Liberte and Annie’s and the reformulation of our GoGurt business here in the first quarter.

[Michael Lavery:]

Thank you very much.

[Jeff Siemon:]

Okay Operator, Jennifer, I think that’s all the time we have. We’re at the 8

[Operator:]

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.