General Mills, Inc.
Q4 2017 Earnings Call Transcript

Published: 20 Sep 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter Fiscal 2018 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, September 20, 2017. I would now like to turn the conference over to Jeff Siemon, Vice President of Investor Relations. Please go ahead, sir.

[Jeff Siemon:]

Thanks, Sarah, and good morning everyone. I am here with Jeff Harmening, our new CEO and Don Mulligan, our CFO 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 first quarter results was issued over the wire services this morning and you can find this release and the copy of the slides that supplement this morning's remarks on our Investor Relations website. I will remind you that our remarks this morning will include forward-looking statements that are based on management's current views and assumptions and the third slide in today's presentation with factors that could cause our future results to be different than our current estimates. And with that, I will 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 2018 results. As we mentioned at our investor day in July, our number one priority at fiscal 2018 is improving our top line performance by focusing on four global growth priorities. Growing Cereal globally including CPW, improving U.S. yogurt through innovation, investing in differential growth opportunities and managing our foundation brands with the appropriate investment. As Jeff will share in a moment, we executed well against these priorities in the first quarter and we're seeing the results in our in-market performance. In the U.S., our Nielsen-measured retail sales trend improved by 300 basis points versus our fourth quarter result. We saw a good improvement in France and the UK as well. We anticipated a slow start to the year on adjusted operating profit and adjusted diluted EPS driven by sales declines in the phasing of input cost, expenses and cost savings. We expect sales results to strengthen and first quarter margin headwinds to lessen in the remainder of the year, driving growth on profit EPS in the second half. We continue to maintain a disciplined focus on cash and we delivered strong growth in free cash flow in the first quarter and I'm pleased to announce that we reaffirmed our full year fiscal 2018 targets in this morning's release. Let me review our performance in the quarter. Slide 5 summarizes first quarter fiscal '18 financial results. Net sales totaled $3.8 billion, down 4% as reported, organic net sales also declined 4%. Total segment operating profit totaled $664 million, down 16% on a constant currency basis. Net earnings decreased 1% to $405 million and diluted earnings per share increased 3% to $0.69 as reported. Adjusted diluted EPS which excludes certain items affecting comparability with $0.71. Constant currency adjusted diluted EPS decreased 9%, reflecting lower operating profit partially offset by lower interest, tax rate and average diluted shares outstanding. Slide 6 shows the components of total company net sales growth. Organic net sales decline 4% in the quarter driven by lower organic pound volume in the North America retail in Asia and Latin America segments. Organic sales mix and price realization was neutral in the quarter. Neither [ph] foreign and currency translation or the impacted divestitures had a material impact on net sales. In North America retail, organic net sales were down 5%. U.S. yogurt represents more than half of the segment's net sales decline in the quarter, driven by continued significant declines in Greek and Light varieties, partially offset by excellent performance on We by Yoplait which launched in July. U.S. Cereal net sales were down 7%, reflecting a reduction in customer inventory levels and unfavorable trade expense phasing. Retail sales results for Cereal were much strong with Nielsen-measured takeaway down just 1% in the quarter. The 2% net sales decline in U.S. snacks was due to Fiber 1 snack bars, partially offset by growth on Larabar, Annie's and Nature Valley. Canada net sales were also down 2% and U.S. Nielsen baking net sales were flat to last year, driven by strong customer orders on progressive soup leading into soup season, as well as growth on Old El Paso and Totino's offset by declines in Pillsbury refrigerated dough. First quarter segment operating profit declined 15% in constant currency, due primarily to lower volume, unfavorable trade expense phasing, higher input cost and a 6% increase in advertising media expense. I'll share more color on first quarter profit drivers and our expectations for the full year profit margin improvement in a moment. In our convenience stores and food service segment, first quarter organic net sales reflect compared to last year. Growth on Cereal and Foodservice channel and our new premium sandwich spreads in K-12 schools was offset by declines in cup yogurt and biscuits. Segment operating profit was down 8%, driven by higher input cost on favorable mix and a comparison against the year-ago period when profit was up 16%. Organic net sales for our Europe and Australia segment were up 2%, with good growth on our ice cream and snacks businesses. We continue to expand Häagen-Dazs in Australia in European markets in our stick bar; pint and mini cup innovation is gaining traction. Snack bars benefited from strong performance on our Fiber 1 and Nature Valley brands as we continue to increase household penetration behind effective messaging and innovation. Segment operating profit was down $13 million in Europe and Australia, driven by significant raw material inflation, especially dairy and vanilla [ph], which impact both Häagen-Dazs and Yoplait, as well as currency-driven inflation on products imported into the UK. Our Asia and Latin America segment posted an 8% decline in organic net sales in the first quarter, reflecting the timing shift in Brazil's reporting calendar last year and challenges related to an inner price reporting system implementation which also impacted Brazil's results. On a positive note, we posted high single digit growth in local currency on [indiscernible] in China and we recently expanded our Yoplait China business into four additional cities near Shanghai which will drive incremental growth for the brand this year. Segment operating profit in Asia and Latin America was $16 million, compared to $22 million a year ago, reflecting lower sales in currency-driven inflation on imported products. First quarter adjusted gross margin decreased 230 basis points and adjusted operating profit margin was down 210 basis points, driven by volume deleverage, higher input cost including currency-driven inflation on imported products and unfavorable trade expense phasing. We expect each of these margin drivers to turn more favorable in the remainder of the year. Specifically, we expect our volume performance will improve driven by increasing benefits from innovation in brand building, as well as much stronger performance on key seasonal businesses in the next two quarters. Input cost will be less of a headwind as benefits from COGS [ph] HMM savings increase and inflation lessens. On trade expense phasing, you will recall that we are making some substantial changes to our trade plans a year ago primarily in the U.S. The timing in those changes had a significant impact on how trade expense was phased by quarter, with last year's first quarter seeing the lowest level of trade expense on cost per case basis. This unfavorable phasing impact will ease over the course of the year. Let me reassure you that our trade pressure in the market was not meaningfully different than last year. In fact, as Jeff will share in a moment, our average price points in the U.S. were actually higher in the first quarter than they were a year ago. With these margin headwinds lessening, we expect adjusted operating profit margin will improve in the second quarter and again in the second half. For the full year, we continue to expect our adjusted operating profit margin will be above fiscal 2017 levels. Slide 12 summarize our joint venture results in the quarter. CPW net sales grew 2% in constant currency due to favorable net price realization in mix. Häagen-Dazs Japan net sales were up 14% in constant currency, driven primarily by volume gains on our core mini cup business. Commodity after tax earnings from joint ventures totaled $24 million, down 1% on a constant currency basis. This was driven by volume growth for CPW offset by higher product cost from Häagen-Dazs Japan. Slide 13 summarizes other noteworthy income statements in the quarter. We incurred $19 million in restructuring in project-related charges in the quarter, including $14 million recorded in cost of sales. Corporate unallocated expenses including certain items affecting comparability decreased by $17 million in the quarter. Net interest expense was down 2% from the prior year. We continue to expect full year interest expense will be flat to last year. Defective tax rate for the quarter was 30.4% as reported compared to 30.9% a year ago. Excluding items affecting comparability, the tax rate was 30.5%, 90 basis points below last year, driven by benefits from the newly adopted accounting standard on stock based compensation. We continue to expect our full year tax rate will be in-line with last year at approximately 29% and average diluted shares outstanding decline 4% in the quarter as we benefited from repurchases in fiscal '17 and additional buy backs in the quarter. We continue to expect average diluted shares will be down 1% to 2% for the full year. Turning to the balance sheet, Slide 14 shows that our core working capital decreased 8% versus last year's first quarter. There's a benefit of our terms extension program more than offset higher accounts receivable and inventory. We still see opportunities for further improvement in payables, which would continue to benefit core working capital in fiscal '18. First quarter operating cash flow totals $590 million, up nearly 60% over the prior year, driven by further improvements in accounts payable, as well as changes in trade in set of accruals. Capital investments in the quarter totaled $160 million. We continue to expect to convert more than 95% of our full year adjusted after tax earnings into free cash flow. For the quarter, we returned $843 million to shareholders to dividend and net share repurchases. Turning to Slide 16, you can see our expectations for the remainder of the year. As I mentioned upfront, we're encouraged that our execution [indiscernible] global growth priorities is improving our retail sales trends. We expect this momentum to transit into fiscal '18, organic net sales results that are better in the second quarter than the first quarter and better in the second half than the first half. Part of that improvement will be due to the fact that we'll be in the zone on promotions during key seasons for soup and refrigerated dough and will continue to invest behind compelling media campaigns to strengthen our brands. As I mentioned earlier, we expect to lessen the declines on our adjusted operating profit margin and adjusted diluted EPS in the second quarter and to drive growth on those measures in the second half of the year. So let me close my portion of our remarks by reiterating that we remain on track to deliver the fiscal '18 guidance we outlined in July. Mainly, we expect organic net sales growth to be down between 1% to 2% which translates to a 200-300 basis point improvement over our fiscal '17 performance. We project total segment operating profit growth to be in the range between flat and up 1% on a constant currency basis, with adjusted operating profit margins higher than last year and we expect adjusted diluted EPS will be up between 1% and 2% in constant currency. The one update to our guidance is that we now estimate foreign currency will have a $0.01 favorable impact to full year adjusted diluted EPS. With that, I'll turn it over to Jeff for an update on our fiscal '18 growth priorities.

[Jeff Harmening:]

Thanks, Don, and good morning, everyone. I'd like to start my remarks this morning by summarizing three main takeaways from our first quarter results. First, our entire company is showing great focus and urgency in executing against our global growth priorities in the first quarter and we've started to see those efforts gain traction in the marketplace. I consent the change in momentum as I talk to employees across our company. Now, we still have much work to do to return to growth, but our efforts are beginning to pay off and we're confident with the direction that we're headed. Second, we're going to build on momentum that we saw in the first quarter as we approach the second quarter. We'll continue to expand successful innovation like We by Yoplait, we'll increase our brand-building investment behind Häagen-Dazs, Nature Valley and our Cereal portfolio and we'll drive significant improvement on our performance on soup and refrigerated dough. And third, as Don mentioned earlier, we have a line of sight to delivering on our full year commitments on sales, earnings and cash generation. Now let's review the results we're seeing in the market so far this year, beginning with the broad overview of the U.S. before covering our global growth priorities in more depth. Our first quarter U.S. sales trends improve by more than 300 basis points over the fourth quarter of last year. Our results strengthen each month in the quarter and that improvement has continued as we have seen the first couple of weeks of data in September and the improvement is broad-based. 80% of our U.S. retail sales are represented in our top nine categories and we're seeing stronger Nielsen trends and almost all of them. Our largest business in the U.S. Cereal improved by almost 200 basis points and we saw nearly 800 basis points improvement in soup. Hot snacks and fruit snacks both accelerated their growth delivering 3% and 6% retail sales growth in those quarter respectively. Although the retail sales for our Mexican business slightly slowed in the quarter, they were still up 4%. Importantly, our broad-based improvement including better volume performance and positive pricing shows stronger results for the categories in which we compete in the first quarter. Across our U.S. business, pricing in our category was up 1% in the first quarter and our pricing was up 2%, and we had positive pricing in 11 of our top 12 categories. Our pricing was up for two main reasons

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Andrew Lazar from Barclays. Please go ahead.

[Andrew Lazar:]

Good morning, everybody. Just first off, I think last quarter you have talked about expecting positive pricing in the first half of the fiscal year and even though price was positive in North America retail in the market, I think as you pointed out, Jeff; in the P&L, for North America retail pricing, where I think it's still down about 2% year-over-year. So I'm trying to get a sense of how much of that was just due to that funky year-over-year trades and comparison that you noted? And I guess we do expect positive year-over-year pricing - maybe as we go into fiscal 2Q in North America retail segment?

[Don Mulligan:]

Yes. Andrew, this is Don. We did come into the year, obviously, as you mentioned with a funky trade expense, relationship which I'm happy to go into a bit more as you talk about gross margins. But I think as you saw on the first quarter, we saw positive pricing in our retail sales in U.S. We have that reversed because of the trade expense phasing in our P&L. So as the year unfolds and as that trade expense unfairability unwinds, we will see better pricing come through at our P&L to more reflect on what you are seeing in the marketplace.

[Andrew Lazar:]

Okay. And then you knew that obviously had probably pretty significant impact on the gross margin piece as well. Is there any way to help us quantify a little bit about maybe what impact that had on gross margin?

[Don Mulligan:]

Sure. Let me talk about gross margin more fully because I'm sure [indiscernible] on it and I guess I'd start with saying that as Jeff noted in the release and in his remarks, our top line came in as expected. Our bottom line was a little bit short, but not materially and not material enough. Certainly to change our full year expectations. We expected segment operating profit should be down double digit, so the actual results were not materially off of that and importantly, as I've already said, we continue to hold to our total company SOP guidance for the year with flat to +1 and frankly, to each of our segments as well - the guidance we gave in July on margins to be higher in North America, CNS and Asia, LatAm still holds and to be down in EU, AU, driven by the currency-driven inflation on our imported products in the UK. Both for the total company and in each segment, we're holding to the guidance that we provided in July. As we look at the quarter, there were the three items that we mentioned

[Andrew Lazar:]

Got it. I appreciate that detailed answer, Don. I had a literally, a very quick one, just to follow up for Jeff if I could and then I'll pass it on. Jeff, I know this is a self-described reinvestment year. It's all geared to get in the top line going again. Does the positive EPS growth expected for the full year versus last year, did it handcuff you at all in sort of the investment that you feel like these brands really need? Particularly in Light, it may be the weaker albeit as expected, the weaker start to the year and I guess if not, maybe if you just go into a little bit why that would be because that is a question that I get a lot. Thanks very much.

[Jeff Harmening:]

So the spending profile we have this year and the guidance we've given for EPS really doesn't handcuff us to do the things that we want to do. In fact, one of the things that I see as I look in the first quarter, I'm pleased that the areas where we've invested in marketing spending. So Nature Valley for example, which is up 8%, Häagen-Dazs ice cream which retail sales were up 20%, Cereal where we've closed the gap on growth. The areas where we've invested in summer spending are the ones where we're seeing the best results. And I'm really pleased with our marketing efforts and the quality of our marketing in the first quarter, execution has been really good. The shorter answer, Andrew, no, the guidance we have set out did not handcuff us to do what we need to do to get our business back to growth. The key for us is making sure that as we make investments, we're monitoring whether they're working or not and so far what we've seen in the marketplace, whether it's spending out a brand I just talked about or the innovation on Yoplait or plowing out the way that we had anticipated and we're very pleased with that.

[Andrew Lazar:]

Great. Thanks a lot.

[Operator:]

Thank you. And our next question comes from the line of Ken Goldman with JPMorgan. Please go ahead.

[Ken Goldman:]

Hi. Thank you very much. Don, one for me. I do appreciate that your total working capital is improving, but your receivables as a percentage of sales have been growing I think 1Q's level at least by my model is the highest in over a decade and it looks like it's the sixth straight quarter in which this metric is growing year-on-year. There's a lot of concern about retailer versus vendor power and so forth. Can you just walk us through some of the drivers of these receivables trend? How long do you think it will last and so forth?

[Don Mulligan:]

Well, I think there are two things. There's a longer term trend and a shorter term trend. The shorter term trend that we've seen actually into both Q4 and Q1 was our sales strengthened as the quarter unfolded. The exit rate of our sales was stronger than the average for the quarter, which means we have more shipments late in the quarter, so we have more receivables on the balance sheet, just from a tiny standpoint. I just showed you the chart for example of the U.S. retail sales trends and the improvement every month. Second half, that's quarter-to-quarter and it has been on the phasing. The longer term one, as we continue to see a mix of our business more international, they have longer payment cycles both on the receivables and the payables side. That will have that if you have a mixed effect on it. Our receivables as you look in each market are very competitive. It really becomes a mixed play over time and we can use the focus on keeping those at the right level and again, as our working capital, we think the bigger lever is on our payable side.

[Ken Goldman:]

Okay. Just to be clear, in the U.S. retail segment, no real meaningful changes to your receivables except for the one time timing issue this quarter that you're looking at?

[Don Mulligan:]

No, none at all.

[Ken Goldman:]

Okay, great. Thank you for that. And then a quick follow-up for me, Jeff. Obviously, we're talking about ecomm a lot more and more these days. With Amazon picking up whole foods and Amazon doing what it can, obviously there's a lot of delivery that's growing in earliest expectation to that, but we're also seeing some food retailers really double down on the click and collect. I'm just wondering from your perspective, is there really any difference in how you would approach the merchandizing and the marketing of that? Any difference to the margin? I'm just trying to get a sense for sort of which of these is better for the vendors if there's really any difference at all?

[Jeff Harmening:]

First of all, I appreciate the question on e-commerce. You know I touched on it because there has been a few things written on e-commerce here and the first quarter end and in July with investors in the investor meeting as I recall it, [indiscernible] in e-commerce and I think a few head is going to look at me slightly like, 'Are you sure?' What I want to reiterate is that we've seen really good growth in e-commerce and it's been broad-based. The question you ask is a good one and that when people think of e-commerce, a lot of times they just think of Amazon, but we have throughout our customer base whether it's the likes of Walmart, or Kroger or a lot of our East coast customers. We have e-commerce sales throughout our customer base and we're being successful across them. So whether it's click-and-collect or whether it's delivery, what you need to know is that when it comes to full basket sales, we feel good about the progress we've made and the shares that we have. In terms of the economics for us on delivery versus click-and-collect, I'm not going to get deep into it, other than to say that there's not really a difference in the economics for us and the way we manage our categories across us, too, is not dramatically different.

[Ken Goldman:]

Great. Thanks so much.

[Operator:]

Thank you. And our next question comes from the line of Rob Dickerson from Deutsche Bank. Please proceed.

[Rob Dickerson:]

Thank you very much. I have two quick questions. The one is just a yes in terms of the retail takeaway we're seeing relative to what you're putting up in organic and it sounds like what you're saying is as we get to the year hopefully they should start to trend together a bit more closely. But I'm just curious, in terms of what you call it out as a near-term Cereal inventory reduction, a retail, is that supposed to bounce back? I'm just trying to get a sense as to why exactly the going forward that we shouldn't see incremental organic sales pressure relative to the retail trend especially as I think you said on the last results call, it seemed like maybe the mix in Nielsen on a pricing basis wasn't as good or was not as good as what you were getting because you were implying that maybe the retailers themselves were taking a little bit of the pricing pressures. Really one, just why you should trend a bit more closely as we go forward and then two, I guess is there any change in that retail pricing dynamic with the retailers? Thanks.

[Jeff Harmening:]

Rob, thanks for that question. This is Jeff. Let me talk to you broadly about retail inventory and let me then talk more specifically about Cereal. If you look at retail inventory for the quarter, there really wasn't a change at all as we look across our U.S. portfolio. There was not an impact from we call it pipeline, but a retail inventory change, that wasn't one at all. But there are differences between categories. So for example, we actually built inventory in our soup business because as we head into the season and we expect our merchandising to increase, our retail inventory and Cereal actually decreased because as we said in June, we had a buildup in the prior quarter. The reason why our inventory levels in both cases are reasonable. As we look ahead getting to Cereals specifically, our reported net sales were down 7% in the quarter. Nielsen was actually only down 1% and frankly if you look at where we did an unmeasured channel, which is about another point, our sales were about flat overall on Cereals. There's about a 7 point gap between reported net sales and what we see our retail sales to be. Of that gap, about half of it is expense timing that Don talked about, our trade expense timing. And the other half is a change in pipeline and really, reversal from what we saw the prior quarter. For these reasons, that's why we're confident as we look ahead on Cereal, the gap Cereals specifically, the gap between reported net sales and retail sales were closed, because we know what that expense phasing look like and we know that that will correct itself over time and we also know that we don't have an extraordinary level of retail inventory, so we're on a pretty balanced place, so we would expect that to even over time. We got a pretty good line of sight to both those things which gives us confidence to tell you that delta between reported net sales and what we see retail were closed.

[Rob Dickerson:]

Okay, great. I'll pass it on. Thank you.

[Operator:]

Thank you. And the next question comes from the line of Chris Growe with Stifel. Please proceed.

[Chris Growe:]

Good morning. Just two questions for you. The first one would be -- and just to follow up [indiscernible] earlier on the call, Don, around pricing -- as I understand, you're going to have a little higher promotional spending year-over-year in Q2 and Q3, especially in some of the seasonal categories. Is pricing in that North American division expected to be up or down? Then there shouldn't be a phasing issue then going for the next three quarters, it sounds like. Am I right in saying that?

[Don Mulligan:]

Yes. Well, the trade expense as it evens out over the course of the year will actually be [indiscernible] from a drag in the first quarter to a plus -- particularly a plus in the second half of the year. That will actually -- in terms of our reported sales -- will be accretive as the year unfolds. In the marketplace, we will be seeing different dynamics in the second and third quarter on our seasonal businesses than a year ago. So that what you'll see in the marketplace will differ at touch from what you're going to see in our reported sales. But in both cases, certainly in the retail market, we still expect for the full year to be showing neutral deposited pricing.

[Chris Growe:]

Okay, that's helpful. Thank you. And then just a question for you overall. There has been a lot of talk and a lot of interest in private label growth currently. We do tracked up certainly through the IRR database on a Nielsen is very similar, but it looks like you've had pretty modest overall private little market share gains in your categories. Do you see any pressure there, any further acceleration and just curious how you see retailers using that certainly in your categories.

[Jeff Harmening:]

Chris, as we look at our categories, the starting point, I would say is that the private label penetration and the categories in which we compete is only about 18% or about 10% versus 18% more broadly. We see in lower private label penetration in our categories. What you say really is true and that as we looked over the last 12 months, there have been a couple of categories where we've seen pretty significant growth on private label, but broadly speaking, that hasn't been the case. In those two categories, I don't think, not consequentially or in refrigerated dough and in soup where the fact that we weren't very competitive on merchandizing over the last year kind of opened the door. As we look at Cereal, we don't see a big growth in private label; as we look at yogurt, we don't see a big growth on private label; as we look at bars, we don't see a big growth on private label and those are areas where we've been more competitive and we'd like our innovation on our market end. What I would say is you look, the challenge of the private label will be there. In fact, internally called it retail brand, so there's something we take seriously, but your remark is right, we don't see broad-based growth and private label on our category. There's really a couple and other than that, when we do our job on innovation and marketing and we get our price points right, we're able to be very effective with retail brands.

[Chris Growe:]

Okay. Thank you for the time.

[Jeff Harmening:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Jason English with Goldman Sachs. Please proceed.

[Jason English:]

Hey. Good morning, folks. Thank you for letting me ask the question. I want to come back - not to be the dead horse, so I want to come back to make sure I really understand this trade spend accrual. Can you give us some quantification of how much that impact was on your net price for North America this quarter?

[Jeff Harmening:]

Jason, this is Jeff. Our net price in North America was down to 2 points and I think the trade expense phasing was the full amount of that on rough terms.

[Jason English:]

That's helpful. Let's say your net price in the segment wouldn't been neutral absent that noise. I think Jeff pointed to retailers, your price at retail up till per Rob's question earlier, you mentioned that last year, retailers were effectively subsidizing some of your prices. So your net price wasn't as negative as what we see in a retail. It looks like that slipped. Are you now seeing retailers effectively take margin on you and try to reverse some of that and if so, is that something we should expect to continue on the forward?

[Jeff Harmening:]

Retail margin changes wasn't really a big driver in the quarter for us. If you look at retail sales, what drove our positive pricing was a combination of two things I talked about. One is our baseline sales outpaced our growth overall so we still have 300 basis point improvement on our overall sales, but our everyday sales were up 450 basis points. And the other thing that drove it was we got really good quality merchandizing, we had good display merchandizing at higher price points and that's really what drove our pricing improvement over the last quarter and the reason why you don't see that translate into report a net sales or what Don talked about earlier which is the trade expense phasing and so that really is the reason why you see the results that we post in the first quarter.

[Jason English:]

Okay, that's helpful. One more question and I'll pass it on. This could have been a bit of a disconnect between what your expectations are and what the street's expectations are as illustrated by our results for this quarter. Can they help close that gap? So can you give us little more color in service of what you're expecting for the second quarter? You mentioned some sequential improvement, but are we still talking about a down year-on-year quarter? And then for the full year, the path to margin progression, what are your expectations on gross margin for the full year?

[Don Mulligan:]

Jason, as we said at the beginning of the year, our expectation is that we're going to see sales sequentially improve -- first quarter, second quarter, first half to second half; and we expect profit to be down in the first half and then positive profit growth in the second half and that's still our expectation and it's driven for the three factors I mentioned. In terms of our margin, the expansion that we're going to get between HMM and inflation is going to be strongest in the second half through the fourth quarter as global sourcing contributes to a greater extent, the sales strength and the volume associated with that will give less volume deleveraged as the year unfold and then the trade expense reversal. So we still expect -- and the trade expense reversal to be clear is primarily in the back half because again, last year, as we eliminated the trade, it was really the back half of the trade eliminations, so the comparisons are going to be on a positive sense this year in the back half of the year. So that guidance still holds, we expect our operating profit and our EPS to be down again in Q2 and then turn positive in the second half of the year.

[Jason English:]

Okay. Thanks a lot, guys. I'll pass it on.

[Operator:]

Thank you. And our next question comes from the line of Michael Lavery with Piper Jaffray. Please proceed.

[Michael Lavery:]

Good morning. Thank you. Just wanted to touch on -- you mentioned as part of your yogurt initiatives, you've gotten extended distribution on Yoplait Original. Can you give a little more color there? Is that already in place? How significant was that upside? What is it replacing? Is it regaining lost, distribution, or is it purely incremental? Can you just help us understand that's been a part of the business aside from pressure and it sounds like it's not we that you're referring to obviously; so can you just help us understand what's happening there?

[Don Mulligan:]

Yes. As we look at our yogurt business, let me go a broad picture and then I'll work it down to little bit more on Yoplait Original distribution. Broadly speaking, what we said this year for our yogurt business to get better is that we needed our innovation to work and we're pleased by that both on we and our yogurt mix ins. We needed to see some improvement in our Yoplait Original and our yogurt businesses because we need to see those because we're going to see declines in Yoplait Light and Greek 100. So we're seeing the declines in Yoplait Light and Greek 100. Our innovation has worked the way we expected and we're starting to see improvements in our Yoplait Original and our GoGurt business. The GoGurt trends have really accelerated dramatically in the last few weeks because we've introduced new innovation on our existing business, easier-opening tube with some really good marketing; so we've seen that accelerate faster and we're now starting to see an impact from distribution growth on Yoplait Original; and that's really only been recently and we'll accelerate in the second quarter. So I would anticipate that our distribution on Yoplait Original will improve in second quarter from where it was in the first quarter and we should see the results follow. Some of that is going to be a replacement of things that weren't as successful, so as we see declines and distribution on Yoplait 100 and on Yoplait Light, it certainly won't be all incremental distribution but we expect some of it to be incremental because some retailer probably cut back too far on Yoplait Original in the past. So some of it will be incremental, but certainly not all of it, some of it we'll be replacing what we've lost in Yoplait Light and Greek 100.

[Michael Lavery:]

And is it on a net basis for your total yogurt portfolio? Are we shuffling or do you have some of these retailers where you're expecting a net increase in your total sell space on the yogurt side?

[Jeff Harmening:]

Our yogurt sell space now is down from where it was a year ago and not we expected, but we also expected that that position will improve throughout the year and we continue to expect that in everything see based on what we see now and the second quarter than what we anticipate from our new product innovation from the back half, we say that our distribution will improve as the year unfolds. So whether it gets to positive or not, I don't know, but it will improve from where it currently is as the year progresses.

[Michael Lavery:]

Okay. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of Matthew Grainger with Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Hi, this is actually Pam [ph] on the line for Matt. I was just wondering if you could elaborate on what drove the softer performance in the focus six platforms in the convenience and food service segment? Seems like there is a moderation there versus what we've seen recently.

[Don Mulligan:]

Yes. Pam, this is Don. There was a couple of factors. One is that just as we've seen as Jeff was talking about with our U.S. yogurt business, as we see some of our position in our Light and in Greek, as we've seen those negative trends in the U.S., we're starting to see a little bit of that in our food service business as well. We think there is opportunity to launch Wii and get some presence in Wii, our food service segment and we think that will help reverse it and continue to drive our Pro business. More importantly as we look forward, we continue to see terrific performance in our series business and we're going to grow on that and we actually have seen that as the school year as started, we have terrific take on our products, continue to take terrific take on our college and universities. Mostly importantly, if you remember last year, we talked about the fact that we didn't really have a good season with the K through 12 frozen breakfast; we missed some windows and this year we were able to get those accounts back and we obviously started shipping that as the school year started, so we will see that strengthen as the second quarter starts. And those are the things that turn the focus. We so expect Focus 6 to be a contributor to sales this year, sales growth. We think Cereal, we think our frozen business and we think our snacks business in C-Store [ph] can contribute as well as we get presence with some of the Nature Valley innovation that we've driven in retail like the cups business. So we still feel good about it. It was a quarter where the scales weren't as strong as we'd like clearly, but it doesn't diminish our expectations for the full year and frankly, we think we'll start seeing our strength return in Q2.

[Unidentified Analyst:]

Thanks. That's helpful.

[Operator:]

Thank you. And our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed.

[Robert Moskow:]

Thank you for the question. I think the major concern that a lot of people have about what's happening at grocery and in your category is breakfast Cereal because we saw the dispute in [indiscernible] quite a bit with one major retailer and I guess with breakfast Cereal consumption down so much, my question is do you have to do more for the trade to persuade that to maintain shelf space for your items? Maintain shelf space for the category and the discrepancy in the trade spending in the quarter, it just seem to reflect that like the big difference between your negative 7 on shipments for Cereal and the negative 1 on retail. Is there more you're having to do for the trade in this category than your other categories, or is that just objects? Thanks.

[Don Mulligan:]

Well, Rob, it's a fair question and I certainly understand it. But it really is just optics. The reason I'm not getting into soup, but for Cereal, the difference between what you see and report in net sales and what we actually saw in retail was really the two things that I said, it was the change in retail or inventory and the phasing of trade expense, which does not mean more trade expense or deeper trade expense or really just a timing issue. So look, I understand the concern and I understand the broader narrative, but when it comes to Cereal, that really hasn't been the case for us. The results you see and the discrepancy, it's really as I described. So while I understand the question, I just want to be clear that we know those things that drove the difference and we see that gap closing as the year unfolds.

[Robert Moskow:]

Okay. Thank you.

[Jeff Harmening:]

Maybe we have time for one more here, Sarah?

[Operator:]

Thank you. And our next question is from the line of John Bobgunner [ph] from Wells Fargo. Please proceed.

[Unidentified Analyst:]

Hi. Good morning. Thanks a lot for the question. Jeff, I'd like to touch on yogurt and snack bars, I mean if you're clearly very active on the innovation front this year, but in more of the category level, are you two really striking me as having become very SKUs and the velocity is now also softening. So I'm curious in your view, what gives retailers to begin adjusting these self sets, stripping out inner performer, they are dilutive to growth? And how much influence do you have in terms of the category [indiscernible] influenced at -- just trying to think through some of the exogenous factors here going forward.

[Jeff Harmening:]

Let me guess the series of questions. I will try to make sure that I hit home, but if I don't, please follow up. When we look at snacks for bars and for yogurt, they really are driven by innovation and constant innovation news. As we look at the yogurt section itself, it has expanded over time. I'm not sure that yogurt is overskewed, but certainly its expanded so much as new innovation comes to the market. I don't think we'll see the same [indiscernible] expansion in that category and distribution that we have seen. The key really is to have the best innovation brought to the marketplace and there probably are some underperforming skews that can be taken out. Some of which are ours, which I talked about Lite and Greek 100, but some of competitors as well. That's why it's critical for us that we have good new product innovation in yogurt, as well as good news on our established brands which we feel like we have now. We see our retail trend starting to improve and we expect them to improve more. While we are satisfied that we made progress in the first quarter, we are not satisfied in the absolute either for our yogurt business or overall. When we get back to growth, then we'll be more satisfied. When it comes to snack bars, the bars category is still growing when you look at nutrition bars and grain bars and certainly, the key for us is that we have brands or drawing within that Nature Valley which is the largest in the bars category and in snacks [ph] bar and those two are providing a significant amount of growth and bars - just those two brands alone. Again, like yogurt, the key for us in bars is making sure we have good new product innovation, as well as terrific marketing on our established brands and we feel like we have both of those on Nature Valley and bar and we're working to get that on Fiber 1.

[Unidentified Analyst:]

Great. Thanks for your time.

[Jeff Siemon:]

I think that's all the time we have, everyone. I know we didn't get quite to everybody in the queue, I imagine, so please feel free to give me a ring. I'm on the phone all day today. With that, I think we'll wrap up, thanks. Thanks, Sarah.

[Operator:]

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