General Mills, Inc.
Q4 2012 Earnings Call Transcript

Published: 27 Jun 2012

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter F '12 full year results conference call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, June 27, 2012. I would now like to turn the conference over to Kris Wenker, Vice President of Investor Relations. Please go ahead, ma'am.

[Kristen Smith Wenker:]

Thanks, operator. Good morning, everybody. I'm here with Ken Powell, our CEO; and Don Mulligan, our CFO, who will discuss our fiscal 2012 results and our outlook for the new fiscal year in just a minute. First, I'll do my usual housekeeping. Our press release was issued over the wire services earlier this morning. It's also posted on our website if you still need a copy. We've posted slides on the website, too, to supplement today's prepared remarks. These remarks 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. And with that, I'll turn you over to Don.

[Donal Leo Mulligan:]

Thanks, Kris, and hello, everyone. Thanks for joining us this morning. As you’ve seen in our press release, we posted solid results in the fourth quarter. Slide 4 gives you a summary. Sales totaled $4.1 billion, up 12%. Segment operating profit was $737 million, a 9% increase versus last year. Net earnings attributable to General Mills totaled $325 million. And diluted earnings per share were $0.49, as reported. Excluding changes in the mark-to-market valuations of certain commodity positions, integration expenses from the international Yoplait acquisition and the restructuring charges we announced at the end of last month, adjusted diluted EPS totaled $0.60, up 15% year-over-year. Slide 5 summarizes operating highlights for the quarter. Net sales increased 3% excluding acquisitions, and all 3 of our business segments posted gains. Gross margin declined 140 basis points, excluding mark-to-market effects. This was an improvement from results through the first 9 months. The addition of Yoplait International to our business mix accounted for roughly 1/2 of the fourth quarter decline. Our media investment increased 11% in the quarter. And segment operating profit rose 9% with strong contributions from our International businesses and a 4% gain for our U.S. Retail business. With this good fourth quarter finish, our annual results were consistent with revised guidance we provided in February. Slide 6 summarizes our results for 2012 in total. Sales grew 12% to $16.7 billion, led by the addition of Yoplait International and strong net price realization on our base business. Segment operating profit increased 2%, exceeding $3 billion for the first time in company history. This included input cost inflation of more than 10% along with an 8% increase in worldwide advertising expense. Diluted earnings per share declined 13% as reported. Adjusted diluted EPS, excluding certain items affecting comparability, reached $2.56, up 3% from last year. Results for our U.S. Retail segment reflected the challenged operating environment for food manufacturers in 2012. U.S. Retail net sales increased 3%, but segment operating profit was 2% below year-ago levels due to inflation, volume declines and a 5% increase in media investment. Our Bakeries and Foodservice business posted another year of solid top line growth. Sales increased 8% in 2012 with modest volume growth and strong net price realization both contributing to this increase. This performance is well ahead of the industry. And as you can see on Slide 8, we posted good growth across our key channels and brands. Operating profit for this segment declined as expected due to sharp input cost inflation and comparisons against record grain merchandising earnings last year. Our International segment delivered another year of strong performance. Net sales and segment operating profit both increased nearly 50%, reflecting good contributions from our international Yoplait acquisition and growth in our base business. These good results included balanced growth across both developed and emerging markets. For example, in Western Europe, net sales for our base business increased 6% in constant currency. And in China, constant currency sales grew 22% for the year to reach $550 million, led by Häagen-Dazs and our line of Wanchai Ferry frozen dim sum items. And we are very pleased with the results of the Yoplait International yogurt business acquired last July. In our 3 largest markets, France, the U.K. and Canada, we delivered sales growth and market share gains, including 1 full point of share gain in France and nearly 3 points of share growth by our Liberté brand in Canada. In 2012, our global media expense increased 8% to exceed $900 million. This includes higher levels of investments in our core developed markets and media support behind our International businesses, including Yoplait. We increased our investment in targeted media vehicles like digital and multicultural. Based on measured media spending tracked by Kantar, we rank as the top U.S. advertiser among all food and beverage companies over the last 12 months. Slide 11 summarizes our 2012 joint venture performance. Net sales for Cereal Partners Worldwide increased 5% in constant currency basis, led by mid-single-digit growth in developed markets like the U.K. and Australia and double-digit growth in the emerging markets in Asia and Latin America. For the year, we maintained our 23% value market share. CPW earnings declined in 2012, reflecting a onetime adjustment to tax reserve related to prior years, higher input cost and expenses for new manufacturing capacity in emerging markets, including Malaysia, Turkey, South Africa and Brazil. In Japan, constant currency sales for Häagen-Dazs increased at a mid-single-digit rate, but earnings were below year-ago levels. This is expected, given the difficult economic environment in Japan following the earthquakes and tsunami a year ago. That being said, this business finished the year a bit ahead of our plans. Turning to the balance sheet. Slide 12 shows the components of core working capital. In a year where net sales increased 12%, our core working capital declined 7% as our focus on inventory reduction will improve working capital efficiency. Increased levels of accounts receivable and accounts payable, primarily from the Yoplait acquisition, were largely offsetting. Cash flow from operations totaled $2.4 billion, and this was after a $200 million voluntary cash contribution to our pension plan. This strong cash flow funded $676 million in capital spending. We invested in new manufacturing capacity in our snacks, cereal and yogurt businesses, and we funded multiple cost-savings projects across the company. We returned $1.1 billion of cash to shareholders, including a 9% increase in our dividend. And our strong profit growth and cash flow allowed us to fund 3 acquisitions and take on additional $544 million in debt while maintaining our credit rating. Last month, we announced a restructuring program designed to improve our organizational effectiveness and alignment on our key growth strategies. We recorded a $101 million pretax charge in the fourth quarter, which we've excluded from adjusted diluted earnings per share. We expect to record an additional $19 million in pretax expense in fiscal 2013. We're estimating $75 million in annualized cost savings from this restructuring plan. In fiscal 2013, we realized the majority of these savings, roughly 80% of the full amount, which we reinvested to support our key growth strategies and to accelerate innovation across General Mills' global business platforms. In our U.S. yogurt business, we're launching 35 new items the first half of 2013. That's 3x the number in last year's first half. They were supporting our 2013 product news with increased levels of marketing investment and merchandising support. We're also investing to accelerate development for certain international businesses, including support for the Canadian Yoplait yogurt business we'll acquire in September and investment in emerging markets, particularly in China. So let me outline more fully our fiscal 2013 plans, which call for another year of good sales and earnings growth for General Mills. We're targeting mid-single-digit sales growth. That includes good contributions from acquired business

[Kendall J. Powell:]

Thank you, Don, and good morning to everyone, and thank you for calling in. As you all know, the last 12 months was a challenging period for the food industry. Input costs increased at the highest rate in over 3 decades, and the pace of economic recovery around the world remains slow at best. As we move into fiscal 2013, we expect slow economic growth to continue, and we think the packaged foods business will remain very competitive. The restructuring program we announced last month will better align and focus resources against our best opportunities for growth, accelerate our innovation efforts and make General Mills a more efficient organization. It will generate savings we will invest back in our businesses and enable us to deliver a balanced plan for growth across our global platforms. And I want to tell you a bit more about this initiative. In our U.S. Retail segment that reports to Ian Friendly, we're strengthening our alignment and focus by creating 3 new divisions. Our new Meals division will be solely focused on our key center store meal items

[Operator:]

[Operator Instructions] And our first question comes from the line of Matthew Grainger with Morgan Stanley.

[Matthew C. Grainger:]

So when we think about the need to -- or the desire to accelerate your international investments, whether in China or in other markets, clearly, this is going to be a multi-year process. Does this have the potential to weigh on your ability to generate high single-digit EPS growth over the next several years? Does the commitment to increase scale outside the U.S. imply that the company's sustainable EPS growth over the midterm could or potentially should be below your long-term targets?

[Donal Leo Mulligan:]

No.

[Matthew C. Grainger:]

Okay. And I guess when you think about the acceleration in international investments, is this -- does this really mark sort of a structural step-up in how you're thinking about allocating your spending across the different regions? Or is this sort of -- is 2013 going to be a more focused year of increased investment?

[Donal Leo Mulligan:]

I wouldn't -- I would say that as we look at emerging markets -- well, let me step back and just say 2 things. First off, when we think about growing our business, first order of business is ensure that we have a very strong base business, whether that is here in the U.S., Canada, Europe. And you saw those results this year with Europe, for example, showing mid-single-digit base business sales growth. And so that's always job one, is to make sure that we have a very vibrant base business. Then where we see incremental opportunities is in international, particularly in emerging markets. We have a fabulous business in China that's growing over 20% this year. We're augmenting that with obviously an acquisition -- a soon-to-be acquisition in Brazil. But also on an organic basis, we're plotting back several earnings growth to accelerate even faster in China, for example, and we've done that for the last 3 to 4 years. And while we've done that, you still see that International has grown quite nicely on both the top and bottom line. So this isn't a change of direction. We've been trying to be pretty transparent about that over the last few years that we've been putting additional money back into those markets because we see a long-term growth potential.

[Kendall J. Powell:]

The only thing that I would add to that, Matt, is I would say we don't have a target percentage of international business that we're chasing. We want to do this in a thoughtful and strategic way. Obviously, we're buying businesses that we think fit very well within our capability where we can add value and that will create value for us over the long term. This year was interesting because we had a couple of significant opportunities with Yoplait International at the beginning of the year and Yoki at the end, but -- I mean, this is -- you can't always predict how these things will fall, but -- and in both cases, clearly, both acquisitions, I think, fit very well within our product categories and the things that we're good at, and we're going to use those to create value for shareholders over the long term.

[Matthew C. Grainger:]

Okay. And very quick follow-up. Just with respect to the 2015 targets that you've outlined in the past, are you still committed to those?

[Kendall J. Powell:]

We are. We are committed to those. We think that certainly when you include the businesses we've acquired over the last few years, I think it’s -- we're probably nicely ahead of the top line and operating profit goals on those targets. And we think we're in the hunt on EPS as well, so we're still very committed to those targets.

[Operator:]

And our next question comes from the line of Eric Katzman with Deutsche Bank.

[Eric R. Katzman:]

I have a couple of questions. I guess just some details first. Don, you included some what looked like onetime transaction costs in the dilution from Yoki. Can you give us a sense as to how much onetime costs you're looking within that $0.02 to $0.03 of dilution?

[Donal Leo Mulligan:]

Yes, the transaction will be about $0.01.

[Eric R. Katzman:]

Okay. And then on the pension accounting assumptions, I feel like I've been screaming in the wilderness, but a couple of your peers have -- with fiscal years close to yours have made some adjustments to the accounting, which were kind of favorable to their growth. Why didn't you do that?

[Donal Leo Mulligan:]

A couple of reasons. The major one is consistency, both with our historical results and what is still, I think, the norm for most of our peer set. And then the other one is transparency, and the information you need to see what our results would look like with different accounting treatments or reporting treatments is readily available in our Qs and Ks. So if someone wants to take a different look at our pension, we have the information there for them to do that. Plus, as you saw on the call today, we highlight when there's a material movement in the pension expense. So it's really about consistency and transparency, and we're quite satisfied with our accounting and reporting treatment.

[Eric R. Katzman:]

Okay. And then I guess to you -- to Ken, I thought you laid out a good view of the upcoming year. But one thing that's been a little bit different, I guess, in terms of the board and your signaling is that with the Yoki acquisition, despite spending about $1 billion on this, you've now kind of committed to buying back stock where, for example, with the Yoplait deal, you suspended that. Is that kind of a signal of your and the board's view of the valuation of the stock? Or just maybe you could kind of explain the use of capital in that regard.

[Donal Leo Mulligan:]

Yes, Eric, I'll take that one. And we -- clearly looking at the stock price today, I think you'd look at our results at any kind of multiple whether it's cash flow earnings versus historical measures, and we think we're undervalued, and that certainly plays into our consideration of how we use our capital per share versus acquisition funding.

[Eric R. Katzman:]

Okay. And then last thing, sorry for this, I guess there's some concern over the volume performance in the last quarter, and obviously, as you well know, there's been incredible focus on yogurt. Can you care to say what the volumes were if you pulled out what's happening in yogurt? Because you seem to be gaining share and doing pretty well across every other part of the business, and I'm kind of wondering, does the 7% volume drop in the last quarter -- is that mostly tied to yogurt and everything else is doing pretty well? And I'll pass it on.

[Kendall J. Powell:]

Well, I mean -- the answer would generally, Eric, would be yes. I mean, yogurt has been a drag this year. And if you look at the -- if you just look at market share, for instance, for U.S. Retail with and without yogurt, I mean, if you back yogurt out, I think our share was flat to slightly above in aggregate across the rest of those categories. So there are some other factors in there. But in general, I think your premise is correct. And with all of the innovation and renovation that we have on our yogurt business as we entered the first quarter this year, work both on our core product line with very good marketing initiatives and new products that we feel are quite good. Obviously, we're committed to reversing that and getting unit and sales growth in our yogurt business this year, and we think we have a good chance to do that.

[Operator:]

And our next question comes from the line of Bryan Spillane with Bank of America.

[Bryan D. Spillane:]

Two questions. One, just in terms of the process you've gone through in terms of business realignment. Can you just talk through, I guess, first, as far as you see it today, is that process complete, meaning you've made some adjustments to how you're viewing the world and what you need to do to source incremental growth going forward and you feel comfortable that this process is done? Or do you think it's -- there's still kind of more of an ongoing -- more events to come in terms of realignment?

[Kendall J. Powell:]

Well, this process is done. But as you know, as a company, we have an ongoing very high focus on margin-expanding activities under the HMM grouping. We're very focused on continuous improvement. And so, as you said, while this restructuring, which is based on our look going forward of inflation and the environment, while this particular reorganization process is done, we remain very highly committed to these HMM processes. And in fact, we're going to have a very -- in addition to this restructuring that we've just completed, we will have a very strong level of HMM in the plan next year, both in the U.S. and increasingly on the international side where we just are seeing more and stronger engagement with those HMM disciplines.

[Bryan D. Spillane:]

Okay. And then just a follow-up. In terms of your revenue outlook for 2013, this is more, I think, just a U.S. -- a question about the U.S. If you could give any color at all in terms of your view on price-volume mix expectations, and I guess what I'm really interested in is, given the volume weakness really across the industry, is there any expectation in your view that either for your own plan or for the industry that there's some reinvestment in price or promotion in order to drive volume?

[Kendall J. Powell:]

So let me give you a couple of thoughts. First of all, our volume growth assumption in -- we're confident about our volume growth assumption in U.S. Retail, which basically assumes a continuing good level of volume growth in our -- in all of our snack businesses, which have been very strong and would include products like LÄRABAR, Nature Valley, Fiber One. So those products have very strong momentum, and they're going to contribute to growth. We also have very strong initiatives in our yogurt business, and that will contribute as well to units. And then we have, we think, very, very prudent and reasonable volume assumptions on some of our bigger, more established categories like cereal, and we think the mix, all-in, is very prudent. On the merchandising side, as we said, we took a lot of pricing last year. We got it mostly right. Going forward, we're going to be adding some merchandising selectively in selective categories and product lines, just to make sure that they are competitive and, as we say, in the zone. We typically do that anyway, and following very substantial amount of price increases this year, we're going to be doing that again as we go into 2013, just to make sure that we have that value equation right everywhere. And it's important for us to do that. We constantly monitor the value. We're not looking at necessarily a price point. We're looking to be in a zone and -- that will allow our marketing programs and our consumer promotion programs to be as effective as they can be. So we'll be doing some of that as well.

[Donal Leo Mulligan:]

Bryan, the only color I would add -- Bryan, the only color I'd add a little bit further is just in terms of phasing. We do expect volumes to grow over the course of the year, to be relatively flat in the early -- in the first quarter and then begin building as we come out of the negative trends we've seen through F '12.

[Operator:]

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

[Christopher Growe:]

I'd like to ask you in relation to the sales growth guidance, I think you had said, Don, it does not include the Yoki acquisition. What else would it include? Would it include a couple months of Yoplait from last year? Would also -- would it include the Yoplait licenses that you are reacquiring?

[Donal Leo Mulligan:]

Yes, I'm glad you asked. Let me just -- let me run through because there are quite a number of them, and that's worth about 2 to 3 points in our top line. So there's the 2 months of the Yoplait International business that we bought last July that are incremental to 2013. There are 9 months of Yoplait Canada. We'll take over that business on September 1. There's 10 months of Food Should Taste Good, which we acquired in the fourth quarter of fiscal '12, 10 additional months. There's roughly 11 additional months or incremental months of Yoplait Ireland that we acquired in May. And then there's virtually a full year of Parampara, the small business that we bought in India. So those 5 businesses in those months I listed are all going to be incremental, '13 versus '12. That all excludes, of course, Yoki, which we'll provide some guidance on when we actually close it.

[Christopher Growe:]

So I think you just indicated, about a -- call it a 2-percentage point benefit overall to the sales from those -- all those factors or a little more than that?

[Donal Leo Mulligan:]

About 2 to 3 points.

[Christopher Growe:]

Okay, and that's in relation to the mid-single-digit sales growth that you're giving for the year then?

[Donal Leo Mulligan:]

Correct. That's right.

[Christopher Growe:]

Okay. So I guess what I'm trying to understand then is the underlying sales growth guidance, let's just call it kind of roughly 3%, I'm just trying to understand what's embedded within that expectation. Is it -- so are you going to have some follow-through pricing still coming through? I'm just really trying to work up to volumes and trying to get a sense of what you expect on the volume front. Do you expect that to turn pretty meaningfully into, say, second and third quarter to a positive?

[Kendall J. Powell:]

Yes, so some of it is as you said, Chris. There'll be some be carryforward pricing that comes in. And then the rest of it is really what I said in the -- in trying to reply to the previous question, which is modest volume assumptions for some of our big core categories and then continuing pretty good volume growth in that healthy snacking area where we have very strong momentum and very -- another year of very good innovations, so that would be all the healthy snacking, many of the Small Planet Food product lines. So we're expecting good growth there and some growth, unit growth, in Yoplait in the U.S. So it would be those components that would give -- lead us to the volume growth in the U.S.

[Donal Leo Mulligan:]

Right. And for the full year, that underlying sales growth will be a mix of volume and price mix. And the volume, as I mentioned, will build as the year unfolds.

[Christopher Growe:]

Right, okay. And then just a follow-up, if I could. In relation to the guidance for marketing to be flat to up, I guess I want to understand, that's on, I guess, a constant-currency basis or is that on a reported basis? Again, given all the new products you have, and you’ve even highlighted some areas of investment you want to make, I guess I thought it would have been up a little more than that. I want to make sure I’m understanding the number correctly, though.

[Kendall J. Powell:]

Yes. Well, we're starting with a very, very high base. I mean, we have really, really increased investments here continuously over the last 5 or 6 years. So I think Don may have said, we're the largest consumer foods advertiser in the U.S. now. So it's a good base, Chris. And we think it'll probably up close to sort of low single digits. But I think at this point, we'll just say at that level or maybe a bit more. It's a substantial amount, and we've got plenty of advertising to fuel our growth in the plan.

[Operator:]

And our next question comes from the line of Andrew Lazar with Barclays.

[Andrew Lazar:]

Just a couple of quick things. One, just following up a little bit on Chris. You talked about some of incremental investments totaling around $100 million in fiscal '13 and with media spending being up a bit off of an already high base, I'm just trying to get a sense of where that incremental $100 million is going. Is a lot of that the sort of merchandising activity you've talked about a little bit to make sure you're, I think as you put it, kind of in the zone on certain sort of price ranges and such? Just maybe a little more clarity on where that spending is going would be helpful.

[Donal Leo Mulligan:]

Yes, there's really 3 areas as I think I noted. There's Yoplait U.S. where we have product launches, 35 new items in the first half of the year, and so we're advertising behind that. There's also merchandising programs behind that.

[Kristen Smith Wenker:]

So introductory trade spending is definitely a piece.

[Donal Leo Mulligan:]

Yes, correct. And the second is Yoplait Canada. As we reacquire that business, there's going to be some investment to bring that in. And then the third area, as I mentioned, was the emerging markets, particularly in China, where for the last few years we have put additional investment behind it and rolled back some of the earnings to accelerate growth.

[Andrew Lazar:]

Got it. And then I think when you originally announced the Yoplait International acquisition, you said there would be about $0.01 of dilution in fiscal '12 and then some level of accretion thereafter. Is that still coming through the way you expect it and any way to help quantify what that helps you in fiscal '13?

[Donal Leo Mulligan:]

Yes, the Yoplait acquisition is performing at least as well, if not a touch better, than we anticipated a year ago. I mentioned some of the top line results, but the bottom line has been just as encouraging. So the guidance we gave last year in terms of the EPS flow would be consistent.

[Andrew Lazar:]

Got it, okay. And then the last thing would be the repurchase or the buying of the Canadian franchise, and then I was just -- to a smaller extent, Ireland. Are there -- I mean, to the extent you can talk about it, are there other, let's call it, Canada-like or more sizable Yoplait franchises sort of out there that either the timing of the agreement comes up over the course of the next year or so or where it may make sense to kind of go ahead and buy out the franchisee? How likely are we perhaps to see some other things like this that are somewhat more sizable like Canada in the near to intermediate term?

[Donal Leo Mulligan:]

Well, there's -- Yoplait, we have licensees across some 70 markets. In many of those, we have existing General Mills operations. We'll continue to analyze those just as we did in Ireland and in Canada. I don't have any news to announce today in terms of what our next step would be, but that is part of the integration of the business is to evaluate each of those relationships and determine if it's best with the current licensee or part of our wholly owned family.

[Operator:]

And our next question comes from the line of Greg Hessler with the Bank of America Merrill Lynch.

[Gregory Hessler:]

You indicated in the press release that on the Yoki transaction, you're going to fund that with cash, a combination of cash and commercial paper. Can you tell us about the breakdown there? And just given where rates are today, might we see you in kind of the longer-term bond market?

[Donal Leo Mulligan:]

Yes. Greg, thanks for coming on the call. I like it when the debt capital market guys get involved as well. We are -- the initial funding obviously will be with commercial paper, and then over the year, we'll pay that commercial paper down with our cash flow. And we will likely be in the market -- we have a maturity coming up in February of next year. And so the combination of that and the commercial paper balance will probably bring us into the market at some point later this calendar year. One thing I will mention, just to build on that and just take advantage of the question, as I mentioned earlier, our view on our shares and our share buyback activity will be higher this year than last year. But I also want to just reaffirm that our credit metrics are very important to us. And as we pay down some of the debt we take on for Yoki, our intent is absolutely to get back to the credit metrics that we're carrying today.

[Gregory Hessler:]

Okay, appreciate that. And then maybe just one follow-up. As you look at your capital structure as it stands today, I mean, is there a particular tenor, whether it be 5 years, 10 years, 30 years that you might look to when you do come to market?

[Donal Leo Mulligan:]

Well, in today's environment, longer is obviously better, given where the curve is. But actually, our maturity ladder is pretty well dispersed, so there's not necessarily individual pockets that I would highlight today. We'll make that determination as we get closer to going to market.

[Operator:]

And our next question comes from line of David Driscoll with Citi Investment Research.

[David Driscoll:]

Want to follow up a little bit here on the bridge for F '13. So I appreciate the reconciliation on the top line guidance, that it does include some of the acquisitions. The approximately 5% to 7% segment profit growth, I would assume that there is also the flow-through from the, what did you say, about 3 points from those carry -- the acquisition carryover into F '13 that will also go in to drive your slightly better than the mid-single-digit sales growth for segment op growth. So assuming I'm still right there, then a couple of points here. The diluted -- sorry, the share repurchase, you normally do 2% of diluted shares outstanding. Is that your intention for F '13?

[Donal Leo Mulligan:]

Okay. Dave, this is Don. I'll take that one. There were several questions rolled in there.

[Kendall J. Powell:]

What are the questions?

[Donal Leo Mulligan:]

Yes, let me just clarify something. You said SOP growth of 5% to 7%. We didn't say 5% to 7%. We said mid-single digits, just to clarify that. Within that, clearly, is going to be some benefit from the acquisitions, the most material one would be the Yoplait International, the extra 2 months. And I wouldn't quantify beyond that. And as far as share, we always said that we are going to have -- reduce shares that will contribute to EPS, even after the Yoki acquisition. So that will play a role in our EPS growth.

[David Driscoll:]

But you won't say that it's 2% of diluted shares outstanding?

[Donal Leo Mulligan:]

No.

[David Driscoll:]

Okay. And Ken, sorry for the rambling of my statements here, but it's difficult to reconcile everything that you've got here because there's pieces missing. If we don't know diluted shares and then you blend it in...

[Kendall J. Powell:]

We understand there are a lot of moving parts here, so...

[David Driscoll:]

Yes, I know. I apologize here. I'm trying to be as clear as I can. The realignment is -- that relates to the 850 workers that you've reduced in the force. And I want to just make sure that's not part of ongoing HMM.

[Kendall J. Powell:]

That's correct. And the realignment that I focused on in my remarks, David, really, the focus there was on the 3 segments. So I made some comments on U.S. Retail and International and Foodservice. There were other elements to the restructuring that we did that I didn't comment on. I mean, I commented on it generically, but -- so for instance, we did some very good work in our R&D organization that really just accelerated a path that we were already on, which was to centralize more of our R&D capability around platforms and which is going to generate, we think, a higher level of innovation and in a very efficient way. So for instance, we used to have 4 different R&D groups working on snack bars, depending on the division, and we said that didn't really make -- we can do better than that. Let's put them all together and have one group focusing on that big platform. So we've done other things like that, and altogether, that would be the bigger number. And then this is all incremental to our ongoing level of HMM across our supply chain and -- which will be very, very strong. We're going to generate very strong base core HMM in the plan for F '13.

[David Driscoll:]

All right. Let me try one final way on this particular line of logic is if we've got mid-single-digit operating profit growth including a whole number of factors, the $100 million of investment, the realignment in the worker reduction, when you go from there to 3% growth year-over-year as your forecast at $2.65, there's then obviously below the segment operating line, there's a bunch of negatives here that retard the EPS growth. The problem that -- I can't really see it in the numbers right now is if there's a diluted share repurchase going on, if there is a share repurchase going on, it would seem like the $2.65 number that you've given is worse than the pieces that I can -- I'm guessing at. But Don, maybe you can just help me clear up any of this. I mean, is it just as simple as you're taking this mid-single-digit operating profit growth and you get down, that translates into 3% EPS growth because of the pension and the tax headwind and whatever the diluted share number is at the moment, it's extremely minor?

[Donal Leo Mulligan:]

Right. Well, if you take the $2.65 guidance and you add back the Yoki dilution that we highlighted at $0.02 to $0.03, the tax at $0.02 and the pension at $0.06, you get to a $2.75, $2.76 number, which is high single-digit growth, which is what our long-term models calls for.

[David Driscoll:]

Okay. Final question, moving on to yogurt. The 35 new product launches, Ken, can you talk about the shelf space issue that I would guess that you would face launching that many products? Is there any issue in actually getting all these things on shelf? Maybe you can talk about do you have to take some of your current products off shelf, or is this just net incremental adds to your current yogurt space? And then what does it imply for your projections for growth in U.S. Yoplait in 2013? And from there, that'll be it for me.

[Kendall J. Powell:]

Okay. David, that is a great question, and thank you for asking it. We have 2 sort of thrusts in yogurt in terms of category management and distribution. The big one and the main one, and we put a lot of effort into this, is making sure our retail partners understand how dynamic and how exciting this category is. And the intent of that is to help them and make sure that they are planning to expand the case. And we've had very good success doing that over the last -- over the last several years and so we -- depending on the retailer, I mean, we can go in and recommend another 2 feet, another 4 feet, another 6 feet. So we've done, I think, a very good job of playing a leadership role in that area, and you are seeing -- across many of our large retail partners, we are seeing them expand the footage. And so then within that, our goal is to increase our distribution. We held it basically stable in 2012. We lost a little bit as we got to the end of the year, and I mean very small amounts. But as we go in with all of these new items, we have the retailer very optimistic about the category and inclined to expand shelf space. We think we'll be able to hold our core distribution and add incrementally with new products that we think are quite exciting and quite incremental. So that's sort of the 1-2 punch to this.

[Operator:]

And our next question comes from the line of Rob Moskow with Crédit Suisse.

[Robert Moskow:]

I guess I'll focus on gross margin guidance. It's for a slight improvement, I think, Don? The commodity cost inflation outlook is very unstable. You can see corn prices starting to shoot up again. But on the other hand, I get calls from a lot of investors who think that General Mills might have a lot of gross margin expansion similar to what happened, I guess, in fiscal -- was it fiscal '10 or fiscal '09? And I wanted to know how is this year going to be different from that prior year where margins were up 400, 500 bps? Is this different because it's more like decelerating inflation rather than true deflation? And as you look at the grain markets right now, are you really locked in at favorable rates that protect you from what's happening in grain?

[Donal Leo Mulligan:]

Sure. Well, first off, we view F '13 as very different than F '10. F '10 was a deflationary year. We had I think it was minus 3% input cost that year. This year, we expect low single-digit at 2% to 3%, I mentioned in the script -- 2% to 3% inflation. Thank you, Kris. 2% to 3% inflation. So it is a very different environment. We're about 50% covered as we enter the year, which is about an average position for us. And as you noted, Rob, the markets are very volatile, and we've taken positions accordingly. But that volatility will play out as the year unfolds.

[Kristen Smith Wenker:]

Thanks, everybody. I apologize that we didn't get through all the queue. Give me a shout if I can be of help. Thanks so much.

[Operator:]

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.