General Mills, Inc. (GIS) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the General Mills Second Quarter F '12 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, December 20, 2011. I would now like to turn the conference over to Ms. Kris Wenker, VP Investor Relations with General Mills. Please go ahead, ma'am.

Thanks, operator. Good morning, everybody. I'm here with Don Mulligan, our CFO; and Chris O'Leary, Executive Vice President and Head of our international operation. Ken Powell, our CEO, is traveling, but he's participating by phone. I'm going to turn the call over to the 3 of them in just a minute, but first, I'll cover my usual housekeeping item. Our press release on second quarter results was issued over the wire services earlier this morning. It's also posted on our website. We've posted slides on the website too that supplement today's prepared remarks. These remarks will include forward-looking statements that are based on management's current views and assumptions. The second slide in today's packet lists factors that could cause our future results to be different than our current estimates. Let me also observe here that we're going to conclude this call promptly on time, because I know a number of you want to listen to ConAgra. So let's do one question per person, please. No voice. With that, I'll turn you over to my colleagues, beginning with Don.

Thanks, Kris. Hello, everyone. Thanks for joining us this morning. As you've seen from our financial results release this morning, General Mills continues to deliver stellar performance in a tough operating environment. We posted broad-based net sales growth, reflecting our international Yoplait acquisition and strong levels of price realization and new product activity across our base business. Despite significant input cost pressure and a high single-digit increase in media investment, our earnings were generally in line with year ago levels. We expect to deliver strong sales and earnings growth in the second half of the year. So in total, General Mills is on track to deliver our full year sales and earning targets for 2012. Slide 5 summarizes our results for the quarter. Sales totaled $4.6 billion, up 14%. Segment operating profit grew 2%. Net earnings attributable to General Mills totaled $445 million, and diluted earnings per share were $0.67 as reported. These results include changes in the mark-to-market valuations of certain commodity positions as well as integration expenses from the international Yoplait acquisition. We're also lapping a net benefit from certain tax matters in the year ago period. Excluding these items, adjusted diluted EPS would be $0.76, in line with our year ago performance. Slide 6 shows the components of our net sales growth on an as-reported basis, which includes a full 3 months of results from Yoplait International. Pound volume contributed 10 percentage points of growth in the quarter. Sales mix and net price realization added 3 points of sales growth, and foreign exchange added one percentage point to our sales growth rate. So on an as-reported basis, net sales increased 14%. Excluding the impact of Yoplait International, net sales grew 6%. Price mix drove this underlying performance, contributing 10 points of sales growth. As expected, pound volume was lower in the quarter, down 4 percentage points, and foreign exchange did not have a material impact on sales growth this quarter. Slide 7 details our net sales performance by segment. U.S. Retail net sales grew 3%. International had a great quarter, whether you look at it with or without Yoplait. Sales, as reported, were up 55%. Excluding Yoplait, our sales still increased at a double-digit rate. And net sales in our Bakeries and Foodservice segment also increased strongly at 12%. Slide 8 outlines our second quarter gross margin performance. On a reported basis, gross margin declined to 34.5%. Remember that this includes the mark-to-market changes in value for grain inventories and commodity hedges we'll use in future periods. Excluding these mark-to-market effects, our gross margin was 36.5%, down 300 basis points. The addition of Yoplait International accounts for about 35% to 40% of that decline. The remainder reflects higher input costs year-over-year for our base business. As a reminder, our estimate for fiscal 2012 input cost inflation continues to be 10% to 11%. Slide 9 focuses on our media spending. We invested strong levels in brand building activities to drive sales growth. Our second quarter advertising and media expense increased 8%. This includes media investment for Yoplait International and a 3% increase in media expense for our base business. Our in-market consumer pressure continues to grow as measured by GRPs. In the second quarter, our U.S. GRPs increased at a mid-single-digit rate on top of a double-digit increase in the second quarter of 2011. Slide 10 summarizes our segment operating profit for the quarter. U.S. Retail profit was 4% below year ago levels, reflecting higher input cost and a 6% increase in media investment for this business segment. International profit increased 50%, with significant contributions from Yoplait and good growth from our base business. And Bakeries and Foodservice profit grew 1% despite a sharp -- despite sharply higher input cost. After-tax earnings from joint ventures declined $6 million in the quarter. This was driven by higher input costs for CPW. On a constant currency basis, CPW sales were up 3%, led by growth from Nesquik and Chocapic brands. Constant currency sales for Häagen-Dazs Japan declined 5%, reflecting the challenging economic conditions in that market. Completing our review of the income statement, you see that interest expense increased 7% in the quarter due to increased levels of overall debt with the addition of Yoplait. The effective tax rate for the quarter was 33.3%. Excluding items affecting comparability in both periods, our tax rate was 33.7% compared to 33.5% a year ago. Yoplait integration cost, about $4 million, did not have material impact on earnings per share in the quarter. And to remind you, these expenses fall in corporate unallocated items and are excluded from our calculation of adjusted diluted EPS. Let me now turn to the balance sheet. Slide 13 shows that core working capital declined 6% in the quarter even with the inclusion of Yoplait International. This was driven primarily by planned inventory reductions with some additional benefit from the timing of promotional payments. First half cash flow from operations totaled roughly $1.2 billion, nearly double the $600 million in the first half of 2011. In addition to the decline in core working capital, changes in the fair value of open grain contracts and foreign currency hedging also contributed to the increase. We expect growth in operating cash flow to remain strong in the second half as well. Slide 15 summarizes our financial performance through the first half of the fiscal year. Net sales were up 12% as reported and up 6% excluding Yoplait. Despite significantly higher input cost and increased media investments, segment operating profit matched year ago levels. Net earnings attributable to General Mills totaled $850 million, and diluted earnings per share were $1.28. Excluding items affecting comparability, our adjusted earnings per share totaled $1.41 compared to $1.40 a year ago. So with the first half completed, we remain on track to deliver our 2012 targets. In the second half of the year, we expect to deliver double-digit growth in net sales with significant contributions from Yoplait International and strong levels of product innovation and consumer marketing support on our base business. Gross margin as a percent of sales will remain below year ago levels, reflecting the business mix shift to include Yoplait International and higher year-over-year input cost, but we expect the magnitude of the margin decline for our base business will be less than in the first half. We expect segment operating profit to be above year ago levels in the second half, including a planned increase in advertising and media investment. Adjusted diluted earnings per share are expected to grow at a high-single digit to low double-digit rate in the second half. We expect growth to be faster in the fourth quarter than in the third. And for 2012 in total, we're reaffirming the guidance we provided this past summer. We expect EPS to grow at a mid-single-digit rate and reach $2.59 to $2.61 per share. Our guidance excludes any mark-to-market effects and Yoplait integration costs. I'm now going to turn the microphone over to Chris O'Leary. Chris?

Thanks Don, and good morning, everyone. I appreciate the opportunity to update you on General Mills' International business. Last month marked the 10th anniversary of our acquisition of Pillsbury, which really opened the door for General Mills' expansion to international markets. Remember that back in 2001, General Mills reported only $300 million in international sales, and most of that was Canada. The Pillsbury acquisition transformed our international profile. We doubled our business in Canada, and we picked up great brands like Häagen-Dazs, Wanchai Ferry, Old El Paso and Green Giant that gave us a foundation to build on in many other markets. Today, we have a decade of growth under our belts. Including pro forma sales estimates for Yoplait, our international net sales now exceed $4 billion. It might surprise some of you that half of General Mills' total employees now work outside the United States. We have 30 manufacturing locations outside the U.S and sales in over 100 countries. With Yoplait included, our International segment generates 25% of General Mills' reported net sales. Fiscal 2012 is shaping up to be another year of strong growth for our International business. Through the first half of the year, net sales and operating profit expanded by more than 40% on an as-reported basis and increased at double-digit rates in constant currency. Now those figures obviously include strong contributions from Yoplait. But even if Yoplait is excluded, our sales and profit are growing at double-digit rates. Slide 20 shows the components of our International sales growth in the first half. Sales, as reported, increased 43%. The addition of Yoplait with the lower price per pound is the driver of the lower price and mix you see here. Net sales excluding Yoplait were healthy as well, with pound volume, pricing and mix and foreign exchange all contributing to net sales growth of 13% on the base business. Slide 21 shows you our first half sales growth by region. On a constant currency basis, we had double-digit sales increases in all 4 regions. Let me give you some highlights for each of them. In Canada, constant currency sales increased 24%, driven by cereal and the addition of Liberté yogurt business. We're leading growth for the cereal category in Canada with great innovation. We have the strongest new product lineup we have had in many years with the launches of Chocolate Cheerios, a shredded wheat variety of Fiber One and 2 varieties of gluten-free Chex. And with the recent approval from Canadian authorities to talk about the cholesterol-fighting benefits of oat fiber in Cheerios, we're bringing established product news to the market as well. Our year-to-date performance has been terrific. We've added 2 full share points so far this year. We think this kind of -- this combination of innovation and health news will add up to a good year for our cereal business in Canada. We are also seeing a terrific performance on our Canadian yogurt business. Liberté is the leading brand of organic and natural yogurt in Canada and is the clear share leader in the fast-growing Greek segment. Year-to-date, net sales have increased at a double-digit rate, and we've added 1.6 points of market share. In Latin America, our constant currency sales were up 16% through the first half, with contribution from both volume growth and pricing. Our performance is being led by Nature Valley. We are seeing distribution gains across multiple customer channels. Year-to-date sales are up double digits. Regional brand performance is also contributing to our sales growth. We've added a premium pasta line to our La Salteña business in Argentina, driving double-digit growth on this business. We continue to deliver strong results in Europe. First half constant currency sales increased 80%, reflecting 3 months of Yoplait contributions and mid-single-digit growth for our base business. Across Europe, Häagen-Dazs sales have increased at a mid-single-digit rate, and we have gained share in each of the 3 largest markets: France, Spain and the U.K. In France, our recent launch of Häagen-Dazs Secret Sensations is exceeding expectations. Consumer response to this product has been terrific. We are rolling out Secret Sensations to more markets across Europe in the back half of the year. Our Nature Valley business in Europe is gaining household penetration through a combination of strong new product performance, retail distribution gains and increased levels of consumer marketing support. Led by our business in the U.K., we continue to gain market share in the grain category. And across Europe, year-to-date, Nature Valley sales have increased at a double-digit rate. Old El Paso is leading the Mexican category in Europe. We are attracting new consumers to the category with innovation like our Extra Mild Fajita Kit. Year-to-date sales for this brand have increased at a high single-digit rate. And we are certainly seeing strong contributions from Yoplait. Our Europe sales has essentially doubled with the addition of this business. While our U.K. share declined slightly in the first half, we are seeing terrific performance in France. With increased product innovation and media investment on key brands like YOP, Perle de Lait and Petits Filous, we've added almost a full share point year-to-date. So looking at our Europe business in total, we are very pleased with performance this year. Our growth in this region is significantly outpacing results for many of our multinational food peers. The Yoplait acquisition gives us a great branded position in the important yogurt market. And our categories of superpremium ice cream, Mexican meals and grain snacks are in relatively early stages of development here in Europe, so we have great opportunities ahead to increase household penetration of our brands to drive future top line growth. Let me turn now to the Asia Pacific region, where first half constant currency sales increased 15%. On Häagen-Dazs, we continue to see strong sales growth in our standalone retail shops. We expect to open roughly 60 new shops across the Asia Pacific region in fiscal 2012. We've also recently launched Secret Sensations in several Asian markets. We're driving growth on Wanchai Ferry by expanding our product line and reaching new cities. We're now in over 100 cities across greater China and are entering new markets. Strong distribution gains are driving double-digit growth on Nature Valley. We've added chewy varieties in Australia and recently launched Nature Valley in South Korea. We're seeing strength on regional brands as well. Our recent acquisition of Pasta Master in Australia is exceeding our expectations. While in India, our dry mix business is growing at double-digit rates, led by atta flour. Innovation will continue to be a key driver of our Asia Pacific growth, and to support those efforts, we will break ground on a new R&D center in Shanghai in 2012. Let me just briefly mention Cereal Partners Worldwide, our joint venture with Nestle. You'll hear much more about our plans to grow our cereal business in markets around the world from Christi Strauss at the CAGNY conference in February. CPW has 2 decades of strong growth under its belt. Today, net sales exceed $2 billion, and we have a combined 23 share of cereal category sales across over 130 markets worldwide, and good growth is continuing in fiscal '12. We are building on our positive momentum from last year with first half pound volume up 3% and net sales up 5% on a constant currency basis. We are seeing improving trends in our established markets. In the U.K., our net sales grew at a mid-single-digit rate, outpacing category performance. And in Australia, CPW net sales increased high-single rate -- digit rates, led by growth in Uncle Tobys Hot Oats cereal. We'll also continue to see good growth performance across developing and emerging cereal markets, including mid-single-digit growth in Mexico, and double-digit growth in Brazil and Turkey. So for fiscal 2012 in total, we expect CPW to show good sales and profit growth. With that, let me wrap up my comments on General Mills' international business segment. Our 2012 results will build on a track record of strong performance. In recent years, net sales as reported have increased at a double-digit rate, twice the company average during that time. Our operating profit has been growing at a high single-digit rate, again outpacing total company performance, and the addition of the international Yoplait business significantly increases our scale outside the U.S. Looking ahead to the next decade, we really like our prospects for increasing our sales and earnings in markets around the world. I've seen some of you write that strong performance around the world starts with great people, and we agree. At the heart of our plans for future growth is a team of over 15,000 employees around the world. Developing our global talent will remain a strategic priority for General Mills moving forward and is critically important to our continued success. Our plans are focused on building 5 global platforms: ready-to-eat cereal, superpremium ice cream, convenient meals, healthy snacks and yogurt. We will drive sales growth in developed markets with core brand innovation. Our categories are still developing in most markets, so significant household penetration opportunities lie ahead. And we will continue to increase scale in emerging markets, including strong -- continued strong levels of investment in China. International has led company growth over the last decade. And with expected sales growth and operating margin expansion above the company average, we expect to lead growth in the years ahead. On behalf of the entire International division at General Mills, thank you for your time this morning. I will now pass the microphone to Ken.

Thanks, Chris, and good morning, everybody. You just heard about the strong growth we're seeing in our international businesses, so let me give you a quick update on our other 2 business segments, beginning with Bakeries and Foodservice. Through the first half of this year, our sales in this segment are up 12%. That growth has been led by price and mix, but pound volume also is up 1% year-to-date. We are continuing to outperform foodservice industry trends by focusing on the most resilient customer channels. Our sales with Foodservice Distributors grew 8% driven by good performance on our hot breakfast products like Pillsbury Mini Pancakes and French Toast. Our sales in convenience stores were up 10%, led by recent new product launches in the channel like Nature Valley Recharge bars and Fiber One Brownies. And our good growth in bakeries and national restaurant accounts reflects particularly strong performance from in-store bakery items. We continue to innovate for our Foodservice customers, and we'll launch a variety of new products in the second half. For example, we're adding mini waffles to our successful hot breakfast line. In convenience stores, we'll launch several new items, including Nature Valley Granola Thins and new Fruit Twists, which is a gluten-free snack. We continue to expect good sales growth for Bakeries and Foodservice for fiscal 2012 in total. We still expect a mid-single-digit decline in segment operating profit as planned, because we are lapping particularly strong levels of grain merchandising earnings last year. Turning to our U.S. Retail segment. Net sales were up 3% through the first half, with price and mix contributing 9 points of growth. As we mentioned in our press release, pound volume reduced net sales growth by 6 points, primarily reflecting lower shipments of heavier items such as flour, dessert mixes, canned vegetables and yogurt. However, on an equivalent case basis, volume was down just 2% through the first half. Slide 34 shows consumer movement for our product lines across measured and non-tracked channels. Retail dollar sales were up 3% with momentum growing in the second quarter across many of our largest categories. In addition, our baseline or non-promoted dollar sales in Nielsen-measured outlets are up for the fiscal year-to-date, with particularly strong growth for grain snacks, baking products and soup. Our U.S. Cereal business continues to perform very well. Our dollar share through the first half was 32% in measured outlets, matching year ago levels. We posted good sales on several of our largest established brands, including Honey Nut Cheerios, Chex and Cinnamon Toast Crunch. In addition, new 80-calorie Fiber One Cocoa Puffs Brownie Crunch and Cascadian Farm French Vanilla Almond Granola are doing well. These products will continue to be incremental contributors to our cereal business in the second half. And we have more new cereal innovation coming. Dulce de Leche is our latest addition to the Cheerios franchise. This caramel-flavored cereal features a taste profile that's popular with Hispanic consumers, but we think it will have broad appeal. This new cereal contains 19 grams of whole grain per serving and only 6 grams of sugar. New Peanut Butter Multigrain Cheerios contains 16 grams of whole grains, and Frosted Toast Crunch builds on the success of our Cinnamon Toast Crunch line and offers 11 grams of whole grain per serving. All 3 of these great tasting cereals will be arriving on store shelves in the next few weeks, so we expect Big G to show good sales growth in the second half of this year. Our Snacks business is a growth leader for the U.S. Retail segment this year. Grain snacks is a $1.8 billion category in Nielsen-measured outlets alone, and it's growing at a mid-single-digit pace. Our first half growth led the category with retail sales up 20%. Fiber One Brownies launched in June have been a big hit, contributing to double-digit increase for the Fiber One snack franchise. We also posted double-digit sales growth on our Cascadian Farm organic snack bars. We've got a great lineup of new products coming in the second half that should help keep this momentum going. New Nature Valley Protein Bars contain 10 grams of protein and 5 grams of fiber per serving, great for consumers looking for added protein for energy or weight management, and we're adding new flavors to our successful Granola Thins and Fiber One snack bar lines. These items taste great and contain 90 calories or less per serving. Now Larabars aren't a grain snack. They're an all-natural fruit- and nut-based energy bar, and we'll be expanding this line with new crunchy fruit and nut über bars. Retail sales for the Larabar brand are up over 30% so far this year, so we're excited about building on this successful line. Let me turn to yogurt, where the U.S. yogurt category shows sales up 8% through the first half driven by the Greek segment. Yoplait is lagging that category performance, and we saw volume declines for our original and light businesses in the quarter. However, Yoplait Greek yogurt is gaining momentum, with sales up 50% year-to-date, as we benefit from additional manufacturing capacity and advertising support that began in August. The kid yogurt segment also is growing, and Yoplait is leading that growth with strong performance from Go-GURT. Sales for that line are up double digit due to a great ad campaign and effective Hispanic marketing initiatives. And Mountain High yogurt was incremental to sales in the first half. We've got some good innovation coming on Yoplait in the second half. We'll introduce Greek yogurt and granola parfaits and new flavors of our Greek yogurt in multipack formats. We're also launching a new line of lactose-free Yoplait yogurt. Studies show that around 15% of U.S. consumers are lactose intolerant, and the percentage is higher among the growing multicultural populations. Dairy products that provide a lactose-free benefit are growing at a double-digit rate, so our retail customers recognize the increasing importance of this trend. We think this is a good innovation for the Yoplait brand, and we'll support this new line with couponing, digital advertising and in-store sampling. And for consumers making weight loss part of their New Year's resolutions, we'll be increasing our digital marketing efforts on Yoplait Light, including advertising on key weight management and health-oriented sites like Weight Watchers and Everyday Health. As we've said before, 2012 is an investment year for Yoplait, but we are seeing improving trends on many parts of our business, and we expect that to continue in the second half. We've got a number of convenient meal items that are doing well. New Pillsbury Egg Scrambles and Breakfast Sandwiches are perfect for a fast, hot breakfast. Launched last quarter, they've been exceeding our expectations, and we project their combined year one retail sales in all channels will total more than $40 million. Totino's Pizza Stuffers are another first quarter launch that is exceeding expectations. Year one retail sales for these heat-and-eat sandwiches should exceed $20 million in all channels. Progresso soup had a very strong first half with retail sales increasing more than 6%, driven by pricing and compelling product news. So far this year, baseline or non-promoted sales are up 8%. We also had significant distribution gains in the quarter driven by retailer SKU rationalization in the soup aisle. And our Old El Paso Mexican dinner kits posted good performance in the first half, too. Retail sales grew 5% as they make for a fun and an economical family dinner. So in total, U.S. Retail is on track to meet our full year targets of mid-single-digit sales growth and low single-digit operating profit for this business segment. Product innovation is a key growth driver for all of our businesses. We launched more than 100 new products across our 3 business segments in the first half of fiscal 2012. We'll build on that success with more than 50 new products coming in the second half. While the total number of new products launching this year is comparable to last year, we think the quality of our innovation is strong and new products will continue to drive incremental sales growth for us in the second half and beyond. So to summarize today's update on General Mills, our first half performance reflected strong sales growth driven by the Yoplait acquisition, price realization and product innovation. We expect to generate strong sales and EPS growth in the second half. Our guidance calls for double-digit net sales growth and high single-digit to low double-digit growth in earnings per share over the last 6 months of the year. We see several factors contributing to our second half growth. First, our net sales and operating profit will continue to reflect significant contributions from the Yoplait acquisition. And then across our base business, our categories continue to grow. The pricing action we announced in 2011 are now in the market. We see the contraction in our gross margins moderating in the second half, and we have a strong lineup of both innovation and marketing programs. So we are on track to achieve our financial targets for the full year. So thank you for your interest in General Mills this morning. We'd be very happy to answer your questions now. Operator, can you please get us started?

The first question comes from the line of David Driscoll with Citi Investment Research.

Great. I wanted to talk a little bit more, Ken, about the Greek yogurt segment in the United States and U.S. yogurt overall. We've done a lot of analysis on this market. The Greek segment looks like it's doubled in size in the last 12 months. It's now about 25% of the U.S. yogurt category. General Mills, according to our numbers, has just about a 5% share, and distribution points in our food, drug and mass data look flattish, maybe even down slightly. I guess the heart of the question here is what's your confidence level that you can really penetrate this market, the Greek yogurt segment? And can you talk a little bit in more depth about your plans to do so? How do you go up against Chobani, which looks like it has a fairly significantly lead at this point?

So thanks for the question, David. And obviously, the -- your numbers on the impressive growth of this segment are -- we're well aware of those. And the way we look at it is as follows. First of all, the yogurt category is -- it's an enormous segment. It's the second largest segment we compete in, and it's showing a tremendous growth right now, as you all know, driven by Greek. So it's big, and it's growing, so it's exciting. We do not have our fair share of that segment or of the growth right now, and we're obviously very determined to get that. We are very pleased with the performance that we've had from Yoplait Greek in the first half. That's played out very much as we thought it would, and so that product grew about 50%. We now have more capacity, and we're advertising that we're introducing extensions to that line, so we think that, that will continue to grow very rapidly in the second half, and we're pleased with that. Beyond that, the only thing I want to say is that I think that you're going to see a very high level of innovation in the yogurt category generally and in Greek yogurt specifically over the next 6 to 12 months. I'm certain that, that will happen. We have other initiatives that we're working on. We're very committed to getting our fair share of that segment. And while we're very pleased with Yoplait Greek and we believe that's going to continue to grow, again, I think you will see a very high continuing level of innovation in the category generally and in Greek yogurt, and we're very committed through that innovation to build and get our fair share of that segment.

One quick follow-up on yogurt. Do you expect the original and light segments to grow in the second half? Or will they continue to decline? When does the pressure abate in those big segments?

Yes. We're very committed to stabilizing the performance in those segments. And so we think that, for instance, the lactose-free product that we're launching, that's a very good idea. There are lots of consumers out there who need to avoid lactose, and we're the first player to really take that segment seriously in yogurt. And so we think that, that will help. And we have other initiatives that we're working on, on those core cup brands that we think will strengthen their appeal to consumers. So we think that the performance will improve in the second half.

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

Just a quick follow-up on your comment on the distribution gains that you had in your Soup business. Just so I'm clear on it, is the -- some of the SKU rationalization that you talked about that retailers have done, has that taken away sort of shelf space from the overall soup category? Or has it just kind of resulted in a shifting, if you will, competitively in space that you've been able to pick up?

Andrew, it wasn't so much of a -- I wouldn't describe it as a competitive shift. Really I would describe it more as a focus on what are the top turners and making sure that they had a good representation of those turners. So just as an example, the Rich & Hearty portion of the Progresso line, which is -- these are really sort of full-flavor robust soups. Think Italian wedding, these kinds of products. Those are very, very high turners. And as we did our analysis of the category, we saw the products -- that many of those, as an example, Rich & Hearty products, were underrepresented even though they continue to be very, very popular with consumers and very high turning. And some of the space in the category had moved to some of the newer items, some of the simplicity items and which turn but don't turn as well as some of the core items. So I think what we're seeing is kind of a return to what are the top items. Let's organize the category around turns. And as they've done that, we've certainly seen our performance improve. We've gained a significant amount of distribution, for instance, around that Rich & Hearty line, over the last 3 or 4 months.

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

I guess I wanted to kind of delve into the issue of the weight versus the units or volume. And I guess not so much specifically, Ken, kind of like tracking it from General Mills' perspective but kind of how do we think about that within the context of the consumer and the retailers? Is it -- like is that a -- like an economic issue that consumers are, I don't know, going towards products that, I don't know, maybe less expensive or less density? Or how do I interpret that because that's -- I don't remember you referencing that kind of differential in terms of your volume numbers. So perhaps you could just kind of go into that a bit more.

Well, let me -- Eric, let me take a shot at it, because I think it is complicated and a little bit confusing, and I'll give you my take on it and then I suspect that Don will want to jump in. We look at both weight, literally gross weight pounds, which is I think a common industry measure. Obviously, we also focus on units. And units are what we produce in our plants, and they are what consumers buy, and they're what retailers sell. So I think you have to keep in mind both measures. As you look at our portfolio this year and the way it's performed -- and I apologize for going through this in a little bit of detail, but it might be worthwhile just to sort of run it down for you. Cereal, up 3% or 4%, that one's fine. Grain, way, way up. Everything is working -- our Pillsbury division, everything's working pretty well there and good baseline on those core products and our -- several of our core businesses in the Meals Division. So soup, for instance, baselines and distribution, as we were just commenting, quite strong there. Old El Paso, quite strong. In the Meals Division, it's really the heavier products, which are our canned vegetable and our frozen vegetable products, that are seeing bigger declines. And they're seeing those declines because those products saw the highest inflation or very high inflation relative to the rest of our business. And so high inflation logically corresponds to a bit tougher volume picture, and these happen to be heavy products. So I think it's a very logical link of inflation leading to differential elasticity on the volume in products that just happen to be heavy. It's a very similar case in Baking, where those products, flour, cake mix, primarily wheat based and grain based and as a result, those products had differentially higher inflation and slightly bigger volume declines. By the way, very much expected by us, given the work that we do around elasticity. They also happen to be heavy products. And then yogurt, with the issues that we've talked about there, yogurt is a heavier product. So higher inflation leading to higher pricing for a couple of the segments and leading to bigger declines in products that happen to be heavier. So hopefully, that is somewhat helpful. I think our, obviously, consumers and our retail partners are focused on unit sales. And there, we commented that those are down 2%, and what I would say there is that is very, very much in line with what we modeled and what we expected. And so we're pretty much -- Eric, we're pretty much where we thought we would be given the level of inflation and the level of pricing that we took at the beginning of the year. Don, would you add anything to that?

Well, I think you captured the drivers very well. The only thing that I would add is that while this is a particularly wide gap between units and the weight volume measures, we have had it before, a couple of years ago kind of in this -- it was either in Q2 or Q3 during soup season, we had a similar gap. So it has -- it does happen from time to time, and that's why we try to point it out, because to Ken's main point is it's the units that really matter from a retailer and a consumer standpoint and from, in fact, a leverage standpoint.

And then, Don, does this then -- like should we think about this reversing as some of like the baked goods products kind of fall off seasonally and that this reverses in the second half to get to your full year view?

Yes. You will see less -- because those products are seasonal, obviously, it goes a little bit into our Q3 as well, you will a lessening of that impact in the back half. Yes.

And you'll also, Eric, see us -- I mean we'll begin comping periods where -- I mean, remember, we began taking our pricing in the early spring of last year in February, so as we start comping the period where our pricing was really starting to hit retail. Then as you said, we see that comp, and the pressure should moderate here somewhat.

And the next question comes from Alexia Howard with Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: So I wanted to ask about your plans for taking Yoplait into China. I think I've seen reports over the last week that Danone has decided to close one of its China plants on the yogurt side and most of the reports cite intense local competition as one of the reasons for that. I know you've talked about wanting to take Yoplait into China, and I guess this may be a question for Chris. But how does that news affect the way that you think about entering that yogurt market in China and just making sure that you're using cash as wisely as possible as you do so?

Yes. Chris, I think that one's yours.

Okay. So thanks, Alexia, for that question. The first thing I would say is yogurt is a big category in China. It's about $4.5 billion, growing double digit, and we clearly see that not stopping. So that is the first thing. I think to succeed in China, you need a combination of the right product and the right local team to execute against those plans. As you know, we have a very strong team in China, some 4,000-plus employees, mainly local Chinese, who have done a great job on brands like Häagen-Dazs and Wanchai Ferry. And with regards to the success of our likely, we haven't announced plans to go into China, but we are looking at it. Yes, we have to be mindful of all the considerations to make it a successful launch. So do we have the right product? Do we have the right dairy sourcing? Do we have the right cold chain distribution system and relationships with the retailers? So that's obviously all factored in. I won't specifically comment on Danone's success or failure there. Although I will say we have had tremendous success thus far in China in our other categories, and if we do launch yogurt, it would be a very mindful, very planful launch.

One thing I would add. Yes, one thing I would add to that, Alexia, is that I think one of the secrets to our strong success in China is that we've really proven out business models in small geography before we've expanded. And so anything that we do there has been -- really prove it out, learn about the consumer reaction and dynamics and then expand. So that's been a conservative model, but it's worked very, very well for us.

And the next question comes from the line of Ken Zaslow with BMO Capital Markets.

Just on pricing. Have you taken all the pricing that you're required to take to offset the higher commodity prices? And is the implication that once February comes around that there will be a greater than your long-term growth in terms of the margin expansion opportunity given that commodities have seemingly stabilized? Can you just talk to that a little bit?

Hey, Don, will you take that one?

Sure. Well, Ken, as you know, we don't talk prospectively about our pricing. But as we've been clear, we began taking pricing last really end of the third quarter, but more in our fourth quarter of fiscal 2011 in anticipation of the inflation that we saw coming in 2012. And so that pricing impact has built as this year has unfolded. One of the reasons that we point to better profit growth in the second half is -- one of the factors will be that we will have that pricing fully in place. But we're not going to talk prospectively about any pricing actions that we may or may not take.

Is there a point in time though with the price -- with the commodities leveling off that you would actually -- how would, I guess, General Mills react to a potentially deflationary commodity environment if that comes out next year?

That's highly speculative and hypothetical at this point. Again, as you know, when we look long term at input cost, we expect them to average inflation in the mid-single digits based on world demand. And we haven't come off that, and we certainly haven't given any specific guidance for F '13 yet.

The only -- the thing I'd add to that, Ken, is remember, we're only halfway through our fiscal year. So we've got 6 months to go, which in these commodity markets has proven to be a lifetime over the last several years. So what we will do for you at our -- around our June meeting, as we always do, is we will give you our best forecast of pricing for -- or I'd beg your pardon, of inflation for our coming year. And so we'll do that about 6 months from now.

And the next question comes from the line of David Palmer with UBS.

Last inflation cycle, General Mills volume held up really well, probably the best in the industry, and that was in spite of a rapid price pass-through environment. The domestic retail business has fallen off in terms of volume more this time. Aside from yogurt, and we obviously talked a little bit about the weightier products, why do you think the inflation cycle has been different for Mills in this inflation cycle? And relatedly, I'm wondering how volume might set up for fiscal '13. Do you think as input cost maybe abates somewhat, you might be able to promote a little bit more than you've been doing and stabilize volume as you exit this year?

So the key factor, going back to that last big cycle, David, is that if you'll recall, that was the period of time where we saw consumers move away in a pretty measurable way from Food-Away-From-Home, so we saw quite a bit downward adjustment in meals at restaurants, meals at home. And that volume ended up in the grocery store and gave us the cycle that you described, which was not only strong pricing in an inflationary environment but that volume tailwind that we got from Food-Away-From-Home. So this go-around we are seeing so far this year anyway, really over the last 12 to 18 months, we've seen that Food-Away-From-Home sector basically moving sideways. So we're not getting nearly the same level of contribution from that kind of change. So I think that accounts for what we're seeing this time, which is a more sort of classic response based on elasticity around price increases. And as we move into our next fiscal year, which again, 6 months down the road, we'll comment more fully on how we see volume pricing inflation, that sort of thing then.

And the next question comes from the line of Eric Serotta with Wells Fargo.

Wanted to touch upon your inflation outlook. I was a bit surprised that it didn't change much from the 10% that you spoke about previously given the moderation in some commodities that we've seen. Are you guys using options as one of the tools in your hedging? And if so, why not a little bit of a pullback in the inflation that you're expecting?

Hey, Don, would you take that?

Sure. Eric, our inflation expectations for the year are -- have been, obviously, pretty consistent things since we first announced them last summer. As we sit here today, we're about 90% covered. And so we have a pretty good line of sight over the year. We'll come in from an inflation standpoint. And as always, we use a number of tools for that coverage, which gives us pretty good line of sight on where the costs are going to come in. To say we've had any pullback, obviously, that's taken into account in our estimate. But again, for many of our core products, prices are still up year-over-year on a spot basis.

And the next question comes from the line of Chris Growe with Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just wanted to ask you, I guess, a bit of a follow-up on Eric's question. Your first half or second half cost inflation, I'm not sure if you've talked about that in any more detail. I didn't catch it if you did. But how much of a factor or less of a factor is cost inflation in the second half of the year versus the first half of the year?

Don, why don't you just keep it going?

Yes. What we talked about, Chris, is that we expect gross margin compression to improve or lessen in the second half of the year. There's a number of factors. One is sales growth. We do expect volumes to improve in the back half. We talked about innovation. Our media will still be up strongly, and we'll be rolling over softer volume in last year's fourth quarter. Our pricing will be fully in place. That will help -- we'll have a little bit of plus for mix. But one of the other things that maybe isn't as apparent that I think is important to point out is our inventory management. You see it very strongly in the cash flow. We came into this year knowing our sales volumes would be down. We took a very proactive stance in terms of how we managed our inventory, and we brought our inventory units down as well, actually even slightly more than our sales. Volume has come down. You see that in our cash flow, where inventory has freed up about $300 million this year versus a year ago. One of the impacts that has is you have less production units to absorb the manufacturing cost. So you have more costs coming into your P&L and the time you're bringing inventory down, and we saw that in our first half. As we look at our second half, we have really taken down the inventory to the level that we wanted to, so we'll see less of that in the second half. And that was about -- probably about a 70-basis-point drag in our first half gross margins that will not reappear in the second half. It's about $30 million in total, so about $0.03 on our EPS. So that will not reappear in the second half, and so that's one of the reasons that we have confidence, again with sales growth and pricing in place, that we'll have improved gross margins in the back half versus the first half. Still down from a year ago because of that high inflation but less compression than we saw in the first half. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: And in that second half, Yoplait would still be roughly a 100-basis-point drag on the gross margin. Is that about right?

We'll still have the same relative impact in the back half, correct. Yes, Yoplait International.

And the next question comes from the line of Ed Aaron with RBC Capital Markets.

Great. I wanted to just ask a quick question on the Yogurt business. So for the -- a follow-up on the U.S. yogurt question from earlier. When do you expect that business to return to positive sales growth in the U.S.?

We are very focused on returning that business to sales growth as we move into our next fiscal year.

So a fiscal '13 event. And then on the -- on Yoplait International, can you give us -- and I apologize if I'm missed this -- the comparable growth rate for that business in the quarter?

Kris, do you have that?

Say that again?

Yes. Can you repeat the question, please?

Yes. I was just wondering how fast Yoplait International grew in the quarter on a comparable basis. I realize, of course, you've known it last year, but just wondering the -- where that business is tracking from a growth perspective.

Thank you. I can talk you through July, October. So is that close enough?

Yes, better than...

So anyway, the international side, France has started growing over that timeframe high single digit. U.K. is growing low single digit. The Liberté business in Canada is growing double digit. So strong growth across 2 to 3 segments.

And the next question comes from the line of Jonathan Feeney with Janney.

Just a quick one. I wanted to -- considering a lot of, I think, the data you've given us on this call, the order of presentation I think, certainly the Yoplait deal, seems like a greater international focus has been happening at General Mills, and I think that's indicative of the industry more broadly. Can you talk -- as you look forward -- I mean, certainly, you have your cash flow generative. You have room to borrow. Are international acquisitions rising in importance to General Mills as sort of the domestic environment so it doesn't become impossible to fix but maybe a little bit more challenging and a little bit more elastic in certain spots at the moment?

Well, I'd make a couple of comments on that, Jonathan. First of all, we love our U.S. business, and we've -- we think we're in great categories, and we clearly are in great categories. And where we have an issue right now in yogurt -- but it happens to be in a category that's absolutely terrific. And we will figure out how to -- through innovation, how to reaccelerate our growth in that category, and we just -- we love the outlook for healthy snacking in the U.S. We think the cereal category is terrific. We're getting great performance out of our Pillsbury brands, these -- really, these tried-and-true businesses that just keep knocking it out, very high margin, and so we really like the business in the U.S. And as we've said in many previous calls, we're always looking for businesses that we might tuck into that U.S. business, because we think that the profile of the business is so good. Obviously, we live an era of tremendous international expansion. And as you pointed out in your question, we're trying to capture that through these steps that we've taken. And as we've said many times before, we -- we're -- are looking for other ways to build and gain scale internationally. So I think the answer is yes, we're always looking. Now is a great time, as you've said, and we'll continue to do that.

But the priority hasn't really changed recently from the past 6 months?

Not really. I mean, we're really looking for ways to capitalize on the opportunities that we see both in the U.S. market which, as I said, we think is terrific and also outside the U.S. So we're really kind of broadminded in the way we're looking.

And we're going to stop there so that ConAgra can start on time. If you have follow-up questions, please give me a shout. Happy holidays, everybody.

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.