General Mills, Inc. (GIS) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the General Mills Third Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, March 20, 2013. I would now like to turn the conference over to Kris Wenker, Vice President, Investor Relations. Please go ahead, ma'am.

Thanks, operator. Good morning, everybody. I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Dave Dudick, Senior Vice President and Head of our Bakeries and Foodservice business, and I'll turn the call over to them in just a minute. First, I'm going to cover my usual housekeeping items. Our press release on third quarter results was issued over the wire services earlier this morning, it's also posted on our website, if you need a copy. We've put slides on the website, too, they supplement today's prepared remarks. Our 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 future results to be different than our current estimates. And with that, I'll turn you over to my colleagues, starting with Don.

Thanks, Kris, and good morning, everybody. Thank you for joining us today. Our third quarter results are summarized on Slide 4. Net sales grew 8% to more than $4.4 billion. Sales for our base business grew 2%. New businesses, primarily Yoki in Brazil and Yoplait Canada, contributed 6 points of net sales growth in the quarter. Segment operating profit grew 11%, led by double-digit gains for our U.S. Retail and Bakeries and Foodservice segments. Net earnings totaled $398 million, and diluted earnings per share were $0.60, as reported. Excluding certain items affecting comparability, our adjusted diluted EPS would be $0.64, up 16% from last year's third quarter. Slide 5 shows the components of our net sales growth. Pound volume contributed 9 points of growth in the quarter, that's primarily the addition of Yoki and Yoplait Canada, which together contributed 8 points of volume growth. Volume growth excluding new businesses contributed 1 percentage point of growth. Sales mix and net price realizations subtracted 1 point of sales growth, and foreign exchange had no impact on total company sales growth in the quarter. Slide 6 shows net sales growth by segment. The U.S. Retail net sales grew 2%, as our Snacks, Small Planet Foods, Baking and Meals divisions all posted gains. U.S. Retail pound volume matched year ago levels. International net sales rose 24%, as reported, and 25% on a constant currency basis, with good growth across all geographic regions. These results do include 20 points of growth, primarily, from Yoki and Yoplait Canada. Excluding new businesses and foreign exchange, International sales grew 5% in the quarter. And net sales for our Bakeries and Foodservice business matched year-ago levels. Gross margin declined in the third quarter, as reported results include the impact of the mark-to-market valuation for certain grain inventories and commodity hedges we'll use in future periods. Slide 7 also shows that excluding mark-to-market effects, underlying gross margin declined 60 basis points, primarily due to change in our business mix. We expect our underlying gross margin will be down again in the fourth quarter and down 60 to 80 basis points for the full year. Slide 8 shows third quarter profit growth by operating segment. U.S. Retail posted a 13% increase, reflecting lower inflation year-over-year, lower advertising expense and continued discipline around administrative costs. International profit was flat for the quarter, reflecting the impact of the bolivar devaluation in Venezuela. For us, this will total around $23 million in fiscal 2013, with $15 million hitting in the third quarter. For the year in total, this represents a roughly $0.02 impact on EPS, that's consistent with the estimate we gave you in December. Excluding the bolivar devaluation, International operating profit would've increased 16% in the quarter. In Bakeries and Foodservice, profit grew 13%, driven by favorable net price realization mix, grain merchandising earnings and lower manufacturing costs. Dave will talk more about this business segment in a moment. After-tax earnings from joint ventures increased 37% in the quarter to $21 million, led by Häagen-Dazs Japan. On a constant currency basis, CPW sales increased 1%, with continued good performance in emerging markets, partially offset by market softness in southwestern Europe. Constant currency sales for Häagen-Dazs Japan grew 5%, led by new products and strong brand building support. Through 9 months, after-tax earnings from joint ventures are up 6% to $77 million. Corporate unallocated expenses, excluding mark-to-market effects, were $76 million this quarter, that's above last year's third quarter, primarily due to increased pension expense. Third quarter interest expense declined $19 million, primarily due to favorable rates and mix of debt. We now expect full year interest expense to show a low double-digit decline from 2012 levels. Our effective tax rate for the quarter, excluding items affecting comparability, was 30.8%, below year-ago levels, due to audit settlements and federal legislation passed during the quarter. We estimate our underlying tax rate for fiscal 2013 will be below 33%. That means the fourth quarter rate will be above last year's fourth quarter, which had the lowest quarterly tax rate of the year. Turning to the balance sheet. Slide 11 shows our core working capital increased 3%, driven by the addition of Yoki. Excluding the impact of Yoki, core working capital actually declined in the quarter, due to our focus on inventory reduction. Through the first 9 months, cash flow from operations exceeded $2.1 billion. Capital expenditures totaled $412 million, roughly comparable to last year. So as you can see on Slide 12, our free cash flow is up 40% so far this year to more than $1.7 billion. We're returning cash to shareholders through share repurchases and dividends. We have repurchased approximately 19 million shares of common stock this year, for a total of $745 million. For the full year, we continue to target a net reduction in average diluted shares outstanding. And as we indicated at the CAGNY conference, our goal next year is a net 2% reduction in shares outstanding. Dividends paid through the first 9 months of this year totaled $652 million, that's up 9% over last year. In fact, as shown on Slide 13, General Mills dividends have grown at an 11% compound rate in recent years. And last week, we announced a 15% dividend increase to a new quarterly rate of $0.38 per share, effective with our August 2013 payment. Slide 14 summarizes our financial performance through the first 9 months of fiscal 2013. Net sales were up 6% to more than $13 billion. Segment operating profit is growing faster than sales, up 9%. Net earnings attributable to General Mills totaled nearly $1.5 billion, and diluted earnings per share were $2.24. Excluding items affecting comparability, our adjusted earnings per share totaled $2.16, up 10% from a year ago. As we look to the end of the year, we expect to generate continued good sales growth. We do expect fourth quarter EPS to be below strong year-ago results, due to increased merchandising levels in this year's fourth quarter, higher supply chain costs and a higher tax rate. Including these assumptions for the fourth quarter, we remain on track to achieve our fiscal 2013 financial targets. We expect net sales to grow at a mid-single digit rate, including low-single digit growth from our established businesses, plus contributions from new businesses. We expect segment operating profit to grow at a mid-single digit rate, and we've raised our full year earnings per share guidance a bit to a range of $2.66 to $2.68 before items affecting comparability. With that, I'll turn the microphone over to Dave for a review of our Bakeries and Foodservice segment. Dave?

Thanks, Don, and good morning, everybody. I appreciate the opportunity to give you an update on our Bakeries and Foodservice business. Let me start with a reminder of how we've transformed this business over the last 5 years. Under the leadership of my predecessor, John MacHuzick, we've sold or exited lower-margin product lines, streamlined our supply chain and implemented a direct sales force. We've also focused our resources on our highest margin products in the most resilient channels. As a result of these efforts, we've significantly improved the profitability of this business. Since 2008, segment operating profit has increased at a 14% compound rate, and our profit margin has expanded by nearly 600 basis points. This is top-tier industry performance. And with margins that are approaching the General Mills corporate average, we are an increasingly important contributor to company operating profit. Our momentum is continuing in 2013. As you can see on Slide 18, year-to-date net sales are down modestly. But year-to-date operating profit is up 16%, driven by favorable product mix, lower input cost and grain merchandising earnings. Our operating profit margin exceeds 16% through the first 9 months of the year. Today, our Bakeries and Foodservice business is focused on 6 key product platforms: snacks, cereal, frozen breakfast items, yogurt, biscuits and baking mixes. These products account for nearly 3/4 of our segment operating profit and represent our best prospects for long-term growth. We are also focused on the fastest-growing channels. Slide 20 shows that food and beverage sales in certain channels are expected to grow ahead of foodservice industry rates. For convenience stores, food products are becoming an increasingly important contributor to channel sales and profit, as gasoline and tobacco products are on the decline. In the education channel, the K-12 breakfast occasion is expected to grow at double the overall channel growth rate of 2%. And on colleges and universities, the collective purchasing power of students is $76 billion and rising. And the healthcare channel is projected to grow ahead of industry rates in response to the growing needs of the aging U.S. population. Moving forward, we will continue to focus our efforts on our most profitable products in these fastest-growing foodservice channels. Of our 6 key product platforms, 4 are consumer branded. These are snacks, cereal, frozen breakfast items and yogurt. Let me tell you a bit more about our efforts against each of these businesses, beginning with snacks. In convenience stores, our direct sales force provides unique consumer insights and category management expertise to drive sales growth for our customers and for General Mills. We've increased C-store distribution for our snack products in each of the past 4 years, driving double-digit net sales growth and a 2-point increase in market share. Our Nature Valley Oats 'n Honey Bars, the top-turning gran snack bar in the entire convenience store channel. And we've just launched a great new product lineup in January, including Nature Valley Protein Bars and a new Chex Mix variety. We're quickly expanding C-store distribution of our recently acquired Food Should Taste Good natural snacks. In cereal, our Outnumber Hunger initiative gives college and university operators and students an opportunity to help ease the hunger issue in their communities. With every student cereal purchased on-campus, General Mills will make a donation to a local food bank. In the K-12 channel, we're the cereal category leader in school nutrition programs and breakfast programs. Recent legislation of the K-12 school nutrition program recommends more whole grain at breakfast. Since all of our Big G cereals contain more whole grain than any other single ingredient, we have a great opportunity to expand our cereal distribution in the education channel. The recommendation of more whole grains is good for our K-12 frozen breakfast business, too. Our Pillsbury branded waffles, pancakes and French toast are each an excellent source of whole grain, with 16 to 24 grams per serving. And these products are easy for operators to prepare, they can be heated and served right in the package. We've recently added Pillsbury breakfast flatbread and Pillsbury Mini Muffins to our lineup. In yogurt, we are providing operators and consumers with solution-based innovation. Yoplait ParfaitPro gives foodservice operators an easy way to prepare layered yogurt parfaits. This year, we've expanded distribution of yogurt parfaits to nearly 1,600 campuses across the country, nearly double the level of just 3 years ago. We've added a Greek variety, and we've recently expanded our ParfaitPro business to convenience stores and other foodservice channels. We've enhanced our K-12 yogurt offering by improving the health profile of our Trix yogurt products. And we've expanded our healthcare channel Greek yogurt assortment to include Yoplait Greek 100. In addition to strong brands, we also bring strong sales capabilities to our customers. Our direct sales force provides pricing recommendations, unique consumer insights, category management expertise and supply chain capabilities. This sales team is a competitive advantage for General Mills and our customers seem to agree. Fiscal year-to-date, our Bakeries and Foodservice division has been recognized by customers and industry organizations with 18 awards, reflecting our ability to provide our customers with great brands and unique insights to drive category growth. We expect to deliver continued profit margin expansion moving forward, and here's what gives us confidence: first, we continue to invest behind our most profitable products in the fastest-growing foodservice channels. Second, we are leveraging the same HMM principles as our U.S. Retail counterparts, identifying and removing waste and redeploying the captured savings to invest in our business. Third, we continue to review our product portfolio for additional opportunities to refine and focus our efforts. And finally, we've built market share in a very difficult economic period, so we are well-positioned for sales and profit growth as the economy recovers. With that, let me wrap up my overview of General Mills' Bakeries and Foodservice business. Foodservice industry sales are expected to grow at a mid-single digit rate in the years ahead, outpacing recent performance in traditional U.S. Retail channels. Our strategy of focusing on the highest-margin products and the fastest-growing channels is working, and we remain on track to deliver our targets for 2013, including segment operating profit growth at a mid-single digit rate or better, and another year of solid double-digit operating profit margin. And we see excellent growth prospects in 2014 and beyond. I'd like to close by thanking the more than 500 employees of General Mills' Bakeries and Foodservice division. Their talents and dedication make me optimistic and excited about the future prospects for our business. Thank you for your time this morning. I'll now turn the call over to Ken Powell.

Thank you, Dave, and good morning, everybody. You just heard about the very good results that Dave and his team are posting on our Bakeries and Foodservice segment. So now I'm going to review performance in our other 2 business segments, beginning with U.S. Retail. As Ian mentioned at CAGNY last month, the U.S. operating environment is getting better. Across our categories, pricing trends are moderating and volume trends are improving. For our categories in aggregate, Nielsen Unit Volume increased in each month of the third quarter. And year-to-date, both volume and pricing contributed to Retail sales growth. As shown on Slide 31, year-to-date net sales for our U.S. Retail business increased 1%. Through a combination of net price realization and mix, strong HMM performance, cost savings from last year's restructuring and lower media expense, U.S. Retail operating profit grew faster than sales, up 7% year-to-date. In the U.S. cereal category, after 5 consecutive years of market share gains, we've lost a bit of share so far in 2013. But as our levels of merchandising improved in the third quarter, our share trend has also improved, and we expect further improvement in the fourth quarter, with both established brands and new cereals contributing to our momentum. For example, our new advertising campaign is reminding consumers about the simple goodness of our iconic original Cheerios. Baseline trends are improving in response to this message and we'll support this baseline momentum with strong promotions, including our Spoonfuls of Stories free book program next month. Adults make up nearly half of total Lucky Charms cereal consumption, so we've expanded our marketing efforts to include new advertising that targets adults, and results have been terrific. Since the new campaign started in January, Lucky Charms baseline sales have increased 16%. And in celebration of St. Patrick's Day, we just launched our Chase for the Charms mobile application, giving consumers the chance to chase down their favorite marshmallow charm and win great prizes. We've also launched a strong slate of new cereal products. Honey Nut Cheerios is the single largest brand in the U.S. cereal aisle. Our latest addition to the franchise is Honey Nut Cheerios Medley Crunch, it started shipping in January and advertising began 8 weeks ago. Early consumer response has been terrific. We're adding new varieties of other popular cereal brands, too. Fiber One 80 Calorie Chocolate cereal offers consumers 35% of the adult daily value of fiber and a great chocolate taste at just 80 calories per serving. And new Peanut Butter Toast Crunch builds on the success of our Cinnamon Toast Crunch franchise. In total, our January cereal launches represent over a full percentage point of category sales and will help build momentum in our cereal business in the fourth quarter and into fiscal 2014. In yogurt, our biggest innovation is Yoplait Greek 100-calorie yogurt. This product is expanding the buy rate of current yogurt consumers and bringing new users into the category. Yoplait Greek 100 is on track to deliver $100 million in year 1 retail sales. And for our Greek yogurt business in total, sales are significantly outpacing growth of the segment. We picked up 3 points of segment market share year-to-date. For Yoplait Original and Yoplait Light, what we call our core cup business, we've improved our existing product lineup, added new varieties and better aligned our merchandising price points with competitive levels. And our core cup products are still very responsive to advertising. Baseline sales per point of distribution are up since we launched new advertising last fall. With declines in distribution, our core cup sales are still down for the year, but we're seeing a nice improvement in core cup unit volume turns, the key step in restoring this business to growth. In the kids segment, Yoplait is the clear category leader, with a nearly 50% share. In January, we added 2 great products to our kid yogurt lineup: Go-GURT Twisted gives kids 2 flavors and 2 colors in every tube, and with 10% of the daily calcium and vitamin D requirements, no high fructose corn syrup and just 70 calories per serving, moms like it, too. New Yoplait Pro-Force is a great-tasting higher protein yogurt for tweens. We're supporting this item with a robust digital advertising campaign. Our U.S. yogurt plans also include regional expansion of 2 great brands. Year-to-date, Liberté sales have increased at a robust double-digit rate, and we still have significant distribution growth ahead of us. Our Mountain High brand currently leads the large size yogurt segment on the West Coast. We are now expanding distribution to the remaining 2/3 of the country. In the third quarter, retail sales increased 7%. And we're excited to offer this great-tasting, all-natural yogurt product nationwide. For our yogurt business in total, we're very encouraged by recent trends. We are leveraging 3 great brands, Yoplait, Mountain High and Liberté, to deliver product innovation and impactful marketing programs to all parts of the category. We expect to see continued momentum in yogurt, including another quarter of sequential volume improvement as we wrap up fiscal 2013. It's still cold outside, so let's talk about some favorite cold-weather consumer brands. Year-to-date retail sales for Progresso soup are up 7%, including an 11% jump in baseline sales. Our media spending is up double digits. We've increased Progresso points of distribution and household penetration, and we're gaining share in the now growing ready-to-serve soup segment. Our Pillsbury and Betty Crocker brands are the dominant players in the $3.9 billion Baking Products category. We've just wrapped up a great holiday season with growth in volume, sales, profit and market share in the latest quarter. We really like our competitive position in this category, and we see terrific growth prospects ahead. In the Frozen Food aisle, new Green Giant Seasoned Steamers is a big hit with consumers. Just last month, this line was selected as a Frozen Foods Product of the Year in a survey of over 50,000 consumers. We're seeing good growth across our established Totino's Pizza Rolls line, and in January, we added new Totino's Pizzeria varieties to the lineup. We also launched Totino's Bold Rolls into the Club Channel, targeting millennial males with the Buffalo Chicken variety. As shown on Slide 45, we've expanded our Fiber One snack bars franchise with the launch of Fiber One Protein Bars. These have at least 6 grams of protein per serving and 20% of the adult daily value for fiber at 140 calories or less per bar. We're adding new varieties to our Nature Valley and Cascadian Farm product lines, and we've launched Green Giant vegetable chips. Our snacks portfolio also includes some great natural and organic items. Year-to-date sales for Lärabar, all-natural fruit and nut bars, are growing at a double-digit pace. And we've just launched Lärabar ALT bars in the natural channel, adding a vegan-based protein bar to the lineup. We're supporting the launch of ALT with product sampling and a strong social media campaign. So for our U.S. Retail business in total, we are nicely on track to meet our targets for 2013, with low-single digit growth in net sales and faster growth in segment operating profit. Turning to our International business, year-to-date performance is shown on Slide 47. Net sales are up 23% as reported. This reflects contributions from recent acquisitions and mid-single digit growth on our base business. Segment operating profit increased at a double-digit rate as well, and that's despite the impacts of the bolivar devaluation in Venezuela and nonrecurring expenses booked last quarter to transition the Yoplait business in Canada. On a constant currency basis, International sales are up 27% through the first 9 months of the year. We are posting good growth across all of our geographic regions. In the Asia Pacific region, our business in China is leading 14% constant currency sales growth. Sales in Canada are up 21%, reflecting the addition of the Liberté and Yoplait yogurt businesses. In Europe, sales grew 16%, with good performance on the Yoplait, Nature Valley and Old El Paso brands. And in Latin America, sales have more than doubled year-to-date, reflecting the addition of Yoki. We are performing well in many of our established markets. In Europe, we're seeing strong early results from new products launched in the U.K., including Calin, our functional yogurt brand and Greek-style line extensions of our Perle de Lait and Weight Watchers brand. Earlier this month, we launched Liberté Greek into the U.K. as well. For our Europe yogurt business in total, year-to-date retail sales are growing at a mid-single digit pace, and we're gaining market share. In our other European categories, household penetration levels are well below other developed markets, so we see terrific opportunities for growth. For example, retail sales for our Nature Valley Granola Bars are growing at a double-digit rate, and in Mexican foods, Old El Paso retail sales are up 7%. We are also performing well in emerging markets. In Greater China, new Häagen-Dazs cafés, strong mooncake sales and increased retail visibility are driving a double-digit increase in net sales for this business year-to-date. Our Wanchai Ferry product line is moving beyond frozen dumpling into frozen noodles, tongyuan and wonton in existing cities. We're also expanding our frozen dumplings product line into new cities. In total, year-to-date sales are growing at a double-digit rate. In Brazil, Yoki is posting double-digit sales growth in some of its largest categories, including popcorn, seasonings and side dishes. We see exciting opportunities for future product innovation, sales growth and margin expansion in this key emerging market. So we're pleased with our International performance. Our base business is growing, and our recent acquisitions are on pace to deliver expected year 1 results. We remain on track to meet our targets for the full year. These are high single-digit net sales growth and operating profit ahead of last year for our base business and contributions to both sales and operating profit from acquisitions. Let me also say a quick word about our Cereal Partners Worldwide joint venture. Through the first 9 months, constant currency net sales were up 2%. We are leveraging our large core brands, like Chocapic and Cheerios, and we recently launched Chocolate Cheerios in the U.K. The cereal category is posting growth in markets around the world. While there is some category softness in southwestern Europe, sales in other established markets, like the U.K. and Mexico, are up. And the category is growing even faster in emerging markets, in Latin America and Asia. CPW holds a 23% value share of the cereal category outside of North America, and we continue to like the growth prospects we see for this venture. So with that, let me summarize today's update on fiscal 2013. We have robust levels of news and product innovation in markets around the world. We've delivered solid year-to-date performance, with a mid-single digit increase in total company net sales and double-digit growth in adjusted diluted earnings per share. And for the full year, we've raised our EPS guidance to $2.66 to $2.68 for fiscal 2013. And as we outlined at CAGNY last month, we will return to our long-term earnings model in 2014, including high single-digit growth in EPS and increased cash returns to shareholders. So thanks to all of you for your time this morning and for your interest in General Mills. I'll now ask the operator to open the call to your questions.

[Operator Instructions] Our first question, coming from the line of Andrew Lazar with Barclays.

I guess, I was -- within U.S. Retail in the third quarter, I was a bit surprised that despite a lot of the big gain in last year's third quarter in price mix, that price mix actually accelerated sequentially from, I think, 0 in the second quarter to up 2 in the third. So I'm trying to get a sense of what drove that and if that was primarily just a mix of products shift? And I guess, more importantly, given some of your language around the fiscal fourth quarter and what to expect in more in-store merchandising and such and the very tough comp with respect to pricing last year, should we expect price mix in the fourth quarter to be lower and then, I guess, heading into fiscal '14? And the reason I ask is because obviously, one of the concerns out there for the group is, given more modest input cost inflation and what have you, does it drive the industry to sort of get a bit more promotional, like we saw back in sort of '09 and 2010, which didn't end up that well?

Andrew, let me, maybe let me address the last point that you made first, and then, I'll turn it to Don. I mean, I think the short answer on Q3 is, that was driven by mix, but we can elaborate a bit and give you some commentary on what we expect in quarter 4. I think what I would say on -- just on pricing and promotion is, as you know, we've had -- we've sort of been carefully and selectively, but consistently, adjusting price points and merchandising frequency over the course of the year. As we look at our price points across our categories now, we think we are about where we need to be. And as we have gotten to those price points and mix of merchandising that we want, we've seen our baseline sales improve consistently, really over the course of the entire year. So we feel that we're about in the right place, with the exception of some aspects of the cereal category, overall, we think that -- which we've commented on -- overall, we feel that the merchandising environment is reasonably stable now. So we don't really expect any changes in the fourth quarter.

Yes, and Andrew, what I'd add to that is just to emphasize that it really was more mix favorability in the third quarter. We do expect that to moderate in the fourth quarter, because we do, as said before, our merchandising phasing is more backloaded this year. We're not going deeper, but just more frequency, and so we'll see that come through in probably lower price mix in the fourth quarter than what you saw in the third quarter.

Got it. And is that -- is the gross margin that's implied in your fourth quarter, based on your full year guidance, is certainly below what we have been modeling and we've obviously been modeling a lower gross margin year-over-year anyway. So I assume that's partly driven by the price mix piece that you just mentioned.

Yes, it is.

And inflation...

Yes, I mean, just for a little bit of detail there, if you looked at merch a year ago in Q4, it would've been down 6%. So part of this is just the comp.

Our next question, coming from the line of Eric Katzman with Deutsche Bank.

Okay. I guess, the first one is, let's say, a more simple question, but with the devaluation hit, the Venezuela, Don, the margins in International dropped quite a bit. Should -- are you taking pricing up relative to the deval there and so we should see margins recover in International as like, F 2013 comes to a close and F 2014 starts? Or is this lower level kind of what we should think of as the right one?

Well, the deval is obviously a onetime hit, for the most part, the restatement of the balance sheet. And Venezuela is a fairly small piece of our International business, so what you see in our margins in International is largely a mix, which will even out as we lap the acquisitions next year, so you'll start to see margin expansion, our normally planned margin expansion following that, so I wouldn't overread too much into the Venezuela piece.

Okay. And then Ken, at CAGNY, I guess you and the board kind of made the decision, with what's been very good free cash flow over the years, to kind of take a pause on the M&A international side and return cash to shareholders. Can you kind of talk a little bit more about, kind of, why you're doing that? Is it that the organization is, let's say, maxed out on terms of its ability to take another deal on, or are the prices too high? Or that the stock is, in your view, too cheap, and that's why you want to return the cash via share repo? And then, obviously, you put the dividend up, too.

Yes. So Eric, I think what I said at CAGNY was that we have had an unusually high level of M&A activity over the last 18 months. And frankly, while we would like to expand our footprint internationally, and we've talked about that repeatedly, these opportunities came before us at a pace that we didn't really expect and were very high-quality as well. And so we were -- we took advantage of those opportunities and we were very, very active. As we look forward over the next period of time, we don't see anything of that size or scale, really, on our radar screen right now, and so that's one factor. And -- but I would say, generally, we don't expect our pace of M&A activity to be anywhere near what it -- as we, on a running rate basis, anywhere near what we saw during the past 18 months, which was just a very high level of activity. So I'd say that, that's the -- sort of, that's the guiding principle. And for next year, we expect M&A to be relatively low and we will be very much on model. That doesn't preclude going out over the longer term, that we might find an opportunity in other key emerging markets. There are a few that we've talked about, India for example. But we think those would be very manageable, and again, we don't have anything on our radar screen now.

Our next question, coming from the line of Matthew Grainger with Morgan Stanley.

I just wanted to ask about the cereal category, generally. Your volumes overall have definitely appeared to have remained fairly soft, leaving aside all the cyclicality in market share. Can you just talk a bit more about competition within the day part? I know this is a commonly discussed issue, but any new observations you can add on why volumes haven't recovered more, even with a fair amount of promotional intensity from multiple players in the category?

Yes. I think it is -- obviously, breakfast is a very competitive occasion. Breakfast cereal is, by a wide margin, the most dominant component consumed at breakfast. We are in well over 1/3 of all breakfasts and the #2 falls far below that, so we're the lion's share. But there is competition, clearly, for the breakfast occasion. Snack bars, which are adjacent to the category and where we've been very, very successful, is one of those competitors. And so we see a little bit coming from there. Hot breakfast, just eggs and bacon, and that sort of thing, we're seeing a little bit of resurgence there. So that, I think, is a competitive element. But mostly, Matthew, I think it's such a versatile category and it's so responsive to innovation. I think, clearly, the opportunity is for us to strengthen our innovation, strengthen the marketing. I think there are going to be other nutrition-oriented opportunities that we can innovate around. And I think as we do that, typically, what we see is a return to category growth, low single-digit growth, but we've seen that low single-digit growth in response to innovation that we lead over very long periods of time. So there's competition out there, there always will be, whether it's bacon and eggs or snack bars. But the category is so big, and there's so many opportunities for innovation that we feel very confident that we can bring innovation that will get us back on that low single-digit growth path.

Yes, I'd just add that, again, if you look over the longer term, this is a category that has grown low single digits, not each and every year, but certainly over time. Wide participation in the category in terms of penetration and high-frequency, and as Ken mentioned, by far, the highest frequency in terms of in-home breakfasts. So we believe it still has a lot of growth in front of us and to Ken's point, it really is about innovation and ensuring that we and other market leaders are supporting the brands the right way, and I think we're starting to see that in the category again.

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

I guess, 2 questions for Dave, relative to Bakeries and Foodservice. One, I guess, is just in terms of the efforts you've made, the investments you've made in terms of having a direct sales force, how much of an advantage is that? Or maybe, how does that stack up relative to your competitors? Or is that sort of -- was that a function of catching up to what some of your other competitors are doing? Or do you feel as though you've actually got a more muscular sort of effort in terms of selling into accounts?

Well, I would say, first of all, we obviously started at -- a couple of years ago, we had a brokered sales force. So we've had experience with that. We still have brokers working in certain pieces of our business. The dominant piece of our sales force is our own sales force, and we do feel as though it's a competitive advantage for us. We have a chance to look at the ROI in both and because -- if you think about our channels, there's some specialized sales that go on within our channels, whether it's healthcare, where you're talking to dietitians, if it's K-12 with all the nutrition guidelines. And we really feel like they're able to carry our message and give a better oral argument and take our capabilities to our customers and our operators in a better fashion. So we actually do feel as though this is a competitive advantage for us.

And then, in the slide, I guess it's Slide 19, where you show the gross profit, 73% comes from the 6 key platforms. In the 27% that's Other, is the milling business in that Other piece?

Yes, it is.

So -- ConAgra has recently, kind of, taken the move to peel out its milling business and move it into a joint venture and I guess as we've kind of gone through the math in looking at that, it was definitely a much lower-margin business, relative to the rest of its Foodservice business. And I guess the implication here is that, that seems like it's the same here. So had you -- was that something that you had considered? Were you surprised by that move? Were there any -- would there be anything that would inhibit General Mills from being able to do something similar?

Well, you're right in that we, the Bakeries and Foodservice division, obviously, are heavy users of our mills. We've got a very lean and efficient operation right now. And in terms of the Ardent Mills, I think you're speaking of the Ardent Mills joint venture, and we're not -- I really don't want to speculate on the particulars of that today, but obviously, we're always looking for moves that would improve our shareholder value. So we are open to several things and we're discussing those on an ongoing basis. I think Don may have a couple of comments, too.

Yes, what I would just add to that is our mills are very highly utilized, so we get great asset leverage on them. To Dave's point, they're low-cost, they're also, in some aspects, integrated with our branded business, Bisquick, for example. And we do, like many parts of our portfolio, we look at them from time to time to see if there's a different way to structure them to extract more shareholder value and quite honestly, we've never seen the play. And so we like the participation we have with the mills and they're not a big part of our business, of course, but they are an integral part to some of Dave's businesses and some of our U.S. Retail businesses.

So Matthew, just one more comment going back on the -- on your question, your good question on sales. I would just add that across General Mills, we do use both. We use -- we have our own sales forces and sales leadership in both the Retail side of our business and in Foodservice. But we also use brokers, especially for the in-store piece, where that execution can be very efficiently done by brokers. But I guess I would tell you, our very strong view is that the sales capability is, it's a core strategic capability for us. We really want to make sure we're on the same side of the table as our customer and that we're helping them grow their business. And that means that we've developed a number of capabilities around category management, around supply chain, around in-store marketing, that we believe we can do most effectively and in advantaged ways on our own. And we think that's been a real top line driver for us historically, and that's why we run it the way we do.

And just to run that point to the ground, because we do have both in-house and broker sales force on both brands in our Bakeries and Foodservice and our U.S. Retail, we have a good line of sight on what the cost structure is of each, and we know that our direct is very competitive and to Ken's point, more effective in what we're trying to do to drive growth.

Our next question, coming from the line of Ken Goldman with JPMorgan. Kenneth Goldman - JP Morgan Chase & Co, Research Division: In recent weeks, we've heard both Kroger and Safeway talk about, I guess, featuring more better-for-you items and really, in Safeway's case, really making some dramatic changes to their layout. Safeway even talked about wanting to become a wellness store that just happens to sell food. So I'm curious if you're comfortable with your level of participation in this growing part of the store? Or if you feel you maybe need to accelerate your growth in healthier eating by really ramping up the pace of acquisitions for Small Planet? And I know you've said you wanted to do deals in that division, and you've done them in the past, I guess I'm just asking about the pace of those deals, what you're seeing in the market and whether you want to pick M&A up, given what some of your customers may be looking for?

So Ken, I think I would start by saying, we believe strongly that our broad portfolio is naturally advantaged when it comes to health benefits, and we've continued to improve our portfolio, really, over long stretches of time. Cereal, I think, is -- we know that consumers have a high regard for the nutrition profile of cereal. And as General Mills has added whole grain to our cereals over the years, so that we are now one of the leading sources of whole grain in the country, and done things like reduce sugar, that's only increased the perception of that. Our snack bar franchise, I think, is strongly health-oriented, that's really one of the key appeals of that product line. And then, as you go down the list, our soup business, our Progresso soup business, our Green Giant business, the entire yogurt category. So -- and we have metrics in place and incentives and management focus across the company to make sure that we continue to improve these products continuously. So just as an example, recently, we took the high fructose corn syrup out of Yoplait Original in response to what we were hearing from consumers and actually advertised that to a very great benefit. So as you think about consumer attitudes and changing consumer attitudes, think about the portfolio of General Mills, we think it is highly advantaged. And that's before you get to the organic and the natural products in our Small Planet division, which as you pointed out, we've been adding to with acquisitions. And I think that is an area that's of interest to us, and we will continue to look for opportunities there, because that is a growing area and it's, for a variety of reasons, the natural piece, the values embodied in organic that appeal to many consumers. So that will be an area of interest for us as well. But I think the core point is we have a very strong portfolio when it comes to health and nutrition.

Our next question, coming from the line of John Baumgartner with Wells Fargo.

Don, just in terms of Europe and maybe even in terms of contributions from joint ventures, what are your thoughts there for growth into fiscal '14? I think it seemed maybe, up to this point, you're bracing for a bit of a slowdown on account of the economy, are you seeing anything different there in terms of being better able to weather the economy, is performance better than you thought, is there still some downside there? Just kind of curious about the European environment.

Well John, thanks for the question. We don't have specific guidance yet for F '14. We'll provide that in June. But our business in Europe continues to grow, which is different than many of our competitors. Ken outlined some of the key reasons, not only do we have great brands and great capabilities on the continent, but we also are less penetrated in most of our categories outside of Yoplait, obviously. And we're seeing that as a great growth opportunity. So we -- we are not immune to the economic realities of Europe. We're seeing it, certainly, in southwestern Europe in our cereal joint venture. But overall, we're seeing growth in Europe, and it's been -- year-to-date, it's still low-single digits to mid-single digits, and we like the shape of our business in Europe.

The only thing I'd add to that, John, is that Don's comments on cereal, where we are much more exposed to southern Europe, that European cereal category was running at less than 1% through the first half of their year. But the recent performances has been better, it's been closer to 2%. So anyway, one swallow doesn't make a spring, but we're seeing a little bit better performance in one of our most important categories in Europe. But overall, I think obviously, we are all very aware of the economic difficulties there.

And Ken, just as a follow-up, in terms of the Yoplait business internationally, I mean, do you see opportunities there to take on more licensee businesses? Or is that kind of done for the time being?

I'm sorry, John, what were you -- to take on...

More licensee businesses, as you fold [ph] more...

So that, we've talked about that in the past, and that, I think, could be -- there could be further opportunities for us going forward, and we'll continue to explore, but absolutely nothing to announce on that today. But clearly, that's out there as an ongoing opportunity.

Our next question, coming from the line of Chris Growe with Stifel, Nicolaus. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just had a couple of questions for you. I wanted to go back to an earlier question about -- and just to better understand what's going on in the fourth quarter with promotional spending. Is there -- you talked about an increase in frequency, not so much in depth, and I was just curious if that -- is the Q4 promotional spending meant to be a change from Q3, is there a pickup? I realize it's a comparable factor year-over-year. Is there an increase in Q4 at all as you get some of the new products on the shelf?

Chris, it's primarily the fact that we were lighter a year ago, so there is a comp there. I think there may be a bit more just around new products, but those would be very -- that would be a very specific kind of activity. But in general, as I said earlier in this call, having carefully moved our merchandising programs over the course of this year, we feel pretty good about where we're at right now. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, my other question for you was on International. And you've had a -- you had a couple of unique factors last quarter with Canada and this quarter with the Venezuelan bolivar, so you've had good underlying profit growth. Year-to-date, by my calculation, you've been about in line with your revenue growth, actually a little faster than revenue growth in terms of your profit increase. But in the last couple of quarters, it's been a little below the revenue growth. My question just is that -- just to understand the investments or sort of what's going on behind the scenes, that's -- where you're investing that's keeping profits from keeping pace of sales the last quarter or 2?

Your math is correct. Year-to-date, if you take out the bolivar and the Yoplait Canada transition costs, I'll call them, the earnings -- underlying earnings are growing faster than sales. And obviously, sales are growing pretty robustly at 23%. In International business, there's a lot of different markets, there's a lot of different dynamics. Quarter-to-quarter, you're going to see some of those movements. We tend to look over the full year multi-quarters and the trend that we're seeing in International is we're bullish on the growth. And as I mentioned earlier, on the margin expansion opportunities, too, which are masked a little bit this year, gross margin opportunities, as we bring in new businesses, which not surprisingly, have lower gross margins but faster absolute dollar growth opportunities for us. So you'll -- I think you'll see a cleaner picture and a clearer picture of that as we get into F '14.

Our next question, coming from the line of Robert Moskow with Credit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: Actually, a question for Don, I think one of the reasons that investors are kind of concerned about a more aggressive promotional environment going forward is the perception that commodities are kind of deflationary. But I think what you're kind of pointing to is that your inflation is kind of rolling through, probably, at a higher level as we head into fiscal '14, specifically because it was higher in the fourth quarter. So higher inflation tends to be the thing that keeps the environment rational. So is there anything you can kind of, directionally, you can point us to for inflation in '14?

I'm not going to give guidance, but I do want to just make sure it's clear on one thing, because you do hit an important point. When you look at our fourth quarter, we gave guidance for the full year of gross margin being down 60 to 80 basis points. Obviously, you do the math, you can see it's going to be down by more than that in the fourth quarter. We've talked about the timing of merchandising and the lower merchandise levels a year ago that we're rolling over. But inflation is the other factor. We took some coverage to complete our full year coverage for commodities, especially grain commodities, in the fall. That was obviously impacted by the drought. That coverage only extends to the end of F '13. So that coverage, that higher cost coverage, if you will, does not extend into F '14. But to your point, again, without giving guidance for F '14, we expect more moderate inflation. We -- as we do our planning, we always plan for something in the low-single digit to mid-single digit inflation. We don't see it going to deflation, certainly as of today. We are aware of the concern that you articulated from investors in terms of where pricing can go even if we see deflation as an industry, and we don't foresee that as we sit here today.

[Operator Instructions]

Our last question, coming from the line of Jason English with Goldman Sachs.

So U.S. Retail sales, organic sales, were better than we expected. This has been a pretty consistent pattern of you guys exceeding what's measured in Nielsen by a fairly meaningful magnitude. Can you help us as understand where the drivers of the excess growth are coming from?

Well, I would say on U.S. Retail, I guess my starting point would be, as we have worked price and merch over the last year, as we've done that, Jason, we've seen baselines in U.S. Retail across all channels improve very nicely and sequentially. I think we were down -- the baselines were down 5% or 6% in Q1, down 3% in Q2 and flat in the most recent quarter. So as we get our pricing in the zone, which has been our goal, the response that we are seeing is actually an improvement overall in the business and improvement in unpromoted sales. And so -- so that, I think, the response there has been very encouraging and has been a key driver in our performance.

I guess, Jason, the only thing I would add is, as you saw in this quarter, it's really that sales growth was a price mix, particularly, mix plus for us. So we don't see a -- part of the underlying question may be, are we seeing any pipeline build? We're not seeing that, it is really just a matter of the mix of the business coming through with a stronger top line.

Yes, I was also just curious about sort of the unmeasured channels, there's still a big swath out there that's not going into Nielsen. With Small Planet foods, you guys have good momentum, I'm wondering if some of that's coming in maybe the specialty or natural channel or out of Club, are you seeing outsized growth in any of those channels?

Good growth in Club and as you said, good growth in natural. So yes, those are, obviously, important channels for us and we are doing well there. Very good growth, as Dave commented, in convenience stores, which is an increasingly important channel for us. So we're -- and that -- so we're very, we have very good sales focus on all of that channels -- on all of those channels, which goes back to the early discussion we had on the sales force, and we're seeing solid growth in those places.

Thanks, everybody. For those that are still in queue, sorry we didn't get all the way through. Give me a shout, I'll try and get your questions answered.

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. Have a great day.