General Mills, Inc. (GIS) Q4 2013 Earnings Report, Transcript and Summary

Welcome to the General Mills F13 Q4 year-end earnings release conference call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, June 26, 2013. I would now like to turn the conference over to Kris Wenker, Vice President, Investor Relations. Please go ahead.

Thanks, operator. Good morning everybody. I'm here with Ken Powell, our chairman and CEO, and Don Mulligan, our CFO. And I’ll turn the microphone over them in just a minute, but first, let me cover my usual housekeeping items. Our press release was issued over the wire services earlier this morning. It's also posted on our website, if you still need a copy. We've posted slides on the website, also. They supplement our prepared remarks this morning. And our remarks will include forward-looking statements that are based on management's current views and assumptions. The second slide in today's materials lists factors that could cause future results to be different than our current estimates. And with that, I'll turn the call over to Don.

Thanks, Kris, and hello, everyone. We appreciate your interest in General Mills today. As you’ve seen from this morning’s press release, net sales in the final quarter of 2013 grew at a high single-digit rate up 8% to exceed $4.4 billion. That includes 7 points of growth from new businesses. Segment operating profit of $722 million was 2% below year ago results that grew 9%. Net earnings attributable to General Mills and diluted earnings per share both grew at a double digit rate, primarily due to lower restructuring expense this year. Adjusted diluted EPS, which excludes restructuring and certain other items affecting comparability, declined 12% to $0.53 per share. Slide five gives you the components of our fourth quarter sales growth. Volume was up 11%, including strong contributions from the recently added Yoki and Yoplait international businesses. Price and mix reduced sales growth by 1 point in the quarter, and foreign exchange subtracted 2 points of growth. Slide six shows the gross margin, excluding mark-to-market effects, declined in the fourth quarter as expected. This reflects the factors we discussed on our last call, namely that our fourth quarter input costs were above year ago levels, and so was our in-store merchandising activity. For 2013, in total, underlying gross margin was down 80 basis points to 36.1%. This was entirely driven by the change in our business mix, primarily the additions of Yoki and Yoplait Canada. Slide seven summarizes a few other items of note to the fourth quarter. Advertising and media expense increased 5%. Corporate unallocated expense, excluding mark-to-market effects, totaled $115 million. That’s above last year’s fourth quarter, due in part to a $40 million annual increase in pension expense this year. Our fourth quarter tax rate was 31.5% as reported, including several discrete tax items that have been excluded from our calculation of adjusted diluted EPS. Excluding certain items affecting comparability, the fourth quarter tax rate was 35.1% this year, compared to 31.1% a year ago. Remember that last year’s fourth quarter rate was the lowest of the year. For the full year, our underlying tax rate matched last year’s 32.4%. One final item of note to the fourth quarter. Historically, many of our international operations have been consolidated at a one-month lag to our fiscal year. We have a long term project underway to align all of our international operations on our corporate fiscal reporting period. As part of that effort, fiscal 2013 includes 13 months of results for our Europe region. Last fiscal year’s results included 13 months for our operations in greater China. The extra period in each year does have some impact on fourth quarter sales growth rates for our Europe and Asia-Pacific regions. However, there was no material impact on the total international segment results or on overall company sales and operating profits for fiscal 2013. The full year results are summarized on slide eight. Net sales for 2013 grew 7% to reach $17.8 billion. New businesses contributed 6 points of that growth. Sales at our base business increased 2%, before a 1-point drag from foreign exchange. Segment operating profit increased 6% to reach $3.2 billion, net earnings and diluted EPS grew at double digit rates, and adjusted diluted EPS, which excludes restructuring costs. Mark-to-market effects and certain other items affecting comparability, grew 5% to reach $2.69 per share. That’s a bit above the $2.65 target we set at the beginning of the year. Now let me give you a quick summary of how our three operating segments finished 2013. For our U.S. retail segment, net sales grew 1% to $10.6 billion. And operating profit increased 4% to $2.4 billion. On slide nine, you can see U.S. retail sales split by our new marketing division structure we adopted at the start of the fiscal year. Sales for our Big G cereals, frozen food, and Yoplait declined for the year, while baking products, snacks, meals, and Small Planet Food divisions posted sales gains. Consumer takeaway trends in the fourth quarter saw sequential improvement as we can see on slide 10. Our increased merchandising activity in the quarter helped drive retail consumer sales growth for a number of key product lines and even stronger unit volume gains across our U.S. portfolio. So we exited 2013 with better momentum in this business segment. For our bakeries and food service segment, net sales declined slightly in 2013, reflecting a 1% decline in pound volume. But operating profit rose at a double digit rate to $315 million, a new record. And segment operating margin expanded 160 basis points to 16.1%. This good performance reflects our ongoing strategy of focusing on key branded product lines and the most resilient customer channels. 2013 net sales for our international business segment grew 24% to reach $5.2 billion. This reflects mid single digit growth in base business net sales and strong contributions from Yoki and Yoplait International. Operating profit rose 14% to $490 million. That’s despite the Venezuela currency devaluation and the one-time costs associated with transition of the Yoplait Yogurt license in Canada. If these items are excluded, our consolidated international operating profit would have increased 24%, in line with sales growth. On slide 12, you can see our international sales, split by geographic region. Canada sales rose 22% to $1.2 billion, reflecting low single digit growth in base business net sales and the addition of Yoplait. Latin America sales more than doubled to $876 million as we added Yoki. Our sales in the Europe region grew 11% to exceed $2.2 billion. This includes low single digit business net sales growth, two incremental months of Yoplait results, and one extra month of base business results, as I mentioned earlier. In the Asia-Pacific region, sales grew 11% to $900 million. That’s despite lapping the extra period last year for greater China. On a constant currency basis, our total international segment sales grew 28%. Today’s press release includes constant currency sales growth by region. Slide 13 summarizes 2013 joint venture performance. Net sales for cereal partners worldwide rose 2% on a constant currency basis, and constant currency sales for Haagen Dazs Japan grew 5%. After tax earnings from joint venture grew 12%, to reach nearly $100 million. And dividends received from the joint venture, net of advances made to them, totaled $79 million in 2013. Turning to the balance sheet, slide 14 shows the components of core working capital. In a year where net sales increased 7%, our core working capital declined 5%, reflecting our focus on extending payables terms. Cash flow from operations totaled $2.9 billion for the year, a robust 22% increase versus last year. And that’s net of a $200 million voluntary contribution to our pension plans. This strong cash flow funded $614 million in capital spending. That’s a bit below our original estimate for the year, primarily due to changes in project timing. And we returned $1.9 billion of cash to shareholders through stock buyback activity and an 8% dividend increase. We bought back 24 million shares during the year at an average price of roughly $42 per share. In addition, we funded strategic investments in new businesses. Debt increased a bit this year due to those investments. However, we still received an upgrade from one of the primary debt rating agencies. Turning to fiscal 2014, our plans call for another year of good sales and earnings growth for General Mills. We’re targeting low single digit sales growth that includes volume and sales growth in our base business in three incremental months of Yoki and Yoplait Canada. We’re estimating input cost inflation of 3%. We expect our strong set of holistic margin management initiatives to offset this cost headwind. We expect segment operating profit to grow faster than sales. Pension expense was a $0.06 per share headwind for us last year. As we look at 2014, pension expense will be a neutral factor. I can also report that our pension plans are in good shape. The return on plan assets was over 16% in 2013 and the funded status overall exceeds 94%. Finally, I’ll remind you that our 2014 plans call for increased cash returns to shareholders. We expect to generate strong operating cash flows again this year. We expect capital investments to total roughly $700 million. The resulting free cash flow will fund a 15% dividend increase, effective August 1, and share buybacks are designed to reduce diluted shares outstanding by a net 2%. Slide 17 provides a summary of our earnings guidance for 2014. Our targeted sales growth is expected to push annual revenue above $18 billion. Underlying gross margin is projected to improve modestly from 2013 levels. We expect our media investment to grow in line with net sales. We project our operating profit will grow at a mid single digit rate. We’re assuming an underlying tax rate comparable to last year’s 32.4%. We expect new venture earnings to grow at a mid single digit rate in constant currency, and be roughly comparable to this year’s strong results on an as-reported basis. And we expect adjusted diluted earnings per share to increase at a high single digit rate to a range of $2.87 to $2.90 per share. We believe our operating plans for 2014 are quite strong. We have high levels of innovation planned across our portfolio. To tell you more about our plans for the new year, I’ll turn the call over to Ken.

Thanks, Don, and good morning to one and all. So Don’s just given you the key financial targets embedded in our 2014 plans. Our confidence in this year’s plan is rooted in the strength of our product portfolio. As you know, we’ve taken clear actions in recent years to focus and enhance our business mix. Slide 19 provides our 2013 sales split by platform for our five global platforms, and for our additional businesses that are largely US-based. We compete in large, profitable food categories that are important to both retailers and consumers, and our brands hold leading positions in these categories. Our global categories of ready-to-eat cereal, super-premium ice cream, convenient meals, wholesome snack bars, and yogurt are projected to grow at attractive rates in the years ahead. Innovation will be the key driver of this growth, and we’ve got strong plans to do our part in fueling that category growth in 2014. We’ll share the details of those plans at our investor meeting on July 9, but let me give you some quick highlights of our first half innovation plans this morning, and I’ll start with our cereal business. After an extended period of sales and market share gains for our U.S. cereal business, we gave up a bit of ground in 2013. Category sales also declined modestly for the year. In 2014, we’re bringing a stronger new product lineup, and stronger advertising to the cereal aisle, and we expect to generate annual sales growth for Big G. Slide 21 shows just the new items we’ll be launching in the first half. We’ll have additional new items later in 2014. We’ve also got significant ad campaigns behind several Big G stalwarts including Lucky Charms, Reese’s Puffs, and the one and only Cheerios. In Canada, we’re expanding the Cheerios franchise with new Honey Nut Cheerios Hearty O Crunch. We’re expanding the Fiber One franchise too, with an almond and cluster variety, and we’re increasing the consumer marketing activity focused on the cholesterol lowering benefits of our whole grain oats cereals. Our cereal partner worldwide also has a full slate of product news and marketing innovation planned this year, including new varieties of Fitness, Chocapic, and Nesquik. Add it all up, and we see excellent growth prospects for our global cereal business in 2014. Let’s turn to snacks, beginning with our wholesome snack bars business. We’ve added nearly 10 points to our share of the $3 billion U.S. grain snacks category over the past five years, and we’ve got a strong innovation lineup coming again in 2014. This includes extensions of Fiber One protein bars and new lemon and coffee cake flavors of Fiber One 90-calorie bars. We’re also expanding our Nature Valley franchise with two terrific new lines: soft baked oatmeal squares and Greek yogurt protein bars. That’s all in our U.S. retail business. Our bakeries and food service team sells a lot of snack bars in convenience stores too. We’ve got several new items launching in this channel, including single-serve versions of our Nature Valley soft baked oatmeal squares and Betty Crocker brownies. Beyond grain snacks, our new line of Green Giant vegetable snack chips is off to a great start. We launched the first flavors in January and will expand the line this summer. And in the freezer case, we’ve got some new, bold flavors of Totino’s pizza rolls. And finally, we’ve got some great new items for consumers interested in organic and natural snacks. Sales for our LARABAR all-natural fruit and nut bars continue to grow at a robust double digit rate. The newest addition to this line is ALT, a snack alternative that gets its high protein content from peas. We’re also expanding the Food Should Taste Good assortment, with two varieties of corn dipping chips. Outside the U.S., our Nature Valley and Fiber One snack bar lines continue to expand at a fast clip. Our 2014 plans include new flavors, new package sizes, and new points of distribution for these two powerful brand franchises. Slide 27 shows a few of our new convenient meals items for 2014. Retail sales of Progresso soup increased 8% in 2013. We’ll fuel that momentum with an assortment of great tasting new varieties. Every night, over 1 million U.S. families choose Hamburger, Chicken, or Tuna Helper for dinner, but this business has been languishing in recent years. We intend to renew Helper’s growth in 2014 with a comprehensive marketing plan featuring new products, new packaging, and new advertising. We’re also introducing a completely new line of high quality frozen Old El Paso Mexican entrees. Outside the U.S., we’ve got strong product news and innovation coming on our key Old El Paso and Wanchai Ferry lines. And in Brazil, we’re launching a new line of dinner kits called Yoki [unintelligible]. For our Haagen Dazs ice cream business, fiscal 2014 is primed to be another strong growth year, fueled by a global advertising campaign featuring actor Bradley Cooper. This advertising just began airing in select international markets. And finally, let’s talk about yogurt. We’ve got a tremendous amount of product innovation coming across our global yogurt business in 2014. In the U.S., we fell short of our goal to renew annual sales growth in 2013. However, we did post a modest increase for the fourth quarter of the year, and we intend to build on that momentum in 2014. Our launch of Yoplait Greek 100 Calorie yogurt is a clear success. Year one retail sales for this product are expected to exceed $140 million. We’re launching a multi-pack version and supporting the line with increased levels of advertising. We’re launching a new full-calorie line of separated Yoplait Greek yogurt. This product’s point of difference is its superior taste. We’ve got a new line of Yoplait Fruitful yogurt, a new high protein variety of Gogurt, and the continuing U.S. regional rollout of Liberte yogurt. So all of this should fuel U.S. yogurt growth this year. And outside the U.S. our yogurt business is posting good sales and share increases in key markets. We’re a leading player in the emerging Greek yogurt segment in Canada, the U.K., and France, with brands ranging from Liberte to Yoplait Yopa, to Yoplait Source. We’re developing the reduced calorie segment in various global markets with Weight Watchers endorsed product lines. Cal-in yogurt delivers the calcium and vitamin D that contribute to bone health, and we’ve got a range of new yogurt items designed to appeal to kids and their moms. In short, we believe we’ve got lots of ideas that will drive good growth for our brands and the global yogurt category in 2014. In the U.S., we have one more product category I want to mention, and that’s our baking products business. Our Pillsbury and Betty Crocker brands are the leading players in refrigerated dough and shelf-stable baking products, categories that generate a combined $4 billion in retail sales. We’ve just wrapped up a great fiscal 2013, with growth in volumes, sales, and profit. Our 2014 innovation efforts include the launch of a gluten-free line of refrigerated dough products, expanded distribution of the Immaculate Baking line, and some great new dessert mix items including a line featuring the irresistible taste of Hershey’s chocolate. So that’s a few highlights from our innovation plan. It’s a strong full year program. So we feel confident about our prospects for good top line growth in 2014. We’re expecting to combine that sales growth with margin expansion this year. Our schedule of HMM projects adds up to a strong level of cost savings, and we see the 3% input cost inflation in our plan as manageable. Remember too that some of the margin compression we’ve seen in each of the last two years simply reflected changes in our business mix, particularly the additions of Yoplait International and Yoki. We’ve largely integrated those businesses, and have already begun introducing HMM tools and other practices that drive efficiencies. These factors all support our goal of growing operating profits faster than sales in 2014. We also expect to resume improvement in return on capital this year, following two years where strategic acquisitions interrupted our progress. Net earnings growth will be the primary driver of that ROC increase, but our discipline around working capital and uses of cash will also contribute to this objective. So I’ll wrap up this morning by summarizing the key points of our 2014 outlook. Our plans for this year add up to a healthy level of top and bottom line growth, fueled by robust innovation and marketing plans across our portfolio. We expect to couple sales and earnings growth with an increasing return on capital. We’ve planned a strong level of cash returned to shareholders, and we look forward to talking more with you about these plans during our investor event two weeks from now. So with that, we’ll open the call for questions. Operator, please get us started.

[Operator instructions.] Our first question comes from the line of Chris Growe from Stifel. Please proceed.

I had two questions for you. Maybe the first one for Don. Is there anything unique to the year in terms of maybe the way the input cost inflation is flowing, or maybe the comparisons to fiscal 13, where you had a number of one-time items, like the Venezuelan bolivar devaluation. Just trying to get an understanding of the shaping of the earnings for the year and if there's any unique things that we should be aware of?

Yeah, we expect 3% for the year. It will be a little heavier in the front part of the year as we phase it through, as we come through some of the costs you saw in our fourth quarter in Q4. So as you model it, think about a little bit heavier inflation in the front half than the back half. But importantly, think inflation, not deflation, throughout the year. But a little heavier in the front half.

Is there a certain amount of hedging you have in place now in the input cost inflation, Don?

Yeah, we’re about 45% covered, which is a typical spot for us to be at this point in the year. So we have pretty good visibility, particularly the front half.

My second question was on Yoplait, in the U.S. in particular. You had another year of sales being down. And I just want to be clear on, as you look at the new product pipeline, your core cup performance, maybe some marketing increasing? I’m just trying to get an understanding of your expectations for your performance with Yoplait in fiscal ’14. Do you expect sales growth? And how do you rate the new products this year versus last year?

We do expect sales growth in 2014, and that’s built around a couple of pillars. First of all, we did see the churns on our core cup business strengthen considerably over the course of this year, high single digit, low double digit from month to month as we moved into the second half. And so we’re very encouraged by that. That happened as we got those merchandising price points back into the correct zone. And we believe that that improving turns performance will allow us to stabilize our distribution on that core cup line. So we’re very encouraged by what we’re seeing there. Our kid business has continued to be quite robust. We really like what we’re seeing from Liberte as we continue to expand that business across the U.S. And I believe we’re in about 50% of the country now, and so obviously more to go there. And then finally, we have quite a good lineup of new products. The Yoplait traditional Greek product that we will be shipping here as we come into July is a terrific product. It’s a filtered traditional Greek yogurt. It has absolutely a terrific taste profile, and we believe that will be very well received by consumers. Retailers are quite enthusiastic about it as we bring that to market. We really just started with Yoplait Greek 100. That’s been very successful for us as we said in the presentation. We think that’s going to be well over a $100 million in year one. And we’ve just started on that. So we’ll be bringing new flavors to that, multi-packs, all the things that we can do to continue to give that product the growing shelf space that it will deserve. So we feel quite good about the innovation that we’ve got on that business. So we’ll have high levels of advertising and we’re sort of loaded for bear here and feel optimistic about 2014.

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

First, I just wanted to dig into the gross margin expansion, you expect a little more for fiscal ’14. I think you said underlying gross margin, ex the acquisition, was roughly flat in fiscal ’13, and you expect it up a bit in ’14. Inflation’s expected to be pretty similar year over year. So I’m trying to get a sense of what the more significant drivers of the improvement in gross margin will be in ’14. Does HMM look like it will be comparable to last year? Or perhaps greater? Or is it all really just expected better base business performance that will get you there?

It’s actually probably three components I'll point to that you can really put in the larger HMM bucket. We talked about HMM. It’s about productivity, mix, and price. So productivity, we continue to see our productivity grow. We are still very much online to meet or exceed our commitment to get $4 billion of COGS productivity in this decade. So that will be a contributing factor, certainly. The other two are more in the mix bucket. We continue to see strong performance out of our bakeries and food service business as we continue to even heighten our focus on the key product platforms and customer channels where, with our branded products and our direct sales force, we can make a difference, both in terms of volume and importantly mix benefit. And then the other mix, and we actually saw that as we came out of F13, is stronger baselines in our U.S. retail business, which will contribute to better gross margins as well. As a matter of fact, that was probably the key reason that we were able to beat our previous guidance for F13, is that our baseline volume in U.S. retail was better than we had originally participated at the beginning of the quarter. It allowed us to exceed our original guidance by $0.01, and it will help to contribute to some margin expansion in F14 as well.

And Ken, just a broader industry question. I guess I’m curious if you think this is a fair characterization of where the industry is at. It’s that perhaps the recovery in volume has not been as rapid as the industry players would like to see, but that at least it’s been sort of moving forward at maybe a slow and steady pace. So I’m trying to get a sense, is that a fair characterization? And why do you think the recovery has been maybe slower than everyone would like, particularly as we’ve lapped a lot of the pricing?

As to why the recovery has been slower than we all would have liked, I’m not an economist, but I think we’ve all read about how this has just been a very troublesome and challenging recovery for the country. And I think we have felt our share of it. But you know, the important thing, as you said, is that we are seeing steady improvement. We saw sequential improvement in our categories over the course of the year, particularly in the second half, and so the category and trends are improving. And as we enter F14, our situation basically is the categories generally are better. As we just commented a bit, our prices are stable. Inflation is moderate, and we think will be quite manageable for us from an HMM standpoint. And we’ve got a good lineup of innovation. So we feel that with this slow improvement and the steady improvement in the category fundamentals, we feel in quite a bit better position as we enter 2014 both for the industry and also for our portfolio of brands and categories.

Our next question comes from the line of Eric Katzman, Deutsche Bank. Please proceed.

I’m going to follow up on Andrew’s question, Ken, because it seems to me that if you’re forecasting, on the core business, low single digit sales growth, but at the same time you’re saying that categories are better, you’ve seen sequential improvement, your mix and baseline business is stronger, you’ve got a lot of confidence in your new products that you’re introducing. Maybe some of the categories are a little bit different, but it just seems like the organization is targeting market share kind of flat, and not market share gains. Can you respond to that?

Well, we’re looking for flat to up on market share, and I think the points that you’ve made, they’re good points, but the other side of it is it continues to be very, very competitive out there, obviously, as Andrew pointed out. While we’re seeing recovery, the recovery is still pretty slow. So we feel good about the fundamentals as we enter the year, we feel our guidance is prudent, given the continuing challenges of the environment.

And Don, as a follow up, based on my calculations and I think some of your comments at our conference, it looks like you’re trading at about a 7% free cash flow yield. You’re going to give about 3% of that back in the form of a dividend, and you’re buying back 2% of your stock. Why wouldn’t you be more aggressive given that your leverage ratios are pretty reasonable. It seems like you’ve got another 1-2% of free cash flow to either return to shareholders or pay down debt more aggressively. I don’t remember if you said what you expect interest expense to be, but maybe that’s the difference.

First of all, your math is right. It’s about 7% as we sit here today. With our market cap, you’d expect it to be about a 7% yield. Our expectation is that our free cash flow for F14 will be more than 100% of our earnings, so we’ll have the same kind of conversion efficiency we’ve had for the last couple of years. And we’ll return that cash to the shareholders in the form of dividends and share repurchase, and it will be split as it has been in prior years, about a 15% increase in dividends, and we’ll have the 2% reduction in the number of shares. We’ll return a higher amount in dollar terms than what we generate in cash, so we will maintain our leverage ratios for the year. But we will return all that cash to shareholders in the form of dividends and share repurchase. In terms of interest expense, our interest expense will be up in F14 versus F13. Our debt levels in total will be higher, obviously, based on the Yoplait and more recently the Yoki acquisitions. And we also expect to term some of that debt out and probably carry a little less CP this year than we carried last year. So the mix will be a little bit more on the fixed side, and hence a slightly higher rate as we term out at what are still very attractive rates. But shareholders will see all the cash back this year that we generate, as we’ve been talking about for the last several months.

Our next question comes from the line of David Palmer with UBS. Please proceed.

With regard to the big two categories in breakfast for you, yogurt and Big G, yogurt, it seems that the Yoplait Greek 100, you’ve effectively found pretty good promotion price points where it seems to be moving off the shelf rather well. For instance, we’re seeing 10 for 10s lately. Is that part of what’s working there for that, that you’ve been able to find the right size and the right price point, where that’s beginning to resonate in addition to the fact that you’ve gotten the taste and calorie counts to a point so it’s a promotion strategy that’s working? And as you’re thinking ahead to fiscal ‘14, is this really a law of big numbers, where Greek 100 is beginning to overtake the declines that you’re seeing in core cup Yoplait?

So I think that the fundamentals of Yoplait Greek 100 is that it offers consumers a terrific benefit. And you touched on that in your question. But it’s a great tasting, traditionally filtered Greek yogurt that has only 100 calories per serving. And, by the way, it has a nice endorsement from Weight Watchers. And we know that that is a very very compelling benefit in the yogurt category. The light segment, in the traditional yogurt side of the category, that’s a huge segment. So we know the consumers really look for and appreciate that benefit, and I would say that’s fundamentally why it has been so successful, along with the fact that it tastes terrific. And then in terms of the marketing and promotion of that brand, it’s been, I would say, advertising driven. We’ve had good introductory advertising on that brand, I think, and consumers find the benefit compelling. The promotional in-store strategy I would say is very much in the zone, and very competitive. We’re not trying to outpromote anybody with Greek 100. We don’t feel we need to. We’re really driving it with consumer awareness building. So we feel very good about that benefit, and we think that we’ll continue to grow that next year. We have more capacity coming onstream this summer, which I think is an important point, to support the expansion of that brand, and this Yoplait Greek product that we’ll be launching in July, which is more of a traditional Greek product. And I think what we’ll say to you this morning is that product really really tastes good, and those of you who have decided to attend our investor day here in a few weeks will have the opportunity to taste that product and see it in its final packaging configuration and that sort of thing. And probably it’s a case of one taste will be worth a thousand words on that one. But, so, the combined impact of this Greek innovation that we’re bringing I think will give us continued very high growth in that segment. And that’s going to help our top line sales growth next year, obviously.

And just a follow up on cereal, when Big G was really firing and getting share, it seemed to be on the wellness news of the day, whether it’s fiber or whole grain, and also you played well on weight management. What benefits today do you think you can emphasize, and will be emphasizing, to get that trade up consumer? What are you going to be focusing on into fiscal ’14?

Well, we’ll be focusing across our great portfolio. We’re bringing a lot of marketing news on our Cheerios franchise, fresh new advertising on yellow box and Honey Nut. We’re already seeing some nice improvements in baseline on yellow box in response to new advertising there. So when we get that right, that kind of marketing innovation always works for us. So we’ll be bringing fresh news there. We’ve got some good new products including Hershey’s Cookies and Cream cereal, which we think will be a good success for us. Chex continues to be a very high growth franchise for us. That’s another health benefit. But I would also say our stalwart kid brands continue to perform very well for us. Lucky Charms, Cinnamon Toast Crunch, Reese’s Pieces, these are great products. We’ve had very good growth from those. And one of the things we’re seeing here over the last year is as we advertise those products, those traditional kid brands, to adults, we’re seeing nice bounces in baseline, just by reminding adults how these products taste. So we’ve got a lot of good penetration driving marketing initiatives in Big G next year, that we believe will restore that division to growth.

Our next question comes from the line of Thilo Wrede from Jefferies. Please proceed.

Ken, last year at the analyst day that you had in New York, you laid out all the innovation that you had planned for Yoplait for the year. And you sounded very optimistic that they would improve the performance of the brand. Now, you said earlier today that the plans didn’t quite work out for Yoplait. What would give me confidence that the innovation that is coming over the next 12 months will work better, and the plan will work out better than apparently the plan last year did?

We are disappointed that we didn’t have sales growth this year in the Yoplait division, but I would hasten to add that as you look at the sequential trends for the business, they’re quite encouraging. So our Q1 performance, we were minus 10 sales, Q2 was minus 6, Q3 was minus 3 or 4, and then we were flat or up slightly in the last quarter of the year. So clearly the trend is positive. I think the reason for the longer length of time for us was that it was very important for us to get our merchandising price points corrected and competitive in the market, and we began doing that, frankly, in Q4, going back two years ago. But it just took longer to see the impact of those price point adjustments and corrections flow into the market. But as they did flow over the course of the year, we saw significantly strengthening trends. The new product innovation in Yoplait worked very well. As you’ve heard, Yoplait Greek 100 has been quite successful for us. So I think that played out, if anything, a little better than we expected, and we clearly have something we can build on. So as we enter F14, what gives us confidence is that we’ve got our price points right on the core cup business, turns are up dramatically on core cup, and so that provides a foundation for stabilizing distribution on that business. And then we’ve got real good innovation on the Greek side. So that encourages us that F14 will be a good opportunity.

And then on a different topic, your advertising and media spending as a percentage of sales has been declining for I think three years now. Based on the guidance that you gave today, it sounds like it will stabilize. What’s the thinking behind the trend over the last two years and why the stabilization now? Why is this the right level now?

First of all, just a little bit of context, we’ve increased our advertising by 50%, which I would suspect puts us at the top of the class in terms of our commitment to brand building. Now, this past year, in 2012, again, we made the decision early in the year to make some investments in merchandise price points just to make sure that we were in the right zone there, and that caused a slight reduction in advertising for the year. But also, resulted in strengthening baselines for us over the course of the year and our belief is that as we got those price points right, see those baselines recover, that really makes all the advertising spending much more effective. So we think we made the right tradeoff there. As we enter 2014, again, we enter with our price points just where we want them to be, and we are planning an increase in advertising in line with sales, for F14. So really back on model, if you will, for General Mills and advertising spend.

Our next question comes from the line of Alexia Howard from Sanford Bernstein. Please proceed.

Maybe just following up on the question about U.S. cereals. In terms of category growth, other companies have said demand is fairly weak at present, especially for adult cereals. And I was just wondering if you’ve been seeing the same thing and whether you have views on what might be causing that. And then as a follow up, there’s been quite a few legislative and retailer-led developments in response to increasing consumer concerns about genetically modified foods. Are you seeing any impact? And then if you are, then what steps are you taking to address those?

Where we see baselines that are a little bit weaker or declining, it always has something to do with what we’re doing or not doing, and fundamentally would come back to not the right kind of innovation. And so as I mentioned earlier, take yellow box Cheerios as an example. As we’ve shifted and refreshed our advertising, particularly in the second half of this year, we’ve seen that brand first stabilize in Q3 - I think share was down just a couple of basis points - and then continue to strengthen in Q4. This is yellow box Cheerios. And this is all behind better messaging and around the health benefits of that product. So we look at it as down to us. It’s about the quality of our messaging and our innovation, and we’re encouraged by what we’re beginning to see in the Cheerios franchise as an example. Another example for us would be our Chex franchise, which is broadly an all-family franchise, but a good bit of adult consumption. And here, of course, where we have that strong gluten-free benefit that we’ve communicated well about, I think we’re in our third year of double-digit growth. And so the way we look at it, we see plenty of evidence that when we get the message right, when we get the innovation right, these brands respond. We’re seeing that in Chex, we’re beginning to see that in Cheerios, and we have a very strong program of innovation and marketing and consumer promotion next year. So we think we’ll continue to see those franchises strengthen. And maybe the last point is one that I made earlier, just advertising some of our more traditionally child-targeted adults, like Cinnamon Toast Crunch. Getting plenty of adult consumption there, with that advertising, and adults may be looking for some variety and they love the way those products taste. So there are lots of signals that we’re not victims here. If we get the innovation right, we’ll do just fine. It’s on us, and we like what we’ve got in the pipeline for next year. On GMOs, obviously aware of what’s going on there and the traffic in social media. Again, we’re not seeing an impact on our business. What does impact our business is when our innovation and our messaging is right, then we see a fairly rapid impact in a positive direction. So obviously that’s something that’s out there, but we don’t see it really affecting our business.

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

Wanted to follow up on cereal, and then a Hamburger Helper question. On cereal, kind of picking up the thread that I think many analysts have laid out, baseline cereal dollars have been weakening. Ken, you’ve already tried to explain this a little bit, but when I look at the slides and I see the BFast product, I also see a similar product from your big competitor. I wonder if you guys aren’t hedging a little bit here about what’s happening to breakfast and the volume growth within the cereal category itself. Can you explain a little bit about how BFast fits in? If this thing is really successful, is it successful at the expense of the cereal business itself, because of the underlying trends? I think a lot of people are really trying to get at this. We’re watching these baselines. They look awfully weak. We’re seeing these other products out there suggesting that people are moving away from that traditional breakfast. How do you put this all together for us?

Look, I won’t repeat myself on what I’ve said on the core cereal business. This is a third of all breakfast occasions. We saw it down a little bit this year, a couple of percentage points. There are so many innovation and messaging opportunities around health and taste in cereal that we’re quite confident that we can find messages that will resonate and that will restore that category to growth. We really strongly believe in the category and that we can do that. Something like BFast, breakfast is a huge category. It’s a huge occasion. I mean, I’m going to guess $100 billion or more of products consumed at breakfast. So that’s a big ocean. And people drink beverages at breakfast, and interested in convenience. And so we just see an opportunity there, and are simply capitalizing on it. It’s too soon to say how bit it is, but we clearly think it’s interesting. And in terms of where it might get its volume from, it’s probably everything from fruit and yogurt and coffee, you name it. Probably sourced a little bit from everything. But we simply see it as a good opportunity on its own. Obviously we have very strong breakfast equities and credentials at General Mills, and so we want to pursue that opportunity and we think there may be something there.

The only thing I would add on BFast is historically consumption for cereal has been teenagers and younger and 45-50 and older, and there’s the breakfast skippers in the middle. And that’s really what we’re going after a BFast. So we’ve seen, in the testing that we have done so far, this to be highly incremental to our RTE cereal business.

On Hamburger Helper, it seems like you’ve been attacked on two fronts there, on both kind of the cheese side within the dinners, and then also perhaps on the price point in merchandising. Can you talk about your response? It looks like you’ve got some nice packaging and products coming out. How quickly do you believe that you can restore the strength of the Helper franchise?

Well, our goal is to do it this year. And you’ve seen some of the packaging, and I’m sure we’ll demonstrate those products more in a couple of weeks. But it’s a complete redo of the core line, with packaging and some reformulation and refreshed advertising. We’ll also be launching a subline of products called Hamburger Helper Ultimate, and those products will feature liquid pouches, if you will, and so that would include some cheese-based pouches to make some very, very good dishes, but also some other liquid ingredients that would make other different kinds of Helper meals. And we’re quite excited about that product as well, which we think will extend that franchise in a nice direction. So again, it’s about refreshing and renovating these core brands and bringing good innovation. And we think we’ve got a very good program for Helper as we go into 2014.

Our next question comes from the line of Todd Duvick of Wells Fargo Securities. Please proceed.

Don, I think you answered this in part already, but with respect to your debt balance, you’ve got about $2 billion of short term debt, including a $700 million note that matures in August. Can we expect you to be in the market probably before that matures to refinance that, and a portion of the CP you had mentioned?

I’m not sure if we’ll be in the market before September. We have a couple of maturities this year. I think about $1.4 to $1.5 billion of maturities between September, and I think we have another one in February, if I recall the date correctly. So we’ll definitely be in the market. Probably do something pretty substantial, $1 billion plus. I would think later this calendar year, probably not before September necessarily. And it will be to both refinance those as well as term out a little bit of our CP. Back to Eric’s question on free cash flow, I just want to be very clear on it. We are going to return all our cash to shareholders and maintain our leverage, but just the math behind it, because I think that’s really what Eric’s question was getting at, is our free cash flow yield will be about 7%, or is sitting today at about 7%. Obviously our dividend yield is about 3%. We are going to reduce our average shares outstanding by 2%. So if you think of the math behind that, since we didn’t reduce our shares this year, we actually have to take 4% of our shares off this coming year to average 2% down. So think 4% going to share repurchase, 3% going to dividends. That really explains the 7% free cash flow yield and how it’s being returned to shareholders. So I just want to be clear about that, more back to Eric’s question than yours, but for everyone doing the math behind the cash flow, I want to make sure they know where it’s going.

And a quick follow up. Can you just remind us, in terms of how you manage your balance sheet, you did mention the upgrade by Moody’s. Do you really manage to kind of a rating target? Or do you look at a specific range of leverage ratios?

We look at the latter. It’s not our call on what the rating agencies rate us at. That’s their call. But we target leverage ratios, and primarily our debt to EBITDA. And so obviously each of the rating agencies calculates that a little bit differently. But we want to stay basically in the range that we’re in today, and where we’ve been actually for the last couple of years.

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

I want to come back to your 3% inflation guidance. I think it’s a little bit higher than some people expected, including myself. Can you help us understand some of the factors that are driving that?

Obviously we have a pretty broad input basket. Again, this is all of our COGS. And it’s pretty widely dispersed, as we’ve talked about in the past. Ten percent or less is in grain, you have 5% in dairy, 5% in energy, 5% in soy, 5% in sugar. So it’s a pretty broad base. And if you look today, on a spot basis, most of the grains are still up, certainly energy is up, and [even in] a forward market that would hold true for most of those items as well. And as we look forward, both in positions we have and where the forward market is, whether it’s a viable forward market for our inputs, it comes to about a 3% inflation for the year. Obviously different by business, and by geography, but averaging 3% for the company. And as I mentioned earlier, a little higher than that in the first part of this year and a little lower than that in the back half. But inflation in every quarter.

So no particular outliers. I want to come back to some of the category questions we’ve been getting. First, congratulations on some of the velocity improvements that we’ve been seeing in yogurt. It’s encouraging that it does seem to suggest your base is a lot stronger. The path to get there has been pretty long, and somewhat painful, with discontinuations, product pruning, sharpening your price points. As we look at your cereal business now, the velocity looks almost as bad as it was in yogurt before you had to go through that process. Your velocity’s now down around 12% or so, more than offsetting the distribution gains you’re getting. What’s the path forward there? And is it going to be different than what you’ve experienced in yogurt?

Well, I think for cereal, the path forward, it’s always brand by brand renovation and execution. And so where we have solid messaging and innovation, we’re seeing a very good response, and very good growth. And this year we didn’t feel that we had all that we needed, or should have, and so as I’ve said, we’re very encouraged by the response to new advertising on Cheerios, and we’ve got more innovation planned on Cheerios as we go into F14. So we’re encouraged by that. We’re very encouraged by the continuing strength of our kid brands. Fiber One is a brand that I haven’t mentioned. That’s been a good grower for us over the last four or five years. We didn’t see that last year. We think there are some product renovation and [flanker] opportunities that can revitalize that franchise, and so we’ve got some initiatives that we’ll be taking there. So it really comes down to just making sure we’ve got the right innovation and messaging program on all these core brands, and we just didn’t have that this year. And we feel much more confident about the program that we’ve got for F14.

And I think we’ll have to end it there. We’re at the end of our hour, so if there’s people still left in queue, please give me a call, and I’ll try and get your questions answered.