Welcome to the third quarter F14 earnings conference call. [Operator Instructions] I would now like to turn the conference over to Kris Wenker, senior vice president of investor relations. Please go ahead, ma’am.

Thanks, operator. Good morning, everybody. I'm here with Ken Powell, our chairman and CEO; Don Mulligan, our CFO; and Ann Simonds, senior vice president and president of our baking products division. Before I turn the call over to them, I’ll 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 the website, if you need it. You can find slides on the website that supplement this morning’s presentation. 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. With that, I'll turn you over to my colleagues, starting with Don.

Thanks, Kris. Good morning to everyone. Thank you for joining us today. As we noted in our preliminary release last week, several factors restrained our third quarter operating performance. Severe winter weather resulted in weak sales trends across the food industry and our categories. Foreign exchange was a headwind. We made significant incremental investments in our U.S. yogurt business in the quarter, including advertising, sampling, and in-store merchandising. Early response is encouraging, and Ken will share the details with you in a few moments. And finally, our comparisons in this quarter were difficult, lapping double digit gains in adjusted segment operating profit and adjusted diluted EPS a year ago. Our third quarter results are summarized on slide five. As a reminder, we’re now excluding Venezuela currency devaluation from total adjusted segment operating profit and adjusted diluted EPS. That affects last year’s third and fourth quarters and will likely impact this year’s fourth quarter. In the third quarter, net sales totaled nearly $4.4 billion, 1% below last year. On a constant currency basis, net sales in the quarter matched year ago levels. Adjusted segment operating profit totaled $690 million, 10% below year ago results. Net earnings grew 3% to $411 million, reflecting good control of administrative expenses and favorable mark-to-market effects. Diluted earnings per share were $0.64 as reported, up 7% from last year. Adjusted diluted EPS totaled $0.62, down from $0.66 a year ago. Slide six shows the components of our third quarter net sales growth. As I mentioned, foreign exchange reduced net sales growth by 1 point. Pound volume was 1% below year ago levels and sales mix and net price realization added 1 point of sales growth. Slide seven shows third quarter net sales results by segment. For U.S. retail, net sales declined 2% overall, with gains in…

Thank you, Don, and good morning to everyone. It’s a pleasure to be on the call today to give you an update on our baking products business and how we’re growing this portfolio of iconic brands. Internally, we call our baking products division Mill City, which is a tribute to the Minneapolis milling heritage of General Mills and Pillsbury. This division generates $2.5 billion in annual retail sales, making us the largest branded baking business in the U.S., with nearly a 50% share of our baking products categories, combined. Refrigerated baked goods generate over half of our sales, and Pillsbury is the leading brand in this $2 billion category. We’re also home to the Immaculate Baking brand, which includes organic, gluten-free, and Non-GMO Project-verified dough products. Betty Crocker is the leading brand in the $1.8 billion dessert mix category. Combined with the Bisquick brand, baking mixes generate more than a third of our division sales. Gold Medal flour, General Mills’ oldest consumer brand, rounds out our sales. With all of our baking products in one division, we’re leveraging our extensive baking knowledge and driving efficiencies across R&D, manufacturing, and marketing. These efficiencies, along with our market-leading positions, put our division’s profitability well above the company average. We like the growth prospects we see for our business. Dessert mixes and refrigerated dough enjoy high household penetration rates, and people shop these categories nearly every month, because baking is on trend. That’s particularly true with growing consumer groups in the U.S. Millennials are a great demographic for us. As Ken described last month at the CAGNY conference, this is the generation that is starting families. They like to cook and bake. They’re willing to try new things, and they’re also developing an interest in scratch baking. But keep in mind, for many…

Thanks, Ann, and thanks to you and your great team for these very strong product and marketing initiatives, and good morning to one and all, all of you on the webcast. As you can see, our baking products business is a terrific platform for sales and profit growth in our U.S. retail segment. Now, as Don mentioned earlier, our U.S. results for the third quarter reflect actions we’ve taken on our yogurt business. Let me give you some details. The U.S. yogurt category wasn’t immune to the food industry slowdown this winter. After posting 9% retail sales growth through the first half of the fiscal year, retail sales for the yogurt category grew just 3% in our third quarter. Retail sales for our yogurt business in total declined in the quarter. But during this period, we put our foot down on the gas pedal, with incremental investment in this business, and here’s what we’ve done. We launched 16 new product SKUs in January. That’s twice the number we launched this time a year ago. We increased our merchandising support. This included introductory trade funds to generate feature and display on all of those new products, and we matched competitive merchandise price points on Greek. In January, we announced Yoplait Greek’s taste superiority over the leading blueberry Greek yogurt, and we launched the Greek Taste-Off. As part of that announcement, we began a sampling program that will ultimately reach stores that account for nearly half of total retail volume. We supported this news with incremental TV advertising, and we opened a pop-up store in New York City, so consumers could judge for themselves the superior taste of Yoplait Greek. We’re already seeing benefits from these efforts. Since January, our turns on Greek varieties have increased, and we’ve gained dollar share nearly…

[Operator instructions.] Our first question comes from the line of Andrew Lazar from Barclays.

First, Ken, of the three main drivers you mentioned around lower yogurt profitability in the quarter: increased dairy costs, trade promotion for the new products, and some price matching in Greek, and then on the consumer spend, I was hoping you could dimensionalize them for us a bit. Was one much larger an impact than the others, or were they all about equal?

It was basically a third, a third, a third. Don, do you want to put a finer point on that? No, he doesn’t. So significant dairy inflation. We did get those merchandising price points in line, and there has been a good increase in consumer spending, and that spending is all about taste, Andrew. It’s very taste-oriented advertising, and it’s a lot of sampling. We want to get these products in people’s mouths, because we know that they perform very, very well, and people like them. So think a third, a third, a third.

And on its conference call last week, Post mentioned that it expects the ready to eat cereal category growth will return to a single digit rate of growth in 2015. And they’re basing that on a lot of the actions taken by the two leaders in the category to bring consumers back in. And they also thought that many of the more recent demand shocks in the category are sort of nearer to the end than the beginning. And most of their comments are really based on what you and others do, as opposed to them, but I guess I just wanted to get some thoughts on if you share that level of optimism about ’15 for cereal, or maybe their comments are a bit premature at this stage.

We certainly share their optimism on the outlook for the cereal category, which is a great category in response to innovation. And I would also share the view that, for instance, as you look at the growth of Greek yogurt as an example, I think that is still growing, but that growth is starting to taper. And to the degree there’s been some interaction there, that also is potentially something to monitor closely. I would love to see it return to growth in 2015. As we’ve said, we think that the recipe is all about core brand renovation and good new products, and good levels of advertising. And we’re very focused on doing that. And we’re hearing good messaging from the other leaders in the category that they’re focused on that as well, so we think, as those things continue to increase, and we continue to see the level of renovation strengthened in the category, consumers are going to come back in. We’re very confident that that will happen, and that’s why we’re focused on those kinds of activities.

Our next question comes from the line of David Palmer with RBC.

You mentioned the weather drag in the quarter. Specifically in the last couple of months, just looking at the scanner data, it looks like some of the home meal oriented categories improved, presumably because people were eating more at home. Could you just talk about what you’re seeing with the weather and exactly what you meant by that?

I'd be happy to David. I have to say, I didn't – could you just repeat the – you were – it wasn't exactly clear. You said your data shows what?

There were a lot of the home meal oriented categories. It looked like they improved in the last couple of scanner period, considerably because people were eating more at home and as you know restaurants were suffering over those same two months, and so it seems logical that people were eating more at home, so, just wondering what you are seeing in terms of a net impact to your business.

First of all, our categories, over the three months of the quarter, actually declined sequentially, and basically February for us, the categories were flat. So we were seeing softening of retail purchases as well. Now, as we’ve gone into the most recent periods, which I think is the data that you’ve referenced you saw, we are seeing those categories start to recover, although, I have to say, from a pretty low basis. But as the weather improves, we are seeing those categories recover. Just in terms of the nature of the weather impact, basically, on our side, it really just disrupted plant operations and logistics. So we lost 62 days of production, which would be 3% or 4%, which hasn’t happened in a long time to us, think decades. And that would be the result of people not being able to get into work safely, or not having inputs arrive. And so there was that impact. There’s an even greater logistics impact, as trucks couldn’t move, and the rail system becomes less efficient. And those things combined, basically, as Don said, those combine to add cost to the quarter. And then on the retail side, we’ll let the retailers give you all the detail there, but I think basically it’s just fewer trips for all the obvious reasons. Fewer trips to restaurants, and then of course in schools and universities, which were closed, they’re just serving fewer meals in cafeterias, and those sales are clearly lost. So it’s a combination of logistics and plant factors that added the cost, and consumers staying at home and probably drawing down a bit from their own pantries, which slowed down the industry. Does that give you a bit of texture?

That is helpful. And I guess just one separate last question here, just on the M&A front, I haven’t heard you talk about acquisitions lately. Wondering is that something that you’re still continuing to look for deals from that angle, or are you looking more international still with regard to acquisitions?

We are still looking to see how we can continue to refine and evolve our portfolio, and our focus areas haven’t changed. Emerging markets, obviously our move into Brazil was very instrumental in that respect about a year and a half ago. So we continue to look at it. As we’ve said before, we’re interested in expanding our businesses and getting a larger footprint, particularly in Indonesia and India. And then within the developed markets, particularly in the U.S., the area of the better for you snacking, we’ve made some moves over the last couple of years in that regard. It remains a point of interest. But as we said a year ago, F14 was not going to be a year of acquisitions, and that’s how it’s playing out. But we’ll continue to look, and share news as it becomes relevant.

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

Ken, you mentioned an expectation that U.S. food industry volumes should improve going forward. How much of that is just related to some of the extraordinary factors like weather that impacted Q3 and how much is an expectation of a tangible improvement in consumption? And just with respect to the inflation outlook, in a number of commodities, not necessarily grains, but a number of commodities moving higher, what’s the risk that more selective price increases across the industry could limit the likelihood of that volume improvement playing out?

In terms of the development of our categories, I think it’s going to be both the points that you mentioned. In the short term, we’re coming off of a very severe winter, and we’re already seeing our categories strengthen a little bit as we get through that. And as we’ve said in the past, while the economy is improving slowly and incomes are strengthening slowly, they are improving. And we think that as incomes continue to grow and consumers gain confidence, that will be a positive sign for our category. The one other near term headwind I think are the SNAP reductions that took place over the course of last year, and I think will continue to impact us a little bit this year. That was clearly adding some purchasing power to consumers when it comes to food. So that would be a bit of a headwind. But in general, we see the economy strengthening, and that will support our categories. In terms of inflation, it’s always a mixed bag. Some things are up and some are down. For us, grains have moderated significantly. As everyone knows, dairy costs have been significantly higher. On balance, though, as we’ve said the last couple of times, we see the inflation environment manageable at this point. We’ll be able to offset the inflation that we see with our productivity efforts, and we would expect pricing to remain relatively stable in the near term.

The only thing I would add is the recent jump in some certain commodities and some of the headline news that has made, as we’ve talked about before, as we look forward for inflation, we assume that we’ll see the same kind of inflation we’ve seen over the last six or eight years, which is in that 4% and 5% range. And I don’t think anyone is projecting something different than that as we go forward. From our standpoint, I think we’ve shown the ability to offset that through productivity and mix management and our [HMM] activities.

And just to add one final thought, triggered by Don’s comment, the whole oats controversy. In fact, we had a great harvest in the northern of oat growing regions this year. We just couldn’t get it to market because of the logistics disruptions that I mentioned over the winter. So that’s a short term spike in oat costs, and those should moderate going forward.

I think it’s already passed you by.

All right. Well, no need, then. Just one follow up on Yoplait. I appreciate that the share trends at retail are improving, but based on the step down that we’re seeing in implied third quarter shipments, even though there’s new products coming out, it looks like you’re working down an imbalance in new products and inventories that’s been going on for the past two quarters, where do inventories stand now? And are we sort of at the point where we should expect to see shipments align a bit better with consumption going forward?

Well, consumption was ahead of shipments in the quarter, and eventually those things always come into line, especially for a short shelf product like yogurt. But what we have been seeing really over several months, really since December, for Yoplait in total, we’re seeing our distribution expand, which is a very good sign. As I said, we’re seeing Yoplait Original now growing on an absolute basis. It’s very significant to us that Yoplait Light turns are now positive, because positive turns are, if you will, the precondition for being able to expand distribution. And if we’re able to maintain that turn strength, ultimately we’ll get that franchise going on an absolute basis as well. And as I said, we’re very pleased with the early trends that we’re seeing across all of our Yoplait Greek products, which include Yoplait Greek 100 and now Greek Blended, and lots of flavors, formats, multipacks. And so as you say, there’s still more to do, but we feel we’re quite a bit ahead today where we were six months ago, and we like the direction the business is going in.

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

At CAGNY, you made a comment that you see growth out there in the packaged food industry, but you have to work harder to get that growth. Are these measures that you’ve taken on Yoplait Greek an example for how you’ve worked harder? And if so, does that mean that you might expand these measures to categories like cereal and what would that mean for margins going forward?

Well, for yogurt, we’ve reached a point where we have the right product portfolio. As I just mentioned, it’s a very broad and consumer focused portfolio, and the products are very high quality. And we have the distribution that we needed, and critically, we have the manufacturing capacity that we need. And so it’s the perfect time for us to really go out and drive trial on these products through, as I mentioned, strong advertising and sampling. So it’s a good time to really focus and build that business. In cereal, we are going to work harder there. We already have high levels of trial generating advertising and consumer focus support in the cereal business. There, our focus is on the renovation of brands, often by bringing important health news to them. And we see that work well for us. We’ve commented, for instance, on the success of gluten-free brands or taste improvements, or new products. And so it’s very much an innovation focus in categories like cereal. I think the way it plays out will vary by category, but we just think, in a time where the consumer is a little bit stretched, we just believe that the way forward is through innovation and renovation and strong communication of our benefits. And when we get that right, we see it work across all of our categories. And that’s really the focus for us.

And what does it mean in terms of margin pressure for the next 12 months?

As I mentioned earlier, we’re expecting manageable levels of inflation. I think as you all know, we have very disciplined productivity programs. And so I’m not going to comment today on what our margins will look like over the next 12 months, but I will say, among our peers, we’ve been among the very best over the last five years of maintaining or expanding margins because of our productivity discipline. And certainly we’ll keep that mindset going forward.

What I would add to that is there are some product lines we launched that are margin accretive on a dollar basis, but maybe margin dilutive on a percentage basis. Greek yogurt is a good example of that, where from a per-serving basis, we actually make a bit more penny profit on Greek, but because of the higher price point, it’s actually slightly margin dilutive on the gross margin line, but it’s obviously dollar accretive. So those tradeoffs that we’re willing to make, we also then look at our operating margins, and there’s a couple of factors that can come into play there. One is we obviously have very strong control on our admin expenses. If you look at our SG&A for the year, it’s flat year to date. And I expect it to be flat or even slightly down on a full year basis, so that is part of managing those margins as well. The other, and Ann touched on this, is that in our digital marketing, as we go to market digitally, we see strong returns there, and that helps manage our margins as well.

Our next question comes from the line of Robert Moskow with Credit Suisse.

Just a question on yogurt in China. Can you talk about the investment that you’re making there, maybe quantify it and then talk about that business in terms of how big you think it can be in year one?

We’re not going to quantify how much we’re putting into the market, but we are making a substantial move to tap into what we think is a very attractive yoga market, one that already is relatively large, but we think there’s an opportunity for Yoplait to have a leading role. I think that’s all we’re ready to share at this point in time.

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

Just wanted to touch on the fact that the full year EPS guidance would imply something like 40% of fourth quarter growth, and it seems a lot of that will come from margin expansion. And I think that signals that it’s transitioning into a more favorable cost environment as you indicated in the press release. How should we think about this going forward? As the rest of calendar ‘14 plays out, should we expect to see similar favorability in the types of costs that you’re experiencing on a year over year basis?

Let me just take you through Q4. We touched on some points that I just want to make sure are clear. Because essentially all of our EPS growth is in the fourth quarter, so I think it’s important for investors to understand how we get there. And they are, I think, very visible. Again, the primary ones would be the gross margin expansion. To your point, we expect a deceleration of inflation - we still expect inflation, but decelerating - in the fourth quarter, which is very different than a year ago, when we were seeing accelerating inflation. So we’ll have pretty significant margin expansion, and obviously our HMM activities will continue to be very robust. For the full year, we expect our tax rate to be comparable to last year. And if you look over the last several years, we have consistently held or dropped our tax rate on an annual basis, but quarter to quarter, it can vary quite significantly. And last year’s fourth quarter was actually a higher tax rate quarter. So we’ll have favorability in our tax line. And then I mentioned the share count. We have been accumulating shares as the year has gone on. One percent reduction in Q1, 2% in Q2, 4% reduction in Q3. So you can kind of expand from there what Q4 could be. So those factors will come through, but importantly, we’re not banking on accelerated sales growth. Frankly, we expect our sales growth to be about the same as it has been year to date. So it’s really based on those middle of the P&L factors that will get us that substantial EPS gain in the fourth quarter and have us deliver the full year in the same range as we talked about back in July. As far as what it means going forward, obviously we’re not in a position today to give F15 guidance for inflation or any portion of our financials, but I guess I would just caution, based on the question that Matt asked earlier, inflation is a tough thing to project. Everyone was asking us if we were going to see deflation a few months ago, and now there’s been a turn in some markets and people are asking us if we’re going to see accelerating inflation next year. So I just would caution not to get ahead of ourselves in terms of what our inflation expectations are. But we will be very clear what they are when we release our results in the fourth quarter, when we give ’15 guidance in June.

Moving on to yogurt, obviously you were negatively impacted by some inflation in dairy. Should we be expecting any price increases in yogurt from you in the near future? And what have you seen in terms of your competitors in the market in terms of pricing?

We never talk about possible or prospective pricing increases. I will comment that we have seen, as you all know, dairy inflation over the last year, primarily driven by increased demand for dry powdered milk, primarily in Asia and particularly in China. And that demand really is driving the market. And I think the herds shrank a little bit earlier in the economic crisis. But those things have a way of adjusting, and we’re not seeing it yet, but the prices are unusually high now, and we expect that they’ll moderate over time.

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

A couple of follow ups to some of those questions. One is, when you think about next year, are you using your base earnings of $2.87 to $2.90, or are you using the number including Venezuela when you think about the growth rate?

We’re going to use $2.87 to $2.90. Part of the reason to take out Venezuela is the remeasurement impact of Venezuela, it’s a one-time noncash event that we don’t think is representative of our underlying earnings profile.

It’s been four years you’ve been a little bit below your long term growth algorithm, do you see material headwinds derail you for another year or two? Or do you think things are actually becoming a little bit more normalized, if that’s a good way to use the word?

I would say that things are slowly improving, and our comment at CAGNY was that for next year, we’re affirming our growth model. But you know, we continue to see slow improvement, with an emphasis on slow. And I think we’ve been saying that consistently, and our predictions have been accurate over the last several years.

And then on the Yoplait side of it, do you think that the competitive environment has structurally compressed the margins for that business? Or do you think it will be able to return to the margins of the last couple of years once you get through this period of time of getting your market share where you want it to be? Can you talk about that?

I think the inflation that we’ve commented on, that’s the critical factor that’s compressed the margins. And there’s always volatility in those input costs. But that’s been the key issue. Obviously, our mix has changed, and it is changing quite significantly as the category migrates to Greek. But as Don said, we like the price point of Greek yogurts. They’re $1 or more, so we like that a lot. On a percentage basis, the margins are a bit lower, but certainly overall, on an absolute basis, we think those margins are just fine. So I think the key thing will be to work our way through this inflation, which we will eventually do, and we’ll see margins strengthen as we do that.

And my last question, for Don, is you’ve mentioned that you’re obviously doing a lot of work on your working capital, but this quarter, your working capital actually cost you cash, but you said it was going to normalize in the fourth quarter. Can you just explain that? I just didn’t understand it.

I’d break out the working capital into two components. The core working capital that I highlighted on the slides, the bulk of it, and that was down 8%, and that will be down for the full year as it has been for the last three to four years. So that will be a cash contributor. You also have accruals and payment timings for our trade, for our tax, for our advertising. Those were negative this quarter. Those will normalize as the year unfolds. So you’ll see pretty strong cash inflow from working capital in our fourth quarter. And for the full year, we still expect working capital in total to be a cash contributor for us.

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

First, you’re abstaining from giving us an outlook for next year right now. You have in the past, around this time, felt comfortable giving us at least a bit of a glimpse into the fall. So my question, is why not now? What’s preventing you from giving us that outlook?

We don’t historically give guidance until June. We did it on a one-off basis last year because we were coming through a period of pretty significant change in terms of the portfolio, a couple of large deals. We also had some operating headwinds that meant we were off model from a bottom line earnings and a cash return to shareholders standpoint. And the last piece was very strategically, we decided, because we had some strategic M&A that we wanted to do. So last year we made a point of noting that we’d be back on model both from earnings and a cash return standpoint in FY14, but that was a one-time view to the future that we thought was important for the market. But historically, in every other year, we have given guidance in June, and that’s what our practice will be this year as well.

On cereal, net sales look pretty strong for you so far this year. I think you said up around 1 or 2, around 2 for year to date, around 1 this quarter. Clearly, consumption is not tracking there. So my question is, on inventory, are you just coming off a very low base, and this is just sort of rebuild to normalized levels, or is there risk that we get a [deload] at some point in the future.

Some of it is shipments of new products. We launched three more in January, and those always expand inventory. As you’ve observed, we also have had good share gains, about 30 basis points over the nine months of the year so far, and really over 40 basis points of share improvement in Q3. But you’re right, our shipments are a little bit ahead of sales right now, and I would expect those to come in line over time.

Yoplait, congratulations on some of the early read success on the Greek side, and it’s encouraging to hear about some of the turns on Light. When we look at your aggregate yogurt portfolio, the turn rate has been decelerating since something around down 10% and down 6% the prior 12 weeks, and down 3% the 12 weeks before then. In light of some of the strength you’re seeing, I guess where is the big offset that’s causing velocity to decline so rapidly?

There were two areas that have been declining over the last period of time. Light, which continues to decline, although at a rate less than the Light segment, that one continues to decline overall, and largely because of distribution [unintelligible]. But as I said, where it is in distribution, we’ve seen the turns reverse now. Those are growing now, which again sets up a case for us to hold and then expand distribution. We also had an uncharacteristic decline in our kid business over the last couple of quarters, and that’s been a good grower for us, all the way through. And we attribute that to our own variability in execution. We don’t feel we had the right kind of kid-oriented promotions on Gogurt. And that’s easily correctable. So those are the two soft spots, and we think those are both reversible, and we like the trends on Yoplait original and Greek, as we said.

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

Don, as you went through the fourth quarter drivers, really helpful. If I’m looking at it correctly, it looks like, for the full year, it gets you to the low end of a mid-single digit operating profit growth. Am I looking at that correctly?

Operating profit growth, we ended the year with guidance of mid-single digit. Given what we’re coming off of in the third quarter, I think we’ll probably be a touch below that for the full year.

And then just in terms of this year getting to the earnings growth in a way that was a little bit different than what you were projecting at the start of the year, looking forward, as we start to try to model going forward, and just assuming that we’re in the algorithm for next year, does it put more burden on operating profit growth, because now we’re comping against really good cost control in SG&A, we’re comping against a lower share count, we’re comping against the tax rate being flat? I’m just trying to get a better understanding of, just to get back on the algorithm, do some of the other line items in the P&L get more burdened next year in terms of trying to get there?

I don’t know if I’d say more burdened. It certainly depends on us getting back on model on the operating side, sales and SOP growth. We’re getting to the bottom line number this year, but we’re not getting to it in the way we intended at the beginning of the year. Next year, we intend to build a plan that gets us there starting from the top line and working through SOP all the way down to EPS.

All right, I think we’re over time everybody, so if there’s someone left in queue, apologies. Give us a call and we’ll try and help you out.