General Mills, Inc. (GIS) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the fiscal 2015 fourth quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded, Wednesday, July 1, 2015. I would now like to turn the conference over to Jeff Siemon, Finance Director, Investor Relations. Please go ahead.

Thanks, Tina and good morning, everyone. I am here with Ken Powell, our Chairman and CEO, Don Mulligan, our CFO. Kris Wenker is here too but she has put herself in listen-only mode. I will turn the microphone over to Ken and Don in just a minute, but first let me cover our usual housekeeping items. Our press release was issued over the wire services earlier this morning. It's also posted on our website if you need a copy. And you can find our slides on our website that supplement our remarks this morning. These remarks will include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists factors that could cause our future results to be different than our current estimates. With that, let me turn the call over to Don.

Thanks, Jeff. Welcome to your first earnings call. And hello everyone. Thank you for joining us today. Before I get into the numbers, let me just take a moment to recognize Kris Wenker's tremendous 35 years with General Mills and her terrific, differential leadership of our Investor Relations efforts. She will be missed, both inside this building and I know by many of you on the phone after today. We wish her all the best. As noted in our press release today, due to the business in hand, General Mills' operating performance in fiscal 2015 was mixed. Our convenience stores and foodservice segment had an excellent year with segment operating profit increasing 15% to reach a record high of $353 million. And our international segment posted good margin expansion and profit growth in constant currency. But sales and profit declined for U.S. retail, our largest operating segment. Our business performance strengthened in the second half of the year as our Consumer First efforts gained traction and we took important strategic actions during 2015, including the acquisition of Annie's and the initiation of several projects designed to increase our speed and agility while reducing costs. These actions have positioned us to deliver stronger growth in 2016 and beyond. Our fourth quarter results are summarized on slide five. Remember that this quarter included extra week which contributed approximately six points of net sales growth and $0.04 of earnings per share. Net sales of $4.3 billion essentially matched the year ago results. On a constant currency basis, net sales increased 6%. Segment operating profit totaled $800 million, an increase of 9% as reported and 13% in constant currency. Net earnings and diluted earnings per share were both down on a reported basis, primarily due to an impairment charge taken out of our Green Giant brand asset and a tax charge related to a one-time repatriation of foreign earnings. Adjusted diluted EPS, which excludes these and certain other items affecting comparability, increased 12% to $0.75 per share. Constant currency adjusted diluted EPS increased 18% in the quarter. Our full year results are summarized on slide six. The 53rd week contributed approximately one point of net sales growth in fiscal 2015. Net sales declined 2% to $17.6 billion. On a constant currency basis, net sales increased 1%. Segment operating profit fell 4% to $3.0 billion. Constant currency segment operating profit was 2% below last year. Net earnings attributable to General Mills totaled more than $1.2 billion and diluted earnings per share were $1.97. These results were below year ago levels including the charges related to restructuring projects, the brand asset impairment and the repatriation of foreign earnings. Adjusted diluted EPS of $2.86 was up 1% as reported and up 4% in constant currency. Slide seven provides the components of our net sales growth. For the fourth quarter pound volume increased 3% from prior-year including Annie's in the 53rd week. Sales mix and net price realization also added three points of sales growth. And foreign exchange reduced sales growth by six points. For the full-year, pound volume declined 1%. Net price realization and mix added two points of sales growth and foreign exchange reduced sales growth by three points. Our U.S. retail segment had a disappointing year, but as you can see on slide eight, trends did improve in the second half, most notably, for yogurt and cereal. Our U.S. retail brands gained share in categories representing 65% of measured sales volume, including gains in the cereal, yogurt and grain snacks categories. But overall sales trends in many categories were weak reflecting the impact of changing consumer food preferences. For convenient stores and foodservice, fourth-quarter net sales increased 4%. Our six focus platforms, which include cereal, yogurt, snacks, frozen breakfast, mixes and biscuits continue to lead growth for this segment with sales up 8% in the quarter. For the full-year, segment net sales increased 4% to $2 billion, including 9% growth on our focused platforms. Fourth-quarter net sales for our international business segment increased 9% on a constant currency basis, with gains across all four regions. For the full-year, international net sales totaled $5.1 billion, 5% below last year's reported, but 6% above last year in constant currency. Slide 11 shows you constant currency net sales results by region. Full-year net sales in Latin America increased 17%, reflecting inflation driven pricing across many markets. In the Asia-Pacific region, constant currency net sales grew 5%, driven by growth of Häagen-Dazs in China and Betty Crocker products in the Middle East. Sales in the European region also increased 5% due in part to Strong innovation on Old El Paso Mexican products. In Canada, sales in 2015 essentially matched year ago levels in constant currency. On slide 12, you can see that adjusted gross margin increased by 70 basis points in the fourth quarter. This was driven by positive net price realization. For 2015 in total, adjusted gross margin was down 70 basis points to 34.7%, reflecting the impact of volume deleverage. Our input cost inflation for the year totaled 2%. Slide 13 details our segment operating profit results for fiscal 2015. Total segment operating profit declined 2% in constant currency driven by the fall in U.S. retail. On a constant currency basis, international's profit increased 9%. And as I mentioned earlier, profits in convenience stores and foodservice were up double-digits. Slide 14 summarizes 2015 joint venture performance. On a constant currency basis, net sales for cereal partners worldwide declined 2% and Häagen-Dazs Japan sales grew 6%. After tax earnings from joint ventures totaled $84 million, a decline of 6% as reported, but in line with year ago results in constant currency. Slide $15 highlights some additional items from our 2015 income statement. At the end of the fourth quarter, we made a strategic decision to redirect certain resources supporting our Green Giant business in U.S. retail to other businesses in the segment. As a result, our future sales and profitability projections for this business declined, causing us to record a $260 million impairment charge related to our Green Giant brand intangible asset. We recorded restructuring and project related charges of $357 million in fiscal 2015, including $73 million in cost of sales. Corporate unallocated expenses, excluding items affecting comparability, declined 7%. Annual interest expense increased $13 million driven by higher average debt levels. In the fourth quarter, we incurred a tax charge of $79 million related to the one-time repatriation of foreign earnings. We expect to pay $24 million in cash taxes. Lastly, the adjusted effective tax rate was 30.5% compared to 32.2% a year ago, reflecting changes in earnings mix by country and favorable discrete items. Turning to the balance sheet. Slide 16 shows that core working capital declined 13% in fiscal 2015, due primarily through improvements in accounts receivable and accounts payable. This is the ninth consecutive quarter that we have reduced our core working capital versus the prior year. Cash flow from operations totaled more than $2.5 billion in fiscal 2015, essentially unchanged from the previous year. Fixed asset investments totaled $712 million, including investments related to Project Century. We paid over $1 billion in dividends and repurchased 22 million shares for $1.2 billion. Since fiscal 2011, General Mills has returned $10 billion to shareholders through dividends and share repurchases. Over that time, our dividends per share have grown at an 11% compound rate and we reduced average diluted shares outstanding by 2% per year. And we have accomplished this during the same period that we acquired three significant businesses in Yoplait International, Yoki and Annie's. Slide 19 provides an update on the status of our cost savings initiatives. We delivered $75 million in savings in 2015 from Project Century, Project Catalyst and our policies and practices update. This reflects accelerated pace of savings compared to our original projections. In addition, last week we announced Project Compass, an initiative designed to streamline our international organization structure and save $25 million to $30 million in fiscal 2016 and $45 million to $50 million by 2017. We anticipate incurring between $57 million and $62 million in restructuring charges associated with this project. In total, we now anticipate the combination of all our recent cost initiatives including Project Compass will deliver between $285 million and $310 million in savings in 2016 and more than $400 billion by 2017. We plan to reinvest a portion of these savings into growth driving initiatives including cereal renovation, capacity expansion for grain snacks and our launch of Yoplait in China. Looking ahead to fiscal 2016, we expect to increase our operating cash flow above 2015 levels. The first call on cash is investment into the business to support growth and drive cost savings. On slide 20, you can see that we anticipate fixed asset investments will increase to approximately $840 million in 2016 driven by increased investment in Project Century. Slide 21 provides a summary of our 2016 sales and earnings guidance. The 2016 growth rates reflect the impact of one less week. We are targeting net sales to be approximately flat in constant currency. Excluding the difference in weeks, we expect 2016 net sales to be up 1% in constant currency. We expect to deliver $400 million in cost of goods HMM. This should more than offset input cost inflation, which we estimate at 2% this year. Given HMM plus Century savings, adjusted gross margin is expected to improve from 2015 levels. We expect our media investment to decline slightly. We project our total segment operating profit will grow at a low single-digit rate in constant currency. Our plan assumes a mid-single-digit decline in interest expense, reflecting a stable level of debt and lower average rate resulting from refinancing maturing higher coupon bonds. We are expecting our adjusted tax rate will be comparable to last year's 30.5%. We expect joint venture earnings to grow at a low single-digit rate in constant currency. And we plan to continue returning cash to shareholders through share buybacks. For fiscal 2016, we are targeting a net reduction in average shares outstanding of approximately 1%. We expect mid-single-digit constant currency growth in adjusted diluted earnings per share. At current exchange rates, we would estimate a $0.04 headwind to full year adjusted diluted EPS growth in 2016. In terms of the quarterly cadence of EPS in 2016, we expect the first quarter to show the strongest growth as it compares to a weak prior-year period. The fourth-quarter will have the comparison with one less week, though we do expect base business growth in the final quarter. We have a broad slate of Consumer First renovation and innovation planned in each of our business segments for fiscal 2016. For more on that, I will now turn the call over to Ken.

All right. Well, good morning, everybody. Thanks, Don. So as we enter fiscal 2016, General Mills is keenly aware of our consumers' changing food preferences and the impact those changes are having on our industry. We remain deeply committed to following the consumer adapting to their evolving preferences and driving growth. And where we embraced Consumer First in fiscal 2015, we saw our business respond whether that's with protein cereals in U.S. retail, Yoplait Yogurt in U.S. retail and foodservice channels or Old El Paso dinner kits around the world. Our plan for 2016 is to expand our Consumer First efforts worldwide to generate sustainable topline growth. So let me give you some highlights starting with U.S. retail. We have four clear priorities for U.S. retail in 2016. They are, first and foremost to grow our cereal business, second to accelerate our performance in better-for-you snacking, which includes both our yogurt and snacks operating units within U.S. retail, third to drive double-digit growth on our natural and organic portfolio by leveraging the combination of Annie's and our heritage natural and organic brands and finally to deliver Consumer First value on select brands in a way that generates positive returns for our business. Let me give you a few details on these priorities, beginning with cereal. General Mills has been leading performance in the $10 billion U.S. cereal category. We gained 30 basis points of value share in fiscal 2015 and have grown our share in seven of the past eight years, gaining 1.6 share points during that time. But our share growth in 2015 did not translate into sales growth for us. So we have more work to do. Consumer First renovation is at the heart of our plans to renew cereal growth. At CAGNY, we told you we are embarking on a broad investment plan designed to renovate our Big G portfolio for today's consumers and that gluten-free Cheerios was the first step in that plan. Later this summer, we will begin marketing five of our largest Cheerios varieties which make up nearly 90% of franchise sales as gluten-free. We have developed a technology that separates our oats which are naturally gluten-free from other gluten containing grains that find their way into the oat supply. We know that 30% of U.S. consumers are interested in gluten-free foods and that a number of them have less the cereal aisle as a result. This news gives them five great reasons to come back. We will be taking another of our oat based cereals, Lucky Charms, gluten-free later this year. Between Cheerios, Lucky Charms and our Chex franchise, we are gluten-free news on product representing over half of our cereal sales and 17% of total category sales. Last week, we unveiled the second step in our cereal renovation plan. We are removing artificial flavors and colors from artificial sources from all General Mills cereals. Nearly half of U.S. households are making an effort to avoid artificial flavors and colors and we are responding. 75% of our Big G portfolio will meet this claim by January with the remainder targeted by the end of calendar 2017. In addition to Consumer First renovation news, we are launching a strong slate of innovation in 2016 geared toward growing segments of the cereal category. Nature Valley Protein Granola has been a big success since it launched last two years ago. This year, we are introducing two varieties of Nature Valley Protein Soft Baked Granola Bites, a portable granola for consumers on the go. Muesli is another cereal form that is benefiting from consumer interest in simple less processed foods. To capitalize on that trend, we have recently launched new Nature Valley Toasted Oat Muesli in Original and Blueberry flavors. Our line of Cascadian Farm organic cereals and granolas continues to enjoy strong growth and we are introducing a new Honey Oat Crunch variety this summer. And finally, we are expanding our Nature Valley Protein Hot Oatmeal line with Maple Pecan Crunch and Toasted Coconut Almond Crunch varieties. So these are all first half launches and we have more new items planned for the back half. In fact, our lineup of news is as strong as I have seen from Big G in a very long time, with core renovation that impacts the entire portfolio, compelling new product innovation, strong promotional events and increased consumer directed marketing, all rooted in a deeper understanding of what our consumers are looking for today. Add it all up and we expect to deliver share growth and sales growth for our U.S. cereal business in 2016. Let's turn to yogurt where we generated strong growth in 2015. Retail sales for Yoplait increased 7% and we gained nearly a full point of market share and this growth was broad-based. Retail sales growth for our Yoplait Greek yogurts increased 39%, led by Yoplait Greek 100 and New Greek 100 whips. Our original style Yoplait business saw retail sales increase 15%, thanks to new advertising focused on better-for-you snacking for the whole family. And retail sales for our kid yogurts returned to growth driven by our removal of artificial colors and flavors and by fun movie equities, like Frozen and Star Wars. In fiscal 2016, we will build on this positive momentum. Core brand renovation is at the heart of our 2016 growth plan for original style Yoplait. We recently rolled out a 25% sugar reduction across the entire line and early response has been positive. In Greek, we have a new line called Yoplait Plentí. These eight varieties include whole grain oats, slacks and pumpkin seeds. We are also launching two new flavors of Yoplait Greek 100 whips, Coconut Macaroon and Chocolate Cherry. And we will grow our kid yogurts by partnering with movie equities, like Disney's Frozen and by leveraging our GoGurt Get the Last Drop advertising campaign. With broad-based momentum and strong plans in place across the business, we expect 2016 will be another year of sales and share growth for our U.S. yogurt business. Over the past decade, General Mills has leveraged consumer interest in convenient great tasting better-for-you snacks to build a grain snacks business that totals $1.4 billion in Nielsen measured outlets. Our market share has increased by 15 points over the last seven years, including almost two points of growth in 2015. Core brand renovation is a central part of our 2016 grain snacks plan too. In the second quarter, we are rolling out an improved Nature Valley crunchy bar that's easier to bite and we will be marketing 20% of the Nature Valley portfolio as gluten-free. And we have got some terrific new items too. In fiscal 2016, we are launching two new Fiber One Cheesecake Bars in Salted Caramel and Strawberry flavors and we are introducing a pair of new Nature Valley Simple Nut Bars featuring whole simple ingredients for consumers interested in less processed snacks. Our natural and organic portfolio of brands ended 2015 on a strong note with net sales nearly doubling to $200 million dollars in the fourth quarter. Even excluding the Annie's business, net sales for our heritage natural and organic brands were up approximately 25%, led by our Cascadian Farm, Lärabar and Food Should Taste Good brands. Pro forma sales for our U.S. natural and organic brands are now approaching $700 million and we remain on track to grow this business to $1 billion by 2020. We have a strong growth plan for natural and organic in 2016, which we expect will deliver double-digit sales growth. We will use General Mills sales strength in traditional channels and Annie's strength in the natural channel to grow distribution across our natural and organic portfolio. On the innovation front, we are launching a line of Annie's soups later this summer. These are five organic soups, packaged in Tetra Pak cartons featuring flavors that kids will love and a brand that moms trust. This new platform will be in stores only nine months after we closed on the acquisition. We also have exciting news across many other parts of our natural and organic portfolio. We are launching two new Food Should Taste Good Real Good Bars and we are doubling consumer investments on Lärabar. Our final priority for U.S. retail is to deliver Consumer First value on select brands in our portfolio. On Helpers, we are launching our 20% more initiative to better meet the needs of larger families. On Totino's Pizza Rolls, we are adding value with the crispier crust product improvement and on Betty Crocker Desserts, we are making a clear distinction for consumers between our everyday value products and our more premium value-added mixes. So that's a glimpse of the Consumer First marketing plans we have in U.S. retail in 2016. You will hear much more on this business from Jeff Harmening at our Investor Day on July 14. As Don mentioned, our convenience stores and foodservice segment had an outstanding year in 2015. Net sales grew 4% overall and consumer and customer first innovation helped generate 9% growth for our six focus platforms. And that favorable mix drove segment operating profit to a record $353 million, 15% above the prior-year. Let me give you a few examples of our product news and innovation for 2016. On cereal, we will leverage the gluten-free and color and flavor renovation work from U.S. retail and bring that news to K-12 schools and college and university foodservice outlets. On yogurt, we will launch Yoplait Smoothie Pro, a ready to serve smoothie solution for foodservice operators and we will continue our partnership with McDonald's offering Yoplait GoGurt in Happy Meals at more than 14,000 locations across the U.S. We will grow our successful line of frozen breakfast products targeted to school operators. Our new cream cheese-filled Pillsbury mini bagels are heated right in the bag and meet the nutritional requirements for K-12 school meals. And we will expand our Pillsbury Mini's portfolio in convenience stores with two new flavors of ready-to-eat Danish. Bethany Quam, President of our Convenient Stores and Foodservice segment will share more details with you on the 14th. Our international segment generated 6% constant currency net sales growth in 2015. We had a strong year in Europe, where constant currency sales rose 5% and today, nearly 40% of the segments' $5.1 billion in net sales are generated in emerging markets, which represents an important long-term growth opportunities for our brands. Let me share some highlights of the Consumer First product news and innovation we have planned for 2016, starting in our developed markets. Constant currency net sales for Old El Paso increased mid-single-digit in Canada and double-digit in Europe in 2015. We will build on that success in 2016 by launching our premium line of Ristorante dinner kits into Europe and by introducing Old El Paso flavor blasted tortilla shells in Canada. In addition, we will expand our convenient meal offerings by introducing a line of Parampara Indian spice mixes in Europe. We are encouraged by early results of our Häagen-Dazs stick bar launch in France and we will be extending that innovative platform to other markets later in 2016. In the U.K. and Canada, we are launching a line of Liberte Greek products with grains and seeds utilizing the same technology as Yoplait Plentí in the U.S. In emerging markets, we continue to focus on the growing middle class consumer. Our plans in 2016 include a new line of Yoki branded ready-to-eat popcorn in Brazil, leveraging Yoki's leading position in the microwave popcorn category. In China, we will extend the line of Wanchai Ferry dumplings with more vegetables and lean meats, appealing to a younger consumer demographic. We will introduce seasonal flavors of Häagen-Dazs ice cream like apricot lavender and cream and expand Häagen-Dazs shops and retail outlets into new cities. And we will broaden distribution in Shanghai on our new Yoplait business which we launched just last month. Our CPW joint venture has been capitalizing on growth opportunities for the past 25 years. This is now a $2 billion net sales business and a strong number two player in the cereal category outside of North America. CPW is focused on Consumer First growth plans too. In fiscal 2016, we are bringing gluten-free news to Nesquik, the second largest global brand in CPW's portfolio. In the U.K., we are seeing growing consumer interest in simplicity and we are launching two varieties of shredded wheat with fruit to capitalize on that trend. And emerging markets continue to be a great growth opportunity for CPW. In the Philippines, we are introducing a cocoa crunch all-in-one product that comes in a single-serve package with milk powder so a consumer just adds water to enjoy a bowl of cereal with milk. So that gives you a sense for the growth plans we have across our international business in 2016. Chris O'Leary will share more details with you in two weeks. So let me quickly summarize our plans for 2015. Our primary strategy is to expand our Consumer First focus to generate sustainable topline growth. We will do that by investing in significant core brand renovation across our portfolio and by introducing a strong slate of meaningful innovation, all geared toward meeting consumers evolving food preferences. We will maintain our focus on HMM and will deliver increasing levels of savings from our cost reduction initiatives and above all, we remain focused on our commitment to deliver earnings growth and strong cash returns to our shareholders. We look forward to talking more with you about these plans during our Investor event on July 14. So with that, I will open the call for questions. Operator, please get us started.

[Operator Instructions]. Our first question comes from Chris Growe of Stifel Nicolas. Please go ahead.

Hi. Good morning.

Hi, Chris.

Hi, Chris.

Hi. Just two questions, if I could. The first would just be, you have a lot of cost savings coming through this year, in particular on the HMM cost savings as well as obviously the restructuring related savings. Just wanted to get a better sense of, if you could give an idea like how much of these are being reinvested, how much do you expect to come to the bottom line and maybe a breakdown of those savings roughly between cost of goods sold and SG&A? If I could just add one other question, it would be a different question, in relation to, you mentioned an investment in Yoplait in China and I guess just to get a better sense of when that's going to start hitting, when we should see that in the market and any expectations for that business? Thank you.

Sure. Chris, this is Don. I will take the cost saving reinvestment. Obviously we see this year, talking about 2016, we do see a step up in the cost savings contribution the incremental value of those this year. We are selectively reinvesting. We are, as we think about how we have built the plan this year, it was really about balancing, reinvesting to derive sustainable topline growth with increased efficiency in margins and then returning cash to shareholders. And as we balance all that, we did some opportunities for some specific investments. As you do your modeling, it is probably going to be 50% plus in the phase this year will go back into the business. And that's going to be across both COGS, in media, in consumer support more broadly and then as some SG&A capabilities. So for example, as you think about gluten-free Cheerios, removing artificial colors and flavors across our cereal brands, the sugar reduction in yogurt, getting our value right on Betty Crocker and Helpers launching Yoplait in China that you refer to. Plus there are some things we didn't talk about today that we are improving our capabilities to reach Hispanic consumers in the U.S. and putting some chaos in our categories against some faster growing channels like e-commerce. And so we have been very targeted where we see the greatest growth opportunities and the commonality of all those is where we see Consumer First opportunities to grow our business for the long-term and that's where we are putting the reinvestment. We do expect to see a return to comparable top line growth this year. As I said, if you remove the one week, it's going to be up 1%, but I also want you to think about this being a two-step process. We are going to see part of the benefit of those reinvestments this year. We expect to see another step as we get into 2017. Because we are building the base for growth for the long-term and we will start seeing that infection and change in trajectory this year.

And just to add to that, Chris, Yoplait China would be a good example of really looking at the long term and to build businesses that are going to sustain over many, many years. I think you know we have been planning to enter China for a number of years. Interested, of course because it's a very large multibillion dollar category already in China and so we began shipping from our own plant last month. The products are on the shelf in retail stores in Shanghai. We are offering a couple of traditional spoonable varieties. These are very, very high quality building on the French heritage of Yoplait. We are also offering a drinkable product. So there will be basically three platforms. They are on the shelf. They look great. We are really excited by it. We are going to do what we have always done in China, which is to really learn about the business model in Shanghai and then as we success we fully intend to expand that business into other major cities in China.

Thank you. Our next question comes from Eric Katzman of Deutsche Bank. Please go ahead.

Hi. Good morning, everybody.

Hi, Eric.

Good morning, Chris.

I guess, I am not sure if we calculated this correctly, but if you exclude the acquisitions and you exclude the extra week, was the fourth quarter volume down mid single-digit? And if so, was that within your expectations for the quarter?

Eric, your math is pretty good. It's probably around 4% when you back out the extra week in Annie's and so forth. It was actually. And there's two things that I would just point. One is, in our C&F business we did exit a line of low to no margin businesses and that had an impact in the quarter. And then in U.S. RO, we actually were lapping a build of retail inventory from a year ago. So we had anticipated both of these when we gave our guidance. Our sales actually came in pretty much in line with what we expected including the volume component of our sales. So we enter 2016 in the position that we expected to when we first started building our plan back in the spring.

Okay. Thank you. And then, maybe I could ask about this value initiative and just how should we think about that? It seems like it's mostly some of the baking goods, baked goods products that are being affected and is this kind of a straight out price cut? Or are you promoting? Or is it like a combination of trying to drive some of those, I guess, center of the store brands that have struggled a bit?

Yes. So Eric these, as you know, we are not trying to win on the basis of pricing and merchandising, but in the case of some of our baking products and also Helpers, for example, we simply found ourselves not competitive from a merchandising standpoint as the year unfolded. That was also true for soup where we didn't enter the season with the right price point. So I would just describe this as getting our merchandising price points and frequency in line with competition, tactical adjustments. In the baking area, for instance, we are adjusting prices on some of the more value oriented parts of the line anyway. So think cake and frosting. Other parts of the line maybe brownies and cookies and these sorts of things, we will leave those prices as is. So these are really just tactical adjustments to move us into the competitive zone and we think that that will benefit in much better volume performance.

Okay. I will pass it on. See you in Boston.

Yes.

Thank you. Our next question comes from Bryan Spillane of Bank of America. Please go ahead.

Hi. Good morning, everyone.

Hi, Bryan.

Hello, Bryan.

Hi. I wanted to follow up on Chris Growe's question, just with regard to just making sure I have got all the pieces on the cost savings that are incremental this year and then trying to sort of figure out how much is being reinvested, because I think back of the envelope, I was looking at between HMM and the three programs, the incremental savings for this year should be somewhere in the $500 million to $600 million range. Is that right?

Yes. That's correct. That's what will impact COGS. That will impact in total, sorry, not just COGS, but in total, yes.

In total, yes. And then implied, I guess, in the operating profit growth currency neutral is mid single-digit operating profit growth is like $150 million or so of operating income. So if you are reinvesting half of the savings but there is $150 million of operating profit growth, it just seems like there is something I am missing in between. So could you just help bridge that?

Yes. You see, there is inflation. We have 2% inflation in COGS. We will have normal inflation across the remainder of our SG&A. And again, the reinvestment is going to be over half of what the cost saves are. So you have got to roll that in as well. And then the last piece that you might not have is for our pension expense with the change in mortality table, it's going to increase our liability, increase our expense, non-cash by about $70 million next year. That will not all flow through because we have some things that will partially offset that. But it is some thing that we will have to absorb next year.

Okay. That helps. And I guess the 53rd week is also another $30 million or $40 million of OI that you have to lap?

Yes. That's going to take a point plus off your growth rate.

Okay. Great. Thank you.

Thank you. Our next question comes from Robert Moskow of Credit Suisse. Please go ahead.

Hi, Rob.

[indiscernible] for myself out there. A question on --

We lost you, Rob.

Mr. Moskow, we are unable to hear you, sir.

Can you hear me now?

Yes. We can hear you now. Okay. Now we have lost you again.

All right. I will hop out. Thanks.

We will go to the next question. Our next question comes from Kenneth Zaslow of BMO. Please go ahead.

Hi. Good morning, everyone.

Hi, Ken.

I just have two questions. One is, every couple of quarters or several quarters you guys start looking again at the cost savings opportunities throughout different pieces of the businesses. Are there any businesses that you are in the process of reviewing to go another level of cost savings? That's my first question. My second question is, can you discuss the different sales trends for cereal in retail versus foodservice? Is there any insight to be gleaned from the different growth trajectories of those two?

So you want to take the question?

Yes. Ken, on the cost saves side, it's an ongoing effort, it's an ongoing practice within the company to look at where we are not as competitive as we think we could be and as opportunities present themselves that are material enough for investors to have different guidance on, we obviously disclose that as we did with Project Compass just a couple of weeks ago.

And on your cereal question, Ken, I think part of it is just rooted in the fundamentals. As you know, our convenience and foodservice business is very, very targeted to the channels that we think have longer term growth potential and so we are highly focused in schools and universities and healthcare and all of those channels are growing anywhere from 2% to 4%. So a part of it is that we are just seeing there is a little bit of a tail wind there and I would say the second part is that our innovation has just worked terrifically well in those channels. We have great tasting cereals. The whole grain benefit of our Big G cereals has been extremely important to school foodservice operators and has given us a real competitive advantage. We have a little over half the share in that segment. So I would say, it's a combination of some tailwind in those channels, very well targeted innovation and that's why we are very encouraged by the innovation that we will be bringing to the general market in 2016. We think that's very well targeted, very focused on consumer trends and we are going to see revenue growth that will result from that innovation.

Great. Thank you.

Thank you. Our next question is from Robert Moskow of Credit Suisse. Please go ahead, sir.

Hello, again.

I hope that --

Rob, you have got to try. You have got to get on a different phone. We are not hearing you.

You are going to find a pay phone.

All right. Thanks. I am out. I will try again later. Bye, bye.

Okay.

Thank you. Our next question is Matthew Grainger of Morgan Stanley. Please go ahead.

Hi. Good morning, everyone.

Hi, Matt.

Hello, Matt.

Hi. So just two questions. First, I wanted to see if you would give any more context on the rationale for the Green Giant impairment? It is a brand that obviously has very high awareness. You have done some testing out of the branded snacks. Just how did you assess the pros and cons of continuing to try to enhance its credibility in more of a health and wellness context? And with the impairment, what are the implications for the future of it in your portfolio, whether that's just prioritization or other alternatives?

So Matt, we do continuously review where and how we are allocating our resources and resources defined as R&D investments and marketing investment and capital investment. So as you can imagine, we are just constantly looking very closely at that. And we have, you have already heard about a number of opportunities that we have around the world in cereal and yogurt and snack and you will hear more about it in July. And we are dedicating resources to drive growth in those businesses and that necessarily means that other businesses are getting less and we have highlighted Green Giant. The fact that we have done that shouldn't take away from the fact that Green Giant know is in fact a profitable business for us. As you said, it's a really good brand. We are going to be bringing news and innovation to Green Giant, both in the U.S. and in international markets in F16. So sort of reallocation doesn't mean not doing things. We like that equity. And we think there is innovation opportunity there. So we will have news coming, but we have just shifted some of the resources to areas that we see as higher growth and that's resulted in the impairment analysis that we have highlighted.

Okay. That helps. Thanks, Ken. And then, Don, just briefly to come back to your comment on the prior year comp, from an inventory standpoint. Can you just give a sense of where retail inventory stands at the moment as we go into the year? Because there were some retailer inventory reductions earlier in 2015 and we have heard a fair amount of public discussion around inventory practices at some key retailers changing. So just whether you feel you are at normalized levels, whether we should expect any volatility?

A good question, Matt. I appreciate the chance to clarify. We do think we are at normalized levels in the retail trade. The issue is that we had some billed inventory at the end of last year. We had that inventory then depleted during this year. So we ended up taking two hits, one for the depletion this year and one for lapping last year's increase. But we think as we enter 2016, the retail inventories are going to normalize level.

Okay. Great. Thanks, Don.

Thank you. Our next question comes from David Driscoll of Citi Research. Please go ahead.

Great. Thank you and good morning.

Hi, David.

Good morning.

I had kind of one major question and then just a couple of little details. First one is about cereal, both U.S. and international. Ken, you said a lot in your prepared comments about it, but when I look back at the track record in cereal and the category, it's just been such a tough category. So I would just kind of like to ask you what gives you real confidence that this is the turn that you are going to grow the business? And if you could delineate between your confidence and growth in the U.S. versus international, that would be helpful. And is this a General Mills specific positive or is this a category comment that you will also participate in?

Well, so let me start by saying, first of all, I think that the category in the U.S., as we look at that, still declining but the levels, the rate of that decline is moderating. And so we are, David, encouraged by that. And if you just look at last 12, last three, it was a little over 3% decline for the year. For the quarter, it was a little less, 1.5% decline and okay. And I think as you know, the latest month was an easier comp, but there was actually a little bit of growth there. So we do see the category rates of decline moderating, not only in the U.S., but we are also seeing that in Canada and other developed markets around the world. So I think that's an important factor. The second point is that we think we have a very good understanding for the new preferences that consumers have for breakfast and we have talked about this with you many times for products that are simpler, products that are more filling, products that taste good, products that address very specific issues that consumers have like gluten and artificial colors. And as we address those things and as we bring innovation that address those, we are seeing growth. Our granola business is growing really well. We think Muesli is going to do really well for us. We see products that have had taste improvements grow extremely well. Our Cinnamon Toast Crunch, which is the third largest brand in the category grew at double digit this year. So I guess just the second part of my answer to your question, David, is that we think we are really good theory on what's going on in the category and as we addressed it with Consumer First, we are seeing a response. And then to your last point, we were very single-mindedly focused on growing our business and we think we have very, very strong innovation in order to do that. Of course it will be, as we see other players in the category invest more in innovation, as we see stronger investment in media and we think we are beginning to see that, these of course are going to be very helpful as well. So as the entire category focus is on these things and we get the consumer support back in the category, that's going to make a big difference as well. So anyway, long answer, but hopefully give you our rationale.

Very helpful. Just two quick ones for Don. What's the Annie's revenue contribution in F16? Is it about one percentage point to growth? And then on media, I think in your guidance slide you said it was down but then in response to one of the Q&A you said that there was reinvestment in -- and I forget what word you used -- advertising, media from the cost savings initiative. So apologies, I am confused. Is media down and I think it is and then why did you say that there was reinvestment in it from the cost saves?

Media is down. I will get that question first. Media is down and what I said is our total consumer will be up. And just let me parcel that out. So media is obviously what you see on air, what you see in digital or in print. It will be slightly down, essentially I think about it as flat on a 52 to 52 week basis. So we lose a week obviously this year. Importantly it's going to be up on key growth platforms where we have clear ideas. Ken just talked about cereal in U.S. and internationally, our snacks business in the U.S., yogurt in the U.S., natural and organic in the U.S. Internationally, we see it in Old El Paso in addition to the cereal businesses and in emerging markets. So we will have media up on platforms where we have strong growth ideas. And then total consumer will be up low-single digit. So when I talk about total consumer, that takes into things like in-store events. We have many of those in the emerging markets. We are doing Häagen-Dazs in-store displays in Southeast Asia markets. Obviously Yoplait displays in China, Yoki in Brazil. So a lot of opportunity to get more exposure in the store itself. And then sampling falls into it as well. Again think about Yoplait in China as we are launching that brand. We are going to see a lot of our natural and organic businesses getting supported by increased sampling this year in the U.S. So there is a number of vehicles that don't hit media nor a consumer vehicles that don't hit media that we will be increasing or invested on this year.

The only think I would just underline on that is, Don's comment on sampling. Sampling is perhaps the most powerful penetration driver that we have and many of our natural and organic businesses are not really driven in the traditional media. They are in fact driven almost entirely by getting the products into people's mouths. So that's a growing part of our marketing mix and one that is not really counted in the media thing. So that's an important highlight for you.

What was Annie's?

So the other question was on Annie's sales contribution. It was about 1% in both 2015 and in 2016 because we had it for roughly half a year in both instances.

Perfect. Thank you. I will pass it along.

Thank you. Our next question comes from Diane Geissler of CLSA. Please go ahead.

Good morning.

Hi, Diane.

I wanted to ask a question just about the cereal category in general. I know you are probably category captain with a variety of retailers, but obviously cereal sales have been weak for a number of years. And I am just trying to gauge where the retailer is at, in terms of the category and some of the alternatives to the category such as the granola products you are launching which I think are quite a bit different than the regular sort of boxed cereal, but also what you have been doing on the bar business? How does that all shake out at the retailer? Are they increasing square footage, linear feet for some of these new products and decreasing the amount of shelf space for the core products? Or is the granola and bar growth kind of incremental? And then I have part two to the question which is, we have seen a lot of manufacturers come into that bar category. I think SKU proliferation there has been pretty massive over the last few years. And so, what are you seeing in terms of some of these more protein enriched granola snack bars that have been launched over the last few years?

Okay. Well, Diane, so let me start my answer by reminding everyone that cereal is $10 billion category in the U.S. So it's very, very large and as you know, it's been declining for the last couple of years, but still very, very large and still about a third of all breakfasts include cereals. So I think the first point is, it's very, very important to the retailer and basically what they want from us is innovative ideas that will drive growth in that category. And so they are very enthusiastic about the initiatives that we are bringing. I can assure you that you will see lots of in-store support and activity this summer and going into the fall, for example around gluten-free Cheerios. Cheerios is by far the largest brand in the category. They are highly enthusiastic about that initiative and it will get a lot of support because they see it as great news for the whole category. So I guess the first point is, it's big and our retail partners really want us to bring innovation. And so they are quite enthusiastic about what we are doing. In terms of SKU proliferation in these targeted areas of granola or protein or things like this, those initiatives are working for us. And so that's exactly what our retail partners want. They see those trends as well in other parts of the store. It makes sense to them and we are getting nice support from them on those brands. Of course, both of us are constantly looking at what are our top turning items, what are the bottom turners and making sure that we are pruning. But as you have heard from us before, in general, our cereal items are very high churning and so we have held our share of distribution. We have actually grown our share of distribution over the last several years because we have really strong brands. So does that kind of get your question, Diane?

Yes, because some good color on what the retailer is thinking about those two categories. I also wanted to ask about the cash repatriation and the tax charge on that. I guess the question is that obviously you didn't need those funds to grow the businesses internationally, otherwise you wouldn't have repatriated them, but is there an expectation about future repatriation? Or was that done because of some kind of timing with regard to tax rules? If you could kind of frame that for us, that would be helpful. Thanks.

I appreciate you flagging at it. This is a one-time repatriation. It was $600 million. We look at the economic cost of bringing that money back for some of the cash need that we have in the U.S. for restructuring actions of Annie's that we did last year. We brought it back and while effective tax rate charge was $79 million, it carries $24 million cash charge to it. So it was low cost from that standpoint. It is one-time. It doesn't change our perspective in terms of how we are going to manage the rest of our cash internationally nor does it reflect -- it doesn't reflect anything on our investments internationally. We have some robust investments internationally, but we also have a very cash generative business internationally.

That's great. Thank you.

I think we have time for one more question.

Thank you. Our next question comes from Ken Goldman of JPMorgan. Please go ahead.

Hi. Good morning, everyone.

Hi, Ken.

I am a little bit surprised by how far Green Giant has fallen. I mean it used to be a really good brand. The category is not the greatest but other of your competitors are doing okay. So as you think about what happened there, are there any learnings you can take away from that that you can apply to maybe some of your other brands and categories just to sort of make sure something like that doesn't happen again? Because I know in your words here you are sort of softening what's happening, but it's not every day we see an impairment charge to this degree.

The observation that I would make, Ken, is that it's increasingly kind of a value focused category and the segment that is performing a little better tends to be the commodity oriented, just frozen blocks of vegetables. And so that's the direction that the category has moved in. And of course, as you know, we are also in the canned part of the category as well with our products. So that would be an observation for you. Having said that, we do see our portfolio is primarily more value added and more flavored and soft products and we see opportunities to continue to innovate and adapt with those kinds of products and it tends to be the higher and more innovative end of the category. And so that will be our focus going forward.

And Ken, what I would add to it in terms of learnings is this is one area where the consumer preferences have shifted pretty rapidly. And a large focus of ours, from a Consumer First standpoint, is moving as rapidly as we can against those. Some times you are constrained by the number of resources you can put against the business. And so the cost saving initiatives that we are undertaking to free up resources to get after opportunities like these, I think will allow us to be better and more adaptable and more agile as these kinds of shifts happen as we go forward.

That's helpful. Can I sneak in a very quick one? Cereal reformulation, you talk about no colors from artificial sources. Is that different than saying no artificial colors? I am just trying to make sure I understand that?

No, it's not. We are eliminating artificial. And so any color and flavors that will be, by the end of 2017, will be from natural sources.

Great. Thank you.

Okay. Tina, I think we are out of time. So Kris and I will be taking calls all day. For those of you that don't have my number, you can reach me at 763-764-2301. So thanks every one and have a great day.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.