General Mills, Inc. (GIS) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2016 Earnings Conference Call. During the presentation all participants will be in a listen-only-mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded, Tuesday September 22, 2015. I would now like to turn the conference over to Jeff Siemon, Director of Investor Relations at General Mills. Please go ahead sir.

Thanks, Cathy and good morning everyone. I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Shawn O'Grady, Senior Vice President and President of Sales and Channel Development. I'll turn the call over to them in just a minute, but first let me cover our usual housekeeping items. A press release on first quarter results was issued over the wire services earlier this morning and is also posted on our website. You can also find slides on our website that supplement this morning's presentation. I'll remind you that our remarks this morning 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. And with that I'll turn it over to my colleagues, beginning with Don

Thanks, Jeff, and good morning to everyone. Thank you for joining us today. As noted in our press release, General Mills posted strong operating results in the first quarter of fiscal 2016 with 4% constant currency growth in net sales and double-digit constant currency growth in segment operating profit and adjusted diluted earnings per share. We continue to make good progress on our cost savings initiatives and we have clear visibility to delivering our 2016 savings target. We are reaffirming our full year fiscal 2016 growth targets, which currently exclude any impact from the proposed Green Giant divestiture. Slide five provides a summary of the Green Giant transaction. We're selling the Green Giant and Le Sueur brands of frozen and shelf stable vegetables to B&G Foods for $765 million in cash, subject to an inventory adjustment at closing. General Mills will continue to operate the Green Giant business in Europe and select other markets, primarily in Asia and the Middle East under a perpetual royalty free license from B&G. B&G will operate Green Giant primarily in the U.S., Canada and markets throughout Latin America and the Caribbean. We anticipate using the net cash proceeds from the sale for share repurchases and debt reduction. The transaction is expected to be dilutive to our fiscal 2016 earnings per share in the range of $0.05 to $0.07 excluding transaction cost and a one-time gain on the sale. We'll provide you with another update after the transaction closes, which we expect to take place before the end of the calendar year. Now let's turn to the first quarter. On slide six you can see net sales totaled $4.2 billion, up 4% in constant currency. Segment operating profit totaled $826 million, 23% above the prior year in constant currency. Recall that profit was down 15% in last year's first quarter due primarily to higher merchandising expense in U.S. Retail. Net earnings increased 24% to $427 million and diluted earnings per share were $0.69 as reported. These results include mark-to-market valuation effects and restructuring and project-related expenses. Excluding these items affecting comparability, adjusted diluted EPS increased 30% to $0.79. On a constant currency basis adjusted diluted EPS was up 36%. Slide seven shows the components of total company net sales growth. Pound volume increased 2% from the prior-year including a one point contribution from the Annie's acquisition. Sales mix and net price realization also added two points to sales growth. And foreign exchange reduced sales growth by five points. U.S. retail net sales for the first quarter were 4% above last year, with growth in the Cereal, Meals, Yogurt and Snacks operating units. U.S. Retail net sales growth outpaced Nielsen measured sales in the first quarter. This was due in part to good growth in non-measured channels and increased customer inventory levels in advance of strong second quarter merchandising on promotions like gluten-free Cheerios. It's also important to remember that last year's first quarter net sales lagged Nielsen movement. Over a two year period growth rates for U.S. Retail net sales in Nielsen measured sales were comparable, excluding the impact of Annie's. Looking forward we expect Nielsen measured sales to strengthen in the second quarter. In our Convenience Stores and Foodservice segment net sales increased 1% in the first quarter. Our six focused platforms, cereal, yogurt, snacks, mixes, frozen meals and biscuits posted combined net sales growth of 9%. Net sales for our remaining products were down driven by our exit of some low margin businesses in late fiscal 2015. Slide 11 summarizes the first quarter net sales results for our International segment. Constant currency net sales grew 5% overall. Sales in Europe increase 7%, driven by good growth on Häagen-Dazs and Old El Paso. Canada sales were up 5% due to strong growth on snacks. Latin America sales grew 3% and in the Asia-Pacific region sales increased 3% due to growth in South Korea and India. Slide 12 shows the first quarter adjusted gross margin increased 290 basis points. Recall that high levels of promotional expense significantly reduced gross margin in last year's first quarter. Also this year our first quarter margins benefit from our cost savings projects. In addition our COGS HMM savings offset inflation. We expect inflation will be the lowest in the first quarter and will build over the year to average 2%. Slide 13 details our segment operating profit results in the first quarter. Total segment operating profit was up 23% in constant currency driven by strong increase in U.S. Retail's profits. Remember that the U.S. Retail profit was down 25% in last year's first quarter. Constant currency International profit declined 3% versus year ago results that were up 17% and Convenience Stores and Foodservice profit was down 9% reflecting higher input costs, including lower grain merchandising and a comparison against 18% growth in last year's first quarter. Combined after tax earnings from joint ventures totaled $26 million in the quarter, up 16% in constant currency due to favorable input costs, and a decrease in SG&A for CPW and favorable price realization for Häagen-Dazs Japan. CPW sales were 2% below year ago levels in constant currency, while Häagen-Dazs Japan posted constant currency sales growth of 9%. And completing our review of the income statement; we recorded restructuring and project related charges of $95 million in the first quarter including $35 million in cost of sales and about $2.5 million in non-consolidated interest -- non-controlling interest. Unallocated corporate expenses, excluding mark-to-market evaluation effects and restructuring and project related charges were down $19 million. Net interest expense decreased $3 million in the quarter. The effective tax rate for the quarter was 32.7% as reported. Excluding items affecting comparability the tax rate was 32.3% this year, essentially matching year ago levels. And average diluted shares outstanding declined 2% in the quarter. Turning to the balance sheet, slide 16 shows that our core working capital decreased 16% versus last year’s first quarter, driven primarily by continued improvements in accounts payable. This is the 10th consecutive quarter that we have reduced our core working capital versus the prior year. Operating cash flow totaled $431 million in the quarter, 31% above last year’s results due to higher earnings. Capital expenditures for the quarter totaled $147 million and we returned more than $400 million to shareholders through dividends and share repurchases. Slide 18 provides an update of our cost savings initiatives. We are on track to deliver $400 million in cost of goods sold HMM savings in fiscal 2016. In addition we are making good progress on our incremental cost savings initiatives, including Project Catalyst, Project Century, Project Compass and the changes to our administrative policies and practices. Taken together these initiatives remain on track to deliver between $285 million and $310 million in annual savings this fiscal year and more than $400 million in fiscal ‘17. Slide 19 provides a summary of our 2016 sales and earnings guidance which currently excludes any impact from the proposed Green Giant divestiture. We are reaffirming the targets we outlined in July. We expect 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 project our total segment operating profit will grow at a low single-digit rate on a constant currency basis and we are targeting mid-single digit constant currency growth in adjusted diluted earnings per share. At current exchange rates we estimate a $0.09 headwind to full year adjusted diluted EPS growth in 2016. Again all these growth rates exclude the impact of the Green Giant divestiture. We’ll provide an update to these growth targets after that divestiture is closed later this calendar year. With that I’ll turn the microphone over to Shawn O'Grady. Shawn?

Thanks, Don, and hello everyone. It’s great to be on the call this morning and give you an update on our U.S. Retail sales force and how we are partnering with our customers to drive growth. The mission of our U.S. selling organization is to lead profitable growth for both General Mills and for our customers. This morning I would like to take you -- like to highlight three primary ways to accomplish this mission. First, we drive growth by supporting the fiscal 2016 U.S. retail priorities that Jeff Harmening shared at our Investor Day in July. Second, we accelerate this growth by expanding our reach across new and growing food distribution channels. And finally we look to maximize the return of our efforts by delivering quality in-store execution. And we do this through the efforts of the top sales teams in the industry, as ranked by our customers in the Annual Kantar Power Ranking survey. We are proud of that accomplishment, and more importantly it shows the credibility that we have with our retail customers. We know it means that our customers are counting on us to partner with them for growth. To ground you in the size and scope of our organization we employ around 1,700 sales professionals across the U.S. Our organization includes cross functional teams that call on customer headquarters, a retail organization that make sure our products are merchandised in stores and stocked on shelves and a centralized support group that provides advantaged capabilities to our sales teams. We have expertise in 25 categories, that span all three temperature states and we manage an average of 690 General Mills items in distribution. The primary way we lead profitable growth is by supporting the U.S. Retail segment’s top priorities, which are to grow cereal, accelerate yogurt and snacks, drive double-digit growth on our natural and organic portfolio, and deliver consumer first value on key brands. In many cases the difference between an idea's success and failure is in how it comes to life in the stores of our retail partners. Let me share some example from a few of our priority categories. By now you have probably heard of the exciting news that nearly 90% of our Cheerios franchise is going gluten free. Our Cereal operating unit has developed a strong marketing plan to reach consumers with this news and we’ll build on that plan by making it an unmissable event in stores. This quarter we’ll place 35,000 full pallets on display across all retailers. To put that in to context our back-to-school merchandising event, the largest annual event across our entire cereal range is about this size. That means gluten-free Cheerios will be one of the largest merchandising event in our cereal business' history. In addition to full pallets, we're creating custom gluten-free point of sale materials and leveraging digital tie-ins with several of our key customers. Retailers are incredibly excited about this news and the interest that will bring to Cheerios and to the cereal category more broadly. In addition to supporting renovation, like gluten-free Cheerios we work to build in store excitement for innovation like our new Yoplait Plenti Greek yogurts and Nature Valley Simple Nut Bars. Our first job is building distribution, leveraging our category management capabilities to secure visible -- a visible block on the shelf for these new items. While it's still early customer acceptance and initial distribution build on these items are trending higher than our original expectations. Once we have new items in distribution, we execute introductory merchandising and in-store sampling to drive trial. And increasingly we're partnering with customers on digital marketing to build consumer awareness. We're also working hard to drive growth for our natural and organic portfolio. Annie's, our most recent brand addition is a terrific brand with a great deal of distribution upside. We're focused on growing shelf presence on the top-33 Annie's SKUs which have only 30% average distribution nationally. In fact, since the acquisition we've grown Annie's distribution double digits, including a 16% increase at Target, which was the customer with the highest level of Annie's distribution prior to the acquisition. We're also expanding Annie's into relatively untapped channels, including club, e-commerce and food service, and we're leveraging our broad category expertise to help launch Annie's into new categories like soup and yogurt. In addition to supporting U.S. Retail priorities, we also work to accelerate growth across the segment by expanding our offerings into faster growing channels. We have a strong position in traditional grocery stores and in super centers and a long history of generating growth in these two channels. We're also keenly focused on alternative channels where food retailing is expanding. In fact, sales in many of these formats are increasing at high single digit and double-digit rates. Club Stores continue to generate strong growth, especially with attractive consumer segments like healthful foodies. We've experienced increasing success with Club retailers by focusing on winning in snacks with our Nature Valley Fiber One and Food Should Taste Good brands, leveraging strong product credentials like gluten-free cheerios, Immaculate Baking natural and organic refrigerated dough, and Yoplait Simple GoGurt. And launching unique offerings like Larabar almond butter, which appeal to the Treasure Hunt mentality of club shoppers. Natural and organic retailers have also experienced strong growth as consumer preferences change. We've been selling to these retailers for more than 15 years but the acquisition of Annie's has opened up new growth avenues and increased our capabilities. We're now the third largest natural and organic food manufacturer in the United States and this enhanced scale combined with our dedicated stewardship of our brands has made us a significant and credible supplier to natural and organic consumers. We're increasing our investment to further strengthen our capability from this channel and we're leveraging Annie's direct sales team in Berkeley and their broker relationship to accelerate growth for existing General Mills' natural and organic brands like Muir Glen organic tomatoes and Cascadian Farm's organic frozen food. We're also seeing greatly enhanced merchandising execution on our cereal business in the channel, which is helping to drive 50 basis points of cereal growth for Cascadian Farm organic cereals in these outlets. In Drug and Dollar Stores we're seeing increased focus on food as retailers search for their next source of sales growth. Our scale, insights and dedicated sales force across food have provided us with an opportunity to positively impact growth for these customers. We leverage our leading brands and broad category positions to secure advisor ships early and those relationships have tended to stick and be beneficial to our business overtime. We're taking this learning to the e-commerce channel too. E-commerce is the fastest growing food channel and our customers are testing a wide range of business and distribution models. We've established an e-commerce Center of Excellence to provide leadership for the virtual shelf by serving as food captain and we engage in annual collaborative business planning with our key retailers like Amazon, Wal-Mart.com and other pure play e-commerce retailers. Our portfolio is well suited to the two main ways consumers shop for food online. We have limited distribution items like Larabar or gluten-free products that do well on sites that are geared to spear fishing or single item search. And our leading brands are seeing accelerating sales growth on sites that cater to customers looking to do their full basket shop online. Across these and other alternative food channels we're enhancing our capabilities to lead profitable growth for our customers and our brands. The third way we lead profitable growth is by focusing on two key areas of execution, on-shelf distribution and in-store display. Over the past few years distribution growth and display availability across traditional retail channels has slowed. As a result we've shifted our focus to enhancing the quality of these activities. In fiscal 2016 we're focused on driving the right distribution across our portfolio. We are prioritizing what we call our Power 450 SKUs. These are our 450 best turning national items. In fact they turn at a rate that is nearly four times faster than the other items in our portfolio. These products represent three-quarters of our U.S. Retail volume, but less than 20% of our SKUs. More importantly we have on average less than 350 of these 450 items on the shelf. That's almost a 25% distribution gap and a significant growth opportunity for our largest and most profitable brand. The recent decline in effectiveness of merchandising across the store has been driven by too many displays containing too many items and worse too many small items. We are working with retailers to improve merchandising effectiveness by refocusing on big categories, big brands and fewer but larger items. That should mean more merchandising support for cereal which is by far the most productive merchandise category in the center store and more support for Honey Nut and Yellow Box cheerios, the largest items in the categories leading franchise. Now let me show you an example of how the U.S. Retail sales force integrated these efforts to lead profitable growth with Hispanic consumers in fiscal 2015. We started by leveraging strong dedicated Hispanic marketing initiatives on brands like Yoplait, Honey Nut Cheerios and Nature Valley. We focused our resources on specific markets and channels where we could maximize our results, for example Hispanic chains, wholesalers, Supermercados and select stores from national retail chains with concentrated Hispanic shopper bases. We then built a customized distribution and display plan for each of these customers and we developed Consumer 360 surround with local event sampling, radio, digital couponing and in some cases the use of credible celebrities. The result in 2015 was a five percentage point increase in sales growth where we implemented this initiative as compared to our national trends. In fiscal 2016 we are expanding our efforts from three cities to 24 cities, which collectively represent 50% of the food and beverage dollar spend by Hispanic consumers in U.S. I hope I've given you a better understanding of how our U.S. Retail sales force is leveraging our capabilities and relationships to lead profitable growth, both for our customers and for our brands. And with that I'll turn the microphone to Ken to provide some operating highlights from the first quarter. Ken?

Okay. Hey, thanks Shawn and good morning to one and all. As Don described fiscal 2016 is off to a good start with strong top and bottom line growth. We continue to put the consumer first and have posted solid sales growth on many brands across our portfolio. Let me give you an update on our performance in each of our business segments. In our U.S. Retail segment we delivered strong sales and operating profit growth in the quarter and we made progress on our key priorities for the year. We posted net sales growth for our cereal, yogurt and snacks businesses. We are seeing continued good performance from our natural and organic brands as we increase distribution across the country, as you just heard from Shawn. And we are gaining traction as we address value on key brands like Helpers and Betty Crocker mixes. In cereal we are encouraged by recent trends in the category. As you can see on slide 39 category sales declines have been moderating over the past several quarters with retail sales down about 1% in the most recent quarter. We believe product renovation and innovation are two keys to restoring the cereal category to growth and we’ve been doing our part with many of our recent launches. Our five varieties of gluten-free Cheerios have been flowing on to store shelves over the past month and we just began advertising this news a few weeks ago. While it’s still early days we’ve received very positive consumer response. We’ve also been innovating within specific segments of the cereal category. For example Nature Valley Protein Granola has been benefitting from the increased consumer interest in Granola. We added to our Nature Valley cereal offerings in the first quarter with soft baked granola bites and toasted oats Muesli contributing to strong double-digit retail sales growth for Nature Valley cereals and we’ll expand this franchise in the second half of fiscal 2016 with Baked Oat Bites and two varieties of Oat Clusters. We have renovation news, more new items and increased media support plan for the remainder of the year and we’re on track to grow net sales for our U.S. cereal business in fiscal 2016. We posted good retail sales growth in segments within the U.S. yogurt category too. Retail sales for Yoplait Greek varieties increased 11% in the first quarter on the strength of Greek 100 Whips! This summer we introduced two new flavors of this light and airy Greek Yogurt. And we recently launched eight flavors of Yoplait Plenti Greek Yogurt, which includes wholegrain oats, flax and pumpkin seeds for consumers seeking a heartier yogurt experience. Consumer support on Plenti started this month and early response has been positive. Our reduced sugar messaging on Yoplait Original, along with its all family snack appeal drove 4% retail sales growth for this variety in the quarter, and that’s on top of 12% retail sales growth in last year’s first quarter. We’re expecting another year of solid growth for our yogurt business as we grow distribution, bring more new items to the category and increase our media support for Yoplait. For our U.S. snacks business we saw first quarter retail sales and share growth on our Grain Snacks led by Fiber One. This summer we launched two new Fiber One cheese cake bars with great success. The strawberry variety is now the fastest turning bar in our Fiber One portfolio. First quarter retail sales declined for our Fruit and Salty Snacks driven by decreased merchandising activity compared to a year. We’ll have product news coming across our snacks portfolio in the second half of the year along with continued consumer support for our brands. Our natural and organic snacks are growing nicely, retail sales across Larabar nutrition bars, Food Should Taste Good savory snacks and Cascadian Farm granola bars were up a combined 13% in the first quarter in Nielsen measured outlets. We brought innovation to the Food Should Taste Good brand in the first quarter with several varieties of bean chips and Real Good Bars. In the second half of the year we’ll be increasing consumer investment on Larabar and have new varieties of Cascadian Farm Snack Bars coming. Retail sales for Cascadian Farm Cereals grew 14%, leveraging consumer interest in Wholesome Granola. Cascadian Farm is the share leader in granola. We’ll be bringing new flavors to the brand in the second half of the year and we’re very excited about our line of Annie’s soups that launched this summer. These five soups deliver the great taste kids love and they provide moms with a quick and easy lunch time option from the trusted Annie’s brand. And we have seen very positive response to this launch on social media and customer acceptance has been strong. And there is more to come. In January we’ll introduce Annie’s Organic Yogurt. This three flavor line will be made with real organic fruit and whole milk for a creamy taste and texture that we think kids and the whole family will love. As Shawn told you our sales team has strong plans in place to grow distribution on our natural and organic businesses and we are excited about the innovation we have coming later this year. Several other U.S. retail businesses deserve a quick mention. Retail sales for Old El Paso Mexican products grew 2% in the quarter, thanks to good performance on our new mini Stand 'N Stuff Shells and new bold Ranch Shells. Totino's Hot Snacks posted 4% retail sales growth powered by great advertised and bold flavored new products. Watch for a crispier crust version of these hot snacks coming later this calendar year. Progresso is innovating on two growing segments of the soup category, with new cooking stock and stew varieties and we're supporting the brand with a new ad campaign. We are expecting to deliver improved results in this year's soup season and we're addressing value on key brands. On Helpers dinner mixes, we've recently added 20% more pasta on our top SKUs to better meet the needs of larger families. While it is still early we are seeing base unit growth on those upsized products. On desserts we're bringing our prices in the line with competition in certain category segments and our market share is stabilizing as a result. Once we get the value right we can turn our efforts to bringing consumer first new and innovation to these businesses to drive sustainable growth. So we believe we're on the right track with our consumer first initiatives across our U.S. retail segment. Turning to our Convenience Stores and Food Service segment, Don told you that our focus six platforms posted 9% net sales growth in the quarter. First quarter net sales for our cereal business grew mid-single digits in food service outlets led by continued growth in K-12 schools. Yoplait Greek varieties and ParfaitPro drove mid-single digit net sales growth for our Yoghurt business in the first quarter. Net sales for our snacks portfolio were up high-single digits. We're seeing good growth on our snack bars in schools and our grain and salty snacks are performing well in convenience stores. And our frozen meals posted double digit growth in the quarter thanks to the continued success of our frozen breakfast products in K-12 Schools lead by mini bagels that launched earlier this calendar year. First quarter net sales for our International segment grew 5% on a constant currency basis, led by solid performance in developed markets. Net sales in Canada increased 5% primarily driven by innovation. We posted particularly robust performance on grain snacks as our summer launches of Nature Nut and Seed bars and Fiber One crumble bars exceeded expectations. Good performance on Liberté Yogurt contributed to 2% retail sales growth for yogurt in the quarter and the new cereals we launched in Canada this quarter are off to a good start. Constant currency net sales in Europe increased 7% in the first quarter. It was an excellent summer for Häagen-Dazs ice cream led by the successful launch of premium stick bars in France. And the continued popularity of Stand 'N Stuff soft Taco shells contributed to solid retail sales growth for Old El Paso so far this year. Challenging economic conditions are having an impact on our categories and our businesses in emerging markets. First quarter net sales increased 3% on a constant currency basis for the Asia-Pacific region, but it was a mixed bag across our portfolio. In China, constant currency net sales were down 1%, driven by a decline on Wanchai Ferry dumplings. We have more promotions and advertising planned on Wanchai Ferry to spur growth in the second half of the year. Häagen-Dazs ice cream posted low-single digit net sales growth in China led by good performance on our retail products. And I'm pleased to report that our Yoplait yogurt launch in Shanghai is off to a good start. We've already achieved a 5% value share of the yogurt category in that city. We saw particularly strong performance on our Perle de lait premium varieties. We're learning more about the Chinese yogurt consumer, the taste and packaging preferences and we're taking a consumer first approach to give them what they want. Our business in the Asia, Middle East and Africa market is small and fast growing. Constant currency net sales increased at a double digit pace in the first quarter driven by Häagen-Dazs ice cream and Betty Crocker snacks. In Latin America, first quarter net sales increased 3% on a constant currency basis, driven by double digit growth in Mexico and Argentina. Constant currency net sales declined in Brazil as consumers continue to struggle with challenging economic conditions and as we lapped a very successful World Cup promotion during the first quarter of last year. We will continue to monitor emerging markets closely and will build on the good momentum we generated in developed markets. We're confident we have a strong portfolio of international brands and businesses to drive growth for General Mills' over the long-term. So I'll summarize our remarks this morning this way; our business posted strong growth in the quarter. We’re making good progress against our priorities for our U.S. Retail segment, and our sales initiatives and capabilities are well aligned with these priorities. We're keeping the momentum going on our Convenience Stores and Food Service segment and we had a strong start in International developed markets, while growth in emerging markets has slowed. Our cost savings programs are on target and we're poised for margin expansion this year and we remain on track to achieve our fiscal 2016 performance goals which currently exclude the impact of the Green Giant divestiture. So with that I'll the open the call for questions. Operator, will you get us going please?

Certainly, thank you. [Operator Instructions]. And our first question comes from the line of David Palmer with RBC. Please proceed with your question.

Hi, David.

Thanks, maybe just a housekeeping. Hey, good morning, Ken. There was a mention about Häagen-Dazs in the retail products led to low-single digit growth in China. Just one little housekeeping question, is the retail, are the retail comps there, are they continuing to be fairly consistent, how are they -- how is the consumer environment in China lately? I think people would be interested to hear that. And then, but more of a core question, the promotional activity that we're seeing in U.S. Retail across all of food is really changing in the latest quad week periods. We're seeing a reduction in promotions. I know you had some merchandising timing yourself, but speaking for yourself and the industry it seems that in-store promotional activity has really dropped off. What are you doing to perhaps shift your spending there and what are you seeing across your peer group? Thanks.

Okay David, let me answer the Häagen-Dazs question first. So when I referred to retail I was referring to traditional grocery retail sales in China, and that has increased. I actually don't know by how much, we can probably get you that later. As you look more broadly across Häagen-Dazs and you look at the shops that was driven by geographic expansion. Same-store sales in shops was actually down, as it has been for the last few quarters. And so but all-in on Häagen-Dazs we saw growth there. And then as I mentioned our frozen food business was down 2% or 3%. So we're still seeing headwinds there. We have some good innovation coming on the frozen food line later this year and so we think that, that will help. And but it's still challenging in China and Brazil. On the promotion, I'll make a few, the merchandising, I'll make a few comments and then turn it over to Shawn. We would not interpret a declining trend in merchandising right now. Frankly it's a mixed bag. We are seeing some increases in some categories, a little more frequency of promotion. We're seeing that in yogurt, we're seeing a little bit in cereal. In other categories, for instance in snacks particularly in our fruit snacks and salty snacks we're seeing declines in promotion. Now that's primarily retailer led, some of our retailers are choosing to simply promote those products less often. So I would say our perspective is, it's mixed, and we're not sort of concluding that there is going to be a lower, a less intense promotional environment if anything we're seeing a bit more. I don't know Shawn if you would add anything to that.

Yeah, I think that's right, Ken. And I think if I were to add a word to I'd say it's mixed but stable for right now, over the past quarter. In the categories that we compete in we saw an increase in quality merch support across the categories of 1%, which is nominal. So as Ken mentioned, it is when you look at the broad swath it's 1% category by category. Depending on the position of the players that we compete with, there is some increased activity, or as you indicated David there are some competitors who are backing off their merchandising. But overall I would say stable.

Thank you.

And our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your questions.

Hey, Rob.

Hi, good morning. So I wanted to ask about the difference between the shipments and the Nielsen data. I think you said that you are shipping ahead of consumption this quarter, in advance of some heavy promotion that's going to happen in second or activity in second quarter. But the direction of our Nielsen data, we're kind of a slave to the numbers here, it seemed to go lower than I would have thought and can you give us a sense for just like, what the shape of the curve is going to look like on a retail basis, like I'm looking at negative 3% declines from a Nielsen perspective. Do we -- should we expect a pretty sharp uptick over the next few months as you get your cereal merchandising in place and maybe the new products start selling? Thanks.

And that really is, you kind of have answered your question. That's what we expect to see. I mean we did build inventory, as we noted in our remarks, in advance of Q2. And I'll just make a couple maybe of additional points on that. Back-to-school which is a big promotional window for us, it was early last year and actually falls in Q2 this year. So that's a focal point for merchandising for us. We have a very solid line of merchandising on seasonal brands and here we talk about soup and baking and meals, and frankly we didn't execute all that well a year ago in Q1, and so we feel that we have a much better plan. This year we'll be more competitive and so we expect to see that in Q2. We've already talked about cereal and the promotional, not only the gluten-free event. But we also -- we have other promotional partnerships in Q2, movie tie-ins, this sort of thing. They're going to be quite strong and so we expect that to strengthen in Q2 and Q3 and this is all versus Q1 last year when we had protein, which was our big first half launch and had lots of activity that was Q1. So that's a bit of texture, I mean which kind of builds on the point you made. We just -- Q1 was stronger for us last year, there is less activity. We've got things lined up for Q2 and Q3, and that's how we expect the year to play out. Shawn, would you add anything?

Just to reiterate the kind of the -- our focus in cereal will be on the gluten-free news, which is probably the best piece of renovation news that we've had in a long time and that really is just hitting shelves now. So we feel good about the merchandising we've lined up with customers because they've been very excited about that news. And as Ken said, our seasonal merchandising, as we went into the holidays last year, I think was more tepid just in execution than we expected to be this year.

And the back-to-school again, did you say it's going to fall more in second quarter than first quarter this year or is back-to-school comp the same?

Yeah, just the timing of the- back-to-schools a week later and so this year versus last year. So you'll see more activity in September than you did a year ago.

All right. Great, thank you.

Okay, thank you.

And our next question comes from line of Eric Katzman with Deutsche Bank. Please proceed with your question.

Hey, Eric.

Hi, good morning everybody.

Good morning.

Can't let Don off the hook here. So I wanted to, one, I guess, did you change the forecast on the currency headwind for the fiscal 2016 guidance?

Yes, it's about $0.05, I think it is. I think we had $0.04 in July, it's $0.09 now. So about $0.05 swing. And obviously the U.S. dollar strengthens, the Canadian dollars, it’s the A dollars, the euro, the Brazilian real. So yeah we see more of a headwind in our reported results from currency.

Okay, and then I guess on the -- thank you for that. And then on the Green Giant divestiture, so I guess a quantitative question than more of a qualitative, the $0.05 to $0.07 dilution, what -- is that, I guess is that on an annual basis and does that, like are you assuming use of proceeds to buy back stock to offset some of the dilution or kind of what factor you are assuming around that?

Good question. That is a fiscal ‘16 estimate. So it will be a partial year, depending on when the deal closes, that's -- hence the reason we gave you a range. As we’ve talked about, Eric you and I talked about, I talked with other investors, as we talk about our portfolio the reason we’re often asked why don’t we do -- why aren't we more active from a divestiture standpoint and one of the things we always come to is we have very profitable cash generative brands. And so Green Giant has a little under $600 million in sales last fiscal. Its margins were in the upper teens and that’s going to be lost income this year. We’re obviously going to use the proceeds to, as we said half of it is going to be used to reduce debt, half is going to be used to buy back shares. So that will have a somewhat mitigating impact on the results, but at the end of the day it’s a profitable business and hence the reason we got a pretty fair price from B&G.

Thanks for that. Is there a lot of -- is there some stranded overhead associated with it that's…?

Yes, a small, certainly a significant amount of direct overhead, that will go and there is some stranded overhead that will go as well during the course of this year, that's in those numbers as well.

Okay, last question. I guess Ken, on the value changes that you have made with Betty Crocker and Hamburger Helper, like how long do you think you need to wait to see whether those actions are kind of generating the response you hope?

We’re already seeing it, Eric and I’ll let Shawn jump in here.

So I will take them separately. So in the baking area, where we’ve really shifted our attention to, getting the price point at the shelf right, that’s already been executed, and we’re already seeing the stabilization of that business. On the joint ventures front where it’s the value that's being delivered by increased products in the box, that takes longer to actually execute and get the flow through on the shelf. And so that will probably take us, I would say another 60 days to get it fully on shelf and get a good clean read.

Okay thanks. I will pass it on.

Okay, thanks Eric.

And our next question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Hi, good morning everyone.

Good morning, Ken.

Don, just hoping to weigh maybe some of the one quarter gross margin tailwinds you mentioned, just to sort of get a better sense of things. So if I can first, am I missing anything big in terms of the drivers? You talked about, I think lapping high promo expenses, benefits in cost savings, the least amount of inflation in the year, anything large that I am missing there? And then number two if we are sort of thinking about putting those drivers into buckets, maybe which would be the most important in terms of how well the gross margin came in and which maybe had a less important impact in the period?

Yeah, those are the key drivers. Actually the other one is we’re seeing growth in U.S. Retail, that obviously has a beneficial mix impact to it, slight favorable mix impact. But you hit the big three and let me just address that, and I think what's probably a question about our balance of the year as well, because you do hit on what is going to change as the year unfolds. So we had a benefit, as you recall a year ago we had higher merchandising expense in the first quarter. We spend much of last year working that down and we started seeing the benefit of that in the back half of the year. We started seeing gross margin expansion starting in Q4. We also have the benefit of our cost savings, that is still primarily hitting our administrative expenses, but we are starting to see some benefit in our gross margin as well. And then inflation, inflation in the first quarter was less than 1%. We still expect to be 2% for the full year. So obviously we'll above 2% for the next three quarters, and that had a beneficial impact, disproportional beneficial impact in Q1. And those three items rolled relatively equal in terms of their impact in the quarter and as the year unfolds. And so we certainly had planned for a very strong Q1, as Ken mentioned in his remarks, in the earnings release, and we're pleased to see it come through.

Great, thank you very much.

And our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Good morning everyone.

Hi Alexia.

Can I ask two quick ones based on your comments? You talked about e-commerce, can you comment on what proportion of U.S. retail sales are currently going through those kinds of channels today and maybe what proportion of sales you might expect that to go to overtime. And then you talked about the long tail of much smaller SKUs, I'm guessing with much lower velocities. Is there are an opportunity to lock some of those off, and maybe cash off a group of products that are very unprofitable? And what would prevent you from doing that, if it's the right thing to do in terms of the financial impact? Thank you.

Yeah, thanks for the questions Alexia. Both of them really good, on the e-commerce front, in the U.S. food sales that are going through online are between 1% and 2%. Now that's changing pretty quickly, meaning moving from 1% to 2%. If you said what does it look like out four or five years ahead, all the projections I've seen are in the 5% to 6% range. So it's going to be a high growth area. Obviously Amazon is leading some of the thought there, Wal-Mart.com is investing a great deal to make sure that they and utilizing their stores to make sure they are competitive. And that really is causing all the players in the marketplace to one of the actives in the e-commerce space. So an important place for us to play, we believe, as I mentioned with our portfolio, whether it's small hard to find items or our top turning items, we believe that we're well positioned to capture that growth. As far as the long tail and our look at, our overall distribution of SKUs, they've been several efforts over the years by I would say all the manufacturers to go through SKU rationalization. And in general SKU rationalization, if you just cut off the tail, because a lot of those items are either highly profitable or are covering a lot of overhead, that doesn't really work. So the job first is to get better distribution on the high turning SKUs and replace, get those slower turning off the shelves so that when you do discontinue them, the impact of those is very small at that point. So our first job is to really move our distribution up to our fastest turning items and then consider what things we can discontinue.

And the only thing I would the only comment I would add to that Alexia is that it's very easy to see e-commerce sales grow very rapidly. We have only to look at other markets where we do business like the UK and France where, for some of our categories our online sales are approaching 10%. So it's pretty clear that we're going to move in that direction very rapidly in the U.S. and this is an area that we're investing in at General Mills to develop our capability and make sure that we can be leaders and great partners for all of our customers who have a lot of interest in this.

Just to put one final point on what Ken just said, that the piece that will really shift the U.S. landscape on e-commerce is one that moves from being single item search to being full basket, online search, which it has in the places Ken mentioned in Europe and other parts of the world. And you can see that coming and so that's why we expect the growth projections to materialize.

Great, thank you very much. I'll pass it on.

And our next question comes from the line of Bryan Spillane with the Bank of America. Please proceed with your question.

Hi, good morning everyone.

Hey, Bryan.

Just a couple of follow-ups. I guess, first just in terms of Green Giant it's a -- the $0.05 to $0.07 dilution's a partial year. So should we also be factoring something in for next year as well in terms of dilution or do you expect it to be more mitigated by then.

It will be that same level but it will be something incremental to that. In the next year we'd have a full impact of the share reduction and the debt reduction. So it will be south of the $0.05 to $0.07, but it will be incremental since this year is only partial year.

Okay, great. And then Don, also just on gross margins, I guess I think what you have said at the start of the year was just that it would be higher than last year. I don’t think you really gave a sort of a magnitude, but I think as we look at this quarter, even if we kind of strip out the benefit from just lower promotional expenses, it looks like gross margins would have been up even little bit more year-over-year in this quarter than it was in fiscal fourth quarter. So just trying to gauge like order of magnitude on, is that sort of 70 to 100 basis point range kind of rate when all the noise settles out or is there something that’s going to eat in the gross margin expansion more as we move through the balance of the year?

This year we were up 290 basis points. Last year in the comparable quarter we were down, I believe was 200 basis points. So to think about a full year increase in the 50 to 100 basis points is a pretty fair range to be in.

Okay, thank you.

And our next question comes from the line of David Driscoll with Citi. Please proceed with your question.

Great, thank you, good morning.

Hi, David.

Don, first question for you is just with the quarter up 30% year-on-year, did this quarter exceed your internal expectations?

We were pleased with the sales growth. I think the cost pieces that came in were pretty much right in line with our expectations, because again they were pretty foreseeable in terms of the merchandising timing, the cost savings, the inflation. What I would say is we are very pleased with U.S. retail sales. The volume came in probably a point ahead of our expectations and from a company standpoint; stripping out Annie’s and ForEx we had organic volume growth of 1% and price mix of 1%. So a total sales of, organic sales growth of 2% and we haven’t seen a quarter like that in a couple of years. So we felt good about the start, and what I would say is we’ll continue to monitor that and we’ll handle the proceeds of that similar to what we’ve done with our plan and our cost savings which is if we see some plus there is going to be we invest back and some that we flow and we will keep you apprised of what we see.

Okay, but it sounds like it might be fair to say that you did better in the first quarter. You keep your guidance the same, because at least your constant currency guidance is same, but the FX guidance all-in is worse by a nickel, you have got this dilution that’s kind of not incorporated into the guidance of 5% to 7% from Green Giant, but all things equal here the first quarter is off to a very good start and there are positives. But maybe just too early to want to do anything to the guidance, is that a fair recap?

I think that is a fair recap. We feel good about the quarter, it did come a little ahead of our expectation, on the top line and obviously flowed through to the -- a little bit better on the bottom line but it’s only one quarter, and as Ken and Shawn talked about most of our initiatives are still in front of us which we feel good about but we want to see play out before we revise our expectations for the full year.

Ken, on International it sounds like on a constant currency basis whenever I hear that, it never really sounds that bad, and then when I look over at the International profit line it’s down like 20%. So I guess what I struggle with is just understanding why we are not seeing more pricing, given the sizable FX headwinds there and just the magnitude of profit decline seems quite large, what can be done about this?

That’s an excellent question and Don will be very happy to…

Well, first of all, I will tackle the question on the earnings. I mean, again we were 20% down, strip out ForEx it was 30 -- it was 3% and that has a number of factors, anything from transaction FX to launch cost for Yoplait in China. So some timing items as well. We still fully expect not only mid-single digit sales growth on a constant currency basis in international but margin expansion on top of that. So we still feel good about how the year will play out. In terms of your question on pricing, pricing comes into play locally, when there is local inflation that’s offsetting it. If there is not necessarily economic factors that are driving it, it’s a little bit tougher to get pricing in the marketplace but we take pricing where we believe that we have the opportunity to do it and you have seen that come through probably most fully in our Latin American markets overtime where you do see local inflation.

And maybe just one follow-on on the international side did China worsen here, has the run rate continued to get worse, given the last couple of quarters here and the comments on Wanchai Ferry?

We can follow up with you. My recollection is that it's been -- it was pretty stable. It was better in Q4 and it was, I mean we were kind of -- we were down 1% here in Q1. But I mean it's basically been stable. And so I would say it didn't worsen. Of course we'd like -- we need to see it improve.

Okay. I'll pass along. Thank you so much.

Maybe one more question.

And the last question comes from line of Jonathan Flee with Atos Research [ph]. Please proceed with your question.

Good morning. Thanks very much. Just a detail question and a little bigger picture one. First would be, I think in the prior quarters you've given us the contribution between pricing and volume on Annie's to the U.S. retail business. If you have that detail and you could give it, I would appreciate, just trying to work through that on U.S. Retail. And the second question would be bigger picture, ex the new launches would you say that retail, so just as you think about your promotional strategy, going into this holiday selling season, independent of any new products. Are retail or inventory levels above the average because of your potential promotional plan at this point or is it really -- is that maybe a little bit of that build that was mentioned earlier in the call, I think by Rob, is all of that new product driven. Thanks very much.

Well, I'll take the Annie's question, Jonathan. Annie's was a three point benefit to our net sales U.S. overall net sales. Two points of that was volume and one point was price mix.

Got you, okay.

As you saw on the slide the company was one point each.

I don't -- do we know the answer to the second…?

On inventories, we believe that our inventory levels are actually inline as we go in to Q2 this year. That was not as much the case last year when we were in this position. So I would expect, as Don indicated earlier that kind of our movements and our earnings [ph] should kind of track well from here on now.

Great. Okay, thanks very much.

We know our friends that cannot go [ph] on the phone. So I think we should wrap up here.

Okay. Thanks everyone.

Ladies and gentlemen, that does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.