General Mills, Inc. (GIS) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter Fiscal 2018 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Wednesday, December 20, 2017. I would now like to turn the conference over to Jeff Siemon, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Sarah, and good morning to everybody. I’m here with Jeff Harmening, General Mills CEO; Don Mulligan, our CFO; and Jon Nudi, President of our North America Retail segment, and I’ll hand the call over to them in a moment, but before I do, I’ll cover our usual housekeeping items. Our press release on our – results in the second quarter was issued over the wire services earlier this morning and you can find the release and the copy of the slides that supplement our remarks this morning on our Investor Relations website. I will remind you that our remarks will include forward-looking statements that are based on management’s current views and assumptions and the second slide in today’s presentation list factors that could cause our future results to be different than our current estimates. And with that, I’ll turn you over to my colleagues, beginning with Jeff.

Thank you, Jeff, and good morning, everyone. Thank you for joining us today to discuss our second quarter fiscal 2018 results. Our biggest challenge entering 2018 was to change the momentum on our top line. And I’m pleased to say that we have delivered broad-based improvement in the second quarter across geographies, product platforms and channels. We’re executing better. We have stronger innovation, more effective brand building and better merchandising that’s driving market share gains in the majority of our key global platforms. We’re growing aggressively in key emerging channels like e-commerce. And I’m also pleased to say that, we grew organic sales in absolute terms across all four of our operating segments this quarter. And while we like our momentum, I must say, it feels great to grow again in absolute terms. While we like the momentum we’re building on our top line, we also know we have work to do to deliver the year. Our second quarter total segment operating profit was improved over the first quarter, but still down over a year-over-year. We have concrete plans in place to deliver strong profit growth in the second-half of the year, while continuing to drive our top line. So with two quarters behind us and good visibility to our back-half plans, we are raising our organic sales outlook for the year and maintaining our guidance for profit and EPS growth. With that as a summary, let me turn it over to Don Mulligan to provide more details about our second quarter performance.

Thanks, Jeff. Let’s jump right into our financial results on Slide 6. Net sales totaled $4.2 billion in the quarter, up 2% as reported. Organic net sales increased 1%. Total segment operating profit totaled $773 million, down 8% in constant currency. Net earnings decreased a 11% to $430 million and diluted earnings per share declined 8% to $0.77 as reported. These results include a $42 million charge related to a prior year tax adjustment. Adjusted diluted EPS, which excludes that tax charge and other items affecting comparability was $0.82, down 5% on a constant currency basis. Slide 7 shows the components of total company net sales growth. Organic net sales increased 1% in the second quarter, driven by sales mix and net price realization. Foreign currency translation yielded a one point benefit to total net sales. Second quarter adjusted gross margin decreased 240 basis points and adjusted operating profit margin was down 220 basis points as expected, driven by higher input cost, including currency driven inflation on imported products, unfavorable trade expense facing, stronger seasonal merchandising performance and a 7% increase in media expense. These were partially offset by savings from cost management activities. As we look ahead, there are a few key drivers that will strengthen our adjusted operating profit margins from the low 17% range in the first-half to more than 18% in the second-half. First, we expect to drive positive net price realization and mix across all four segments, driven by trade phasing, pricing in certain geographies and improved sales mix. Second, our cost savings will accelerate as our global sourcing initiative ramps up. And third, we expect input cost inflation to moderate a bit after peaking in the second quarter. For the full-year, we have increased our sales guidance maintained our profit guidance, we now expect our adjusted operating profit margin to be below last year. Due to a higher input cost outlook, more negative transaction FX impact, some incremental investment we’ve chosen to make in our differential growth platforms to accelerate their growth in fiscal 2019, and favorable translation FX helping sales more than operating profit. Slide 10 summarize our joint venture results in the quarter. CPW net sales declined 2% in constant currency, due to volume declines in the UK, partially offset by strong performance in Asia and Middle East and Africa region. Häagen-Dazs Japan constant currency sales were 3% below a year ago period, when net sales grew 21% in constant currency. On a year-to-date basis, constant currency net sales were up modestly for CPW and up 4% for Häagen-Dazs Japan. Combined after-tax earnings from joint ventures totaled $24 million in the quarter compared to $30 million a year ago, driven by lower volume and higher input cost for CPW and a comparison against 27% constant currency after-tax earnings growth last year. Slide 11 summarizes other noteworthy income statement items in the quarter. We incurred $6 million in restructuring and project-related charges in the quarter, including $5 million recording in cost of sales. Corporate unallocated expenses, including certain items affecting comparability increased by $17 million. Net interest expense was down 1% versus prior year, and we continue to expect full-year interest expense will be flat to last year. The effective tax rate for the quarter was 35.9% as reported, compared to 32.8% a year ago, driven by the prior year adjustment I mentioned earlier. Excluding items affecting comparability, the tax rate was 29.3% roughly in line with our full-year expectations and 310 basis points below last year’s quarterly rate due to favorable impacts from discrete foreign items. We continue to expect our full-year adjusted effective tax rate will be in line with last year. At this point, we have not incorporated any estimate of the impact of U.S. tax reform legislation into our guidance. And average diluted shares outstanding declined 3% in the quarter. We now expect shares to be down approximately 2% for the full-year. Turning to our first-half financial performance. Net sales of $8 million were down 1% as reported and on an organic basis. Segment operating profit declined 12% in constant currency and adjusted diluted EPS was down 6% as reported and 7% in constant currency. Turning to the balance sheet. Slide 13 shows that our core working capital decreased 42% versus last year’s second quarter, with benefit from our terms extension program more than offsetting higher accounts receivable. First-half operating cash flow totaled $1.6 billion, up 45% over the prior year, driven by continued improvements in accounts payable, as well as changes in trade and incentive accruals. Year-to-date capital investments totaled $260 million. And through the first-half of the fiscal year, we returned over $1.1 billion to shareholders through dividends and net share repurchases. As we turn our attention to the second-half of fiscal 2018, we expect to continue to drive strong seasonal merchandising performance, as the soup and baking key seasons extend through the third quarter. We have an excellent back-half innovation lineup and we expect our new products sales will continue to outpace last year. We anticipate favorable price mix across each operating segment. We expect input cost inflation to moderate in the second-half and cost savings to accelerate, with the largest benefit coming in the fourth quarter. As a result, we’re targeting strong growth in segment operating profit and adjusted diluted EPS in the second-half. Importantly, given the seasonal merchandise in the third quarter, cost savings wrapping up in the fourth quarter and some shifts in below the line items, we expect growth in SOP and EPS to be more heavily weighted to the fourth quarter. Let me close my portion of our remarks by outlining our updated fiscal 2018 guidance. Namely, we now expect organic net sales growth to be in a range between flat and down 1%. This translates to a 300 to 400 basis point improvement over our fiscal 2017 performance. In addition, we now estimate currency translation will increase reported net sales by approximately 1 percentage point for the full-year. We continue to project total segment operating profit growth to be in a range of between flat and up 1% on a constant currency basis. As I said, we now expect adjusted operating profit margin to be below last year’s levels. We continue to expect adjusted diluted EPS will increase between 1% and 2% in cost currency. As I mentioned earlier, this outlook excludes any impact from proposed U.S. tax reform legislation. And we continue to estimate foreign currency will have a $0.01 favorable impact to full-year adjusted diluted EPS. With that, I’ll turn it over to John for an update on our North American retail performance.

Thanks, Don. Good morning, everyone. I appreciate the opportunity to give you a deeper dive into our North American Retail segment. I’m proud to lead this team. We have great people. We’re moving with urgency. We’re operating differently than a year ago and I think you can begin to see that translate into our performance. The key messages for North America Retail this quarter are similar to headlines for a total company. We’re driving broad-based top line improvement with organic sales slightly positive amounting to flat in the quarter. Our profit was down this quarter, but improved sequentially over the first quarter and we have clear initiatives that will deliver profit growth in the second-half. We’re executing well against our fiscal 2018 priorities and we have strong back-half plans in place to maintain our trajectory. Looking at the financial results in the second quarter, organic net sales for this segment were up just under 0.5%. U.S. Cereal posted 7% net sales growth, which was ahead of Nielsen-measured retail sales, due to non-measured channel growth, strong sell-in for new Chocolate Peanut Butter Cheerios and other quarterly timing shifts. Fiscal year-to-date, U.S. Cereal net sales and retail sales are each roughly flat to last year. U.S. Snacks net sales increased 5% in the quarter, with growth on Lärabar, Nature Valley and fruit snacks, partially offset by declines in Fiber One. Canada net sales are up 1% in constant currency and net sales for the U.S. Meals & Baking operating units were down 2%. U.S. yogurt net sales declined 11% and a 11 point improvement over the first quarter, driven by continued declines in Light and Greek varieties, partially offset by excellent innovation in news and core established brands. Segment operating profit declined 5% in constant currency in the quarter, driven by higher input costs, unfavorable trade phasing and increased advertising and media expense, partially offset by favorable product mix and benefits from cost savings. We’ve driven sequential improvement in U.S. retail sales since the beginning of the year. In fact, our second quarter retail sales trends are almost 700 basis points better than fourth quarter of last year and our improvement is driving better results for our categories. We saw retail sales trend positive in measured channels in the second quarter. And it’s not just a couple of businesses driving this trend, our retail sales trends are better in eight of our nine largest U.S. categories. We’ve had absolute retail sales and dollar shared growth in this quarter on six of these nine businesses. Not only those – not only are these trends broad-based or high-quality, we’ve increased our brand-building investment this year and we’re leveraging new campaigns on some of our biggest brands, generated by new creative agencies and we’re taking a fresh approach towards consumer messaging. For example, new campaigns on Cereals, Nature Valley and Pillsbury are helping drive baseline sales improvements by as much as double digits for these branches at the end of last year. We’re also seeing benefits from an increased focus on innovation with retail sales from new products of more than 50% of the share, driven by successes like Oui by Yoplait and Chocolate Peanut Butter Cheerios. In total, our second quarter baseline sales trends in the U.S. improved by over 600 basis points relative to the fourth quarter of 2017. That represents more than 75% of our overall improvement in the Nielsen-measured channels. We’re also driving better merchandising performance this year. Our display support, which is the most effective merchandise vehicle was up double digits in the quarter. And when you have good brand-building support and strong innovation, your merchandising works even harder for you. It’s important to note that we’re maintaining discipline in our pricing in the market. Average unit prices for our overall U.S. portfolio were up 5% in the first-half. However, three quarters of that increase was due to significant mix impacts from our year-over-year business. Excluding year-over-year, average unit prices for the rest of our portfolio were up 2% in the first quarter and about a 0.5% in the second quarter. The quarterly change was driven in part by moving end of the zone or [ph] dough businesses, where our seasonal pricing is lower than last year, but still higher than two years ago, as we had planned. As we look ahead to the second-half of fiscal 2018, remember that our Nielsen pricing metrics will compare against periods last year, when our aggregate U.S. pricing was up 5% or more. We’re also driving strong results in growing channels, including exceptional performance in e-commerce. Our U.S. e-commerce business grew 82% in the first-half of the year and we still enjoy higher market shares in online full basket purchases compared to shares in bricks and mortar channels. We’re excited about the opportunity that e-commerce provides and we will continue to develop our insights and capabilities to keep our business in advantage position and it’s important in emerging channel. With that as a backdrop, I thought I’d briefly check in on the segment priorities I shared at our Investor Day in July and give you a preview of the product news innovation that will drive results in the back-half of 2018. Our top priority, North America retailers are driving improved performance in U.S. Cereal. I’m happy to report that we’re achieving that goal through six months. We’ve seen a strong turnaround performance in measured channels this year, with retail sales growth in the second quarter, and we’ve gained 70 basis points in market share through the first-half. Four of our largest taste-oriented cereals, which make up over third of our portfolio driving a performance this year. Year-to-date retail sales are Lucky Charms and Cocoa Puffs reached up 14%, while Cinnamon Toast Crunch and Reese’s Puffs are up 8%, the corn puff and kid cereals, because roughly half of the consumption on these brands is by adults. Compelling consumer news has been a theme across these brands, whether that’s new marshmallow news each quarter on Lucky Charms or cinnamon news on Cinnamon Toast Crunch, which has driven 43 consecutive months of market share gains for the brands. We’re planning to extend our cereal momentum in the second-half behind some exciting innovation and platform marketing executions. Chocolate Peanut Butter Cheerios, which launched in October is off to a great start and is turning at the top of the category. We’ll continue to fuel this new product in the second-half with strong in third quarter. In January, we launched two new blasted shred cereals in Peanut Butter Chocolate and Cinnamon Toast Crunch flavors and an opportunity to invigorate $400 million shredded wheat segment by delivering on to tidy and taste. What happened in the fast-growing nut butter channel with new almond butter and peanut butter varieties of our Nature Valley Granola Cereals. We’re supporting these launches, as well as the rest of the portfolio with remarkable marketing and merchandising. I’m probably most excited about our cheerios and merchandising initiatives at the Ellen DeGeneres show that begins in January. We’re running an on packed sweepstakes, where consumers share an active good that demonstrated for a chance to win two prizes. One for themselves and one to share with another person as an active good. The sweepstakes will be announced on the show next month. Now let’s shift gears to our second priority, which is reshaping our U.S. yogurt portfolio by innovating in faster-growing emerging segments of the category. In 2018, the yogurt innovation has been tremendously successful thus far, led by Oui by Yoplait, which already makes up almost 10% of our U.S. yogurt portfolio. Oui’s glass jar and unique positioning really standout on shelf, which has helped drive strong consumer trial and we’re seeing an acceleration in repeat purchases. Retailers love wheat, because it is driving more sales with current consumers and attracting new yogurt buyers. Through the first four months in shelf, we used the largest launch in the category over the past five years. And Yoplait Mix-Ins targets towards traditional yogurt levers looking for great tasting snack options is the second largest launch in the category this year. While innovation is critical to our U.S. yogurt strategy, it’s also critical that we stabilize our two large core platforms in kid yogurts and Original Style Yoplait. This year, we adjusted our biggest consumer paying atGoGurt franchise by making the tubes easier to open. Consumer investment communicating this change is driving improvement on the GoGurt business, with retail sales nearly flat in the second quarter. We’re also investing in advertising for Original Style Yoplait, featuring our Mom On Campaign, where we celebrate hard working moms and show how Yoplait fits into our busy life, and we’ve seen sales trends improved here as well over the last few quarters. We have plenty of news to drive further improvement on GoGurt in second-half, and we were launching four additional flavors in January; Raspberry, Key Lime, Mango and Black Berry. We’re also launching a new line of Annie’s powder sugars. We make this product using organic home milk and four flavors that combine fruits and vegetables with no added sugar. Fruit is the hero on the traditional yogurt segment, nearly 50% of shoppers like more. So we’re giving them what they want, adding more fruits to our Original Style Yoplait. We’re updating the package to communicate the change, and thus using the change on TV and digital advertising. We’ve also seen indulgence opportunity in the traditional yogurt segment and then we can bring more consumers to shelf for the decadent home milk and real food offering. Our new fruit sideline shows off its indulging ingredients with clear packaging and it’s price for the dollar to maintain broad appeal. We know there’s still a long way to go on the U.S. sugar, but we like the direction we’re heading. We think the combinations were first-half improvements and our back-half news will help us cut our declines to single digits by the end of the year. Our third priority in North America Retail this year is driving differential growth on Totino’s hot snacks, Old El Paso and snack bars. I would say, we’re generating good growth so far this year with low single-digit retail sales increases across each of these large platforms. On Totino’s hot snacks, we were forced to led consumer support plan for the back-half, target towards a millennial male consumer. We’re bringing to life for live free couch hard campaigns in time for football championship season by inviting consumers to show us how they couch hard. We’re supporting the campaign with football theme in store merchandising and we will continue to run advertising and digital in TV throughout the year. For Old El Paso in the second-half, we’re accelerating our in-store activations. We’re again partnering with Avocados from Mexico, which is one of our largest merchandising events of the year, and we’re bringing taco truck merchandising displays to key retailers. And we will continue to support the business with our Anything Goes in Old El Paso campaign. Growth on our snack bars business has really been a tale of two stories, with strong growth from Nature Valley and Lärabar, offsetting declines in Fiber One. Retail sales for Nature Valley are up up double-digit so far this year, helped by new advertising on our core and excellent performance in our new nut better biscuits and granola cup platforms. And Lärabar continues to deliver 30% retail sales growth behind strong distribution growth and investment behind its food made from food campaign, which will continue in the back-half of the year. The story on Fiber One is more challenging. We’re working hard to improve performance by refocusing our messaging on our core consumer and renovating our products and packaging which are the Fiber One’s core role permissible indulgence. And the retail sales were still down sharply in the first-half, driven by reduced distribution base sales per point of distribution of turn positive, which is a good indicator of future trends. We’re working to rebuild the innovation pipeline of Fiber One, including the launch of eight new items in January, featuring four flavors of Fiber One Bites and we’re supporting these launches with our all mine TV and digital advertising. We have some great new indulgent offerings on Nature Valley as well. Consumers are looking for indulgent treats made from real food. So we’re introducing layer bars to have a triple layer of nut butter, granola with nuts and chocolate, and we’re launching soft-baked filled squares that combine whole grain Oatmeal bars with creamy peanut butter filling. We’ll support these lunches with TV, social media, digital coupons and merchandising. With the winter in full swing here in Minneapolis, I thought I’d share a quick update on our performance so far in the key soup and baking seasons. We’re back in our game on – in soup this year. Retail sales growth were up 2%. We gained a half point to share in the category two months in the soup season, with strength across a core registered business, including new progress organic. Retail sales for Betty Crocker Dessert Mixes were up a 0.5% since October, and we gained over a plenty of share behind strong and season support and good performance from our core segments. And I’ll closer by refrigerated dough, our results have improved over last year’s key season, but we’re still not where we want to be. Our new media campaign Made at Home is driving better baseline sales and we have stronger merchandising plan this year. Retail sales declined 1% in the first two months of key season, but we’re seeing month-by-month improvement and we posted growth in November. Our final priority for this year is to expand our national organic portfolio and we’re seeing good results here too, particularly on three of our largest businesses Mac And Cheese, Cereal and fruit snacks. We generate year-to-date market share gains across each of these categories due to strong consumer engagement, distribution expansion and instruct support, and we’ll continue those efforts throughout the second-half to continue to drive growth in our national organic portfolio. I’ll close by summarizing my key messages for North America Retail today. We’re seeing broad-based high-quality improvement in our top line trends, including organic sales growth in the second quarter. Our profit performance is improving and we have clear initiatives that will deliver profit growth in the second-half. We’re making progress on our fiscal 2018 key priorities, and we have strong back-half plans in place to maintain our trajectory. For the full-year, we now expect organic sales to be down 1% to 2%, which is a 100 basis points better than our original guidance. We expect segment operating profit growth on a constant currency basis. With that, I want to thank you for your time this morning, and I hand it back over to Jeff.

Thanks, Jon. I’ll cover second quarter performance for our other three segments. In Convenience Stores and Foodservice, second quarter organic net sales were up 5%, driven by mid single-digit growth for the Focus 6 platforms and benefits from index pricing on bakery flour. Within the Focus 6, Innovation drove strong double-digit growth on frozen meals, including new frozen breads and stuff presence in K-12 schools and new Stuffed Waffle in Convenience Stores. We also generated good growth on Cereal and the Foodservice channels. Segment operating profit was down 2% in the quarter, driven by higher input costs. Looking ahead to the second-half, we expect to continue driving good performance on frozen meals, led by strong demand in K-12 schools for our healthy delicious and easy-to-prepare meal solutions. And we like the prospects for our Stuffed Waffle, which meets many C-store’s consumers desires for convenience and great taste. We’ve also seen our snacks business strengthened in C-stores recently. And we’ll build on that success – with success with the support for Gushers and Nature Valley Granola Cups. And finally, we expect further growth on Cereal on the back-half, including our successful Granola offerings in colleges and Universities. Turning to Europe and Australia, organic net sales were up 1% in the second quarter. We gained market share across our seven largest Häagen-Dazs markets, driven by innovation on stick bars and mini sticks, new packaging on our prime business and investment behind a new advertising campaign. Our performance on yogurt improved behind new product innovation, focusing on a combination of simple ingredients and great taste. In the UK, we leveraged our learning from Canada to drive 25% growth on the Betty. And in France, we found success with our Triple Sensation’s launch. On snack bars, innovation and increased distribution grow double-digit retail sales growth across the segment, including in the UK, our largest snacks bars market. Segment operating profit totaled $27 million in the quarter, compared to $41 million a year ago, primarily driven by significant raw material inflation and currency-driven inflation on products imported into the UK. As we look at the back-half, we expect Häagen-Dazs and snack bars will lead the segment’s growth. It’s summer in Australia and we’re looking to build on our successful Häagen-Dazs launch last year by driving the brand’s consumer awareness through media, sampling and consumer promotions. On Fiber One snack bars, we’ll leverage our diet season playbook to reach consumers who are looking for an indulgence that doesn’t break their New Year’s resolution. In our Asia and Latin American segment, second quarter organic sales matched year ago levels with growth in Asian markets offset by declines in our Latin American markets. In China, we had our strongest Häagen-Daz mooncake season in four years behind new flavors and improve marketing. Our Wanchai Ferry business strengthened behind our innovation and marketing of our core shrimp dumpling line and we continue to expand distribution for Yoplait yogurt. We also posted excellent growth on our snacking platform in India and the Middle East. While our Latin America business improved from the first quarter, net sales were still below last year due to continued challenges related to our enterprise reporting system integration in Brazil, as well as the impact of natural disasters in the Caribbean and Mexico. Segment operating profit decreased to $17 million in the quarter, compared to $29 million a year ago, reflecting currency driven inflation on imported products and increased media and advertising expense. We have an exciting lineup of news planned across Asia in the second-half of this year. There is strong demand for premium yogurt in China, so we’re expanding our pro-delay line with two new flavors created specifically for our Chinese Yoplait consumers, Mochi green tea and red bean, and we’ll have more news to share on pro-delay innovation in coming months. For Häagen-Daz, we’re introducing two new flavors at our limited edition fruit and flower line. We’re continuing to rollout sour new global packaging design and we’re launching new green tea and red bean flavors on our popular Häagen-Daz Mochi line. In addition, we have some important snack bar launches across the segment, including new Pillsbury pastry cakes in India and Nature Valley crunchy single bars across Asia, which better aligned with Asian consumers preferred sizing and price point expectations. Before I close, I wanted to provide a brief update on the four key growth priorities for fiscal 2018 that we outlined back in July. First, our momentum is building on Cereal, and I like our chances to grow Cereal globally, including CPW this year. Second, while there’s still work to do, we’ve made significant progress on improving our U.S. Yogurt business through Innovation, thanks to the great success of Wii and Yoplait Mix-Ins. Third, we’re shifting resources towards our differential growth platforms. As Don mentioned, we’ve added investment on these platforms this year to accelerated growth – to accelerate growth in fiscal 2018. And fourth, we’re in the zone for soup and baking seasons and we expect our performances on those businesses will be much improved versus last year. With that, let me summarize today’s key messages. We delivered high-quality, broad-based improvement and our net sales performance this quarter with organic sales growth in absolute across all four operating segments. We drove sequential improvement and operating profit in the second quarter, and we have clear plans in place to deliver profit growth in the back-half of this year. And with six months in the books and visibility to the impact of those second-half plans, we’re raising our 2018 organic net sales guidance and maintaining our outlook for total segment operating profit and adjusted diluted EPS. Now, we’ll open up the call for questions. Operator, will you please get us started?

Thank you. [Operator Instructions] One moment please for the first question. And our first question comes from the line of Chris Growe with Stifel. Please proceed.

Hi, good morning.

Good morning, Chris.

Good morning, Chris.

Good morning, Chris.

Good morning. So I just had a question for you in relation to this pretty significant shift you’re going to see in margin for the second-half of the year, and you’ve got a pretty significant improvement built in. You obviously have some trade phasing benefit coming in later in the year – sorry, the trade accounting benefit. But your trade, I think, you said we’re higher in the third quarter. I know that cost savings are picking up, inflation is coming down. When I put it all together, I’m trying to understand, especially into the third quarter how that gross margin is going to pick up significantly, or should be more fourth quarter weighted. And then overall for the year, as you think about the gross margin, how much could that be down? Are you giving any kind of color around the amount of gross margin decline for the year?

Sure. Okay, Chris. This is Don. A lot of questions rolled into that. But I’ll try to answer. If I don’t, let me know. So first off on gross margin, as I said in the second quarter, the operating margin [Technical Difficulty] including transaction FX, unfavorable trade-phasing and incredible into the accounting behindthat last quarter, so I won’t go through that again, but that will – that impacted this quarter as we expected. Again charge seasonal merchandising and we had increased media expenses and that was partially offset by costs. If you look at the back-half, we expect again the same thing from the low 17% that we saw in the first-half more than 18% in the second-half. The primary drivers are going to be positive price mix on all four segments, and that’s driven our reported results by trade-phasing reversing, improved sales mix and pricing as we mentioned in certain geographies. Our cost savings will accelerate as those – as our sourcing initiatives ramps up. And input cost inflation will moderate pursuing up slightly for the full-year was higher than we expected, but will moderate in the second-half after keeping in the second quarter. Those are the drivers. You see, your question on the phasing, we’ll take more in the fourth quarter. And the reason for that is that the merchandising activity obviously carries through the third quarter. As I mentioned, the global sourcing savings ramp up in the fourth quarter. The largest impact that once we start again the year was it our incentive through up. We began producing our incentive accrual last year, primarily in the third quarter. So we’ll see that impact that year-over-year impact drag in the third quarter will limit the growth in margins. And then in the below the line, the other item is that where I think about EPS is metrics. It’s actually – we have negative comp in Q3 and positive in Q4. There’s a number of factors that we’ll see the margin in the fourth quarter and the one tax item that we’ll see the EPS for the fourth quarter.

Okay. That was helpful. Sorry, so just a quick follow-up and it would be in relation, so you’ve had a couple of food industry competitors here down some larger-scale acquisitions recently. And it seems like they’re really heavily focused on growth of these acquisitions. I’m just curious, you’re very internally focused right now. You’ve got a lot going on in General Mills. Is that these acquisitions that would be of interest to you? I mean, more from a high-level growth-oriented acquisitions, or maybe you could comment perhaps on your pipeline of acquisitions or how you’re looking at that today for General Mills?

Yes. So, Chris, this is Jeff Harmening. The – what I would say is that, first, we don’t feel pressure to do M&A just because all the other kids are doing it. So and we don’t really think that, that scale for the sake of scale is what’s important. And we think that having leading positions and good categories is really what drives growth. Having said that, what I will say is that a couple of things. One is that, M&A is part of our growth strategy. The first piece and most important piece of that is being competitive in the markets we currently compete in. The second piece is an accelerating in some certain categories. And then the third piece is M&A itself. So we think M&A has a role in our growth strategy going forward, but is one of three pieces. The most important in the foundation of being, which is being competitive in our own categories. To that extent, what I will also tell you is that, I’d say, we’re increasingly confident in our ability to execute M&A as part of this broader growth strategy and really for three reasons. The first is that, we’re increasingly confident in execution on our base business. And internally, here we talk about that all the time that being competitive where we are kind of gives us a better foundation to build upon whether that’s accelerating in other categories or whether that’s M&A. So we feel increasingly confident about that as hopefully the second quarter results start to show. The second is that, whether it’s Annie’s or Apec or Carolina yogurt business, which we’ve acquired recently. One of the things we feel good about is that, we have demonstrated our ability to grow businesses. And in the case of Annie’s, we’ve actually accelerated that growth. And we’ve been able to use our internal capabilities effectively in order to do that. And so we feel good about our base business. We feel that – we feel good about our ability to grow businesses. And with a lot of our restructuring behind us, we’re – we feel like our ability to integrate businesses will certainly be improved. And then third, look, we have the financial capacity to execute against M&A. Our cash flows are really good. Don and his finance team have done a really nice job with working capital. And to the extent, we can grow our profitability in the back-half of the year, which we feel good about. We’ve got good cash flow. So we feel good about our base business, increasingly good and our ability to execute that. We feel good that we’ve been able to grow businesses – growth businesses and we have the capacity. So, M&A will be an important component of our growth, but it’s only one of the three.

Okay. Well, thank you and happy holidays.

Happy holidays. Thanks, Chris.

Thank you. And our next question comes from the line of John Baumgartner from Wells Fargo. Please proceed.

Good morning. Thanks for the question.

Hey, John.

Jon, I’m curious, there’s some concern circulating about retailers scaling back to center store to make room for the parameter and then just downward pressure on pricing from suppliers in general. But from your commentary, it doesn’t sound as though, you’re expecting an impact from Mills. So could you speak a bit to the broader retailing environment, how you’re seeing retailers responding to your initiatives?. And in terms of just new shelf base and merchandising and also how you’re comfortable that margins won’t deteriorate further relative to the guide?

Yes, sure. Thanks, John. I’ll give you – try to answer as many of those questions I can as a lot rolled up there. Clearly, it’s a competitive environment right now as new players entered the U.S. as emerging channels like e-commerce come on to the scene. So definitely, it’s competitive both on the retailer side, as well as the manufacturer side. What I can tell you is, I feel really good about our ability to compete in this environment. Where we’re big in the U.S., we’re one of the top food companies. We have scale across center store, refrigerated and frozen. And as we grow the categories of our retailers growth, so again, it’s important that we have good plans locked in with our retailers. In addition to that, we’ve got one of the best sales forces as ranked by Cantor in the industry. They’re doing a great job of really sitting down with the retailers and putting together joint business plans. And what we find with those joint business plans is trade-offs. And again, even across a retailer, we might give a bit one category to get something in return in another. But by applying our scale, and again, if we’re growing broadly, that’s really good for our retailers category. We’re finding a way to get to win-win solution. So, again, there’s a lot going on. And certainly, space optimization, that’s something that we’re seeing as well. What I’d tell you there is, we have some businesses that are going to win in that. So we have a broad snacking portfolio, which will likely win in that environment in addition to that natural organic’s core strength of ours as well with the third largest national organic player in the country, so that’s good. And in the categories that might contract. What we tend to see is that, the smaller manufacturers the third or fourth or fifth players tend to be the ones that lose. And when you look at our business in the U.S., 80% of our brands are the number one or number two in their category. So it’s tough out there for sure. But at the same time, I actually feel like, we’re in a place now that we can be advantaged and really win in this marketplace.

Great. Thanks, Jon.

Thank you.

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

Hi. Good morning, everybody.

Hi, Ken.

Hi, Ken.

I just wanted to get, Don, appreciate the – you gave it already, I think healthy list of reasons why the second-half will get better in terms of the growth, both especially on the bottom line. But I think what might help is, if you get a little sense maybe of, which of those factors will be the most critically important as we think about modeling the business, because one of the questions I’ve been getting this morning and I have it myself is, you’re talking about better price mix. Obviously, some of that is trade accrual phasing. You’re talking about less cost inflation, cost inflation innovation. Just trying to get a sense of really where the key, I guess, pivot points are that’s going to make or break the year, because in modeling it, I don’t know, if we necessarily have enough information to sort of say, all right, this is what really needs to have happened for this company to make it. So I’m just trying to get a sense if you had a sort of bucket or rank them how you would do that in terms of the factors helping the second-half?

Yes, sure. They’re really are in the order now listen. The major piece is going to be the price mix. And probably half of that is going to be from the reversal and the trade accrual. And as we said in the first quarter, that was about 100 basis point drag, it was close to that in the second quarter that will start reversing in the second-half. And then on top of that, we expect improved sales mix in the second-half, given the businesses that will drive our growth and pricing in certain geographies, obviously, across the emerging markets a little bit in the UK as we battle the transaction FX. So that will be the largest driver. Second will be the cost savings acceleration that we see in global sourcing. Again, that’s going to be largely in the fourth quarter. And then the third and the smallest bit will be the input cost moderation.

Okay, thank you for that. And then just a quick follow-up, just so we said expectations, I think, at a reasonable level. Can you give us any sense of all? And I really do appreciate you guys talking about just being more fourth quarter loaded than third quarter. But are we talking about EPS potentially being flat in the third quarter year-on-year, or do you still expect them to be up to some degree based on what you’re seeing right now?

We still said growth in the third quarter, but the majority of the growth was going to be in the fourth quarter.

Okay. Thank you.

Thank you. And our next question comes from the line of Matthew Grainger with Morgan Stanley. Please proceed.

Hi, good morning, everybody. I wanted to ask first on, I guess, about the open question on the proposed tax legislation. And I know there’s probably going to be a hesitancy to give formal comments before everything is set in stone. But can you give us any sense assuming it passes in its current form 21%, where the consolidated tax rate for the company would go. And how we should think about the flow through of that to the bottom line in the second-half and in 2018,maybe just in generality if not in absolute? And I guess, secondarily, just to the extent that you can talk about this on a forward-looking basis, do you see that having any impact on the promotional equilibrium in the industry? How do you think about the ways that cash flow may be or that earnings flexibility might be reinvested?

Well, I guess, I’ll start by just saying that, we think it’s important for U.S. businesses to be – to not to be competitively disadvantage globally relative to our foreign competitor. So lower corporate tax rate as the current legislation in visions certainly make the U.S. a more attractive place to invest. The territorial system makes U.S.-based corporations more competitive, because we have reduced global tax burden, and obviously, we have increased access to our cash from foreign earnings. So that’s the positive. Based on the current legislation, clearly, it’s still a moving target. Even just last night, I said, I made some changes, the house now has to revote on. The bottom lime, we’ll see a reduction in our effective tax rate. But, Matt, frankly, these have timing of it and the magnitude of it, will have to determined once you see the final bill. It will be favorable, but however phase-in 2018 versus 2019 in the absolute magnitude, we will have to come back to you on once we actually digest the entire bill, and we’ll do that in due course once that’s available to us.

Okay, understood. And I guess, just one question from a sort of a category – from a category standpoint. I guess, just your thoughts on the health of the cereal category in the U.S. at the moment. I know you’re gaining share. You saw strong sales delivery here in the quarter. But overall, when we look at the scanner data, the category still declining 2% to 3%, it looks like promotional levels are up year-on-year, although I know that can sometimes be misleading. I guess, are you happy with where the category is at the moment? And do you think anything needs to change there to ensure that the growth you’re seeing right now is going to be more sustainable?

Yes. Sure, Matthew, this is Jon. What I can tell you is that, we really like the way that we’re competing in the cereal category right now. When you look at our performance through the first-half, our change in trend is pretty significant and nearly 70% of that change is from baseline sales. So, again, it’s really better innovation and better marketing that’s driving our results in the category, and that’s really been the recipe for success in the category over the long-term. So we’re very committed to, again, continue to build strong brands and then innovate more aggressively and we feel really good about the pipeline as we look forward. As you think about the category, it’s still a big category, important category is the fourth largest class across grocery. And we believe and it’s highly penetrated 90% of households consume cereal. So we really believe in the category. We think there’s growth ahead. There are some interesting timing of things. So again, if you think about the category grew nicely during the financial downturn. So between 2007 and 2012, the category grew. As the economy gradually got better and out of home eating increased, we saw the category tip the negative. So we’re starting to see that moderate in terms of the in-home versus out-of-home. We also know that, 30% of consumption of the category comes from boomers and older adults and that group of consumers are going to grow. So we absolutely believe in the category. We believe that strong marketing and good innovation can drive it. We’re committed to doing our part and we look forward to again driving our growth as we move to the back-half and into the future.

Okay, great, Thanks and happy holidays, everyone.

You too.

You too.

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

Great. Thanks a lot and good morning, everybody.

Hi, David.

Wanted to follow-up, Jon, on refrigerated dough. So can you – you touched on it in your prepared comments, but can you just talk a little bit more about the trends and how stage is. And I’m kind of curious why fields aren’t a bit stronger there, that’s such a dominant franchise and comping against a reasonably weak year-ago period? Do you expect refrigerated dough to see material improvement in the remainder of the winter season? And kind of what would give you confidence, if that would be true?

Hey, David, good question. Obviously, a big important category for us. And as I mentioned, we got off to a bit of a slower start than we had hoped. We are seeing improvement for sure. I would say two things drove this slower start. One was a distribution built a bit slower than we had planned as we came to the key season. What I can tell you is, distribution is getting to our projected levels as we are really entering December and January here. The second thing is, we missed a promotional window at a major retailer in October. And as a result of that, that really impacted our performance there. As I mentioned in the prepared remarks, we grew in November, which is great and we’re seeing some positive things so far in December. So we are still confident that we’re going to deliver a much improved year in refrigerated bake goods. We believe that we’re tending in the right direction.

Thank you. And then two follow ups. One on cereal, and I’m just specifically interested in the shift in versus sell-through second quarter impact, and then what it means to the third quarter? So given our plus seven in the second quarter, are we going to have a negative in the third quarter simply because of the timing issues between 2Q and 3Q, as it outlined? And then I had a – just a follow on tax question for you, Don. Maybe you don’t have all the quantifications on, which is understandable. But I think, we’re all just curious what the company would do with that money higher capital spending, dividends, share repurchase, just what you do with kind of found money of this magnitude? Thank you.

Hi, David, I’ll quickly take the cereal question. I mean, the short answer is, we don’t expect a knock-on effect in Q3. If you look at the – first of all, if you look to the first-half, our end market movement our RNS is almost perfectly aligned. So, again, it’s where we expected to be. There were some quarterly shifts, so the biggest drivers in the RNS versus movement difference in Q2 was first non-measured channels continue to grow nicely and that’s a piece of it. We ship Chocolate Peanut Butter Cheerios in October, and that’s off to a great start, as I mentioned, all of that hasn’t moved through the register. And actually, at the beginning of the quarter, we had some impact due to the hurricanes. If you remember, in August, the hurricane hit Texas. And as a result, due to some supply chain interruptions, we felt pipeline in September that likely would have shipped in August. So, again, we feel really good about how we’re performing in cereal and expect normal movement in RNS as we move to the back-half of the year.

Yeah, on the tax front, as we see with any increase in earnings, we’ll evaluate several uses. We’ll look at brand investment, look at capital investment, look at M&A and clearly cash return to shareholders. Our long-term expectations on how we’re going to drive the business haven’t changed.

Thank you.

Thank you. And our next question comes from the line of Jonathan Feeney with Consumer Edge Research. Please proceed.

Good morning. Thanks so much, and happy holidays.

Good morning.

I had – good morning. I had a couple of questions. First, I know when you think about U.S. retail specifically, can you comment at all about – anything standout to you as far as pockets of success by channel like mass versus traditional or not necessarily in absolute, but say relative to the competition. I know you mentioned e-commerce, but any sort of like takes where, wow, this is really working, it’s really coming together in a particular channel? And secondly, and maybe related, there has been – can – there has been a fair amount of the data we see and what you report to us this morning share gain across a lot of few different categories. Can you comment on the – you mentioned the competitive environment, but specifically, that share gain this year right now at a time when everyone is looking for the same thing. Can you comment about your take on potential competitive responses in 2018 and how you’re set up for that? Thanks.

Sure, sure. This is Jon. So a couple of things. One, we really like the way we’re competing across categories. And again, as I mentioned in my prepared remarks, we’re seeing broad-based improvement across the majority of our categories and we like the way we’re competing across channels. It’s really is broad-based better as well. We feel like we’re winning in the majority of our channels, so that feels really good. As we think about share, again, the thing that gives us good confidence that we’re heading in the right direction here is the majority of our change and improvement in trend is really coming from baseline sales. So, again, across total U.S. retail, 75% of our improvement is via baseline sales. So it’s really not a case of merchandising driving the bulk of our improvement, so it’s better marketing. And as I mentioned in my remarks, we made a pretty major change last year shifting long relationships with advertising agencies moving to some new ones and we really like that trend that we see in market and we know that is driving our business and our baselines and our innovations are better, it’s up 50% year-over-year. And I can tell you that’s actually off the same number of items. So, again, it’s not turning much stuff out there, it’s actually better quality. So we’re really focused on competing. We’re focused on the fundamentals. And we believe that if we continue to do that, we can continue to see broad-based wins across our business.

Great. Great, Jon. Any comment about channel at all, like particularly successes that you had?

Again, we feel good generally across the majority of the channels. And again, without calling off specific customers, there’s this puts and takes. But the reality is, we’re growing share across all channels. And I think for us right now, that’s the focus to compete wherever we are. So I’m not going to – there’s not one that jumps out of me. Again, we feel really good about how we’re trending in all of them.

And to build on Jon’s point to broaden that from the U.S. to more broadly globally, one of the things we’re most pleased with for the quarter in general is just the breadth of our growth. And so whether you look across product categories in the U.S., we improved. If you look across channels in the U.S., we improved. If you look across channels more broadly like Convenience Stores and Foodservice, we improved. If you look at Europe, we improved. If you look at Asia, we improved. And so, the – for us means, Jon answered the question for the U.S. But I would say, more broadly as a company, one of the things we’re most pleased about with the quarter that we hope to continue and that we plan to continue is just the breadth of the improvement that we have seen, and that’s geographic improvement in channel, as well as product line.

Well, thanks very much. And any of you have spare room for the Super Bowl? Don’t be shy, I’m an excellent house guest. You know how to reach me.

Exactly.

Thank you. And our next question comes from the line of Akshay Jagdale with Jefferies. Please proceed.

Hi, good morning. Thank you for the question. I wanted to ask about the innovation momentum. So can you comment on the yogurt that we launch. You mentioned, it’s obviously the best the category it seems. But what’s the endgame there, if you can help us sort of size that opportunity. And more importantly, like what is that – you or your organization that you can apply to other franchises and when should we potentially expect some of that, meaning, more sort big bet innovation across your other franchises? Thank you.

You’re welcome. So this is Jon. I’ll give you a few thoughts on Wii. So, again, we’re really pleased with the results there. It’s about 1.5 share of the category already. We expect that to continue to increase. And for year one, again, we expect this to be in north of $100 million in sales. So, again, it’s off to a terrific start. We’re seeing really good repeat rates and consumers are telling us that they view us very, very unique. In terms of how we got there, I’m really proud of we. And again, let me just start by saying, we know there’s a lot more work to be done in yogurt. So we’re not taking any victory laps in that category, to be clear. But I like the way that, that seems really operating. They’re focused on playing our game and then looking for opportunities and segments that are going to be growing in the future and bringing fundamental innovation. And we did it in a really scrappy way, innovating quickly and closely with consumers is truly is consumer-first innovation. And by being in market and iterating over time, we’ve got to a product that we know really resonates with consumers really works hard. So the actual process that we used to create, we were actually moving across overall use in the U.S., really around the world to make sure that we move more quickly and make sure that we’re connected as closely to the consumer as we can. And we believe that’s going to help our pipeline as we move forward and make our innovation even more impactful.

And to build on Jon’s point, one of the things I’m really pleased about is, as I look across our organization and how we’re working differently now is that, Wii is a great example of something as simple ingredients and great tasting. Well, we use that same kind of thought in the UK and in France, and it didn’t happen to be Wii, but the same consumer insight drove Liberte taste success in the UK and Triple Sensation success in France. So as an organization, we’re getting better, much better and much faster, sharing insights across geographies. And I’m really proud of the UK team, for example, for taking Liberte, which has been so successful in Canada and and not trying to do anything different than what was done in Canada and applying that to the UK and growing it by 25%. And so I’m pleased with our team here in the U.S. on yogurt and we see improvement broadly in our yogurt business across the globe. And I’m also pleased with how we’re working differently, whether that’s the specifics to the launch of we here in the U.S. or how we’re sharing ideas more broadly and quickly globally.

So just two quick follow-up. So when do you think we’ll start to see a broader impact on your top line growth as you’re sharing these ideas, right, whether it’s globalization or just innovation being the bigger piece of the top line? I mean, it’s already better, but should we expect that to accelerate, and when might that happen?

Well, obviously, look, I think you’re already seeing it in this quarter. I mean, we cut our losses on yogurt. Our declines on yogurt in the U.S. in half behind innovation. And we hope to get the single-digit losses and plan to get the single-digit losses in the U.S. in the back-half of the year. We’re down less than 1% on yogurt in Europe this quarter, so this was one of the best quarters we’ve had behind new innovation. So to be honest with you, I think, you’re starting to see it already, and we’ve got a team that’s dedicated to continuing that, whether it’s on yogurt or on Häagen-Dazs or on Old El Paso and on snack bars. If you look at the second-half of the year, one of the things I mentioned in my remarks was that, you’ll see Nature Valley in Asia and are expanding Nature Valley in Asia and that’s based on success we saw in Europe and obviously the success we’re having in the U.S., but applying it to Asia consumers in a slightly different format that works for them. And so, honestly, I think you’re starting to see it now and our plan is to continue that.

Perfect. I’ll pass it on. Thank you. Happy holidays.

Happy holidays.

You too. Operator, I think we have probably time for just one more unfortunately.

Thank you. And our last question comes from the line of Steven Strycula with UBS. Please proceed.

Hi, guys, good morning. Two-part question. For the first part, just want to get a sense of, I think, Ken was asking about it earlier, but the absolute gross margin magnitude of pressure that we’re seeing for the full-year obviously gets better in the second-half. But is it a fair way to think about it down 50 basis points for the year? That’s my first part.

Well, let me focus on operating margins and it’s actually kind of what we’ve been giving guidance on. And I mentioned the factors that will drive it inflation is going to run higher than we – slightly higher than we expected in transaction FX and work against this. We’ve added some investment in accelerators to drive growth, the top line of which will come through next year, but we’re encouraging cost this year to make that happen. And then I mentioned just the kind of the nature of our transaction FX, which is helping the top line more than SOP or more than the operating profit. And just to put it – just to mention that, we were talking about a swing here of maybe 50 basis points. We will still be in the zone of 18% operating margins for the full-year. So we correct that level last year and that’s still remains 200 basis points above where we were three years ago. So just kind of in the order of magnitude, that’s where we were going to land for the year.

And, Steve, this is Jeff. I don’t think gross margin, we don’t expect to have material difference in gross margin trends versus operating margin trends. So I think, the drivers are very similar.

Okay, thanks. That’s really helpful. And then just a question for Jon, just on the soup business. Want to get a sense and there has been a little bit of shuffling of the deck in the category of – for the soup season this year. Just wanted to think about how you think about the health of the overall category, total shelving displays, not just specific to you, but the category in general? And then how do we think about, given some of the decisions that were made in third quarter, are you seeing that – obviously progress is doing better, but do you think that the category is maintaining its momentum and what stopped it from necessarily being a bit back of the business next year? Thank you.

Sure, Steve. The categories through key season is growing, so that’s good overall. And, again, for the rest of the strong share, which we like. Similar to some of the other businesses what we really like that 80% of our improvement in trend in soup is actually coming from baseline sales. So, again, it’s fundamentals, it’s good marketing. Now we’ve got a little bit of innovation with the progress of organics, it’s working for us as well. So, again, like many of the other categories, it’s about fundamentals and competing well. And if we do that, we think that we can be successful and drive the category. And again, through key season, we’re seeing the category grow and it appears to be healthy and we’re having good constructive conversations with the retailers around it. So we’d expect continued growth through the back-half of the year.

Okay, great. Thanks, guys.

All right. And Sara, thanks. Unfortunately, I know we didn’t get to everybody today. I know there are a few people probably still hoping to get a call – question in. So I’m on the phone all day, please feel free to reach out and connect on any question from here on out. Thanks a lot.

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 your lines.