General Mills Q3 Earnings Conference Call: Full Transcript

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the General Mills' Third 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 Wednesday, March 23, 2016. I would now like to turn the conference over to Jeff Siemon, Director of Investor Relations. Please go ahead, sir. Jeff Siemon:Director, Investor Relations: Thanks Denise and good morning everyone. I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Jeff Harmening, Chief Operating Officer for our US Retail Segment. 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 third quarter results was issued over the wire services earlier this morning and is also posted on our website and you can find slides on our website that supplement this morning's presentation. Our remarks will include forward-looking statements that are based on Management's current views and assumptions and the second slide in today's presentation lists factors that could cause our future results to be different than our current estimates. And with that I'll turn you over to my colleagues, beginning with Don. Donal L. Mulligan:Executive Vice President and Chief Financial Officer: Thanks Jeff. Good morning, everyone. Thank you for joining us today. As noted in our press release, General Mills third quarter results were in line with our expectations. Net sales, total segment operating profit and adjusted diluted EPS results declined, reflecting the effects of foreign exchange and the Green Giant divestiture. Net sales growth continues to be impacted by high levels of competitor activity in US Yoghurt and lower display merchandizing for US retail. However, our efforts to drive more from the core will lead to improved sales trends across a number of key US retail businesses which Jeff will expand upon in a moment. We continue to maintain strong margin discipline as evidenced by our fifth consecutive quarter of adjusted operating profit margin expansion. Based on our results through nine months, we are reaffirming our fiscal 2016 growth targets. Slide 5 summarizes our results for the third quarter. Net sales totaled $4 billion, down 8% as reported and down 4% in constant currency. Total segment operating profit totaled $679 million, down 1% on a constant currency basis. Net earnings increased 5% to $362 million and diluted earnings per share were $0.59 as reported. These results include $44 million of restructuring and project related expenses and mark-to-market valuation effects. Adjusted diluted EPS which excludes certain items effecting comparability was $0.65, down 7% from last year's third quarter. Constant currency adjusted diluted EPS decreased 6% compared to a year ago. Slide 6, shows the components of total company net sales growth. Pound volume reduced sales by 5 percentage points. Positive sales mix and net price realization increased sales by one point while foreign currency exchange reduced sales by four points. The Green Giant divestiture reduced contribution from volume growth by 4 points and reduced net sales growth by 3 points in the quarter. Turning to our segment results. Slide 7 summarizes U.S. retail performance. U.S. retail net sales decreased 7% in the third quarter driven primarily by the Green Giant divesture which had a five point negative impact on the segment's net sales growth and accounted for the entirety of the meals operating decline. Year-to-date net sales were down 2% including a one point decline from the net impact of the Green Giant sale and the Annie's acquisition. In our Convenience Stores & Foodservice segment, net sales declined 2% in the third quarter. Our Six Focus Platforms posted combined net sales growth of 8% with the strongest growth in frozen meals and yoghurt. Net sales declined in the remainder of the business driven by market index pricing and bakery flour as well as the exit of some low margin businesses in the fourth quarter of last year. Year-to-date net sales were down 2% with 6% growth on our Six Focus Platforms. Slide 9 summarizes our International segment net sales results. On a constant currency basis, third quarter International segment net sales were flat to last year driven by Latin America where sales grew 16% including double-digit growth in Mexico, sales were up high single-digits in Brazil with good performance on snacks, benefits from pricing, and incremental contributions from the additional of the Carolina Yoghurt business. Net sales in the Asia-Pacific region increased 4% including double-digit growth in India and low single-digit growth in China. In Europe, sales were down 2% as dairy deflation contributed to unfavorable net price realization for our yoghurt business. In Canada sales were down 14% reflecting the Green Giant sale. In total, the Green Giant divestiture reduced International segment net sales growth by 2 points in the third quarter. We continue to make good progress on gross margin. Slide 10 shows that third quarter adjusted gross margin excluding certain items increased 160 basis points. This was primarily due to cost savings initiatives more than offsetting modest input cost inflation. Our latest estimate of input cost inflation now rounds down to 1% for the full year. As of February, we're roughly 85% covered on our fiscal 2016 commodity requirements and we now expect full year gross margins to expand by approximately 100 basis points. Turning to Slide 11. Total segment operating profit was down 1% in constant currency. U.S. retail third quarter profit essentially matched last year with continued cost savings more than offsetting the divestiture impact. Constant currency international profit declined 24% in the quarter, due to currency driven inflation on imported products in certain markets and the impact of the Green Giant divestiture. In Convenience Stores & Foodservice, profit was up 31% driven by increased grain merchandising earnings, favorable product mix, and our cost saving efforts. After tax earnings from joint ventures totaled $16 million in the quarter, up 19% in constant currency due primarily to volume growth from Haagen-Dazs Japan. Third quarter constant currency net sales declined 1% for CPW primarily due to lower sales in developed markets. Haagen-Dazs Japan constant currency net sales increased 22% for the quarter driven by excellent results on a new seasonal Hana Mochi which combined Haagen-Dazs ice cream with a traditional Japanese rice cake dessert. Slide 13 summarizes our noteworthy income items, other noteworthy income items in the quarter. Corporate unallocated expenses excluding certain items effecting comparability increased by $12 million in the quarter. We incurred $44 million in restructuring and project related charges in the quarter including $27 million recorded in cost of sales. Net interest expense decreased 4% from the prior year driven primarily by lower average debt balances partially offset by changes in the mix of debt. We continue to expect interest expense will be down mid-single digits for the full year. The effective tax rate for the quarter was 31% as reported, 5.5 points higher than the prior year period. Excluding items effecting comparability, the tax rate was 30.8% this year compared to 27.5% a year ago. We continue to expect our full year tax rate to be comparable to last year. Average diluted shares outstanding declined 1% in the quarter, in line with our full year expectations. One additional item to mention here. As noted in this morning's press release, we sold our Venezuela business after the close of the third quarter. The business primarily manufactures and sells canned meats under the Underwood brand. We expect to incur a non-cash charge of approximately $35 million pre-tax in the fourth quarter related to this sale. This charge will be excluded from adjusted earnings. And we anticipate the tax loss in this transaction will unlock approximately $20 million in incremental cash flow in fiscal 2016. Now let me briefly summarize our 9-months financial performance stated in constant currency. Net sales were down 1% reflecting the net impact of acquisition and divestures, segment operating profit increased 8%, and adjusted diluted EPS were 10% above the prior year. Slide 15, shows that our core working capital declined 40% versus last year's third quarter. Half of the decline is due to Green Giant divestiture and foreign currency exchange effects and the other half reflects continued operational improvements across our businesses. This is the twelfth consecutive quarter we reduced our core working capital versus the prior year. We continue to generate healthy levels of free cash flow. Year-to-date free cash flow is $1.4 billion, up 29% versus last year. We are on track to convert at least 95% of adjusted net sales into free cash flow this year in line with our long-term goal. We also continue to return significant cash to shareholders. Through nine months, we've repurchased 10.6 million shares at an aggregate price of $602 million and we paid $795 million in dividends. On March 8 we announced a dividend increase of 4.5% payable on May 2. This marks the seventh time we have increased our quarterly dividend rate since 2010. For the full fiscal year we expect to return at least 90% of free cash flow to shareholders through share repurchases and dividends. Cost savings from Holistic Margin Management or HMM and our incremental cost reduction projects represent an important component of our earnings growth in fiscal 2016. We have good visibility to achieving $400 million in cost of goods sold HMM savings this year and we continue to make progress toward our goal of $500 million in savings from incremental projects by fiscal 2018. For the full year, we are reaffirming the guidance we updated on the second quarter earnings call. Specifically we expect a low single digit decline in net sales from the 2015 level that included a 53rd week and a full year of Green Giant, total segment operating profits matching last year's levels and a low single digit growth in adjusted diluted earnings per share, all in constant currency. We are expecting impact of currency translation to result in a $0.08 headwind to full year adjusted diluted EPS growth in 2016. Included in this guidance, is a fourth quarter where we expect low single-digit comparable sales growth. Our reported results will reflect unfavorable foreign exchange, the impact of Green Giant sale, and comparison to an extra week in the year ago period. We anticipate adjusted gross margin will be below last year reflecting our highest quarterly inflation rate compared to our lowest quarterly inflation rate a year-ago and we expect media expense will be up as reported and up double digits excluding currency effects, the 53rd week comparison, and Green Giant. With that, I'll turn in the microphone over to Jeff. Jeffrey L. Harmening: Executive Vice President; Chief Operating Officer, U.S. Retail: Thank you, Don and good morning, everyone. I appreciate the opportunity to give you an update on our U.S. retail performance. On Slide 20, I have summarized three main messages I want to leave you with today. First, we delivered strong profit growth and margin results so far this year. Second, we're continuing to experience headwinds in our yogurt business and in display merchandising that are dampening our sales results, and we are actively working to address these headwinds, and third, we are encouraged by the progress we're making with our Consumer First efforts in a number of key businesses. Now let me go a bit deeper on each of these areas. Through nine months, US retail net sales of $7.8 billion are down 2%, including 1 point of decline from acquisitions and divestitures. Year-to-date segment operating profit of $1.7 billion is up double digits versus the prior year. This significant profit performance reflects our continued focus on cost savings. We're generating strong cost of goods HMM savings in addition to the benefits from incremental cost savings projects including Project Century. This give us even greater confidence that our Century initiative will help unlock future HMM opportunities. And importantly, we're expanding our margins while we make Consumer First investments on our products, our brands, and our capabilities, to drive improved sales growth. We'll get back margin in the fourth quarter for the reasons Don explained but we still expect to expand US retail operating profit margins by more than 100 points for the full year. We continue to see growth in our categories with aggregate Nielsen measured retail sales up for the fourth consecutive quarter. We estimate that our categories grew more than 1% in the third quarter when including faster growing non-measured channels. Our net sales results have not get pace with category growth. As I mentioned, our year-to-date net sales declined 2%. The Annie's acquisition and Green Giant divestiture combined to contribute 1 point of that sales decline with the impact falling most significantly on the meals which would be up excluding our M&A activity. Net sales for our yogurt operating unit have been impacted by high competitive activity while reduced display merchandising has particularly impacted our cereal and snacks results. On yogurt, we continue to see high levels of competitive investment as dairy prices remain near 20 year lows. Merchandise volume is up double digits for a key competition in the category with significant increases on merchandising frequency as well as lower price points in certain channels. In addition, we are seeing competitive advertising spending more than twice the level of a year ago. On the second quarter earnings call, we mentioned that to address these headwinds, we would increase our competitiveness in yogurt in the second half of the year and we will. However, given the increased competitive merchandising levels, it has taken us longer than expected to secure additional in-store activity. We also said that we will remain disciplined and not chase unprofitable volume and we remain committed to that principle. For US Cereal, our display merchandising was down more than 30% at a key customer in the third quarter with the impact falling most significantly on our cereal and snacks businesses. We'll begin lapping these reductions at the end of the fourth quarter and will fully lap them after the first quarter of fiscal 2017. These two factors combined to reduce our retail sales growth by more than two points in the third quarter. Despite these headwinds, I am encouraged by the progress we're making to expand the impact of our Consumer First strategy across a number of important businesses. We gained share in five of our top six categories in the third quarter. Let me share some quick examples starting with cereal. Retail sales trends in the cereal category have been improving this fiscal year and we have returned to share growth in recent months behind Consumer First product renovation, on-trend innovation, and effective messaging. Our product renovation initiatives are working in our cereal business. Retail sales of gluten-free Cheerios varieties are up 2% since we launched after declining high single digits last year. As of January, 75% of our cereals no longer include artificial flavors and colors. The seven cereals that received recipe changes in January have posted 6% retail sales growth since launch after posting a 6% decline last year. And last year's largest Consumer First renovation news, more cinnamon and cinnamon toast crunch is delivering 8% retail sales growth this year on top of 8% growth a year-ago. Nature Valley has been a key focus for our cereal innovation efforts in recent years. Initially we launched a brand as a Protein Granola and have since extended it to ready-to-eat cereal, Muesli, Granola bites, and oat meal. Retail sales for this franchise increased 44% last year and are up 35% so far this year through a combination of new product news, media support, and sampling. The ready-to-eat cereals that we launched in January are performing well and we will keep the momentum going next year with more news on the business. So I am bullish on our prospects for cereal growth. Will start to lap some of the display headwinds in the fourth quarter. But more importantly we'll continue to expand the impact of our renovation and innovation news and we'll invest higher level of advertising in the fourth quarter. We believe that yogurt is an attractive growth category now and for the long term. We are focusing on initiatives that help drive category growth by generating news, expanding usage occasions, and bringing new consumers to the shelf. Over time, innovation and great marketing will be the key factors to winning in this category. In January, we launched the whole milk organic Annie's Yogurt into one of the fastest growing segments in the category. We think Annie's all family appeal and strong organic brand equity will bring new consumers to the shelf and we'll have more news to bring to the organic yogurt segment this summer. We're expanding our usage occasions with our One Up Your Cup campaign which encourages consumers to incorporate yogurt into their snacking routine. Nature Valley Bars, our largest business in snacks, has been impacted by reduced display merchandising in certain channels. But on the traditional growth free channel where merchandising has been more consistent, we've driven growth behind Consumer First renovation and innovation. Our Nature Valley Crunchy Bar product renovation and our no artificial colors, flavors, and sweetness advertising are working and we've seen excellent early results on our new Nature Valley Nut Butter biscuits products. As a result year-to-date retail sales for Nature Valley grain snacks are up mid-single digits in the grocery channel. Larabar has delivered double digit annual growth since we acquired the business almost eight years ago and we believe there is still an opportunity to broaden penetration and accelerate the brand's growth. We recently began testing Larabar's first ever TV campaign, supplemented with digital advertising, coupons, and in-store merchandising. Since the campaign began airing, retail sales for Larabar are up more than 40%. We are also maintaining positive momentum on Annie's. Retail sales were up double digits in the third quarter and distribution is up double digits this year in each of Annie's heritage categories. As we told you at our Investor Day, there is still a great deal of distribution upside for this brand so that will continue to be an area for focus for our sales teams. Platform expansions also play a key role on growing Annie's. We entered the soup and yogurt categories earlier this year and will launch three new cereals in the coming months. We are encouraged by early feedback from consumers and customers on these launches and will continue to evaluate other new platforms to further expand the Annie's business. These strong results on Larabar and Annie's have contributed to double digit net sales growth for our U.S. natural organic business in the third quarter. We have completed our soup and baking seasons and we are pleased with our performance. In ready-to-serve soup we grew 2 points of share driven by successful merchandising, product renovation news and good advertising. Our refrigerated dough business had a good baking season with growth in retail sales and market share up 1.8 points. These results were driven by distribution gains on our top selling products and we grew Dessert Mix dollar share during the key baking season this year by aligning our prices more closely with our competition. Next year we plan to bring news and innovation to help grow the Dessert Mixes category. As we look ahead to the fourth quarter, there are a number of factors that will affect our U.S. retail performance. We'll benefit from positive momentum on our renovation efforts and from increased media investment. We'll also begin to lap display merchandise inductions in the quarter and why we still expect yogurt to be a headwind, we expect that headwind to moderate. As a result we expect improved fourth quarter sales performance on a comparable basis although reported results will be impacted by the Green Giant sale and by a comparison to an extra week a year-ago. To summarize my U.S. retail comments, we are seeing strong year-to-date profit and margin performance driven largely by cost savings realization. Although we continue to experience headwinds in display and merchandising, we're encouraged by positive momentum we're seeing across a number of our businesses such as cereal, grain snacks, natural and organic, soup, refrigerated dough, and desserts. With that, I will turn it over to Ken. Kendall J. Powell: Chairman of the Board, Chief Executive Officer: Alright. Well thank you Jeff and good morning, everybody. You just heard about our performance in our U.S. Retail segment and so let me give you an update on our other two business segments starting with Convenience Stores & Foodservice. Net sales for our Convenience & Foodservice segment are down 2% so far this year due to indexed pricing on bakery flour and business exits. However, our Six Focus Platforms of cereal, snacks, biscuits, mixes, yogurt, and frozen meals, continued to deliver excellent sales growth with combined net sales up 6% year-to-date. This sales performance combined with continued benefits from cost savings initiatives is translating into margin expansion for our Convenience Stores & Foodservice business. Segment operating profit is up 8% so far this year increasing this segment's profit margin to 19%. Frozen meals are leading our performance in Convenience Stores & Foodservice with strong double digit sales growth year-to-date. Mini Bagels, continue to grow as part of school breakfast programs and we applied our Consumer First approach to product development in this channel when we introduced products for school lunches a year ago, Pillsbury Cheesy Pull-Aparts are our most recent introduction. Launched in November, these individually wrapped versions of cheese stuffed bread are heated and served right in your packaging saving labor costs and waste. Our bowl packs in schools are driving mid-single digit growth for our cereal business fiscal year-to-date as we are leveraging our no artificial colors or flavors messaging with food service operators and our yogurt business also is posting mid-single digit net sales growth so far this year on the strength Yoplait Parfait Pro in a variety of food service channels from colleges to hospitals. We also saw good momentum on our Kid Yogurts in the third quarter as we gain distribution for our simply GoGurt products in K-12 schools. So we continue to like the performance we are driving for this segment by focusing on the most profitable products in the most attractive food service channels. Turning to our international segment. Net sales are up 2% so far this year on a constant currency basis. The Green Giant divestiture reduced international sales growth by 1 point this fiscal year-to-date. Constant currency segment operating profit declined 1% through the first nine months of the year primarily due to currency driven inflation on imported products in certain markets and a comparison to the year ago period when profit increased 8%. In Canada, constant currency net sales are down 2% so far this year with growth on a number of business lines offset by the impact of the Green Giant divestiture. Our grain snacks business continues to deliver good results, retail sales are up 11% year-to-date on the strength of new product launches like Nature Valley Nut and Seed bars and Fiber One Crumble bars, and innovation on our Old El Paso Mexican meals is contributing to 2% retail sales growth for this leading brand of Mexican foods. In Europe, net sales are up 1% fiscal year-to-date on a constant currency basis led by good performance on ice cream and meals. Haagen-Dazs premium ice-cream bars are driving 13% retail sales growth so far this year. We are introducing 2 new flavors this month and have plans to expand these bars into additional markets. Innovation also is contributing to 1% retail sales growth for Old El Paso dinner kits driven in large part by increased in-store events and higher levels of advertising support. In yoghurt, retail sales are down year-to-date as dairy deflation has led to unfavorable net price realization. However, we posted modest share growth so far this year in Europe with good performance on yogurt beverages and varieties in France. Our focus on execution on the fundamentals drove improved net sales performance in emerging markets in the third quarter. Year-to-date net sales in Latin America are up 11% on a constant currency basis. We posted high single digit net sales growth in Brazil in the third quarter with good performance on our snacks business benefits from pricing and incremental contributions from Carolina yoghurt. As we mentioned at CAGNY last month we acquired the Carolina business in December along with the manufacturing and distribution infrastructure for dairy products and we are excited about our growth prospects for yoghurt in this market. We also continued to post excellent sales growth in Mexico led by solid performance on Snack Bars Fiber One Bars in particular. We introduced the Fiber One brand in Mexico a little over a year-ago and retail sales for our wholesome snacks are up double digit so far this year. Now as you can see on Slide 42, constant currency net sales for our Asia-Pacific region grew 3% year-to-date. We saw improved performance in China in the third quarter with net sales up low single digit. Wanchai Ferry contributed to this growth is good performance on our new rainbow Italian dimsum products during the Chinese new year and Yoplait Yoghurt continues to perform well with market share in Shanghai at 10% in the third quarter. We saw good growth on the Perle De Lait bonus packs launched in conjunction with the Chinese New Year and we are increasing our marketing and promotional activities on the Yoplait brand to drive increased consumer awareness. Finally we continue to generate double digit sales growth so far this year in the Asia Middle East and Africa region. Sweet snacking is leading that growth. This year we launched new fruit flavors of Haagen-Dazs ice cream which has driven high single digit net sales growth. Betty Crocker cookie cakes launched last fall contributed to double digit snacks growth in the region fiscal year-to-date. We are also posting strong double digit net sales growth in India where we've been increasing distribution on our cake mixes and recently launched a line of chocolate spreads. Overall, we're pleased with the improvement we saw in emerging markets this quarter and we remain focused on innovation and fundamental execution to drive continued growth in these markets going forward. So that completes the highlights from our three business segments. I'll wrap up this morning's remarks with this summary. Our third quarter results were in line with our expectations. Foreign currency exchange and the Green Giant divestiture are impacting our reported figures. Our financial discipline is driving operating profit margin expansion while still allowing us to invest in Consumer First renovation and innovation, and we're confident we will deliver our 2016 growth targets. That concludes our prepared comments this morning. I'll ask the operator now to open up the call for questions Question & Answer Operator: Thank you. [Operator Instructions]. Our first question comes from the line of David Driscoll with Citigroup. Please proceed. David Driscoll:Citigroup: Great. Thank you and good morning Jeffrey L. Harmening : Hi David. Kendall J. Powell: Good morning. David Driscoll: Wanted to ask a little bit about the sales growth expectations in the fourth quarter so there you know what you guys showed in the press release and stated on the call here is that you expect fourth quarter is expected to be positive on a comparable basis for sales but can you discuss kind of what has to happen for the guidance to work out as recent US and European Nielsen data shows some fairly significant declines and then maybe related to this, could you also comment on what your take is on the February Nielsen data which showed a market decline from the churn line that we were seeing and this doesn't just relate to General Mills, it relates much more broadly to all US food. Thank you. Kendall J. Powell: What I was saying David for our US business, what has to happen and what we're expecting and that happened in the fourth quarter as far as sales growth to accelerate and we expect to behind a couple of important businesses, one is cereal and the second is snacks and we expect that because we're starting to lap the merchandizing headwind we've seen at one of our biggest customers in the fourth quarter and because our advertising is going to be up significantly on both grain and cereal because we really believe in what we're seeing the results from our renovation efforts. We also think even though yogurt will continue to be a headwind in the fourth quarter that that business will improve behind the merchandising we talked about in the second quarter. So for us to see improved U.S. sales results, really it is a matter of cereal and snacking behind things we understand in the merchandising area and behind great advertising. Jeffrey L. Harmening: And I'll just comment on the other two segments because we expect all three segments David to improve and accelerate in Q4 versus year-to-date and versus Q3 in particular. As Jeff alluded to higher advertising we've seen in US cereal we're also going to see it in International. International also as Ken alluded has a number of new products both innovation and renovation in the market place that will continue to build in the quarter. In addition there is some other things that we are lapping some of the merchandising in US cereal we had business exits in our C&F business in Q4 last year that will lap. The index pricing we talked about in bakery flour in C&F it is profit neutral because we price with the market. But the grain prices really started coming down last year in Q4 so we will begin lapping that will be less bad in Q4 which will help our comparable sales growth and then we will have continued growth acceleration in our emerging markets including some pricing in Latin America and so there is a number of factors that go into improved performance in Q4. David Driscoll: Jeff, can you guys just comment on that February question I had about macro, the big picture? Thank you. Jeffrey L. Harmening: Yes we are going do that. Kendall J. Powell: Happy to do that. So as we look at it what I would say in general our Nielson data was up more than it had been in the month of January and it was down more than we have seen in the month of February and there is nothing fundamental that we see that is changed between January and February. Certainly it could be the effects of weather at the end of January and stock up tricks that happened this year whereas last year we had a couple of big weather events in the Northeast in particular in February. So there could be some weather related activity and we certainly see that but there's nothing fundamental that we see and that would have changed the categories from January to February and our focus remains clearly on the things that we can control which are marketing and innovation activities. David Driscoll: Thank you. Jeffrey L. Harmening: Okay. Operator: Our next question comes from the line of Matthew Grainger with Morgan Stanley. Please proceed. Matthew Grainger:Morgan Stanley: Great. Thanks. Good morning, everyone. Jeffrey L. Harmening: Hi Matthew. Matthew Grainger: So Jeff I wanted to come back I think we've kind of talked about this at CAGNY and in recent quarters but just to a big picture on your merchandising levels in the U.S. and then even though they are down at the key customer you mentioned, your levels of trade promotions still appear to index fairly high relative to the industry average in a lot of your key categories and I know you're planning to take some of these higher. So given that the industry trend is typically going in the other direction, how are you thinking about the right level of merchandising going forward? Is there really room to cut in the scope of how you plan to run the business or is that less peaceful given that you need to support the categories and your competitive positions? Jeffrey L. Harmening: Yes, thanks for the question Matthew. Let me start by saying that this fiscal year we've actually seen price appreciation as we've seen in our categories and we've also seen the effectiveness of our merchandising improve as we cut back lower ROI trade activities and focus on high ROI activities. As I think I've mentioned, we view how we look at trade as we do HMM and other areas and we're always looking to get more effective than we than we are right now and we have seen good gains in HMM on our trades which is why we see the less improving and the ROIs improving in our area of trade. But that will continue to -- we'll continue to focus on that area because one of the things we find with HMM is that the more we look, the more we find and I am certain with as big and complex as the trade bucket is, that we will continue to find opportunities to further improve our effectiveness and our efficiency in the area of trade. Matthew Grainger: Okay. Thanks, thanks Jeff and just one follow up by probably for Don. I just wanted to ask about the margins and Convenience & Foodservice have been pretty strong in the past two quarters, surprised to see 20% margins in those recent months. So how should we think about the sustainability there? Is there a big benefit from grain merchandising in that number or we're at the stage where the mix the portfolio has really improved that much in that operating segment? Donal L. Mulligan: Yes, very pleased to say it's the latter. Grain margin will have a quarterly impact year-on-year but if you look overall business, the fundamental change in the margins because of the business structure and the improvement you're seeing this year is primarily driven by the fact that we're seeing 6% year-to-date growth on our Focus Six Platforms which all have higher than average margins, higher than segment average margins, higher than company average margins as well and combined now with the cost saving initiatives, encompassing and our sort of catalyst in Century that we initiated last year, we had some benefit to C&F as well. So very much a substantial and sustainable change in the margin structure for that business. Kendall J. Powell: I would just maybe to guild the lily a little bit here Matthew. If you go back five or six years in this business we've nearly doubled the margins. I mean it's been more than the last couple of years has been continuous improvement over a long period of time as we've completely restructured that business so that as Don said, very, very focused on the best channels and our most profitable categories. And this year similar Jeff talked about his business increases increasing margins by over 100 basis points we will see the same thing in our see in that business this year. Matthew Grainger: All right, great. Thanks again everyone. Operator: Our next question comes from the line of Kenneth Goldman with JP Morgan. Please proceed. Kenneth Goldman: JP Morgan: Hey good morning, thank you for taking the question. Jeff you highlighted your this my fresh you're sort of lack of interest in chasing the over prices lower, but looking forward milk remains cheap one of your competitors I think continues to have a capacity utilization issue and I guess they are and sending to drive a volume. So how do you unless you are paying more to get that promotional space you get you are expecting to get how do you how should we have confidence that this will really tough around for you and how should we have confident that you will get that merchandizing that you didn't get as you expected this past quarter. Jeffrey L. Harmening: Well look we're always looking to balance growth and return as we've talked about at -- and over returns have been pretty good as we have been disciplined and what we need to do is make sure you balance that out with some growth as well and that's Ken mentioned in the second quarter when he said our merchandizing activity will improve in second half and we'll see that in the fourth quarter and so as we look into fourth quarter we'll improve our merchandising competitiveness because we need to improve our growth at the same time we're also my for maintaining our returns and so we'll balance that out a little bit in the fourth quarter. But we've got a good line of right now to win our merchandizing is going to occur and what merchandizing is going occur and have the high level of confidence that will improve in fourth quarter. Kenneth Goldman: And I guess that means if you're balancing a little bit that you'll have to pay a little bit more in that perhaps we should expect a little bit better sales growth for the little bit worst margin on the yogurt business in the fourth quarter is that or is that the wrong way to look at it? Jeffrey L. Harmening: No I think that's a fair way to look out at it. I think that is a very fair way to look at and we will still see good margins because of the dairy pricing but may be not as high as they are right now and we expect our growth to improve. Kenneth Goldman: Can I ask a quick follow up. There is a sort of growing assumption among industry observers that food producers overtime will sort of follow the 3G models slash promo spending and that really spend much back to offset it but you've talked in the recent past about I guess higher in store marketing and you said today you're not just cutting trade you're really looking to shift that to better ROI projects. Is that the way to look at it, do you think that may be some observers who are calling for massive trade promo that all flows to the bottom line is that true is that overstated at this point as people look at the whole food industry I know you can't answer for everyone else but you guys are obviously in a larger capital out there. I'm just curious how you think about that whole balance there? Jeffrey L. Harmening: So we think about it can in the following terms we think that a sustainable business model needs to have both margin expansion and top line growth so we're very as we've said many, many times we're very focused on both and clearly we acknowledge that the bar is higher now than it used to be on expectations for margin and we're addressing that very diligently through HMM which we had going for many years and the many other restructuring initiatives and other cost savings activities that you see us initiate over the last several years so we're very highly focused on the margin piece and you're seeing that this year we've good gains and we expect that to continue as we go forward. You know, but the additional part for us is that you got to have top line growth and so we're very focused on innovation and being responsive to the consumer by keeping our core brands relevant advertising networks and to drive growth and where we're getting that formula right we're seeing good growth in our core category. So for us it's finding that balance of both we think that's the key to sustainability in this environment and in particular the focus on innovation and consumer of course we think it's critically important in an environment where consumer attitudes and values about food as you guys all know are changing very-very rapidly. So that's really how we approach it. Kenneth Goldman: Thank you. That's helpful. Operator: Our next question comes from the line of Michael Lavery with CLSA. Please proceed. Michael Lavery: CLS Good morning. Jeffrey L. Harmening: Good morning. Kendall J. Powell: Good morning. Michael Lavery: Just looking at cereal you talked about how you're seeing that the lift from gluten-free Cheerios or some other renovation on the other big brands but in total on the quarter it still was down 2% so what's the offset there and how bigger those declines and what's the outlook for where that can go have you seen it stabilize or is there improvement on the way Jeffrey L. Harmening: Yes Michael they looked the biggest offset by far, it is one that I mentioned earlier which is our cereal merchandising one of our biggest customers and we've got a good line of sight to seeing that improve in the fourth quarter. So by far that is our biggest headwind in cereal because we feel great about the renovation initiatives that we have in innovation we've just launched in the third quarter. So we're confident we will see that business continue to improve as it did in the third quarter continue to improve in the fourth quarter as we lapped our merchandizing Michael Lavery: Well I guess I understand that but I just I guess I am looking at it when you talking by brand you know you are saying Cheerios is and the third quarter on the slide 26 for instance, but the trails is up 2% the other 7 are up 6 and you still have momentum it looks like on -- so regardless of channel that's your whole business I assume is that correct and so if that's the case then which brands are the drag is checks or Widdy's down double digits or what's the total picture look like? Donal L. Mulligan: We don't Michael we don't have any one brand that's dragging it down. So there is not smoking down of one particular business. The -- if you look at particular brands there are couple of businesses in particular, one were lapping of lot of Cheerios protein from you earlier which is of course should not gluten-free and the second is our dot brand Fiber One is not performing particularly well and the our checks business is down a little bit, but there is not one of those that you point going to say look that is yes the biggest challenges we have is certainly the merchandising but within our brand portfolio there is a ones that are not performing as well they did a year ago. Michael Lavery: Okay. That's very helpful and then just on -- with that divestiture would that have been a material contributor to the double digit sales growth in Latin America from third quarter? Donal L. Mulligan: No, no that is well is point 0.1% or 0.2% of our sales so very small it will be immaterial. Michael Lavery: Okay perfect. Thanks a lot. Operator: Our next question comes from the line of Jason English with Goldman Sachs. Please proceed. Jason English:Goldman Sachs: Hey good morning folks. Donal L. Mulligan: Hey, Jason. Jeffrey L. Harmening: Good morning. Jason English: Thank you for let me ask the question. I want to come back to Jeff as we have you US retail trends. You guys have kind of condition just over the year is to focus on base trends and see kind of ignore the incremental its noise and you talking of the weaknesses this quarter to some of that incremental noise merchandising competitive dynamics, but when we look at base trends they are loading pretty hard and pretty fast for your overall US retail portfolio so can you talk more about the drivers of the underlying base sales we can see in your portfolio broadly speaking. Donal L. Mulligan: Yes Jason as we look at our as we look at our third quarter base line results remember there are two things that we've talked about one was the merchandising one of our key customers the other is yoghurt and our based sale trends on yoghurt are really driving the negativity for our base line sales for the US categories and in the third quarter and that is largely due to competitive activity we talked about earlier. So we've seen double digits base line declines on our yoghurt business which is due to competitive activity which is served to bring down if you look across the base line performance of the portfolio. Jason English: Okay and another question for Don and gross margins Don you're calling for a negative inflation in the fourth quarter by our math may be green giant investments at in 30 to 40 bites of gross margin is that fair and if so sort of the implied underlying weakness in the fourth quarter is even more substantial is this really an inflation that we should expect as we believe into next year or is it just a blip due to timing factors? Donal L. Mulligan: Yes it's later as we as the years unfolded in the fourth quarter we're still going to benefit obviously from strong each --, but the merge timing that we've talked about and particularly what overlapping a lower merged period last year was higher this year the inflation which is actually the single biggest factor because last year Q4 was our lowest inflation of the year this year it's our highest inflation of the year. Last year is only when in the fourth quarter when dairy and grain came down and while there is still down they are at decelerating more so we are lapping that and we have continued inflation in our manufacturing logistics sugar nuts fruit cakes and obviously I'd say more broadest in the Latin American region the more broadly. So it is it's very much an inflation story in the quarter that just in the phasing of it different this year than last year with the low point last year to high point this year, I wouldn't read anything into it as we look into F '17 and we'll share more full guidance with you for F'17 in a couple of months. But as we talked about CAGNY we are projecting 200 basis points of margin expansion by 2020 and we expect the majority of that quality to come through cost income through gross margin. Jason English: Very good. Thank you very much. Operator: And our next questions comes from line of Eric Katzman with Deutsche Bank. Please proceed. Eric Katzman: Deutsche Bank: Hi, Good morning everybody Jeffrey L. Harmening: Hey, Eric. Kendall J. Powell: Good morning. Eric Katzman: Two questions, if I could. I guess one is question for Ken. I've heard from a number of other CEOs both currently in the industry and formerly in the industry who are getting more concerned about the pressure cost and the risks to food safety and quality you guys have done a very good job overtime but even you had recall earlier and so I am wondering if you could maybe speak within industry had on about you know the choices that are being made as the market pressures the industry to cut cost and then second around I think at CAGNY last couple of years Ken you have talked about kind of how some of these smaller companies get distribution to a certain point they hit a wall and that's that wall is where the large cap companies such as yourself can really leverage that capability but it seems like in yogurt it just keeps going the other way. There is so many brands out there now, it doesn't seems like they're hitting that wall I mean it seems like the only company that pulled back was actually the Pepsico Muller joint venture otherwise there's just more and more brands being added to the category and the Annie's is just another example of that in how long does it take for scale to really I guess win out if it does? Thanks. Kendall J. Powell: Okay, so let me I'll answer the first one first and I can't really -- I understand the observation Eric and the concern you might hear. I can't speak for the industry, I can only speak for us. Clearly, we are very-very focused on product safety and product quality it's sort of central to our mission and that's the kind of capability that we would maintain and actually build upon even in this environment. Because, we just think that consumer trust is sort of is job one for us. So, but it goes to your question goes to the earlier question as well about, what are we trying to do and we're trying to do two things. We are very-very focused on margin expansion and we think we have a good line of sight and we performed well there over the last couple of years, we have a good line of sight and other things we can do to continue that good work. But we are equally focused on maintaining the capabilities that we need in order to drive top line growth and so we are preserving you know we've got a very strong marketing organization -- we've got excellent R&D and so those are very important things and our product quality organization has been maintained at a very high level. So that's, that's how we look at it. I understand the question and I understand the concern but that is service and we would not compromising in that area. To your comments on yoghurt, there is I don't have the numbers in front of me and you know from what's come in and what's gone out over the last couple of years Jeff may have those and so there is a tremendous amount of new product activity in the yoghurt area lots of them don't stick around for very long so it is -- there are a lot of -- it's becoming more competitive category but again where we focus on the right innovation and the right the right renovating right to expanding Annie's into the yoghurt dairy case and another yoghurt innovation initiatives that we'll announce this summer where we have good once, we are able to succeed because of the scale and the distribution power that we have. So, you know we are confident that we can continue to grow there it's an exciting space it's a huge category globally we have very high capability and so we're just going to stay focused on the kind of innovation that we're work in the category. I can come back to your Erick we can look and get some numbers maybe how many have come in and how many have gone out, but your observation that there is a lot more in yoghurt I think is correct. I don't know if you want add anything. Jeff Jeffrey L. Harmening: Yes the observation that there is, there are lot of players in yoghurt is generally correct I mean it's also true that we've grown distribution over this time as well but if we think more broadly about the kind of capabilities of big company in the scale that General Mills can bring I don't think you have to look further than Annie's we have driven double digit distribution increases on Annie's over the last two year and the growth re-trade. But even beyond that looking at the club channel we've grown distribution in our food service area, we are growing Annie's in our food service channels and so broadly speaking we see the kind of capability that General Mills can add to some of the smaller players I want to hit the wall how much better we can do and we were starting to see the same thing without even though we have just that business and we have a high degree of confidence that we'll be able to do a lot more faster than the founders alone could have done with their limited resources. Eric Katzman: Thank you. Excellent. Operator: And our next question comes from the line of John Gartner with Wells Fargo. Please proceed. Analyst: Good morning thanks for the question. Jeff I'd like to ask in terms of the U.S. Retail business that's 450 SKU's that you isolated for us in the past. Maybe if you can update your progress there and billing distribution for that group, how the increase in merchandising plays into that and then how we should be thinking about the magnitude of those SKU's beyond sales for the next few quarters? Jeffrey L. Harmening: Look we are really pleased with what we've seen with developing the distribution of our top 450 SKU we're right on track where we've thought we would be we're up over 5% and distribution of our top 450 SKU's I am really pleased with that performance and it's pretty broad performance over a number of categories and we have even seen the benefits of things that we discontinued, we discontinued align on Hamburger Helper and we have seen the distribution there decrease but we have seen the increase on our top SKU's and as a result we are actually starting to see our churns increase on Hamburger Helper. We have also seen the benefits distribution on our Pillsbury dough business and one of things is driving growth on our Pillsbury business is getting out of SKU's that we're relatively unproductive and getting into more SKU's relatively productive and so we are really pleased with the progress we have seen we have more to do we will keep that business a multiyear plan to get all of our distribution and our top items but we're progressing as we thought we would and you more into go and the more we see that we can do the more we like this initiative Analyst: Great and then just to follow up in terms of yoghurt the comments on the innovation and the category and the competition there, size in the merchandize increase in Q4 can you speak to any opportunities you see maybe improve your mix or maybe where under mixing right now and I think we should be comfortable I would not see beginning of another kind of 2011, 2012 given performance there? Jeffrey L. Harmening: Well on the innovation side you know we feel good about some of the innovation that we have lost and we see some more good innovation on the way. So for example our Greek Whips which we launched a year-ago are doing quite well and we seeing opportunity to expand those future. We have seen good industry results from our Annie's organic yoghurt and we see an opportunity to expand Annie's further and Yoghurt as well as expanding into some other organic areas. So we feel good about the innovation we have done but as we look ahead actually we see even greater potential for innovation and some faster growing segments and really that's building on things like Whips or getting into even further and to organic there is certainly a runway ahead of us for innovation and we know in a category like yoghurt just like in cereal it is going to be the innovation and the marketing the drives long-term growth because dairy prices 20 year low and we'll see how long stay but eventually that go back up and it will be a matter of innovation and marketing is going the win the day in yoghurt. Analyst: Great. Thank you very much. Jeffrey L. Harmening: I think we have time for one more question Operator: And our next question comes from the line of Chris Growe - Stifel. Please proceed Chris Growe: Stifel Nicolaus: Hi, good morning Jeffrey L. Harmening: Hey, hi Chris. Chris Growe: Hi, just had a question for that could on. As you think of all the incremental cost savings coming through this year from all the various programs catalyst and all those programs. Just so we still think about half of in the business is that occurring it sounds like you are going to have an increase in overall investment in this fourth quarter you kind really accelerating investment in the fourth quarter should that continue in 2017 as well? Donal L. Mulligan: Yes, Chris this is Don. Yes I think the mix we talked about in the year about reinvesting roughly half of our savings is still where we're at it is phasing little bit differently as we said I think advertising some of the merchants little over back load than we had originally anticipated but for the full year it will be that same in that same range and actually obviously we haven't completed our plan for next year so didn't give you an exact figure but you would expect we're going to be continue to reinvest in some of those savings back and next year we also expect to have little more leverage from higher top line growth to add to the margin expansion. Chris Growe: Okay. I had just a follow-up question if I could on the international profits were although softer this quarter underlying when expected could you talk about some of the key factors involve in that you give a little bit overview in the discussion but may be some just to get an idea like in the fourth quarter so seen those profits improved and maybe some of the key factors in area that lead into that in this quarter. Donal L. Mulligan: Yes sure, first of our international business in total we feel we're about where the top line has moved solid growth in developed markets really at that low single digit level that we'll continue even if its tempered at mid by some of the yoghurt pricing in Europe encouraging acceleration in emerging market that can take you through which is both innovation our execution and some pricing and as with other segments we expect that to strength in the fourth quarter. In terms of margins there is a couple of things that are at play one is obviously Green Giant does impact our profit international we sold in the North American business of Canada, you've seen the impact of that and that's a low to mid-single digit drag on the earnings for international. The other you see, we mentioned this the currency driven inflation on certain products I mean that's a long way we've seen, we have some transaction affects impact for businesses that we source across borders so for example, much of our Canadian product is stores from the US so, as the Canadian dollar weakens that increase in the cost in Canada we have the same thing across in borders in Europe and that has been a larger drag in the second half, just due to currency movements and some hedged positions that we had and that's what you're seeing in the quarter we'll continue into the fourth quarter as well. But if you strip our Green Giant some of that transaction affects the underlying growth profitable growth we are seeing international is holding up quite well and that's we would expect to continue to see as we move into '17. Chris Growe: Thank you Don. Just to be clear the $0.08 FX you outlined is that include that's exclusive of the transaction affects. Donal L. Mulligan: That does not include any transaction that's all translation effects. Thank you for asking that. The $0.08 all translation. Jeff Siemon: Okay I think that's all the time we have. So, I know some of you were queued up and we couldn't get to your question. So, I am available all day on the phone, so please give me a ring and thanks so much for your attention and questions this morning. Operator: Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.