General Mills' CEO Presents at Consumer Analyst Group of New York (CAGNY) Conference (Transcript)

Feb.18.14 | About: General Mills, (GIS)

General Mills, Inc. (NYSE:GIS)

Consumer Analyst Group of New York (CAGNY) Conference Call

February 18, 2014 8:00 AM ET


Kendall J. Powell – Chairman and Chief Executive Officer

Christopher D. O’Leary – Executive Vice President, Chief Operating Officer-International

Donal Leo Mulligan – Executive Vice President and Chief Financial Officer

Sean Walker – President-Latin America Region


Christopher R. Growe – Stifel, Nicolaus & Co., Inc.

Christopher R. Growe – Stifel, Nicolaus & Co., Inc.

Thank you, good morning I’m Chris Growe the President of the CAGNY Organization this year, and on behalf of the CAGNY Board, I would like to welcome you in a bulker tone and the 43rd Annual CAGNY Conference. I’m pleased to kick off the conference and celebrate CAGNY’s 50th year since its founding back in 1964.

I know many of you may included the timing of this conference, could not have come in a better time considering the cold weather and snow dripping in the Northeast to Midwest so, and also meeting sunny skies always, hope this is better than my earnings estimates of my companies.

2014 is exciting year for the CAGNY Organization. We celebrate our golden anniversary. If you should have received one of these hats to commemorate the milestone for the organization. It was 50 years ago, when a group of food analysts got together to support a company presentation for investors, which occurred only infrequently at that time, that company was Green Giant, which ironically was a separate public company, who always been part owned by General Mills now.

CAGNY was the vanguard of the trends toward offering management access to investors and 50 years later the CAGNY Conference present the full suite of top consumer packaged goods companies offering unique forum for investors. We’ve record attendance this year speaking to the vibrancies of our organization.

I would like to thank Andrew Lazar, Bryan Spillane and Jon Feeney are our conference coordinators. They put a lot of hard work in putting the suite of the companies together or embedded them for their service year-in and year-out, made this about conference possible.

I would also like to thank all the companies, that are presenting this year and sponsoring so many activities and meals for our members, without your support this conference would not be possible.

I posted a few of housekeeping items on the screen, they’ve been running and they will keep running throughout. The Wi-Fi password is CAGNY, for those of you who have got a lot of questions on that, and just one note on our brochures, the small little card that’s going in your name badge, there was a misprint, Mondelēz today is at 12:30 and Philip Morris is at 1:45, just flip flop on that here, the brochure that was correct, so you are aware.

So without further ado, I'd like to kick off the conference and introduce our first presenting company. I am pleased to introduce Chairman and CEO, Ken Powell and General Mills. I would first like to thank General Mills for that excellent breakfast this morning. Please join me in thanking them for the sponsorship.

While the record books are a little fuzzy for CAGNY back to the 1960s, we had to reach out to Lenny Taliban [ph] to get some confirmation of this, we do believe this is General Mills' 43rd year presenting at the CAGNY conference since its founding. It is also its 43rd year of providing breakfast for all of us here at the conference. So thank you very much for that. So let me turn the podium over to Ken Powell to introduce his team and to provide an update on General Mills, their progress in generating strong revenue growth across both the US and international. Ken, to you.

Kendall J. Powell

Okay. Well, good morning to one and all. Thanks a lot Chris for the introduction. I appreciate it. A great pleasure to see you and to help celebrate CAGNY’s 50th Anniversary. So 1964 was a very good year and as our own Lucky Charms cereal is turning 50 this year as well. So, what a coincidence. And as I understand it, this conference has been going on for as Chris said, 43 years. I have it from Kris Wenker who has it from team Bel-Bus [ph] her predecessor in IR at General Mills at the early conferences took place in the hot tub of the Don Cesar Hotel in St. Petersburg. So I know that Lenny could collaborate that. Kris also says there are some people here today who will remember that, but she will not name any names.

Now the long running success of this conference reflects its great scope and timing. CAGNY gives investors a clear look ahead into the new calendar year across the consumer staples industry. At General Mills we’re looking-forward to and we like the growth prospects we see for 2014 and for the longer term.

Lately, we’ve read a number of equity research reports questioning the future growth prospects for branded food companies, everywhere from the U.S. to the EU to emerging markets.

Current conditions are challenging, in the latest quarter food industries’ sales trends in the U.S. and Western Europe had been weak and we see that in our business too, but we don’t share the general pessimism about long-term growth. We have very clear strategies for growing our top line in 2014 and beyond, these strategies begin with consumers needs what foods they like, where they shop and how they cook.

We’re particularly focused on four growing consumer groups and these are older consumers, millennials and multicultural families in the U.S. and middle-class consumers in emerging markets. There is plenty of sales growth to be had and we like the prospects for our global product categories and our leading consumer brands.

Now we are sustaining our companywide practice of Holistic Margin Management or HMM, these initiatives help us fuel our top line growth, protect margins and grow profits faster than sales overtime. And finally, our food businesses are strong cash generators, we intent to make disciplined use of that cash reinvesting some to fuel General Mills’ long-term growth while returning significant cash to our share holders.

This morning my colleagues and I would like to give you a more detailed look at the growth we’ve see ahead, I’ll begin with a perspective on our U.S. business, then Chris O'Leary, Chief Operating Officer for our international operation will cover our growth strategies outside of the U.S. and Sean Walker President of our Latin America Region will give you an in depth look at our growing business in Brazil, Don Mulligan our Chief Financial Officer will review our key financial strategies and I’ll provide some wrap up comments and then we’ll open the floor to your questions.

I also want to acknowledge three other colleagues here today, at the far end of the table is Kris Winker our IR Officer and behind the scenes are Penny Leporte and Jeff Siemon also from Investor Relations who put a lot of work into this presentation and organized this morning’s breakfast. So thanks to all of them.

Our presentation includes comments about the future that are based on our current views and assumptions. As noted in this slide, numerous factors could cause actual results to differ from our estimates.

So it’s been a tough winter for U.S. consumers and for the U.S. food industries sales, but as we look forward at calendar 2014, we’re seeing slow improvement in the consumer environment. Unemployment rates are declining, job levels are steadying and consumer spending is increasing.

Its important to remember that unlike some other developed markets the U.S. has population growth, it’s forecast at a little under 1% per year through the remainder of the decade. Several key segments of our population will show faster growth. The first is adults, 55 years and older, currently this demographics represents about 25% of the U.S. population.

By the year 2020 that will be 30% driven by aging baby boomers and the fact that people are living longer. These consumers are increasingly focused on health and wellness, they read ingredient labels closely and they look for package sizes tailored to one or two person households. Millennials are between the ages of 20 and 37 today, where older consumers are downsizing, millennials are upsizing; this is the consumer segment that’s starting families. As a matter of fact, by 2020 nearly two thirds of U.S. moms will be millennials, these consumers like to cook, they read labels too, looking for simple ingredients, they also like to experiment with different flavors and foods and they value variety.

U.S. multicultural consumers span all age groups. Today, they represent over one third of the U.S. population and that percentage is growing rapidly. In fact, by 2060 more than half of the U.S. population will be multicultural with Hispanics leading this growth. Hispanic consumers are family oriented and they value leading consumer brands.

As the phase of the U.S. consumer is changing, so is the mix of retail channels where they shop for their food. U.S. consumers spend around $640 billion annually on groceries, and on average they shop across five different channels and as you can see on this slide, online and natural and organic outlets are posting the fastest growth, but together they account for just 10% of the total sales generated by traditional grocery stores and less than 5% of food and beverage sales overall. The fact is, sales across all of these channels are growing and our sales force is working to build our business in every single one of these channels.

So let’s shift from where U.S. consumers shop to what they buy. Sales on the perimeter of the store grew the fastest last year, but consumers spend a vast majority of their food dollars in the center of the store, dry grocery is the single largest store segment, generating annual sales of nearly $300 billion in Nielsen measured outlets alone. Adding the refrigerated and frozen section and the center store generates around $400 billion in annual food sales growing at a low single-digit rate in the latest year.

And we are a big player in the center store, the 10 largest categories in which we compete drive more than $40 billion of consumer purchases per year, these categories have strong levels of household penetration and consumers shop them often. Our key product platforms are cereal, yogurt, snacks and convenient meals.

So let’s take a closer look at each of these categories starting with cereal. NPD, National Panel Dairy shows cereal is one of the top 10 foods in the United States and the number one choice for breakfast. It appeals to all consumer age groups with strongest popularity among kids and older adults. Cereal also has strong appeal with Hispanic consumers, especially those under 30. Cereal is low in calories, high in nutrition, it’s convenient, it’s a great value and it tastes really good. So Americans loves cereal.

The slowdown in category sales in volume isn’t a consumer issue, it’s due to insufficient product news and advertising by branded cereal competitors. Not them, it’s not those consumers, it’s us. New products are one source of category news and over the past five calendar years the number of new cereals in their share of category sales have held pretty steady, but new products don’t all sustain. We need more relevant new product innovation and more importantly news on established products is critical for category growth.

Consumer marketing is also key to category growth, over the past four years, cereal advertising has declined 4% and cereal has lost share of voice among food and beverage categories. Now at General Mills, we’ve increased our levels of advertising support on our cereal brands and that’s increased our cereal share of voice well above our share of market – our share of category dollar sales, we’re staying very focused on core brand renovation, new product innovation and strong consumer marketing to drive our top line growth in cereal.

We’re adding more gluten-free varieties to our Chex cereal line and retail sales for that franchise was up 6% in the latest 12 months. We launched Nature Valley granola with 10 grams of protein per serving and new Fiber One protein cereal started shipping in January, it delivers 10 grams of protein and 20% of the daily value of fiber per serving and this is just the start. We have more protein news coming later this year. We have a strong marketing program geared towards Hispanic consumers, including in-store events and product sampling and retail sales for General Mills cereal are outpacing category growth among Hispanic consumers.

Natural and organic cereals are showing good growth in a natural channel and in mainstream outlets too. We’re seeing even faster growth from our Cascadian Farm organic cereals across retail formats. And we’ve been raising the profile of our cereal advertising, lucky charms appeared during the GRAMMYs, we ran a Cheerios ad during the Super Bowl, several media journals ranked it among the 10 best ads of the game and had generated a lot of consumer and media buzz.

With our focus on health news, innovation and advertising support, we’ve been growing our net sales and gaining dollar share. We’re confident that this same recipe played out on a broader industry scale will renew category growth.

Now let’s turn to the U.S. yogurt category, which has been growing nicely over the past several years to exceed $7 billion today. This category has many segments and we compete in nearly all of them, consumers shop across the categories. For example, consumers who buy kid yogurt still make 60% of their yogurt purchases in other segments and Greek yogurt buyers purchase nearly 70% in other segments as well.

In the Greek segment, we believe the taste of our products is now a competitive advantage. Yoplait Greek 100 continues to post sales growth in its second year and we’ve recently added several new flavors. We’ve added new flavors to our Yoplait Greek blended line as well and a new ad campaign puts our taste head-to-head with the leading blueberry Greek yogurt brand.

While its early days, this campaign is generating a lot of media and consumer buzz, turns on our Greek yogurts are up nicely in recent weeks and our share has moved up to 10% in the latest period. On our core cup business, we still have work to do on Yoplait Light, but baseline units are growing again on original style of Yoplait as we’re seeing good performance behind our Swap One Snack campaign.

I should note that our yogurt varieties are performing well in U.S. food service channels as well. Net sales grew 13% through the first half of the fiscal year. In total, we’ve added 16 new yogurt SKUs in January including Yoplait Greek multipacks; Yoplait Light Mix-Ins and new flavors of Liberté, Méditerranée and Greek yogurts, clearly the road to restore growth in our U.S. yogurt business has been longer and slower than we anticipated, but we are on our way, our goal is to renew sales growth during 2014, I’m not sure we’ll make it in fiscal 2014, but I expect this to make it during the calendar year.

Let’s turn to the snack category where many consumers today are looking for Better for You options. Our grain snack bars leverage this trend, in fiscal 2013 retail sales for our Nature Valley and Fiber One bars reached $1.2 billion and we gained nearly 1.5 points in dollar share. So far this fiscal year we’re up another four share points and that’s in just Nielsen measured outlets. Breakfast biscuits are the latest addition to the Nature Valley brand, they provide 26 grams of wholegrain, 5 grams of protein and 4 grams of fiber per serving, and we recently introduced Fiber One meal bars with 10 grams of protein and 9 grams of fiber per bar.

Retail sales for our natural and organic snacks are growing at a double-digit pace across traditional grocery and the natural and organic channels combined and our snack sales are growing at a double-digit pace in convenient stores as well. Remember these sales are captured in our convenient stores and food service segment. Recent new items include Chex chips, Wheaties Fuel bar with 20 grams of protein and Nature Valley nut clusters, made with nuts, seeds and dried fruits.

Our fourth key U.S. product platform is convenient meals; we have a number of big product lines here. Our Helper dinner kits compete in the Add to Meat segment of the dry grocery, dry packaged dinners category. We’ve been focusing on our Chicken Helper varieties, leveraging the fact that chicken is now the number one protein served at family dinners in the U.S., and we’ve been seeing improving share trends on our total Helpers line.

Millennial are driving growth of the Mexican category and Old El Paso is their favorite brand. Our advertising promotes the convenient yet fresh aspect of these dinner kits. Retail sales for Old El Paso are up 3% so far this fiscal year and we’ve gained nearly half a point of dollar share. Progresso soup is another easy meal option perfect for smaller boomer households. Sales are up this year on top of a strong increase last year; we recently announced a partnership with Mayo Clinic promoting our lines of Heart Healthy soups.

We support our U.S. food business with strong levels of advertising, over the past five years our U.S. media investment has grown at an 8% compound rate, while we are the fourth largest U.S. Food and Beverage Company, based on Nielsen measured sales, we’re the second largest food and beverage advertiser. Let me show you three recent ads, I have mentioned today.


Trust me that ad generated a lot of good buzz. Since 2008, our U.S. media spending has grown nearly 50% and the mix has changed. TV advertising is still the largest part of our advertising budget, but we’ve significantly increased our use of digital media and we expect this trend to continue.

So in summary, we see many top line growth opportunities in our home market. The U.S. population is growing and we’re focused on the fastest-growing consumer segments. U.S. consumer shop for food in many different retail channels, our sales team brings capabilities that help drive growth across all of these formats.

Our leading brands compete in food categories that matter to U.S. consumers. We’re bringing health news, increased convenience, great case and superior product quality to our categories and we’re supporting our product innovation with high levels of consumer advertising. These are the brand building activities that drive category sales.

Looking forward, we see continued low single-digit net sales growth for our U.S. business. We’ll target growth at or above the food and beverage industry sales growth and we expect our U.S. operating profits to grow faster than our sales overtime. Now not so very long ago, this U.S. outlook would have been the whole story for General Mills. Today, we have significant business outside the U.S. and it’s growing rapidly.

To tell you more, I’ll turn the program over to Chris O’Leary. Chris.

Christopher D. O’Leary

Thank you very much Ken and good morning everyone. General Mills international presence has expanded rapidly. Cereal partners’ worldwide joint venture with Nestle established in 1990 was our first significant foray outside North America and the acquisition of Pillsbury in 2001 gave us a wholly owned base to build on. By 2008, we had $3.8 billion in net sales outside the U.S., $1.2 billion of which was our proportionate share of our joint ventures.

Over the last five years, we’ve driven strong growth on these businesses. 6% compound on the base business, 4% including joint ventures. We’ve also made two sizable acquisitions with Yoplait and Yoki. These businesses have added almost $2 billion in net sales to our portfolio and as a result today, over one-third of General Mills worldwide net sales are generated outside the United States.

Our strategy has been to focus on five global platforms where we have scale, technical expertise and strong brands: ready meals, yogurt, ice cream ready-to-eat cereals and snacks are all large global categories growing at attractive rates. More than 80% of our international sales in fiscal 2013 came from these five global platforms. I expect the percentage will grow as we maintain our strategic focus on these businesses.

Let me show you how we’re generating top line growth across these platforms in both developed and emerging markets. I’ll start with cereals. Worldwide category sales had grown by $4 billion in the past five years and Euromonitor projects sales will grow by double that amount over the next five.

Over 55% of cereal today is sold in just six markets the U.S., Canada, U.K., Ireland, Australia and New Zealand. Retail sales in these big markets are expected to grow at a low single-digit rate, but cereal sales in the rest of world are forecast to grow at 7% compound and by 2018 there will be more cereal sales in the rest of the world than in those six highly developed markets I mentioned a minute ago

Cereal Partners Worldwide is the number two cereal company outside North America, CPW generates over $2 billion in net sales across more than a 130 countries, it has nearly 5,000 employees, a global network of factories and a healthy 22% value share of the category. Its strong global brands include Fitness, Nesquik, Cheerios and Chocapic.

CPW is nicely profitable and is a growing source of cash return to its two parent companies, CPW is focused on three main strategies to drive top line growth, it is investing in core brands that have global scale, driving efficiency in manufacturing, marketing and research and development. Second, CPW is bringing health news and innovation to the category. And finally, CPW is building leading share positions in the world’s emerging cereal markets.

In fact, CPW holds the number one share position in many important emerging markets from South East Asia to Central and Eastern Europe to Latin America. I will give you two quick examples of how we are driving category growth in these markets. In Indonesia we’re teaching moms about the health and nutritional credentials of the cereal category, our advertising compares the nutrition of a cereal breakfast to common local choices.

Last February Cereal Partners Indonesia partnered with National Association of Nutritionists to promote the first ever national breakfast week. This initiative helped drive retail sales growth over 30% for CP Indonesia and increased market share by a 150 basis points to an impressive 84% of the category.

Cereal can deliver on the consumer need for weight management solution as well, in Brazil we’re leveraging all of the science that shows people who make cereal a regular part of their breakfast have lower body mass indexes. We invested in a heavier plan for the Nesfit franchise in Rio a region where whose consumers over index on weight management interest.

The results were encouraging Nesfit volume doubled in Rio during the campaign growing twice as fast as the rest of the market. In total, Cereal Partners Brazil retail sales grew 9% for calendar 2013

Looking forward CPW is well position to capture an increasing share of the expanding cereal category, we have the global brands and infrastructure to efficiently manufacture and market cereals around the world. We have leading positions in emerging markets, which are expected to drive the majority of category sales growth going forward.

Dave Homer the new appointed CEO is an experienced International leader, he spent the last 10 years running our Australian and Canadian businesses Dave and the CPW team are excited about the prospects for continued sales and profit growth in the coming years.

Now let’s turn to the business that we report through our international segment. In the latest four quarters which captures the full 12 months of Yoki in Brazil, net sales for our international segment totaled roughly $5.5 billion, balanced across four geographic regions.

Operating profit for the segment exceeded $500 million during this time. Our business mix is a growth advantage. Several of our key product lines still have relatively low levels of household penetration, even in our developed markets. As a result, we see terrific opportunities for our brands.

Let me give you a few examples. In Canada, we’re addressing consumers’ interest in better-for-you snacks in protein with the launch of Nature Valley and Fiber One protein bars. This is just the latest example of how we are leveraging our phenomenal U.S. snacks innovation pipeline to drive growth in our international market.

Since fiscal 2008, our Canadian grain snacks business has grown from a 24 share to a 28 share today fueled by the addition of new varieties. This fiscal year-to-date retail sales for our Canadian grain snacks are growing at a 4% pace. We’re not behind on Greek yogurt in international markets and in fact, we are helping to lead the development of this segment, in Canada, in the U.K. and in France.

In Canada, we’ve built a 35% share of the Greek segment with our Liberté and Yoplait product lines. We introduced Liberté Greek yogurt in the United Kingdom last spring and we are just now turning on the media support. At last month, we started shipping Yoplait Yopa! In France where the high protein yogurt segment doesn’t yet exist.

We are accounting on Greek to become as larger portion of the yogurt category in these three markets as it has in the U.S., but we do believe there is growing consumer interest in higher protein yogurt. So Greek should be a nice growth driver for Yoplait in the coming years.

Old El Paso Mexican products are another key business for us in developed markets. The Mexican category generates over $600 million in retail sales in the U.K., France and Australia alone. Old El Paso is a clear market leader and year-to-date, our retail sales are up nearly 6% in these markets.

We are bringing more innovation in the second half of the year with the rollout of our success Stand 'N Stuff Soft Flour Tortilla line from the U.S. Outside the U.S., the world’s food isle [ph] of the grocery store is underdeveloped, household penetration is low, even for Mexican food, which is the largest category. We think consumers’ growing interest in global flavors represents an exciting opportunity for us to lead development of the world foods segment.

Let me turn now to emerging markets where we see an encouraging consumer trends for packaged foods manufacturers. Across China, Indonesia, India and Brazil, the number of middle-class household is projected to grow by almost $200 million during this decade. By 2020, it will be mostly urban with a high percentage of women in the workforce. These consumers are seeing their disposable income grow and they are increasingly pressed for time. So they are looking for convenient food solutions with strong health credentials and great taste.

When I talk about our emerging market present today, I’m primarily talking about China and Brazil, but as we look forward, we are interested in three other regions as well. Our Middle East and North Africa business is small, but fast-growing. Betty Crocker mixes make up about half of our business here and recent innovation like No-Bake Cheesecakes help drive constant currency net sales growth of 24% for the region in fiscal 2013, we are still in the early stage of development in India with the in Parampara, Häagen-Dazs and Pillsbury brands. With a combined population of more than 1.8 billion and a burgeoning packaging food industry these three geographic are highly attractive and we believe our global platforms fit well here.

Christina Law Vice President and General Manager for the region and her team are actively investigating expansion opportunities for General Mills in these markets. China is our largest emerging market business today, it’s made up primarily of Häagen-Dazs super premium ice cream, Wanchai Ferry frozen foods, and snacks marketed under the Bugles and Trix brands.

There has been widespread media coverage of a slowing in China’s overall economic growth, but we are not seeing much impact on our business, through the first half of this fiscal year our constant currency net sales in Greater China grew by double-digits. Our Wanchai Ferry dim sum lines, is the ultimate convenient meal solution for busy Chinese consumers we are the market leader in dumplings the largest segment of the category and we continue to innovate there with our recent regional favorites line.

We are also bringing first to market breakthrough innovation with our Crystal Tao Yen [ph] launch which has helped us grow share in the second largest segment of the category. In total Wanchai Ferry’s constant net sales through the first half of fiscal 2014 grew by 10% in our original cities defined as where the brand has been present for five years or more, sales are growing even faster up 18% in cities that we’ve recently entered.

Häagen-Dazs is our largest business in Greater China; the brand represents an affordable luxury in a market where international luxury brands are extremely popular. Our Häagen-Dazs shops build brand equity and awareness. The Nandong Shop in Shanghai our largest in Greater China has been opened for over 10 years if sales in this shop still grew 6% in constant currency to over $2.3 million in fiscal 2013. In total constant currency same-store sales for our Häagen-Dazs Shops in China grew by over 8% per year from 2010 to 2012 and another 6% in fiscal 2013.

In this year’s first half, same-store sales growth grew 7%, once the Häagen-Dazs equity has been established in a city; we start to develop the retail side of the business. The growth opportunity here is significant, in the first half of fiscal 2014 constant currency net sales for Häagen-Dazs retail grew 19% in original cities and 47% in cities entered within the last five years.

We see plenty of growth ahead for both Wanchai Ferry and Häagen-Dazs, we can increase brand penetration and retail distribution in our existing cities and we can amplify that growth by expanding to new cities. We also see opportunities to expand beyond our current categories in China, as we mentioned before the yogurt market in China is attractive to us. Category sales have doubled in the last five years to $8 billion and are projected to more than double again, in the next five years.

We’ve been working for a number of years with our team in China and our partner Sodiaal, to remind you Sodiaal is France’s number one milk cooperative to secure a high quality milk source in China. We have now broken ground on a new yogurt factory in Eastern China, once our factory is up in running we plan to follow the Wanchai Ferry model, start small in a few cities, prove out the business model and then expand.

We have the management talent, the national sales reach and the distribution capabilities in China to build this business. Our Greater China team led by Gary Chu has delivered many years of strong double-digit net sales growth in constant currency. They are on track for another year of double-digit gains in fiscal 2014 and we see this pace continuing over the next several years. Operating profits will benefit from greater scale and from HMM initiatives. In total, the growth outlook for Greater China is very bright.

To wrap up, I feel great about the strategic focus of our international business. in developed markets, we are in advantaged on-trend categories with enviable growth profiles. In emerging markets, we see significant growth opportunities with the middle-class consumers. Our growth model continues to be high single-digit growth in constant currency net sales with operating profit growing faster than sales.

Now to go deeper on our newest emerging market business in Brazil and in Latin America, let me turn the microphone over to Sean Walker.

Sean Walker

Thanks Chris. Bom dia, good morning everyone. There are three key messages I want you take away from my remarks this morning. First, Brazil is an attractive market, of course it has its challenges, but we see strong growth today and the long-term trends bode very well for the future. Second, the Yoki acquisition gave us a solid business in Brazil; we are now playing from a strong position with trusted brands and a nationwide infrastructure. Finally, we are leveraging that infrastructure and bringing renovation and innovation to the brands so that we can accelerate growth in this business.

General Mills’ business in Latin America is centered on Brazil, which generated over half of our fiscal 2013 net sales in the region. Now remember that since we completed the Yoki acquisition on August 1 of 2012 last year included just nine months of Yoki’s results. So on a pro forma basis, Brazil represents an even greater percentage. Outside of Brazil, we have small businesses in Venezuela and Argentina as well as Mexico and we sell to distributors in other markets in the region.

Venezuela and Argentina are difficult markets right now, with high levels of inflation, but we believe these issues are cyclical and will improve overtime. Our job is to make sure that we have a balanced portfolio so that we can capitalize on growth opportunities when they arise. In recent years, Brazil has been a key economic driver in Latin America, balanced with abundant natural resources in commodities, the compound annual growth in GDP over the last five years had been a bit more than 3%. Of course as you know, the growth has slowed in the last couple of years. But internal consumption remains strong.

This is driven in part by the emergence of the Brazilian middle-class, which increased by 20% between 2005 and 2012 and now represents over half of the population. The rise of the middle-class has coincided with the rise in disposable income. Average monthly income almost tripled between 2006 and 2012. Availability of credit has also grown significantly during this time. These macro trends are driving behavioral changes in the Brazilian middle-class.

Households are evolving with more women being in the workforce. Consumers are increasingly busy, but they still have a deep desire to remain connected to loved ones. Busier lives comes greater interest in convenience and snacking and easier access to food we see if we’re beginning to think about health and wellness options that may – they may not have thought of in the past. Little packaged foods sales in Brazil grew 9% for year over the last five years and the industry is expected to add over $75 billion in sales between 2013 and 2018.

In 2013, we saw low single-digit growth in packaged foods volume, which outpaced population growth as more consumers added non-basic foods to their shopping baskets. Food prices grew high single-digit, driven by raw material inflation. In total, packaged foods value sales grew by double-digit in 2013.

So let’s talk a bit about our businesses in Brazil. Sales in Yoki’s categories have been keeping pace with a broader packaged foods industry. Our top six categories represents almost $5.5 billion in retail sales and we hold a number one or at number two position in five of these categories.

To simplify things, we group our product lines into three major platforms. Half of our net sales comes from meal products; these include side dishes, seasoning flowers and grains and soups. Another 35% comes from snacks, includes popcorn, salty snacks and nuts, final 15% with soy beverages and powered drinks.

Yoki and Kitano are trusted local brands with household penetration of over 90% and 70% respectively. In addition for brand strength, Yoki has built important infrastructure in Brazil. Our national supply chain includes a network of seven factories and 11 distribution centers across the country. Our sales force is another key strength, the retail trade in Brazil has fragmented with over half of food and beverage sales going through the combination of 60,000 small independent stores and another 300,000 even smaller stores serviced by wholesalers and distributors.

Both companies have the capability to call on the key multinational accounts and large local chains, but our team’s national reach with over 1000 sales people gives us an advantage to directly serve many of these small independent stores.

So you are probably wondering how the business is doing since the acquisition. Net sales in the first 12 months under General Mills’ ownership totaled over $550 million, this reflected growth of nearly 20% in constant currency, the gross margins improved by 200 basis points over that timeframe.

While there has been an overall economic growth slowdown in Brazil, we haven’t yet seen it in our business net sales in the most recent quarters grew by 19%. We’ve been able to retain key leadership, which was critical to the success of our integration and we’ve strengthened our customer relationship.

Capitalizing on General Mills experience what the global key accounts, we are truly leveraging the best for both companies to accelerate growth; this is playing out in major channel sales where our business in aggregate is going at an even higher rates than our categories.

One top line growth opportunities we identified early on was improving distribution across our categories. For example, we’ve worked with key customers to implement standard planograms for the side dish category, improving assortment and making the category more productive distribution of the Batata Palha which is the popular potato-based side dish and one of the biggest lines in our portfolio is up four point versus a year ago as a result of that.

Over a number of years, the Yoki team has developed a highly successful in-store merchandising event Festa Junina the June festival. Today, we’re leveraging General Mills’ global sales expertise to develop a year around calendar of consumer driven merchandising events.

Beyond increased distribution in merchandising, we believe we have an opportunity to accelerate growth to a geographic expansion in the North East of Brazil this is the country fastest growing region with over $50 million people. In many ways it’s an emerging market within an emerging market, we have a $100 million business there today and we’re confident we can expand our participation in this part of the country.

Over the past year, we’ve spent a great deal of time going deep with our consumers and has led to some exciting growth ideas. For example, with increasingly busy lives Brazilian moms are looking for ways to bring their families together and with an increase in microwave penetration in Brazil, a number of moms are seeing popcorn as a trigger for together time.

Yoki is tapping into this growth idea with our Exposition of Joy campaign playing of the great sound and smell that comes from making popcorn. Results have been terrific; our market share was up 200 basis points versus the prior year and now stands at nearly 72% of category sales.

We’re talking a fresh look across our portfolio for renovation opportunities. In meals, we’re working to extend shelf life and expand usage and flavors for our market-leading Farofa side dish line. We’re also refreshing packaging and reformulating Kitano seasonings. In snacks we’re leveraging our technical expertise with corn hybrids to increase the volume of popped kernels for Yoki popcorn, and we are introducing a new pop-up bowl package. We’ve also reformulated our peanut snack business improving product quality, while delivering a 15 point margin improvement. In Beverages we’ve increased the concentration of our powdered beverage line, reducing packaging for consumers while savings, shipping costs for ourselves.

And we’ve broadened our soy beverage line to include local flavors, beyond renovation we’ve been aggressively working to bring new consumer driven innovation to market. Our first launch was Kit Fácil, a Brazilian version of the Helpers dinner kit, this idea addresses needs of time crunched working middle class moms. Early results have been positive, but because dinner kits is a new category in Brazil, it will take time to educate consumers and build household penetration.

In March, we are launching a new line of cakes, cookies and brownies co-branded with Yoki and Betty Crocker. Think Betty Crocker done in a Brazilian way, cake mixes is nearly a $300 million category in Brazil growing at a 9% compound growth rate. Our new line tested significantly better on taste and texture against the current offerings in the market. We think sweet snacks can become another strong growth vehicle for us in Brazil.

We are also leveraging our global HMM tool kit to go after a wide variety of margin improvement opportunities, by driving positive mix through margin accretive innovation and SKU rationalization. We’ve improved efficiency and lowered costs by harmonizing the ingredients used in our salty snacks business, we’ve redesigned manufacturing systems and work to minimize wastes across our logistics network and we’ve partnered with our peanut and manioc suppliers to improve production methods.

Now historically Yoki’s gross margin was in the low 20% range reflecting a portfolio of basic foods. I mentioned earlier that this improved by 200 basis points in the first year of ownership, and we are targeting our gross margin in the high 20s, by fiscal 2015. As we build our HMM pipeline we see opportunities for continued margin expansion long-term. So to summarize my comments on Yoki and Brazil, we are off to a good start post-acquisition we are bringing all of General Mill’s global capabilities to the market and we are driving renovation and innovation across the portfolio. As we look forward, we see excellent prospects for continued growth in these important markets.

For our total Latin America business we have strong momentum, first half net sales grew 73% in constant currency, including three incremental months from Yoki and we’re well on track to reach our goal of $1 billion in net sales, in fiscal 2014. Looking forward, we are targeting high single digit constant currency net sales growth and operating profit growing faster than sales. This should translate to a significant increase in earnings and cash flow coming from Latin America in the coming years.

Now let me turn the microphone to the man who will tell you what we are going to do with all this money. Our CFO, Don Mulligan.

Donal Leo Mulligan

Great, well thanks Sean. And hello everybody, While you have heard great deal today about our plans to use consumer focus, product innovation marketing to fuel top line growth in 2014 in the longer term. And now I would like to tell how we expect our sales building efforts to translate into earnings growth, operating cash flow and increasing return on capital.

Let me begin with a quick update on our current fiscal year. We reported our first half results back in December, our bottom line – on the bottom line these results were broadly consistent with our plans. However, sales growth across our categories in developed markets is slower than we forecast and the headwind from foreign exchange has become stronger than our original expectations.

On the positive side, administrative expenses are well controlled and interest rates had been quite low. So those two expenses are tracking lower than expectations. As Ken noted earlier, our sales trends in the latest quarter mirror the generally weak results reported across the food industry. We’ll report our third quarter results on March 19. What I will say today is that we still expect second half adjusted diluted EPS to grow at a double-digit rate that will driven by the fourth quarter where our input cost inflation will be well below year ago levels.

We also expect the quarterly tax rate and the number of shares standing to be well below last year’s fourth quarter levels. For 2014 in total we continue to see our adjusted diluted EPS between $2.87 and $2.90. As we noted in December, currency devaluation in Venezuela will likely put us at the low end of that range. You have heard us outline the consumer trends and the business strategies that underpin our growth plans looking forward.

Our long-term growth expectations follow this model, which calls for mid single-digit growth in segment operating profits. As many of you know we use holistic margin management to drive cost saving actions and reinvestment in top line building activities that will fuel this mid-single digit profit growth. HMM isn’t a new initiative, we adopted this business model back in 2005 and it’s a proven success for General Mills. We expect HMM to yield strong continuing benefits in the years ahead.

Remember HMM isn’t about actions like closing plants or eliminating jobs, HMM is a focus on continuous improvement and eliminating costs in our business activities that aren’t adding value to consumers. Back in 2010, we set a goal to achieve accumulative $4 billion savings in HMM across our cost of goods sold over this decade. We are well on our way to meet this objective, in this year’s planned HHM initiatives add up to record level of annual savings.

These HMM savings our first line defense to offset input cost inflation and protect gross margins, without a doubt commodity cost inflation and volatility of have ranked among the packaged food industries biggest challenges in recent years. In our case, supply chain cost inflation has averaged 5% in recent years, but it was double that rate two years ago. This volatility led to some uneven performance across our peer group, for General Mills, gross margin excluding mark-to-market valuation effects is below the level realized in fiscal 2011, for roughly 40% of that decline is due to change in our business mix as we added Yoplait International and Yoki to our portfolio. HMM was quite effective in protecting our base business margin through this period and we see HMM as a powerful ongoing source of cost savings in the years ahead. And HMM isn’t just a supply chain discipline, it’s a companywide practice.

Let’s look at our SG&A trend. Now we expect media and R&D expense to grow overtime. Those are brand building activities, exclude those investments from total SG&A and the remaining expense was roughly 13.5% of sales last year. That’s down over the last two years and a slight uptick in 2012 reflects the pension expense headwind in our SG&A that year.

Some of you track SG&A cost efficiency across our peer group and you know that we stack up pretty well. Beyond HMM, the restructuring program, we initiated at the end of fiscal 2012 will contribute some incremental savings in this fiscal year. We expect these savings plus our HMM efforts to help hold 2014 growth in non-brand building SG&A expenses to a rate at or below our net sales growth and we’ll stay focused on SG&A efficiency in 2015 and beyond.

Now let’s turn to cash flow. Over the last three years, cash flow from operations has ramped up nicely and we expect to show another year of growth in 2014, reflecting anticipated earnings growth and a continued strong working capital management. We’ll stay disciplined about how we use our cash flow, simply put balance need to make well considered investments designed to fuel General Mills’ growth with our commitments to return significant cash to shareholders.

In terms of investment needs, we anticipate our capital spending will continue to average roughly 4% of sales. Our capital budget includes projects for growth capacity, ongoing maintenance and productivity savings. In fiscal 2014, we continue to estimate capital investment will total roughly $700 million.

Our go-forward growth plans include the potential of investing in acquisitions. We have nothing to report today, but we are looking with a tight focus on businesses aligned with our five global product platforms and in select geographic regions where we see a benefit from greater scale.

So we will invest to fuel long-term growth of our business, but we also intend to return significant cash to shareholders. We see both dividend growth and stock repurchases as key components of our long-term shareholder return model. Now we are a recent to converts to the idea of attractive dividend yield. General Mills and its premise has predecessor firm have paid dividends without interruption or reduction for 115 years. This year’s annual dividend rate represents a 15% increase and at recent stock prices the yield at over 3%. We expect dividend to grow with earnings overtime.

The result of our ongoing share repurchase program is to reduce diluted shares outstanding by an average of 2% per year. For fiscal 2014, we’ve already achieved a 2% reduction with purchases made to-date. We’re getting a lower cost basis that we planned, so the full-year reduction might be closer to 3%. And looking forward, we continue to target a 2% average annual net reduction in our diluted share count overtime.

We expect sound capital stewardship and earnings growth result and increasing return at our average total invested capital. In 2012 and 2013, new acquisition and their immediate addition to our capital base interrupted the growth trends in our ROC, but in 2014, we expect ROC to meet or exceed last year’s level. This performance reflects another strong year of working capital management. Over the last three years, we’ve reduced four working capital expressed in days outstanding by a significant amount and we are on track to further reduce working capital days in fiscal 2014.

We reinforced our commitment to ROC improvement and long-term sales and earnings growth in our compensation system. Annual incentive pay at General Mills is driven by a corporate rating for the year that rating is returned by performance against four key metrics equally weighted. We believe these are the key drivers of value creation for shareholders. all of us at General Mills are working to together to deliver top results on these metrics.

With that let me turn the microphone back to Ken, who will summarize our key messages for today. Ken.

Kendall J. Powell

Okay. I’ll be very, very brief and thank you Don. you’ve heard our thoughts on the growth outlook for General Mills, while current food industry growth is subdued, we do see clear drivers of better performance as we look forward. our portfolio has well positioned in growing markets and great food categories with strong consumer brands. there’s plenty of growth to be had, just it’s our job to go out and get it and we’ve shared our plans and strategies for doing just that. We believe prospects are excellent for us to generate continuing growth, consistent with our long-term model and we believe that that growth will result in superior returns to investors in General Mills in the years ahead.

Now Chris, I know we have gone on quite a bit of time. do you want us to take a question or two here or do you want to…

Christopher D. O’Leary

One question, we’ll go to the break-out session. One question.

Kendall J. Powell

Okay. Yes, we’ll have having one. Thank you.

Question-and-Answer Session

Unidentified Analyst

Do you hear me? Hi, I wanted to know, you have made some bulk statements today about expanding more aggressively internationally, but I think you’ve also said and I think you’re kind of implying that U.S. retail may not grow operating faster than sales this year. So I guess what I’m trying to figure out is, as you invest more aggressively internationally what is your willingness to maybe – are you still able to deliver high single-digit EPS growth with an algorithm, because if developed markets continue to kind of operate in a flat fashion, you’re buying lower margin businesses overseas that require a lot of investment in emerging markets? so how do you balance those two things off?

Kendall J. Powell

So the U.S. and North America is our – still our core market and it's essential for us to be successful there. We’re very, very focused on doing that. I think what you’ve heard today is that we’re acknowledging that in developed markets generally right now as a result of economic dislocation over the last several years, unemployment is still high, income growth is very slow, and so there are macro challenges. but fundamentally as we look out over the next several years, certainly in the U.S., we see the economic situation improving, we see population growth, we see many opportunities for innovation both in terms of the consumer groups in the U.S., we talked about millennials, we talked multicultural and these are all places where we’re applying effort and seeing results so we see many opportunities out there.

And we also see many opportunities in our categories, whether it’s high growth in yogurt, high growth in snacking behavior. So our view is, things are going to continue to improve, we are going to see performance improve in our core market in the U.S., we are going to see differential performance internationally and you add all that together and we are very committed to that long-term growth model.

But we continue to look at tuck-in opportunities around the world; we think that that’s going to be an important part of growth Chris commented on areas of interest for us internationally. You’ve seen us make acquisitions in the U.S. particularly in that smacking arena with products like Larabar and Food Should Taste Good and so you know and it’s a reason why they are all in that snacking space. So we’re very clearly I think on where we see the growth and we’ll continue to pursue at those kind of opportunities.

Christopher R. Growe – Stifel, Nicolaus & Co., Inc.

Let’s leave it there and thanks again General Mills for your sponsorship of breakfast this morning and your presentation. Thank you.

The Q&A will continue in the breakout session right next door.

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