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General Mills (NYSE:GIS)

Q1 2013 Earnings Call

September 19, 2012 8:30 am ET

Executives

Kristen Smith Wenker - Vice President of Investor Relations

Donal Leo Mulligan - Chief Financial Officer and Executive Vice President

Jonathon J. Nudi - Vice President and President of Snacks Unlimited

Kendall J. Powell - Chairman and Chief Executive Officer

Analysts

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Andrew Lazar - Barclays Capital, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Priya Ohri-Gupta - Barclays Capital, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the General Mills Fiscal 2013 Results First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, September 19, 2012. I would now like to turn the conference over to Kris Wenker, Vice President, Investor Relations. Please go ahead, Madam.

Kristen Smith Wenker

Thanks, operator. Good morning, everybody. I'm here with Ken Powell, our CEO; Don Mulligan, our CFO; and Jon Nudi, who is President of our U.S. Snacks division. I'll turn the call over to them in just a minute.

First, I've got to cover my usual housekeeping items. Our press release on first quarter results was issued over the wire services earlier this morning and is also posted on our website if you need a copy. We've posted slides on our website, too, that supplements today's prepared remarks. These remarks will include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists factors that could cause our future results to be different than our current estimates.

And one last note for me, we provided a data page with historical sales and growth rates for our newly organized U.S. Retail division and International region. You can find that data page under the Investors section of our website.

And so with that, I'll turn you over to my colleagues, starting with Don.

Donal Leo Mulligan

Thanks, Kris, and hello, everyone. Thank you for joining us this morning.

Slide 4 summarizes our results for the quarter. Sales totaled $4.1 billion, up 5%, and segment operating profit increased 6% to $769 million. These results were led by our International segment, including contributions from acquired businesses. Net earnings totaled $549 million, and diluted earnings per share were $0.82 as reported. These results include a net increase in the mark-to-market valuation of certain commodity positions in grain inventories, along with the one-time tax benefit and restructuring charges. Excluding these items affecting comparability, our adjusted diluted EPS would be $0.66. This was a bit better than we planned, thanks to strong international performance that benefited operating profit and contributed to a lower underlying tax rate.

Slide 5 shows the components of our net sales growth. On an as-reported basis, net sales increased 5%, with growth driven by acquisitions. Pound volume contributed 9 points of growth in the quarter, sales mix and net price realization subtracted 2 points of sales growth, and foreign exchange also reduced net sales by 2 points. Excluding acquisitions, net sales were 1% below year-ago levels as reported and up 1% in constant currency.

Slide 6 details net sales performance for our newly organized U.S. retail divisions. In total, net sales declined 1%, including the impact of merchandising spending to support new item launches and sharper price points on certain established products. Pound volume was 2% lower in the quarter. This was a sequential improvement from the previous quarter, and it included steady improvement through the last 3 months.

Sales for our Bakeries and Foodservice segment declined 2% in the first quarter. Pound volume was up 2%, but that growth was offset by negative price realization mix. Hot breakfast items, snacks and baking mixes led our sales performance in the quarter.

As shown on Slide 8, our first quarter international net sales grew 36% on a constant currency basis, with growth across all 4 regions. In Canada, sales increased 28%, including the acquired Liberté yogurt business. Sales for the region combining Europe, Australia and New Zealand increased 51%. This top line performance reflects the addition of Yoplait International and good gains by Nature Valley in the U.K., Häagen-Dazs in France and Old El Paso in Australia. Sales in the Asia-Pacific region increased 20%, led by China. In the Latin America, constant currency sales increased 20%. This was before Yoki, which will begin contributing to General Mills' sales and operating profits in our second quarter. Excluding acquisitions, international constant currency sales increased at an 8% rate in Q1.

In the first quarter, our underlying gross margin declined 40 basis points to 38.2%. This excludes the impact of mark-to-market valuation for certain grain inventories and commodity hedges we'll use in future periods. The addition of Yoplait International accounts for the majority of the underlying gross margin decline. The remainder reflects higher input cost. And while grain costs have gone up this summer, we're still estimating 2% to 3% inflation for General Mills in fiscal 2013, well below last year's 10% inflation rate, and we're now roughly 75% covered on our commodity needs for the fiscal year.

Slide 10 shows our first quarter operating profit growth split up by segment. U.S. Retail profit was 2% below year-ago levels, nearing the volume trend. Advertising expense was down 13% in the quarter as our marketing spending was weighted towards promotional activity this period. International profit increased 56%. That includes incremental contributions from Yoplait and a 17% increase in advertising spending. Excluding acquisitions, profit still increased at a double-digit rate. Bakeries & Foodservice profit grew 10% in the quarter, reflecting pound volume growth and higher grain merchandising earnings.

After tax earnings from joint ventures were lower in the quarter, primarily reflecting input cost inflation and unfavorable foreign exchange for CPW. On a constant currency basis, CPW sales increased 1% with double-digit sales growth in emerging markets, largely offset by category weakness in Western Europe. Constant currency sales for Häagen-Dazs Japan grew 4%, led by new products and distribution gains.

Completing our review of the income statement, corporate unallocated expenses, excluding mark-to-market effects, were up $11 million in the quarter, primarily due to higher pension expense. The effective tax rate for the quarter was 22.7% as reported, well below last year, due to a one-time non-cash tax benefit from the restructuring of a subsidiary, which resulted in a reduction of deferred tax liabilities. Excluding items affecting comparability, our tax rate was 31.4% this year compared to 32.4% a year ago. We still see our full year underlying tax rate running at about 33%, and average diluted shares outstanding were essentially flat in the quarter. For the full year, we continue to target a net reduction in average diluted shares outstanding.

Turning to the balance sheet. Let me first answer a likely question. The large increase in cash on our balance sheet is the funding for Yoki. We funded $851 million of the $940 million purchase price with cash. And since we report our Brazil business on a 1-month lag, this cash was still reflected on our balance sheet at the end of the quarter. With the Yoki acquisition closed and the maturity of a long term debt note earlier this month, our cash balance today has returned to a more normalized level. Now in a quarter where net sales increased 5%, our core working capital declined 4%. Our working capital efficiency continues to translate into improved operating cash flow. Over the last 5 years, our operating cash flow has increased at a 7% compound rate, and growth in operating cash flow accelerated to 11% this quarter.

So with the first quarter completed, we're on track to achieve our 2013 targets. We expect to deliver mid-single-digit growth in net sales and segment operating profit on the base business, with Yoki Brazil and Yoplait Canada contributing 9 months of incremental sales and profit this year. We expect to generate adjusted diluted earnings per share of approximately $2.65. As a reminder, our EPS guidance excludes mark-to-market effects, restructuring expense, acquisition integration cost and this quarter's one-time tax benefit.

With that, I'll turn the microphone over to Jon for an update on our U.S. Snacks business. Jon?

Jonathon J. Nudi

Thanks, Don. Hello, everybody. It's a pleasure to be on the call this morning. It seems that there's been a lot of investor interest in snack businesses lately. So I'd like to give you an update on our U.S. Snacks portfolio and the growth that we're seeing on our brands.

U.S. consumers are snacking more than ever, and consumers have changed what to grab for a quick refuel. Instead of mindless munching, consumers are increasingly looking for options to provide real nutritional benefits. So it's no wonder that Better-for-you snacks is the fast-growing segment in the Snacks category. We define this segment using a variety of Nielsen-measured categories. And retail sales increased 6% fiscal 2012 to reach nearly $30 billion. We see plenty of room for continued growth in this segment.

Reported net sales for our Snacks division have grown at an 8% compound rate over the past 3 years and we're up 15% in fiscal 2012, so we're gaining share in this Better-for-you segment. Our Snacks portfolio is split into 3 distinct categories: Grain, Fruit and Savory snacks, as shown on Slide 18. In fiscal 2012, these 3 segments generated $1.6 billion of reported net sales. We have a strong presence in traditional grocery stores, where our pound volume grew 3% last year, with the majority of our Snacks volume that's sold in the faster-growing nontraditional food outlets, such as mass merchandisers, club and dollar stores. For example, club stores represent our largest nontraditional channel. Our pound volume grew 8% there last year as our larger mega-packs represent value to clubs through our consumers. We continue to bring product news [ph] and strong innovation to this channel.

Small-store formats like dollar stores are a growth channel too. Here we offer smaller packages and attractive dollar price point that introduces new consumers to our brands. Our regular sized packages also sell well in these outlets, making this our fastest-growing channel, with pound volume up 9% last year.

General Mills is the market leader in the $900 million Fruit snacks category. Category sales are growing at a 3% pace in the latest 12 months, driven by increasing popularity of fruit snacks with all family appeal. Last year, we saw heightened competition from value players in this segment, resulting in a share decline for us. We expect to post renewed sales and share growth this year with a solid line of new products, including Mott's fruit snacks that appeal to kids and adults alike. Our Mott's Medleys are made with real fruit and vegetable juice and provide 100% of the daily value of vitamin C, with just 80 calories per serving. We just launched this line and it's off to a great start.

The Savory snacks category generates more than $2 billion in annual retail sales and has grown at a 9% rate over the past year. We've just launched several new flavors of our very popular Chex Mix and we introduced a new product line, Pillsbury Baguette Chips. These are made from baked bread. They're great by themselves or with your favorite dip.

And of course, Grain snack bars is our largest and fastest growing business. We created this category back in 1975 with the launch of Nature Valley Granola Bars. Today, the category generates $3 billion in retail sales and it's growing at a 5% annual rate. Our sales are well outpacing the category, driving solid market share gains for us. As you can see on Slide 21, our dollar share of the category has increased 10 points over the past 5 years. And through the first quarter of fiscal 2013, we've gained another full point of share. We're growing our sales and the category by innovating. We've kept the original Nature Valley Crunchy bars growing and we've added new flavors and formats. Then at 2006, we launched a very successful Fiber One snack bar line and that unlocked a whole new level of market growth.

In fiscal 2012, we've further expanded the Fiber One line with the introduction of 90-calorie brownies. In one year, just 2 brownie flavors generated more than $100 million in retail sales. To put that into context, one industry benchmark set the standard of $50 million for a successful new product introduction. We're currently launching a 90-calorie chocolate chip cookie that's off to a terrific start. We're also just launching new Fiber One Chewy Bars, available in kid-friendly flavors like chocolate and peanut butter and jelly. At just 100 calories per bar, they have the nutrition that moms love, including 20% of the daily value of fiber and 10% of the daily value of calcium.

When it comes to Grain snacks, Nature Valley continues to be our flagship brand. Our newest variety is Nature Valley Protein Bars, which contain 10 grams of protein in each bar. They contributed double-digit retail sales growth for the brand in fiscal 2012, and they're on track to be as big as Fiber One Brownies in year one retail sales. We have new flavors and formats in Nature Valley bars coming throughout the year, and we expect the brand to continue to lead our Snacks portfolio.

Now I've been talking specifically about our U.S. Snacks division, but of course General Mills' Snacks business is much broader than this. In small plant and fields [ph], we market Cascadian Farm organic granola bars, along with Larabars and Über bars, which are great-tasting natural nutrition bar options. The retail sales have been growing at a double-digit rate, and Food Should Taste Good chips have been a great addition to our natural foods offerings. Our snacks are growing nicely in food service outlets too. Net sales were up 11% in the first quarter, driven by new product introductions and distribution gains in convenience stores. And we're just beginning to tap into the possibilities for our snacks internationally. Our U.S. portfolio is an innovation pipeline for our international markets. For example, Nature Valley brand is available in nearly 80 markets around the world, and we see many opportunities to expand our other snacks brands into more international markets as the global middle class continues to expand and we gain scale in more emerging markets worldwide.

So to summarize my comments this morning, the future is bright for General Mills' U.S. Snacks division, as consumers are snacking more and increasingly seek out Better-for-you options. We're building on our history of innovation, solid new product introductions across our 3 product platforms. We're also leveraging our strong brands at fast-growing non-traditional food outlets, which should drive sales and profit growth in the U.S. and around the world in fiscal 2013 and beyond.

Thank you for your time this morning. I'll now turn the call over to Ken Powell.

Kendall J. Powell

Okay. Thanks, Jon, and good morning, everybody. You just heard about the terrific innovation that John and his team have going in our U.S. Snacks business. So I want to going to give you a quick summary of the business trends and the innovation that we're seeing elsewhere at General Mills.

Across our U.S. Retail categories, we are seeing pricing moderate and volume improve as we begin to lap last year's significant price increases. As Don mentioned earlier, we still expect inflation in 2013, but at a rate well below the 10% we experienced in 2012. So we do anticipate a more stable food price environment for consumers as we go forward.

We're seeing improving trends for our business as well. In the first quarter, General Mills U.S. Retail pound volume declined 2% and demonstrated sequential improvement over last year. Underlying gross margin for General Mills showed sequential improvement as well, and we expect both our volume and gross margin trends to continue to improve in the remaining 9 months of the year. Our confidence reflects the fact that our categories are on trend with consumer demand for great-tasting, healthy and convenient foods, all at a good value. Because they're on trend, our categories are growing. Each of our 10 largest categories generates at least $2 billion in annual retail sales. And with combined sales of over $40 billion, even low single-digit growth on this sales base is significant.

We're innovating to drive growth for our brands and our categories. Let me give you a few examples. The gluten-free benefit of our Chex cereals continues to resonate with consumers. Sales of new Apple Cinammon Chex are off to a strong start, and we're reaching consumers with both traditional and digital advertising. In combination, these activities drove a 23% retail sales gain for Chex in the first quarter.

Multigrain Cheerios continues to post strong gains, including the new Peanut Butter variety. First quarter retail sales increased 19%. And Cascadian Farm is the #1 granola brand in America, organic or otherwise. We've just added an Ancient Grains variety and increased marketing support, helping to drive an 11% increase in retail sales this quarter.

For our cereal business in total, we experienced a rare decline in sales this quarter as merchandising levels were below the year-ago period. But we expect our growth momentum to resume in the second quarter, and we continue to expect sales and earnings growth for Big G in 2013 in total.

The first quarter sales decline for our U.S. yogurt business overall masks some good progress made in this period. Our Greek yogurt business turned in a good performance, led by our multipack items. Our Greek retail sales increased 85%, and we picked up nearly a full point in the market share in the Greek segment this quarter. As you know, our 2013 plans for Greek yogurt are just getting started. New Yoplait Greek 100-calorie yogurt is just starting to hit store shelves across the country. And while it's early days, we're very pleased with the initial reaction to this product. We're just now activating our fully integrated marketing campaign and dedicated advertising behind this new line.

We've sharpened our merchandise price points on our core cup products. Customer feedback has been very positive, and broad-based execution is planned throughout the coming months. While it's still early, volume trends on this key business are improving.

Across our U.S. yogurt business in total, we launched 35 new items in the first quarter. These new items have been well accepted by our customers and shipments are building. In addition to Yoplait Greek 100, this includes expanded distribution of our Mountain High brand and the beginning of a phased U.S. rollout of Liberté. So as we move into the second quarter, we're excited about our innovation and marketing plans in U.S. yogurt.

Other first quarter highlights included good growth from Progresso. We've launched new flavors of Progresso Light and continue to focus our advertising on the great taste of our ready-to-serve soups, and our new Recipe Starters sauces have enjoyed good customer orders to date. In total, first quarter retail sales for Progresso increased 14%, and we added 3 points of market share in the ready-to-serve segment.

On our Totino's hot snacks business, a significant increase in media investment and distribution gains drove growth across our product line. A combination of strong in-store merchandising support, digital media and contributions from new products drove market share gains on our Pillsbury refrigerated dough items. And Green Giant Seasoned Steamers are the latest addition to our frozen vegetable portfolio. We'll begin to activate the support for this seasonal business in the second quarter of the year.

In total, we launched over 70 U.S. Retail new products in the first quarter alone. Account acceptance of these new items is, in total, above our expectations, and we've got more innovation to come later in the year. As we told you in July, our plans call for points of distribution to decline through the first quarter of 2013, largely reflecting the timing of our new product launches. We expect improved distribution trends over the remaining 9 months of the year and look to achieve distribution growth for the year in total.

As our new items reach good store-level distribution, we'll be activating our media and marketing campaigns against these businesses. We're ramping up activity behind our seasonal items such as soup, baking products and frozen vegetables, and we continue to improve the efficiency and impact of our advertising dollars with targeted investments in digital and multicultural media.

We also have a variety of second quarter merchandising events planned to drive customer and consumer excitement. We're expanding our Save Lids to Save Lives program, which benefits breast cancer research. Starting this month, more than 20 General Mills brands will carry pink lids on over 400 million packages. This program extends to our Bakeries & Foodservice businesses too. We're partnering with sororities across the country to increase breast cancer awareness on-campus. In total, General Mills will donate $0.10 for every lid redeemed up to a maximum total donation of $2.5 million. We also continued to expand our successful Box Tops for Education program. Since the inception of this program, we've raised over $475 million for schools across the country.

These are just a few of the merchandising programs we have planned in the months ahead, and with continued strong levels of marketing support and product innovation, we're excited about our prospects for growth in U.S. Retail over the balance of 2013.

Let me turn to our International segment. In the first quarter, we delivered good performance in Europe. Yogurt is our largest business there. Fueled by sales of new varieties of Calin, a functional yogurt high in calcium, and higher levels of advertising across our yogurt portfolio, retail sales increased at a mid-single-digit rate in the quarter, and we added roughly 0.5 point of market share. Our Europe yogurt results now include Ireland, where we reacquired the Yoplait license in May.

Häagen-Dazs had a good quarter in Europe too. Retail sales increased at a double-digit rate. Our Secret Sensations product was a huge hit in 2012, so we've introduced it into new markets with a new flavor and a new package size in 2013. We've also launched new varieties of pints in mini cups and integrated our marketing efforts across Häagen-Dazs shops and retail outlets.

For our Europe business in total, we're pleased with our performance. Our growth in this region continues to outpace results for many of our multinational food peers. We now have a great branded position in the important European yogurt market and our other key categories of superpremium ice cream, Mexican meals and grain snacks are all in relatively early stages of development in Europe. So we have great opportunities ahead to increase household penetration of our brands to drive future top line growth.

In Canada, yogurt is a $1.4 billion category. And over the last 5 years, sales have been growing at a 7% rate. In our Canadian yogurt business, we're increasing household penetration on our Liberté brand, with distribution gains, new products and television advertising for the first time in Liberté's history. And earlier this month, General Mills assumed the Canada Yoplait business from the previous licensee. We're planning significant levels of investment behind the Yoplait brand in Canada, including new product innovation, improvements on established products and increased advertising. Together, our Liberté and Yoplait brands hold a 35% share of category sales in Canada. With Yoplait added to our business, we're projecting well over $1 billion of retail sales in Canada this fiscal year, making us the fourth largest food manufacturer in the country.

As you know, we're also working to expand our business in emerging markets. We have a large business today in Greater China, and we continue to see robust growth there. First quarter sales in constant currency grew at a strong double-digit rate. This performance is being led by Häagen-Dazs and our line of Wanchai Ferry frozen dim sum items. And while the overall Chinese economy may be slowing a bit, the demand for branded consumer food products continues to expand. Increasing numbers of Chinese consumers want foods that offer quality, convenience, nutrition and taste, all at a good value. And for our business in China, we're seeing robust growth in both existing and new cities. So we expect demand for our products to remain strong in this important market.

Our growth in India is being driven by our new whole wheat and premium varieties of Pillsbury Atta flour, Häagen-Dazs Secret Sensations and contributions from our recent acquisition of Parampara foods branded meal starters.

In Brazil, the acquisition of Yoki makes us very excited about our growth prospects. Yoki products are quite popular with Brazilian consumers and hold leading market share positions in growing categories. And our integration efforts are off to a great start. Given Yoki's terrific breadth and scale, we're integrating General Mills' Brazilian employees, products and systems into the Yoki business. We're just one month in and we're already invoicing our customers as a combined company. And the combination of Yoki and General Mills makes us the 15th largest food company in Brazil, significantly expanding our scale in this important market. We'll look forward to reporting back to you on the growth of this business starting in the second quarter.

So with that, let me summarize today's General Mills update. Our first quarter performance was broadly in line with our expectations. Volume and gross margin trends are improving, and we launched over 100 new products. In the second quarter, we'll support both our established and new items with strong levels of media and merchandising. In both Yoplait Canada and Yoki, we'll begin to contribute to our net sales and operating profit. For the full year, we're on track to deliver our sales and profit targets. And more broadly, we see our business portfolio better positioned than ever to deliver balanced global growth for shareholders in the years ahead.

So thank you for your time this morning and for your interest in General Mills. With this, I'm going to open the call for questions. Operator, would you please get us started?

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from the line of Bryan Spillane with Bank of America Merrill Lynch.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Ken, just a question. You had a lot of new product innovation come through in the first quarter, so I guess just 2 questions related to that. First, was there any impact in terms of sales shift meeting? Was there any inventory build or anything that would have sort of inflated sales a little bit more in the first quarter? And then second, just early -- in terms of consumer uptake, consumer receptivity to the new product innovation?

Kendall J. Powell

We started to ship most of those products in August. And so you would've seen some build during August, but I would say kind of progressively over that month. But I would say some build, but not a lot in occurring late in the quarter. In terms of the consumer uptake, it's very early days. But it looks like, for instance, Progresso Recipe Starters, looks like that's going to be good. It's off to a good start, obviously. But soup season is in front of us, but our customers certainly like that product, so we feel good about that one. The cereals, I think, went in very well. It got high levels of distribution, and we think that those will do well. And as we've said to you before, we'll have a number of other and additional new cereals coming in January. So we feel pretty good about our new cereal lineup for the year. All the yogurt items went in, and it's early days for those, but they're gaining distribution well. Early returns on Yoplait Greek 100 is that, that is developing very nicely. We're quite pleased with how that one is going. And that's really before the marketing impact really starts to hit on that new item, so we like what we're seeing on that one as well. And then Liberté is just starting a regional role and so it's very early days on that, and we'll report -- we'll give you a more -- in Q2 on Liberté. But generally, we feel quite good about how our new products are going in.

Operator

Our next question comes from the line of Ed Aaron with RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Just trying to get a better sense of kind of when and to what extent we should really start to see the traction build from the innovation and marketing initiatives that you've talked about. Is it realistic to expect positive growth in your yogurt sales this quarter on both a reported and retail basis?

Kendall J. Powell

Well, our goal for the year is sales growth in Yoplait. We'll see accelerating performance, improving performance as we go into the second quarter. We have all these new items on shelf. We turn on the advertising and the consumer activity. So that will really begin to hit in the second quarter and we'll continue that in the third quarter, and so our goal would be to see sales growth there.

Edward Aaron - RBC Capital Markets, LLC, Research Division

And then just one other one, if I could. You said a couple of weeks ago that you still expected Q1 to be down in terms of EPS, and it came in a bit better on international. Did you not have maybe the visibility on that international performance at that point in time? Or am I just maybe being too literal about your comments at back-to-school?

Donal Leo Mulligan

Yes. A couple of things broke favorably -- 2 or 3 things broke favorably in the quarter that we only get visibility until -- to the end. International had a strong quarter across a number of markets. China was a significant contributor, for example. But as you can imagine, you're closing the books across 25 different markets, and if they all break a little favorable, it adds up, and that's really what happened in international. So the broad strengths of that business played through. And then the other piece you saw on the tax rate. Some of that was favorably impacted by international or from an earnings mix standpoint. But as you also understand, tax rate can be a little bit volatile just in terms of how you close out open audits, and we have audits across states in different countries. We closed those out during the course of the year. We had some favorable audit closures in the first quarter that benefited the rate as well that again had visibility too, until those are settled. So those are really the 2 big factors as you look at the first quarter. And those 2 together contributed $0.03 or $0.04 to the bottom line.

Operator

And our next question comes from the line of Alexia Howard with Sanford Bernstein.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Can I just make sure that I understand the mid-single-digit sales and operating profit growth guidance from the base business for the full year? I'm assuming that, that excludes acquisitions. So what I'm trying to understand is what the numbers were on an excluding acquisitions basis this quarter. It looks as though organic sales growth was down a little bit this quarter, and excluding the acquisitions, it looks as though operating profit may have been fairly flat, although that's less clear, even with the decline in the advertising spending and the shipments of new products. If that's right and maybe you can confirm that, then where does the acceleration in the top and the bottom line come from for the rest of the year? Are there particular levers, commodity cost inflation that's going to become more favorable going forward?

Donal Leo Mulligan

Alexia, just to clarify, the mid-single-digit sales operating profit is for our business as we entered the year, so it excludes Yoki, it excludes Yoplait Canada, but it does include Yoplait International in total. The reason that we see it accelerating during the year is a couple of things. As Ken -- as we've said before and as Ken pointed to some data this morning, in the U.S., as we see prices lap our increases and the industry's increases from the last year, we expect volume to stabilize and to solidify, and we're starting to see that in the categories, and so that will benefit us as the year unfolds. Second is, as you point to -- we do expect some deceleration of inflation, although I would caution that with the current drought and movement, there is some more pressure than we had originally anticipated coming into the year, and that will play through in the latter part of the year. We still are in that 2% to 3% range of inflation, but obviously, a bit more pressure given where the markets have moved over the last couple of months. And then we expect to see continued strength in International, as we alluded to the -- not only did it grow quite nicely in the first quarter on an as-reported basis, but if you strip out acquisitions, top line grew 8% on a constant currency basis, and so that provides continued momentum as the year unfolds. And our Bakeries & Foodservice business started the year well, 2% volume growth, 10% profit growth, and that business has -- again, has some really solid momentum in some key customer and product line segments that we'll benefit from as the year unfolds as well.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Great. And then maybe the quick follow-up. Could I ask about how you're seeing the category promotional dynamics in cereals changing? It looks as though Post's price per pound has come down quite a bit in the last couple of months. And how are you responding to that?

Kendall J. Powell

Yes. I mean, there are always movements quarter-to-quarter, Alexia. I mean, I think the point that we want to make is, for a variety of reasons, our pressure was quite a bit below what it was a year ago, and this is all about timing, really, and promotional timing. And we knew it was going to be low in June and July, and it was. And so that will restore itself and rebalance as we move into the second, third and fourth quarters of the year. So ours was low. And our merch volume, as a result, was low year-over-year due to timing issues, and that will be -- that will work itself back to a normal promotional profile here as we go into the next 3 quarters.

Operator

And our next question comes from the line of Andrew Lazar with Barclays.

Andrew Lazar - Barclays Capital, Research Division

It's good to see volumes for your categories and for General Mills starting to, as you pointed out, sequentially improve as pricing has kind of moderated. I know there's a lot of discussion over the last couple of quarters about sort of the mystery around why volumes in general had been as weak as they were for the industry. And there were probably a lot of different reasons that were discussed. But the biggest one that most food companies talked about was just the pricing, right, and that combined with the difficult consumer backdrop. Based on what you're starting to see, at least in some of your key categories, I mean, it sounds like you're basically getting at that latter point, which is, it seems like it was primarily the pricing and as that moderates, the volume sort of starts to come back. Does that seem now with what you now see like the most realistic and sensible explanation for what we've seen these last couple of quarters for the industry?

Kendall J. Powell

So Andrew, I mean, I think as you know, that is our premise. And we talked about that quite a bit at our year-end meeting in July. And our view is that, okay, we're only a quarter in, but sort of based on the data we're seeing, our view is that's -- that is the data is confirming our premise on what happened and what the outlook is going forward. I mean, clearly, last year, with a very high inflation in the industry, over 10% for us and all the pricing, there's no doubt that, that was the biggest single factor and consumers responded as we predicted they would with lower unit volume sales. So I think we had a chart in our presentation this morning that demonstrated very clearly that as we begin to sequentially lap that period of time, we're seeing the price comparisons moderate and the unit volumes improve for our category. And we are seeing that as well in our business. Now it's not -- this is not a perfect science, and I think it will -- but our belief, our strong belief is that we're going to continue to see that sort of stabilization in consumer prices and recovery of demand as we progress throughout the year.

Andrew Lazar - Barclays Capital, Research Division

I appreciate that color. And then just a quick follow-up. Don, I apologize if I didn't get this right. Did you mention at the outset that for overall corporate General Mills, that organic sales were up 1% in the quarter? And if I got that wrong, I apologize.

Donal Leo Mulligan

Yes. For overall, 1% on a constant currency basis, minus 1% as reported. So we had a larger than usual drag from ForEx this quarter.

Operator

Our next question comes from the line of Jason English with Goldman Sachs.

Jason English - Goldman Sachs Group Inc., Research Division

I want to go back to the full year guidance of mid-single-digit sales growth. Thanks for the color on kind of what that encompasses. I was thinking about that your base biz comment is suggesting purely organic and it's -- correct me if I'm wrong, but that does include the M&A contribution in the first quarter from Yoplait International?

Donal Leo Mulligan

Correct.

Jason English - Goldman Sachs Group Inc., Research Division

So if I were to strip that out and just think about sort of organic for the full year, can you give us any color on what you expect organic to be for the full year?

Donal Leo Mulligan

Well, I don't have a size [ph] for you that Yoplait International is about $1.2 billion in sales. And we had another couple of months of it this year versus last year.

Jason English - Goldman Sachs Group Inc., Research Division

And if I calculate it right, kind of based on International, it looks like it's going to add around 1.5 points to the full year. So kind of thinking organically, if I can think about mid-single digits is 4 to 6, take out 1.5, I'm kind of now that 2.5 to 4.5 type range. Am I way off base with that line of thinking?

Donal Leo Mulligan

Well, I don't have my calculator for me to check your math. But it is obviously going to be a contributor. I couldn't confirm the 1.5 points, though, for it.

Jason English - Goldman Sachs Group Inc., Research Division

So on drivers of that, kind of getting back to Alexia's question and building on Andrew's there, you had about 1 point in the first quarter. I think Ken mentioned that he's expecting the pricing to be, I think, a lot more stable, which I'm interpreting to be kind of flattish as we progress through the year. That's quite a bit of volume acceleration. Where are you expecting to get that volume acceleration? And what gives you the confidence that it's going to come through?

Kendall J. Powell

Well, I think, Jason, as we continue to see these consumer prices moderate, we do expect our volume to improve continuously over the course of the year. So we are expecting that broadly across the portfolio. We have a number of new products that we're going to be launching, as you know, and the early returns on those is that they're going to be good contributors. So we are expecting our volume in sales trends to improve somewhat in U.S. Retail over the course of the year, and we're very much expecting that to happen.

Donal Leo Mulligan

The other thing I would add, Jason, is that as we talked in the first quarter, we saw a 2% volume growth in Brands on the Go -- or Bakeries & Foodservice, excuse me, offset by some index pricing that will unfold differently. As the year unfolds, that will be additive to sales, but the volume, we feel good about. International has consistently driven low single digit volume growth, did it again in the first quarter, as we said, 8% constant currency growth. And while we focus on pricing in the U.S., I thought we've said back [ph], we still get pricing in international markets, again, more in developed markets than -- in the developing than the developed markets, but we're getting pricing in, so there will be some huge [ph] benefit in international from pricing that we'll see as the year unfolds. So really, what we're talking about is turning our U.S., our old business, from what was negative 4% and 5% growth last year for volume up to flat and slightly positive as the year unfolds.

Jason English - Goldman Sachs Group Inc., Research Division

One last just housekeeping question. The interest expense was a little bit lighter than I thought this quarter and that's just probably a mathematical error on my part. But it sounds like the balance sheet moved around a little bit post the end of this quarter. Can you update us on your expectation for interest expense for the full year?

Donal Leo Mulligan

Yes. We expect interest expense to be up low single digits, inclusive of, obviously, the acquisition of Yoki. Obviously, we're getting a little benefit from the lower short term rates. And I think that probably everybody is, because we're going to stay low for a while. And you might have seen a touch to that come through in the first quarter.

Operator

Our next question comes from the line of Eric Katzman of Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. A couple of questions, I guess following up on the Alexia, Andrew, Jason theme. Isn't the fact that the promotion was more aggressive in the first quarter one of the reasons why the core sales were a bit lower and you kind of expect that to moderate and that's what's also going to be a contributor to sales?

Kendall J. Powell

Eric, maybe you clarify a little bit. When you say promotion was more aggressive, I mean, are you talking about category promotion or competitive or how -- what -- I'm not...

Eric R. Katzman - Deutsche Bank AG, Research Division

No, I thought you said, Ken, that you had -- you'd cut back on advertising, which is an SG&A item, but you promoted more aggressively, which limited your net pricing contribution in the fiscal first quarter, right?

Kendall J. Powell

Yes.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay, so...

Kendall J. Powell

Well, I mean, what I would say is -- actually, in Yogurt, for instance, we promoted more aggressively in the first quarter. We saw that -- we saw sequential improvement in core movement over the course of the quarter, and we think that those core brands will continue to improve as we get uptake on that activity, and then we'll add new products to that. And we think that, that combination will lead to continued improvement in our yogurt business. In our cereal business, for instance, our merch -- as I said, our merchandising activity was light compared to year ago, and that led to merch volume declines. And so we'll see a more normal level of merchandising in cereal as we go over the -- into the second and third quarters, and that will, we believe, result in strengthening volume in that business. So it's really, Eric, in the first quarter, there were a number of moving parts on that -- on the merchandising front. As we move into the second quarter, we expect solid levels of merchandising, good levels of new products, and that, in combination, is going to lead to stronger unit volume.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. Second question. Now that we have all outlet data, theoretically, that's supposed to be a bit better kind of indication on consumption, and yet the -- for, like, U.S. Retail, the IRI Nielsen data actually showed some pretty significant weakness in your business. I got a bunch of calls from investors worried about your results for the quarter based on that. And yet your volume was only down a little bit, a couple of points, much better than I think the IRI Nielsen data showed. What is the difference? Maybe this gets back to Bryan's question initially.

Kendall J. Powell

Yes. Well, I think some of it is just the timing of shipments of new products, and so some pipeline building in the latter few weeks of the quarter. And some of it, I think, Eric, is merchandising pressure across some of our categories in the first quarter, which was not where we wanted it to be. And so we saw a weaker incremental volume for merchandising in those categories. And we expect that to -- we expect that balance to be restored as we move into the second and third quarter.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. And then last question, Don. On Yoki, you had -- so now you've acquired the business, can you give us maybe a little bit more color on the kind of the mix impact from that? When Yoplait was brought in, the mix shift in International segment was a massive negative. How does Yoki impact the segment's mix? And also, is there any adjustment to assumed goodwill and the P&L effect of that with it coming through?

Donal Leo Mulligan

Yes. We'll obviously give more color when we close Q2, when we have a quarter results in our books. But let me give you a little bit of flavor now. As we talked before, Yoki is about $0.5 billion business. It will be in our results for 3 quarters of the year. It does drive a low double-digit operating margin. Now that is on a, if you will, on an operating basis, we will have some depreciation, a step-up -- inventory step-up, some transaction costs this year, some intangible -- a small bit of intangible amortization as well that will be a drag on the results, non-cash drag, but a drag on the reported results. So -- and that, combined with, obviously, the acquisition costs, is what leads to the EPS dilution expectation of $0.02 to $0.03. But from an operating standpoint, you can think about it as a $500 million business that drives low double-digit cash margins for us. As far as kind of within the P&L, as you can imagine, it's the emerging market business, it's delivered margin -- gross margin, excuse me, is lower than our company average, and so you will see some dilution again. We'll give more quantification to that when we release Q2.

Eric R. Katzman - Deutsche Bank AG, Research Division

And is it -- it's products, I assume. Are they a negative mix driver again in the segment just like Yoplait was?

Donal Leo Mulligan

Negative mix in what respect?

Eric R. Katzman - Deutsche Bank AG, Research Division

In that, I guess, like if you've had, I don't know, a 20% negative mix swing as you've reported international, including Yoplait International?

Donal Leo Mulligan

Of price...

Eric R. Katzman - Deutsche Bank AG, Research Division

Price mix.

Donal Leo Mulligan

It's a good question. I don't have an answer off the top on that one. Maybe we'll just follow-up on that one.

Operator

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

Kenneth Goldman - JP Morgan Chase & Co, Research Division

We're seeing, at least anecdotally on shelf, some of your larger competitors in Greek discounting somewhat heavily right now. First of all, is that putting some more pressure on you if you're seeing the same thing? And second, are you doing anything maybe to counter that? I realize you're putting in a lot of new products and so forth. But doesn't that put a little bit more pressure on yours, maybe not -- that not right the really way to look at it, given that you have so many new products on the shelf, and maybe it's -- that'll -- you'll disrupt the category a little bit. I'm just curious how you think about pricing in Greek right now and what's happening?

Kendall J. Powell

So Ken, I think that our expectation for the Greek segment as it really becomes mainstream and there's capacity and scale -- and everybody, we're all kind of focusing on productivity and all the stuff that we do really well. I mean, our expectation is that those prices will come down over time. And I think that we're seeing that. I think that's sort of natural, in a way, almost inevitable. Having said that, we love those typically over $1.00 price points on average for Greek. They look really good to us, especially compared to many other yogurt prices, which are kind of $0.50, $0.60, $0.70. So we like the price point. And we think that now being deeply into it, with multiple product offerings and more to come, we think that's going to be a good business model for us. And whether it's $0.99 or $1.09 or whatever it is, we think we can do just fine with that.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

And then one more. You dropped advertising and media spending by 7% this year and that was on top of, I think, a 7% increase a year ago. So just using some simple math for a second, your dollar ad spending is essentially flat over the last 2 years, but your sales dollars are up 15% over that same time. I realize it's just one quarter, and you're taking ad spending up again shortly. But still, that's a quarter of the year where you deemphasized ad spending pretty heavily. So is that something maybe we should expect more of going forward? Were you a little more strategic from quarter to quarter in whether you're putting money into deals versus consumer marketing? Or is this sort of a one-off or maybe it just happened to be with the timing of where the new products were?

Kendall J. Powell

Well, there are a lot of moving parts in that question. But look, so let me -- let -- well, but let me -- it's a good question, and I understand the intent behind it. But let me sort of -- let me make a first comment. The sales increases over the last couple of years are largely driven by that kind of inflation-driven pricing. So I just think that it's important to keep that in mind. But stepping back a bit, I think the larger context for us on advertising is that we've increased our levels very, very significantly over the last several years. I think we're up close to 50%. I think some of the tracking services have us now as the largest advertiser in the industry. And we have very, very solid shares of voice in the vast majority of our categories. In many cases, they're increasing. So we're very committed to advertising. It drives our business. But I think, as we've said several times over the last year, I mean, we're -- our goal at these levels is to kind of in line with sales or to be roughly at this level. And you're right. As we enter a period where there's -- the merchandising environment is very dynamic, as we saw in the first quarter this year, we do want to make sure that we're paying very close attention to what we need to do to be in the right value zone in terms of price points and merchandising. I think it's really important for us to do that given the mindset of the consumer these days. So we are going to be making tactical trade-offs there. But I will tell you, having said that, our advertising is and will be at very, very high levels and at very competitive, very strong share of voice. But we want to keep that value component. We want to be focused on that as well and make sure that our products are in the right zone.

Operator

And our next question comes from the line of Priya Ohri-Gupta with Barclays.

Priya Ohri-Gupta - Barclays Capital, Research Division

Wanted to see if your thought process was still consistent around that increase in the quarter and whether you're planning to term a portion of that out to -- by coming to the markets? And sort of what that percentage of the 1-1 increase could be.

Donal Leo Mulligan

We did see, obviously, a market increase in our commercial paper balance over the term, given that we were prepping for the Yoki acquisition. We do expect to determine out, whether it will be later this calendar year, early next calendar, it's still to be determined. But either way, we are -- we will be in the market sometime during this fiscal year to a fairly sizable amount.

Priya Ohri-Gupta - Barclays Capital, Research Division

Okay. Should we assume that the bulk of that gets termed out? Or should we still anticipate some of it gets paid down over the course of this year?

Donal Leo Mulligan

It'll get paid down. It's not only going to be termed down. We will absolutely pay down the debt, a portion of the debt. Again, as we said when we announced Yoki, our plan as we did with Yoplait as we will with Yoki is that we're going to finance this at our normal capital structure mix, which is a combination of cash and debt. And so you'll see the debt being paid down over the course of the year.

Priya Ohri-Gupta - Barclays Capital, Research Division

Okay, that's helpful. And then just lastly, as you think about the M&A environment just broadly, can you speak to what sorts of assets are available at this point in time, and sort of has that number decreased and how are valuations looking?

Donal Leo Mulligan

We considered to be very active in looking. We've obviously done some pretty sizable, and even one not sizable, strategic deals, in terms of our businesses that are at Yoplait, Yoki, which got us a good position in the category and in a certain critical geography. And then with Food Should Taste Good in the U.S., which put us in a very different position in a category and particularly around a channel and a consumer need. So we like what we've done to date. They all helped grow our business in key platforms and certainly help accelerate our business, our growth as well. So we'll continue to look, as we've talked before. Emerging markets is a focus for us. We have a great organically growing business in China. We now have an equally sizable business in Brazil with a similar growth profile. But there are other emerging markets where we have small footprints, India for example, that we'd look to -- will be looking to increase our size. And then in the U.S. and more broadly developed markets, Jon outlined a compelling case for Better-for-you snacking and that's an area that's of intense interest to us and is where we've added some businesses over the last couple of years, and we'll continue to look in that area.

Operator

Our next question comes from the line of Robert Moskow with Credit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

Don, I think you mentioned more pressure coming from the drought on your cost side in the back half of the year. Can I understand, like -- your talk about the cost, I guess, of the 2012 calendar year crop. Does that cost of the crop being higher flow through into your fiscal '14 as well, because you kind of have to wait for next year's crop before you can get kind of a lower cost of grain? And maybe I'm overstating the impact because I know your Grain is only 5% to 10% of your cost. I'm just trying to figure out if the drought will flow through into fiscal '14.

Kendall J. Powell

It's a good question, Robert, and I'll give you some thoughts, and I think Don wants to jump in as well. And I think the short answer now is, it's something that we have to be thinking about, because we will -- with the drought, in grains like, clearly, corn, we'll exit the year with very low stocks, and so very low stocks which signal that even more volatility than usual in the corn crop depending on how it starts to develop. But it's too early to say. I mean, we kind of have to see how things go around the world and just how the harvest begins to build develop as we go into F '14. But we will be -- we'll have to watch that very, very closely. Don, I don't know if you would add anything to that.

Donal Leo Mulligan

I would just -- as I mentioned, we had 75% coverage this year, so to the extent we have an impact, as I mentioned, it will be as the year unfolds in the back part of the year, which is putting a little bit of pressure on that part of the year but within the range that we anticipated. And obviously, we're not going to give F '14 guidance, but I think that Ken touched on a couple of the dynamics that we contemplate. The only thing I want to jump in is Rob, thank you for remembering it's 5% to 10% of our inputs. That's usually something I have to remind the market of.

Robert Moskow - Crédit Suisse AG, Research Division

Okay. Let me ask a quick follow-up, if I could. Meals are up, I think, only 2%, but Progresso was up much more than that. Can you talk about what's down in meals and when do you think you'll lap those comparisons?

Kendall J. Powell

So soup, as you said, we had a very strong start to the year in soup. I mean, we've got a good proposition there with very good innovation and very good marketing, and so we have good momentum there. Mexican food is progressing, is doing okay. Our issue is skillet meals, helpers, which are down right now. And we think we know what we have to do to correct what's happening in that business. And that's an issue of the right value for the consumer and the right marketing message. And we don't think we're all the way too bright, frankly, on either one of those things right now. But we think we know what we have to do to stabilize and restore momentum on that business and, obviously, that's something that we're going to be focusing on here as we move into the balance of the year.

Kristen Smith Wenker

We are up to time at this point, so I think I'll just say, those of you who are in queue, I'm sorry we didn't get to you. If I can be of help, please give me a call.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation, and ask that you please disconnect your line.

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