General Mills, Inc. Presents at 2013 Consumer Analyst Group of New York Conference, Feb-19-2013 08:00 AM

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General Mills, Inc. (NYSE:GIS) February 19, 2013 8:00 AM ET


Kendall J. Powell - Chairman and Chief Executive Officer

Ian R. Friendly - Executive Vice President and Chief Operating officer of Us Retail

Christopher D. O'Leary - Executive Vice President and Chief Operating officer of International

Donal Leo Mulligan - Chief Financial Officer and Executive Vice President

Kristen Smith Wenker - Vice President of Investor Relations


Sally Dessloch

Kenneth Goldman - JP Morgan Chase & Co, Research Division

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

Robert Moskow - Crédit Suisse AG, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Sally Dessloch

Good morning. I'm Sally Dessloch, President of CAGNY. On behalf of the board, I'd like to welcome you to the 42nd annual CAGNY conference. Let me briefly cover some housekeeping before we get started. We have our usual rules of the road on the screen. Please take a moment to review them. WiFi should be available to you in this room and there is no code required. Also, please note tonight's dinner is a seated affair with entertainment, so please be prompt for a 7:00 p.m. start.

Before I introduce General Mills, please join me in thanking them for this morning's breakfast and a special thanks for the local Mills sales team, which worked so hard to make it happen. And now without further ado, it is my pleasure to introduce General Mills to kick off our conference as is their tradition. I'm happy to turn the podium over to Ken Powell, Chairman and Chief Executive Officer. Ken will introduce his team and tell us about Mills' long-term growth strategy. Ken, welcome.

Kendall J. Powell

Thanks, Sally. Good morning to one and all. It is a pleasure to see everybody and to once again lead off this year's conference. So let me first introduce my General Mills colleagues. To my immediate left is Ian Friendly, Chief Operating Officer for our U.S. Retail business. Next to him is Chris O'Leary, Chief Operating Officer for our International operation. And then next is Don Mulligan, our Chief Financial Officer. At the far end is Kris Wenker, our Investor Relations Officer. And I also want to recognize Penny Leporte and Bob Houghton, also from Investor Relations for their work on this presentation and also on the terrific breakfast that we all just enjoyed.

I want to give you a quick reminder that our presentation this morning includes comments about the future that are based on our current views and assumptions. As noted on the slide behind me, numerous factors could cause our actual results to be different than our estimates.

Over the next 50 minutes or so, my colleagues and I will provide a detailed update on General Mills and our growth prospects. Here's a summary of our message to you today. We're completing a 2-year period of significant investments. Investments that have strengthened our business in our core U.S. market and investments that meaningfully expanded our base in international markets. Our focus now is on integrating the new operations and executing well across the entire company.

We see stronger growth in our immediate future. In December, we raised our earnings outlook for fiscal 2013 to a range of $2.65 to $2.67 per share. And in fiscal 2014, our plans call for high single-digit EPS growth, consistent with our long-term model. And we expect our sales and earnings growth, along with disciplined use of our strong cash flows, to result in superior returns to General Mills shareholders.

Let me quickly recap the key actions we focused on in recent years to position General Mills for continuing sustainable growth and return. In our core U.S. market, we've introduced an array of new food products. This is job 1 for a branded food company. It's up to us to generate the consumer sales that make our categories grow. So we focused on creating high-quality, great-tasting foods. And we put particular focus on ideas that appeal to the fastest-growing U.S. consumer groups, and these are older adults, the millennial generation and multicultural families. In total, products introduced in just the last 20 months have generated well over $1 billion in U.S. sales. This includes some real standouts such as Fiber One 90-calorie brownies and peanut butter multi-grain Cheerios.

We've invested strongly in our U.S. yogurt business. We've introduced a significant number of new items and product improvements in established segments of the market. And we've launched differentiated new items in the emerging Greek segment. Yogurt is a priority category for us in the U.S., and we're deeply committed to stewarding its growth for many years to come. Our sales trends are improving here. Ian will give you an update on our progress in just a few minutes.

We've invested to expand our U.S. organic and natural foods business. Our actions have included successful product innovation on existing lines and the acquisition last spring of Food Should Taste Good snacks. In total, our Small Planet Foods division is on track to generate net sales of more than $300 million this fiscal year. We're now a significant player in one of the U.S. food industry's fastest-growing segments.

Nearly half of all U.S. consumer food spending is on food eaten away from home, and we've been building our market share positions in this big and diverse industry. We've completed a substantial restructuring of this business. We've launched innovative new products. We've invested in a powerful direct-selling organization, now one of the top-rated sales teams in the foodservice industry according to Kantar. And profitability on this $2-billion business segment has more than doubled in recent years, as we focus on the most attractive customer channels and product categories.

Outside the U.S., we've taken significant steps in the last 2 years to creates a stronger and broader base for growth. Strategic acquisitions have made us the #2 player in the $76 billion global yogurt category. This is a terrific platform for growth. Yogurt is great tasting, it's healthy and convenient. So it's no surprise the category is expanding at attractive rates in markets all over the world.

Now I know that many of you see compelling opportunities for packaged foods in the world's emerging markets and we agree. And we've invested to establish a base for future growth in 3 key regions. In Greater China, we've invested to accelerate expansion of our profitable business there. Our sales in China are on pace to exceed $600 million in 2013, on the way to our goal of $900 million in net sales by 2015.

We've now got a good solid foundation for growth in Brazil, thanks to our acquisition of Yoki. This well-respected company has established a portfolio of leading brands, a 1000-person sales force and a manufacturing and distribution network with nationwide reach. Yoki will be a meaningful sales and earnings contributor for us in the years ahead.

Our business in India is quite small today, but it's a base we can build on. We see clear opportunities for new Häagen-Dazs shops in affluent urban locations, and we see growing demand for value-added packaged food products like our atta flour and the Parampara meal starters line that we recently acquired. Chris O'Leary will be up here shortly to tell you more about the sales and profit growth ahead -- we see ahead for our International businesses.

Overall, our investments to strengthen the General Mills portfolio have been focused on our 5 global business platforms. The first and most important of these global businesses is ready-to-eat cereal. We hold strong market share positions in the world's major cereal markets today. And those are the U.S., Canada, the U.K. and Australia. The rest of the world represents an emerging market for breakfast cereal, and through our CPW joint venture, we are well positioned to lead that category's growth. I've already mentioned our actions to establish international yogurt operations. Today, yogurt is a $3-billion-global business for us where we have the scale and the technical know-how to drive category growth. We've expanded our wholesome snack bars business in the U.S. and international markets, led by our Nature Valley brand. We fueled growth for Häagen-Dazs ice cream from the Champs-Elysées to Shanghai. And we've expanded our portfolio of convenient meal products in markets around the world. Retail sales for our 5 global categories are growing at attractive rates, and that good growth is expected to continue in the years ahead. As I've said to you many times before, it's good to be in the food business. The particular food categories where we compete are highly responsive to innovation, and they're on trend with evolving consumer needs. And these dynamics represent a terrific long-term growth advantage for General Mills.

The investments we've made are fueling good growth for General Mills operations worldwide. In the first half of our current fiscal year, so that's through November, net sales increased 5%. Segment operating profit grew at a high-single-digit rate and our adjusted diluted EPS increased 8%.

For fiscal 2013 in total, we expect to report mid-single-digit growth in net sales. This includes acquisitions but our base business is growing, too. Excluding new businesses and currency effects, we expect net sales to grow at a low-single-digit rate this year. We expect segment operating profit to increase at a mid-single-digit rate in 2013. And in December, we raised our EPS outlook a bit. Our guidance now calls for adjusted diluted EPS in the range of $2.65 to $2.67 per share.

As we look ahead to fiscal 2014, our plans call for growth, consistent with our long-term model. To remind you, we target low-single-digit growth in net sales, mid-single-digit growth in segment operating profit and high-single-digit growth in earnings per share. We expect this business growth, coupled with an attractive dividend yield, will result in double-digit returns for our investors. We'll share the specifics of our 2014 plan with you in late June and July as usual, but let me outline the framework of those plans today.

As I've already mentioned, we're targeting high-single-digit growth in adjusted diluted earnings per share. The new businesses we've added in the last 2 years will make a meaningful contribution to our sales and our EPS results. We expect to generate strong operating cash flow, a higher return on invested capital, and our plans call for increased cash returns to General Mills shareholders in 2014. Don will provide more detail on our financial outlook in a moment.

So with that, let me turn the lecturn over to my colleagues. We'll begin with Ian, who will be followed by Chris and then Don. And then I'll wrap up our remarks and open the floor to questions. So with that, Ian, the floor is yours.

Ian R. Friendly

Well, good morning, everyone. As Ken just mentioned, it is a great time to be in the food business. Demographic and economic trends continue to favor food at-home consumption. The operating environment across our U.S. categories is improving. And our brands are well positioned for future growth.

Let me say a bit more about each of these key points. We see the operating environment as much improved from when we met here a year ago. We compete in 25 food categories across the refrigerated, frozen and center sections of the store. In our categories, volumes in the aggregate have improved as we lapped last year's significant price increases.

In reading sell-side research reports, it's clear this improvement hasn't come as quickly as you'd like. It's been slower than we'd hoped, too. Nevertheless, trends are improving. Inflation is moderating. Levels of product news and innovation are increasing. And consumer response to innovation is greater when prices are stable. So we expect category trends will continue to improve in calendar 2013.

Our food categories are highly relevant to consumers. These products are found in a majority of U.S. households. That's because cereal, soup, grains, snacks, yogurt and the rest of these categories deliver the taste, nutrition, convenience and value that consumers demand. As a result, our food categories are big, and in the aggregate, they are growing. Today, each of our 10 largest categories generate $2 billion or more in annual retail sales. Together, they total $40 billion. So even low-single-digit growth on this sales space is significant. And we hold strong market positions across these categories.

Our plans for 2013 call for sales growth and margin expansion in U.S. Retail. Throughout the first half of the year, our net sales are up 1% and segment operating profit is up 4%. So we're off to a good start, and we feel good about our plans for growth in the remainder of the year. Let me give you some of the highlights, beginning with cereal.

This is a great category. From 1983, the year I joined General Mills, to today, the U.S. cereal category has demonstrated reliable, low-single-digit pound volume and dollar sales growth. Now this 30-year history includes periods like oat bran mania when cereal was hot, and moments like the Atkins Diet fads when it was not. But over the long term, the trend in cereal is steady growth.

In recent years, our U.S. cereal business have led the category's growth. From 2008 to 2012, we added nearly 2 points of market share. Now through the first half of the current year, our cereal net sales and market share were below year-ago levels. That's because other players in the category had more merchandising activity in the first half. We've got more merchandising planned for the second half, including introductory support for new items.

As you can see on this slide, our merchandising activity picked up in December and January, and this doesn't mean a loss of pricing discipline. In fact for Big G and for the category overall, year-to-date average pricing is up slightly. Ultimately, it's product news and innovation that drive category growth. And we've got some strong ideas in the market today. Let me share a few examples.

Cheerios is by far the largest franchise in the U.S. cereal market, with 13% of category sales. The original flanker Honey Nut Cheerios is now the top-selling U.S. cereal. The core 3 Cheerios varieties have grown to a combined 11.5% share of cereal category sales. We've also added new flavor varieties, bringing product news and consumer excitement to the franchise. The latest variations have added another point of market share.

Our newest variety is Honey Nut Cheerios Medley Crunch. This cereal has the heart health benefits and great taste consumers expect from Honey Nut Cheerios. It also has a great texture with Os, clusters and flakes. We're supporting this launch with in-store merchandising and advertising, and retailer response has been terrific.

The strength of our cereal portfolio extends to other brands as well. Chex is one of the fastest-growing brands in the cereal aisle, thanks to several varieties that are gluten-free. Retail sales have increased at a double-digit annual rate in recent years and are up another 9% this year. Cascadian Farm organic cereal is growing at a double-digit rate and is approaching $100 million in retail sales. And many of our kid brands really have all-family appeal. Both Lucky Charms and Reeses Puffs are growing at a mid-single-digit rate. So we are seeing terrific performance on many of our established brands.

These new cereal products are currently arriving on store shelves: Fiber One 80 Calorie Chocolate cereal offers 35% of the adult daily value of fiber and great chocolate taste. New Peanut Butter Toast Crunch builds on the success of our Cinnamon Toast Crunch franchise. And we're also testing BFAST, a shelf-stable breakfast shake with 8 grams of protein, 8 grams of whole grain and 3 grams of fiber per serving.

Now I've heard some investors question the future growth of the cereal category. We remain very bullish on cereal, and here's why: Cereal tastes great and it's quick and easy to eat. Cereal beats most other breakfasts on price. It's just $0.50 per serving, and that includes the milk. Cereal is one of the lowest calorie options for breakfast, too. And cereal is nutrient-rich, a bowl of cereal's actually a source of protein. Including the milk products like Fiber One contain up to 7 grams of protein per serving and fortified cereals provide more iron, folic acid, zinc and B vitamins than any other conventional breakfast food.

Breakfast is a growth market, of course. The number of breakfast occasions rises with U.S. population growth. Breakfast eaten at home are increasing, and cereal continues to be the most popular at-home breakfast option by a mile. So we have confidence in the long-term growth prospects for cereal.

We are equally excited about yogurt. The market generates annual retail sales of nearly $6.5 billion. Recently, category sales growth has been led by the Greek segment. When you look at units, instead of dollars, light, regular and kid varieties are equally popular. We are getting our yogurt business back on track. We are leveraging 3 great brands: Yoplait, Mountain High and Liberté. We're bringing product innovation in impactful marketing programs to all parts of the category. And we are encouraged by recent trends.

For example, in the Greek segment, our 4-ounce multipacks and yogurt granola parfaits are doing well, but our biggest innovation is Yoplait Greek 100-calorie yogurt. Launched last fall, all 6 original flavors are currently turning in the top third of the total yogurt category. We see a lot of upside on this business. We just added lemon and tropical fruit varieties to the line last month. Year-to-date, our Greek yogurt sales are significantly outpacing growth of the segment, and we've picked up nearly 3 points of market share.

At the same time we're gaining traction in Greek, we're stabilizing Yoplait Original and Yoplait Light yogurt, what we call our core cup business. Distribution for established items like these have fallen across the category as the Greek segment expands. Increased turns are the first step in restoring growth for these product lines and we're seeing a double-digit improvement. We'll build on this initiative in the months ahead.

Yoplait is the leader in the kid segment of the yogurt category, with a nearly 50% share. We've just launched a new twisted variety of Go-GURT. A new Yoplait Pro-Force is a great-tasting, higher-protein yogurt for kids and tweens.

New segments, like Greek, have been driving per capita consumption in sales growth in the U.S. yogurt category for the last 35 years. And we expect this will continue. As Chris O'Leary will highlight in just a few minutes, yogurt markets like France and the U.K. have even more product segments than the U.S. And we remain very committed to providing product news and innovation across the category in the years to come.

Let's turn to the soup aisle. We entered this category when we acquired Progresso in 2002. Our share of the ready-to-serve segment has grown consistently since to 40% of segment sales today. We like the prospects for continued growth for Progresso. Our new ProgressOH! television ads invite millennials to share how Progresso soup help them manage their weight and feel great. Progresso is the market share leader with baby boomers. We're reaching them with targeted advertising. And we've expanded helpful penetration and buy rate with Hispanic consumers.

Our Pillsbury and Betty Crocker brands lead the Baking Products category, with annual retail sales in excess of $2 billion. We've just wrapped up another great holiday baking season, with net sales growth and market share gains for both refrigerated dough and dessert mixes in the latest quarter.

Finally, better-for-you snacks are very on trend with today's consumers. Today, the grain snack category generates over $3 billion in retail sales. Our sales are leading growth of the category. Since 2008, we've added 9 points of market share. We've got some great new snack items just entering the market. New Fiber One Protein Bars have at least 6 grams of protein per serving and 20% of the adult daily value for fiber at 140 calorie or less per bar. We're adding new varieties to our Nature Valley and Cascadian Farm product lines, and we're also launching Green Giant vegetable chips with at least 16 grams of whole grain per serving.

Our better-for-you snacks portfolio includes some great natural and organic items. Sales for Lärabar, all-natural fruit and nut bars have grown at a robust double-digit rate. And we've just launched Lärabar ALT in the natural channel, adding vegan-based protein to the LÄRABAR lineup. We're also expanding distribution of our Food Should Taste Good savory snacks. This line is only in a small percentage of traditional retail customers today, so we see tremendous growth ahead for this business.

Across all of U.S. Retail, we have launched over 100 new products in 2013. And a few weeks ago, I had the opportunity to review our 2014 new products. We have an even stronger slate of innovation lined up for 2014. I look forward to giving you more details on this at our Investor Day in July.

Let me say a quick word about media investment. In recent years, our U.S. measured media spending has grown to over $900 million as tracked by Kantar. We expect our U.S. media expense to be down for fiscal 2013 in total. But our in-market pressure continues to expand. Over the latest 12 months available, our tracked advertising dollars are up, and we've added almost a point to our overall share of voice with the consumer.

We also remain committed to holistic margin management or HMM. This is our innovation discipline to identify and eliminate waste and protect our gross margins. For 2013, we are on track to achieve record levels of supply chain cost savings. And we have a good pipeline of HMM projects in the works. So we like our prospects for protecting and expanding our margins in the years ahead.

We'll outline our 2014 plans for you in greater detail this summer, but I'd like to share some initial thoughts with you today. We expect to see continued sequential improvement in the operating environment. We have a strong lineup of consumer-focused product news and innovation planned, including new yogurt items, new cereals and robust plans for other categories, including dinner mixes, baking products and snacks. We expect input-cost inflation to be manageable and HMM savings to be strong. Add it up and we see sales growing at a low-single-digit rate but operating profit growing a bit faster than sales.

Thanks for your time this morning. I will now turn the podium over to Chris O'Leary. Chris?

Christopher D. O'Leary

Thank you, Ian, and good morning, everyone. It's a pleasure to be back at CAGNY. I'm excited about our International growth prospects, because: one, we compete in great categories; two, we are increasing scale in both developed and emerging markets; and three, we see excellent opportunities for margin expansion ahead.

General Mills' International business have been growing rapidly. Over the past 20 months, we've made several acquisitions. Most notably, the international Yoplait yogurt business and Yoki. The growth from our base business has been the real story. Excluding acquisitions, our sales have been growing at a high-single-digit compound rate over the past 5 years. And we're seeing continued good growth in fiscal 2013. International segment sales will exceed $5 billion this year. And if you add our proportionate share of joint venture revenues, total international sales would be north of $6 billion. We are driving this performance by focusing on the full 5 global platforms that Ken mentioned earlier. These platforms represent approximately 75% of our total international sales, including joint ventures. These categories are large and are projected to grow at mid- to high-single-digit rates over the next 5 years. Let me describe how we're building these categories around the world. I will start with cereal.

Cereal Partners Worldwide, our joint venture with Nestlé, is in its 23rd year. This business operates in more than 130 countries and generates more than $2 billion in annual sales. Sales continue to expand and CPW holds a 23% value share in markets where it competes. And CPW delivers strong cash returns to the 2 partners. Over the last 5 years, dividends to General Mills have totaled nearly $300 million. The $26-billion-global-cereal category has plenty of growth potential for all the reasons Ian described. Cereal is nutritious. It's convenient. It's affordable, and it tastes great. We believe that breakfast cereal is one of the best, perhaps the best, option people can choose for breakfast.

Let's focus on CPW's territory, the cereal market outside of North America, which represents the majority of global cereal sales today. Developed markets still represent the largest portion of CPW sales. Although category growth has slowed in Europe recently, we are seeing good performance in markets like the U.K. where category sales are up 2% in the most 52 -- most recent 52 weeks. CPW gained share there with sales up 3%. Category sales in France have increased, too, and CPW gained nearly a point of market share with great growth on Chocapic, Fitness and the teen-focused line of cereal. The category is expanding at stronger levels in emerging markets. Latin America, Asia, the Middle East and some Eastern European markets are seeing high-single digit and even double-digit growth. CPW holds leading-market positions in many emerging markets and our sales continue to grow nicely, including a double-digit increase in Latin America and in Asia where CPW accounts for more than half of category sales.

We are investing in manufacturing capacity to support future growth. In calendar 2012, we opened new plants in South Africa and Malaysia. CPW now has 17 plants in 14 countries. Startup expenses for the newest plants will be reflected in CPW's results in fiscal 2013. We expect margins will expand in 2014 as we leverage this added capacity.

We are investing because we believe in the growth potential of cereal. Today, the 4 largest cereal markets account for over half of cereal volume but just 6% of the world's population. Per capita consumption is still low in many markets, so we like the future growth prospects for this category and for CPW.

Let me now shift to our International segment where sales and operating profit had been growing at double-digit compound rates over the last 5 years. We are growing even faster through the first half of this fiscal year, including new businesses. Excluding new businesses and foreign exchange, first-half sales increased at a mid-single-digit rate. Canada is our most established international market. After assuming the Yoplait business there, we are now the fourth largest food company in Canada. We have scale across all 3 temperature states, refrigerated, frozen and shelf-stable and that's giving us opportunities for revenue growth as we leverage our portfolio.

We are excited about the yogurt market in Canada. This is roughly a $1.5 billion category growing at a 7% rate. Our Yoplait and Liberté brands together account for more than a third of category sales. Combined, these brands are the market leader in the fast-growing Greek segment. Yoplait is the leader in the diet -- light and diet segment. We are driving growth in the kid segment with innovation on Yoplait yogurt tubes and beverages. And Liberté leads the indulgent yogurt segment, which has grown more than 20% in the last 52 weeks.

We see cost synergy opportunities ahead as we explore ways to coordinate capabilities between Yoplait and Liberté.

Let's turn to Europe where our business has been growing nicely. The acquisition of Yoplait contributed significant sales growth in fiscal 2012, but sales for our base business have been increasing at a 5% compound rate. And through the first half of fiscal 2013, constant currencies net sales rose 23% in this region. Yogurt is now our biggest category in Europe, and France is the largest yogurt market. The category generates $6 billion in retail sales across a variety of segments. We concentrate on segments where we can offer value-added innovation. We're the market leader in kid, in fruit and in the indulgent segments, where we're seeing good performance on Calin, a functional yogurt high in calcium and vitamin D. This focused approach is serving us well. Our retail sales were up 6% in the latest 52 weeks and we've gained nearly a point of market share.

In the United Kingdom, the yogurt category generates $3.5 billion in retail sales. This is another highly segmented market, and we're taking the same selective approach on where we compete. Retail sales for Yoplait are growing 6%, and we continue to gain share. As we fine-tune our product mix and identify cost synergies, we expect profits to grow faster than sales for our European yogurt business going forward.

Häagen-Dazs is another big brand for us in Europe. Over the past 2 years, sales have been growing at a 7% pace. We've been centralizing our marketing efforts across the region, and this year, we launched our first global advertising campaign. So that's a little bit about Europe.

Let's now turn to the emerging economies. As Ken mentioned earlier, China is our largest emerging market today. Constant currency net sales have been growing at strong double-digit rate. We're on track to deliver solid growth again in fiscal 2013. Häagen-Dazs ice cream accounts for about half of our sales in China. Wanchai Ferry frozen foods represent about 1/3 and the remainder is our snacks business. Our Häagen-Dazs growth opportunities in China are broad based. The annual mooncake business continues to expand year-over-year, so does our network of shops. We're opening 50 new cafés this year and we're seeing double-digit sales gain in grocery outlets as we increase visibility of Häagen-Dazs with in-store sampling and displays.

Our Wanchai Ferry frozen foods business had been growing at a 26% compound rate over the last 5 years and are now available in more than 136 cities across China. We've expanded the product line beyond dumplings to include frozen noodles, tongyuan and wonton, with lots of innovation still to come. The economy in China has slowed a bit recently, but demand for packaged foods remains strong. So we see tremendous prospects for our business here as we continue to introduce new products and expand distribution to new cities.

Our business in India is small but very fast growing. We expect sales to exceed $70 million in fiscal 2013. Our business here includes Pillsbury branded atta flour plus Nature Valley snacks and Häagen-Dazs ice cream. We're applying the same city-by-city growth model in India that we've used successfully in China, establishing distribution in key markets as the modern trade grows. We'll take this approach with Parampara foods, the meal starters business we acquired last May. We think this brand will drive significant growth for our business in India in the years ahead.

Yoki has opened the door for strong business growth in Brazil. This is the sixth largest economy in the world and its middle-class is large and fast-growing. It's also a complex market. It's culturally diverse with distinct regional differences and levels of economic development, and the majority of food retailers are regional players. Yoki generates more than $0.5 billion in annual net sales to date. The majority of the portfolio aligns with our global platforms, predominantly snacks and convenient meals. In recent months, we've been seeing double-digit growth on many of Yoki's largest product lines, including popcorn, seasonings and side dishes. Yoki has built a network of manufacturing and distribution locations throughout Brazil. This network increases the efficiency and cost-effectiveness of distributing products across this large country. And Yoki's direct sales force of more than 1,000 employees works in multiple retail channels across Brazil, effectively navigating this marketplace dominated by regional accounts. We see exciting opportunities to add value and expand margins on the Yoki brands. For example, General Mills has a long history with convenient packaged meals like Old El Paso. We are looking at ways to -- we can combine Yoki seasonings, for example, with the basic foods business to provide convenience for Brazilian consumers.

Dessert mixes are part of our heritage, too, and we have technology and know-how to bring to Yoki's dessert line. We're also identifying ways we can apply microwave technology to Yoki's popcorn business. In addition, Yoki's infrastructure will help us grow Nature Valley and our Häagen-Dazs businesses in Brazil and allow us to expand into new categories in the future.

In total, our recent acquisitions give us new products that are good fit with our company portfolio. We've gained the infrastructure and scale in key emerging markets. These acquisitions have contributed nicely to our top line and operating profit in 2012 and 2013. But due to various purchase accounting effects and funding cost, they haven't made a notable addition to General Mills' EPS. In 2014, we expect these new businesses to contribute good sales growth and they will contribute approximately $0.15 worth of operating earnings per share. Now that's total EPS, not accretion. And remember, that's just counting our 51% interest in Yoplait International.

With these acquisitions, we have already sailed by our 2015 goal of reaching $3.7 billion in international sales. As I mentioned earlier, we expect our International segment to generate more than $5 billion in sales in fiscal 2013. Europe will still be our largest geographic region, but our business in Asia now represents nearly 1/4 of international sales and our business in Latin America has doubled with Yoki. Our international operating profit has been growing, too, compounding at 16% over the last 5 years. Excluding acquisitions, operating profit has been growing at a high single-digit compound rate. Our operating profit margin has averaged around 9%, increasing to 10% in the past several years as we have ramped up our HMM activities. We are on track to deliver another year of significant productivity savings in 2013. For example, in China, we have streamlined the manufacturing processes for Wanchai Ferry products, adding automations to the production lines and reducing our labor needs. In Europe, we've centralized ingredient and packaging sourcing activities to leverage our buying expertise. We are exploring ways we can fold Yoplait facilities into these efforts to generates further savings. And we're starting to introduce our HMM concepts to the Yoki business. So we have identified clear opportunities to expand gross margin in the years ahead.

We are also increasing the efficiency of our administrative organization with an initiative we call, Project Boost, which was part of last year's restructuring activities. We have realigned our geographic regions. We have created strategic business units for Häagen-Dazs and Yoplait to provide global marketing coordination for these important brands. And we've centralized resources, like marketing and finance, around key markets, reducing redundancies and providing more robust developmental opportunities for our employees. These efforts will provide SG&A cost savings and boost operating margin in fiscal 2013 and beyond. More important, we've aligned our resources with our global growth strategies, so we are well positioned to drive future growth.

To wrap up my comments this morning, our International segment has been posting solid sales and operating profit results, and we're broadly on track to meet our performance goals in fiscal 2013. Our joint ventures continue to make good contribution to General Mills' earnings and cash flows. Our new businesses will be important contributors to General Mills' sales and earnings in 2014. My team and I are sharply focused on driving sales and earnings growth across the enhanced business portfolio we have built. We're energized by the opportunities we see in both developed and emerging markets.

With that, I will turn it over to Don Mulligan.

Donal Leo Mulligan

Thank you, Chris, and good morning, everybody. In my remarks today, I'll begin with the comments on our Bakeries and Foodservice business and summarize the growth outlook for General Mills in total.

While U.S. food expenditures favor food at home today, away-from-home sales still total over $0.5 trillion per year, so this market provides a significant growth opportunity for General Mills and our brands.

After flat to declining sales at the end of last decade, Foodservice industry sales trends are improving. Technomic projects that the industry will post another year of 4% nominal growth in 2013, with both price and volume contributing to the increase. Our strategy in this market has been to focus on the product lines and customer channels that offer the best opportunities for growth. In convenience stores, our direct sales team has increased snacks distribution in each of the last 5 years, driving double-digit net sales growth. Our Nature Valley Oats 'n Honey bar is the top turning grains snack bar in the convenience store channel. And we're now expanding distribution of our recently acquired Food Should Taste Good in c-stores, too. Recent legislation for the K-12 school nutrition program recommends more whole grain at breakfast, so we have a great opportunity to expand distribution in the education channel. We are the cereal category leader in school breakfast programs. And all of our Big G cereals contain more whole grain than any other single ingredient. Our Pillsbury branded waffles, pancakes and French toast are rich in excellent source of whole grain with 16 to 24 grams per serving. And we recently added Pillsbury breakfast Flatbread and Pillsbury mini muffins to our line up.

Turning to yogurt. Yoplait ParfaitPro gives Foodservice operator's an easy way to prepare layered yogurt parfaits. We improved our Trix yogurts by taking out the artificial colors and flavors, and we've expanded our products assortment to include great varieties of both cup and Yogurt ParfaitPro. Our strategy of focusing on the most profitable products in the fastest-growing customer segments is serving as well. Since 2008, our operating profit has increased at a 14% compound rate. And our profit margin has expanded by nearly 600 basis points to a level quite near General Mills' corporate average.

For 2013, Bakeries and Foodservice is on track to deliver the financial targets we outlined last summer, including segment operating profit growing faster than sales and a solid double-digit operating profit margin.

Dave Dudick, President of this business, will provide a more detailed performance review during our third quarter earnings call next month. As you'll hear then, we're enthusiastic about our opportunities for continued sales and earnings growth in this business.

For General Mills in total, 2013 is shaping up this way. We expect net sales to increase at a mid single-digit rate, including low single-digit growth on our base business and contributions from acquired businesses. We expect segment operating profit to grow at a mid-single-digit range. Contributions from acquisitions will be modest this year, net of investment spending and transition and start-up costs. In December, we raised our guidance for adjusted diluted earnings to $2.65 to $2.67 per share. I'll note that we haven't changed our pension accounting methods, so our guidance includes the $0.06 per share headwind we told you about back in July.

We expect our operating performance to result in another year of robust cash generation in 2013. Since 2008, our free cash flow, or operating cash flow less CapEx, has averaged over $1.3 billion per year and has grown at a 9% compound rate, outpacing segment operating profit growth.

Cash flow per share has increased at a double-digit rate during that time and our cash flow yield is approaching 7%. The strong cash flow performance allowed us to broaden our business in key categories and key markets. The new businesses we've added since 2011 generate more than $2 billion in annualized net sales. This recent period of acquisition activity investment did not interrupt growth in General Mills' dividends. Our dividends have increased at an 11% compound rate in recent years. And I confirm today that our plans for 2014 include a further dividend increase.

Acquisition timing did impact our share repurchase activity in fiscal 2012, but we've renewed buyback activity this year. Through the first week of February, we've repurchased almost 19 million shares for a total of approximately $740 million. We expect to achieve a modest decline in average diluted shares outstanding in fiscal 2013. And in 2014, we are targeting a net 2% reduction in shares outstanding, consistent with our long-term goal. Now earnings growth is the primary contributor to our increased cash generation over time. However, we are also driving improved working capital efficiency. Since 2008, our core working capital has increased at an average of just 2% per year versus a 5% annual increase in net sales. As many of you know, our corporate performance metrics include the goal of increasing return on invested capital. The acquisitions of Yoplait International and Yoki caused a decline at our ROC in the last 2 years, but that's only temporary. We expect to resume improvement in return on capital starting in 2014. And our commitment to increasing return on capital over the long term has not changed.

Looking ahead to 2014, we expect General Mills to grow in line with our long-term model. Our worldwide top line growth will be led by a robust lineup of product news innovation and will include an incremental 3 months of contributions from both the Yoki and Yoplait Canada. We expect gross margin improvement fueled by strong HMM initiatives and cost synergies. And with the ongoing cost discipline and a full year savings from our 2013 restructuring actions, we expect operating margins to improve as well. On the bottom line, we expect high single-digit growth in earnings per share next year. We expect this earnings performance, coupled with a strong dividend yield, to generate double-digit shareholder returns over time. In summary, General Mills' financial condition is strong and we have plans to generate good growth returns for shareholders in the years ahead. With that, I'll turn the microphone back to Ken for a few closing thoughts. Ken?

Kendall J. Powell

Okay. Thank you, Don. Ian, Chris and Don have just given you quite a detailed update on our progress in the current year and a high-level preview of our plans for the year immediately ahead. We've reviewed the key investments we've made in recent years to strengthen our business in the U.S. and expand our reach in key markets abroad, particularly emerging markets. We've updated you on the growth we see ahead for our new business portfolio. This outlook includes slightly higher EPS guidance for this year and plans to deliver high single-digit EPS growth beginning in 2014.

We've reaffirmed our commitment to increasing returns on invested capital and generating superior returns to General Mills' shareholders.

General Mills has a long and distinguished record of superior shareholder returns, above the overall equity markets performance. Over the most recent 5 years, which was a particularly challenging period for the capital markets and the economy overall, return to General Mills' holders significantly outpaced the broader market. And over our latest 4 reported quarters, we've delivered continued good growth and returns. This includes strong increases in sales and operating profit, high single-digit growth in earnings per share and strong double-digit growth in operating cash flow and in the cash rely to shareholders through dividends and share repurchases. Over these last 4 quarters, stock price depreciation and dividends combined to generate a, double-digit return to holders of GIS. Our goal is to build on our strong performance record in the quarters and the years ahead.

So we'll give you our next progress update on March 20 when we plan to release our third quarter results. Annual results are scheduled for release on June 26. We'll hold a conference call in conjunction with that year end report. And then we plan to host an investor meeting at the New York Stock Exchange on July 9, where we'll share a detailed overview of our 2014 growth plans. So we're very excited about our business and the growth that we see ahead. We very much appreciate your interest in General Mills and now I will open the floor to questions. And Kris, if you could please direct the activity.

Question-and-Answer Session

Kristen Smith Wenker

Let's start over on this side of the room. Let's start with Ken who's buried in the middle here, Ken Goldman.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

In terms of cereal, you did give an outline for why you think cereal is an attractive category. And I think all the reasons you gave were fair. But I guess my question is, those were all reasons that would've heard for 5 years ago, 10 years ago as well, and yet cereal, at least according to Nielsen data, has been somewhat of a laggard in terms of category growth. So can you help us understand why cereal is considered, including those attributes, one of the more attractive categories out there right now?

Kendall J. Powell

Yes, thank you for that question, Ken. The last 2 years, in particular, which is where I think you would notice that and assume that weakness, across many of our categories, but perhaps in some ways most acutely in cereal, have been characterized by a lot of pricing, and pricing has had a very negative impact on unit volume. And so I think that, combined and the other thing that hurt the categories by -- there were some fairly significant recalls by some category participants that also hurt the categories. So I think there've been events that have hurt the cereal category, more last 2 years. The destiny of that category -- of the cereal category growing or declining was in the hands of the participants. When we innovate well and bring good health and nutrition news to the category, it responds very nicely. You can see that in many of the brands. And so I really think there's those macro factors, and I think the participants in the category, all of us, have to bring more meaningful innovation to drive the category. But all those factors I listed are certainly reasons why the category does and can respond and grow again, and I'm certain it will.

Kristen Smith Wenker

Can we hand the microphone to Alexia?

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

So you mentioned that media spending, I think, would be down this year in absolute terms. I was just curious about what led to that decision. How was your advertising media mix changing to improve both effectiveness while reducing that spend?

Kendall J. Powell

Alexia, so really, as we entered the year and you heard on the comments over the course of the presentation on just the promotional environment and mix has changed a little bit. And so as we entered the year, we found ourselves really not quite all the way where we needed to be on the promotional front, particularly promotion frequency. And so we have adjusted, and I would say, very carefully and very tactically. But it's very important -- as you know, we're not trying to win on promotion, but we really do need to be in the zone. And we found ourselves out of the effective zones in some of our categories. And the problem with that, that then poses for us, if we're not really where need to be, then the rest of our marketing activities simply aren't as effective because the consumer is not seeing the price point that they would like to see. So we made the decision early in the year, as we saw the environment, to adjust, again, carefully and tactically, but to adjust, and that caused increase in promotion and we funded that primarily by reducing media. We think that, that was a very appropriate thing to do in this environment. As we've done that, we've seen the rest of our marketing program, including our advertising, we see the effectiveness of that improve. We see baseline solidify, so we think that, that was a very good trade-off and that's really what drove the decision. As we go forward, our interest is in increasing media spending roughly in line with sales. We think that's important, particularly as we continue to launch a lot of new products and brands that we want to create trial and awareness for. So that continues to be sort of the broad planning approach.

Ian R. Friendly

If I could add one thing to that. Some of the differences I talked about between the tracked spending and what we report is just like we apply HMM to our supply chain, we do the same in our marketing expenditure. And we are certainly finding a lot of ways to reduce what we call nonworking expenditure in media, things like ad production, given our scale. And we invest that. The dollars look the same, but we're getting more GRP, so to speak. Combined with digital -- as we -- as digital explodes, that's a much more efficient approach for us as well. So while the dollars look one way, we're getting the increasing impact from what we do spend.

Kristen Smith Wenker

Can we hand the microphone to Rob Moskow and then I'll come down this way.

Robert Moskow - Crédit Suisse AG, Research Division

A follow-up for Ian. Ian, you showed a slide showing the categories that you're in, showing volume getting a little bit better while pricing abates. And you described that as things are getting better. But I don't think you showed a slide showing your consumption data in Nielsen. And when we, from the outside, look at the Nielsen data, it doesn't look as good as that. So could you comment on how you're doing in your categories in terms of market share? Are you on track? And do you feel like your business is getting better as well?

Ian R. Friendly

Yes, thanks, Rob, for that question. Our share is down collectively, but it's -- we're in 25 categories. So at times, putting it all together may not be as clear a picture as looking at each category. But what we are seeing, certainly, in our -- for our own business as well as sequential improvement, we have some categories that are just performing very well, and we're performing very well, take grain snacks, take soup. Cereal, which is pretty important in our data, as I commented in my remarks, is down in the front half of this year. We've gained share for 4 years in a row. It's really very uniquely around a merchandising and new products slow that will a reverse here, and I think, in the back half and improve as we go forward. And then the other influential part of that data is the yogurt category, where Greek has taken share away from participants and certainly, from us. But we're seeing that one turn, too. And so as I shared with you in my remarks, we're seeing the sequential improvement we want to see in all our business overall. But it started out early in the year a little bit behind our categories, but I'd like the trends I'm seeing.

Kristen Smith Wenker

Bryan Spillane.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Ken, I've got a question for you. Just in terms of M&A, I was just trying to understand, inferring from the comments you made about wanting to grow return on invested capital and sort of after to 2 years of significant investment kind of being back on the model. Should we infer from that, that there's maybe less of an appetite for M&A right now, maybe relative to where you were 2 years ago? Just some thoughts around that.

Kendall J. Powell

So thank you for that. And we, as we said, we've been through a period of significant investments. And I would say, while we obviously have interest in expanding our scale in emerging markets and in core categories like yogurt, I would say, we -- and we planned over our long-range of thinking, think 3 years, 4 or 5 years that we would want to do that, we didn't anticipate that the opportunities that came before us would come as quickly and as clumped together as they did. And so it has been a period of significant investment. As we look forward, there are still areas of interest to us. As we mentioned, India as an example, we don't see anything big on the horizon right now. And we're very committed to returning to our shareholder model, which includes that return of cash to shareholders through dividends and through share buybacks. And so we would just expect a more normal flow of M&A activity, which should be reduced clearly from what we've seen over the last couple of years, which was, I think, as everyone knows, was unusual for us.

Kristen Smith Wenker

Could we hand the mic to Chris Growe.

Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division

I just had a quick question, I think, for Chris, in relation to the International business. And I was just curious, as you look ahead the next several years and also next year, but the opportunities you have in markets like India or Brazil with Yoki or even Yoplait, and the ability to move in some white space markets, should we think about the International business's ability to grow its profits as certainly good and maybe more so in line with sales rather than above because of ways -- areas we can reinvest back into the business? That can be an important part of International business in the next, say, 3 to 5 years.

Kendall J. Powell

Okay, so thank you. The -- first and foremost, the way we're going to continue grow internationally is by investing in the categories in which we already compete in, in the markets where we're at because we believe there's just so much opportunity there. Second, if we're going to focus on margin enhancement in those markets. With response to new categories, we are going to invest in yogurt per se, as you mentioned, in Brazil and India, maybe, obviously, we're looking at it. We bought Yoplait with the -- because it's such a great category globally. Frankly, we have other more fundamental things to do right now in both Brazil and India and even in China. So I would say we have new categories, such as yogurt, on our horizon. In the short term, we are focused on driving penetration in the categories we are in, driving margins and keeping an eye on the longer term. So it's no news to report on any new activities there, but we're clearly focused on what we've got.

Kristen Smith Wenker

I think we have time for just one more question. All right. Well then, it'll be Eric Katzman.

Eric R. Katzman - Deutsche Bank AG, Research Division

Don, a couple of points. I appreciate the free cash flow detail, but in looking at fiscal '14, I guess the acquisitions you've accounted for, so far, they've been neutral to, maybe, slightly dilutive, so when you talk about the $0.15 incremental or versus cumulative, I'm not really sure how that comes out. And then what is going on with the core business if, let's say, you've got 4% to 5% growth from the acquisitions incremental plus 2% from share repo. Your joint ventures, you said, are accelerating. That doesn't point to a lot of core growth in fiscal '14. Maybe you could help us bridge that.

Donal Leo Mulligan

Yes. Let me start by -- the $0.15 of operating profit that Chris alluded is total, not incremental.

Kristen Smith Wenker

Operating EPS.

Donal Leo Mulligan

Operating EPS, thank you, $0.15 of operating EPS is total contribution, not incremental. So the incremental piece we see is obviously the base growth in the business plus the annualization of Yoki and Yoplait Canada. So a portion of that $0.15 is incremental. In terms of EPS accretion or dilution in total for those businesses, they were slightly dilutive this year. We were expecting them to move more towards neutral to slightly positive next year because the funding costs are essentially built into our numbers now and the operating contributions will increase in F '14 versus F '13.

Kristen Smith Wenker

Great. Thank you, Ken and team, for your presentation and for a wonderful breakfast, and we'll now move to the break-out room.

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