Kris Wenker - Senior Vice President, Investor Relations Don Mulligan - Chief Financial Officer, Executive Vice President Jeff Harmening - Executive Vice President, Chief Operating Officer, U. S. Retail Ken Powell - Chairman of the Board, Chief Executive Officer

Ken Zaslow - BMO Capital Markets Eric Katzman - Deutsche Bank Matthew Grainger - Morgan Stanley John Baumgartner - Wells Fargo David Palmer - RBC Capital Markets Jason English - Goldman Sachs Chris Growe - Stifel

Ladies and gentlemen, thank you for standing by. Welcome to the General Mills fiscal 2015 second quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded today, Wednesday, December 17, 2014. It is now my pleasure to introduce Kris Wenker, Senior Vice President, Investor Relations. Please begin.

Thanks, operator. Good morning, everybody. I am here with Ken Powell, our CEO, Don Mulligan, our CFO and Jeff Harmening, Chief Operating Officer for our U.S. Retail segment. And I will turn the call over to them in just a minute. First let me cover my usual housekeeping items. Our press release on second quarter results was issued over the wire services earlier this morning. It's also posted on our website, if you need a copy. You can find slides on our website too that supplement this morning's presentation. Our 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 with that, I will turn you over to my colleague, starting with Don.

Thanks, Kris. Good morning and happy holidays to everyone. Thank you for joining us today. Slide four summarizes our results for the second quarter. Net sales totaled $4.7 billion, down 3% as reported and down 1% in constant currency. Segment operating profit totaled $847 million, 6% below prior year on a constant currency basis. Net earnings declined 37% to $346 million and diluted earnings per share were $0.56 as reported. These results include $233 million for restructuring expense in the quarter as well as mark-to-market valuation effects. Excluding these items affecting comparability, adjusted diluted EPS was $0.80, compared to $0.83 a year ago. Constant currency adjusted diluted EPS matched last year's second quarter. Slide five shows the components of total company net sales growth. Pound volume reduced sales by two percentage points while sales mix and net price realization added one point of sales growth. And as I mentioned, foreign exchange lowered reported sales by two percentage points. Turning to our segment results, slide six summarizes U.S. retail performance. We have realigned our U.S. retail businesses into five operating units cereal, yogurt, snacks, meals and baking products. I will let Jeff Harmening tell you more about this change in a minute. In total, net sales for U.S. retail decreased 4% in the quarter, with growth in snacks and yogurt offset by declines in the remaining units. Segment operating profit was down 10% from last year's levels. Innovation in our convenient stores and foodservice segment helped drive net sales growth of 4% in the second quarter. Our six priority platforms, those are yogurt, snacks, cereal, frozen breakfast, biscuits and mixes posted combined net sales growth of 11%. Favorable product and channel mix helped drive a 13% increase in segment operating profit for the quarter. Slide eight summarizes our second quarter international results on a constant currency basis. Sales grew 3% overall led by Latin America, where net sales grew 14% on inflation driven gains in Argentina and Venezuela. Sales for the Europe region were up 4%, led by strong innovation on Old El Paso. In the Asia-Pacific region, sales increased 2% with double-digit growth in both the Middle East and Korea partially offset by lower Haagen-Dazs sales in greater China. And constant currency sales in Canada decreased 7%, primarily due to a fire at a copacker that forced us to cancel Green Giant merchandising in advance of the Thanksgiving holiday. Slide nine shows our second quarter gross margins excluding restructuring and mark-to-market effects, declined 80 basis points. This was primarily due to the lower net sales, higher supply chain costs and unfavorable mix. We are continuing to estimate 3% supply chain inflation for the full year. At the end of the second quarter, we were roughly 70% covered on our commodity needs for fiscal 2015. After-tax earnings from joint ventures totaled $27 million in the quarter, up 13% in constant currency. CPW sales were 3% below year ago levels in constant currency with good growth in emerging markets, such as Brazil, Chile and Turkey offset by continued category weakness in Western Europe. Constant currency sales for Haagen-Dazs Japan grew 5% behind strong results for core mini cups, multipacks and seasonal items. Slide 11 summarizes a few other income statement details. Corporate unallocated expense excluding restructuring and mark-to-market effects decreased by $21 million in the quarter. We incurred $233 million in restructuring charges in the quarter associated with previously announced projects. Net interest expense increased 13% from prior-year due primarily to higher debt levels. We continue to expect interest expense will be up high single digits for the full year. Effective tax rate for the quarter was 31.8% as reported. Excluding items affecting comparability, the tax rate was 33.5% this year compared to 33.2% a year ago. And average diluted shares outstanding declined 5% in the quarter. For the full year, we are estimating a 4% net reduction in average diluted shares outstanding. Slide 12 shows that our core working capital declined 5% versus last year's second quarter, driven by continued improvements in accounts payable. This makes seven consecutive quarters in 11 of the last 13 that we reduced our core working capital versus the prior year. On slide 13, you can see that cash flow from operations totaled $863 million through the first half. This was down 14% from last year, reflecting the cash flow impact of changes in current assets and liabilities and our lower net earnings. We still expect full year operating cash flow to exceed last year's levels. Capital expenditures totaled $318 million through six months. Our full year estimate of capital expenditures is $750 million including incremental spending related to recently announced North American supply chain actions. We continue to return significant cash to shareholders. Through the first half, we have paid just over $500 million in dividends. We have also repurchased approximately 19 million shares of common stock this year, for a total of roughly $970 million. Since June, we have initiated several cost savings projects intended to create a simplified, more agile organizational structure and produce fuel to invest in topline generating activities. Project Century is our effort to streamline our North American supply chain and deliver more than $100 million of cumulative cost savings by fiscal 2017. Project Catalyst is focused on simplifying our U.S. organizational design and will generate $125 million to $150 million in cost savings by fiscal 2016. We are also making changes to policies and practices that will reduce our overhead expenses. These changes should generate significant cost savings over the next two years above and beyond Century and Catalyst. Together, these initiatives will generate between $260 million and $280 million in cumulative annual cost savings in fiscal 2016 and more than $350 million in savings by fiscal 2017. We will use a portion of the savings to protect our margins and the remainder will be reinvested to accelerate growth. We expect to incur approximately $360 million in restructuring charges associated with actions announced today, about half of which will be cash. This is all on top of our ongoing Holistic Margin Management or HMM efforts, which remain on track to deliver more than $400 million in cost of goods savings in fiscal 2015 and significant additional savings in future years. Let me close by summarizing our outlook for fiscal 2015. After a first half that fell short of expectations, we expect second half net sales to grow at mid single-digit rate in constant currency. This includes the benefit of the 53rd week. Input cost inflation will be roughly 3% for the remainder of the year, which combined with HMM and other cost savings initiatives should result in high single-digit segment operating profit growth in constant currency. Adding joint venture earnings and our continued share repurchase activity and we expect double-digit growth in constant currency adjusted diluted EPS for the second half. For the full year that will result in a low single-digit growth in net sales, a low single-digit decline in segment operating profit and low single-digit growth in adjusted diluted EPS, all in constant currency. Our expectations for the second half include improving our U.S. retail sales and earnings performance. For more about that, let me turn the microphone over to Jeff Harmening. Jeff?

Thanks, Don and good morning, everyone. I appreciate the opportunity to give you an update on our plans for U.S. retail. We know that our first half U.S. retail performance was not where it needed to be. It's true that the slowdown in overall U.S. food and beverage industry sales is a challenge, but it is up to us to take actions to improve our own performance. We will do this through strong new products, meaningful renovation of existing brands and excellent execution of our marketing and customer programs. So far this fiscal year, we are gaining share in categories representing nearly 70% of our measured sales. That's not the case in frozen vegetables and dessert mixes where our price points haven't been competitive. We are making tactical adjustments to address this going forward. We mentioned in our first quarter call that trade merchandising expense was a headwind. We are working to improve trade performance going forward and in the second quarter we were able to increase our average unit prices by reducing some inefficient merchandising spending. We expect to see continued improvement on our merchandising effectiveness as we move through the rest of the year. Let me tell you more about how we are going to deliver improved performance in the back half, starting with the top three priorities I highlighted in July, namely cereal, yogurt and snacks. Our first priority for U.S. retail this year is investing in cereal for growth. Our retail sales continue to outpace the category. We have grown cereal market share in six for the last seven years and their share is up again through the first two quarters of this year. That said, retail consumer sales for our cereals in measured and non-measured channels combined were down 3% through the first half and we are not satisfied with that. We are starting to see some encouraging signs. Retail sales trends for the category and for our business have improved in each of the past two quarters and our base pound volume which measured volume sold without merchandising has improved from down 1% in this year's first quarter to up 1% in the second quarter. We know that when we understand our consumers, deliver product news that meets their needs and interests and then market that news effectively our cereal brands grow. This is happening today on a number of our brands. For example, the past few years has seen a sharp rise in consumer interest in gluten-free foods. We have leveraged that consumer insight to drive an incredible turnaround on our Chex cereal business. Chex was on a steady downward trend for most of the 2000s. Retail sales declined to 50% between 2002 and 2009. Since fiscal 2010, when we began marking the brand as a gluten-free cereal, Chex has grown at a 10% compounded rate. We expect Chex to grow again in fiscal 2015, including contributions from our new Chex gluten-free oatmeal. Consumers today are showing interest in products they perceive as minimally processed. This is driving strong growth for the granola segment where sales are increasing at a 10% compound rate in the past four years. We are the segment leader and retail sales for our granola cereals, including Nature Valley and Cascadian Farm, America's favorite granola have grown at a 27% compound rate over the same timeframe. Consumers are also looking for more protein options at breakfast. So over the past 18 months, we have introduced a variety of higher protein cereal options. The newest are two flavors of Cheerios Protein. Retail sales for this group of cereals are approaching $100 million in calendar 2014, up from just over $10 million last year. Finally, consumer desire for great tasting cereals is as strong as ever. This year, we have added more cinnamon to Cinnamon Toast Crunch and as we expected, consumers loved it. Retail sales for the brand are up 9% thus far this fiscal year. We are focusing our second half cereal innovation efforts on key consumer interest too. We are launching Cheerios Ancient Grains in January, after seeing encouraging results from a similar launch in Canada earlier this year. This cereal features oats, quinoa, spelt and kamut. We are also launching several new gluten-free cereals. Our two new Cascadian Farm granola varieties, Chocolate Lovers and Peanut Butter Bliss fall neatly at the intersection of consumer interest in granola and indulgent great tasting cereals. And are bringing back French Toast Crunch, a great tasting cereal that has maintained a loyal group of followers since it was discontinued back in 2006. When we posted news about the reintroduction of French Toast Crunch on our corporate blog a week-and-a-half ago, web traffic crashed the server multiple times. We know there's still work to do on cereal. We continue to believe what the category needs is bigger, better, fresher ideas, coupled with solid execution. We branded manufacturers need to bring renovation, innovation and advertising investment targeted to areas of consumer interest to grow sales for our business and the overall category. I look forward to talking much more about this at CAGNY in February. Our second priority in U.S. retail this year is to return our U.S. yogurt business to growth. Through six months we have seen broad-based positive momentum. Our share of the Greek yogurt segment continues to rise, reaching 12% in the second quarter thanks to continued distribution gains and strong advertising highlighting the great taste of Yoplait Greek and Greek 100. We have also been able to drive two successive quarters of double-digit retail sales great growth on original Yoplait through product renovation and compelling snack focused advertising. And we have seen retail sales for our kid yogurt business grow in each of the past four months. In total, our U.S. yogurt retail sales are up 5% year-to-date and we have gained half a point of share in the category. We have broad-based innovation across the Greek, original and kids segments in the back half. In January, we are launching a line of eight new Greek 100 Whips. Whips is a differentiated texture in the Greek segment and we think this line will be well received by consumers who are interested in the protein benefit of Greek yogurt but are turned off with the thick texture of existing products. We are also introducing new flavors of Yoplait Greek 100 and original style Yoplait, as well as kid multipacks featuring characters from the Star Wars and Frozen movies. Our third U.S. retail priority is to drive continuing growth in our better-for-you snacks business. Results so far have been excellent. We have delivered 5% retail sales growth and extended our share leadership in the grain snacks category thanks to great tasting innovation like Fiber One Streusel and Nature Valley Protein Bars. We have grown retail sales on our fruit snacks business by 4% and our natural and organic snacks business is up 18% in measured channels alone, thanks to strong innovation behind our Larabar, Food Should Taste Good and Cascadian Farm brands. We have some exciting new snack items launching in the second half of this year, including Nature Valley Nut Crunch Bars. We think this will be another highly incremental offering within our better-for-you snacks platform. On fruit snacks, we are expanding the highly successful [indiscernible] line into Fruit Rolls and in Shakes. We have many more new items coming to market in the second half, including a line of Totino's Bold Blasted Crust Pizza Rolls, which build on the great momentum Totino's has enjoyed in recent years. Old El Paso is leveraging insights and technology from our global meals platform to launch Restaurante dinner kits. These were first brought to market by our Canadian business earlier this year. And Progresso continues to bring great taste to their ready-to-serve soup category with three new offerings launching later in the third quarter. And our Pillsbury refrigerated cookie business posted a strong first-half where our holiday cookie innovation drove high single-digit net sales growth. We are following this up in the back half with Valentine's, Easter and Mother's Day seasonal cookie launches. In total, we have a great lineup of second half news and innovation across our traditional categories. I am also excited about our plans for expanding natural and organic business. Sales in the U.S. natural and organic food industry have been growing at a 12% compound rate for over a decade. General Mills has built a portfolio of natural and organic brands over that time, beginning with the acquisition of Small Planet Foods in 2000 and continuing with the additions of Larabar, Mountain High, Liberte, Food Should Taste Good and Immaculate Baking. The addition of Annie's this October puts our overall natural and organic portfolio at over $600 million in net sales. That is meaningful scale for both our suppliers and our customers. We are operating Annie's separately with John Foraker running the business out of Berkeley headquarters and reporting directly to me. Annie's will add roughly $120 million in net sales and $0.01 of EPS to our results in fiscal 2015. It's being consolidated on a one-month lag, so our second quarter results include just nine days of Annie's sales. Annie's is a great fit for us with almost 90% of sales and meals and snacks. We see excellent opportunities to drive topline growth by expanding the distribution of Annie's existing portfolio, as well as taking the well loved Annie's brand into new categories. There are also great opportunities to drive growth for the rest of our natural and organic brands as we benefit from increased scale and leverage Annie's strong go-to-market capabilities. In addition, we expect to deliver $20 million $25 million in cost synergies from this transaction by fiscal 2017 through SG&A and supply chain efficiencies. Our primary focus is on maintaining Annie's good momentum. Our priorities for the remainder of fiscal 2015 are to accelerate distribution gains in Annie's core categories by leveraging the combined capabilities of our sales teams, to expand Annie's Pizza Poppers and Mini Pizza Bagels nationally after successful introduction at a key customer earlier this year. And to prioritize among the many exciting new category opportunities we see for the Annie's brand. Beyond Annie's, we have an exciting slate of news and innovation across the rest of our natural and organic portfolio. For example, we are rolling out refreshed packaging for our Larabar Uber Bars and our protein bars. We are launching a new Immaculate branded refrigerated pizza dough and we are expanding the Food Should Taste Good brand with new categories with an edamame and roasted red pepper dip and two varieties of gluten-free non-GMO bars. In our new U.S. retail structure, sales for our natural and organic brands are folded into their respective operating units. This is the way we have been managing Immaculate Bakers and Liberte Yogurt for some time. This structure allows our smaller brands to benefit from increased sourcing, manufacturing and R&D resources as part of these larger operating units. On the marketing side, we are establishing a natural and organic Center of Excellence within our central marketing function reporting to Ann Simonds, our new Chief Marketing Officer. This will help our natural and organic brands stay connected, share best practices and leverage marketing capabilities most efficiently. This is all part of rewiring we are doing within our U.S. organization as part of Project Catalyst. And central marketing organization is refocusing the consumer insights group around consumer needs and meal occasions and they are bringing fresh perspectives on media vehicles and buying strategies. We are excited. This rewiring will let us move faster and translate better consumer insights into sales. Let me wrap up my comments this morning. We are happy about the share gains in our highest priority categories and yogurts' return to growth, but the ultimate goal is to renew topline growth for our entire U.S. retail business. This is the focus of our innovation and renovation efforts and is the goal of the organizational changes we are making. Our targets for the second half are mid single-digit net sales and segment operating profit growth and we have clear plans for delivering those targets. I am encouraged by our progress on our top three priorities for fiscal 2015 and I am really excited about how Annie's strengthens our natural and organic platform. I believe we will be well positioned to accelerate for U.S. retail in the future. I want to thank you for your time and attention this morning and now I will the microphone over to Ken Powell. Ken?

Okay. Well, good morning to one and all. Thank you, Jeff. So Jeff just described initiatives underway in U.S. retail and I will give you an update now on our other two segments and I will start with convenience stores and foodservice. U.S. sales for food away-from-home now well exceeds $600 billion annually. Technomic predicts industry sales will grow around 3% in calendar 2015. We are focused on several attractive segments of this large market. As you can see on slide 35, K-12 schools is a $19 billion channel, colleges and universities generate another $16 billion in sales and convenient stores account for more than $50 billion in food and beverage sales annually. Each of these growing channels represents great opportunities for our brands. We have focused our business on six product platforms that together represent nearly half of our total segment sales and as Don showed you a few moments ago, we are seeing good growth on many of these platforms. Our yogurt business grew 22% in the second quarter. We saw good growth on Parfait Pro Bulk Yogurt, which gives operators an easy way to make yogurt parfaits. Our Greek yogurt varieties also are performing well in foodservice channels with sales up double digit in the quarter. The success of GoGurt as a choice in McDonald's Happy Meals is another key sales driver. The GoGurt and McDonald's partnership was launched this summer in 14,000 stores nationwide and we are very pleased with the results to-date. Our snacks business is growing at a double-digit clip. That's due in part to the fact that we have more than 30 fruit and grain snack items that meet government requirements for K-12 school snacks. The current regulations call for more whole grains and reduced levels of fat, sodium and sugar. We have more innovation coming here, including Nature Valley Crisps which were introduced nationally in the second half. U.S. consumers are eating more of our cereal away from home these days. For example, the number of students eating breakfast at school continues to grow. So we have seen good growth on our Bowlpak cereals. Our cereals also are growing well in other foodservice outlets. Next month, we will begin promoting several of our gluten-free cereals in K-12 schools, in colleges and universities and in the healthcare channel. In total, our cereal sales grew 13% in the second quarter. So our convenience stores and foodservice segment has posted strong growth in the first half, thanks to great product innovation. This business is on track to deliver its 2015 targets for sales growth, operating profit growth and margin expansion. Turning to our international business. There were several items that weighed down results in the second quarter. The business disruption in Canada, the gifting policy impact on Haagen-Dazs in China and the slowdown in Brazil following strong first-quarter growth, fueled by World Cup activities. Beyond these items, we posted some good growth and we have solid plans for improved performance in the second half. Our Europe region, which also includes Australia and New Zealand posted 4% constant currency net sales growth in a challenging operating environment. Our sales growth was led by Old El Paso Mexican products. We launched Stand and Stuff Tortillas and dinner kits throughout Europe and are supporting the brand with an effective ad campaign. We will have more new product news in the second half. Net sales for our Haagen-Dazs business grew modestly in the quarter. We are launching new flavors including a limited edition winter variety across Europe. For our yogurt business second quarter sales were down slightly in the U.K. due to softness in the overall category and on our Weight Watchers line in particular. In France, we posted sales growth in the second quarter, thanks to increased interest in Greek yogurt and good growth on our Yopa line. We will have some new Greek varieties coming later this fiscal year. In Canada, constant currency net sales declined 7% in the quarter, including the business disruption Don described. Our Canada yogurt sales declined in total, but retail sales for the Liberte brand grew at a double-digit pace. We will be introducing new flavors of Yoplait Source Greek yogurt with just 70 calories per cup in the second half. Cereal sales in Canada were also down overall, but we are seeing good performance from our recent introductions. Multigrain Cheerios with Ancient Grains were launched in the first quarter and we will be introducing a similar variety here in the U.S. next month. And Nature Valley Protein Granola, which debuted in the U.S. is now a successful product in Canada. Clearly, Old El Paso is the brand where innovation works around the world. You heard Jeff talk about growth in the U.S. It's doing well in Europe and Australia. And new entrées contributed to 8% retail sales growth for our Mexican products in Canada. Nature Valley is another brand with strong global appeal. In Canada, new Nature Valley items drove 7% retail sales growth for grain snacks in the quarter. In Latin America, constant currency net sales grew 14% in the second quarter but as Don mentioned, this was driven by inflation in Argentina and Venezuela. Our constant currency net sales in Brazil declined 2% as the overall economy has slowed. We are taking some tactical action to offset these economic challenges. We recently implemented a focused sale and distribution effort to reinforce the value of our products and this is starting to generate good results. And we continue to innovate. We recently launched Betty Crocker dessert mixes in Brazil, supported with advertising and in-store sampling. Early results are encouraging and we have some new vegetable side dishes coming in the second half. In the Asia-Pacific region, constant currency net sales grew 2% in the quarter. This included a 1% sales decline in China due to lower sales for Haagen-Dazs. Changes in government policies around gifting impacted mooncake sales and gift card redemptions in the quarter. But we continue to see good growth opportunities ahead as we bring innovation to our Haagen-Dazs shops and to retail distribution. Since the end of fiscal 2014, we have opened 40 new cafés and now have nearly 400 ice cream shop across China. And we have expanded our retail business to 10 additional cities so far this fiscal year, bringing the total to more than 50 cities in Mainland China. With these initiatives, we expect to reaccelerate growth on Haagen-Dazs in China in the back half of the year. Sales for Wanchai Ferry products in China grew at a double-digit pace in the second quarter and we remain the leading brand in the dumpling category. Crystal tangyuan has been a big hit. So we are adding new varieties to this line. We are launching these items in time for Chinese New Year celebrations and we expect to have a strong holiday performance. And our plans to launch Yoplait yogurt in China remain on schedule. Plant construction is on track. We are finalizing product formulations and we have achieved strong results in head-to-head testing versus the competition. We are excited about this opportunity with yogurt projected to be a $17 billion category in China within the next four years. So for our international segment, we expect to see good constant currency sales and profit growth in the second half and they remain on track to achieve their full-year constant currency growth targets. Let me say a few words about our Cereal Partners Worldwide joint venture. Our net sales declined 3% in the quarter on a constant currency basis. Overall category performance in the big developed markets of the U.K. and Australia is lackluster. However, as you can see on slide 46, there's good category growth in emerging markets. CPW holds leading share positions in these markets and our business in these regions is performing well. We believe innovation drives cereal growth worldwide and CPW has a good lineup of new offerings in the second half. Some of these draw off the playbook that's working in the U.S. For example, new gluten-free cornflakes are now available in 17 markets around the world and Fitnesse Protein Granola is the newest variety for CPW's biggest brand. This product has 30% less fat than regular granolas. Fitness Delice is another low-fat cereal option with a touch of chocolate, now available in select European markets. We believe the long-term growth prospects for ready-to-eat cereal around the world remain very attractive and we will have more to say about that at CAGNY. So now let me step back and summarize the progress for General Mills in total at the midpoint of fiscal 2015. As I told you at the beginning of the year, our number one priority is to accelerate sales growth. We haven't delivered that yet as you look at the topline of our income statement. Under the surface however, we are very sharply focused on this priority and much is happening. The operating environment remains challenging but as we move into the second half of our fiscal year, we expect to renew sales and profit growth and we will do that by innovating. We just told you about some of the product innovation we have planned across the businesses and we are also rewiring the way we work to drive faster growth. The changes were making will increase the effectiveness of our company as a whole. We are creating an organization that is very highly focused on generating demand for our products in markets around the world. We will be better positioned to know our consumers, to innovate to meet their needs and quickly respond to new marketplace trends. Our restructuring initiatives will generate cost savings that will provide fuel to reinvest for growth, while protecting margin. So that concludes our prepared remarks. I will now ask the operator to open up the call for questions.

[Operator Instructions]. Our first question is from the line of Ken Zaslow from BMO Capital Markets. You may proceed, sir.

Good morning, everyone.

Hi, Ken.

Hi, Ken.

Just a philosophical question. Each of the last couple of quarters, General Mills continues to find more cost-saving opportunities and if the U.S. packaged food volumes continue to temper over the next couple of years, you guys have said that you are looking to hold margins, protect margin and invest in growth. Why would you not think about doing it a little differently and saying look, let's expand margins and expect more modest growth? What is the philosophical reason for why you would be going your way rather than accepting maybe slower growth and expanding margins?

Well Ken, thank you for the question. You know, over the mid and long term, our expectation will be that everyday food consumption in its many varieties of forms, whether it's in-home or through convenience channels or foodservice service channels, that fundamentally is going to be a good growth opportunity for us and we are going to see, after all a slowdown broadly across the industry, we are going to see those categories strengthen. We believe we will see unit volume strengthen some. We believe we are going to start to see, over time, a little bit of pricing come through as well. I think these are very clear expectations and very much the way the category has operated historically and our core belief is that we will see a return to those dynamics. And given that, we see the growth opportunity will strengthen and improve for that. And the way to capitalize on that very big, very core opportunity is to make sure that we are investing in innovation, we are ready to drive growth with renovation and innovation and the right kind of consumer marketing focus. So as we have said all along, also we are very, very focused, as you pointed out on productivity and margin expansion initiatives. We think that the programs that we have initiated recently that Don described around strengthening our supply chain, strengthening the U.S. organization through Project Catalyst, that will generate an additional stream of efficiency, if you will, over the next three to four years. And when you combine those two efforts, we see the opportunity going forward to maintain very solid levels of investments in innovation and marketing while protecting margins and delivering on our long-term financial model characteristics. So I guess, just to go back to the headline, our core belief is that food is going to be a big opportunity, continue to be a big opportunity. We will see our categories recover. We want to be ready to invest and capitalize on that with innovation and investment.

Great. Thank you.

Our next question is from the line of Eric Katzman from Deutsche Bank. You may go ahead, sir.

Hi. Good morning. Happy holidays, New Year to everybody.

Hi, Eric.

Hi, Eric.

I guess the rewiring and the adjustment within U.S. retail. So if I understand it correctly, so now basically Small Planet Foods doesn't exist and something like Cascadian Farms is going to report into the cereal head? Is that kind of how to think about it?

Yes. That's right.

Okay and so this, as much of an opportunity as the organic market presents and obviously you kind of agree given the Annie's purchase, you are talking about $600 million or $700 million in sales out of $10 billion or $11 billion. And so like how does shareholders, why shouldn't they be concerned that what is a relatively small and lower margin but growth business doesn't get lost in the $10 billion or $11 billion in revenue?

Yes. Thanks for that question. I think it's primarily a matter of a couple of things. The first is our historical track record. I me we brought Small Planet Foods into this $10 billion business over a decade ago and we have been growing at double digits since we have done that. And so we are used to operating natural and organic businesses out of Minneapolis and have done it for quite a while. In addition to that, we have had several brands, including Liberte and Immaculate in our baking business that we have had in our operating units for some time already and we have liked how they performed. And far from getting lost, what we have found is that not only have we been able to grow those businesses but also the understanding of the natural and organic consumer and what they are looking for has actually rubbed off on the rest of the people in the business. And so we think that there is an opportunity, not only to accelerate our growth for our natural and organic brands within these operating units, but also that the consumer understanding we generate there will have benefits for our other brands as well.

Okay and then I guess can you, Ken, maybe and with Don, can you talk a bit about just the promotional environment? I guess you are talking about, in addition to HMM, you are talking about hundreds and hundreds of millions of savings relative to, what is it, $2.8 billion or so of EBIT and it seems that in the industry, at the moment, it's kind of a bit of a fight to the bottom. All of your competitors are taking massive restructuring and yet, whether it's HMM or more specific restructuring efforts, those EBIT dollars and maybe this is kind of a little bit to what Ken was alluding to, the EBIT savings or the savings are just not showing up, whether it's better sales or expanding margins. So why should we be comfortable that the dynamic changes and that the shareholder is going to get the benefit of any of these efforts?

Well, Eric, if I understand your question, it is similar to Ken's question. I think that in categories, both broadly defined and narrowly defined that have growth potential and offer high opportunities for innovation and behavior, which is consuming food in a variety of ways that's clearly going to grow. I think that our shareholders should expect us to deliver on all three of the variables that you mentioned. we should be delivering some growth. We should be delivering margin. We should be delivering earnings per share. And so, again, our philosophy, if you will, our core beliefs are that we are talking about overall universe that is over $1 trillion in sales opportunity and it's on us to find the innovation and the growth opportunities that will drive our topline and it would be really a grave error to not really pursue those very aggressively. So our approach is to deliver balanced growth. Our model, financial metrics, we think that that is the right way to run the business. And so that's the approach. I will ask my colleagues to jump in. Don, if you want to add anything to that or?

I will just expand on the point on balance. Eric, as you know, our return model to shareholders has always been balance between earnings growth and cash return. When you talk about growth versus margin expansion or sales growth versus margin expansion, I would apply the same balance term to it. We are going to generate a sizable amount of savings as we talked about today. We are going to reinvest a portion of that to help drive growth, which is by far the most sustainable way to create value for our shareholders. We are also going to use a part of it to protect our margins. Hence you are going to see a very balanced approach to how we look going forward and again very similar to what we have done in a larger scale between our earnings and cash, apply the same thought process and approach to sales growth and margin.

And just to, maybe, pile on a little bit, Eric, as we look across our portfolio, we see so many examples of innovation driven growth. Our concern is not that we can't innovate. Our focus is on delivering more innovation because, to us, that's clearly the way forward. I made a few comments on convenience and foodservice, our business there, which competes in low growth segments in low single-digit growth. We are doing very well in that segment. Now it's all driven by innovation. It's driven by innovation in yogurt, innovation in what our offerings to the foodservice operator. It's all about innovation. As you look across the cereal portfolio, I think Jeff commented on our wellness offerings, our indulgent case, there's just plenty of examples of where you get it right, the consumer responds pretty markedly. So we have this very strong belief that innovation is the way forward for us. There is clear evidence that that is true. We need more of it. And so the approach to the rewiring of the organization that we are pursuing now is very much on a more focused leaner innovation focused structure that will deliver these ideas faster.

That's right and so when we look at it, we have a good understanding of where the consumer is and we feel like we have a really good understanding of where they are going. Whether it's in better-for-you snacking or whether it's in wellness or what they expect of the economic value for their products. And so, because we feel like we have a good idea, when we innovate well and we spend behind it, we like the results. And I will give you a couple of examples. Look at Yoplait Original Yogurt, which is up double digits. And it's all behind the renovation of the product and advertising behind the insight that Yoplait Original is really a better-for-you snack that the whole family loves. And so when we see that we can drive growth on that. The same would be true of Cinnamon Toast Crunch and adding cinnamon and giving a product that delights consumers and executing well against that. The same would be true of Old El Paso when we have flavored shelves and we come out and we grow that business by double digits. And so we see a lot of opportunities and we see those opportunities. We need to pair that with where the consumer is going and we need to invest behind those. And so as Ken said, it really is about innovation and increasing the levels of innovation. We have an innovation that's going to be meaningful to where consumers are and where they are going to be.

Okay, Eric. I think we have beaten that one to death. We better move on.

Yes. I will pass it on. Thank you.

Our next question is from the line of Matthew Grainger with Morgan Stanley. Please go ahead.

Hi. Good morning, everyone. Happy New Year.

Hi, Matthew.

Good morning, Matt.

Hi. So Don, just the earnings for the quarter came in a little bit ahead of the prior range that you had laid out across the business segments. Was there anything in particular that changed or improved as you actualized the quarter?

No. Matt, the quarter actually came in largely as we expected. There was a little bit of phasing on expenses that helped the quarter, but not good enough, obviously for us to more our full-year expectations. But what I would say about the quarter, it was very solid versus what our expectations were and that provides a little extra dose of confidence as we think about delivering our full-year guidance. But I wouldn't take anything away from the quarter in terms of the flavor of the full year is really more expense phasing in the quarter.

Okay, thanks. And just in the context of all the innovation you have had year-to-date, what you have in the second half, advertising in the U.S. and overall is still down mid-single digits, I think during the first half. So where should we think about the full-year coming in? And can you just help us put that mid-single digit decline into context in terms of what it translates to in terms of reach and your selection of media and how you are seeing overall advertising effectiveness?

Yes. Well, that was one of the expense areas that we had some phasing that will come back in the second half. We do expect for the full year now advertising to be down a touch from last year. And part of that, quite honestly, is just being very selective of where we put our advertising, making sure we are putting it behind our best ideas. But don't over read anything into the second quarter and I will turn the mic in a second to Jeff. But in the U.S., for example, while our accrual expense was down, the actual spending in the marketplace and pressure in the marketplace was more level to last year. Thus we don't see that as an overriding concern in the quarter. We expect the full-year, though to be down just a touch as we really reallocate those dollars during the course of the year. Jeff?

To build on that, it really is in the U.S., we expect our advertising and media expense to be down just a little bit for the year. So it really is primarily a matter of timing for the quarter and in terms of the vehicles we invest in, we have a really good idea about the vehicles and what they return and how they work. Whether that is through social media or search or TV or sampling and so we allocate our dollars according to what we think is going to be most effective and we have a good idea across vehicles what that looks like.

Okay, thanks. And I guess is that more a function of just cutting back some of the breadth of where you are spending? Or is that partially a judgment call on whether some of the vehicles you may have used in the past are seeing the same level of effectiveness that they would have historically?

It's not really a matter of the vehicles changing effectiveness versus what we have seen historically. But we want to make sure that we are investing behind the programs and initiatives that are going to be most valuable for our consumers and the messages that is going to rally resonate with them. So it really is not a matter of seeing less effectiveness. It is a matter of making sure that we are spending our shareholder money wisely behind initiatives that the consumer is going to value.

Okay. All right. Thanks again everyone.

Yes. Thanks, Matthew.

Our next question is from the line of John Baumgartner with Wells Fargo. Please go ahead.

Thanks. Good morning. Thanks for the question. Jeff or Ken, just in light of the reduced guidance last month and then the comments today about the tough operating environment, just how are you thinking about the impact of lower gas prices on the consumer and maybe for your center store volumes, either for your categories or for the industry as a whole? Didn't hear much about that in the prepared comments this morning.

Well, as we look forward, like anytime, there are puts and takes. And while it is certainly true that consumers, especially at the lower end of the economic scale, are still challenged. That I think will not change. Having said that, certainly having lower gas prices, if that remains to be the case going forward, that should be helpful. And as should the fact that we are lapping reductions in the snack programs which we started lapping in November. And so you know, those two things, I think are positive and help balance out what we still think will be a challenging environment.

Okay. So you are factoring in your back-half guidance some benefit from lower gas prices and a little bit of relief for the consumer then?

Mostly what we are factoring in our back half guidance, John, is how we assess the innovation that we have and the programs and initiatives. We really look at what we are controlling and what we are doing. It's nice that, we might have what was a bit of a headwind now becomes a tailwind. But that's not strategy for us. That's the environment. It's still on us to do things that drive growth. And so as we think about the back half or look at the back half, we are looking at the new products and the marketing initiatives and these kinds of things and we think those are going to help us push it forward a bit here over the next two quarters.

Thanks, Ken. Thanks, Jeff.

Our next question is from the line of David Palmer with RBC Capital Markets. Please proceed.

Good morning, everyone.

Hi, David.

A question on the marketing direction for Cheerios and your confidence in getting that trademark back to growth from what looks like mid-single digit declines in standard data. In the past, it looked like Cheerios was coming up with new flavors, driving trademark growth with that. The recent innovation looks so, with Ancient Grains and the GMO-free yellow box conversion, it looks like more of an grading quality renovation plus innovation strategy. Do you think that's a fair characterization of what you are going to continue to do? Do you think that's working?

As we look at Cheerios, what I would tell you is that our base business, which is the non-promoted business has gotten better, quarter-to-quarter as look from the first quarter to the second quarter. and certainly part of it is the new product introduction of Cheerios protein but also we have seen improvements on our regular core yellow box Cheerios or original Cheerios and on Honey Nut Cheerios. And for us, I think the key is to make sure that we keep Cheerios, whether it is through product renovation or whether it is through new products, that we keep it relevant for our consumers. So we are looking for things that are minimally processed. And certainly talking about oats and Cheerios, it is something we have started to do and we like the way that looks. But we think we also have more work to do on Cheerios, whether it is through new products or the renovation that we currently have and we will be excited to tell you more about some more specifics about those plans when we come to CAGNY in February.

Yes and one follow-up question on Annie's. I wonder how you think of the extendibility of that brand? Just to stretch the point, could there be an Annie's cereal in the future that you think would make sense?

A couple of things on Annie's. I am glad you asked about Annie's. Most importantly, first the performance of Annie's actually accelerated in the second quarter of this year and so it was the testament to the Annie's leadership team as well as how we are integrating it within General Mills. Beyond that, we see a lot of opportunity with Annie's in growth. The first is through distribution of their existing products. The second, I would say as I talked about, is expansion into some new categories. And Annie's had been planning from expansions. We think we can complement that with some of our own capabilities. And so while I am ready to talk about specifics of what those look like right now, again in a couple months, I will be more than happy to share the direction. But we see growth opportunities for Annie's and for us it's most important as a matter of prioritizing ones we want to go after first, because we see so many opportunities, both in the distribution and in entering new categories.

Thank you very much.

Our next question is from the line of Jason English with Goldman Sachs. You may proceed, sir.

Hi, Jason.

Hi, guys. Thanks for the question. First a bit of a housekeeping question. So far this year you have bought back a lot of shares, hefty dividend distribution. You have had to take on some levers to fund that. It reads like a slow levered recap. Is that the right way to read it? And if so, how comfortable are you in terms of taking that leverage ratio up?

Jason, obviously we are comfortable, otherwise we wouldn't have done it. But we came into the year with our leverage ratios little lower than our long-term goals. And so we had, if you will, have an opportunity to lever a little bit. Annie's gave us a great use for those funds. And that's actually what's driving the leverage. It's not the share repurchases and dividends. It's the fact that we bought a great new property in Annie's and given our balance sheet strength to be able to pay for it fully in debt. So we feel very comfortable with our capital position.

Okay, thanks and Ken, a quick question for you, or anyone who wants to comment on it. I want to go back to the comment on innovation-driven growth. From the outside looking in, the look at the industry and SKU proliferation appears systemic with nearly everyone spinning away on the innovation treadmill. I think every quarter for the last few years we have heard you and your peers trumpet the upcoming innovation success that's expected to follow but we just really haven't seen the evidence. Distribution points grow and volume still bleeds out. It has all the red flags of an industry ripe for portfolio rationalization and we have seen that play out at Heinz, Kellogg, ConAgra and even to Kraft at a modest degree but you and Campbell have really bucked the trend. So I guess my question is, how can we have faith that your innovation is working in context of your persistent topline shortfall? How have you avoided the rationalization to-date? How can you slide into the next round of innovation without sacrificing your existing shelf space? And what's your view of whether or not it's time to examine your own portfolio for rationalization?

So let me just make a couple of general comments, Jason. First of all, I think that you are talking about SKU proliferation and that kind of direction of questioning. I think that's a very legitimate and fair comment and I think it's on us to make sure that we are working to keep our house in order and make sure that hard-working SKUs are on the shelf and taking, if they are not working, get rid of them, if we would be better off with a smaller, more productive range, then by all means we should do that. And frankly that kind of work has been very much a part of the HMM process over the years. We know that rebalancing product portfolios around the highest turning, highest productive and cutting SKUs is a very, very effective strategy for us and for our retailers. So that kind of discipline, we will continue to do them. And I think that your question and the implied challenge there is very legitimate. Having said that, we know that innovation is very effective because as I said earlier, we have so many of examples of what it does for us when it works. Now granted, all of it doesn't work as well as we would hope. There are winners and losers here, but our job is to get rid of the losers, cut our losses, move on, focus on the winners and continue to bring new ideas to the consumer, especially now in this era where we see consumer values about food and consumer desires around food changing in so many ways. It's really an era of change and if our answer to that is to not change, that's a huge mismatch. So with all this change going on with millennial values and how they see food, the time is ripe for good consumer focused innovation. We get it right, capitalize on that change, it's a real opportunity for us and that's really how we see the environment. I don't know if you want to add anything, Jeff?

Yes. My addition to that would be that when we talk about innovation, we have to be careful that we don't only about in terms of new product, but also the renovation of our existing portfolio. And we need to do both. For us, it's an add. We need big sustainable new items, but we also need to make sure that we are renovating our product mix to we keep them relevant. And when we do that and we do that well, we really like what we see. That's why I have highlighted Cinnamon Toast Crunch this morning, whose baselines have grown at 20% in the last quarter. It's based on better product. That's why we have highlighted gluten-free Chex, whose turnaround was not based on new product innovation, but was based on innovation of the existing product and the same would be true of Yoplait Original. And so, Jason, I think the observations you make, as Ken said, is fair. But I think one of the things that we are really focused on is we are making sure the we are innovating, not only on our new product line, but also on making sure that we are renovating our existing products.

Okay, that's helpful.

Okay. Thanks. Jason. Thanks for the question. We appreciate it.

Operator, let's sneak one in here before we are out of time.

Thank you. Our next question is from the line of Chris Growe with Stifel. Please go ahead.

Hi, Chris.

Hi. Good morning.

Good morning.

Good morning.

Can you hear me?

Yes. We can hear you fine. Yes. Good morning to you too.

Thank you. I just had a question for you then on the U.S. retail division. I guess maybe for Ken or for Jeff. But I want to understand, you have had advertising down a little bit year-to-date. It sounds like it will be maybe down modestly for the full year. And then promotional spending, at least, has sequentially decelerated a bit. Is there an investment whether it's advertising or it's promotion that you think needs to happen to get these topline growth going again in that division? And maybe related to that, the new products which I thought was a good lineup in your first half of the fiscal year, I think some of those have actually done relatively well, don't seem to be contributing as much as I expected overall to sales. Are they more cannibalizing the existing business? Or if you could work that in, fold that in, if you will, to your answer?

Well, as we look about what we need to do going forward, it really is a matter of increasing the amount of innovation we have and whether that's on existing products or the new products. That is our number one priority. But in addition to that, we need to back that up with spending behind those good ideas that we have, which is why Don earlier talked about making sure that we are going to be reinvesting some of the savings we generate from program such as Catalyst and Century into topline growth. The other key, I think, is that as we look at our new product lineup, we are really focused on the sustainability of our new items. And for that reason, we will have fewer new items in our second half, but we will have bigger new items in our second half. And this focus on making sure that our new product innovation is sustainable, big sustainable new items, I think is going to be important for us. And it goes back to the question that was asked just a minute ago. So for us to return our U.S. business to growth, it really is a matter of sustainable new product innovation backed by increasing levels of core brand innovation and marketing expenditures that back those things up.

Okay. Thank you for that. And just one quick follow-up, maybe for Don. If I heard right, Don, is the inflation in the first half any different from the second half? I think you had said around 3% inflation in the second half as well. Is that correct?

Yes. That is correct, Chris.

Okay. So things like dairy cost and grains, there aren't going to be as much of a benefit for the second half of the year? Is there, in particular, any inputs that we should watch out for in the second half of the year?

Yes. We have seen some pair of movements in a couple of areas you have mentioned, but we also, with the California drought earlier this year, seeing some ingredient cost increase. We are seeing sugar increasing. So there is enough offset there. And plus you factor in the hedge position that we came into the year with. We do see a pretty stable. Inflation as the year unfolds. Right at that 3%.

Okay and then same on HMM or is there any real difference in the first half or second half savings from HMM?

No. it fairly stays there as well.

Okay. Thanks so much for your time.

Thanks, Chris.

Thanks, everybody. If there are questions remaining, you know where I live. Give me a call.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation today and ask that you please disconnect your lines. Have a great day, everyone.