Kris Wenker - Senior Vice President, Investor Relations Ken Powell - Chief Executive Officer Don Mulligan - Chief Financial Officer John Church - Executive Vice President, Global Supply Chain.

Ken Goldman - JPMorgan Chris Growe - Stifel Robert Moskow - Credit Suisse Eric Katzman - Deutche Bank Bryan Spillane - Bank of America Ken Zaslow - BMO capital markets John Baumgartner - Wells Fargo David Driscoll - Citi Alexia Howard - Sanford Bernstein.

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday, September 17, 2014.

I would now like to turn the conference over to Kris Wenker, Senior Vice President, Investor Relations. Please go ahead, ma’am..

Thanks, Operator. Good morning, everybody. I’m here with Ken Powell, our CEO; Don Mulligan, our CFO; and John Church, Executive Vice President of our Global Supply Chain, and I’ll turn the call over to them in just a minute. Our press release on first 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 also find slides on our website that supplement this morning’s presentation. Our remarks will include forward-looking statements that are based on management’s current views and assumptions.

The second slide in today’s presentation lists factors that could cause our future results to be different than our current estimates.

One last housekeeping item, beginning this quarter we reclassified the balance sheet re-measurement impact from hyper inflationary economy, out of International segment operating profits and into an allocated corporate item. The last slide in today’s material will give you prior year results consistent with the new presentation.

So, with that, I’ll turn you over to my colleague beginning with Don..

Thanks, Kris, and good morning to everyone. Thank you for joining us today. Slide four summarizes our results for the first quarter. Net sales totaled $4.3 billion, down 1% in constant currency. Segment operating profit totaled $690 million, 15% below prior year due to results in our U.S.

Retail segment where lower volume and higher merchandising expense depressed net sales and margin. Net earnings declined 25% to $345 million and diluted earnings per share were $0.55 as reported. These results include mark-to-market valuation effects in restructuring expense.

Excluding these items affecting comparability, adjusted diluted EPS was $0.61, compared to $0.70 a year ago. This was a 13% decline on a constant currency basis. Slide five shows the components of total company net sales growth. As reported, net sales declined 2% due to lower pound volume, mix and net price realization added 1 point of sales growth.

That was offset by foreign exchange which reduced sales growth by 1 percentage point. U.S. Retail net sales for the first quarter were 5% below last year, reflecting weak industry trends, along with higher trade merchandising expense for us in this period. Our pound volume was down 2%, primarily driven by declines in meals and baking products.

We saw pound volume growth in our Snacks, Small Planet Foods and Yoplait divisions for the quarter. The higher merchandising expense reflects several factors. We launched 145 new products across U.S. Retail, almost 20% above last year's number. We are experiencing less effectiveness for merchandising programs.

This is an issue we and others in the industry have noted previously. And we had a difficult comparison. Last year’s first quarter had the lowest quarterly trade expense of the year. It’s important to note, however, that the increased trade expense in the quarter does not reflect greater depth of discount. Merchandising frequency was up in the quarter.

The depth of discount was actually less than the prior year. We expect year-to-year differences in merchandising expense phasing to have less impact on subsequent quarters in fiscal 2015. In our Convenience Stores and Foodservice segment, net sales increased 1% in the first quarter led by our high margin priority platforms.

In total, these six platforms, yogurt, frozen breakfast, snacks, biscuits, cereal and mixes posted combined net sales growth of 4%. Favorable products and channel mix combined with lower input cost helped to drive an 18% increase in segment operating profit in the quarter. Slide 10 summarizes first quarter results for our International segment.

Constant currency net sales grew 6% overall. Sales in Canada declined 2%. Excluding some small exits and addition of business lines, sales would have been up modestly in the quarter. Latin American sales increased 20% driven by another quarter of strong double-digit growth in Brazil.

In the Asia-Pacific region, sales increased 4% led by greater China and Korea. And sales for our Europe region also increased 4% with good growth in both the U.K. and France. Slide 11 details our segment operating profit results in the first quarter. The total operating profit decline was driven by U.S. retails results.

International profit was 16% above year ago levels and up 17% on a constant currency basis. In Convenience Stores and Foodservice, profit increased a robust 18%. After-tax earnings from joint ventures totaled $26 million in the quarter, up 5% in constant currency.

CPW sales were 1% below year ago levels in constant currency with growth in Brazil, Chile and Southeast Asia offset by category weakness in Western Europe. Constant currency sales for Häagen-Dazs Japan grew 3%.

Completing our review of the income statement, corporate unallocated expense excluding mark-to-market effects were down $3 million in the quarter. During the first quarter, we approved a plan to combine certain Yoplait and General Mills’ operational facilities in our International segment to increase efficiencies and reduce costs.

We expect to incur approximately $15 million of net expenses related to these actions and we booked $14 million of this amount in restructuring charges in the first quarter. In a moment, John Church will update you on our plans to increase efficiency and reduce costs across our North American supply chain network.

This initiative will result in additional restructuring charges this year. All of our 2015 restructuring charges will be excluded from adjusted diluted EPS. Effective tax rate for the quarter was 31.8% as reported.

Excluding items affecting comparability, the tax rate was 32.3% this year compared to 32.2% a year ago, an average diluted shares outstanding declined 5% in quarter. For the full year, we continue to target a 3% to 4% net reduction in average diluted shares outstanding.

Turning to the balance sheet, slide 14 shows our core working capital declined 6% versus last year’s first quarter driven by improvements in accounts payable. Operating cash flow totaled $329 million in the quarter below last year's results due to lower net earnings.

We invested $149 million in fixed assets and we returned more than $700 million to shareholders through dividends and share repurchases. Last week, we were pleased to announce plans to acquire Annie’s, a leading company in the U.S. natural organic industry. We have offered to buy Annie's for $46 per share in cash.

We plan to fund the acquisition with debt. So this transaction is not expected of any impact on our fiscal 2015 share repurchase plans. We do expect the Annie’s transaction to be accretive to our earnings in the first 12 months after closing, excluding certain purchase accounting adjustments and transaction integration expenses.

Our offer is subject to tender of the majority of the Annie’s shares and certain other customer closing conditions including regulatory approval. We expect the transaction to close later this calendar year. Our key financial targets for full year 2015 fiscal year have not changed.

We expect mid-single-digit growth in constant currency net sales, including the benefit of the 53rd week. We are also targeting mid-single-digit growth in constant currency segment operating profit. We plan to reinvest the benefits of the 53rd week in growth driving activities.

On the bottom-line, we expect adjusted diluted EPS to grow at a high-single-digit rate in constant currency from the base of $2.82 per share achieved in fiscal 2014. And with that, I will turn the microphone over to John Church.

John?.

Thanks, Don. Hello, everybody. It’s great to be with you on the call this morning to talk about General Mills’ approach to continuously improving our global supply chain. Our supply chain strategy is centered on the engagement of our 25,000 supply chain employees around the world.

We leave that engagement with safety in our products and in our operations. We protect our consumers and our people by establishing systems and processes that ensure the reliability of our operations.

Our supply chain helps grow our business with customer service excellence and increasingly by partnering with customers to drive out waste in our combined value chains, and we prioritize return on capital by reducing inventory levels, creating capacity through operational improvements, and by extending payment terms.

Additionally, return on capital is driven by our long-standing practice of holistic margin management or HMM. HMM has been a defining characteristic of General Mills for nearly 10 years now. HMM in a mindset of looking at our end-to-end processes to identify waste -- to identify costs that are not valued by our customers or our consumers.

Those costs are waste. We find ways to reduce or eliminate waste from our process allowing us to deliver more value to the consumer. HMM is truly holistic. It encompasses cost of goods savings, mix, and pricing. We also work to drive waste out of our marketing programs and our admin processes.

The savings we realized through HMM are used to offset inflation -- and fuel -- and provide fuel to our brand building efforts. We believe the demand driven increases in input costs will be a reality for our business for this foreseeable future. We expect inflation to average 4% to 5% per year.

We are currently estimating input costs inflation of 3% in fiscal 2015, and we're roughly 55% covered for the year at this point. Clearly, the demand for HMM to offset inflation is not subsiding. We're continuing to deliver strong HMM levels each year.

Back in fiscal 2010, we set a goal of achieving a cumulative $4 billion in COGS HMM through fiscal 2020. I'm pleased to say that we’re already halfway to our goal. We are targeting another year of strong HMM delivery in 2015, with more than $400 million in COGS HMM in this year’s plan.

I have great confidence that by the time we get to 2020 we will have met or possibly exceeded our $4 billion goal. Our HMM plans for 2015 include contributions from all areas of our supply chain.

We are taking the same expertise we’ve developed in our internal supply chain to our external partners through an initiative we call GEOS or General Mills End-to-End Optimization Solutions.

By broadening our HMM scope up and down the value chain to suppliers and customers, we expect GEOS to deliver an incremental $10 million in savings for General Mills this year. In International, we reengineered our factory in Pouso Alegre, Brazil.

We streamlined a number of ingredients that we use in the facility going from six types of salt to two types of salt for example. We have improved production scheduling by removing small volume skews that created significant changeover downtime and we automated many of the packaging systems.

In total, these initiatives will save more than $5 million annually for our Brazil business, and we’re globalizing our sourcing capabilities allowing us to leverage purchasing scale and expertise across our domestic and international businesses on inputs like packaging, sugar, fruit, and cocoa.

These efforts are expected to deliver $10 million in savings this year. Our HMM efforts have enabled us to hold our overall gross margin relatively steady in recent years, despite inflation and volatility in our input costs. In fact, our reported gross margin in fiscal 2014 is in line with the levels from 2008 and '09.

That’s despite adding Yoki in Yoplait International to substantial businesses with lower than company average gross margins and despite cumulative input cost inflation of 30% over that time. We are confident that HMM will be an ongoing source of cost savings and efficiency for our supply chain.

But we have also launched a review of our North American manufacturing and distribution network to look for additional opportunities to reduce cost. This effort which we’ve renamed Project Century has the objectives of streamlining and simplifying our North American operations and positioning our supply chain for future growth.

We’re relocating production to make our network simpler and more responsive and we will capture cost savings in the process. We’re targeting $100 million in cumulative cost savings by fiscal 2017 with material savings realized in beginning of fiscal 2016. We’ll be announcing specific actions related to Project Century in the very near future.

I'm confident this initiative will increase our efficiency, generating more fuel that we can use to reinvest behind our brands and fund future growth initiatives. Thank you for your time this morning. I’ll turn the call over to Ken Powell..

Thank you, John, and good morning to one and all. I’ll begin my remarks by acknowledging that the operating environment in several of our markets has grown more challenging. For our U.S. Convenience Stores and Foodservice business, I would say, trends are stable. We’re seeing low single-digit nominal growth in our channels. U.S.

Retail industry trends are a bit weaker. Last year we saw aggregate retail sales for our U.S. categories increase one half of a percent in Nielsen measured outlets. In the latest quarter, measured sales for our categories declined 1%. International developed markets were a bit softer too.

Retail sales for our categories were flat in both Canada and Europe in the first quarter, after growing at low single-digit rate last year. In emerging markets, we’re still seeing sales growth for our businesses, but the pace of growth in China did slow a bit this quarter.

So with that as a backdrop, let me give you an update on performance in each of our three business segments. For U.S. Retail, Don told you, our pound volume in the quarter was down 2% and three businesses really drove that decline, dessert mixes, meal products and frozen vegetables.

Competitive dynamics in these categories were particularly difficult and if you follow Nielsen or IRI, you see that reflected in our market share results. We’re tactically adjusting our plans to make sure we’re competitive in these categories and I expect these actions will result in improved sales trends in the coming months.

We did make good progress on the U.S. priorities that Jeff Harmening outlined at our Investor Day back in July and those were continuing to lead performance in U.S. cereal, returning U.S. yogurt to growth and maintaining strong snacks momentum. I’ll give you some details on each of these starting with cereal. The U.S.

cereal category continues to be challenged with retail sales, including our estimate of non-measured channels down 4% in the first quarter. We believe that returning the cereal category to growth will require more product news, better innovation and increased investment behind consumer-directed marketing from all the branded players.

We are working hard across each of these areas. For instance, consumers love great tasting cereals. We renovated Cinnamon Toast Crunch this year adding more cinnamon taste and retail sales for this brand were up 7% in the quarter. Today's consumers are seeking more protein options for breakfast. We introduced two flavors of Cheerios protein in June.

It still early but the initial results are encouraging. This new line reached a nearly 1% market share in August. We continue to increase our media investment. For example, Honey Nut Cheerios, the largest brand in the category recently launched a great new advertising campaign featuring Usher.

In total, our cereal market share was up 30 basis points to 31% in the quarter. Our second priority for U.S. Retail is to renew sales momentum for our U.S. Yogurt business and we did that in the first quarter with net sales up 1%, retail sales up 3% and market share up a 0.5 point.

Yoplait Greek and Greek 100 remained key growth drivers for this business. This quarter our share in the Greek segment was up 240 basis points versus last year and retail sales for original Yoplait were up 12% in the first quarter. We have some exciting product news coming in the second half of the year to keep this momentum going.

We still have work to do on our Yoplait Light business. It was the most directly impacted by the growth of Greek yogurt over the past few years. We recently removed aspartame from this line and we’re connecting with consumers behind the new outsmart temptation campaign. So some good progress on yogurt this quarter, and our U.S.

Snacks division is off to a nice start. New Fiber One Streusel bars and new Nature Valley items are helping to drive 6% retail sales growth for our grain snacks business. We picked up almost three additional share points, increasing our leading position in grain snacks to nearly 44% of the category.

In fruit snacks, continued investment behind our Mott’s and Fiber One lines led to retail sales growth of 5% and a two point share increase in the first quarter. Our natural and organic snacks also are doing well.

Retail sales across Lärabar nutrition bars, Food Should Taste Good savory snacks, and Cascadian Farm granola bars were up a combined 17% in the first quarter. This reflects growth on core established products as well as strong new innovations like Lärabar Renola, a grain-free granola and Food Should Taste Good gluten-free brown rice crackers.

Cascadian Farm recently launched a bee-friendlier campaign to raise awareness and money for bee colony research. As part of a campaign, we are selling a limited edition Buzz Crunch Honey Almond cereal. The acquisition of Annie's will significantly expand our presence in the U.S.

branded, organic, and natural food industry, where sales have been growing at a 12% compound rate over the last 10 years. Annie's competes in a number of attractive food categories, with particular strength in convenient meals and snacks to General Mills priority platforms. Consumers know and trust Annie's purpose-driven culture and authentic brand.

We believe that combining the Annie's product portfolio and go-to-market capabilities with General Mills supply chain, sales and marketing resources will accelerate the growth of our organic and natural food business. Two others U.S. retail businesses deserve a quick mention.

Retail sales for Totino’s Pizza were up 7% in the quarter and sales for Totino's Pizza Rolls grew more than 3%. The brand posted share gains of roughly one point in both categories.

For Old El Paso Mexican products, new burrito balls in the freezer case and flavor blasted taco shells in the shelf-stable Mexican aisle helped drive retail sales growth of 7% in the first quarter. And slide 35 shows our first quarter market share results in key U.S. retail categories.

In total, consumer takeaway was better than our net sales results in the quarter and we recorded market share increases in categories, representing two-thirds of our Nielsen measured sales. Let’s shift to our Convenience and Foodservice segment where our six priority platforms led topline growth.

Net sales for yogurt increased 34% due to good growth from our Yoplait Greek and ParfaitPro lines as well as the July introduction of Yoplait Go-GURT as an option in McDonald's Happy Meals. Sales for our snack business were up 6% led by expansion of Chex Chips and good growth on Nature Valley.

Finally, we saw double-digit net sales growth in frozen breakfast where we’re leveraging a full line of heat-and-eat whole grain breakfast offerings for K through 12 schools. For our International business, the Europe and Australasia region posted mid-single-digit net sales growth in constant currency in the first quarter.

It was a good summer for Häagen-Dazs with retail sales up 5%, fueled by our new triple sensations line. Old El Paso's line of Stand 'N Stuff Tortillas and Dinner Kits is off to a great start around the region. Retail sales for the brand were up 12% in the latest quarter and Yoplait continues to grow led by Liberté Greek-style yogurt in the U.K.

and Yopa! high protein yogurt in France. Yoplait’s year-to-date category share is up almost a [four point] (ph) in both markets. Turning to our Asia Pacific region, constant currency net sales for Häagen-Dazs increased 9%.

This was driven by unique to Asian varieties like classic milk and blueberries and cream, and by continued retail expansion into new cities in China. Sales of Wanchai Ferry frozen dim sum also increased in the first quarter. Thanks to expanded distribution, as well as new flavors of dumplings.

There is a slowdown in the macro environment in China, which combined with government driven changes in gifting policy is having some impact on our business there.

Despite these factors, our first quarter constant currency sales in Greater China grew at a mid single-digit rate with an exciting lineup of new products coming in the second half, we expect Greater China sales growth to strengthen in the remainder of the year.

In Latin America, constant currency net sales increased by 20% in the first quarter, powered by another quarter of strong results in Brazil. Yoki's Festa Junina merchandising event, which coincided with the world soccer championship this year was a great success.

A great deal of credit goes to the Yoki’s sales force who secured a record number of in-store displays during this period. As a result, constant currency net sales for Yoki Popcorn, already the market leader with over 70% share, increased by more than 30% in the quarter.

And though it's still early, our launch of Betty Crocker dessert mixes in Brazil are off to a good start with positive consumer and retailer feedback. We have plenty of activity coming in the second quarter, Soup Season is fast approaching and our distribution is up. Thanks to new items like cream-based light soups and great tasting traditional soups.

We are increasing our media support this quarter, leveraging Weight Watchers digital media and our taste-focused national TV campaign. And we have great plans for the baking season too. We are launching 11 seasonal items such as Candy Corn and Gingerbread Cookies.

We are increasing TV support for Betty Crocker and we will continue to engage consumers through our digital media efforts. We have exciting plans for our International business. We have quickly gained distribution on Old El Paso Stand ‘N Stuff tortillas throughout our Europe region and we are now turning on TV support in U.K., France and Australia.

We are continuing strong media support for Liberté Greek yogurt in the U.K. and Yopa! in France and we are launching four new Yopa! items to extend our range.

In the Asia-Pacific region, we are introducing new varieties of Betty Crocker mixes in the Middle East and a Belgian chocolate macadamia nut flavor of Häagen-Dazs for our Retail business in Greater China. So, with that, let me summarize today's General Mills update.

The operating environment for food and beverage companies remains quite challenging and trends weakened for some markets in the latest quarter. However, we've not changed our 2015 growth targets.

We expect mid single-digit growth in net sales and segment operating profit on constant currency basis, and high single-digit constant currency growth in adjusted diluted EPS. We continue to see strong opportunities for our brands. Our number one priority is to find those opportunities and leverage them to accelerate our topline growth.

And finally, as John shared, we are maintaining our strong HMM discipline and we are initiating new projects to further boost our efficiency and sharpen our focus. So, I thank you for your time this morning and for your interest in General Mills. Now let's open the call for questions. Operator, will you get us going..

Thank you. (Operator Instructions) And our first question comes from the line of Ken Goldman with JPMorgan. Please go ahead..

Thank you. Good morning, everyone..

Hi, Ken..

Good morning..

Hi. I have a bit of general question.

What do you think has to happen for the food industry to get out of, to me, what seems to be the fairly self-destructive pattern of heavy promotional spending right now? Do we just need and this is really across a lot of categories? I'm just curious, if someone just have to say enough is enough, I am going to loose volume in order to restore some, I guess, price rationality or are you just getting so much pressure you being the industry from large retailers to fund deal back that even if you want to be more rational it might be a little difficult at the current time?.

So, Ken, its Ken Powell, and thank you for the question. I would say that we have albeit Q1 aside. And we can talk in more detail about how that played out in the comparison of this quarter to a year ago and some of the plumbing around that.

But I would say in general as we look at price points, as we look at promotional discounts and this sort of thing, we have maintained fairly steady levels there across our categories. But to your general comment on what’s it going to take industry wide, I think all the roads lead to higher levels of innovation.

I'm continuing to focus on brand renovation making sure that we have the right level of messaging behind our core brands and new products. I mean, I think ultimately innovation and capitalizing on consumer trends is what gets -- what gets us to higher levels of growth.

And the reason we’re so certain of that is because we see that when we get that formula right, we get a very market response from consumers. We talked a little bit about some of the cereal changes in Cinnamon Toast Crunch, Lucky Charms. Last quarter, we’re seeing the response very rapidly.

This quarter we have developed now over the last year and a half and launched very good varieties of Greek Yogurt as an example and in support of those with very effective marketing campaigns and it’s very satisfying now for us to see those products to gain traction.

We changed the formulation in the positioning of our core Yoplait original and that brand was up double digit this quarter. So behind consumer targeted initiatives, so ultimately the answer to your question, which I think is the right question is innovation, core renovation, strong consumer communication, that will get us where we need to be..

Right. Thank you, Ken..

Our next question comes from the line of Chris Growe with Stifel. Please proceed..

Hi. Good morning..

Hey, Chris..

Good morning, Chris..

Hi. I just had two questions I could. First one will be to just to better understand maybe this is with getting a more into the detail you were talking about there, Ken but within U.S retail to see sales down 5% and the measured channel data showing flat up a little bit, down a little bit, somewhere in that neighborhood.

So I just want to better understand maybe this is the promotional spending year-over-year and that comparison that is the major driver of the GAAP if you will, sales in reported consumption and reported sales.

Can you offer a little more color on it?.

Yeah. Chris, this is Don. It really goes back to the point that Ken touched on that one into -- in terms of the phasing of our merchandising, as we talked about in June or July in our Investor Day. We’ve seen drop in merchandising effectiveness. We, General Mills, we the industry have seen that and it does take some time to reset the plans.

And so we knew that the year unfolded that our merchandising expense whether you look at it as a percent of sales or cost per sold case, it will come down on year-over-year comparisons.

But it’s going to take couple of quarters to work it through so that’s one of the reason that we signal that we expected lower profit in the first quarter versus last year where we still see full-year growth in the high-single digits..

Okay. And then maybe a question for Don -- you or for John about the cost savings coming through this year. So with little softer sales in the first quarter, I know you kept your guidance in place for the year.

Do you now expect a heavier degree of cost savings may be along those if you could -- I know we have $400 million, I think of HMM savings, $40 million overhead savings, so are there any project entry savings that have come through this year?.

Minimal projects entry as John said, we’re going to be starting that effort this year. We’ll see significant savings starting in ‘16. We’re not making that a great deal this year. It’s mostly going to come from our overhead efforts. And obviously there is the ongoing both HMM efforts that we see within our COGS, within our overhead expenses.

First, when we you start the year like we have, everyone is tightening their belt a bit from an admin standpoint. And the one thing I would notice is that we did see growth in our media support. So that's one area because we have good ideas to drive growth in some of our key segment and some of our key platforms. We haven't cut back.

What we’re doing it is really an overhead in some of those project areas we discussed. We’re still targeting the $40 million for this year and it would be something larger in F‘16..

Would you expect the gross margin to grow this year, Don?.

Yes..

Okay, thank you..

We still expect it to grow modestly..

Okay. Thank you..

And our next question comes from the line of Robert Moskow of Credit Suisse. Please proceed..

Hi. I guess two questions. I guess, I was a little unclear as to why U.S. retail profits will get better during the course of the year. I think Don you said that it's taking some time to adjust your promotional spending tactics. So maybe just a little more detail on why was the spending so high in first quarter.

You mentioned frequency, I mean, were you just having very frequent deals and now you won't for the rest of the year and therefore the profits will be stronger, just a little more clarity there. And then secondly on the restructuring programs, I haven't seen anywhere how much the programs is going to cost in terms of cash costs or hit the P&L.

Could you give us some help there?.

So let me start with the USRO profit first and then I’ll frame up the Q1 if you thinking about the profit decline in the first quarter for USRO. You know about half of that was because of the trade phasing and the merchandising effectiveness we talked about. There was another, probably third from negative mix, product mix and then a bit from volume.

As I said, we didn’t -- we held our media investment behind, some of the good ideas that Ken took us through. So as the year unfolds, we expect a couple of things to happen. First, our price mix will improve as the merchandising effectiveness evens out and our trade spends phasing rebalances versus last year again as we -- as we try to highlight.

Not only is there a merchandise effectiveness opportunity for us, we also set absolutely lower trade spend in our first quarter last year versus balance of that year and this year the phasing is really reverse of that. So that will be the first thing. Second is we do expect volumes to improve. We look at the phasing of last year’s volume growth.

The comps get easier as the year unfolds. And so we expect that to improve. And then we expect the mix as well not to be as negative in the first quarter as it was in the first quarter. So that -- and again strong overhead control and some of the benefit of that $40 million in overhead savings will accrue to our U.S. retail business.

Those are the factors that give us confidence. So we’re going to see better profit as the year unfolds. In terms of the restructuring charges, as I hope you understand, we want to make sure that we inform everybody internally on what those changes are before we start talking about numbers either in terms of positions or dollars.

What I will tell you is that there will be some severance of fixed asset write-offs, probably about half of it will be non-cash when we do give you the figures..

Okay..

Rob, let me just jump in and add a couple of comments to your first question which you know had to do with rest of the year. So I think Don explained well that we expect to see sort of reduction or elimination of these negatives that we saw in Q1.

You know, coupled with that there are number of positives, I think, that are going to continue to work for us. First of all, as we say we have good marketing initiatives and we have -- we're planning an increase in consumer directed marketing this year.

Second of all, yogurt, which you know, has been a drag for the last couple of years is going to be a positive as we go forward. We’re quite encouraged by what we’re seeing there. And then we feel we’d like to start in spite of the comment that we made about China.

We do like our start in International especially in Canada and Western Europe which are our biggest markets. We like what’s happening there and we also like what we’re seeing in that convenience and food service business, which is off to a very strong start.

So we see a number of positives that we’re going to continue to press for us here over the course of the year. And then as Don said, we have a very good control of costs and overheads, better than plan that will continue. So I think those are kind of the way we’re looking at the balance of the year..

But is it fair to say that U.S. retail mid single-digit profit growth maybe you are going to be a little bit below that.

But it could be made up for by stronger International and Convenience Stores or are you maintaining the segment guidance for the year?.

Yeah, Rob, I think it is fair to say there’s going to be probably a mix shift if you look at how the year started for us. We said we’re going to be down in the first quarter. We were -- we're actually on the bottom line working materially of our own internal plan.

But we did have some favorable results in Convenience and Foodservice and International offset by some weaker than planned results in USRO. I think those trends will probably have some impact on our full-year outlook for those businesses..

Okay. Thank you..

And our next question comes from the line of Eric Katzman with General Mills..

Hey, Eric, welcome to the team..

I have a buy recommendation, but I wouldn’t go that far. Okay. Let’s talk a little bit about sales to start. So you’ve got Annie's, but currency is more of a headwind.

So where do you think dollar reported sales given the -- in addition the promotion and the first quarter miss? Where do you see like dollar reported sales coming in using all other things, including M&A?.

With M&A, it depends obviously when we are closing Annie's, but I wouldn’t tell you that we signaled through the couple set headwind from a forex standpoint on EPS, so let’s around that to a 1%. You can probably apply that same percent on our net sales if you’re going to get the reported numbers.

Annie's is a $200 million, it would be more than that, but then we closed given its growth rate, $1 million business, and we are projecting to close that this calendar year. So we will probably get half a year of sales from that business as well.

So add a $100 million for Annie’s or more and take off about a 1% from forex on top of the mid-single-digit guidance that we’ve given you on constant currency. That will probably range in the ballpark..

Okay. And then I guess the second question has to go with the new products. It seems like you’re really emphasizing all the new product launches both in your last call and at the Analyst Day. Can you make the point that this year is really all about growth? Is this first quarter where U.S.

retail albeit in a very tough environment? Do the new products not as successful as you would've hoped initially? Or was it just promotion on the core that overwhelmed what is new product success, maybe you could kind of expand out a bit?.

We like our new products lineup which I commented on in my remarks. Cheerios Protein is off to a very strong start. The snack products, Strudel, the Nature Valley, they have been good. We think the soups, the light cream soups will be very good. The OEP products that we’ve launched -- Old El Paso, I beg your pardon.

Chris, those flavored shelves will be quite good. I mean, as we go down that, our U.S. portfolio, we feel very good about those. The Foodservice -- Convenience and Foodservice business is entirely driven by new product innovation, whether it’s Go-GURT and McDonald’s or new varieties of Greek, new chips, new offerings to K-12s.

We like the innovation there, and we have good innovation across Haagen-Dazs and Old El Paso in Europe. So the new products are very much important for us and part of the mix.

The issue in Q1 is primarily the trade and the merchandising impact, which, as we said, will normalize as the year goes forward, and those new product contributions I think will be more visible..

And Eric what I will detail also is Ken shared that chart on a market share performance. And while the categories aren’t growing at the rate that we had maybe originally planned, our competitive situation is pretty strong. We have two-thirds of our growing share and two-thirds of our category sales.

And so I think that would not happen without some meaningful contributions from our new products..

Maybe one other point, Eric maybe one other detail here to point, to make, but it’s worth pointing out, we did see particularly in our dessert mix business this summer Betty Crocker mixes. We saw a very competitive promotional environment there. And if you watch our shares, you saw that business down quite a bit, and as to a lesser extent vegetables.

And so I think there were some competitiveness issues there. And as we kind of tactically adjust if you will and head into the fall and winter baking season which is where we concentrate our program, we would expect those businesses which were volume drag also in Q1 again to become more of a contributor..

Okay. If I could just ask one more, in the restructuring, could you consider getting out of any brands or businesses as oppose to capacity and labor.

I mean, with the industry and everything that's going on and you said what were the -- was something more on the brands or lines considered for sale as you look at what can grow in this change in consumer environment? And I’ll pass it on. Thanks..

Well, thanks Eric. So we are continually looking and reviewing our portfolio and the categories that we’re competing in. And so the answer to your question is that’s an ongoing process and obviously nothing to talk about our report but we are constantly reviewing our portfolio..

And our next question comes from line of Bryan Spillane with Bank of America. Please proceed..

Hi. Good morning, everyone..

Hello Bryan..

Good morning..

I just wanted to follow-up on one comment that you have made, Don and then I had a question just on brand merchandising. Don, I think, you might have said previously in response to one of the other questions.

At the first quarter bottom line came in relatively close to where your internal forecast were, is that right?.

Yes, EPS. Yeah. The EPS correct..

Okay. And then in terms of the merchandising, I guess, one question I would have maybe just going forward. It just seems like you’ve got a lot going on. You launched 145 new products in the first quarter. You’re going to be changing some of the merchandising tactics on some of your other brands.

But is the lack of lift or sort of the efficiency of the merchandising and maybe this is a more general question. Is it tied at all to -- there is just generally most of your -- the industry is trying to do more, trying to merchandise more or launch new products to try to stimulate demand.

And retailers just can't execute all of that merchandising effectively.

So it sort of dilutes the intent just simply because they’re trying to do too much?.

So Bryan, you kind of summarize the number of comments that we made in June on the merchandising environment. And there is more kind of merchandising and promotional offers now seeking what is a limited display space in the store and that is an environment where I think, I should question sort of points out quality can suffer.

You see more offshelf kind of pricing. You see more ads without an end isle or you see lots of products at the end of the isle. So there is lots of activity seeking relatively limited space and that’s why for us it's important.

First of all that we focused very much on how we execute these events and the brand that we promote and do everything we can to make sure that there are sort of must have promotions. And there are other consumer things that accompany them to make them appealing. So our execution is very important for us in this environment.

And as well as just constantly looking at what we do, did it work, what was the ROI and if something didn't work or tactic doesn’t work to apply the same HMM stuff that we do in all of the rest of the business, apply those and get rid of that kind of promotion and try something else.

So it is an ongoing process of review and evaluation, making sure the execution is of the highest level because it is a very competitive environment out there as you point out with your question..

But fair to say that as you described sort of changing merchandising tactics, it’s too address that specific dynamic, really trying to hold it on those -- generally inefficiencies and provide retailers with programs that should be more efficient and maybe take a higher priority?.

Very much so and also just to highlight, it’s very much about that. It’s certainly not about depth of discount or anything like that. I mean, we think those are -- it’s not about going in that direction. It’s all about the execution of the entire program..

Okay. Thank you..

Yes..

Our next question comes from the line of Ken Zaslow with BMO Capital Markets. Please proceed..

Hey, good morning everyone..

Hey Ken. Good morning, Ken..

Just two questions, one is how do you assess the opportunities for Annie’s like, what do you envision the size of it, do you -- where do you see this trend going and how large do you think it could be the margin structure, I know they have had some issues internally? So can you give a little bit of color on that?.

Yeah. I’d love to, obviously, we think it’s a terrific equity. It’s a very, it’s a unique equity in that organic space sort of it’s an all family equity. Its mom’s buying organic products for herself and for her family and the kids, which is a very attractive positioning within the organic space.

They’ve -- as you know, they’ve had consistent very strong growth and we think that the brand is very flexible and very expandable, giving that -- given that broad positioning and gatekeeper target. So we really like the positioning and the reason we bought it is because of that flexibility and the growth opportunity.

There are also some sort of business model opportunities that I think will result from the combination of Annie's with General Mills.

First of all, we just have more sales force capacity that we can bring to Annie's and that means that we are very confident that we can continue to increase the distribution of those brands and that’s a good opportunity for us.

There are numerous margin expansion opportunities for -- with Annie's, everything, can from the sourcing and how ingredients are brought in to the logistics and how we reach customers, all of the other internal supply chain, HMM things.

We think there are many opportunities here and we have actually jointly discussed these opportunities with Annie's management and they are quite excited by those opportunities. And then again, they will just be some cost savings that we can capture as a corporate entity, Annie's becomes part of General Mills.

One other thing that I’d like to add, they have terrific marketing and sales capability, particularly as it relates to the natural and organic channel. They really focused there and that is going to be an opportunity for the entire General Mills natural and organic portfolio.

We think that they can really help us to accelerate the growth of our existing portfolio brands. So, anyway, I am not going to tell you, how high is up that we are awfully excited by that brand and what we can do to help it grow faster and more profitably and what Annie's can do to help us with the rest of our natural/organic portfolio.

We think it’s going to be really good combination..

And Ken, to make it more mainstream like, one of your competitor did was a organic type of brand as well or like its good still have it panache of being focused on the organic channel and you are not trying to make it mainstream and make it more of General Mills’ type of product, is that fair?.

Yeah. No. That’s very fair. We learn that lesson about 15 years ago, when we first acquired Small Planet Foods and we have -- we learned a tremendous amount from these various natural and organic companies that we’ve acquired over the years. We've been very good. I think about leaving them alone. Let them do that thing.

We will retain Annie's headquarters in Berkeley. These are very talented people. They build a -- built a really good brand. And key is just to figure out where we have capabilities that can really help them and bring them those capabilities which they are actually eager to -- eager to have to accelerate the growth of this thing..

Great. I appreciate it. Thank you..

Yeah..

Our next question comes from line of John Baumgartner with Wells Fargo. Please proceed. .

Thanks for the question.

Ken, you mentioned the slowdown in China, but the economic news out of Brazil and Europe hasn’t really been to hot recently either? So, I guess, given that, what’s your confident in terms of your guidance and maybe this consumer frugality we are seeing here in North America doesn't take root more deeply in these geographies we are still seeing growth?.

Yeah. So the situation in China, I think, is partly macroeconomic and partly, and I think very specifically related to government policies around gifting and entertainment and these sorts of things that has a very direct impact on some of our channels, our gifting programs through our Häagen-Dazs cafes for an example.

So there is sort of a very specific impact. In Brazil even with the sort of the economic slowdown, we are seeing consumer food sales not just in our categories, but broadly across the industry continue to be a pretty solid. And obviously, we’re participating in that.

And also, I would say, John, that our products are very well targeted to, if you will, the solid working and middle class in Brazil. So our price points are good. These are very much everyday products for most consumers. And so we think that they are very well-positioned to be resilient even during a period of some slowdown in Brazil..

The other thing, John, I’d add in Brazil is that one of the consumer behaviors we’ve seen is the shift to the smaller mom-and-pop stores. And one of the real strong capabilities that we acquired with Yoki was a national sales force that was deeply ingrained in those channels. And we think that’s play into our advantage today as well..

Great. Thanks, Don. Thanks, Ken..

Our next question comes from the line of David Driscoll with Citi. Please proceed..

Good morning..

Hi, David..

Hi. Just wanted to ask a little bit more about the U.S. retail profit performance. Specifically, Don, I wanted to ask -- you cited here unfavorable price realization mix and lower volumes as the contributing factors to the $155 million decline. Notably absent in these comments is comments about gross inflation and/or productivity savings in the quarter.

Can you talk about this a little bit? Obviously it must've been positive, but I'm curious about magnitude of it and the pacing of these programs throughout the year?.

David, as we -- as John reiterated today, we still expect 3% inflation for the year. We think it's fairly evenly distributed during the year, so we don't necessarily see any unique quarterly facing. HMM, our productivity savings from HMM are similar.

So one of the reasons that we remain confident in guiding to a higher gross margin is because with inflation at 3% and HMM productivity savings over $400 million, we look at that as a net offset at least and part of that came through in the first quarter which is why it really wasn’t a contributing factor year-over-year..

But the productivity would be more back-half loaded then front-half loaded?.

No. Not materially..

Final question just, Ken, you make a really important statement in the press release where you say and you said it in your prepared script, but you acknowledge the U.S. market conditions are more challenging than expected. You said the quarter came out EPS-wise where you expected and you maintain guidance.

So there's just -- it’s like you to connect the dots for me, if everything is more difficult, but yet EPS comes out as expected. In a way I feel like I am getting a little bit of both here, I am getting that, your plans coming out as advertised, but then you're making the statement that no, no, no watch out, the environment is tougher.

I feel like we should be worried about the guidance, but I'd like you to comment on what this comment means and how confident you are in the full year numbers?.

Well, I mean, it means that we're staying with our guidance because that's the way the business looks to us right now as we look forward, but we do acknowledge that the environment is more challenging, so there is some risk around that profile.

But we do think because of the factors that we talked about earlier in the call, which is that we -- the trade which was a primary issue this quarter, the trade will normalize, some of the bigger volume drags will strengthen, coupled again with the positive momentum that we have in a number of areas of the business.

Those factors all combined and then again on the -- with well controlled on the cost side, we are guiding to our full year guidance for the year and that we will recover there as we go through the next three quarters. I think the wildcard is the category and we don't know whether they’re going to be a headwind, a tailwind, or a neutral.

I think that’s the unknown right now. We’re encouraged somewhat by what we’re seeing over the last several weeks. They seem to be strengthening, but whether that’s going to be a headwind or a tailwind remains to be seen.

But in any event, our job is to execute around innovation and core brand renovation and make sure we’ve got strong consumer programs drive the business that way and that's our plan, we like the plans that we have and that’s why we feel confident right now about maintaining guidance..

And David, what I would add to that is, as I said, we came close to our internal plan on EPS, but the mix was very different. We absolutely do not plan for the full year for International or for Convenience and Foodservice we are growing midteens in profit.

So there are some puts and takes in the first quarter that some came toward us and some went against us. The overriding one that, we are going to be working on and watching as the year unfolds is the U.S.

thorough topline volume growth, because we do expect that to go from a negative in the first quarter to a positive, while we are working through the merchandising effectiveness.

So any caution around the category performance, the industry performance really reflects that area for us and that is where the, that’s where our key focus is right now as we think about the rest of the year in our financial performance..

Thank you. Very helpful..

Okay. Thank you..

Our next question comes from the line of Alexia Howard with Sanford Bernstein. Please proceed..

Good morning, everyone..

Hey, Alexia..

Hi.

So two questions, first of all on advertising, which I don’t think has come up yet, was your advertising spending up or down year-on-year in this quarter and are you seeing any deterioration in the effectiveness of advertising and a lot of companies are saying with respect to merchandising, so that’s the first question? And then the second one with respect to acquisitions, you obviously announced Annie's this past week, is that it for the time being? Do you have an appetite for more potentially in the near future and if so, which direction would that be, could it be more in the natural area, could it be more looking overseas and what sort of scale might you would be thinking about as you think about your acquisition strategy? Thank you..

Yes. So, Alexia, our advertising in Q1 in the U.S. was up….

Flat in U.S., 1% total company….

Okay. I am getting, so flat in the U.S. and up 1% overall for the company. And of course, we are always monitoring the effectiveness of advertising programs, but we have, we have some very good performance behind advertising.

We think that the sort of revised and renovated positioning for Yoplait Core Cup around the snacking benefits of the product, which we are running quite a bit has been highly effective and one of the reasons why we are seeing resurging growth there.

Obviously, we have been communicating a lot about the product reformulations in Big G we commented on the growth in Cinnamon Toast Crunch. So, again, we are always evaluating and monitoring effectiveness of advertising.

But when we have something -- when we have a good product change or something new to say and we say it to the right people, seems to work well for us..

On M&A, I'll let Don jump in on that..

Yes. Alexia, Annie's, obviously, it set a place for us in terms of, it’s kind of businesses that we are looking for here in the U.S., which is around the natural organic better for you areas. We have done smaller acquisitions, this was the largest one in that space and we feel good about that. And our focus outside the U.S. remains on emerging markets.

As we have talked before, Indonesia, India, finding that next leg if you will to add what we have in China and what we purchased in Brazil, can remains on our focus and those would be in -- the U.S.

ones could be on the smaller side, we’ve done small to large ones, internationally there could be a mix as well, although, if we go into a country like Indonesia, similar to our entry into Brazil, we want to look for something with some size and capabilities to bring -- that had size capabilities, as well as strong brands..

Great. Thank you very much. I will pass it on..

And Operator, we are out of time here. So, I think, I am going to have to apologies to anybody who’s left in queue, if you’ve got questions, please give me a call. Thanks very much for your time today..

And ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..