Ladies and gentlemen, thank you for standing by and welcome to the Quarter Two Fiscal 2017 Earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, you can press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star, zero. As a reminder, today’s call is being recorded Tuesday, December 20, 2016. Now I would like to turn the conference over to Jeff Siemon, Finance Director, Investor Relations. Please go ahead, sir.

Thanks Tony. Good morning and happy holidays to everybody. I’m here with Ken Powell, our CEO; Don Mulligan, our CFO, and Jeff Harmening, our President and COO. I’ll turn you over to them in a minute, but first I’ll cover our usual housekeeping items. Our press release on second quarter results was issued over the wire services earlier this morning. You can find the release and a copy of the slides that supplement this morning’s remarks on our investor relations website. I’ll remind you that our remarks this morning 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. With that, I’ll turn you over to my colleagues, beginning with Ken.

All right, well thanks Jeff, and good morning to one and all. I’ll cover the key headlines for the second quarter First, we feel good about the margin expansion progress and EPS growth we delivered in the quarter, and we continue to have confidence in our ability to deliver on our goal of a 20% operating margin by fiscal ’18. We remain committed to our Consumer First strategy, and where we’re getting the ideas right, it’s driving growth, whether that’s Annie’s and Larabar in the U.S., Haagen Dazs outside North America, or Old El Paso around the world. Even so, our net sales performance did not meet our expectations in the second quarter. We didn’t have enough marketing support, meaning the combination of trade, media and new product news to drive improved top line results, and on top of that we saw a slowdown in food industry growth in the U.S. in recent periods. So we’re making targeted adjustments to our plans in the back half to find the right balance of investment and return while still driving significant margin expansion. Jeff Harmening will take you through more details on our second half business plans in a moment. As a result of our sales trend, we’re revising down our expectations for full year net sales and segment operating profit, but we remain on track to deliver our EPS and margin expansion guidance and we’re increasing our free cash flow growth expectations thanks to continued good financial discipline. Finally, we announced an important change to our organizational structure earlier this month. This change represents a significant step towards operating as a global company, allowing us to unlock global growth opportunities while continuing to drive efficiency and increase agility in our organization. With that, let me turn things over to Don to provide more detail on our financial performance.

Thanks Ken, and good morning everyone. With that as a backdrop, let me get into the numbers, provide a summary of our cost savings efforts, and give you some more details on our updated guidance. Slide 6 summarized our second quarter fiscal ’17 financial results. Net sales totaled $4.1 billion, down 7% as reported. Organic net sales declined 4%. Total segment operating profit totaled $830 million, comparable to last year on a constant currency basis. Net earnings decreased 9% to $482 million and diluted earnings per share were $0.80, as reported. Adjusted diluted EPS, which excludes certain items affecting comparability, was $0.85 Constant currency adjusted diluted EPS increased 5% compared to last year’s results. Slide 7 shows the components of total company net sales growth. Organic net sales declined 4% in the quarter driven by seven points of lower organic pound volume growth, partially offset by three points of positive sales mix and net price realization. Foreign currency translation didn’t have a material impact on net sales this quarter. The net impact of acquisitions and divestitures reduced sales growth by three points in the quarter. Turning to segment results, total U.S. retail net sales declined 9% with growth in snacks offset by declines in the other operating units. Organic net sales were down 6% in the quarter. The difference between reported and organic net sales primarily reflects the divestiture of Green Giant, which impacts the meals unit results. Segment operating profit grew 2% versus last year with benefits from margin expansion initiatives more than offsetting lower volumes. In our convenience stores and food service segment, net sales declined 4% in the second quarter. This segment’s Focus 6 platforms returned to growth with net sales up 2%, driven by growth in cereal, yogurt, snacks, mixes and biscuits. As we expected, net…

Thanks Don and good morning everyone. As Don mentioned, we posted organic net sales declines in the quarter with our growth and foundation businesses down 3% and 8% respectively. In some businesses, we met our expectations and in others we fell short. We didn’t deliver the top line improvement we were expecting from the U.S. retail in the second quarter, with organic sales finishing down 6%. On the other hand, margin delivery was strong with U.S. retail operating profit margins up 270 basis points through 24.4%. We also expected better net sales performance for our convenience stores and food service segment, and we met that expectation with our Focus 6 platforms returning to growth this quarter. Within our international segment, we expected improved organic net sales performance. We saw a top line improvement in Europe and in China offset by a slowdown in Canada, leaving total segment organic net sales growth in line with our first quarter results. Let me describe in more detail the drivers of our second quarter performance and discuss our operating plans for the second half of this year, starting with U.S. retail. The operating environment here in the U.S. remains challenging. As you can see on Slide 24, the industry has experienced a slowdown in retail sales growth, including a decline in the most recent quarter as benefits from pricing have eroded and unit volume has remained weak. In our categories, average unit prices were up 3% last quarter but volume softness drove overall category retail sales down 1%. For our business, it was our five largest categories - cereal, yogurt, snack bars, refrigerated dough, and soup that fell short of expectations. As Ken told you upfront, we did not have enough marketing support in the form of trade and consumer spending and new product…

All right, thank you, Jeff. Let me just summarize our comments this morning. We continue to take a disciplined approach to the top line, focusing our investments behind our highest returning Consumer First ideas and eliminating activities that are not generating profitable volume. Our organic sales results didn’t meet our expectations this quarter, so we’re adding support and launching a solid line-up of new products to strengthen the second half. We delivered strong margin expansion and good EPS growth in the second quarter, and our HMM and other cost savings efforts keep us on track to deliver our fiscal ’18 goal of a 20% adjusted operating profit margin. We updated our full-year growth goals to reflect a softer top line, but we’re maintaining our EPS guidance and increasing our free cash flow growth target as we continue to drive operational efficiency across our businesses. That concludes our prepared remarks. Operator, you can open the line for questions.

[Operator instructions] We’ll get the first question on the line from Robert Moskow with Credit Suisse. Go right ahead.

Hi, thank you. Jeff and Ken, I think investors are going to look at this guide down for sales and segment operating profit as kind of a referendum on the industry’s efforts to reduce trade promo, reduce advertising as a means to improve margins and improve efficiency. I just want to understand how you’re thinking about it internally. You say you’re going to have to add back some marketing in the back half of the year on a selective basis, but can you give us a sense of comfort that the strategy for this year and for next year, that you’re not cutting too far to the bone or that there’s not going to be a bigger reinvestment in ’18 to kind of make up for what’s been lost in the first couple of quarters?

Hi Rob, this is Ken. I’ll start, and I’m sure Jeff will want to jump in. So we think it’s very clear that taking a very disciplined approach to spending, both trade promotion and consumer, is the right thing to do; and quite honestly, we’re going through depth and frequency and executional approach across our trade promotion, and we have the ability to look at those and understand their impact almost deal by deal. We think that doing that and that approach is the right thing to do, we just don’t want to promote in ways that create a loss for us. The same of course is true for consumer spending - we’ve got to see the return, so I think we remain very convinced and committed to expecting strong return from our promotional and advertising dollars. Having said that, as we look back at the first quarter, we think there are cases where we cut too far or reduced spending too much in certain areas, so we’re going to add back and correct as we go forward in the second half. I think you heard Jeff comment on some of the areas where we’re going to do that. So fundamentally, we think discipline in this area is good and there are opportunities to improve, I think quite significantly, but we’ve got to correct as we go forward into the second half. Jeff, I don’t know if you’d add anything?

I would say importantly in some areas, we reduced our spending on trade, for example on Old El Paso and Totino’s hot snacks, and we got it really right and we increased our revenues partially as a result of that, along with some good innovation. So there are areas where we feel really good about what we have done, and cereal is not far off either, to be honest. Cereal really is a matter of we think we’ve got some great ideas, we just didn’t spend enough consumer marketing support against those, which we’ll add back. But fundamentally on the trade side, we didn’t get that too wrong. There are a couple businesses where we didn’t get it as right as we want, and I would say Pillsbury refrigerated dough is one of those. So we’re dedicated to the strategy and we got it right in some places, and in some places we didn’t get it exactly we’re right and we’re making the changes that we need to.

Hey Jeff, can I ask a follow-up? You had one chart that’s rather striking, that shows category pricing has gone negative for the first time in a long time in U.S. retail, but your price realization is up over 3%. How sustainable is that?

Well Rob, I think it’s a really good question. If you look at the--prices have actually deflated if you look at the total store, but it’s really driven by the perimeter. So if you look at the perimeter of the store, that’s really where you see pretty significant price deflation. In the categories where we operate, we’re actually seeing modest amounts of price inflation, so we think we can generate pricing. We think we generated a touch too much in the second quarter, but we can generate price even in this environment because in the categories that we compete in, we’re actually seeing some positive price realization.

Okay, that’s helpful. Thank you.

Thank you very much. We’ll get to our next question on the line from Bryan Spillane with Bank of America. Go right ahead.

Hey, good morning everyone. Just two quick ones. First one, I guess if we look at the guidance for the full year, could you just give us some color in terms of phasing? Will more of it be pushed into the fourth quarter in terms of the growth, or would we see some improvement in 3Q?

Bryan, this is Don. We expect a bit of sales improvement in Q3 and more in Q4. Obviously our cost savings build, cost savings initiatives build as the year goes on, so as a result of that, the EPS growth is much more heavily weighted to the fourth quarter versus third quarter.

But we should see some sequential year-on-year sales improvement in 3Q versus where we were in 2Q?

Modest, a little bit in Q3, but most in Q4.

Most in Q4 - okay. Then just one, and maybe it’s more a follow-up to Rob’s question, but if you look at the five largest categories in the U.S. where you feel short, did the competitors do something different than you expected, so where you were trying to optimize trade spend or there’s some instances in these categories where maybe your competition isn’t, and that’s what’s sort of causing the shortfall?

Bryan, thank you for that. You know, what I would say in general about the operating environment, it’s fairly rational. It is rational, but in some of our biggest categories, a couple of our biggest categories, we did see an increase in trade promotion in the second quarter. We saw it a little bit in soup where our lead competitor had a pretty poor fall last year and came back a little stronger, and then we saw a little bit in cereal as well, a little bit more promotional in cereal, and also in refrigerated dough. So for three of those categories, we saw some more promotional support than we had--than we had seen before, and that really in combination with our pulling back was part of the challenge we saw in the quarter.

All right, thank you. Thanks everyone. Have a happy holiday.

You too.

Thank you very much. We’ll get to our next question on the line from Andrew Lazar with Barclays. Go right ahead.

Good morning everybody, and happy holidays.

Hi Andrew.

A bit of a follow-on as well, and it’s I guess a little more philosophical, but how important is the 20% margin target in fiscal ’18 specifically, in light of a top line that was supposed to showing some modest growth through fiscal ’18? I’m just trying to get a sense of having a specific margin target out there. I understand what drove the thinking around putting a target out there when you did, but we’re in a bit of a different environment now, I think, and does that maybe limit you in what you may feel you need to do from a reinvestment perspective just to get the top line to stabilize? You know, having a certain margin target obviously is noble in a lot of ways, but if it comes on a significantly smaller sales base, it doesn’t get you obviously to where you want to be. It’s a little more philosophical, but I was hoping you could sort of take a shot at that.

Well Andrew, again I’ll start. I mean, it’s been--as we look at the environment, which has been slower growth across consumer industries, and listened pretty carefully to our investors, people who hold our stock, there really has been a very, very high interest in margin in this environment, so we felt it was important to make it clear that we’ve heard that interest, and it was helpful externally but I’ll also tell you very helpful internally for us to set a very clear and important goal. I also want to tell you that the actions that we’ve taken to achieve that have been highly positive for General Mills, and so the work that we’ve done over the last several years to optimize our supply chain, getting the right capacity in the right place has been extremely beneficial to the company for the long term. The base that’s there now is very highly utilized, the actions that we’ve taken, in fact as we’ve said a number of times, to open the door to kind of a second wave of productivity initiatives as those plants are highly utilized, that’s been extremely positive for General Mills. The work we’ve done on the administrative structure, just to get a lighter structure, the work that we just announced to optimize the structure for global growth with a North American segment, kind of a Europe developed marketing segment, Asia - that segment, these are really designed now for executional efficiencies, better sharing. They’re just way more efficient. So I understand the question, but I would just say that the work that we’ve done and we’ve put in place to achieve these stronger margin goals has, I would say, overall been very highly positive for General Mills and sets us up very well for the future. Obviously margin and free cash flow are very important metrics for us, we talk about them repeatedly. Top line of course is also super important, so we understand how important it is to get the top line to turn and we’re very focused on that. If you guys want to add anything?

I’ve got a couple things. I don’t want to reiterate too much what Ken said, but I think it’s important to understand that as we look at our business, there’s different levers we can pull to drive shareholder return. Sales growth is clearly the one that has the longest term benefit and where our focus is, but there’s clearly margin expansion, there’s cash conversion, and cash returned to shareholders. At different points in our history, we’ve pulled those at different strengths based on what the market can bear, and as we looked at the market over the past couple years and at least for the near term, with less available top line growth, we wanted to make sure that we were still delivering a competitive return for our shareholders and that meant more on the margin. So that was kind of one input. The other is that setting a target, and Ken kind of touched on this, it does make you think differently. It’s brought to bear more ideas in terms of where we can find efficiencies, and we’ve done it throughout our P&L and our balance sheet. As a result, it’s creating flex for us to reinvest back into our business, and I think those are all good things. But at the end of the day, the goal is to ensure that we are investing behind good top line growing ideas and then driving a competitive margin, and that’s really where we--at the end of the day, those are the two key things that we look at.

Got it. I appreciate that color. Thank you. Just a very quick one - the new top line guidance, what does that embed for what you’re expecting for foundation and the growth portfolios? Before I think it was down mid-single digit for foundation and up low single digit for growth. I don’t know if you have a new metric on those? Thank you.

We do, thank you, Andrew. As Jeff walked you through, a couple of our large growth businesses is where we were short in the first quarter and the first half. As a result, as we went forward today, our growth businesses will probably be a touch negative, minus low single digits versus the plus low single digits we started the year. The foundation businesses actually have held in well and will still be in the range of mid single digits, maybe at the low end of the range but still in that range, so that’s how you would you think about our new sales guidance.

Great, thanks so much.

I would add on to that, Don. For the U.S., we’re expecting only modest improvements. The guidance that we’ve given allows for only modest improvement in the top line in the U.S. while continuing to expand margins. As we look at the second half, our two biggest improvements will be in our convenience and food service segment as well as in Europe.

Thank you.

Thanks very much. We’ll get to our next question on the line, from the line of Ken Goldman with JP Morgan. Go right ahead.

Hi, thanks. I have two for Don, one quick one if I can, and then a longer one. Don, just to sort of follow up on a question earlier in terms of the pacing of the year, tax rate guidance I think implies roughly 27% for the back half of the year. As we model, should we model that evenly across both quarters, or is there maybe a timing factor that might give a disproportionate benefit to 3Q or 4Q?

The number is about right for the back half of the year. I’d have to check the quarterly phasing of it. I know last year we had a plus in Q3 because of some U.S. tax legislation that came through. That may push a little bit more to Q4 as the opportunity, but quite honestly, I’ll have to confirm that for you, Ken.

Okay, no problem. My longer one is about the free cash flow guidance, and bear with me through some math, if you would. Through the first half of the year, I think your free cash is down over 20% year-on-year. I know these things move back and forth and there’s timing issues and so forth, and I’m not curious about why things can jump and reverse in the back half, but it does imply a pretty sizeable second half - I think over 30% just to get to your guidance, which in turn implies free cash of about $1.4 billion in the back half, which General Mills has never quite achieved before. So I guess I’m curious, Don - is there something unique in the back half of the cash story we should be aware of? You talked about payables. Is capex going to drop? I’m just trying to understand a little bit more of the drivers behind that, if I could.

Yes, it’s a really good question. I’m glad you asked it. There’s actually three things, and they really all revolve around working capital. The first is a year ago we had a big payable from the Green Giant sale that hit our operating cash flow, even though obviously the cash that came in was in the financing section--or the investment section, excuse me. So we had a large liability that will not obviously recur this year, so that was $160 million, I believe, at this point last year. That will change the complexion of our working capital on the balance of the year. The other is our trade and advertising accruals. As we’ve said, our media, our trade was down in the first half, even a bit more than we had planned and anticipated. As we reinvest more in the back half, those accruals will come up, again favorably impacting working capital. Then lastly, and the one that’s the most sustainable that will carry forward into F18 as well, is our focus on core working capital. Inventory was a bit higher than we wanted it to be at the end of the second quarter, and that’s because volumes did not come in as anticipated. That will even out and come down as the year unfolds. Then most importantly as we continue to work on our payables and as we move our vendors to 90-day terms, we’ll see that benefit start to accrete more in the second half and again more in ’18 as well. So it’s all around working capital, and it’s those three big items - the tax payable on the Green Giant divestiture a year ago that we’re rolling over, the level of advertising and trade payables that will increase as the year goes on as we increase investments in those two areas, and then the core--continuing to work on reducing core working capital.

Is it still safe for us to model maybe $730 million, $740 million in capex? I think that was the guidance in the 10-K.

Yes, that’s correct.

Great, very helpful. Thanks Don.

Thank you very much. We’ll get to our next question on the line with David Palmer from RBC. Go right ahead.

Thanks, good morning. First to follow up on that segmentation approach and the related promotion shifts, do you think in some cases you could have done a better job of analysis ahead of time, such that you could have further minimized the volume fall-offs? Conversely, should we just realize that this process is going to have some unknowns, that you may have a competitive response here or there and there’s going to be lumpiness in terms of net revenue realization, both positive and negative, by quarter?

Yes David, we did a lot of analysis before embarking on this, this net revenue management journey, and the returns that we’re seeing from our advertising and our trade are playing out as we expected them to. What I would say is the competitive atmosphere is dynamic, and what you will see from us is making sure we’re making adjustments to those plans as we go along, which is what we’re doing in the back half. So even though we get a lot of things right, some of the things we tactically need to adjust, and that’s what you’re seeing us do in the back half of this year. So as time goes on, we’re dedicated to it, but I would say that we’ve analyzed deeply the second quarter and we’ve already made some changes, even from the end of our second quarter, which is the end of November, until today. So I think what you’ll see from us is making sure that while we remain dedicated strategically to net revenue management and optimizing our profitable volume, we’ll make adjustments as time goes along and as we see the competitive dynamics change.

Just a small one on weather - do you think it played a role in that November quarter? It was a pretty warm quarter. Do you think it might have been a drag on the Pillsbury and Progresso brands, and perhaps with the cold snap we’re seeing in December, some of the early signs are better for these platforms?

Well you know, that may be the case to a small degree in soup and on baking, but I would say the bigger driver of our performance is always what we do and the spending we put in place and how effective our spending is or our new products are. So as we look at the second half of the year, I’m certainly not opposed to it being cold, but for us we really look at what we can drive, which is making sure we make the tactical adjustments to our spending and what we think is a good new product line-up for the second half.

Great, thank you.

Thank you very much. We’ll get to our next question on the line from Jason English from Goldman Sachs. Go right ahead.

Hey, good morning folks.

Morning Jason.

Thank you for letting me ask the question. I’ve got a couple, I’ll just rattle them off quickly. First on gross margins, can you give us a view of what you’re expecting for the full year, and also what the slope of input cost inflation looks like for that 2%? Is it kind of steady throughout the year, or is there any sort of ramp or de-cel to it?

So our gross margin, we increased 50 basis points year-to-date. We think it will be up closer to 200 basis points in the back half of the year, so full year will be below our original 150 guidance, probably more in the 100 to 120 range, but it will improve in the back half for some substantial reasons. First off, we’ll get better volume leverage as we see improved sales in the back half. That is primarily from volume, so our gross margin will benefit from that. The comps from last year, if you look at our trend last year, our gross margin expansion was essentially all in the first half, and that was due to inflation phasing, where inflation accelerated during the course of F16. Last year, gross margins were up 170 basis points in the first half, was actually about flat in the second half, and actually Q3 was down 130 basis points, so again I think that gross margin expansion this year on a comparable basis will skew to Q4. To your specific question on inflation, we think it’s fairly stable through the course of the year, slight acceleration in the back half and fourth quarter, and obviously we’ll see pretty steady contributions from HMM exceeding that inflation. Our cost actions will build during the course of the year. That will help gross margin in the back half, and then transaction FX, which for the full year will be about a $50 million drag for us, $35 million of that is in the first half, as I said in my comments. The pound will continue to impact us in the back half, but we think the Canadian dollar will be less so, so we will absorb the majority of the transaction FX negative in the first half, so that will be less of a drag in the second. So really, those four things - the volume leverage that we’ll get in the second half slightly better than the first half, the comps particularly around inflation phasing will favor the back half this year again, especially the fourth quarter, our cost actions will build around Project Century benefits, and then transaction FX still a negative but a lighter negative in the back half.

That’s helpful. 125 BPs for the full year still sounds pretty solid, even it’s a bit below 150. Building on that, to get to your 150 full-year EBIT margin expansion, A&P is on track to add around 100 BPs to margins, and maybe you spend some back, let’s say at 75, so between GM and A&P, you’ll have 200 BPs of margin cushion there. Implying some SG&A leakage at margin despite all the aggressive cost cuts, is that just a product of some of the sales softness? Is it a cadence of the SG&A discipline? I don’t know, maybe you could shed some light on that.

Yes, I’m not following all your math on that, but from an advertising standpoint, in the back half of the year, we said in the last call we expect advertising after the first quarter to be down double digits for the year. We still believe that, probably mid-teens, which means it will be better in the back half, still down slightly, but importantly up in some key businesses. Matter of fact, if you look at our growth businesses in the back half, excluding U.S. yogurt which we’ve always said we’re going to really right-size our investment there, given our historical share of voice, excluding U.S. yogurt our growth businesses’ advertising investment, media investment will be up low single digits in the back half. And again, it’s fairly spread across the businesses that Jeff talked to, so we’ll see that in the back half. And actually, our admin continues to be below last year, both within SOP and then at the corporate level as well, so that’s actually a contributor. Obviously what’s different is the sales are lower and volume is lower than we started the year, and that’s an offset. So again, I didn’t exactly follow your math, but we expect to get 150 basis points of operating margin expansion. We’ll get a good piece of that, as you noted, through gross margin and we’ll get the balance through the rest of the P&L, but all lines, including administrative costs and overhead costs, will contribute.

Okay, very good. Thank you.

Thanks very much. We’ll get to our next question on the line from Chris Growe from Stifel. Go right ahead.

Hi, good morning.

Morning Chris.

Hi. Just had a couple questions for you. The first is without getting to future revenue growth guidance, I think there was a question that alluded to this earlier, just that you do expect your revenue growth to improve in fiscal ’18. Is that degree of improvement changing such that you’re relying more heavily on cost savings to achieve the operating margin target? I guess as I see the revenue growth weaker in this quarter but also weaker for the year, just worried that some of it could carry into fiscal ’18 and could lead to a little more challenge in achieving the operating margin.

Hi Chris. I think that first of all, we’ll--we don’t want to give guidance for F18 in December, but to your point, the way this year is coming out, I think we’ll have to look at all the components of next year. I think this year coming in softer is obviously going to have to play into how we look at next year. We think that second half will be, as we’ve said, better and will build momentum through Q3 and Q4, so we expect to enter ’18 with the top line going in a better direction. Obviously we’ve talked in great detail about all the margin work that will continue to play out as we go into F18, so I think your point about entering F18 at a lower level than we expected of course has to be considered, and we’ll give detailed guidance on all of that in June, as we always do.

Okay. Then just a question for you on the international growth in sales and operating profit. It was a little weaker than I thought this quarter, so I want to understand just how the--or maybe what regions the performance is expected to improve, and then just understand when you talk about marketing and it being down in the first half of the year, is international going to see a heavier marketing investment in the second half as well that could weigh on the margin a bit?

Chris, thanks for that question. As we look at the second half of the year, the biggest improvement we’ll see will be in Europe, which is a very profitable business for us. We improved that business in the second quarter from the first quarter. We had a tough summer based on the Haagen Dazs sales as well as the Yoplait integration, but we saw the second quarter improve on Haagen Dazs and as well as OEP - Old El Paso and bars, and we expect that to continue in the second half of the year. We’ve got really good innovation on Haagen Dazs, good innovation on Old El Paso, and we continue to expand our bars business. So--and the integration of our Yoplait business with our European business will be largely behind us, so we expect improved performance from there. So I would say in the second half, you’ll see that, but I also want to mention that what we see is that our two largest developing markets, China and Brazil, have returned to growth if you look at organic growth. They’re a little bit clouded by some restructuring we’re doing of our snacks business in China and of our acquisition of yogurt in Brazil, but underlying that, in China we’re back to mid-single digit organic growth. We’re growing our Wanchai Ferry business, we’re growing Haagen Dazs, and we continue to see good growth from yogurt. We’re back to growth in Brazil as well and we’re executing better in Brazil, so we’re back to growth there. So as we look at the second half, we expect to see growth from our two biggest developing markets as well as improved performance from Europe.

Chris, the only thing to add, just as a point, is also that both of our joint ventures are performing pretty well. Haagen Dazs Japan had a good quarter, and I think importantly we now have, I think, two and maybe three quarters of improved performance in CPW really with performance across the board better in that joint venture. So internationally, we’re also seeing improving contribution from those JVs.

Okay, thanks very much. I appreciate it, and happy holidays to you.

Thanks Chris.

Great. Operator, I think we’ve let everyone take two bites of the apple with questions. We probably have time for one more, maybe a second; but let’s go for one more.

Certainly. We’ll get to one more question on the line from the line of Steven Strycula from UBS. Go right ahead.

Hi, good morning guys. Have a two-part question. The first part would be just to recap, what would you say is the key explanatory reason as the revised guidance on sales? Looking back to how you guided in July, is it more the delta that we’re seeing in the yogurt business, or was there a little bit of a surprise in meals? Just expected that the core U.S. retail trends would kind of improve, much cleaner aisle impact in major retailers. That’s one. The second question would be, what is your go-forward M&A strategy, given the U.S. market has been decelerating a little bit more recently and emerging markets remain volatile?

This is Jeff Harmening. Let me take the first part of that question, then I’ll hand it over to Ken for the second part, I guess. On the first piece, the first half of the year, we plan to take out unprofitable volume, and we’ve talked about that and we certainly did that while improving our margins. But the combination of taking out a little bit more spending than we had anticipated, as well as the competitive environment being a little bit more promotional than we anticipated, that kind of combination is what led to our first half sales results, particularly in the U.S., being below what we expected them to be. Although we got it right in some places on our spending, in some places we need to make adjustments.

On the M&A front, look - as we’ve said, we continue to look in many places for opportunities to create value, and these would be acquisitions that could drive growth or synergy, or both. We would look both in the U.S. and internationally. We are quite interested in snackable ideas, snacking is very much on trend. Also, simplicity and natural is of interest to us. Bolt-ons to existing business are quite interesting to us. So if you look at the last 24, 30 months, we acquired Annie’s, an organic business, Epic Provisions all-natural beef snacks, Carolina Yogurt, a bolt-on, and so those are the kinds of things we’ve been doing and we continue to look in those areas.

Okay, great. Then one follow-up for Don. Just to make sure that I heard you correctly, the year-over-year earnings growth rate in the back half, fourth quarter is supposed to be more pronounced growth than the third quarter, if I heard you correctly. Is that accurate?

That is correct.

Okay. Thanks guys. Happy holidays.

Tony, do we have time maybe for one more, if we can sneak on?

Absolutely. We’ll take one more question on the line, from the line of David Driscoll from Citi. Go right ahead.

Man, that must have been my holiday Christmas present. Thank you, and good morning. I really appreciate that. I do have a couple of good ones here. I wanted to ask about the volumes in U.S. RO. So it’s down 10, and wanted to understand how much of this is unprofitable volume that frankly you don’t mind jettisoning, versus good stuff that you’re really disappointed to see go? So could we start there?

Well David, this is Jeff. Obviously a large part of it is unprofitable volume, and that’s why our U.S., despite the fact that if you can imagine, we had a lot of deleverage given that our volumes were down 10% in the quarter, why our operating margin was up 270 basis points because--and it’s not the only reason, but for sure a lot of this was unprofitable volume that we don’t mind losing. I think there were a couple cases where we felt like we had--we feel like we have good marketing, good news, and some things we could optimize. I look at cereal advertising, for example - we love the returns we get from our gluten-free advertising and from no artificial colors and flavors, and that advertising we think we can spend more than we did in the second quarter because we like the returns on that and we think we have really good news.

Then bigger picture, the sales guidance is down two to three points, the segment profit guidance is down four points, so it kind of goes back to this unprofitable volume question. When I look at figures like that on the reduction, it sounds to me like the sales that you’re now expecting, this change in sales guidance, this was good stuff. This was volume that you did not want to lose, yet you are, so it does seem as if, if I’m reading all the tea leaves here correctly, that we’re getting into some of the bone here rather than just taking out excess fat, i.e. unprofitable volume. Is that the right way to characterize what’s happened within the sales guidance change?

Well David, as I said, there’s a large portion of the volume that was not particularly profitable, and we got rid of that; but I also said we didn’t get it exactly right. So I think there are some pieces of that volume that are more profitable, especially the non-promoted volume on big brands like cereal and bars where we think we didn’t get the spending exactly right. By spending more to improve the everyday sales of those businesses, we can drive both our volume and our profitability.

David, this is Don. The only other thing I’d add in terms of--you know, if you look at how much we reduced our sales guidance by versus SOP, the other factor not to lose sight of that doesn’t impact sales is our transaction FX. As I mentioned, we have a $50 million, roughly $50 million negative transaction for products shipped into Canada and into the U.K., and about $40 million of that frankly was--it’s about $40 million higher than what we had planned. Obviously Brexit happened after we announced our guidance, and that’s incorporated into these updated guidance figures as well.

Final question from me, Ken, with the sales guidance reductions, you still are very confident on the call about the 20% margin goal in 2018. Would you simply characterize that the change in sales here is just not so significant relative to this 20% goal, that investors need to be concerned about the achievement of the 20% goal in light of the sales performance?

Look - we want to do all three. Our core metrics are revenue growth, margin expansion, and the efficiency with which we generate free cash flow and return it to shareholders. So all of those, we think are very important to our investors, and we’re very focused on all three. Clearly over the last several years, we’ve been highly focused on a variety of very positive restructuring initiatives just in terms of increasing the efficiency of our business model. That’s all been very good, and that’s included eliminating some volume that was unprofitable. I think as we go forward and with the distractions of some of those things mostly behind us, we’re very highly focused on generating top line growth. Obviously that’s critical to sustaining our business model, and we’re very focused on that. That will be very important, and we’ll see things improve here in the second half and we’ll be highly focused on continuing that momentum as we go into F18.

Thanks so much, and happy holidays.

Great. Thanks everyone for sticking with us. I know we didn’t get to everybody, so I’ll be on the phone all day. Please give me a ring, look forward to speaking with you. Happy holidays everyone.

Thank you very much. Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day everyone.