General Mills (GIS) Q2 2018 Earnings Conference Call Transcript

General Mills (GIS 0.85%)
Q2 2018 Earnings Conference Call
Dec. 20, 2017 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Second-Quarter Fiscal 2018 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone.

If at any time during the conference you need to reach the operator, please press * 0. As a reminder, this conference is being recorded Wednesday, December 20, 2017. I would now like to turn the conference over to Jeff Siemon, vice president of investor relations. Please go ahead, sir.

Jeff Siemon -- Vice President of Investor Relations 

Thanks, Sarah, and good morning to everybody. I'm here with Jeff Harmening, chairman and CEO; Don Mulligan, our CFO; and Jon Nudi, president of our North America retail segment, and I'll hand the call over to them in a moment, but before I do, I'll cover our usual housekeeping items. A press release on our results in the second quarter was issued over the wire services earlier this morning, and you can find the release and a copy of the slides that supplement our remarks this morning on our Investor Relations website. I'll remind you that our remarks will include forward-looking statements that are based on management's current views and assumptions.

And the second slide in today's presentation lists factors that could cause our future results to be different than our current estimates. And with that, I'll turn you over to my colleagues, beginning with Jeff.

Jeff Harmening -- Chairman and Chief Executive Officer

Thank you, Jeff, and good morning, everyone. Thank you for joining us today to discuss our second-quarter fiscal 2018 results. Our biggest challenge entering 2018 was to change the momentum on our top line, and I'm pleased to say that we have delivered broad-based improvement in the second quarter across geographies, product platforms, and channels. We're executing better, we have stronger innovation, more effective brand-building, and better merchandising that's driving market share gains in the majority of our key global platforms.

We're doing aggressively in key emerging channels like e-commerce, and I'm also pleased to say that we grew organic sales in absolute terms across all four of our operating segments this quarter, and, while we like our momentum, I must say it feels great to grow again in absolute terms. While we like the momentum we're building on our top line, we also know we have work to do to deliver the year. Our second-quarter total segment operating profit was improved over the first quarter, but still down over a year-over-year. We have concrete plans in place to deliver strong profit growth in the second half of the year while continuing to drive our top line.

So with two quarters behind us and good visibility to our back half plans, we are raising our organic sales outlook for the year and maintaining our guidance for the profit and EPS growth. With that as a summary, let me turn it over to Don Mulligan to provide more details about our second-quarter performance.

Don Mulligan -- Chief Financial Officer

Thanks, Jeff. Let's break into our financial results on Slide 6. Net sales totaled $4.2 billion in the quarter, up 2% as reported. Organic net sales increased 1%.

Total segment operating profit totaled $773 million, down 8% in constant currency. Net earnings decreased 11% to $430 million and diluted earnings per share declined 8% to $0.74 as reported. These results included a $42 million charge related to a prior-year tax adjustment. Adjusted diluted EPS, which excludes the tax charge and other items affecting comparability, was $0.82, down 5% on a constant-currency basis.

Slide 7 shows the components of total company net sales growth. Organic net sales increased 1% in the second quarter, driven by sales mix and net price realization. Foreign currency translation yielded a 1 point benefit to total net sales. Second-quarter adjusted gross margin decreased 240 basis points and adjusted operating profit margin was down 220 basis points as expected, driven by higher input cost, including currency-driven inflation on imported products, unfavorable trade expense phasing, stronger seasonal merchandising performance, and a 7% increase in media expense.

These were partially offset by savings from cost management activities. As we look ahead, there a few key drivers that will strengthen our adjusted operating profit margin from the low 17% range in the first half to more than 18% in the second half. First, we expect to drive positive net price realization and mix across all four segments, driven by trade phasing, pricing in certain geographies, and improved sales mix; second, our cost savings will accelerate as our global-sourcing initiative ramps up; and third, we expect input cost inflation to moderate a bit after peaking in the second quarter. For the full year, having increased our sales guidance and maintained our profit guidance, we now expect our adjusted operating profit margin to be below last year due to a higher input cost outlook, more negative transaction FX impact, some incremental investment we've chosen to make in our differential growth platform to accelerate their growth in fiscal '19, and favorable translation FX helping sales more than operating profit.

Slide 10 summarizes our joint venture results in the quarter. CPW net sales declined 2% in constant currency due to volume declines in the U.K. partially offset by strong performance in Asia, Middle East, and Africa region. Häagen-Dazs Japan constant-currency sales were 3% below a year-ago period, when net sales grew 21% in constant currency.

On a year-to-date basis, constant-currency net sales were up modestly for CPW and up 4% for Häagen-Dazs Japan. Combined after-tax earnings from joint ventures totaled $24 million in the quarter compared to $30 million a year ago, driven by lower volume and higher input costs for CPW, and a comparison against 27% constant currency after-tax earnings growth last year. Slide 11 summarizes other noteworthy income statement items in the quarter. We incurred $6 million in restructuring and private related charges in the quarter, including $5 million recorded in cost of sales.

Corporate and allocated expenses, excluding certain items affecting comparability, increased by $17 million. Net interest expense was down 1% versus prior year, and we continue to expect full-year interest expense will be flat to last year. The effective tax rate for the quarter was 35.9% as reported, compared to 32.8% a year ago, driven by the prior-year adjustment I mentioned earlier. Excluding items affecting comparability, the tax rate was 29.3%, roughly in line with our full-year expectations, and 310 basis points below last year's quarterly rate due to favorable impact from discrete foreign items.

We continue to expect our full-year adjusted effective tax rate will be in line with last year. At this point, we have not incorporated any estimate of the impact of U.S. tax reform legislation into our guidance. And average diluted shares outstanding declined 3% in the quarter.

We now expect shares to be down approximately 2% for the full year. Turning to our first-half financial performance. Net sales of $8 million were down 1% as reported and on an organic basis. Segment operating profit declined 12% in constant currency, and adjusted diluted EPS was down 6% as reported and 7% in constant currency.

Turning to the balance sheet. Slide 13 shows that our core-working capital decreased 42% versus last year's second quarter, with benefits from our terms extension program more than offsetting higher accounts receivable. First-half operating cash flow totaled $1.6 billion, up 45% over the prior year, driven by continued improvements in accounts payable as well as changes in trade and incentive accruals. Year-to-date capital investments totaled $260 million, and through the first half of the fiscal year, we returned over $1.1 billion to shareholders through dividends and net share repurchases.

As we turn our attention to the second half of fiscal '18, we expect to continue to drive strong seasonal merchandising performance as the soup and baking key seasons extend through the third quarter. We have an excellent back-half innovation lineup, and we expect our new product sales will continue to outpace last year. We anticipate favorable price mix across each operating segment. We expect input cost inflation to moderate in the second half and cost savings to accelerate with the largest benefit coming in the fourth quarter.

As a result, we're targeting strong growth in segment operating profit and adjusted diluted EPS in the second half. Importantly, given the seasonal merchandising in the third quarter, cost savings ramping up in the fourth quarter and some shifts in below-the-line items, we expect growth in SOP and EPS to be more heavily weighted to the fourth quarter. To close my portion of our remarks by updating fiscal '18 guidance. Namely, we now expect organic net sales growth to be in the range between flat and down 1%.

This translates to a 300- to 400-basis-point improvement over our fiscal '17 performance. In addition, we now estimate currency translation will increase reported net sales by approximately 1 percentage point for the full year. We continue to project total segment operating profit growth to be in a range between flat and up 1% on a constant-currency basis. As I said, we now expect adjusted operating profit margin to be below last year's levels.

We continue to expect adjusted diluted EPS will increase between 1% and 2% in constant currency. As I mentioned earlier, this outlook excludes any impact from proposed U.S. tax reform legislation, and we continue to estimate foreign currency will have a $0.01 favorable impact to full-year adjusted diluted EPS. With that, I'll turn it over to John for an update on our North American retail performance.

Jon Nudi -- President of North American Retail

Thanks, Don. Good morning, everyone. I appreciate the opportunity to give you a deeper dive into our North America retail segment. I'm proud to lead this team.

We have great people, we're moving with urgency, and we're operating differently than a year ago, and I think you can begin to see that translate into our performance. The key messages from North American retailers this quarter are similar to headlines for our total company. We're driving broad-based top-line improvement, with organic sales slightly positive, amounting to flat in the quarter. Our profit was down this quarter but improved sequentially over the first quarter, and we've clear initiatives that will deliver profit growth in the second half.

We're executing well against our fiscal '18 priorities, and we have strong back-half plans in place to maintain our trajectory. Looking at the financial results from the second quarter, organic net sales from this segment were up just under 0.5%. U.S. cereal posted 7% net sales growth, which was ahead of Nielsen-measured retail sales due to non-measured channel growth, strong selling for Chocolate Peanut Butter Cheerios, and other quarterly timing shifts.

Fiscal year-to-date, U.S. cereal net sales and retail sales were each roughly flat to last year. U.S. snacks net sales increased 5% in the quarter, with growth on Lärabar, Nature Valley, and fruit snacks, partially offset by declines in Fiber One.

Canada net sales were up 1% in constant-currency and net sales for the U.S. meals and baking operating unit were down 2%. U.S. yogurt net sales declined 11%, an 11-point improvement over the first quarter, driven by continued declines on light and Greek varieties, partially offset by excellent innovation and news on core established brands.

Segment operating profit declined 5% in constant currency in the quarter, driven by higher input costs, unfavorable trade phasing, and increased advertising and media expense, partially offset by favorable product mix and benefits from cost savings. We've driven sequential improvement in U.S. retail sales since beginning of the year. In fact, our second-quarter retail sales trends are almost 700 basis points better than the fourth quarter of last year, and our improvement is driving better results for our categories.

We saw retail sales turn positive in measured channels in the second quarter. And it's not just a couple of businesses driving this trend: Our retail sales trends are better in eight of our nine largest U.S. categories, and we've had absolute retail sales in dollar share growth in this quarter on six of these nine businesses. Not only are these trends broad-based, they're high quality.

We've increased our brand-building investment this year and we've been leveraging new campaigns on some of our biggest brands. Generated by new creative agencies, we're taking a fresh approach to consumer messaging. For example, new campaigns on cereals, Nature Valley, and Pillsbury are helping drive baseline sales improvements by as much as double digits through these brands since the end of last year. We're also seeing benefits from an increased focus on innovation, with retail sales from new products up more than 50% this year, driven by successes like Oui by Yoplait and Chocolate Peanut Butter Cheerios.

In total, our second-quarter baseline sales trends in the U.S. improved by over 600 basis points relative to the fourth quarter of 2017. That represents more than 75% of our overall improvement in Nielsen-measured channels. We're also driving better merchandising performance this year.

Our display support, which is the most effective merchandising vehicle, was up double digits in the quarter. And when you have good brand-building support and strong innovation, you're merchandising works even harder for you. It's important to note that we're maintaining discipline in our pricing in the market. Average unit prices for our overall U.S.

portfolio were up 5% in the first half. However, three-quarters of that increase was due to significant mix impacts from our yogurt business. Excluding yogurt, average yield prices from the rest of our portfolio were up 2% in the first quarter and about 0.5% in the second quarter. The quarterly change was driven in part by moving into the zone on our soup and refrigerated dough businesses, where our seasonal prices were lower than last year but still higher than two years ago, as we had planned.

As we look ahead to the second half of fiscal '18, remember that our Nielsen pricing metrics will compare against periods last year on an aggregate U.S. pricing was up 5% or more. We're also driving stronger results in growing channels, including exceptional performance in e-commerce. Our U.S.

e-commerce business grew 82% in the first half of the year, and we still enjoy higher market shares in online full-basket purchases, compared to shares in bricks-and-mortar channels. We're excited about the opportunity that e-commerce provides, and we'll continue to develop our insights and capabilities to keep our business in an advantaged position in the emerging channel. With that as a backdrop, I thought I'd briefly check in on the segment priorities I shared on our Investor Day in July to give you a preview of the product news and innovation that will drive results in the back half of 2018. Our top priority in North America retail is to drive improved performance in U.S.

cereal, and I'm happy to report that we're achieving that goal through six months. We've seen a strong turnaround in performance in measured channels this year, with retail sales growth in the second quarter, and we've gained 70 basis points of market share through the first half. Four of our largest [Inaudible]-oriented cereals, which make up over one-third of our portfolio, are driving our performance this year. Year-to-date, retail sales for Lucky Charms and Cocoa Puffs were each up 14% while Cinnamon Toast Crunch and Reese's Puffs are up 8% -- and don't call them kids' cereals because roughly half the consumption on these brands is by adults.

Compelling consumer news has been the theme across these brands, whether that's new marshmallow news each quarter on Lucky Charms or cinnamon news on Cinnamon Toast Crunch, which has driven 43 consecutive months of market-share gains for the brand. We're planning to extend our cereal momentum in the second half, behind some exciting innovation and impactful marketing executions. Chocolate Peanut Butter Cheerios, which launched in October, is off to a great start and is turning at the top of the category. We'll continue to fuel this new product in the second half of strong [Inaudible] the quarter.

In January, we're going to be launching two new Blasted Shred cereals in peanut butter-chocolate and Cinnamon Toast Crunch flavors, in an effort to invigorate the $400 million Shredded Wheat segment by delivering us a tidy and taste. And we'll tap into the fast-growing nut butter trend, with new almond butter and peanut butter varieties of our Nature Valley Granola cereals. We're supporting these launches as well as the rest of the portfolio with remarkable marketing and merchandising. I'm probably most excited about our Cheerios merchandising initiative with the Ellen DeGeneres show that begins in January.

We're running an [Inaudible] sweepstakes, where consumers share an act of good they've demonstrated for us to win two prizes: one for themselves and one to share with another person as an act of good. The sweepstakes will be announced on the show next month. Now let's shift gears to our second priority, which is reshaping our U.S. yogurt portfolio by innovating the faster-growing emerging segments of the category.

Our 2018 yogurt innovation has been tremendously successful thus far, led by Oui by Yoplait, which already makes up almost 10% of our U.S. yogurt portfolio. Oui's glass jar and unique positioning really stand out on shelf, which has helped drive strong consumer trial, and we're seeing an acceleration in repeat purchases. Retailers love Oui because it is driving more sales from current consumers and attracting new yogurt buyers.

Through the first four months on shelf, Oui is the largest launch in the category over the past five years, and Yoplait Mix-Ins, targeted toward traditional yogurt lovers looking for great-tasting snack options, has been the second-largest launch in the category this year. While innovation is critical to our U.S. yogurt strategy, it's also critical that we stabilize our two large core platforms in Kid Yogurts and Original Style Yoplait. This year, we adjust our biggest consumer [Inaudible] Go-Gurt franchise by making the tubes easier to open.

Consumer investment communicating this change is driving improvement on the Go-Gurt business, with retail sales nearly flat in the second quarter. We're also investing in advertising for our Original Style Yoplait, featuring our Mom On campaign, where we celebrate hard-working moms and show her how Yoplait fits into her busy life, and we've seen sales trends improve here as well over the last few quarters. We have plenty of news to drive further improvement on yogurt in the second half. On Oui, we're launching four additional flavors in January: raspberry, key lime, mango, and blackberry.

We're also launching a new line of Annie's pouch yogurts. We make this product using organic whole milk and four flavors, that combine fruits and vegetables, with no added sugar. Fruit is the hero in the traditional yogurt segment. Nearly 50% of shoppers would like more.

So we're giving them what they want and adding more fruit to our Original Style Yoplait. We're updating the package to communicate the change, and messaging the change on TV and digital advertising. We've also see a [Inaudible] opportunity in the traditional yogurt segment, maybe we can bring more consumers to the shelf with a decadent, whole milk, and real fruit offering. Our new fruit sideline shows off its indulgent ingredients with clear packaging and it's priced at $1 to maintain broad appeal.

We know there's still a long way to go on U.S. yogurt, but we like the direction we're heading and we think the combination of our first-half improvements and our back half-news will help us cut our declines to single digits by the end of the year. Our third party in North American retail this year is driving differential growth on Totino's hot snacks, Old El Paso, and snack bars. I would say we've generated good growth so far this year, with low single-digit retail sales increases across each of these large platforms.

On Totino's hot snacks, we have a full slate of consumer support planned for the back half, targeted toward a millennial male consumer. We're bringing to life our "Live Free, Couch Hard" campaign in time for Football championship season, by inviting consumers to show us how they couch hard. We're supporting the campaign with football-themed in-store merchandising, and we'll continue to run advertising on digital and TV throughout the year. For Old El Paso in the second half, we're accelerating our in-store activations.

We'll again partner with Avocados from Mexico, which is one of our largest merchandising events of the year, and we're bringing taco-truck merchandising displays to key retailers. And we'll continue to support the business with our Anything Goes and Old El Paso campaign. Growth on our snacks bar business has really been a tale of two stories, with strong growth for Nature Valley and Lärabar, offsetting declines declines on Fiber One. Retail sales for Nature Valley were up double digits so far this year, helped by new advertising on our core and excellent performance on our new nut butter biscuits and granola cup platforms.

And Lärabar continues to deliver 30% retail sales growth behind strong distribution growth and investment behind its food mix and food campaign, which will continue in the back half of the year. The story on Fiber One is more challenging, and we're working hard to improve performance by refocusing our messaging on our core consumer and renovating our products and packaging to return to Fiber One's core role, permissible indulgence, and though retail sales were still down sharply in the first half, driven by reduced distribution, base sales per point of distribution have turned positive, which is a good indicator of future trends. We're working to rebuild the innovation pipeline on Fiber One, including the launch of eight new items in January, featuring four flavors of Fiber One bites, and we're supporting these launches with our all-mind TV and digital advertising. We have some great new indulgent offerings on Nature Valley as well.

Consumers are looking for indulgent treats made from real food, so we're introducing layered bars that have a triple layer of nut butter, granola with nuts, and chocolate, and we're launching soft-baked filled squares that combine whole-grain oatmeal bars with creamy peanut butter filling. We'll support these launches with TV, social media, digital coupons, and merchandising. With winter in full swing here in Minneapolis, I thought I'd share a quick update on our performance so far in the key soup and baking seasons. We're back in our game on -- in soup this year.

Retail sales for Progresso are up 2%, and we've gained a 0.5 point of share in the category two months into soup season, with strength across our core registered business, including new Progressor Organic. Retail sales for our Betty Crocker dessert mixes were up a half-percent since October, and we gained over a point of share behind strong in-season support and good performance from our core segments. And on Pillsbury refrigerated dough, our results improved over last year's key season, but we're still not where we want to be. Our new media campaign, "Made at Home," is driving better baseline sales and we have stronger merchandising plans this year.

Retail sales declined 1% in the first two months of key season, but we're seeing month-by-month improvement and we posted growth in November. Our final priority for this year is to expand our national organic portfolio, and we're seeing good results here too, particularly on three of our largest businesses: Mac & Cheese, cereal, and fruit snacks. We've generated year-to-date market-share gains across each of these categories due to strong customer engagement, distribution expansion, and in-store support, and we'll continue those efforts throughout the second half to continue to drive growth on our national organic portfolio. I'll close by summarizing my key messages from North American retail today.

We're seeing broad-based, high-quality improvement on our top-line trends, including organic sales growth in the second quarter. Our profit performance is improving, and we have clear initiatives that will deliver profit growth in the second half. We're making progress on our fiscal '18 key priorities, and we have strong back-half plans in place to maintain our trajectory. For the full year, we now expect organic sales to be down 1% to 2%, which is 100 basis points better than our original guidance, and we expect segment operating profit growth on a constant-currency basis.

With that, I want to thank you for your time this morning, and I'll hand it back over to Jeff.

Jeff Harmening -- Chairman and Chief Executive Officer

Thanks, Jon. I'll cover second-quarter performance for all of the three segments. In convenience stores and foodservice, second-quarter organic net sales were up 5%, driven by mid-single-digit growth for the Focus six platforms and benefits from index pricing on bakery flour. Within the Focus six, innovation drove strong double-digit growth on frozen meals, including new frozen breads and stuffed crescents in K-12 schools, and new stuffed waffle in convenience stores.

We also generated good growth on cereal in the foodservice channel. Segment operating profit was down 2% in the quarter, driven by higher input costs. Looking ahead to the second half, we expect to continue driving good performance on frozen meals, led by strong demand in K-12 schools for our healthy, delicious and easy-to-prepare meal solutions. And we like the prospects for our stuffed waffle, which meets many C-store's consumer desires for convenience and great taste.

We've also seen our snacks business strengthen in C-stores recently, and we'll build on that success with support for Gushers and Nature Valley Granola Cups. And finally, we expect further growth on cereal in the back half, including our successful granola offerings in colleges and universities. Turning to Europe and Australia. Organic net sales were up 1% in the second quarter.

We gained market share across our seven largest Häagen-Dazs markets, driven by innovation on stick bars and mini sticks, new packaging on our prime business, and investment behind the new advertising campaign. Our performance on yogurt improved behind new product innovation, focusing on a combination of simple ingredients and great taste. In the U.K., we leveraged our learning from Canada to drive 25% growth on Liberte, and in France, we found success with our Triple Sensations launch. On snack bars, innovation and increased distribution drove double-digit retail sales growth across the segment, including in the U.K., our largest snacks bars market.

Segment operating profit totaled $27 million in the quarter compared to $41 million a year ago, primarily driven by significant raw-material inflation and currency-driven inflation on products imported into the U.K. As we look at the back half, we expect Häagen-Dazs and snack bars will lead the segment's growth. It's summer in Australia, and we're looking to build on our successful Häagen-Dazs launch last year by driving the brand's consumer awareness through media, sampling, and consumer promotions. On Fiber One snack bars, we'll leverage our diet season playbook to reach consumers who are looking for an indulgence that doesn't break their New Year's resolution.

In our Asia and Latin American segment, second-quarter organic sales matched year-ago levels, with growth in Asian markets offset by declines in our Latin American markets. In China, we had our strongest Häagen-Dazs mooncake season in four years, behind new flavors and improved marketing. Our Wanchai Ferry business strengthed behind our innovation and marketing of our core shrimp dumpling line, and we continue to expand distribution for Yoplait yogurt. We also posted excellent growth on our snacking platform in India and the Middle East.

While our Latin America business improved from the first quarter, net sales were still below last year due to continued challenges related to our enterprise reporting system integration in Brazil, as well as the impact of natural disasters in the Caribbean and Mexico. Segment operating profit decreased to $17 million in the quarter compared to $29 million a year ago, reflecting currency-driven inflation on imported products and increased media and advertising expense. We have an exciting lineup of news planned across Asia in the second half of this year. There is strong demand for premium yogurt in China, so we're expanding our Perle de Lait line with two new flavors created specifically for our Chinese Yoplait consumers, matcha green tea and red bean, and we'll have more news to share on [Inaudible] innovation in coming months.

For Häagen-Dazs, we're introducing two new flavors of our limited edition fruits and flower line. We'll continue to roll out our global packaging design, and we're launching new green tea and red bean flavors on our popular Häagen-Dazs mochi line. In addition, we have some important snack bar launches across the segment, including new Pillsbury pastry cakes in India and Nature Valley Crunchy single bars across Asia, which better align with Asian consumers' preferred sizing and price point expectations. Before I close, I wanted to provide a brief update on the four key growth priorities for fiscal 2018 that we outlined back in July: first, our momentum is building on cereal, and I like our chances to grow cereal globally, including CPW this year; second, while there's still work to do, we've made significant progress on improving our U.S.

yogurt business through innovation, thanks to the great Oui and Yoplait Mix-Ins; third, we're shifting resources toward our differential growth platforms. As Don mentioned, we've added an investment on these platforms this year to accelerate growth -- to accelerate growth in fiscal 2019; and fourth, we're in the zone for soup and baking seasons, and we expect our performances on those businesses will be much improved versus last year. With that, let me summarize today's key messages. We delivered high-quality, broad-based improvement in our net sales performance this quarter, with organic sales growth in absolute across all four operating segments.

We drove sequential improvement and operating profit in the second quarter, and we have clear plans in place to deliver profit growth in the back half of this year. And with six months in the books and visibility to the impact of those second-half plans, we're raising our 2018 organic net sales guidance and maintaining our outlook for total segment operating profit and adjusted diluted EPS. And now we'll open up the call for questions. Operator, will you please get us started?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you like to register for a question, please press the 1 followed by the 4 on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the 1 followed by the 3.

If you're using a speakerphone, please lift your handset before entering your request. One moment please for the first question. And our first question comes from the line of Chris Growe with Stifel. Please proceed.

Chris Growe -- Stifel -- Analyst

Hi, good morning.

Jeff Harmening -- Chairman and Chief Executive Officer

Good morning, Chris.

Chris Growe -- Stifel -- Analyst

Good morning. So I just had a question for you in relation to this pretty significant shift you're going to see in margin for the second half of the year and you got a pretty significant improvement built-in. You obviously have some trade-phasing benefit coming in later in the year -- sorry the trade-accounting benefit. But your trade, I think you said would be higher in the third quarter.

And I know that cost savings are picking up and inflation is coming down. When I put it all together, I'm trying to understand, especially into the third quarter, how that gross margin's going to pick up significantly or should it be more fourth-quarter weighted? And then overall for the year, as you think about gross margin, how much could that be down? Are you going to give any kind of color around the amount of gross margin decline for the year?

Don Mulligan -- Chief Financial Officer

Sure. OK, good. This is Don. Many questions rolled into that but I'll try to answer.

If I don't, let me know. First on the gross margin, as we said in the second quarter, of the operating margin, more broadly [Inaudible]. The key drivers in the second quarter were [Inaudible] costs, including transaction FX, unfavorable trade phasing, and we kind of went into the accounting behind that last quarter, so I won't go down that again. But that will -- that impacted the quarter, as we expected.

Again, charge seasonal merchandising and we had increased media expenses and that was partially offset by costs. If you look at the back half, we -- again, strengthen from the low-17% than we saw in the first half, more than 18% in the second half. And the primary drivers are going to be positive price mix on all four [inaudible], and that's driven reported results by trade phasing, reversing, improved sales mix and pricing, as we mentioned, in certain geographies. Our cost savings will accelerate as those -- -as our goal sourcing issue ramps up and the input cost inflation will moderate.

So [inaudible] for the full year was higher than we expected but will moderate in the second half after peaking in the second quarter. Those are the drivers. You see your question on the phasing, it will take more than the fourth quarter. And the reason for that is that the merchandising activity obviously carries through the third quarter.

As I mentioned, the global sourcing savings ramp up in the fourth quarter. The largest impact, one of the things we talked about at the beginning of the year, was our incentive -- we began reducing our incentive accrual last year primarily in the third quarter so we'll see that impact, that year-over-year impact, drag in the third quarter will limit the growth in margins. And then the below line, where I think the EPS is tax rate. The tax rate will be a negative comp in Q3 and a positive in Q4.

There's a number of factors that will skew the margin to the fourth quarter and the one tax item that will skew the EPS for the fourth quarter.

Chris Growe -- Stifel -- Analyst

OK. That was helpful. Sorry. So just a quick follow-up then would -- be in relation to you've had a couple of food industry competitors tear down some larger scale acquisitions recently and seems like they're really heavily focused on growth of these acquisitions.

I'm just curious. You're very internally focused right now. You've got a lot going on at General Mills. Is that -- these acquisitions that would be of interest to you? I mean, more from a high-level, growth oriented acquisitions or maybe you can comment, perhaps, on your pipeline of acquisitions or how you're looking at that today for General Mills?

Jeff Harmening -- Chairman and Chief Executive Officer

Yes, so, Chris, this is Jeff Harmening. What I would say is that first, we don't feel pressure to do M&A just because all the other kids are doing it. So -- and we don't really think that scale for the sake of scale is what's important. We think that having leading positions in good categories is really what drives growth.

Having said that, what I will say is that a couple of things: One is that M&A is part of our growth strategy. The first piece, and most important piece of that, is being competitive in the markets we're currently competing in; the second piece is then accelerating in some certain categories; and then, the third piece is M&A itself. So we think M&A has a role in our growth strategy going forward but it's one of three pieces. The most important and the foundation of being which is being competitive in our own categories.

To that extent, what I will also tell you is that, I'd say we're increasingly confident in our ability to execute M&A as part of this broader strategy. And really, for three reasons: The first is that we're increasingly confident in execution on our base business. And internally, we talk about that all the time, that being competitive, where we are, kind of, gives us a better foundation to build upon, whether that's accelerating in other categories or whether that's M&A, so we're feeling increasingly confident about that as hopefully the second quarter results start to show; the second is that, whether it's Annie's or Epic or our Carolina yogurt business, which we've acquired recently, one of the things we feel good about is that we've demonstrated our ability to grow growth businesses, and in the case of Annie's, we've actually accelerated that growth. And we've been able to use our internal capabilities effectively in order to do that.

And so, we feel good about our base business. We feel that -- we feel good about our ability to grow businesses. And with a lot of our restructuring behind us, we're -- we feel like our ability to integrate businesses will certainly be improved; and then third, look, we have the financial capacity to execute against M&A. Our cash flows are really good, Don and his finance team have done a really nice job with working capital.

And to the extent we can grow our profitability in the back half of the year, which we feel good about. We've got a good cash flow. So we feel good about our base business, increasingly good, and our ability to execute that. We feel good that we've been able to grow businesses -- growth businesses, and we have the capacity.

So and M&A would be an important component of our growth but it's only one of the three.

Chris Growe -- Stifel -- Analyst

OK. Well, thank you and and happy holidays.

Jeff Harmening -- Chairman and Chief Executive Officer

Happy holidays. Thanks, Chris.

Operator

Thank you and our next question comes from the line of John Byrne from Wells Fargo. Please proceed.

John Byrne -- Wells Fargo -- Analyst

Good morning, thanks for the question.

Don Mulligan -- Chief Financial Officer

Hey, John.

John Byrne -- Wells Fargo -- Analyst

Jon, I'm curious there's some concern circulating about retailers scaling back to center store to make room for the perimeter and then just downward pressure on pricing from suppliers in general, but from your commentary doesn't sound as though you're expecting an impact for Mills. So could you speak a bit to the broader retailing environment? How you're seeing retailers responding to your initiatives? And then in terms of just shelf base and merchandising, and also, how you're comfortable the margins won't deteriorate further, relative to to the guide?

Jon Nudi -- President of North American Retail

Yes, sure. Thanks, John. I'll give you answers to as many of those questions as I can, there's a lot rolled up there. Clearly, it's a competitive environment right now as new players enter the U.S., as emerging channels like e-commerce come on to the scene.

So definitely, it's comparable from the retailer's side as well as the manufacturer's side. What I can tell you is I feel really good about our ability to compete in this environment. We're big in the U.S., we're one of the top food companies. We have scale across center store, refrigerated, and frozen, and as we grow, our -- the categories of our retailers grow.

And so again, it's important that we have good plans locked in with our retailers. In addition to that, we've got one of the best sales forces, as ranked by Cantor, in the industry. And they're doing a great job of really sitting down with the retailers and putting together joint business plans. And what we find the joint business plans are trade-offs.

And again, even across our retail, we might give a bit in one category to get something in return in another. But by applying our scale, and, again, if we're growing broadly, it's really good for our retailers category, we'll find a way to get a win-win solution. So again, there's a lot going on. Certainly, space optimization, that's something that we're seeing as well.

What I'll tell you there is, we have some businesses that are going to win in that. So we have a broad snacking portfolio which will likely win in that environment. In addition to that, Natural Organic's a core strength of ours as well, we're the third largest natural organic player in the country, so that's good. And in the categories that might contract, what we tend to see is the smaller manufacturers, the third or fourth or fifth players tend to be the ones that lose.

And if you look at our business in the U.S., 80% of our brands are either No. 1 or No. 2 in their category. So it's tough out there for sure, but at the same time, I actually feel like we're in a place now that we can be advantaged and really win in this marketplace.

John Byrne -- Wells Fargo -- Analyst

Great. Thanks, Jon. thank you

Jon Nudi -- President of North American Retail

Thank you.

Operator

Thank you. And our next question comes from the line of Ken Goldman with JPMorgan. Please proceed.

Ken Goldman -- JPMorgan -- Analyst

Hi, good morning, everybody.

Jon Nudi -- President of North American Retail

Hi, Ken.

Ken Goldman -- JPMorgan -- Analyst

I just wanted to get -- Don, I appreciate the -- you gave a healthy list of reasons why the second half will get better in terms of the growth, especially on the bottom line. But I think what might help is if you give a little sense of maybe of which of those factors will be the most critically important as we think about modeling the business. Because one of the questions I've been getting this morning and I have it myself is, you're talking about better price mix, obviously some of that is trade accrual phasing. You're talking about less cost inflation, cost inflation innovation.

Just trying to get a sense of really where the key, I guess, pivot points are that's going to make or break the year because in modeling it, I don't know if we necessarily have enough information to sort of say, all right, this is what really needs to have happened for this company to make it. So I'm just trying to get a sense if you had to bucket or rank them, how you would do that in terms of the factors helping them in the second half?

Don Mulligan -- Chief Financial Officer

Yes, sure. There really are -- the major piece has got to be the price mix. And probably, half of that is going to be from the reversal and the trade accrual. And as we said in the first quarter, that was about a 100-basis-point drag, it was close to that in the second quarter, that will start reversing in the second half.

And then on top of that, we expect improved sales mix in the second half, given the businesses that will drive our growth. And pricing in certain geographies, obviously, across the emerging markets, a little bit in the U.K. as we battle the transaction FX. And so, that will be the largest driver.

Second will be the cost savings, acceleration that we see in global sourcing, again, that's going to be largely in the fourth quarter, and then the third and the smallest bit will be the input cost moderation.

Ken Goldman -- JPMorgan -- Analyst

OK. Thank you for that. And then, just a quick follow-up. Just so we set expectations, I think, at a reasonable level.

Can you give us any sense of all -- and I really do appreciate you guys talking about this being more fourth quarter rather than the third quarter -- but are we talking about EPS potentially being flat in the third quarter year-on-year or are you still expecting to be up to some degree, based on what you're seeing right now?

Don Mulligan -- Chief Financial Officer

You know, we still said growth in the third quarter but the majority of the growth is going to be in the fourth quarter.

Ken Goldman -- JPMorgan -- Analyst

OK. Thank you.

Operator

Thank you. And our next question comes from the line of Matthew Grainger with Morgan Stanley. Please proceed.

Matthew Grainger -- Morgan Stanley -- Analyst

Hi, good morning, everybody. I wanted to ask, first, Don, I guess, about the opening question on the proposed tax legislation. And I know there's probably going to be a hesitancy to give formal comments before everything is set in stone. But can you give us any sense, assuming it passes in its current form, 21%, where the consolidated tax rate for the company would go and how we should think about the flow-through of that to the bottom line in the second half and then 2018? Maybe just in generality if not in absolute.

And, I guess, secondarily, just to the extent that you can talk about this on a forward-looking basis, do you see that having any impact on the promotional equilibrium in the industry? How do you think about the ways that cash flow may be or that earnings flexibility might be reinvested?

Don Mulligan -- Chief Financial Officer

Yes. Well, I guess, I'll start by just saying that we think it's important for U.S. businesses to be -- to not to be competitively disadvantaged globally, relative to our foreign competitors. So a lower corporate tax rate, as the current legislation envisions, certainly makes the U.S.

a more attractive place to invest. The territorial system makes U.S.-based corporations more competitive because we have reduced global tax burden, and obviously, we have increased access to our cash from foreign earnings. So that's the positive. Based on the current legislation, clearly, it's still a moving target.

Even just last night, the Senate made some changes that the House now has to revote on, the bottom line, we'll see a reduction in our effective tax rate, but Matt, frankly, the exact timing of it and the magnitude of it will have to determined once you see the final bill. It will be favorable but how it'll phase in '18 versus '19 and the absolute magnitude, we will have to come back to you on once we actually digest the entire bill, and we'll do that in due course once that's available to us.

Matthew Grainger -- Morgan Stanley -- Analyst

OK, understood. And, I guess, just one question from a, sort of, a category standpoint. I guess, just your thoughts on the health of the cereal category in the U.S. at the moment? I know you're gaining share.

You saw strong sales delivery here in the quarter. But overall, when we look at the scanner data, the category is still declining 2% to 3%, it looks like promotional levels are up year-on-year, although I know that can sometimes be misleading. I guess, are you happy with where the category is at the moment and do you think anything needs to change there to ensure that the growth you're seeing right now is going to be more sustainable?

Jon Nudi -- President of North American Retail

Yes, sure, Mathew. This is Jon. What I can tell you is that we really like the way that we're competing in the cereal category right now. When you look at our performance through the first half, our change in strength is pretty significant and nearly 70% of that change is from baseline sales.

So again, it's really better renovation, better marketing that's driving our results in the category. And that's really been the recipe for success in the category over the long term. So we're very committed to, again, continuing to build strong brands and then innovate more aggressively, and we feel really good about the pipeline as we look forward. As you think about the category, it's still a big category, important category, the fourth-largest across grocery.

And we believe -- and it's highly penetrating, 90% of households consume cereal. So we really believe in the category, we think there's growth ahead. There's some interesting timing things. So again, if you think about the category, it grew nicely during the financial downturn.

So between 2007 and 2012, the category grew. As the economy gradually got better and out-of-home eating increased, we saw the category tip to negative. So we're starting to see that moderate in terms of the in-home versus out-of-home. We also know that 30% of consumption of the category comes from boomers and older adults and that group of consumers is going to grow.

So we absolutely believe in the category. We believe that strong marketing and good innovation can drive it. We're committed to doing our part, and we look forward to again, driving our growth as we move to the back half and into the future.

Matthew Grainger -- Morgan Stanley -- Analyst

OK. Great. Thanks and happy holidays, everyone.

Don Mulligan -- Chief Financial Officer

You too.

Jon Nudi -- President of North American Retail

You too.

Operator

Thank you, and our next question comes from the line of David Driscoll with Citi. Please proceed.

David Driscoll --

Great, thanks a lot, and good morning, everybody.

Jon Nudi -- President of North American Retail

Hey, Dave.

David Driscoll -- Citi -- Analyst

I wanted to follow up, Jon, on refrigerated dough. So can you -- you touched on it in your prepared comments but can you just talk a little bit more about the trends and how the state is? And I'm kind of curious why sales aren't a bit stronger there, that's such a dominant franchise and comping against a reasonably weak year-ago period. Can you expect refrigerated dough to see material improvement in the remainder of the winter season? And, kind of, what would give you confidence if that would be true?

Jon Nudi -- President of North American Retail

Yes, Dave, a good question. Obviously, an important category for us. And as I mentioned, we got off to a bit of a slower start than we had hoped. We are seeing improvement for sure.

I'd say, two things drove the slower start: one was, our distribution built a bit slower than we had planned as we came to the key season. What I can tell you is distributions getting to our projected levels as we really enter December and January here; and the second thing is, we missed a promotional window on a major retail in October. And as a result of that, that really impacted our performance there. As I mentioned in the prepared remarks, we grew in November, which is great, and we're seeing some positive things so far in December.

So we are still confident that we're going to deliver a much improved year in refrigerated baked goods. We believe that we're trending in the right direction.

David Driscoll -- Citi -- Analyst

Thank you. And then two follow-ups. One on cereal. And I'm just specifically interested in the ship-in versus sell-through second-quarter impact and then what it means to the third quarter.

So given a plus-7 in the second quarter, are we going to have a negative in the third quarter, simply because of the timing issues between 2Q and 3Q? There's that one, and then I had a, just have a follow-on tax question for you, Don. Maybe you don't have all the quantifications on, which is understandable. But, I think, we're all just curious what the company will do with the money, higher capital spending, dividend, share purchase? Just -- what do you do with, kind of, found money of this magnitude? Thank you.

Jon Nudi -- President of North American Retail

Hi, I'll quickly take the cereal question. I mean, the short answer is, we don't expect a knock-on effect in Q3. If you look at the -- first of all, you look at the first half, our end market movement and our net is almost perfectly aligned. So again, it's right where we expect it to be.

There is some quarterly shifts, so the biggest drivers in the RNS versus movement difference in Q2 was first, non-measured channels continued to grow nicely, and that's a piece of it. We shipped Chocolate Peanut Butter Cheerios in October, and that's off to a great start, as I mentioned. All of that hasn't moved to the register. And actually, at the beginning of the quarter, we had some impact to the hurricanes.

If you remember in August, the hurricane hit Texas. And as a result, due to some supply chain interruptions, we filled pipeline in September that likely would have shipped in August. So again, we feel really good about how we're performing in cereal and expect normal movement in RNS as we move to the back half of the year.

Don Mulligan -- Chief Financial Officer

Yes, on the tax front. You know, as we see with any increase in earnings, we'll evaluate several uses. We'll look at investment, we'll look at capital investment, we'll look at M&A, and clearly, cash return to shareholders. Our long-term expectations on how we're going to drive the business haven't changed.

David Driscoll -- Citi -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Jonathan Feeney with Consumer Edge Research. Please proceed.

Jonathan Feeney -- Consumer Edge Research -- Analyst

Good morning. Thanks so much and happy holidays.

Don Mulligan -- Chief Financial Officer

Good morning.

Jonathan Feeney -- Consumer Edge Research -- Analyst

I had a couple of questions. First, I know, when you think about U.S. retail specifically, can you comment at all about -- anything stand out to you as far as pockets of success by channel, like mass versus traditional or -- not necessarily in absolute but, say, relative to the competition. I know you mentioned e-commerce but any, sort of, like takes where, wow, this is really working, it's really coming together in a particular channel.

And secondly, and maybe related, there's been -- can -- there's been a fair amount of data we see and what you reported to us in this morning, share gain across a lot of your different categories. Can you comment on the -- you mentioned a competitive environment, but specifically, that share gain this year right now at a time when everyone's looking for the same thing. Can you comment about your take on your potential competitive responses in 2018 and how you're set up for that?

Jon Nudi -- President of North American Retail

Sure, sure. This is Jon. So a couple of things. One, we really like the way we're competing across categories.

And, again, as I mentioned in my prepared remarks, we're seeing broad-based improvement across the majority of the categories. And we like the way we're competing across channels. It surely is broad-based there as well. We feel like we're winning in the majority of our channels.

So that feels really good. As we think about share, again, the thing that gives us good confidence that we're heading in the right direction here is that the majority of our change and improvement in trend is really coming from baseline sales. So again, across total U.S. retail, 75% of our improvement is via baseline sales.

So it's really not a case of merchandising driving the bulk of our improvement. So it's better marketing. And as I mentioned in my remarks, we made a pretty major change last year, shifting long relationships of advertising agencies, moving to some new ones, and spending a very like [Inaudible] that we see in market and we know that is driving our businesses in our baselines. And our innovation's better, it's up 50% year-over-year.

And I can tell you that's actually off the same number of items. So again, it's not just throwing a bunch of stuff out there, it's actually better quality. So we're really focused on competing, we're focused on the fundamentals, and we believe that if we continue to do that, we can continue to see broad-based wins across our business.

John Feeney -- Consumer Edge Research -- Analyst

Great, Jon. And any comments about the channels at all, particularly successes that you had?

Jon Nudi -- President of North American Retail

Yes, again, we feel good generally across the majority of the channels. And again, without calling out to specific customers, there's some puts and takes. But the reality is, we're growing share across all channels. And, I think, for us right now, that's the focus to compete wherever we are.

So I'm not going to -- there's not one that jumps out of me. Again, we feel really good about how we're jumping in all of them.

Don Mulligan -- Chief Financial Officer

And to build on Jon's point, to broaden that from the U.S. to more broadly, globally. One of the things we're most pleased with for the quarter in general is just the breadth of our growth. And so, whether you look across product categories in the U.S., we improved.

If you look across channels in the U.S., we improved. If you go across channels more broadly like convenience stores and foodservice, we improved. If you look at Europe, we improved. If you look at Asia, we improved.

And so the -- for us, I mean, Jon answered the question for the U.S., but I will say, more broadly as a company, one of the things we're most pleased about for the quarter that we hope to continue and we plan to continue. It's just the breadth of the improvement that we have seen, and that's geographic improvement in channel as well as product line.

John Feeney -- Consumer Edge Research -- Analyst

Well, thanks very much. And if you have any spare room for the Super Bowl, don't be shy. I'm an excellent house guest. You know how to reach me.

Operator

Thank you. And our next question comes from the line of Akshay Jagdale from Jefferies. Please proceed.

Akshay Jagdale -- Jefferies -- Analyst

Hi, good morning. Thank you for the question. I wanted to ask about the innovation momentum. So can you comment on the yogurt launch you mentioned? It's obviously the best category it seems.

But what's the endgame there? If you could help us, sort of, size that opportunity. And more importantly, like, what has that taught you or your organization that you can apply to other franchises? And when should we potentially expect some of that, meaning more sort of big-bet innovation across your other franchises? Thank you.

Jon Nudi -- President of North American Retail

You're welcome. So this is Jon. I'll give you a few thoughts on Oui. So again, we're very pleased with the results there.

It's about 1.5 share of the category already. We expect that'll continue to increase. And for Year 1, again, we expect this to be in north of $100 million in sales. So again, it's off to a terrific start, and we're seeing really good repeat rates and consumers are telling us that they view it as very, very unique.

In terms of how we got there, I'm really proud of the -- and again, let me just start by saying, we know there's a lot more work to be done in yogurt. So we're not taking any laps in that category, to be clear. But I like the way that that team's really operating. They're focused on playing our game and looking for opportunities, and certainly things are going to be growing in the future and bringing fundamental innovation.

And they did it in a really scrappy way, innovating quickly and closely with consumers. This truly is consumer-first innovation. And by being in-market and iterating over time, we got to a product that really resonates with consumers that really works hard. So the actual process that we use to create Oui, we're really actually moving it across all of our reviews in the U.S.

and really around the world to make sure that we move more quickly, and make sure that we're connected as closely as to the consumers as we can. And we believe that's going to help our pipeline as we move forward and make our innovation even more impactful.

Jeff Harmening -- Chairman and Chief Executive Officer

And to build on Jon's point, one of the things I'm very pleased about, if you look across our organization and how we're working differently now is that Oui yogurt's a great example of something simple ingredients and great tasting. Well, we used that same kind of thought in the U.K. and in France, and it didn't happen to be Oui, but the same consumer insight drove Liberte's success in the U.K. and Triple Sensations' success in France.

So as an organization, we're getting better, much better, and much faster, sharing insights across geographies. And I'm really proud of the U.K. team for example, for taking Liberte, which has been so successful in Canada, and not trying to do anything different than what was done in Canada and applying that to the U.K. and growing it by 25%.

And so, I'm pleased with our team here in the U.S. on yogurt, and we see improvement broadly in our yogurt business across the globe. And I'm also pleased with how we're working differently, whether that's the specifics of the launch of Oui here in the U.S. or how we're sharing ideas broadly and quickly, globally.

Akshay Jagdale -- Jefferies -- Analyst

So just a quick follow-up. So when do you think we'll start to see a broader impact on your top-line growth as you're sharing these ideas, right? That's globalization or just innovation being the bigger piece of top line. It's already better but should we expect that to accelerate? And when might that happen?

Don Mulligan -- Chief Financial Officer

Well, obviously, look, I think you're already seeing this in this quarter. I mean, we cut our losses on yogurt, our declines on yogurt in U.S. in half behind innovation, and we hope to get to single-digit losses and plan to get the single-digit losses in the U.S. in the back half of the year.

We are down less than 1% on yogurt in Europe this quarter. So this was one of the best quarters we've had behind new innovation. So to be honest with you, I think you're starting to see it already, and we've got a team that's dedicated to continuing that, whether it's on yogurt or in Häagen-Dazs or Old El Paso and on snack bars. If you look at the second half of the year, one of the things I mentioned in my remarks was that you'll see Nature Valley in Asia and our expanding Nature Valley in Asia and that's based on success we saw in Europe.

And obviously, the success we're having in the U.S. but applying it to Asia consumers in a slightly different format that works for them. And so honestly, I think, you're starting to see it now, and our plan is to continue that.

Akshay Jagdale -- Jefferies -- Analyst

Perfect. I'll pass it on. Thank you. Happy holidays.

Don Mulligan -- Chief Financial Officer

Happy holidays.

Jeff Harmening -- Chairman and Chief Executive Officer

Operator, I think we probably just have time for one more, unfortunately.

Operator

Thank you. And our last question comes from the line of Steven Strycula with UBS. Please proceed.

Steven Strycula -- UBS -- Analyst

Hey, guys, good morning. Two-part question. For the first part, just wanted to get a sense of -- I think Ken was asking about it earlier, but did absolute gross margin magnitude of pressure that we're seeing for the full year obviously gets better [ in ] the second half. But is it a fair way to think about it, down 50 basis points for the year? That's my first part.

Don Mulligan -- Chief Financial Officer

We'll let me focus on -- let me focus on operating margins, and it's actually what we've been giving guidance on. And I mentioned the factors that will drive it: inflation is going to run higher than we -- slightly higher than we expected and transaction FX will work against us. We've added some investment in accelerators to drive growth, the top line of which will come through next year. But we're incurring some cost this year to make it happen.

And then I mentioned just the, kind of, the nature of our transaction FX, which is helping the top line more than SOP or more than the operating profit. And just to put it -- just to mention about it, we were talking about a swing here of maybe 50 basis points. We will still be in the zone of 18% operating margins for the full year. So we crack that level last year and that still remains 200 basis points above where we were three years ago.

So just, kind of, in the order of magnitude, that's where we we're going to land for the year.

Jeff Harmening -- Chairman and Chief Executive Officer

And Steve, this is Jeff. I don't think gross margin, we don't expect a material difference in gross-margin trends versus operating margin trends, so the drivers are very similar.

Steven Strycula -- UBS -- Analyst

OK. Thanks, that's very helpful. And then, just a question for Jon, just on the soup business. I just wanted to get a sense, there's been a little bit of a shuffling of the deck in the category for the soup season this year.

Just wanted to think about how you think about the health of the overall category, total shelving displays, not just specific to you but the category in general? And then, how do we think about, given some of the decisions that were made intra-quarter, are you seeing that -- obviously Progresso's doing better, but do you think that the category is maintaining its momentum, and what stopped it from necessarily being a bit back of the the business next year?

Jon Nudi -- President of North American Retail

Sure, Steve. The category's through key season's growing, so that's good overall. And again, Progresso's growing share, which we like. Similar to some of the other businesses, what we really like is that 80% of our improvement in trend in soup is actually coming from baseline sales.

So again, it's fundamentals, it's good marketing, and we've got a little bit of innovation with Progresso Organic that's working for us as well. And again, like many for the categories comments, it's about the fundamentals and competing well, and if we do that, we think that we can be successful and drive the category. And again, through key season, we're seeing the category grow and it appears to be healthy and we're having good constructive conversations with the retailers around it. So we'd expect continued growth through the back half of the year.

Steven Strycula -- UBS -- Analyst

OK. Great. Thanks, guys.

Jeff Harmening -- Chairman and Chief Executive Officer

All right, Sarah. Thanks. Unfortunately, I know we didn't get to everybody today. I know there are a few people probably still hoping to get a call -- question in.

So I'm on the phone all day. Please feel free to reach out and connect on any questions from here on out. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.

Duration: 64 minutes

Call Participants:

Jeff Siemon -- Vice President of Investor Relations --

Jeff Harmening -- Chairman and Chief Executive Officer --

Don Mulligan -- Chief Financial Officer --

Jon Nudi -- President of North American Retail --

Chris Growe -- Stifel -- Analyst --

John Byrne -- Wells Fargo -- Analyst

Ken Goldman -- JPMorgan -- Analyst

Matthew Grainger -- Morgan Stanley -- Analyst

David Driscoll -- Citi -- Analyst

Jonathan Feeney -- Consumer Edge Research -- Analyst

Akshay Jagdale -- Jefferies -- Analyst

Steven Strycula -- UBS -- Analyst

More GIS analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.