General Mills, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter fiscal 2019 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, please 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, this conference is being recorded Wednesday, March 20th, 2019. Now I'd like to turn the conference over to Jeff Seaman. Please go ahead.

Thanks, Edison, and good morning to everyone. I'm here with Jeff Harmoning, our chairman and CEO, Don Mulligan, our CFO, and John Newdy, who leads our North America retail segment, who will join us for the Q&A portion of the call. And I'll turn it over to them in a moment, but before I do, I'll cover a few housekeeping items. Our press release on our third quarter results 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. Please note 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. And with that, I'll turn you over to my colleagues, beginning with Jeff.

Thanks, Jeff, and good morning, everyone. There are three things I hope you'll take away from today's call. First, we had a strong third quarter with solid execution, leading to positive organic sales growth and significant operating margin expansion. Second, our year-to-date performance and fourth quarter plans give us confidence that we will meet or exceed all of our key fiscal 2019 financial targets. Specifically, we are raising guidance for full-year adjusted diluted earnings per share and free cash flow conversion, and we expect net sales will finish toward the lower end of our guidance range, And adjusted operating profit will finish toward the higher end of the range. And third, our improved execution and strengthened performance this year reinforce our view that a balanced approach to top and bottom line growth, centered on our consumer first strategy, will drive long-term value for our shareholders. Now I'll turn it over to Don to walk through our financial performance in the quarter. Then I'll come back to provide an update on our fiscal 2019 priorities and share a few highlights of our year-to-date performance.

Thanks, Jeff, and good morning, everyone. Slide 5 summarizes our third quarter financial results. Net sales of $4.2 billion increased 10% in constant currency, including contributions from the Blue Buffalo acquisition. Organic net sales increased 1% in the quarter. Holistic margin management savings, positive net price realization and mix, continued strong cost control, and the addition of the higher margin Blue Buffalo business helped drive significant margin expansion in the quarter. resulting in adjusted operating profit of $730 million, up 25% in constant currency. An adjusted diluted EPS of 83 cents increased 6% in constant currency, driven by adjusted operating profit growth, partially offset by higher net interest expense, adjusted effective tax rate, and average diluted shares outstanding. Slide 6 shows the components of net sales growth in the quarter. Organic net sales were up 1%, driven by positive net price realization and mix across all segments, partially offset by lower contributions from pound volume. Foreign currency translation was a two-point headwind to net sales, and the net impact of the Blue Buffalo acquisition and the divestiture of our La Sultana business in Argentina added nine points to net sales in the quarter. Turning to our segment results on slide 7, North America retail organic net sales were up modestly in the quarter, rounding down to flat. Our consumer takeaway trends improved in the quarter and tracked more closely to our shipments. With U.S., Nielsen measured retail sales flat versus last year and share gains in the majority of our top U.S. categories. Net sales results improved sequentially for all our U.S. operating units. Growth on U.S. cereal and U.S. meals and baking was offset by declines in the Canada, U.S. snacks, and U.S. yogurt operating units. This net sales performance benefited from recent innovation, including Pillsbury's sweet Hawaiian baked goods and positive initial results on Cinnamon Toast Crunch churros. Plus, as we anticipated on our second quarter earnings call, stronger merchandising performance led to improved net sales results in U.S. cereal and U.S. snacks. And even with this greater merchandising, price mix continued to contribute two points to the segment's net sales growth. U.S. cereal net sales exceeded our retail sales growth in the quarter, bringing year-to-date net sales growth in line with retail sales when adjusted for non-measured channels. U.S. meals and baking net sales growth reflected strong performance on our key seasonal businesses, as well as growth on Totino's hot snacks, Olo Pasto shells and tortillas, and Annie's mac and cheese. Segment operating profit increased 12% in constant currency. driven by benefits from cost savings initiatives, lower SGA expenses, and positive net price realization and mix, partially offset by input cost inflation. In convenience stores and food service, third quarter organic net sales increased 3% versus prior year. Our focus six platforms generated 4% net sales growth, led by strong performance at our Pillsbury Stuffed Waffle and Chex Mix snacks in convenience stores. as well as cinnamon rolls and other frozen baked goods in the food service channels. Segment operating profit increased 15% in the quarter, primarily driven by benefits from cost savings initiatives and positive net price realization and mix, partially offset by input cost inflation. Third quarter organic net sales for our Europe and Australia segment were down 2%, as declines on yogurt and the negative impact of a continued challenging retail environment in France were partially offset by growth on snack bars and ice cream. Nature Valley and Fiber One snack bars delivered another quarter of strong double-digit retail sales growth as we secured distribution gains and brought successful innovation to market. Paganas retail sales also grew double digits as we expanded distribution on stick bar, mini cup, and pint innovations. Sigma operating profit in Europe and Australia was down 1% in constant currency, driven primarily by higher input costs, including significant dairy inflation and currency-driven inflation on products imported into the UK, partially offset by benefits from cost savings initiatives, lower SG&A expenses, and favorable net price realization and mix. In our Asia and Latin America segment, organic net sales increased 7% in the quarter. We drove double-digit retail sales growth on snacks in India and the Middle East, behind expanded distribution and compelling marketing on Pillsbury and Betty Crocker snack cakes. Nature Valley also performed well in the Middle East and Latin America as we continued to build distribution. In China, our Wan Chai Fairy business delivered another quarter of solid growth, driven primarily by Chinese New Year activations on core dumplings. Aganas continued to grow across Asia and Latin America, behind successful innovation like new mochi and peanut butter flavors of pints and stick bars. further development in e-commerce, and continued expansion of Haagen-Dazs shops. Segment operating profit totaled $20 million compared to a loss of $2 million last year, driven primarily by organic net sales growth and lower SG&A expenses, partially offset by higher input costs. For our pet segment, third quarter net sales increased 4% on a pro forma basis. on top of 15% pro forma growth in last year's third quarter. Significant growth at FDM and e-commerce channels was partially offset by declines in pet specialty. Segment operating profit of $73 million was $2 million below prior year on a pro forma basis, driven by plant startup costs and intangible amortization. Excluding these two items, Blue Buffalo operating profit would be up high single digits and margin up over 100 basis points versus last year. Slide 12 covers our margin results in the third quarter. Adjusted gross margin increased 170 basis points, and adjusted operating profit margin was up 230 basis points over the prior year. These strong margin results were driven by increased COGS HMM savings, benefits from positive net price realization and mix, continued strong cost control in SG&A, and the addition of the higher margin Blue Buffalo business. partially offset by input cost inflation. Slide 13 summarizes our joint venture results in the quarter. Shiro Partners worldwide net sales increased 2% in constant currency, driven by solid growth in our Asia, Middle East, and Africa, as well as Europe regions, partially offset by declines in Latin America. Paginas Japan net sales were down 5% in constant currency, driven primarily by declines on crispy sandwich and stick bars varieties. Combined after-tax earnings from joint ventures totaled $12 million in the quarter, compared to $17 million a year ago, primarily due to our $4 million after-tax share of a restructuring charge at CPW. Slide 14 summarizes other noteworthy income statement items in the quarter. Restructuring, impairment, and other exit costs of $60 million reflected our recently announced global supply chain optimization actions, including the planned closure of our yogurt facility in California. We recognized a $35 million loss on the divestiture of our La Sultana business in Argentina. Corporate unallocated expenses, excluding certain items affecting comparability, increased by $24 million in the quarter. Net interest expense increased $42 million compared to last year's total that included $16 million in one-time expenses related to the Blue Buffalo acquisition, which were excluded from adjusted earnings. The adjusted effective tax rate for the quarter was 19.9% compared to 15.2% a year ago, primarily driven by a year-to-date adjustment during last year's third quarter related to U.S. tax reform. And average alluded shares outstanding were up 4% in the quarter. Slide 15 summarizes our financial results through nine months. Net sales of $12.7 billion increased 9% in constant currency. Organic net sales were flat to last year. We've driven year-to-date expansion in adjusted gross margin and operating profit margin, resulting in an 11% constant currency growth in adjusted operating profits. and nine-month adjusted diluted EPS increased 3% to $2.39. Slide 16 provides our balance sheet and cash flow highlights through nine months. Our core working capital totaled $498 million, up 12% compared to the same period last year, due entirely to Blue Buffalo's addition to our balance sheet. Excluding Blue Buffalo, core working capital was down double digits, driven by continued benefits from our terms extension program. Operating cash flow totaled approximately $2 billion compared to $2.1 billion in the prior year, primarily reflecting a little less benefit from changes in accounts payable. Capital investments totaled $368 million, and we've converted 113% of adjusted after-tax earnings into free cash flow, helping fund nearly $800 million in year-to-date debt reduction. And we paid $884 million in dividends so far this fiscal year. Looking ahead to the fourth quarter, we continue to expect significant top and bottom line growth for Blue Buffalo as we benefit from our launch into new FDM customers and the expansion of our wilderness subline into FDM channels. We expect organic net sales growth to moderate from Q3's results. as North America retail shipments are expected to return to modestly lagging retail takeaway, as they did in the first half, and as our other three legacy segments compare against their strongest quarterly sales growth performance in fiscal 2018. Finally, we expect fourth quarter margins to be down versus last year, reflecting the comparison against significant margin expansion in last year's Q4, as well as higher incentive compensation and brand building investment this year. I'll close my portion of our remarks by updating our fiscal 2019 guidance, which you can see on slide 18. We now expect constant currency net sales and organic net sales to finish toward the lower end of our previous guidance ranges of 9% to 10% growth and flat to up 1% respectively. We now estimate constant currency adjusted operating profit to finish toward the higher end of our previous range of 6% to 9% growth. Net interest expense is now expected to total approximately $535 million for the full year. Our full-year adjusted effective tax rate is expected to be in a range between 22% and 23%, or one point below our most recent guidance. We're raising our guidance for constant currency adjusted diluted EPS to range between flat and up 1%, compared to the previous range of flat to down 3%. We're also raising our expectations for free cash flow conversion to at least 105% of adjusted after-tax earnings, which is ahead of our previous guidance of at least 95%. And we continue to project currency translation will be a 1% to 2% headwind to full-year net sales growth and will not have a material impact on operating profit or EPS for the full year. With that, let me turn it back over to Jeff to give some color on our performance against our fiscal 19 priorities.

Jeff? Thanks, Don. On slide 20, you can see the three priorities we laid out at the beginning of the year. Grow the core, transition Blue Buffalo, and deliver our financial commitments. I'm pleased to say that through nine months, we're on track to achieve each of these priorities. At Invest Today in July, we outlined five keys to growing the core, including improving our U.S. yogurt and emerging market businesses, strengthening our innovation, stabilizing our U.S. distribution, and driving greater price mix. Year-to-date, we've driven improvement in each of these areas compared to our 2018 performance. We've returned to share growth in U.S. yogurt. Emerging market organic sales are up high single digits to the first nine months of the year, well ahead of last year's growth rate. We've improved our sales from innovation. We're growing our share of U.S. distribution. And we're driving two points of positive price mix year-to-date versus one point last year. These results are translating into stronger retail sales performance in our U.S. business. On slide 22, you can see that we've driven steady improvement in our Nielsen measured sales results, with the two-year trend reaching positive territory in the most recent quarter. We're also competing more effectively within our categories, with year-to-date market share gains in seven of our ten largest U.S. categories. While we know there is certainly still more work to do, we're encouraged by the significant progress we've made since fiscal 2017. With that as a backdrop, let me share some specific examples of our year-to-day performance against our growth of core priority in each of our platforms around the world. We're encouraged by the improvement we're seeing in U.S. cereal, where category trends have improved consistently since 2017. We're also pleased with our U.S. cereal retail's performance in the third quarter. with measured channels retail sales up 1% as we restored more normal merchandising levels. And through nine months, we're gaining market share and expanding our position as the number one manufacturer in the category. These results have been fueled by strong innovation, holistic brand building activations, and benefits from price mix. Five of the top six new products in the category are Big G cereals, including Cheerios O' Crunch, Cinnamon Toast Crunch Churros, and Fruity Lucky Charms. Retail sales for our Chex franchise are growing year-to-date, thanks in part to our holiday season partnership with The Grinch Movie. And our strategic revenue management actions have helped drive one point of positive price mix for our cereal business this year. Beyond U.S. retail, we're also growing cereal in our convenience and food service segment, with net sales up low single digits through the first nine months of the year, led by strong performance in the K-12 schools. Now let's turn to U.S. yogurt, where we've grown market share year-to-date. While our overall retail sales are below last year, we've positioned our portfolio for future growth with our focus on fast-growing Simply Better yogurt segment and our core go-gurt and original-style Yoplait product lines. Simply Better is a small but rapidly expanding part of our portfolio, and we hold the number one position in this segment. Our year-to-date retail sales grew at a strong double-digit rate behind We by Yoplait and our new We Petite launch. Go-Gurt and original-style Yoplait represent more than 50% of our portfolio. Year-to-date retail sales for these product lines were up low single digits, driven by Go-Gurt equity flavors and Dunker's innovation, as well as original-style Yoplait, more real fruit news, and all-family consumer messaging. Our Greek and light products were down double digits through nine months as we right-sized distribution on shelf. And for the remainder of our portfolio, including product lines such as Yule Play Whips and our Kid Cup business, year-to-date retail sales were down, but we expect trends to stabilize as we adjust our product assortment. Overall, we feel good about our U.S. retail yogurt improvement this year and look to continue that improvement in fiscal 2020. Outside U.S. retail, we generated low single-digit net sales growth for yogurt in convenience stores and food service channels in Q3, driven by our Parfait Pro product that provides an easy way for operators to prepare on-trend offerings like coffee coolers. We also like the way we're competing across many important regional businesses this year. In the U.S., Pillsbury Refrigerated Bake Goods had a strong key baking season with retail sales up 2% year-to-date, and 3% in the latest quarter, fueled by our made-at-home media campaign and strong innovation like our new Sweet Hawaiian Biscuits and Crescent Rolls. In convenience stores and food service, year-to-date net sales on the frozen baked goods platform were up mid-single digits, driven by expansion of our frozen product line, including cinnamon rolls, cookies, and puff pastries across all their channels. Totino's Hot Snacks retail sales were up 5% through nine months, driven by a fully integrated video game partnership campaign and our expansion of value size offerings. And we continue to generate excellent growth on Wanchai Ferry in China, with retail sales up 7% so far this year due to strong activation on the core, innovation, and compelling marketing like our New Year's ritual consumer campaign around the Chinese New Year holiday. The second component of growing the core in fiscal 19 is increasing growth on our four global Accelerate platforms. Global retail sales for Old El Paso are up 3% year-to-date, led by the U.S., where retail sales increased 7% due to gains in distribution and consumer investment. Our Making Taco Night Easy campaign continues to resonate with consumers, and our highly successful in-store Old El Paso taco stand displays will be back in stores beginning in Q4 of this fiscal year. Our broad portfolio of natural and organic brands resonates with consumers and positions us well to win across categories. Year-to-date retail sales increased 3%, with strong growth on Annie's Mac and Cheese and Fruit Snacks, as well as Muir Glide Tomatoes, partially offset by decisions we've made to eliminate some unsuccessful category expansion volume. On Annie's Mac and Cheese, we renovated our classic SKUs and increased our support behind the business, resulting in double-digit gains in distribution and retail success. retail sales. In fact, Annie's is now the number one box mac and cheese at a number of our customers. We're also driving solid performance on Annie's fruit snacks behind our new Sour Bunnies innovation. And we've refreshed the packaging on our Muir Glen product line to showcase the premium nature of the products, which has translated into double-digit retail sales growth so far this year. We continue to see two different trends behind our international and North America snacks bars businesses. International bars growth continues at strong double-digit rates. Europe and Australia is driving retail sales growth with strong in-store execution and distribution gains, resulting in broad-based year-to-date share gains. Innovation has been a key driver to that growth, including Nature Valley nut butter biscuit lines, as well as 501 popcorn bars and cake bars. In our Asia and Latin America segment, we had another strong quarter. In fact, we've doubled net sales in our bars business in Asia this fiscal year. This growth has been driven by the investments we've made in distribution expansion, innovation, and consumer engagement. Pillsbury-branded cookie cakes and pastries in India have been a cornerstone of this growth, and we're building on that success by partnering with the Indian Premier League cricket in Q4 with an exciting lineup of in-store, on-pack, and consumer promotions that feature some of the biggest names in the sport just in time to kick off the season this coming weekend. Retail sales for our U.S. snack bar business were down mids of singles this year to date, and we continue to work to improve our trends on this important platform. On Nature Valley, we are focused on improving the fundamentals and are looking forward to the launch of a new Krispy Kreme wafer bar that will start shipping in the fourth quarter. Our 501 bars' performance in the U.S. has remained challenged. As we mentioned on our Q2 call, we expect declines in the near term as we cycle through distribution losses, especially on tail SKUs. Looking ahead to the next fiscal year, we have plans to renovate the 501 product line to increase its relevance with weight management consumers. On a positive note, Larabar retail sales were up five single digits through the first nine months of the year behind expanded distribution, innovation, and brand support. And Protein One performance continues to strengthen as we've tapped into consumer need for on-the-go, great-tasting snack bars with high protein and low sugar. On Haagen-Dazs, Our final accelerated platform retail sales for the first nine months of the year were up 12%, led by double-digit growth in Europe, driven by a mini-cup expansion in the UK, and peanut butter innovation in both pints and sticks. Now let's move to the second priority this year, successfully transitioning Blue Buffalo into the General Mills family. We feel great about the progress we're making here, and we're incredibly optimistic about the future of Blue. as we're still in the early innings of the pet food category's transformation toward wholesome natural products. We remain on track to deliver double-digit top and bottom line growth for blue buffalo in fiscal 2019. Our FDM expansion is currently underway and is progressing as expected. I'll share more details on this effort in a moment. And we expect to see significant margin expansion for blue buffalo in Q4, driven by increased HMM savings, synergies, benefits from strategic revenue management actions we implemented earlier this year, and strong product mix driven by the FDM expansion. While Blue Buffalo's quarterly net sales results have varied this year, driven by the timing of our channel expansion, we're encouraged the brand continues to win with pet parents. Aggregate year-to-date retail sales for Blue were up high single digits, and we've continued to gain market share in the category. From a channel perspective, Blue continues to drive strong performance and share gains in FDM. Through three quarters, Blue retail sales in FDM were up triple digits, and we continue to grow and gain share, including, importantly, our first wave of FDM customers, where third quarter retail sales were up double digits versus the second quarter. In pet specialty, year-to-date retail sales for Blue were down double digits, as we expected. This channel remains important for Blue and will continue to partner with pet specialty customers to bring variety, unique innovation, and education to serve pet parents in the channel. In e-commerce, which makes up roughly 25% of Blue Buffalo Net sales, we saw category retail trends slow in the third quarter. Still, Blue's retail sales continue to outpace the category, leading to further market share growth. Blue's year-to-date e-commerce retail sales were up 24%. and we continue to see tremendous growth ahead in this channel as more pet parents look for pet food online, where Blue is the number one brand. Slide 32 provides some additional details about our fourth quarter expansion plans for Blue Buffalo. As I mentioned earlier, we're launching Blue into new FDM customers in Q4, which will double the brand's ACV distribution by the end of the fiscal year. In addition, We're taking Blue's second largest product line, Wilderness, and making it available to FDM customers for the first time starting in March. The success we've seen with the Life Protection Formula line and FDM over the last 18 months has meant that Wilderness is being added incrementally across our FDM customer base. We expect the combination of launch of Wilderness into FDM and the expansion of Blue into new FDM accounts will result in sales growth of more than 30% in the fourth quarter. In addition to growing our core and transitioning Blue Buffalo, we continue to have a good line of sight to achieving our third priority, delivering our financial commitments. The combination of significant COGS HMM savings, increased price mix from our strategic revenue management efforts, strong cost and capital discipline, and continued improvement in our core working capital are translating to EPS and cash flow expectations that are ahead of our initial guidance from last July. I'll close our prepared remarks this morning by reiterating today's key messages. We delivered a strong third quarter and with solid execution leading to positive organic sales growth and with significant margin expansion. We're doing what we said we'd do this year, and we're on track to meet or exceed all of our fiscal 2019 financial targets. And our results increase our confidence in our consumer first strategy and our global growth priorities. and reinforce our view that a balanced approach to top and bottom line growth is the right model to drive long-term value for general mill shareholders. With that, let's open the line for questions. Operator, can you please get us started?

Thank you. Ladies and gentlemen, effective register question, please press the 1 followed by the 4 on your telephone. You are hit 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. Once again, to register a question, it's 1-4 on your telephone. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed.

Good morning, everybody.

Good morning, Andrew.

Hi. Don, just a quick one for you. Just kind of back of the envelope math, it would seem that sort of pricing in North America retail maybe because it could have accounted for maybe roughly one-half of the base business gross margin expansion that the company saw in fiscal 3Q. Does this seem broadly sort of right to you? And I think at Cagney you'd said that maybe a higher portion of pricing moving forward would be more of the list price variety. And is that playing out sort of broadly as you expected, including your thoughts on elasticity to volume? Thank you.

Sure. Yeah, you know, as we – we are delivering on the – on the second half drivers that we outlined in our Q2 call that we reiterated at Cagney. And it's a combination of things, Andrew. It's increased HMM savings. You know, we said global sourcing would continue to drive higher benefit to us. We're seeing that come through. It is the positive price mix that you referenced. You know, we saw an uptick from 2% to 3% in the quarter. Continued strong cost controls across SG&A. and the increased contribution from the higher margin blue buffalo business. So all of those came through as we expected in the quarter. And I wouldn't necessarily put one out. They were kind of equally weighted. I wouldn't put one out as the particular driver, but they all benefited our margin, and they all came through largely as we expected.

And then elasticity, is that generally – I think it was in North America retail, it was positive 2% price mix, negative 2% volume. I don't know if that's roughly in line with how you expected it to play out, or as improvements in yogurt and snack bars continue, maybe that elasticity looks even a little less onerous as we go forward.

Well, I'll let John maybe speak to what we're seeing in the market, but if you look at our third quarter for North America retail versus the first half, Price mix contributed two points again, but volume growth was two points better. So there was some strengthening of the volume while we held our price contribution.

Yeah, Andrew, I would just say I'd say a lot of specificities are playing out as we expected. And remember, obviously, we did take some car lot, but we're really leveraging the full toolbox of strategic revenue management as well. So pack price architecture as well as mix and promotional optimization. So As you pull each of those levers, they have a different impact on volume, and I would say our models keep getting better and better, and they're very much in line. Our results are in line with what we expected.

Thanks, everyone.

Thank you. The next question comes from John Baumgartner with Wells Fargo. Please proceed.

Good morning. Thanks for the question. Maybe for Jeff or John, I just wanted to come back to North America retail, just given the improving Nielsen baseline takeaway and the elasticity that Andrew mentioned. But I guess in light of shipments versus takeaway noise in Q4, can you speak to the performance, just in light of the focus on non-price promo this year? I guess to what extent are you seeing improvement in terms of shelf sales or quality merchandising? And I guess what metrics should we be looking at engaging the conversion of those efforts going forward?

Yeah, just generally, I guess, as we look at our business, we feel like the fundamentals continue to get better. So as we think about SRM outside of car lot, again, I think that's driving several of our businesses and big businesses at that. And, again, as we make some of those moves, I think, you know, the distribution is playing out as well. So as we look holistically at our business, new products are working really hard for us, and that's driving our business, which we feel really good about. SRM is playing out the way that we'd hoped as well. And then in the middle of the P&L, HMM is really delivering, too. So as we look across our businesses, we like the momentum on the top line. We like the middle of the P&L. And, again, things seem to be playing out as we expected. And importantly, again, I think we're looking for consistency moving forward. And we think that we've got a business model now that will drive consistent top line performance across the business and make sure we deliver on the bottom line as well.

And then, John, just on the cereal business, when you outperform the category in the quarter, how do we think about shipments versus takeaway in Q4? And then as the category itself has softened in terms of volumes, how much of that are you seeing from increased substitution from QSR breakfast or frozen breakfast versus just something more just kind of transitory in nature?

So, John, maybe I'll start with just the question about shipments versus takeaways. So for Q3, our – our R&S was ahead of our takeaway by a couple points. If you remember back to Q2, it was actually the opposite. So for the year, our takeaway is actually very much in line with our reported net sales, and that's in line with what we're seeing across the segment as well. So there's really nothing notable from an inventory standpoint. We actually were encouraged by what we're seeing in the category. So Q3, we saw the best category performance we've seen in several years at not only a half point, There's a lot happening underneath, you know, the category in terms of pack price and architecture, both from ourselves as well as some of our competitors. But if you look at underlying, you know, pull through and the way that consumers are responding to innovation as well as our marketing, we're actually quite encouraged about the category and very encouraged about our business, you know, which is performing much better than it has over the last several years.

Thanks, John. Thanks for your time. Thank you.

The next question comes from Ken Goldman with J.P. Morgan. Please proceed.

Hi. Thank you. Good morning. Two for me, if I can. First, there's a few areas of the business that I think, it's fair to say, are not working quite as well as you'd like. I think you mentioned U.S. snacks, maybe Haagen-Dazs, Japan. I think in the press release you talked about France, and maybe you'll play in France, and I'm not sure which categories in France, but you'll play across Europe and Australia maybe. Can you just give us a little bit of idea of when you expect some of those businesses to turn around, which ones you think will be maybe a little less onerous in terms of turning around. And then I guess that leads to my next question, which is typically on your third quarters, you'll give at least some, you know, what I would call soft commentary on the out year. Is there anything that you can provide right now as we look into fiscal 20 that's helpful, you know, not necessarily quantitatively, but just in terms of, you know, headwinds or tailwinds we should be thinking of as we think about modeling into next year?

Let me take the first part of that question, and I'll hand it over to John Newdy for maybe some additional commentary on U.S. snacks, and then Don maybe can handle the second piece. On the, you know, growth of the year, first I would say, you know, our growth has largely played out as expected, and even if we're at the low end of our guidance range on sales, I mean, it's a pretty narrow range to begin with. I mean, it's a one-point range from flat to up 1%, so we, you know, we feel like we're in the range of what we thought at the beginning of the year. As you mentioned, it's true, there are give and takes every year to to where your volume is going to be. And so, yes, it's been a tougher year in France, particularly on yogurt, but really in France with inflation on ingredients and difficulty in achieving price gains. But that's been offset by a really good year for us in the UK, where we're leading the growth of all food manufacturers in the UK. You know, I would say the same thing in U.S. retail, where, you know, it's been a little tougher in Canada, but our meals and baking business has done really well. And we talked about Pillsbury earlier this year, but also Totino's and Old El Paso and And we've been as pleased with that as we have other things. And so there are always offsets like those. The one that really we feel like we need to do better on and we can do better on, really starting next fiscal year, is going to be our U.S. Next business. And I'll let John talk a couple points on that.

Yeah, so, Ken, you know, and Jeff mentioned this up front. As we look at our business, really two brands are challenges for us, FiberOne and I would say it's more structural as modern weight managers are really looking for different macros in the products that fit their diet. So as Jeff mentioned, we are renovating Fiber One. I'm actually quite excited about the product that we're going to roll out in Q1, Q1 of fiscal 20, and we'll share more on that as we get closer. Nature Valley, I would tell you, actually, we feel generally good about the underlying health of that business. The biggest driver of our underperformance this year has really been innovation. If you look historically, Nature Valley has really been driven by broad-based innovation that hits on really broad need states. This past year, the need states we went after were a bit more narrow and a bit more niche in terms of the areas we focused on, and the results were much smaller as a result. As we look to next year, we've got a great new product coming out actually in the Q4 of this year, which is Krispy Kreme wafer bars. We're really excited about that. The retail response to it has been quite good, and our consumer testing looks very positive as well. And then we'll have some more news in the back half of fiscal 20 as well in Nature Valley. So I do believe you'll see Nature Valley trends improve as we move into fiscal 20. And, again, Fiber One, some big news coming there. But we've got some significant work to do on Fiber One.

Yeah, and, Ken, if there's anything, you know, for looking out of beyond F19, you know, we typically don't give guidance and we're not going to this year either until June. But I'll tell you, as Jeff alluded to at the beginning of our presentation, We're very pleased with the execution that we're seeing this year, and we certainly expect that to continue and continue to strengthen as we move into next year.

Thank you everyone.

The next question comes from David Driscoll with Citi. Please proceed.

Great, thank you and good morning everybody. Morning David. Wanted to ask a couple of pet questions. So on the wilderness brand. It's significant news that you're going to be taking it from exclusive to specialty to moving it into FDM. When you did this with life protection, there was a very kind of methodical, progressive rollout of life protections throughout the food and mass channels. Will the wilderness rollout be similar, both in the pacing of how you roll it out to different retailers and and in the size of the rollout, would you expect to get a significant amount of shelf space that's incremental to what you currently have with the life protection in the food and mass channels?

David, let me try to take those kind of one at a time, and hopefully I hit on all the things you asked, maybe even a little bit more. Just for context, you know, we launched Life Protection Formula 18 months ago, and now we're launching Wilderness into FDM. And in the pet specialty channel, Wilderness is roughly 40% of our sales. It's almost as big as the Life Protection Formula brand itself. So this launching of Wilderness into food, drug, and mass is not a small endeavor. It's a big endeavor, and it's a big endeavor from a logistical standpoint, but also what it can do for our sales, which is one of the reasons we're confident we can grow 30% plus in the fourth quarter. You know, I mentioned in my comments, which might seem like a throwaway, but, you know, the fact that we're performing well on FDM is really important because as we bring in wilderness, we're seeing the wilderness launch being highly incremental to our assortment and our current customer base to life protection formula because they see the growth that Blue Buffalo has driven for them in the category so far, and they know the importance of the wilderness brand. In terms of, we'll certainly be thoughtful about how we expand wilderness. But, you know, one of the benefits, I think, of the General Mills brings the Blue Buffalo business is being able to get into more customers faster. And so while we'll be thoughtful about where we bring in wilderness, you'll see the ACV on wilderness expand a lot more quickly than we did on life protection formula. And that's not because we're less thoughtful. It's just because we have greater capability with the combined Blue Buffalo and General Mills than we did before. And And I will also add for, you know, for a bonus that, you know, we said we'd get up to ACV of 65% by the end of April. I can tell you at the end of February, we're already at 58. So we are a long way, we're a long way to our goal already, gaining about 22 points of distribution in the month of February alone on Blue Buffalo. And I think that just shows what the combination of Blue Buffalo and General Mills can achieve.

Okay. And then I just have two more related questions on this. The first one is that when you do the wilderness move, is there anything, you know, kind of extra special that you're doing for these pet specialty retailers to ease the pain of taking this from exclusive to pet specialty and moving it into FDM? And then to Don, on this stuff, like in the fourth quarter, I think our math is working out, and I really just want to check the math here, that we've got to get double-digit profit growth in blue X the inventory change. We have to have, like, fourth quarter blue buffalo profitability at, like, $120 million, and that's, like, double last year's numbers. It's just such a big jump. I just want to make sure that we're not making a mistake this morning on the mathematics. Thank you, guys.

Well, look, David, importantly, I mean, the Pet Specialty Channel is really important to us. And just like the natural and organic channel was when we rolled out, you know, Annie's and Laura Bar and things like that. And we've already had lots of discussions with our pet retail, our pet specialty customers about what we can do for them. There are a lot of things we can do for them that are differentiated from what we do with other customers. And, you know, pet grooming would be one example in tying that to pet food sales. And so whether it's through promotions or whether it's through unique innovation or whether it's through pet detectives and having people on the On the floor, there are a lot of things we can do to drive sales in pet specialty, and we're actively working with our big customers to make sure that we can do that because we want to make sure that Blue Buffalo is successful and available to pet parents no matter where they shop.

And, David, on the profit growth, we do have to see significant profit growth, and we expect to see significant profit growth in the fourth quarter. It's going to be leveraging the 30-plus percent sales growth that Jeff alluded to, One thing I wanted to make sure you capture is the impact of the purchase accounting in the quarter as well, because we don't have to quite double our sales growth to – or our profit growth, excuse me, to get to our number for the full year.

Dave, this is Jeff Seaman. I think, remember, our double-digit profit growth for the full year is excluding purchase accounting charges. So, you know, I would encourage – that is – that will be roughly 65 to 70 million of total purchase accounting charges for the year. So we said we'd grow double digits, excluding those impacts.

But if you're going to do a very strong double-digit growth, that's right. Thank you.

The next question comes from the line of Steve Strykula with UBS. Please proceed.

Hi, good morning. Question for Jeff. So we've heard some noise that a large U.S. e-commerce e-tailer is pushing CPG manufacturers more to a third-party marketplace system versus first-party. You know, for investors on the line, how do we think about the context of what this might mean for General Mills in terms of impact and business dynamics? And ultimately, how do we think about what the margin economics might be directionally for a third-party system relative to a first-party system? Thank you.

Yeah. First, I will let specific retailers talk about their business specifically. I think it's better that they talk about it than we do. I'm not sure I see the same trend that you talk about. But I think importantly for e-commerce and food, I think there are a couple of important things to remember. In food, maybe unlike some other categories, I think there's got to be a lot of winners in e-commerce with regard to food. It's not going to just be one pure play who's going to win in food. I see the strengthening of you know, quite a number of our traditional retail customers, and whether that is through delivery or click and collect. I think the playing field for e-commerce is going to be kind of wide open. I think there are going to be multiple winners, not just one. The second, I would say that, you know, we're well-positioned in e-commerce, and our sales are up more than 50% this year. And, I mean, everybody can quote big numbers in e-commerce because it's growing rapidly, but I think as important as the fact we're up 50% is that we over-index. in the customers where we are in e-commerce through our bricks and mortar. And that's because of the strength of our brands. And whether that is Cheerios or Nature Valley or Yoplait or Blue Buffalo, the reason that we over-index, for me, is because we've got great brands and great brands travel across channels. And so we think the economics for us in e-commerce are going to be good. And our goal is to win across our customers because there's certainly going to be more than one winner in e-commerce and food.

Okay, that's helpful. And then a quick follow-up to that. If I heard you correctly on your prepared remarks, you said that for Blue Buffalo's e-commerce business, they're still growing solid double digits, but it maybe has slowed a bit sequentially. Was that more of a transitory issue, something that's happening in the supply chain, or should we just think that we're growing on top of very large numbers already and that's a natural cadence of the business?

Yeah, that's a good question. I think the key for, as we talk about e-commerce and Blue Buffalo, is that the category for e-commerce and pet food slowed in the third quarter. Blue Buffalo is still gaining share, and we're still growing double digits, but our growth slowed primarily because the category slowed, but within that context, we're doing well. And the question is, you know, do I think that e-commerce is going to be transitory? And, you know, I don't I think e-commerce may pick up again in PET, especially as we roll out across food, drug, and mass, because you think about the places where we are and the places where Blue Buffalo is going, there is certainly a strong e-commerce business and developing e-commerce business in food, drug, and mass. And I wouldn't be surprised if that in the coming quarter is e-commerce growth picked up again in PET due to the rollout of e-commerce capabilities across our FDM customers.

Okay. Thank you.

The next question comes from Rob Dickerson with Deutsche Bank. Please proceed.

Great. Thank you. Good morning. Hey. So two questions, one on PET and then just one on kind of margin expectation progression as we think into next year and given a little nuance in Q3 and Q4 this year. So I guess one on PET. is just, you know, I think we heard at Cagney from you, expectation was, you know, mass distribution gains shouldn't be margin dilutive. You know, entering mass, obviously, with wilderness now. So, you know, as we think through, you know, getting to Q4, right, where there's sell-in, but then really into 20, where we need to have the velocities obviously turned so you can sustain the product on the shelf. I'm just curious, can you give just kind of brief overview as to what the strategy really is, right, at, let's say, one large mass customer to increase, you know, the buyer base of Buff incrementally, not just, you know, share of shift between channels, but kind of why, you know, more people should be buying Blue Buffalo because it's offered, you know, in more locations versus just shifting channels? their purchase destination. That's first. Thanks.

Well, no, I think it's a fair question. I think I talked a little bit about this at Cagney, so if I'm repeating myself, you know, I apologize. But the most important thing, as you look at, is household penetration and what's going on with household penetration. And as we've expanded Blue Buffalo across channels, our household penetration continues to rise. And so... Now it's north of 35%, I think, household penetration, which is up maybe threefold from where it was a year ago. Jeff can check me on that math and get back to you. But it's up quite significantly. And I think that is actually the key because as we've expanded distribution, we've brought in more households, more pet parents where they sell it. And so I think the evidence is actually already there that as we've expanded across channels, we've grown household penetration and not just cannibalized our own sales. The second thing, and this is consistent with what we've seen before on things like Annie and Laura Bar and Epic. And so I know that maybe it would be a surprise to some. It's actually not surprising to us in following a very familiar pattern of what we've seen on other natural and organic businesses. But the second point you raise is important, and that's about, you know, how are we turning where we currently are? And that's why, you know, I mentioned the first four customers we've been at a year. You know, how are we doing? I mean, our turns are really good. And as evidenced by the fact that our Q3 business is up double digits for where it was in Q2. And because when we bring in wilderness, it's going to be incremental. And the only reason it's going to be incremental is because what we have there right now is turning well. And so that's really the key. And the reason for that is because Blue Buffalo is a really good brand. And Billy Bishop and his team have done a nice job with in-store signage and display, but also really good advertising and marketing campaigns. And so You know, they have built a great brand, which we're capitalizing on. And so the key as we expand it is to make sure that not only are we growing distribution, which we are, but our turns are doing well. And, look, even places where we're – you know, our business is down. I mentioned pet specialty. We're down double digits. Our turns are actually pretty good. It's the fact that we've actually lost some distribution. So our business is still turning at these places. We just have less distribution than we were before. I think that's encouraging, and that's one of the reasons why – you know, eventually our plan is to get back in the game with Pest Specialty because the turns of Blue Buff on those places are actually pretty good. It's just our distribution is down. So that's really the – we feel confident about as we roll out Blue Buffalo, we'll continue to gain pet parents, which is to say household penetration, and that our sales will be incremental because that's what we've seen to date.

Super. Makes sense. And then just quickly, you know, as we think about fiscal 20 – I know you're not giving guidance – But, you know, I'm just curious. Obviously, Q3, right, margin did a lot better than people expected, I think, on average. Q4, you know, there's a little give back just, you know, given the timing of shipments relative to takeaway and incentive comp, et cetera. But it seems like the core drivers, right, of just better margin or stabilized margin at least in the next year, which would be pricing, saving synergies, and then mix, you know, partially on, North America business and cereal and also partially just given the buff. It seems like those are still sustainable, right? I mean, if we are thinking in the next year, is there anything in, you know, each of those three buckets that really would change or do they just stay as the drivers of, you know, stabilized or improving margin? Thanks.

Sure. Yeah, I think firstly kind of ground on this year, as you alluded to, you know, we came in where we know was well ahead of where the consensus was, but frankly, versus our own internal expectations, Q3 was a bit stronger on the margins, but not materially stronger. We had a bit better gross margins because our plant performance was stronger. We had a bit better operating margins because of that and because of good cost controls, and EPS came in a little bit better on top of that because the tax rate was a little bit better. So we had some improvement in the middle of the P&L and down through tax rate, and that's what flowed through to our new guidance for this year. But it was a little bit better than we expected, but not as outsized as certainly maybe what's compared to the street. As you mentioned, in the fourth quarter, we see tougher comps. Our gross margin was at a high point last year. It grew in the quarter last year, so we're lapping that, and as you mentioned, incentive. And as I said in the call, we have higher brand investment in the quarter. So for the full year, we expect – our margins to be a bit better, our operating margins to be a bit better than when we started the year. And our most recent guidance, we think they'll be flat and slightly down, which is a bit stronger than what we thought a quarter ago. As we look to next year, you know, our focus is going to be on staying very balanced. You know, we want to make sure we have a mix of top-line growth and margin expansion. We're not going to lean, you know, strongly in one way or the other. We know we have to deliver a balanced year to have a sustainable model, and that's what we're going to be focused on as we build the year. The factors you mentioned in terms of pricing, strong HMM, the added benefit of Blue Buffalo, stronger margins, should all carry through.

Yeah, I'd build on Donna's point and say, you know, the quarter was better than what was expected externally. That's fair. And our profit a little bit better. I would broaden the lines to look at the last year for us. And, you know, we had a tough Q3 last year. That's no surprise or secret. But I really like the way the General Mills team has bounced back from that, and I think you see the strength in execution, and it's not an accident. We've really focused on how well we're going to execute, whether that's SRM or e-commerce or brand building, how we forecast the business, and there's no reason to think our ability to execute well is going to diminish next year. And that's, I think, what allowed us to deliver on our commitments this year is that we've delivered on the core, what we said, and we've delivered on Blue Buffalo, what we've committed, and And that and is what we were looking for as a company. And so there's no reason to think that that won't diminish. At the same time, I mean, while we feel good that we've executed well and our performance has improved and we feel good about that, there's still more work to be done. And we're not yet to a sustainable, you know, top line and bottom line model where our shareholder return has a flywheel that we expect of ourselves over the long term and that hopefully you expect out of us. You know, we're not going to give specific guidance on F20, but I can tell you our goal is going to continue to work toward getting closer to that sustainable model that's going to continue to build value for shareholders. And we've taken one step this year, and we're, I would say, pleased but not yet satisfied. And we're pleased with what we've done, but we've got more work to do, and we're going about the business of doing that.

Super. Thank you.

The next question comes from Robert Moscow with Credit Suisse. Please proceed.

Thank you for the question. So the inventory has shifted around a lot this year, and you're not alone. There's several other packaged food companies that had inventory bills in January. And so I'm asking, John Newdy, have you had any conversations with big retailers as to whether their inventory strategy has changed at all? It seems like every year they're working hard to try to reduce those levels. But as you plan the business going forward, do you think we're at a sustainably higher level that's appropriate for the business? Or do you think that it makes sense to continue to expect a little bit of burn every year. Thanks.

So, hey, Rob. You know, as you think about our retail partners, just like us, they continue to stay focused on working capital, and I think leveraging technology and processing systems to improve working capital. So we would expect them to continue to get better in terms of being able to operate with less inventory. So that's our going assumption as we move forward. And I think for the year, again, you see that. So our takeaway is about a point better than a reported sale, and I think that's what we'd expect in Q4 and end of Q4 as well.

So, again, so you think you'll lag retail consumption by about a point in Q4, right?

We do.

We do, yes.

Okay, thank you.

The next question comes from Jason English with Goldman Sachs.

Hey, good morning, folks. Congratulations on a strong quarter, and thanks for the question. I've got two quick questions. First, on the all-in inflation outlook, I know you're beginning to cycle what was an uptick last year. As you cycle over that, are you seeing your all-in rate of inflation subside? And if so, kind of to what levels are we settling in that?

Yeah, Jason, we still see inflation coming in around 5%. It may be a couple basis points lower than when we started the year, but we're still seeing inflation in grains, packaging, other commodities. Logistics, from a percentage standpoint, is the biggest change. And then we're seeing higher inflation in our European business, which is trending higher than that 5% full-year guidance, and we're really seeing it in dairy and vanilla. So there hasn't been a material change to our outlook in inflation. It might be just a touch lower, but still rounding to 5%.

That's helpful. Thank you. And I want to touch on your divestment plans. It's something you've announced an intent to pursue over a year, about a year ago now, I guess. Why is it taking so long? And while we're waiting, clearly some M&A multiples have begun to contract in the space. There's a lot of company shopping assets, and your cash flow conversion is rock solid, as you point out. Are those dynamics giving you pause and causing you to reconsider whether or not you want to go down that path?

No, thanks for the question. I appreciate that, Jason. No, it hasn't really – it hasn't – It hasn't forced us to reconsider whether we want to go down that path. But I think the points you mentioned will only go down that path if it makes, to the extent it makes sense for general mill shareholders, as it did when we exited Argentina, you know, this last quarter. And so, you know, I would reiterate, we're not doing divestiture, which is roughly about, we think roughly about 5% of our portfolio. We're not doing it because we need to generate the cash. We're clearly already doing that. We're doing it because we believe that by divesting some businesses that are slower growing will not only help improve our organic growth rate, but also help our improved focus on some of the businesses that are going to be really important for us to invest in. So it hasn't really changed. We've changed on the timing, and I know it can seem slow, but for me, I would call it thoughtful, and that is that coming into this year, especially after our Q3 last year, We said we better execute well in our core business and transition Blue Buffalo effectively. And if we do that, we think that shareholders will reward us, and that feels to me like it's the case. And that whether we do divestitures or not, people are going to look back on our core and look on to whether we're transitioning Blue Buffalo successfully. And we feel like we're on the path to doing both of those. And so our attention certainly is still on divestitures and looking at what we would do from that standpoint. And – And so it hasn't been anything other than that. We felt like we had a job to do, and we feel like we're well on our way to doing that. And so we'll continue to evaluate divestitures. And we'll do it if we think it makes long-term sense for General Mills shareholders. And if it doesn't, then we'll come back and tell you that it doesn't. But for now, that's still our plan.

Makes sense. Thank you.

All right. It looks like we've hit the bottom of the hour here, so I think we'll go ahead and cut it off. I know there's a number of people we haven't gotten to, and my apologies for that, but I'll be available all day for additional questions. Thanks, everyone, for your time and attention this morning, and have a wonderful day.

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