General Mills, Inc.

Greetings and welcome to the fourth 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 the star zero. As a reminder, this conference is being recorded Wednesday, June 26, 2019. It is now my pleasure to turn the call over to Jeff Seaman, VP, Investor Relations. Please go ahead, sir.

Thanks, Tanya. And on behalf of General Mills, thanks, everyone, for joining us this morning. I'm here with Jeff Harmoning, our Chairman and CEO, and Don Mulligan, our CFO. In addition, John Newdy, who leads our North America retail segment, is joining us for the Q&A portion of the call. I'll hand the call over to them in a moment, but before I do, let me cover a few different housekeeping items. Our press release on our Q4 and full year fiscal 2019 results was issued over the wire services earlier this morning, and you can find the release and a copy of the slides that supplement this morning's remarks on our investor relations website. I'll remind you that our remarks this morning will include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists factors that could cause our future results to be different than our current estimates. And with that, I'll turn you over to my colleagues, beginning with Jeff.

Thank you, Jeff, and good morning, everyone. In fiscal 2019, we executed well, successfully transitioned Blue Buffalo into our portfolio, and delivered on our financial commitments. We met our sales growth guidance, and we exceeded our guidance for profit, for earnings per share, and for cash flow. We also delivered double-digit top-line and bottom-line growth for Blue Buffalo, as we said we would at the beginning of the year. And while we're pleased with these results, we know that there's still room for improvement. Turning to fiscal 2020, we'll continue to pursue our consumer-first strategy and our compete, accelerate, and reshape growth framework. We'll drive innovation and invest in our brands and capabilities to accelerate organic sales growth. We'll continue to execute our HMM and strategic revenue management, or SRM, programs, and maintain our strong margins, and we'll continue our cash discipline to reduce our leverage. On slide five, you can see the key financial performance metrics for our fourth quarter and the full fiscal year. For the fourth quarter, net sales totaled $4.2 billion, up 9% in constant currency. Organic net sales declined 1%, driven by lower volume. Adjusted operating profit grew 5% in constant currency, driven by the addition of Blue Buffalo and strong HMM savings, partially offset by higher inflation and other supply chain costs. It should be noted that this profit performance compared against by far our strongest quarter of growth last year, when adjusted operating profit was up double digits. Adjusted diluted earnings per share totaled 83 cents and grew 6% in constant currency. For the full year, net sales totaled $16.9 billion, up 9% in constant currency. Organic net sales were in line with year-ago levels, with growth in Asia and Latin America and convenience stores and food service segments offsetting declines in North America retail and Europe and Australia. Adjusted operating profit for the year totaled $2.9 billion, up 10% in constant currency, due to the addition of Blue Buffalo. Full year adjusted diluted EPS totaled $3.22, an increase of 4% in constant currency. A year ago, we laid out three key priorities for fiscal 2019. Grow the core, transition Blue Buffalo, and deliver our financial commitments. Let me spend a few minutes summarizing our performance against each of these priorities over the past year. We outlined five keys to growing the core in 2019, including improving our U.S. yogurt and emerging market businesses, strengthening our innovation, stabilizing distribution in the U.S., and increasing benefits from price mix. I'm pleased to say that we made measurable progress against each of these areas. At the same time, we experienced challenges in a few other areas, most notably U.S. snacks, which held us back from fully realizing our top-line ambitions. We have plans in place to improve our organic sales growth in fiscal 2020, and you'll hear quite a bit more about those plans at our Investor Day in two weeks. We competed more effectively in fiscal 2019 as measured by our market share performance. We held or grew share in seven of our top 10 U.S. categories, which represent roughly 85% of our Nielsen-measured sales, thanks to solid innovation and brand building, proactive execution of our SRM initiatives, and improved distribution trends. This included encouraging share gains in some of our largest categories, including cereal, yogurt, and refrigerated dough. Of the three categories where we lost share, soup was down just 10 basis points after a year where we delivered strong share gains. On fruit snacks, we were capacity constrained in a growing category in fiscal 19. We have capacity coming online in early fiscal 20 that will unlock growth for our brands in that segment. And our biggest opportunity is clearly in U.S. snack bars. At Investor Day, John Newdy will go into more depth on our plans to improve Nature Valley and Fiber One performance in fiscal 2020. With that as a background, let me spend a bit of time summarizing our Grow the Core performance in fiscal 19 on our large global platform, starting with Cereal. We are encouraged by our continued positive momentum in cereal across U.S. retail, convenience stores and food service, and our cereal partners worldwide joint venture. In U.S. retail, the cereal category has sequentially improved for eight consecutive quarters. We grew our retail sales for the second year in a row, and we extended our leading market share position through good brand building and very good innovation. On Lucky Charms, compelling consumer news and refreshed advertising helped drive a second consecutive year of retail sales growth, and we had a great year on innovation, led by Cheerios O' Crunch, Cinnamon Toast Crunch Cheerios, and Fruity Lucky Charms. In fact, five of the seven largest new products in the category in fiscal 19 were Big G cereals. We're encouraged by early results of our April launch of Blueberry Cheerios and look forward to another strong year of innovation and brand building in fiscal 2020. Beyond U.S. retail, we drove strong performance on our cereal platform in the convenience stores and food service segment in 2019, with net sales up low single digits. We saw good results on bowl pack cereals in K-12 schools and bulk cereal in colleges and universities. In our CPW joint venture, constant currency net sales increased low single digits for the year, with broad growth in Asia, the Middle East, continental Europe, the U.K., and Australia. I'm also pleased with the improvements we made in our U.S. yogurt business in fiscal 19. As you can see on slide 10, we've improved our trends significantly over the past two years. We also grew share for the full year of first since fiscal 2015. We improved our core yogurt business, which represents more than 50% of our retail sales and includes brands such as Go-Gurt and Original Style Yoplait. All family messaging on equity flavors such as Sour Patch Kids drove mid-single-digit retail sales growth on yogurt. And original-style Yoplait stabilized behind more real fruit news. We continue to post impressive retail sales growth in the Simply Better yogurt segment, including a 48% increase on WE and contributions from YQ. In fiscal 20, we expect further improvements in U.S. yogurt as our strong consumer marketing plans and innovation continue to drive growth, while the declines in our Greek and light product lines are less a drag on our results. Shifting to our Accelerate platforms, Haagen-Dazs, Old El Paso, Snack Bars, and Natural & Organic, we grew retail sales on three of the four platforms in 2019. Haagen-Dazs retail sales were up double digits as we broadened distribution of mini cups and stick bars across Europe and Asia and launched compelling innovation, including our new barista line of coffee-inspired flavors, as well as peanut butter pints and stick bars. Old El Paso retail sales grew low single digits, led by strong performance in North America. Our U.S. retail sales were up 6% behind our Anything Goes campaign, as well as in-store taco stand displays, which showcase a variety of offerings to make taco night easy. Retail sales results continue to vary across geographies for snack bars. Fiscal 19 results in the U.S. underperformed our expectations with retail sales down mid-single digits. Fiber 1 declined significantly in fiscal 19 as we fell out of step with modern weight managers. And on Nature Valley, our innovation and in-store execution did not meet our objectives. On a positive note, Epic and Larabar continued to increase availability. And retail sales for our treat bar product line were up 50% as we expanded into more stores and offered incremental pack sizes. Importantly, we continued to drive strong performance on snack bars outside of North America, with retail sales up 30%. In Europe and Australia, we posted 26% retail sales growth. And even more impressive, we posted retail sales and share growth across all markets. Retail sales for bars in our Asia and Latin America segment were up 47%. Asia drove outsized growth behind distribution gains and portfolio expansion on Nature Valley and Sweet Treat snack bars. On our natural and organic platform, retail sales were up low single digits in F19, as decline from our exit of some tail offerings and channel-specific product lines were more than made up for by strong growth on our core products, including Annie's Mac and Cheese, Bunny Graham's, Muir Glen Tomatoes, and Epic Meat Bars. We'll continue to invest to accelerate growth across these four platforms in fiscal 20, and you'll hear more from our segment leaders about those plans at our investment day in two weeks. Our second growth priority was to successfully transition Blue Buffalo while maintaining momentum on the business. I think we can confidently say that we delivered against this priority. We delivered our F-19 pro forma growth guidance with an 11% increase in the top and bottom line versus the prior year adjusted for purchase accounting. We continue the momentum on Blue with retail sales up high single digits, led by the food, drug, and mass, or FDM channel, and strong growth in e-commerce. And we significantly expanded distribution in FDM, reaching 65% ACV for the final month of the fiscal year. Every year today, retail sales for Blue were up high single digits, and we've continued to gain market share in the category. Looking at results by channel, Blue Retail Sales and FDM were up triple digits, and we continued to grow and gain share across customers in this channel. Perhaps most importantly, for customers where Blue has been in distribution for at least 12 months, retail sales grew nearly 30% in the fourth quarter versus last year. In the month of April, Blue was the market share leader in a number of FDM accounts and held double-digit market share at three large customers. In pet specialty, retail sales for Blue declined double digits in F19, consistent with our expectations. This channel remains important for Blue and will continue to partner with specialty customers to bring product variety, unique innovation, and education to serve pet parents in the channel. For example, we're launching Carnivora, a new super premium product line under the Blue banner in the pet specialty channel later this summer. In e-commerce, which makes up roughly a quarter of Blue Buffalo net sales, we saw category retail trends slow in the back half of the year. Still, Blue's retail sales continued to outpace the category, and we extended our market share leadership in this channel. E-commerce sales, retail sales for Blue were up 21% in fiscal 19, and we see more growth ahead as parents increasingly look for pet food online, where Blue is the number one brand. Overall, we're happy with Blue Buffalo's performance in year one, and we see a long runway of growth ahead for this important business. For our third fiscal 2019 priority, delivering on our financial commitments, I am proud to say that we did just that. We exceeded our guidance for operating profit, for earnings per share, and free cash flow conversion in F-19. We generated two points, the positive organic price mix by leveraging our enhanced SRM capability, including positive price mix in each of our segments. We also delivered record levels of HMM. And our strong cash flow focus allowed us to pay down $1.3 billion in debt, helping reduce our net debt to adjusted EBITDA ratio to 3.9 times. This was ahead of our initial F-19 goal and bolsters our confidence that we can reach our target of 3.5 times by the end of F-20. With a clear understanding of what worked in fiscal 19, and where we can still improve, we've outlined three priorities for fiscal 20, which can be found on slide 15. Our first priority is to accelerate our organic net sales growth. We'll improve growth in North America retail by maintaining momentum on cereal, continuing to improve U.S. yogurt, and improving U.S. snacks through sharpened execution, strengthened innovation, and increased capacity on platforms where we were constrained a year ago. We'll also see accelerated sales growth as we bring Blue Buffalo into our organic sales base, and we continue to drive strong growth for that business in F20. Blue Buffalo will shift to a May year-end to align with our corporate calendar, which will add an extra month of results in F20. On a like-for-like basis, we expect Blue Buffalo net sales to increase 8% to 10% in F20, and we're targeting double-digit growth on a reported basis. Our second priority is to maintain our strong margins. Benefits from our long-running HMM cost savings program and contributions from our SRM actions will continue to provide fuel to invest in brand building on our highest priority and highest return categories, including cereal, pet, our accelerated platforms, and U.S. yogurt. In addition, we'll invest to drive deeper data and analytics to support our e-commerce and SRM capabilities. And our final priority for F20, is to maintain a disciplined focus on cash to achieve our fiscal 20 leverage target. With these priorities in mind, we expect to deliver on the fiscal 2020 guidance laid out on slot 16. Namely, we expect organic net sales to increase 1% to 2%. We're targeting adjusted operating profit growth of 2% to 4% in constant currency. We expect constant currency adjusted diluted earnings per share to increase 3% to 5%, and we're targeting free cash flow conversion of at least 95% of adjusted after-tax earnings. I am confident in our strategies and our plans for F-20. With that, I'll turn it over to Don to review our F-19 financial results and the 2020 financial outlook in more detail.

Thanks, Jeff, and good morning, everyone. Jeff provided a high-level summary of our fiscal 2019 financial results. I'll share a few additional details, starting with the components of net sales growth on slide 18. Organic net sales were down 1% in the fourth quarter, driven by lower contribution from pound volume. Organic net price realization and mix was flat in the fourth quarter, compared to three points of positive price mix in the same period last year. Foreign currency translation was a two-point headwind to net sales, and the net impact of acquisitions and divestitures added 10 points to net sales in the quarter, primarily driven by Blue Buffalo. As Jeff mentioned, full-year organic net sales were flat to last year, with volume down 2% offset by two points of positive price mix. And on a two-year basis, we saw both organic volume and price mix improve sequentially from the first half to the second half of fiscal 19. Turning to our segment results on slide 19, Full-year North America retail organic net sales were down 1% and lag Nielsen-measured retail sales growth by about one point, which was in line with the expectations we outlined at the beginning of the year. Our SRM actions drove one point of positive organic price mix for the full year, which was two points ahead of last year's results. Fourth quarter organic net sales rounded down to a 2% decline, driven primarily by declines in U.S. snacks and Canada. We saw unfavorable price mix in the quarter driven by higher promotional expense as we returned to normal merchandising levels this quarter after having relatively little in-store activity in last year's Q4. Second half price mix was favorable by one point in line with the full year result. And fourth quarter retail sales trends were slightly positive in U.S. Nielsen measured outlets with market share gains in the majority of our top U.S. categories. Full-year segment operating profit increased 3% in constant currency, primarily due to benefits from cost savings initiatives and lower SGA expenses, partially offset by lower net sales and higher product costs, primarily driven by input cost inflation. Fourth quarter segment operating profit decreased 2% in constant currency, compared against high single-digit growth last year. Inconvenient stores and food service, organic net sales were up 2% for the full year, led by mid-single-digit growth on our Focus 6 platforms. In fact, each of our Focus 6 platforms grew net sales in fiscal 19, including strong performance on frozen pouch breakfast and bowl pack cereal in K-12 schools, Pillsbury stuffed waffle and Chex Mix snacks in convenience stores, and cinnamon rolls and other frozen baked goods in food service channels. Organic net sales were also up 2% in the fourth quarter, driven by continued growth on all Focus 6 platforms. Segment operating profit increased 7% for the full year, primarily due to benefits from cost savings initiatives and positive net price realization and mix, partially offset by higher product costs, again, primarily driven by input cost inflation. Fourth quarter segment operating profit was down 1%, compared against double-digit growth last year. In our Europe and Australia segment, organic net sales were down 1% for the full year. 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 501 Snacks delivered strong double-digit retail sales growth in fiscal 19 as we secured distribution gains and brought successful innovation to market. Haagen-Dazs retail sales also grew double digits as we expanded distribution on minicup, stick bar, and pint innovations. Fourth quarter organic net sales were down 3% from the prior year period that grew mid-single digits. Segment operating profit decreased $19 million for the full year, driven primarily by higher input costs, including significant commodities inflation and currency-driven inflation on products imported into the UK, partially offset by lower SG&A expenses. The bulk of that full-year decline, $15 million, was in Q4, reflecting the difficult comparison against 55% profit growth a year ago. Our Asia and Latin America segment delivered broad-based sales growth in fiscal 19, including increases in China, Brazil, and India. the segment's three largest markets. Full-year organic net sales increased 6%, driven by growth on Nature Valley and Betty Crocker snacks in the Middle East, India, and Latin America, as well as strong performance on Haagen-Dazs across Asia and Wan Chai Ferry in China. These results exclude the impact of the sale of La Sultana in Latin America and the sale of our yogurt business in China to a new Yoplait franchisee. Fourth quarter organic net sales increased 1% over the prior year period that saw double-digit like-for-like growth after adjusting for the calendar reporting change in Brazil. Segment operating profit increased $33 million for the full year, driven by organic volume growth, positive net price realization mix, and lower SG&A expenses, partially offset by higher input costs. Fourth quarter segment operating profit increased $13 million. Slide 23 covers our pet segment results. As Jeff mentioned, we achieved our full year targets of double digit top and bottom line growth for Blue Buffalo, excluding purchase accounting charges. Fourth quarter net sales increased 38% on a pro forma basis driven by significant distribution expansion in the FDM channel and the difference in shipping days from the month of acquisition. Fourth quarter segment operating profit increased 82% on a pro forma basis and grew 88%, excluding purchase accounting charges, driven primarily by robust volume growth and benefits from SRM actions that we implemented earlier in the year.

Slide 24 summarizes our fiscal 2019 margin results.

As we anticipated, our fourth quarter margins were down compared to significant margin expansion a year ago. For the full year, adjusted gross margin decreased 10 basis points, and we delivered 30 basis points of adjusted operating profit margin expansion, driven primarily by record levels of COGS HMM savings, strong cost control and SG&A, and the addition of the higher margin Blue Buffalo business, partially offset by input cost inflation and higher product costs. Slide 25 summarized our joint venture results in fiscal 19. TPW delivered its third consecutive quarter of top-line growth and finished fiscal 19 with constant currency net sales growth of 1%. Full-year Haganash Japan net sales were down 7% in constant currency, driven primarily by seasonal innovation timing and declines on mini cups and crispy sandwich varieties. Combined after-tax earnings from joint ventures totaled $72 million in fiscal 19 compared to $85 million a year ago. The decline was driven primarily by our $11 million after-tax share of CPW restructuring charges, as well as the lower sales in Haagen-Dazs, Japan.

Slide 26 covers other noteworthy income statement items in the quarter.

Corporate unallocated expenses excluding certain items affecting comparability increased $62 million in the quarter, driven primarily by higher incentive expense and favorable one-time items in the same period last year. Net interest expense was $12 million below last year's fourth quarter that included a $34 million expense related to the bridge term loan financing for the Blue Buffalo acquisition. That expense was excluded from our adjusted earnings. Full-year net interest expense was modestly better than our expectations as strong cash flow allowed for accelerated debt reduction. The adjusted effective tax rate for the quarter was 20.6% compared to 26.7% a year ago, primarily driven by the net benefits related to U.S. tax reform. Our full-year adjusted effective tax rate came in just below the low end of our guidance range, primarily due to earnings mix.

And average diluted shares outstanding were up 3% in the quarter. Slide 27 captures our balance sheet and cash flow highlights for fiscal 19.

Our year-end core working capital balance totaled $385 million, down 34% versus last year, driven primarily by continued benefits from our terms extension program and a bit from lower inventory balances. Employer operating cash flow totaled $2.8 billion, and capital investments were $538 million, resulting in free cash flow of $2.3 billion, or 115% of our adjusted after-tax earnings. And our strong cash discipline enabled us to pay $1.2 billion in dividends while reducing more than $1.3 billion in debt this year. Shifting to fiscal 20, slide 28 captures our key financial assumptions for the year. Our fiscal 2020 results will include a 53rd week in the fourth quarter. Contributions from the 53rd week The impact of divestitures executed in fiscal 19 and currency translation are collectively expected to result in reported net sales growth finishing one to two percentage points above our organic sales growth guidance. Blue Buffalo will shift to a May year end in fiscal 20 and therefore will include an extra month of results, which will impact our fourth quarter. As we've done with previous calendar alignments, we will include this adjustment in our fiscal 20 organic net sales results. We're planning for growth investments in brand building and global capabilities like e-commerce and SRM to drive improvements in our organic growth profile in fiscal 20 and beyond. We expect holistic margin management savings and input cost inflation to each total roughly 4% of cost of goods sold. We're roughly 50% covered on our global commodity positions at this point in the year. Below the operating profit line, we estimate benefit plan income for the non-service components of our plans will total approximately $120 million, up roughly $30 million from fiscal 19 due to lower interest expense and higher recent asset returns. We expect net interest expense to total approximately $500 million, and we're planning for the adjusted effective tax rate in fiscal 20 to be in line with fiscal 19 rates. and we anticipate average diluted shares to increase approximately 1%. Based on these assumptions, slide 29 summarizes our fiscal 20 outlook for our key financial metrics. Organic net sales are expected to increase 1% to 2%, driven by improved growth in North America retail, 8% to 10% like-for-like growth for Blue Buffalo, and double-digit growth, including the extra reporting month. and growth consistent with F-19 for our convenience stores and food service, Europe and Australia, and Asia LATAM segments. We estimate constant currency adjusted operating profit will increase 2% to 4% from the base of $2.9 billion reported in fiscal 2019. Constant currency adjusted diluted EPS is expected to increase 3% to 5% from the base of $3.22 earned in fiscal 2019. We're targeting free cash flow conversion of at least 95% of adjusted after-tax earnings. And we do not expect currency and translation to have a material impact on fiscal 20 adjusted operating profit or adjusted diluted EPS. With that, let me turn it back over to Jeff for some closing remarks.

Thank you, Don. And as we look at next year, what I would like to say is that I'm pleased with the way we executed this year. I'm pleased that we transitioned Blue Buffalo effectively into the General Mills family and especially pleased that we delivered on our financial commitments. We have strong plans in place for fiscal 20 to drive improved organic sales while maintaining our strong margins. I remain confident in our strategies and look forward to taking another step forward in fiscal 20 on our path towards sustainable long-term growth. With that, I think we'll open up the line for questions. Operator, can you get us started?

Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Our first question comes from the line of Ken Goldman with J.P. Morgan. Please proceed with your question. Hi.

Good morning, everybody. Good morning. I wanted to ask a quick question about the 13th month for Buff this coming year. Without going into the nitty gritty, my math is that the extra month adds maybe 70 to 90 basis points to your expected organic top line growth rate. I just wanted to make sure that's correct, or at least reasonably correct. And is it also safe to assume that the extra month will entirely benefit for Q20?

Yeah, Ken, on your last question, yes, the extra months will all come in Q4. As far as the contributions to the organic growth, there's really three components. We said that CNF, Europe, Australia, and Asia, LATAM will grow at the same rate, grow, but at the same rate as this year. So the increase for next year is really we're seeing it step up from a combination of Blue's like-for-like growth, that 8% to 10% we talked about, the extra month, and the base business. And frankly, they're all about equally weighted. So you're probably a little high in what you're guessing for – what you're estimating for the month. And you should look for all three of those to have roughly equal weighting in that improvement from this year.

Okay, that's helpful. And then a quick follow-up. John, I know you – or I know John is going to discuss snacks at the investor day today. But it really seems to be worsening, at least in what we're seeing in Nielsen, right? For a while, it was really Fiber One, then Nature Valley started getting worse. And now even Larabar in measured channels is trending negatively. I know we don't see everything in Nielsen and IRI, but is there a structural issue you think that's causing really most of your major brands to sort of decline at once here?

Yeah, Ken, thanks for the question. I think the sure answer is probably not. In fact, Larabar grew 11% for the year. I think there were some comps as we got into Q4. And Larbar, a big portion of that business, is actually a non-measured channel. It's where we continue to do quite well. We are very focused and, frankly, not satisfied with our performance on both Nature Valley and Fiber One. And that's really what we need to turn around in the coming year. Nature Valley is really about getting back with meaningful innovation. We just launched a crispy, creamy wafer bar that we're excited about. And it's very early days, but the early returns are good. Frankly, we didn't execute very well. We missed some key windows from a merchandising standpoint back to school on Nature Valley. We feel like we've got good plans in place to get after it this year. Fiber One's been a structural issue over the last few years. Consumers, weight managers have really changed in terms of what they're looking for in terms of the macros of a product. We just reformulated that product. It's flying into market now. Again, early days, but encouraging signs there as well. What I would tell you, we like Larabar. We don't believe there's a structural issue there. We love Epic. That continues to grow nearly 50% this past year. It's really Nature Valley and Fiber One that we're focused on as we move into fiscal 20.

To build on John's point, I agree with John's perspective that it's not structural. It's some of our innovation and execution. In fact, to that end, we're confident we'll sequentially improve. in the first quarter and the first half of next year on snacks, and that will accelerate even further in the back half of the year.

Thanks very much.

Thank you. Our next question comes from the line of Rob Dickerson with Deutsche Bank. Please proceed with your question.

Great. Thank you very much. I said a question just around expectation on brand support in fiscal 20. I mean, it seems like what's implied, obviously, in the guidance is for essentially operating margin, call it, you know, to be flat year over year. But at the same time, you do have your noted, you know, margin mix benefit should be coming from, at least from Blue Buffalo. I'm just curious to hear, you know, as you think about total company, you know, vis-a-vis kind of the Blue Buffalo benefit, hopefully, it would imply that maybe there's still some margin contraction potential in other parts of the portfolio. And I'm not sure if that, you know, if that's given increased brand support levels or if there's maybe just flex in the overall P&L as we think about the next fiscal year. Thanks.

Well, there are two questions in there. One's about brand building support, and the other about margins. So let me take the first, and then I'll push it over to Don for the second. In terms of brand building support, what you will see is us increase our investment behind our brands, especially our priority brands and businesses as we look at next year. And so I made some remarks. When you think about cereal and what we like, we like what we see in cereal. Obviously, U.S. yogurt is improving, and we want to keep that trend up. We need to get snacks back on track. You'll see us invest behind some really good ideas on bars and snacks. And then our accelerator platform. So the things that are the biggest priority for us, you'll see us improve our brand building, not only because they're a priority, but because we get good returns and we get some really good marketing on a lot of those businesses. So from a brand building perspective. And then the same would be true of Blue Buffalo. And Blue Buffalo, we're really encouraged by the trends we see in food, drug, and masks. And we've got great marketing on Blue Buffalo. So you'll see us invest behind all of those businesses as well as capabilities to drive growth. We talk about SRM and we're pleased with what we've done, but there's more we can do. And with e-commerce, whether it's on Blue Buffalo or whether it's on our core business, we think that there's more we can do to invest in those capabilities.

Yeah, I don't have a lot to add. Jeff touched on, you know, where the investment is going to go to drive the top line. And as you alluded to and as Jeff commented in his opening remarks, our focus is maintaining our strong margins, and that's what the plan is geared to do. Okay, super. Thanks so much.

Thank you. Our next question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Good morning, everybody.

Good morning, Andrew. Good morning.

I guess with Blue Buffalo entering the base in fiscal 20 and including the calendar shift, it would seem that maybe that could drive about, call it one point of organic growth in fiscal 20. I guess that suggests the legacy can be anywhere from flat to up one to hit your targeted organic sales growth range next year. I think organic was flat in fiscal 19, and you've obviously got another year of significant reinvestment on tap. this coming year. So I guess my question is, what would potentially hold back, you know, the organic, if you will, on the legacy portfolio, potentially to just flat again? Is it not knowing maybe how quickly snacks and yogurt responds or, you know, any additional sort of competitive concerns out there that are worth mentioning? Or is it really just, you know, again, trying to be prudent and conservative in the way you're thinking about how organic growth sort of builds on the legacy? Thanks so much.

Yeah, so I mean, you know, two responses, Andrew. One is on, you know, how we guide, and the second is about kind of what our expectations are. On, you know, on how we guide, I mean, there's a natural tension there because on the one hand, you know, it occurs to us that, you know, doing what you say you're going to do is pretty important. And so, you know, we set our guidance accordingly. On the other hand, nobody really likes a sandbagger, either in business or in golf. And so we're not trying to be too conservative either. We want to set targets we think are going to be realistic that are going to drive values for shareholders, but that we're going to hit. So that's the way we think about it. In terms of our organic sales growth next year, clearly Blue Buffalo is going to make a big contribution, but we've got great plans for North America retail, and we think North America retail, that's where we can see improvement. Behind maintaining momentum on cereal, which we feel good about, improving our yogurt business and improving U.S. snacks. And so with those three things improving to the extent that we can, you know, we can hold with growth on convenience and food service, hold our business in AU where it is on growth, and continue mid-single-digit growth on Asian Latin America, that tells me that growing Blue Buffalo and improving our top-line sales in our two areas we can look for for growth.

Great. Okay. Thanks for that. And then just a quick one. I realize portfolio mix in North America retail can swing the pricing number around from quarter to quarter quite a bit. If we're thinking about fiscal 20, maybe we could talk a bit about just how you see the contribution from volume and price playing out in North America retail.

Let me take it to a company standpoint, and then I'll pass it to John from North America retail. From a company standpoint – First, Ann, I would take you back to fiscal 2019. At the very beginning of that year, we said we're going to see about 4% inflation, but we needed some pricing. And I think it's fair to say there was some skepticism as to whether we could do that or not, you know, broadly. And we're pleased that we were able to do that. And we said, look, a little pricing goes a long way. And it was about 2% versus 1% the year before. You know, I would say that, and we're not going to give how much pricing we're going to get next year, but what I will say is that we would expect to get a little bit of pricing next year, starting in the first quarter. and we see a little bit of inflation. So for the company as a whole, we see a return. We see some inflation in the coming year, as Don indicated, and we think that we will get some pricing as well. So with regard to North America, John, you might want to comment a little bit on this year and kind of what you expect. Yeah, sure.

So, Andrew, you're right in the fact that there are some fluctuations between quarters. For the back half of fiscal 19, we drove about a point of price mix, and that was the same for the year as well. So we feel really good about our ability to leverage our SRM toolkit and really drive some pricing in the market. And we have good confidence as we move into fiscal 20 that we'll continue that through Q1 and really through the fiscal 20 as well. Great.

Thanks, everyone.

Thank you. Our next question comes from the line of Brian Splank with Bank of America. Please proceed with your question.

Hey, good morning, everyone. I guess just two quick ones for me, maybe just following on Andrew's question, if we kind of take A little bit of pricing and what you're expecting in terms of HMM savings. Would it be safe to say that the expectation around gross margins are kind of flattish as we're looking at 2020? And then the second question I had was just simply, I don't know if you gave it before, but just what you're expecting for CapEx for 2020. Okay.

We didn't give guidance on the latter, but it's only about 3.5%, so pretty much in line as a percent of sales from this year. And as far as the construct of the P&L, you'll actually see some gross margin expansion. The key contributors you mentioned about the positive price mix that we expect to get that Jeff alluded to, we also obviously have the one-time benefit of rolling over the inventory step-up charge that was in F-19. So we will see gross margin expansion. The investments that Jeff talked about in our brands and our capabilities will be SG&A investments. So you'll see SG&A go up as 8% of sales, again, as I answered in an earlier question, leading to stable operating margins.

And just fair to say that for 20, there's less of a, I guess, a need for pricing to sort of drive the gross margin relative to the position that you were in a year ago.

A little less. I mean, our HMM and inflation projections for 2019 are a little more in balance than we came in for 2019, yes. Okay, great. Thank you.

Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Hey, good morning, folks. Thank you for slotting me in. I have a couple of questions on Buff. First, real quick housekeeping. Sorry, maybe I'm a little bit dense this morning, but I was having a hard time following the puts and takes on your growth expectations for Buff. Could you just give me a number of what you expect that business to grow at in 2020?

Well, yeah, on a like-for-like basis, 8% to 10%.

And what is in like-for-like? Does that exclude just the extra month? Correct. Got it. Okay. And on the online component, you guys showed the 21% growth this year, which is obviously quite strong. But it was a pretty big deceleration from the 30% growth in the first half. It kind of suggests that you're probably tracking sort of low double digits. And I guess my question is, what's driving that? Is that the whole channel has flown or has your market share declined? started to drift lower. And regardless of kind of what the driver is, if you could give us maybe your thoughts on the explanation of what's causing that.

Yeah, so in the fourth quarter, our sales in e-commerce were about 14%. And, you know, the category itself grew less than that. So it really was a – which is about, you know, 10% or 11%. So we gained share, and gained share commensurates with what we've seen throughout the year. So it's not a slowdown in our competitive positioning within the category. I feel great about that. The channel itself slowed. And I think there are probably a couple components of that. The first is that there were players in that channel who were trying to take more profit in the category, and then their sales slowed. I will also say, if you look at Nielsen, you can see that not only did the Blue Buffalo pick up in the last quarter of the year, But the FDM channel picked up significantly in the last quarter of the year. Behind, I would say, Blue Buffalo's launch. And so that is certainly another component. What I expect going forward, we'll talk about more on Investor Day, pet food is really something that's built for e-commerce. And whether that e-commerce takes place with pure players or whether it takes place with our traditional retail customers, I would expect at some point what we're going to see is that the e-commerce channel itself will start to re-accelerate. and that will accelerate with it. But to answer your question, it's not Blue Buffalo getting less competitive. We feel great about our position. It really is the category itself.

That's really helpful. Thank you. And last quick question, I'll pass it on, I promise. You delivered phenomenal margins on Buff in the fourth quarter. I know there was probably some leverage with a bit of the pipeline fail that maybe not won't sustain, but at the same time, You've got new capacity coming online next year. You've got to fall away of some of these startup costs. How should we think about the sustainable profitability of that business in context of what we saw in the fourth quarter?

Well, you're right, Jason. We had some particular benefits in the fourth quarter from building the inventory in the pipeline as we launched in FDM that was particularly beneficial from a profit standpoint. I think we ran 27% margins in the fourth quarter. We would expect margin expansion from full year F19 going into full year F20, and primarily driven by the fact that we aren't going to have the inventory step up in the numbers. So we expect Blue to be driving very solid margins and certainly be as margin accretive as we expected when we purchased the business a year ago.

Okay. Thanks a lot, guys.

Thank you. Thank you. Our next question comes from the line of Chris Groh with Stifel. Please proceed with your question.

Hi, good morning.

Good morning, Chris.

Good morning. A couple of follow-ups, if I could, please. Just to follow on Jason's question, we talked about e-comm there for pet. Where are you sourcing the market? Where's FDM, if you will, sourcing a lot of the market share gain for Blue Buffalo? And we saw, of course, that your pet specialty channels were down as well. Is that the main area where it's coming from? I guess you also would associate it with e-commerce as well, given that's slowed in the second half of the year.

Yeah, what we're saying, thanks for the question, Chris. What we're saying is that the growth in our FDM channel is highly incremental. And, you know, it looks to us about 70% incremental to everywhere else. And what I will also say is that our household penetration continues to rise. And that is the highest predictor of future success is your growth in household penetration. And so as we look at the FDM channel, our volume is really being sourced from other brands. within the FDM channel. And you can see that the FDM channel itself is growing in terms of dollars. And so as we've expanded into the FDM channel, one of the things we're most pleased with is that our business is not being sourced from the other members of the wholesome natural segment as much as it is brands in the middle. And so the whole segment is rising. The whole natural segment is rising. And that tells us there's a great demand for these kind of products. and Blue Buffalo is the market leader. And that's kind of what we expected with our launch into FDM, and we're really pleased that it's working out that way.

Okay. Yeah, thank you for that. And then just one other question, I think, a bit for John Newdy. Just so I have it straight, you have cost inflation broadly offset by HMM in the year, but you also do expect SRN to be a positive contributor. I think you said pricing to be up around 1%. So that's obviously one question or just one clarification, but related to that, I also want to better understand the shift in price mix from Q3 to Q4, just the implication for fiscal 20. There's a bit of a comp issue in there, I think, with the prior year, but it is a pretty big move from positive pricing and mix to negative pricing and mix in Q4. Just understand kind of the basis of why that changed so much.

Yeah, absolutely, Chris. So you're absolutely right. We had some fluctuations between quarters. Again, importantly to remember, for the year, we drove a point of price mix, and for the back half, we drove a point. There were certainly differences between Q3 and Q4, and the biggest driver of that was trade timing and really the comp to last year. Last April and May, we had very little merchandising on some of our major businesses. We got back to just normal levels of merchandising this year, and that drove some trade expense. So Again, we are very confident in our ability to take pricing and really leverage our SRM toolkit, and we expect that to continue as we move into fiscal 20 as well.

Those trade timing issues should be mostly settled out now. Is that right for fiscal 20?

Yeah, that's right. Again, we were just getting back to normalized levels. Our comps last year, again, we didn't have a lot of merchandising, particularly in the months of April and May.

Okay. Thanks so much.

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

Great. Thank you, and good morning. Morning, David. Morning, David. I wanted to ask a few Blue Buffalo questions. Could you talk about the pacing of sales in 2020? Obviously, in 19, there was a lot of distribution gains, but I'd just like to hear your thoughts on how this lays out in 2020. in even just rough form, so we have a good way to track. And I assume that there are additional points of distribution that you still expect to gain, like everything wasn't gained just in the fourth quarter. So if we could start there.

Yeah, David, thanks for the question, and I'll take this one. As far as the phasing, we'll probably see the strongest growth in blue in the middle part of the year, Q2 and Q3. Q1 will be hampered a little bit by the fact that we had an extra week in our fiscal 19, Q1. And obviously in Q4, we lapped the launch in Walmart and the expansion of Wilderness. The other factor in Q4 is that we're going to get the benefit of the extra month, which, as I mentioned in an earlier question, that all falls in Q4. So on the like-for-like basis, that 8% to 10% we talked about, strongest in Q3, Q2, and Q3. a little less in Q1 and Q4 for the reasons I mentioned, and then the full benefit of the calendar change in Q4. So I hope that helps. Your other point, we do expect to continue to see distribution gains, clearly not the rate we saw this year, given the fact that we made the big launch in Walmart, but you'll continue to see us. As a matter of fact, if you look at the latest, Nielsen, we're already up versus the 65 that we had at the end of April. So we're in the low 70s already. So we expect to continue to expand that as F20 unfolds.

Thank you. Then following on Blue, can you talk about the growth in wet and treats? One of the benefits that was expected was to see wet and treats grow significantly as you enter into the food and mask channels because of the frequency of shopping. Are you seeing the traction there that you wanted to see, and what are your expectations in F20?

Yeah, we are seeing the traction we wanted to see as we launch into the FDM channel. In fact, our proportion of wet and treats is higher in FDM than it is in pest specialty, and that's what we thought we would see as we enter the channel. Again, it gives us confidence that we understand the business and how it's going to evolve. What I would tell you is that we also think there's a big opportunity to innovate in the wet and treats area, and You won't see that as much, especially in the first half of F20. It'll really be on continued distribution and the growth in wet and treats and the distribution. But we think there's a second act of that, and that second act really is around innovation in both of those important segments. I would also say, it wasn't asked, but as we look at the expansion in food, drug, and masks, We expanded distribution numerically, but we also launched wilderness, and we're really pleased with both of those expansions. They are right on track, and they're growing well, and so we see continued growth from those.

Last question for me on Blue. We have this African swine fever that's expected to impact protein prices. Protein, I think, is the largest piece of the cost of goods for your Blue Buffalo business. Can you talk about how that would be expected to impact? Are you able to hedge? Do you think you have to take pricing? Just trying to gauge where the level of concern is on this or if there is almost any concern.

David, we're not concerned about that when it comes to Blue Buffalo. While there is some pressure on protein, it's less on chicken, which is the major protein in Blue's portfolio. Now, African swine fever is impacting our port crisis, and we're seeing that in our Asian business and our China business, but less so in our blue business.

Okay, guys.

Thank you. I'll pass it along. Thank you. Our next question comes from the line of Alexia Howard with Bernstein. Please proceed with your question.

Good morning, everyone.

Good morning, Alexia.

So can I stick with the pricing and inventory question on North American retail? I'm really just curious about why in measured channels, on average across your U.S. portfolio, the pricing was fairly flat. Obviously, you said that because of comparables, your net price mix was down 2%. But I'm just kind of curious about why that pricing being down for you wasn't passed on to the consumer, right? And then just on the inventory front, it looks as though the flat sales in cereals and yogurt was below the kind of trends of 3.5% sales growth, 1.5% sales growth that we saw in measured channels. Was that to do with pricing dynamics, non-measured channels, or maybe retailer inventory reductions? Thank you, and I'll pass it on.

Sure, Alexi. So as we look at the quarter, Q4 came in for North America retail very much as we expected. It was actually our strongest quarter of the year from a Nielsen standpoint. So we feel good about the momentum that we're driving in the market. We had about a point and a half gap between Nielsen movement and what we reported in net sales. About a point of that was an inventory drag that we've seen all year as retailers are working on reducing their working capital and pulling inventories down. There was about a half point related to merchandising timing. And again, this expense that was in Q4 as we got back to normalized levels of merchandising. So that was really the one thing in Q4 that really affected both price mix as well as our reported net sales. Again, as we look at our momentum in the market, we look at our share position, we feel really good about the momentum that we have as we move into the coming year and feel good about our plans as well.

Jeff Steeman, I would just add that if you look at the full year, North America retail, Nielsen's versus shipments was directly in line with what we said at the beginning of the year, which is we'd lag by about a point, and that's what we saw for the full year.

Do you expect those retailer inventory reductions to continue if they've been fairly consistent through the course of fiscal 19?

We do. I mean, again, we definitely see our retail partners focused on working capital, and we think they'll continue to put initiatives in place to reduce inventories over time. Will it be to the same extent as this year? I don't know, but we expect it to continue.

Great. Thank you very much. I'll pass it on.

Thank you. Our next question comes from the line of Ken Saslow with Bank of Montreal. Please proceed with your question.

Hey, good morning, everyone.

Good morning, Ken.

I just have a big overall question. You know, your long-term growth algorithm is mid-single-digit operating profit. You had a year that you kind of consolidated and figured out a lot of the issues. You moved past so many things. And then in 2020, you're still looking for 2% to 4%. operating profit growth. What do you, can you kind of compare and contrast why there's a difference between your long-term and when you'll return to that and why not in 2020?

Yeah, I think, you know, the way I look, Ken, this is Jeff, the way I look at it is that we keep making improvements toward our long-term algorithm. And I think we took a step this year when we acquired Blue Buffalo and we'll take another step forward in fiscal 20. And And I think the most important part of getting to the mid-cycle-digit operating profit really is to drive organic sales. And between Blue Buffalo and what we expect with NAR next year, we think we'll take another step forward with driving our organic sales to 1% to 2%, which is higher than we've done in the past few years. And we're disciplined as we look at costs in doing it. And then we'll look to take another step the following year. For me, the steady progression is the key, and it really starts actually with organic sales.

So I know this is way out there, and we just gave 2020, but you would expect, though, outside any exogenous factors, that 2021 would be at least back into that range. I know that's a little far out, but I'm just trying to figure out, like, when the long-term growth rate, you know, we could start to assume that that is a viable place to start. Is that a fair way of looking at it? I'm not trying to box you in. I'm just trying to think about it.

Ken, this is Don. We just gave two fiscal 20 guidance, so we're going to hold off on talking anything beyond fiscal 20 at this point. Okay. Great.

I appreciate it. Thank you. Thank you.

Thank you. Our next question comes from the line of Robert Moscow with Credit Suisse. Please proceed with your question.

Hi, thanks. Most of my questions have been asked, but I guess I'll ask a follow-up to Ken Zaslow's question. I mean, you have now operating margins in the low 20% range for blue, North American retail, and convenience stores and food service. It just feels like these margins don't have much room to go higher, and you have reinvestment needs that seem to be kind of ongoing. retailers have invested a lot in data analytics, and it seems like there's a data war that you will need to keep putting money into. Maybe give me an update in the data war, maybe. Are you getting closer to investing in SRM at the appropriate level? And then just bigger picture, is it possible that if sales growth stays in a low single-digit range, Maybe it just is going to be a lot harder from an algorithm standpoint to see mid-single-digit operating profit growth. Thanks.

All right. Well, Rob, I'll start with the larger picture and make a couple comments on data, and I'll let maybe Jeff go in a little more about how we're thinking about that. But in terms of the margins, just building up Jeff's answer to Ken's question is it really is, going to be triggered off continuing to accelerate our organic growth. Your comments on NAR, CNF, and Blue Buffalo's strong margins is well taken. It's not that those businesses don't have opportunity, but they're already very healthy. And frankly, driving growth in those businesses, top-line growth, is a very attractive proposition, even at the current strong margins. As we look longer, though, we do know we have opportunity internationally. And as we think about margin expansion, you know, beyond fiscal 20, we think the international is where the percentage margin benefit can come from. As far as the data analytics or our investments, we will continue to invest in our brands and in our capabilities. We're targeting now continuing to build out what we're doing with e-commerce and SRM by getting deeper into the data analytics. It's something that has served us well. Um, and we will continue to invest next week. It's a key driver to our ability to drive that and accelerate that top line growth.

Yeah, I was, you know, I build on what Don said. I mean, it's, it's interesting. You care, I can characterize the data as a, as a war and, you know, I'm not really sure I view it that, that same way. I mean, I, I think that our ability to use data to, uh, to drive our consumer first strategy is actually a, uh, potential for high competitive advantage because it requires scale. And, you know, we have proprietary data through our three big websites. We think we'll have proprietary data through Box Tops for Education. We'll talk a little bit about that in the coming weeks. And data analytics is something where scale matters, and not only for a retailer but for us. And we think that the fact that some of our retailers are getting more sophisticated with data actually helps us because we think that we would be able to utilize that better than some of the other players, especially some of the smaller players in the market. I understand that it makes people nervous when we start talking about data and when our retailers start talking about that, but I don't view it as a war. Actually, I think it's a net opportunity for us.

Okay. Well, maybe you're winning the war, Jeff. Thanks a lot. Got it.

Okay. I think we have hit the bottom of the hour, so I know we didn't get quite to everyone, but we appreciate the time that you all spent this morning. We are around all day for follow-up questions for those of you that we didn't get to. Thanks again for the interest in General Mills and hope everyone has a wonderful day. Thanks, Tanya.

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