General Mills, Inc.

And welcome to the General Mills Second Quarter Fiscal 2020 Earnings Conference Call. During today's presentation, all participant lines will remain in a listen-only mode. Afterwards, we will conduct a question and answer session with instructions to follow. If at any time during today's presentation you need to reach an operator, please press the star followed by the zero on your telephone. Please note today's conference is being recorded Wednesday, December 18th, 2019. It is with pleasure that I now turn the call over to Mr. Jeff Seaman. Please go ahead, sir.

Hey, thanks, Bridget. And good morning to everyone. I'm here this morning with Jeff Harmoning, our chairman and CEO, and Don Mulligan, our CFO. Also joining us this morning for Q&A are Kofi Bruce, our Vice President of Financial Operations, who will take over for Don as CFO on February 1st, as well as John Newdy, who leads our North America retail segment. I'll turn it over to the team in a moment, but before I do, let me cover the usual housekeeping items. Our press release on our second quarter results was issued over the wire services earlier this morning, and you can find that release as well as a copy of the slides that supplement our remarks this morning on the Investor Relations website. Please note that our remarks will include forward-looking statements that are based on management's current views and assumptions, and the second slide in today's presentation lists factors that could cause our future results to be different than our current estimates. And with that, I'll turn you over to my colleagues, beginning with Jeff.

Thanks, Jeff, and good morning, everyone. I'll kick off this morning's remarks with our key messages on slide four. I'm encouraged by our second quarter performance, both on the top line and bottom line. This includes broad-based improvements in our organic sales trends, with strong performance in pet, good results in North America retail, and a significant sequential step-up in our remaining three segments. We generated strong first-half earnings results while increasing media investment behind our brands. And our cash discipline drove double-digit growth in free cash flow, which allowed us to reduce our debt by more than $600 million through six months. In the second half, we'll step up our investments in brand building and capabilities and future growth initiatives, and we expect to see further improvement in our organic sales growth. And importantly, we'll remain on track to achieve our fiscal 2020 goals for sales, profit, earnings per share, and we are raising our guidance for free cash flow conversion. Slide 5 summarizes our Q2 financial results. Net sales were flat to last year at $4.4 billion. Organic net sales grew 1%, led by strong growth in PET. All five segments contributed to profit growth, with adjusted operating profit up 7% in constant currency, driven by HMM cost savings, lower consumer promotion expense, and favorable manufacturing leverage, partially offset by input cost inflation and higher media investments. The manufacturing leverage favorability was driven by higher inventory balances at the end of the quarter, which is a timing benefit that will unwind in the back half of the year. Second quarter adjusted diluted earnings per share totaled 95 cents, up 11% in constant currency, driven by higher adjusted operating profit, lower net interest expense, and a lower adjusted effective tax rate. On slide six, you can see our three priorities for fiscal 20. As I reflect on our first half results, I'm proud to say we've made good progress on all three. First, we're on track to deliver accelerated organic sales growth in fiscal 20. We improved top-line growth in North America retail in the first half compared to fiscal 19, and we generated double-digit growth in the pet segment. I'll share details on these results in a moment. Our second priority is to maintain our strong margins. In fact, we're a bit ahead of our plan on the bottom line through the first half, which gives us flexibility to step up investment in the second half and strengthen top line growth. Our final priority is to maintain a disciplined focus on cash to achieve our fiscal 20 leverage target, and we're well on our way to achieving our goal of 3.5 times net debt to adjusted EBITDA by end of year. With these priorities in mind, I'll now cover our Q2 results by segment before turning it over to Don to review our performance on margins, and cash, and outlined back half expectations. Slide 7 summarizes components of net sales growth in the quarter. Organic sales were up 1% versus last year, primarily driven by organic volume. FX was a one-point drag in the quarter, resulting in flat reported sales. Turning to segment results, beginning on slide 8, second quarter organic sales for North America retail were in line with year-ago levels. Net sales grew 5% in US cereal and were up 2% in Canada on a constant currency basis. Net sales declined 1% in US meals and baking, 2% in US snacks, and 4% in US yogurt. Looking at our first half in-market results, we grew share in five of our top 10 categories, which comprised roughly 85% of our US retail sales. Constant currency segment operating profit increased 4% in the second quarter, driven by HMM cost savings and favorable manufacturing leverage partially offset by input cost inflation and higher media investment. With this as a backdrop, let's dive a bit deeper into our first half performance in North America retail, starting with cereal. I'm very pleased by our performance in U.S. cereal, driven by strong execution against the fundamentals. We grew our U.S. cereal retail sales modestly in fiscal 18 and in fiscal 19, and our results accelerated to 2% growth in the first half of fiscal 20. We've expanded our shared leadership position through investment behind compelling consumer ideas, such as our Cheerios heart health campaign, which drove 4% retail sales growth on the Cheerios franchise in the first half of the year. We benefited from consumer support behind Cinnamon Toast Crunch and our partnership with Travis Scott on Reese's Peanut Butter Puffs. And innovation continues to add to our growth with strong first-half performance on Blueberry Cheerios and Cinnamon Toast Crunch Cheerios. I'm also excited about the plans we have for the rest of the year to build on our leadership position in cereal. We'll continue to invest in our brands, including strong support behind the Cheerios Heart Health News. With more than 100 million Americans having some form of heart disease, Cheerios is on a mission to inspire happy hearts. For a limited time, we are changing some of the iconic O's into hearts, supported by new advertising, an updated box design, and a social media campaign. In addition to increased brand investment, We're launching a strong lineup of innovation in the second half, including an oats and honey variety of Cheerios Oats Crunch, Hershey's Kiss Cereal, and Trix Trolls. Turning to U.S. yogurt on slide 10, we improved our U.S. yogurt retail sales in fiscal 19 behind our strategy to expand into faster-growing segments of the category and to support our core with brand-building investment and on-trend equity news. Our goal in fiscal 20 is to further improve U.S. yogurt with a strong lineup of innovation, brand building, and product news. In the first half, our retail sales took a slight step back as we lapped a period of significant investment on We Buy, You Apply and had a more meaningful headwind from distribution. At the same time, we were encouraged by growth on our core products, with retail sales for original-style yogurt up 1% and Go-Gurt up 10% through the first half of the year. We fully expect to strengthen our U.S. yogurt performance in the second half of the year behind several specific initiatives. Our second half innovation lineup features a new coconut-based dairy-free offering on weed by Yoplait with the rich and creamy texture of weed delivered in our signature glass pot. We'll launch a new limited edition line of original style Yoplait in four signature Starburst flavors. And we'll launch Just Three by Yoplait, a new line of traditional yogurts with just three simple ingredients. We'll also increase our consumer support in the second half on our core products and on We by Yoplait. And finally, we'll face reduced distribution headwinds as we move into calendar 2020. In total, we expect these efforts will result in improved retail sales growth for our U.S. yogurt business in the second half of the year. Now let's turn to U.S. snacks on slide 11. Coming up at Disappointing Fiscal 19, our goal in Fiscal 20 is to improve our performance behind innovation, renovation, brand building support, and in-store execution. We're pleased by our U.S. Snacks improvement in the first half. Retail sales for Nature Valley improved behind a stronger back-to-school merchandising season and a successful launch of Nature Valley Crispy Creamy Wafer Bar. Retail sales for Fiber One have also improved since we reformulated the product line to be more relevant for modern weight managers. While we're still lapping distribution losses from earlier this calendar year, our turns per point of distribution, an important leading indicator of growth, have stepped up meaningfully across both of these important brands. On fruit snacks, we drove 3% retail sales growth in the first six months of the year, and we returned to share growth in the second quarter behind strong performance on Disney Equity fruit snacks. Our back half plans on U.S. snacks include continued contributions from Nature Valley Innovation and the Fiber One renovation, greatly improved distribution on bars, and increased brand building behind both bars and fruit snacks, all of which should drive another step up in our U.S. snacks retail sales trend in the second half. We're focused on competing effectively everywhere we play, including our $4 billion U.S. meals and baking operating unit. We returned soup to both retail sales and share growth in the first half. Retail sales for Progresso were up 3%, primarily driven by product renovation on Rich and Hardy. First half retail sales for Old El Paso grew 6%, and we grew share behind increased distribution, consumer news, and price realization across channels. We had a great year on Pillsbury Refrigerated Dough in fiscal 19, driving more than one point of share growth. We've continued to grow share in the first half of fiscal 20 thanks to distribution gains, contributions from new products like sweet biscuits, and good results on cookies. Retail sales in the first half declined 3% due to the later Thanksgiving holiday. However, fiscal year-to-date retail sales for Pillsbury through the first week of December, which is just for the holiday timing, were actually up below single digits. In total, we're off to a good start, and we feel good about our plans for the key soup and baking seasons. And we believe we are set up to have a successful year on U.S. meals and baking. Overall, I'm encouraged by our first half results in North America retail. In the second half, we'll drive improvement in U.S. snacks and U.S. yogurt, while lapping more challenging retail sales comparisons in U.S. cereal. And we remain on track to achieve our goal of improved full-year organic growth for the segment. Shifting gears to our pet segment on slide 13, I'm pleased to say that we had a great second quarter. with net sales up 16%. Our Q2 growth was driven by strong growth in the food, drug, and mass and e-commerce channels, positive price mix, and a benefit from the timing of shipments in advance of holiday merchandising. This net sales performance was led by strong double-digit growth on Blue's two largest product lines, Life Protection Formula and Wilderness. Looking at in-market performance, we drove first-half all-channel retail sales up low double digits, and we grew share. in the pet food category. On the bottom line, second quarter segment operating profit grew 14% versus a year ago, driven by higher net sales partially offset by higher media expense. On slide 14, you can see how the key components of the pet segment's first half double-digit retail sales growth break down by channel. Retail sales were up more than 100% in the food, drug, and mass channel, as we benefited from our expansion to new customers and the launch of wilderness into the channel in last year's fourth quarter. Importantly, retail sales for food, drug, and mass customers who have carried blue more than 12 months were up 45% in the second quarter. As we expected, retail sales in pet specialty continued to decline by double digits. This is an important channel, though, for Blue, and we continue to support the channel through unique programs and innovation. And Blue continues to win in the rapidly evolving e-commerce channel, with retail sales up high teams through the first six months of the year. Looking to the second half of the year, we have an exciting lineup of consumer initiatives, such as our Blue Years of Resolution promotion. We'll invest in media support behind our broad portfolio of products, and we'll continue to drive distribution ensuring we have the best of Blue everywhere pet food is sold. For the full year, we remain well on track to deliver 8 to 10% like-for-like growth in the pet segment, excluding the benefit of the calendar differences in fiscal 20. We remain confident in the long-term opportunities for Blue Buffalo, and we're excited about the growth prospects ahead. Shifting gears to the convenience and food service segment on slide 15, organic sales were flat in the quarter, a four-point improvement over our Q1 result with volume growth offset by unfavorable price mix. The Focus 6 platforms led the segment with 2% growth behind cereal, frozen baked goods, and yogurt, with strong contributions from our two-ounce equivalent grain cereal offering and bulk Yoplait yogurt. Second quarter segment operating profit grew 5% versus a year ago, driven by COGS HMM savings partially offset by input cost inflation and unfavorable price mix. In the second half of the year, we'll continue to see strong performance on the Focus 6 platforms led by our K-12 schools. In Europe and Australia, second quarter organic sales were down 1%, a four-point improvement over Q1 results, with declines on yogurt partially offset by growth on old El Paso Mexican foods and snack bars, two of our Accelerate platforms that also drove mid-single-digit retail sales in the quarter. Second quarter segment operating profit increased 45% in constant currency, driven primarily by a timing difference in brand building investment that was neutral through the first half of the year. Looking to the second half for Europe and Australia, we'll improve top-line growth versus the first half due to increased merchandising and brand building support behind Old El Paso Mexican food and our portfolio of snack bars, including Nature Valley, Firewad, and Larabar. And in Q4, we'll begin to lap the impact of reduced Haagen-Dazs distribution in France. In Asia and Latin America, second quarter organic sales increased 1%, which was also a 4% improvement over the first quarter. In Latin America, growth was driven by route-to-market changes in Brazil, resulting in improved performance on our Yogi brand. In China, net sales were up due to expanded distribution and pricing actions on Wanchai Ferry. In India, sales declined as we continue to change our distribution network to focus on more strategic and profitable outlets. Second quarter segment operating profit in Asia and Latin America was up 42% in constant currency, driven by lower SG&A expense, partially offset by lower volume. We expect a step up in second half growth in Asia and Latin America, driven by benefits from our strategic revenue management actions and continued distribution expansion on Wan Chai Ferry. With that, I'll turn it over to Don to cover joint ventures, margins, and cash, as well as our back half expectations. Don?