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 18, 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 1, as well as John Nudie, who leads our North America retail segment. I'll turn it over to the team in a moment. 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 it 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 and 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 five 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 of 7% in cost and currency, driven by HMM cost savings, lower consumer promotion expense, and favorable manufacturing leverage, partially offset by input cost inflation and higher media investment. 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 $0.95, up 11% in cost and 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 to 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 outline back half expectations. Slide seven 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 eight, second quarter organic sales from 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 US cereal, driven by strong execution against the fundamentals. We grew our US 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 share 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 Reedy Peanut Butter Puffs. And innovation continued 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 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 allowed the period of significant investment on We Buy You Play 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 gogurt 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 We Buy You Play with the rich and creamy texture of wheat delivered in our signature glass pot. We'll launch a new, limited edition line of original style yogurt play in four signature Starburst flavors and we'll launch Just Three Buy You Play, a new line of traditional yogurt with just three simple ingredients. We'll also increase our consumer support in the second half on our core products and on We Buy You Play. 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 off a 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 -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 backup 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 and 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 -to-date retail sales for Pillsbury through the first week of December, which adjusts 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 season. And we believe we are set up to have a successful year on US 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 US snacks and US yogurt, while lapping more challenging retail sales comparisons in US 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 willingness. Looking at end 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 and pet specialty continue 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 at Resolution promotion. We'll invest in media support behind our broad portfolio 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% life for life 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 platform has led the segment with 2% growth behind cereal, frozen baked goods and yogurt with strong contributions from our 2 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 in the second quarter segment, with the second quarter segment operating profit increased by 45% in constant currency, driven primarily by a timing difference in brand building investment that was a significant advantage and 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 Wanshai Ferry. In India, sales declined as we continued to change our distribution network to focus on more strategic and profitable outlets. Second quarter segment operating profit in Asia and Latin America rose 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 Wanshai Ferry. With that, I'll turn it over to Don to cover joint ventures, margins and cash as well as our back half expectations.

Thanks Jeff and good morning everyone. Let me begin on slide 19 by summarizing our joint venture results in the quarter. Serial Partners Worldwide posted top line growth for the fifth consecutive quarter with constant currency net sales up 1%. That growth was broad based including positive results in the UK, Australia, Turkey and the Middle Eastern markets. Agenas Japan net sales declined 6% in constant currency driven by slower category performance in the quarter. Second quarter combined after tax earnings from joint ventures totaled $25 million up 11% from last year, driven by positive price mix and benefits from cost savings at CPW, partially offset by lower net sales at HDJ. Turning to total company margin results on slide 20, second quarter adjusted gross margin and adjusted operating profit margin were up 80 basis points and 110 basis points respectively. Driven by COGS, HMM savings and favorable manufacturing leverage, partially offset by input cost inflation and increased media expense. As Jeff mentioned, the favorable manufacturing leverage was a timing benefit resulting from higher inventory balances at quarter end. We built inventory in the second quarter to protect service while we worked through labor contract negotiations. With those negotiations now successfully concluded, we expect inventory levels to normalize which will result in unfavorable deleverage in the back half of the year. For the full year, we expect input cost inflation and COGS HMM savings will each be approximately 4% of cost of goods. Slide 21 summarizes other noteworthy Q2 income statement items. Unallocated corporate expenses excluding certain items affecting comparability increased by $6 million in the quarter. Net interest expense decreased $13 million driven by lower average debt balances. The second quarter adjusted effective tax rate was in line with our full year expectations at .9% but was favorable to our .8% rate a year ago, primarily driven by the timing of discrete tax benefits and more favorable earnings mix. An average diluted shares outstanding were up 1% in the quarter. Now let's cover our first half results on slide 22. Net sales totaled $8.4 billion, down 1%. Organic net sales were flat in the first half with positive price mix offset by lower volume. Adjusted operating profit was up 7% in constant currency driven primarily by positive price mix, a one-time purchase accounting adjustment in the Pets segment in last year's first quarter and the timing benefits referenced earlier, partially offset by higher input costs. Adjusted diluted EPS of $1.74 increased 12% in constant currency driven by higher operating profit, lower interest expense and a lower adjusted effective tax rate. Slide 23 provides our balance sheet and cash flow highlights for the first half of F20. First half cash from operations was $1.4 billion, up 4% from the prior year, driven primarily by higher net earnings. Our core working capital balance totaled $429 million, down 19% from a year ago, driven by continued improvements in accounts payable. Capital investments in the first half totaled $158 million. This resulted in free cash flow of $1.3 billion, up 14% from last year. We paid $596 million in dividends and reduced debt by $655 million in the first half of F20. Slide 24 outlines our expectations for the second half. We expect to maintain our in-market competitiveness in North America retail and will continue to drive strong retail sales growth for the pet segment. We expect total company organic net sales growth to accelerate in the back half due to improved results in the convenience stores in food service, Europe and Australia, and Asia and Latam segments, as well as the extra month of results in pet as we align that business to our fiscal calendar. We expect second half profit to be impacted by mid-teens percent increase in brand building investment, increased investments in capabilities and future growth initiatives and the unwinding of the favorable manufacturing leverage and pet shipment timing benefits we saw in Q2. From a phasing standpoint, we expect -over-year profit results to be more favorable in Q4 than Q3, given that Q4 includes the extra month of sales for pet in the 53rd week for the remaining segments. As Jeff mentioned up front, we are reaffirming our key fiscal 2020 guidance metrics for sales, profit, EPS and leverage and increasing our guidance for free cash flow conversion. You can see our current expectations for these measures on slide 25. Namely, we expect organic net sales to increase 1 to 2 percent. We continue to expect the combination of currency translation, the impact of divestitures executed in fiscal 19 and contributions from the 53rd week in fiscal 20 to increase reported net sales by approximately 1 percent. Cost of currency adjusted operating profit is expected to increase 2 to 4 percent. The benefit of the extra fiscal week is being reinvested in capabilities and brand building initiatives to drive improvement in the company's organic sales growth rate in 2020 and beyond. Cost of currency adjusted diluted EPS is expected to increase 3 to 5 percent from the base of $3.22 earned in fiscal 19. We continue to estimate that foreign currency will be immaterial to adjusted operating profit and adjusted diluted EPS. Given our strong first half results, we now expect to convert at least 105 percent of adjusted after-tax earnings into free cash flow, which is up from our previous guidance of at least 95 percent conversion. And we'll maintain our fiscal, and we'll continue to focus on cash to achieve our targeted year-end leverage ratio of 3.5 times net debt to adjusted EBITDA. I'll turn it back to Jeff for some closing remarks.

Thanks, Don. And before we close, I'd just like to take a minute and acknowledge a key leadership transition with Don Mulligan's upcoming retirement. After a distinguished 21-year career at General Mills, including the last 12 years as CFO, Don will be retiring at the end of this fiscal year. He'll be stepping into an advisor role effective February 1st and will retire on June 1st of 2020. As most of you listening already know, Don has served the company and his function with distinction. He is a true expert in his field and has provided steady leadership throughout his tenure. As you can see by our results so far this year, he is certainly running through the tape. Today, on his 50th earnings call, I'd like to personally thank Don for his contributions to the company and for the counsel he has provided to me in his role. We'll certainly miss him and wish him all the best as he begins a new chapter. I'm also pleased to introduce Kofi Bruce, who will be taking over as CFO effective February 1st. Kofi has been with General Mills for 10 years in a variety of roles, including Treasurer, Segment Finance Leader for convenience and food service, and most recently as Vice President of Financial Operations. Kofi brings a wealth of external perspective from prior experiences at Ecolab and the Ford Motor Company. Kofi is well suited for this role given his productive experience, his track record of delivering exceptional results, and his passion for developing talent in our organization. In closing, I'd like to summarize today's key messages. I'm encouraged by our performance. We grow broad-based improvement in organic sales trends in the quarter, generated strong first half earnings and free cash flow results, and we reduced our debt. In the second half, we'll increase our investments and growth and we'll further improve our top-line trends. Importantly, we remain on track to meet or exceed all of our key goals for Fiscal 2020. With that, let me open up the line for questions. Operator, can you get us started?

Thank you very much. We do welcome all questions or comments. To register, 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 1, 3. Again, to register questions or comments, please press 1, 4 on your telephone. One moment, please, for the first question. And our first question comes from the line of Ken Goldman of JPMorgan. Please proceed with your question.

Hi, good morning, everyone, and Don, thank you for all your help over the years. Thank you, Ken. I wanted to ask a couple questions. First, are you thinking this is more of a technical question, but on slide 24, you had mentioned that Blue Buffalo is the only business not to have an extra week, but I thought previously we were modeling this and maybe I just didn't understand it correctly. We were previously modeling five extra weeks in the fourth quarter and then subtract a week that went away in the first quarter. That gets us four net for the year. So I thought we were previously guided to having an extra week in Buffalo, Blue Buffalo for that fourth quarter, but maybe I missed it. I thought it was five total. Ken, this

is Jeff Seaman. You're right. It's five incremental weeks in Q4. As we define organic versus not organic, all that change in Blue Buffalo falls under organic sales definition. The 53rd week in the remaining segments is above and beyond in the inorganic calculations.

Okay, so nothing has changed there just to make sure.

Correct.

Thank you. And then my next question is you have a little bit of controversy on your hands at least in the investor community right now obviously on the grain-free side. We met with you guys a month ago. You didn't sound very concerned about it. Has your concern level changed at all in the last few weeks about grain-free and some of the FDA reports out there or are you still not really necessarily seeing consumers react as feared?

Yeah, thanks for the question, Ken. Contrary to what's been written, we actually really haven't seen an impact on our businesses as witnessed by the strong Q2 results on Blue Buffalo including Wilderness which happens to be grain-free. That along with life protection formula really led our growth in the quarter. I do think it's important to take a step back and remember why did we get into this in the first place and what we bought was a great brand and a great category and a brand that travels across different diapositives and diatotypes, both grain-containing and grain-free and travels across channels and you can see that with our results in e-commerce and FDM and so while there's been a lot of talk of grain-free, we haven't seen it in our business and our trends even in pest specialty really haven't changed on grain-free and I also think it's important that in this discussion we don't lose sight of the fact that the FDA has really they have not identified a causal link or drawn any conclusions. They have brought it to people's attention clearly but they have not drawn a causal link and I would also like to say that along with our human food we work closely with the FDA and the rest of the pet industry is as well. Now there has been slowdown in the grain-free and category but there are a lot of moving pieces I mean part of that is probably a shift to Blue Buffalo and part of that is channel shifting and all the rest but there has been a slowdown in the grain-free segment although Blue Buffalo has really been a big part of that because we really haven't seen that. Thanks so much.

And our next question comes from the line of John Baumgartner of Wells Fargo. Please proceed.

Thanks for the question. You know Jeff I also want to stick with the topic of DCM and maybe just looking at it differently. Can you frame the situation as you see it may be in terms of options for the portfolio or anything else. How do you think about the optionality there?

Well I mean I think that I start that question I look out and start answering that question with something I mentioned briefly that Blue Buffalo plays really well across all diat pipes and I think that's really important to note. The second thing I guess I would like to say that we have some product lines that even though they're technically grain-free they also have a they also benefit as high protein so I look at wilderness and while it's grain-free it's also true that it's high in protein and many consumers buy because of that. We certainly don't have any plans to reformulate products but if we ever needed to we can certainly shift. We currently can make some shifts and make some changes. As I said we don't have plans to do that now because we haven't seen an impact and we don't feel the need but should that need arise we certainly can.

Great and then Don very strong quarter for margins you mentioned the benefits there from the manufacturing leverage but how is the pacing coming through from the global sourcing and some of the logistics work you're doing both in North America and Europe where does initiative stand kind of going forward in terms of incremental benefits for the back half and then maybe into fiscal 21?

We continue to see a strong return on the investments we made in global sourcing for example our HMM is tracking on plan it will fully offset our 4% inflation this year and we're seeing fairly consistently quarter to quarter we expect both in the front and the back half for inflation and HMM to kind of run in lockstep and that's with an elevated HMM results partially driven by the global sourcing that you referenced. Great, thanks for your time.

And our next question comes from the line of Andrew Lazar of Barclays please proceed.

Morning everybody happy holidays.

Morning, happy holidays.

I guess first off more of a quick one I guess Don are you able to help maybe quantify or maybe put some parameters around the benefit from some of the timing that you talked about in pet shipments and manufacturing leverage in any retail that is set to unwind in the second half?

Sure, I guess I'll step back first and just talk about margins more broadly you know we are pleased with the way the middle of the P&L is developing this year you're seeing a consistent improvement in our expansion of our gross margin and even when you strip out lapping the inventory step up on pet from last year and the timing benefit this year you're seeing a 30 to 40 basis point improvement in margins and gross margins in both the first and second quarter and you're also seeing that we're investing that back in higher media which has been running mid single digits and actually increased in the second quarter versus the first quarter and our admin is well controlled so we're getting leverage there which is leading to the improved through the first half the improved operating margin as well so we like the structure as we look to the second half there's three things that we referenced we are going to see a step up in our brand investment that's going to be in the mid teens and to put in perspective we run an annual media budget last year was around $600 million we'll also see increase in investments we talked at the beginning of the year we'll see more and more and we'll continue to invest in those and increase that investment in the second half we'll also start spending some money on pet innovation which again will benefit beyond our F20 and the last piece is the shipments the reason I recap them the timing, excuse me the reason I recap them is because that is the order of impact as well so I want to make sure the first two pieces which was created as we increased inventory in the second quarter and it will unwind largely in the third quarter and then a small benefit from shipment timing in pet together those will be about a $25 million benefit or benefit in Q2 reverse in the second half again largely in the third quarter but again there's three components all are material and the timing is actually the smaller of the three

that's helpful and then your comment on pets which is thinking about the runway for growth there this fiscal year obviously you're seeing the benefit from the white space distribution fill and the FDM channel and not only from life protection formula but wilderness sub-brand as well is the opportunities we had into fiscal 21 become less about channel fill and more about product form thinking about wet and treats and if so what does the analysis suggest to you around the magnitude of that opportunity as we go forward?

So as we look ahead Andrew I think one of the things I would say first of all that we're most encouraged by is if you look at the growth we have in pet distribution we've had for more than a year it's at 45% and so the idea that once distribution stops growth stops is not something we subscribe to and that actually follows what happens in human food a lot of times when we launch new products into a channel people are still finding those products for a couple of years and so it's actually not surprising to us that we would see continued growth in pet and channels where we already exist it's actually quite good so as we look at F21 the first thing I would tell you even though we have quite a bit of distribution already I think pet parents are still going to be finding blue buffalo especially in the food, drug and math outlets so I think we'll see continued growth from that on pet specialty we'll look to turn around some of those trends in the pet specialty because we think that we can do better through promotions that are suited to that channel and product innovations Carnivora is just the beginning and continued growth

music

Can you hear me guys?

Yes, alright Andrew, sorry We're back Don just said in 50 calls this is a first for him technical difficulties I'm going to pass it back to Jeff Jeff was I think probably talking for a little while longer about our pet growth opportunities so we'll cycle back to that

Yeah, I can help you there We got cut off right after Jeff had said you still see opportunity obviously in in some of the core channels that you're in and then you're just going to kind of transition to the next part of the point

Okay, good, I don't want to miss it it was sheer brilliance We'll

never know, we'll never know I'm sorry

you denied that Look, the other thing I was saying that was the other opportunity is really through innovation through wet and treat and one of the things we'll beat work spending more money in the back half of this year on and you'll see that come to fruition in F21 and to dimensionalize it the wet and treat part of the pet food category is about 45% of the category so almost $15 billion in sales and we weigh under index so our share of dry dog food is probably about 10% our share of wet and treat is somewhere in the 3 to 4% range and so the opportunity is enormous and so as we look to next year we think we can grow through continuing to do what we do well and continue with Pet Parents finding a channel and through wet and treat innovation

Thank you

Yep

Thank you and our next question comes from the line of Dara Mosinian of Morgan Stanley please proceed

Hey, good morning guys Hi

Dara, good morning So two

questions first, just in US retail, Serial had a strong quarter it's a continuation really of the solid results you mentioned over the last couple of years with the growth but obviously you also need to comparison this year with the merchandising shift last year and one of your key competitors has talked about increasing merchandising in that business so Jeff was just hoping for a bit of a state of the union there on your serial performance the key growth drivers going forward and where you're focused and expectations for the back half of the year and then a similar question on US yogurt what trends did weaken sequentially in the quarter I think you've had some greater competition on the low end so maybe you can talk about the competitive environment in yogurt your prospects for the back half of the year and with a number of the drivers you mentioned do you think that business could actually get the growth in the back half of the year and expectations there would be helpful

Thanks Hi Dara, this is John Nudy I'll jump in and take both those questions on serial we feel really, really good about our performance to date the quarter was a terrific one we were up 5% from an R&F standpoint and it's really being driven by fundamentals if you look at our marketing we feel great about where we are in our major brands in fact we had the best quarter on Cheerios in over a decade with our total Cheerios franchise up .5% Jeff mentioned some of our kids' Cheerios and Reese's Puffs and Travis Scott collaboration so you'll really get about our marketing on our big brands at the same time our innovation is quite strong as well in fact we have the top 4 new products introduced over the last year in the category and nearly 50% of all the new category volume from new products is coming from General Mills so I feel really good about the fundamentals you mentioned the comp, we were a bit softer last year in Q2 from a merchandising standpoint and obviously we benefited from that our comps get a bit more challenging in the back half but as I look at the fundamentals behind marketing and innovation we feel like we're going to compete very effectively as we move through the back half of the year so we feel really really good about Cheerios and importantly the category was actually flat for the first time in quite some time in the quarter as well it continues to get better over time and we feel good about the future of the category and certainly the way that we're competing switching to yogurt as Jeff mentioned our goal that we set at the beginning of the year was to improve from a minus 2 that we delivered in fiscal 19 we took a bit of a step back we were down 3% for the first half and really two major drivers of that one was that we lost some significant distribution at several major customers last January we'll lap those distribution declines next month and again we think that will be an inflection point and also in the summer of fiscal 19 we brought up a second line on wheat and as a result we spent a tremendous amount around marketing support to really drive that business in fact in Q2 last year wheat was up almost 40% so our comps normalized in the back half on wheat and that will help us from a comp standpoint we feel really good about our core business original style yogurt was up 1% in the quarter yogurt was actually up 10% we had some really great taste news and we feel good about our new product lineup for the back half as well as Jeff mentioned we're launching a new non-dairy whee which is coconut based we've got a starburst promotion as well so we believe that we are still on track to a meter objective of improvement from the minus 2 and we'll see yogurt strengthen as we move to the back half

okay can you just talk a little bit about some of the low end competition you're seeing and if that's an issue how you view that in yogurt?

thanks yeah I would tell you I don't think that's something that we're super focused on you know again we think that across the eastern of our lines we're very clear who our consumers are on OSY or original style yelp play again that's where we probably see the highest private label interaction and as I mentioned we grew 1% even seeing private label gain pretty strongly so we believe if we focus on innovation and building our brands we can be successful and again we believe that we're going to have strength in the back half and be our objective great thanks thank you

our next question comes from the line of Jason English of Goldman Sachs please proceed with your question

hey good morning folks congratulations on your pending retirement on and welcome Kofi I'm looking forward to working with you I want to bring us back to PET with a couple of quick questions on it first performance in PET specialty I guess I'm surprised by the continued double digit erosion particularly in context of the much improved results you're seeing out of PETCO and PETSMART and the Carnivora launch can you give us some context around what's driving the sustained share losses there and also the teens type growth on e-commerce obviously strong and absolute quantum of growth but we're hearing Nielsen talk about 40% plus growth in e-comm and obviously we've seen the robust results continue at Chewy the data suggests you may be losing share in e-commerce as well if you could weigh in on your perspective there

yeah with regard to PET specialty the results aren't particularly surprising to us in PET specialty it doesn't mean we like them and we're not working to turn them around and you know the reason we've had tough results in PET specialty I think there are two reasons one is that in two of our biggest players we were down on distribution quite a bit and until we start lapping that which will be in the back half of the year we'll continue to be down and then the second is we haven't had a lot of off-shelf placements on marketing in those channels which we're also looking to turn around and so that's not all that surprising the other thing is that the e-commerce channel does interact quite a bit with PET super stores and we've had strong performance in e-commerce over the years including this latest quarter and so that probably accounts for some of the declines as well but we're working, it's an important channel for us and even if we're not surprised it doesn't mean we're happy and so our goal will then be to improve that performance in the near term when it comes to e-commerce there's been a lot written about e-commerce and I think especially about I think Chewy announced I think last quarter 40% growth in their business I think it's important to remember that their growth also includes pharmacy and hard goods and not only PET food in terms of our growth we feel great with the number one PET food online we're the number one CPG brand online and we continue to grow with PET parents and so in terms of market share there are probably three different sources for market share we use two of them and according to that we're actually growing share in the channel we haven't used Nielsen frankly because their data has not been as reliable as we would have wanted it to to the extent that that changes here over time we'll pick up Nielsen but we stopped using them because the data was not as robust as we needed it to be I think it's also important to remember that Nielsen includes all e-commerce channels not just your plays like Chewy and Amazon but things like Target and Walmart and all the rest

Got it that's really helpful. One more and I'll pass it on On the portfolio overall you obviously have a sizable grain in offering as well as grain free Is there a meaningful margin delta between those two? And also what's the general price spread between those two? Thank you

I would say for wilderness our pricing is higher on average than it is for the rest of the line and our margins are very robust I'm not going to get into specifics of that but our margins are very robust and so as is with all our PET food so I would say wilderness is our biggest grain free line and it's got good margins and a higher price point

Thank you very much

Yep, thank you

Our next question comes from the line of Faiza Aloui of Deutsche Bank. Please proceed

Yes, hi. Good morning. Thanks for the question So I had a couple of questions. First I just wanted to go back to the DCM issue only because as you're aware It's a big focus point for investors and one is it's clear that you're not seeing an impact from retail sales But are you seeing any impact as you're looking at consumer sentiment out there? And is there anything beneath the retail sales where you're potentially concerned about DCM at all? And then my second question is just a little bit broader question around your priorities I guess if you just look at this quarter alone you could come up with the perspective that you are prioritizing profitability and deleveraging Which is great and I don't mean to look at it on a glass half empty point of view But maybe could you give us a little bit more comfort in terms of your priorities around top line growth And sort of what's driving this shift in investments toward the back half versus this quarter. Thank you

Yes, so on DCM I'll probably reiterate a statement I made a little bit earlier Which is to say that we haven't seen an impact on our business from this Now there are a lot of moving pieces with channels and distribution bills and all the rest But we have not seen an impact on our business from the discussion of DCM And there has been quite a bit of discussion There's been a slow down in the grain-free segment within the category So that also has to be said and some channels are impacted more than others Particularly the Pets Specialty channel more than the Food, Drug and Mass channel And so we'll certainly keep an eye on that but from what we see now it hasn't had an impact on our business And of course we're dedicated to, you know, Blue Buffalo was created with a mission to create the healthiest pet food possible And we'll maintain on that mission and with regard to DCM and any other issues affecting pets We're in constant communication with the FDA as well as the rest of the pet industry In terms of our first half versus second half and kind of what we're prioritizing I guess I would say our goal has been for the last few years and again this year is really to stay in the middle of both And we're increasing our organic sales but we want to make sure we do that in a way that is disciplined And I think if you look at our full year we'll be able to accomplish that And we'll be able to accomplish that by increasing our organic growth rate and we'll accelerate that in the back half of the year As well as raising guidance on our free cash flow conversion and maintaining our guidance on our profitability So if you look at the whole year I would say that our goal is to increase our organic growth rate But to do so in a way that is as efficient as possible It is true that in the first half of the year we accelerated our profitability more than we did our organic growth And I think you'll see a little bit of a change to that in the back half of the year as we spend more on brand building And we have confidence in the ideas that we have, we've got really good ideas on really big brands So whether it's in snacks with Nature Valley and Fiber One or whether it's in Yoplait yogurt or whether it's on things like Cheerios or Cinnamon Toast Crunch We have really good marketing ideas on really big brands and so you'll see us spend behind that in brand building in the back half of the year to accelerate organic sales growth

Okay, thank you very much

Thank you

Our next question comes from the line of Nick Modi of RBC Capital Markets, please proceed

Good morning, this is actually Steve Chemisch on for Nick Just another quick one on PET As we approach the leadership transition in BLUE just wanted to get a sense of if there have been or will be any significant operational changes And I guess on that point will BLUE still have a somewhat independent sales force or is that going to be integrated into the broader general mail sales force? Thank you

Well first I would say that our PET performance seems to be pretty good right now So we're going to keep doing what we've been doing and add innovation on top of that A couple things I think to remember, the first is that the Bishop family, Billy and Bill Sr. and his brother Chris They'll still be involved in the business as advisors going forward and I just had a conversation with Billy yesterday And so they bring a lot of PET expertise and they'll continue to bring that expertise, it just won't be in an operational role, it'll be in an advisory capacity The second is that we have a strong leadership team in place that's going to carry over So we have someone who's been in BLUE Buffalo for a long time leading our marketing organization and leading supply chain We have an HR professional who's been there for a while as well as someone in finance And so the leadership surrounding Bethany who are going to remain in place and they've been very effective And then finally Bethany herself, we have a tremendous amount of confidence in Bethany and she's a great culture builder And it's proven she can drive growth as she has in CNF and she's excited to do the same thing in PET with the team around her So we feel good about the leadership transition, obviously the Bishops are fantastic and we will miss them But they'll remain involved and we have a great deal of confidence in Bethany and the rest of the herd

Okay, thank you very much

Our next question comes from the line of Robert Moskow of Credit Suisse, please proceed

Hi, thanks for the question Two things, in the guidance for the back half, I think consensus is expecting operating profit to be flat to down already Is that kind of what you're thinking if we had to isolate third quarter in particular because of the comparisons and the $25 million and all of that? I wasn't sure from the script, it sounded like you thought, it sounded like the opposite but I couldn't tell And then secondly, I noticed in the press release that lower consumer promotional expense was one of the drivers of the gross margin being higher Does that include trade promotion or is it specific consumer promotions that you're talking about? And to what extent is that I guess being offset by the higher media expense? And maybe you can give us a little more clarity on how much media is going to be up for the year A lot of questions in there

I'll

do my best Rob I tried to be clear, if nothing else

So for the second half, if you just do a squeeze on operating profit, we're 7% up in the first half Our guidance is 2 to 4 so it squeezes to flat to slightly down in the second half That's just the math and as we alluded to, there's particular pressure because of the unwinding of the image And the inventory and the pet sales timing in Q3 And we'll also see a step up in our media and in the capability building in Q3 and through the fourth quarter So you will see those pressures come through probably more acutely in the third quarter than the fourth quarter And the fourth quarter obviously will also benefit from the extra month in pet and the extra week across the business That's the phasing The promotional expenses were not trade, they were actually in what we call other consumer So they're in SG&A And to your point, they were down a touch but media was up strong mid-single digits in the quarter And again, as we said in the second half, we expect media to be up mid-teens in the balance of the year So we continue to invest behind our brands, we're seeing it more directly in our media budget and media spending this year And we expect that to step up in the second half

And Don, can you give us any color on trade spending? Like, you know, there's been a shift in the industry overall towards higher trade spend and then lower brand building Are you saying that your trade spending is going to be about the same and then in addition to that, you're going to increase the direct to consumer as well? How would trade spending be affected by this, if at all?

Yeah, I'd say it's not. The media spend is in addition I'll let John talk a little about trade in a second, but I'll just go back to the comment I made to Andrew's question If you step back and look at the shape of the P&L, the way it's coming in this year, you're seeing the benefit of all the work that we're doing in terms of gross margin extra timing and the purchase accounting adjustment from last year Gross margin expanding about 30 to 40 basis points in the first half and that was in both quarters Media is up mid single digits through the first half and again accelerated in the second quarter and our admin expenses have been held in check And so we're leveraging those to drive operating margin expansion And that's what we expected to do during the year, as Jeff alluded to, we actually came in a bit more with a bit higher profit in the first half than we had originally anticipated And that gives us some flexibility to invest in the back half And that investment is going to be in media, in capabilities, in future growth initiatives such as the PET Innovation, not in higher trade So John, if you want to comment a bit about the environment you're seeing Yeah,

so Rob, I'd say our trade spending in the US is relatively stable year over year We're leveraging strategic revenue management to try to get more from those dollars and leveraging that whole toolkit, but relatively stable And we're really excited about the opportunities on the brand building side I tell you that we've got probably more ideas than ever in terms of where we can get behind and the proven drivers And again, when we invest behind big brands like Cheerios with Heart Health News, we're seeing amazing results So we'll be competitive and compete in our categories from a trade standpoint and we'll build our brands in media as well So we feel really good about the fuel we have in the driver business forward Okay, great. Thank you

And our next question comes from the line of Laurent Grande of Guggenheim Partners. Please proceed

Yes, good morning everyone and congrats Don and welcome Kofi Just a follow up on the US yogurt category, could you please update us on how you see the state of the yogurt business The recent relaunch of YQ, I mean the launch of GoodBelly and WePetit that we internally can't see in Nielsen And also could you share your aspiration for WeDairyFree that you just announced and how it fits with your overall plant-based strategy that most probably include your investment in KTL? Thank you

Sure, Laurent, this is John. So as I mentioned earlier, we were a bit softer in the first half than we'd like on our yogurt business And as I mentioned, we feel like we've got drivers in place to improve in the back half You know, some of the things you asked about are GoodBelly as well as YQ I would tell you candidly, they did not perform as well as we would have hoped through the first half I would say distribution is a bit lower than what we would have liked Particularly on GoodBelly, we've got some real pockets of success and we're drilling in to understand what's working and how we can expand that brand out As we pivot to the back half, we are excited about our innovation lineup As you know, plant-based yogurt is growing nicely, it's still relatively small And we think that coming with the wheat packaging will be a real point of difference and we love the product as well So we think that will help us as we move forward and play a really important part of the category that's growing quickly So we'll continue to innovate and iterate in that category I'll tell you there's probably more innovation and yogurt than the other 25 categories we compete in in the US And we, as a result, recognize that we're going to have to have a strong pipeline and continue to bring ideas as the consumers continue looking for new things in the category

Thank you very much, and I've got the time for a second question So I'd like to understand the rest of the organization's change between Dana McNam moving from CERONs to Europe Any update on that transition, which would impact your European business, you think? And also, how you will feel about issues in the US sort of business that's working very well for now?

Yeah, so the transition is going smoothly Dana is being replaced in CERIAL by Ricardo Fernandez, who's an exceptional leader with really good knowledge of the CERIAL category So one of the things I feel great about is that we have a very good team of CERIAL experts here at General Mills And I would also say Dana has had a great team in CERIAL, and they're remaining in place We've got good people in marketing and finance and operations, and so the rest of that team is remaining in place, and they're a very talented group And so my expectation is that we'll continue to grow CERIAL as we have in the US Dana is a fantastic leader. She knows Europe very well. She spent time with me at CPW, so I know Dana well And so she knows the European market context. She's a very good marketer. She really likes to grow So looking forward to what she can do with that business and continue some of the trajectory we've had on Old El Paso And maybe even improve it further and improve what we've done on Bars, which has been really good And at Haagen-Dazs, and then she'll have a chance to make sure we get our yogurt business in Europe back to growth Which has underperformed wrong with the rest of the yogurt category So she's a terrific leader who understands the market, and she'll be starting there in about 10 days

Okay, thank you. Have a seat down. Thank you very much

All right, Bridget, I think that's unfortunately that's all the time we have, so thanks everyone for your questions this morning I know we didn't get to everyone, so please feel free to follow up over the course of the day And happy holidays everyone. Thanks for listening in this morning

And that does conclude today's presentation We do thank you for your participation and ask that you please disconnect your lines. Have a great rest of the day and happy holidays everyone