General Mills, Inc.

Greetings and welcome to the General Mills Quarter 3 Fiscal 2020 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct the question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, you may press the star followed by the 0. As a reminder, this conference is being recorded Wednesday, March 18, 2020. I will now let me turn this conference over to Jeff Seaman, Vice President of Investor Relations. Please go ahead.

Thanks, Nelson, and good morning, everyone. I'm here with Jeff Harmoning, our Chairman and CEO, and Kofi Bruce, our CFO. Also joining us this morning for Q&A is John Newdy, who leads our North America retail segment. I'll turn the call over to them in a moment, but before I do, let me first touch on a few items up front. Our press release on third quarter results went out earlier this morning, and you can find the release and a copy of the slides from this morning on our investor relations website. It's important to note that our remarks this morning will include forward-looking statements that are based on management's current views and assumptions, including facts and assumptions Jeff and Kofi will share related to the impact of the COVID-19 virus outbreak on our results in fiscal 20. The second slide in today's presentation lists a number of factors, among them the impact of COVID-19. 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. Our key messages today are listed on slide four. But before we cover our execution against fiscal 20 priorities, our Q3 results, and our updated outlook, given this extraordinary period of time, I'd like to take a minute to discuss what we're seeing with respect to the COVID-19 virus outbreak and share what General Mills is doing to address our most important objectives, which are the continued health and safety of our employees and our ongoing ability to serve consumers around the world. For the past 154 years, General Mills has played a critical role in making food to meet the needs of our consumers. And in recent weeks, I can tell you that I'm proud of the way we've partnered with our retail customers to address the increased demand for food at home. We are taking steps to flatten the curve and limit exposure to the virus while continuing to safely operate our business. We've asked all of our employees to partake in social distancing practices, and we've required those who can to work from home through at least April 1st. For the safety of all involved, we've also restricted business travel and visitors at our facilities. With that in mind, slide 5 summarizes how COVID-19 has impacted our business in recent weeks, and what we expect to see in the coming months. As we mentioned last month at Cagney, nearly half of our Haagen-Dazs shops in Greater China had been temporarily closed. In total, we saw a 90% decline in traffic in shops and substantial declines in other food service outlets in China in February, resulting in a significant reduction in Haagen-Dazs sales in Asia for the month. This was a 50 basis point headwind to total company organic net sales growth and an estimated 150 basis point headwind to adjusted operating profit and adjusted diluted earnings per share growth in the third quarter. As the virus continues to spread, we expect to see reduced consumer demand for away-from-home food in the near term, impacting both our Asia and Latin America and convenience stores and food service segments. In Asia, while most of our shops are now open again, Many have reduced hours in service and store traffic is still down roughly 60% during the month of March. At the same time, we expect to see greater near-term demand for food at home, primarily impacting our North America retail and Europe and Australia segments. While it is still early, we've seen increased customer orders and higher retail sales take away in meals and measured channels since the beginning of March. Our US retail sales results for the weekend on March 7th were up low double digits, including pet, and we anticipate takeaway for the week ending March 14th will be many times higher across all channels. While we assume this short term stock up demand will ebb in the coming months, our expectation is that overall at home food demand will remain elevated in Q4 and the bulk of any unwind will happen in fiscal 21. There is a great deal of uncertainty in this component of our forecast, and if we see a material change in outlook, we will provide an update before the end of the fiscal year. Importantly, our supply chain is operating effectively around the world, and we've been able to service the vast majority of customer demand to date. Our outlook assumes we continue to operate our supply chain with minimal disruption, but this could change if the virus situation worsens materially. Given this heightened level of uncertainty regarding COVID-19, our four-year guidance that Kofi will cover in a few minutes reflects a wider range for sales, profit, and EPS than we would typically carry with just one quarter remaining in the year. With those assumptions in mind, let me now turn it over to Kofi to review our third quarter financial performance and updated outlook for the year. Kofi?

Thanks, Jeff, and good morning to everyone. Slide 7 summarizes our financial results for the third quarter. Net sales were flat to last year at $4.2 billion. Organic net sales were also flat, with another quarter of strong growth in PET largely offset by declines in North America retail and convenience stores and food service. As expected, constant currency adjusted operating profit was 8% below prior year results. driven primarily by higher SG&A expenses, including higher media investment. Third quarter adjusted diluted earnings per share totaled 77 cents, down 6% in constant currency, driven by lower adjusted operating profit, partially offset by lower net interest expense. Slide 8 summarizes the components of net sales growth in the quarter. Organic net sales were in line with last year, with positive organic price mix largely offset by a modest decline in organic pound volume. Foreign exchange was flat in the quarter. Turning to segment results on slide 9, North America retail performance in the third quarter compared against our strongest quarter from a year ago on the top and bottom lines. The results included third quarter organic net sales, which were down 1%, primarily driven by U.S. meals and baking. In the first nine months of the fiscal year, organic net sales were in line with year-ago levels, which was a one-point improvement over our fiscal 19 organic net sales growth. We drove sequential net sales improvement in U.S. snacks and U.S. yogurt in the third quarter, while our U.S. serial results stepped back versus the first-half growth rate as we expected. Looking at our fiscal 20 year-to-date in-market results, we grew share in six of our top 10 categories, which comprise roughly 85% of our Nielsen-measured retail sales in the U.S. And third quarter constant currency segment operating profit declined 9%, primarily due to a significant increase in media expense, as well as lapping double-digit profit growth in last year's third quarter. Turning to convenience stores and food service on slide 10, organic net sales declined 2% in the quarter, driven by non-Focus 6 flour and mixed businesses. Net sales for the Focus 6 platforms grew 2%. led by cereal, frozen baked goods and yogurt, which continued strong contributions from our new two ounce equivalent grain cereal offering in schools and bulk yogurt. Third quarter segment operating profit was down 5% driven by higher input costs. Slide 11 summarizes our results for Europe and Australia. Third quarter organic net sales were down 1%, driven by declines in yogurt and ice cream, partially offset by growth in snack bars and Mexican food. In terms of in-market performance in the quarter, retail sales were up double digits for snack bars and up mid-single digits for Mexican food. Third quarter segment operating profit declined 11% in constant currency, driven by higher input costs partially offset by lower SG&A expenses. In Asia and Latin America, third quarter organic net sales essentially matched year-ago results. Net sales in Latin America were up low single digits in constant currency, driven by continued improved performance in Brazil after a slow start to the year. Net sales in Asia were down low single digits in constant currency in the quarter. As Jeff mentioned earlier, the COVID-19 outbreak had a significant negative impact on foot traffic in our Haagen-Dazs shops and food service outlets in Asia. And the majority of our stores were temporarily closed in China. As a result, February's lower ice cream net sales in Asia were a 500 basis point drag on the segment's net sales growth in the third quarter. This headwind was partially offset by strong growth on Wan Chai fairy dumplings in China, driven by increased at-home food consumption in February. Third quarter segment operating profit in Asia and Latin America was down 64% in constant currency, driven by higher S&A expenses and lower Asia ice cream net sales, partially offset by higher net sales in Latin America. Our third quarter pet segment results are summarized on slide 13. I'm pleased to say we had another great quarter of growth, with net sales up 11%, driven by strong growth in food, drug, and mass, or FDM channels, and positive price mix. 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, our year-to-date all-channel retail sales were up low double digits, and we continued to gain share in the U.S. pet food category. On the bottom line, third quarter segment operating profit grew 29%, driven by higher net sales, partially offset by higher media expense. Slide 14 summarizes our joint venture results in the quarter. Serial Partners worldwide posted top-line growth for the sixth consecutive quarter, with constant currency net sales up 1%. That growth was broad-based, led by the UK, Middle East, Mexico, and Turkey. Agenda's Japan net sales declined 5% in constant currency, driven by lower volume, partially offset by positive price mix. Third quarter combined after-tax earnings from joint ventures totaled $11 million, down 8% from last year, driven by phasing of brand investment at CPW and lower volume at HDGA, partially offset by positive price mix in both businesses. Turning to total company margin results on slide 15, third quarter adjusted gross margin was down 30 basis points, driven by higher input costs, partly offset by positive net price realization and mix. Adjusted operating profit margin was down 130 basis points in the quarter, driven by higher SG&A expenses, including a significant increase in median investment. Slide 16 summarizes other noteworthy Q3 income statement items. Unallocated corporate expenses excluding certain items affecting comparability increased $8 million in the quarter. Net interest expense decreased $21 million driven by lower average debt balances and lower rates. With our good progress on debt pay down and favorable interest rates, we now expect full year net interest expense to total $470 million approximately. The adjusted effective tax rate for the quarter was 21% compared to 19.9% a year ago, driven by certain discrete tax benefits in fiscal 2019, partly offset by changes in country earnings mix in fiscal 20. And average diluted shares outstanding were up 1% in the quarter. Now turning to our fiscal year-to-date results on slide 17. Net sales totaled $12.6 billion, down 1% versus last year, driven by unfavorable foreign currency exchange. Year-to-date organic net sales were in line with last year, with positive price mix offset by lower volume. Adjusted operating profit was up 2% in constant currency, driven by positive price mix partially offset by higher SG&A expenses, including higher media investment. Year-to-date adjusted diluted earnings per share of $2.51 increased 5% in constant currency, driven by higher adjusted operating profit, lower interest expense, and higher non-service pension income, partially offset by higher net shares outstanding. Slide 18 provides our year-to-date balance sheet and cash flow highlights for fiscal 20. Nine-month cash from operations was $2.2 billion, up 7% from the prior year, driven primarily by higher earnings. Our core working capital balance totaled $342 million, down 31% from a year ago, driven by continued improvements in accounts payable. Capital investments in fiscal year-to-date totaled $269 million. Given the timing of year-to-date spending, we now expect full-year capital spending to finish a bit under 3% of net sales. Nine-month free cash flow totaled $1.9 billion, up 14% from last year. This strong free cash flow performance enabled us to pay $895 million in dividends and reduced debt by $862 million in the first nine months of our fiscal 20. Now let's turn to our outlook, including our fourth quarter expectations, which are summarized on slide 19. We expect Q4 organic net sales growth to step up significantly, driven by improved performance in North America retail, as well as an extra month of results in pet as we align that business to our fiscal year end. Q4 reported net sales will benefit from a 53rd week in May. This accelerated net sales growth will drive a strong increase in gross profit dollars in the quarter, which will be partially offset by a significant increase in growth investments in brand building and capabilities. And as Jeff indicated with regards to the impact of COVID-19, We'll remain agile as the demand for at-home versus away-from-home food evolves across our markets. Our outlook assumes that we continue our strong supply chain execution through the end of the year without significant disruption. With that as a backdrop, our updated fiscal 2020 guidance is outlined on slide 20. We continue to expect organic net sales to increase 1 to 2 percent. The combination of currency translation, the impact of divestitures executed in fiscal 19, and contributions from the 53rd week in fiscal 20 is expected to increase reported net sales by approximately 1 percent. Constant currency adjusted operating profit is now expected to increase 4 to 6 percent. which is ahead of the previous range of 2% to 4% growth. The primary drivers of our increased profit outlook include increased holistic margin management productivity savings, a modest reduction in our input cost inflation forecast, and continued tight control over administrative expenses. Constant currency adjusted diluted earnings per share are now expected to increase 6 to 8% from the base of $3.22 earned in fiscal 19, which is ahead of the previous range of 3 to 5%. The primary drivers of our increased EPS guidance are the increased forecast for adjusted operating profit and the expectation for reduced interest expense that I mentioned earlier. We continue to estimate that foreign currency will be immaterial to adjusted operating profit and adjusted diluted EPS. We continue to expect to convert at least 105% of adjusted after-tax earnings into free cash flow. And we'll maintain our disciplined focus on cash to achieve our targeted year-end leverage ratio of 3.5 times net debt to adjusted EBITDA. With that, I'll turn it back over to Jeff to cover our progress against our fiscal 20 priorities.