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.

Thanks, Kofi. On slide 21, you can see our three key priorities for fiscal 2020. As I reflect on our results for the first nine months of the year, I'm pleased to be able to say that we have a good line of sight to deliver on all three. First, we're on track to deliver accelerated organic sales growth compared to our fiscal 19 results. We expect to improve organic growth in North America retail by a full point versus last year and to deliver double-digit organic growth in the pet segment. After getting off to a slow start in the first quarter in our remaining three segments, our top-line trends have improved in the last two quarters, and we've continued to work to get those businesses back to growth. Second, we expect to deliver a positive year on margins with good results on HMM productivity and positive price mix from our strategic revenue management efforts allowing us to significantly increase growth-oriented investments in brand building and in capabilities. And third, as Kofi just mentioned, we're on track to achieve our fiscal 2020 leverage reduction target. With these priorities in mind, I'll share a few examples of our year-to-date performance, highlighting what's working well and where we're working to improve. I'll begin with North America retail, focusing on cereal, yogurt, and snacks. I'm quite pleased with our performance in U.S. cereal today. Following two years of modest retail sales growth in fiscal 18 and fiscal 19, our results have accelerated to 1% growth in the first nine months of fiscal 20. We've strengthened our share leader position in the U.S. through remarkable brand building and strong execution against the fundamentals. For example, we've invested behind compelling consumer ideas, such as our Cheerios Heart Health campaign, which drove 4% year-to-date retail sales growth on the Cheerios franchise. Retail sales for the Cinnamon Toast Crunch franchise were also up 4% so far this year, driven by strong media support on the core, as well as continued success of recent innovations such as Cheerios and Chocolate Toast Crunch. And our innovation continues to add to our growth with Blueberry Cheerios, a new oats and honey variety of Cheerios O Crunch, and Peanut Butter Chex representing the three largest new products in the category in the third quarter. Now let's turn to U.S. yogurt on slide 23. Our strategy to get yogurt back to growth centers on continuing to grow our core product lines through brand building and product news, while at the same time innovating in faster growing spaces that will soon become sizable enough to offset declines we're seeing in retail and our tail. While our year-to-date results modestly lag our fiscal 2019 trends, driven by more significant tail distribution losses and the phasing of support on our We Buy Yo Play product line, we're encouraged by more recent performance. We continue to drive growth on our core, with year-to-date retail sales up 2% for original-style yogurt and up 6% for Go-Gurt. We've seen sequential improvement in our distribution trends in the last two months, while continuing to grow turns per point of distribution this fiscal year. Our second-half innovation is off to a good start. While it's still early, our limited-edition Starburst line of original-style Yoplait and our new coconut-based dairy-free offering by We Buy Yoplait are the two largest launches in the category since January. And we're increasing our brand building support on our core, including We Buy Yoplait, which saw retail sales improve in the third quarter behind a stronger consumer support plan. For U.S. Snacks on slide 24, we drove retail sales improvement through the first nine months of fiscal 20, and we expect further improvement in the fourth quarter behind innovation, renovation, brand building support, and improved distribution. Nature Valley Performance has benefited from our successful wafer bar innovation, which is the biggest launch in the snack bar category this year, as well as improved merchandising execution. On Fiber One, our renovated products and refreshed marketing campaign have made the brand more relevant for modern weight managers. These two brands are also beginning to lapse significant distribution losses from a year ago, which should further improve their retail sales trends. And our treat bars featuring household favorite brands such as Cinnamon Toast Crunch, Lucky Charms, and Golden Grahams are continuing to enjoy outsized growth with year-to-date retail sales up over 100%. On fruit snacks, we drove 5% retail sales growth and strengthened our leading market share position in the first nine months of the year behind excellent performance on Gushers and Disney Equity fruit snacks. With benefits from better distribution trends, contributions from Nature Valley Innovation and Fiber One renovation, and increased brand building investment behind bars and fruit snacks, we remain on track to improve U.S. snacks performance in fiscal 2020. Overall, we're making progress in North America retail through the first nine months of the year. Year-to-date organic net sales results are a full point better than last year, and we're competing effectively, holding our growing share in six of our top 10 categories, and we're stepping up investment behind our brands to build momentum as we close out fiscal 20 and head into fiscal 21. Turning to our pet segment on slide 25, we continue to drive double-digit all-channel retail sales performance on blue through three quarters. From a channel standpoint, year-to-date retail sales were up significantly in food, drug, and mass as we benefited from our expansion to new customers in the launch of wilderness and food, drug, and mass in last year's fourth quarter. Importantly, retail sales for food, drug, and mass customers who have carried blue more than 18 months were up 31% in Q3. As expected, year-to-date retail sales and pet specialty were down versus last year. We continue to support the channel through unique programs and innovation. And as we shared at Cagney last month, we're launching two new lines into select pet specialty retailers in the second half, including Baby Blue, which brings solutions to new and younger pet parents at a time when they are most engaged, and True Solutions, a line of pet food formulated to treat common pet ailments. And Blue Buffalo continues to drive strong new-to-date retail sales growth in the rapidly evolving e-commerce channel. Looking ahead to Q4, there are two factors that will have a material impact on our pet segment results this year. First, we'll lap last year's distribution expansion and willingness launch into food, drug, and mass, which shows significant pro forma growth and positive price mix in last year's fourth quarter. Second, as Kofi mentioned, we'll report an extra month of results in our pet segment in this year's Q4 as we align the segment to General Mills May year-end. For the full year, we remain on track to deliver 8 to 10% light for light growth for the pet segment, excluding the benefit of the calendar differences in fiscal 20. We're excited about the growth prospects ahead and continue to remain confident in the long-term opportunities for Blue Buffalo. In total, we're encouraged by our performance in North America retail and pet this year. For our other three segments, we had a slow start to the year, and while we've improved organic sales since the first quarter, there's clearly more work to do to get these businesses back to growth. As we look ahead, we'll remain agile across all segments as we navigate the changing consumer demand patterns in at-home versus away-from-home food driven by the COVID-19 virus. In addition, for convenience stores and food service, we're focused on continuing to drive growth in the Focus 6 platforms while improving our performance in flour and mix. In Europe and Australia, we expect to regain some lost distribution on Haagen-Dazs in France and Q4. And at the same time, we anticipate some short-term headwinds in the UK driven by reduced distribution and lower levels of quality merchandising. Our priorities for this segment are to continue to invest behind our Accelerate platforms, including Snack Bars, Old El Paso, and Haagen-Dazs, while working to stabilize you over through focus on our core lines, including Petit Filou, Yop, and Pearl Belay. In Asia and Latin America, we'll continue to drive growth on our Accelerate platforms, including Haagen-Dazs Ice Cream and Nature Valley Snacks, while investing behind important regional brands such as Wanchai Ferry in China and Yoki and Kitano in Brazil. I'll close our remarks this morning by summarizing today's key messages. First and most importantly, our top focus remains on the health and safety of our employees as well as serving our consumers as we manage through the rapidly evolving situation with COVID-19. Second, we're executing extremely well and we're on track to deliver our fiscal 20 priorities and what is proving to be a highly dynamic environment. Third, our third quarter results were broadly in line with our expectations, excluding the impact of the COVID-19 virus in Asia. And finally, we're raising our guidance on profit and EPS. With that, let's open the mic for questions. Operator, can you please get us started?

Thank you. If you would like to register a question, please press the one followed by the four on your telephone. you will hear a three-tone prompt to acknowledge your request. If your question has been asked by another and you would like to withdraw your registration, please press the one followed by the three. Once again, your question is the one followed by the four. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed. Good morning, everybody.

Good morning. Good morning. Hey, there. You know, an interesting question, I think, is whether some of... know the unanticipated trial that general mills and others are getting you know as a result of the sort of current situation you know maybe some portion can be sustained longer term as you know consumers add some items maybe their ongoing shopping basket but they wouldn't have otherwise done you know as they see some of the improvements made by certain brands to improve product quality and sort of relevance over the past couple of years i know it's a hard one to obviously answer now but Maybe you can share some of your thoughts on this and maybe a little context or a bit of maybe what your consumer insights might say about some of the improvements or the areas where the company has made, what you think are some of those improvements in terms of things like product trial and repeat rates, where you've made maybe significant changes in relevance, things like that. I appreciate it's dynamic and some of this we'll have to see, but maybe just some of your thoughts on that would be really helpful. Thanks so much.

Yeah, Andrew, that's a really thoughtful question. Let me give you a couple insights from China, and then I'll pass it to John Newdy to maybe give you a couple insights from North America retail. And in China, you know, as we've said, our shops business has been down over the last month. But interestingly, our frozen dumpling business has been up double digits, and particularly with delivery at home. And it's very clear that we've increased household penetration in China, and that demand continues to be strong. even as our shop business opens up and China gets back to work. And so I'm not sure the lessons we learned in China will hold everywhere, but at least what we're seeing in China is that our household penetration on one cherry fairy dumplings has increased and that there is strong growth following the fact that people are starting to get back to work. We have done a lot of work in the U.S. on some of our product lines, in particular snacks, but I'll let John Noody comment on that.

Yeah, so good morning, Andrew. I guess the first thing right now, obviously, it's a really fluid situation. So the bulk of our time is spent on working with the retail partners and servicing the business. With that being said, as Jeff mentioned, we've worked hard over the last few years to renovate the majority of our product lines. If you think about refrigerated baked goods, we've touched the bulk of that business, which is big and important and profitable for us. Cereal has been renovated as well. So we do believe it's an opportunity. perhaps as consumers come back and try our products again after several years to see the products and the improvements that we've made and ultimately, hopefully, drive penetration for the long term.

Appreciate your thoughts. Thanks, everybody. Thank you.

Our next question comes from the line of Ken Goldman with J.P. Morgan Company. Please proceed.

Hey, good morning, and thank you for the question. Two for me. First, just wondering if you could elaborate a little bit on what you've seen the last week or two in your convenience store business. I know it's hard to know. You're not exactly timing your shipments with our takeaway, but any color there would be helpful, just obviously given that consumers are on the road a little bit less. Then the second question is you talked a lot about increased marketing, and I totally appreciate the benefits of that in the long run. Can you walk us through a little bit maybe of how that conversation goes internally when you have increased demand naturally already, whether you're thinking about pulling back at all on some of that marketing and maybe letting some of that cash flow either drop to the bottom line or be reinvested in CapEx or other ways, just trying to think about how you balance those factors. Thanks so much.

So, Ken, and, you know, as we look at channels, I mean, clearly the situation is evolving quickly. And I'll give you what insights we have, which may not be sufficient. But, you know, as we look at March so far, we haven't seen a big fall off in our convenience and food service business, you know, through today. But clearly the situation continues to evolve. And, you know, you, like us, saw schools closing. And that's a big piece of our business. And we also see the restaurant traffic is down. And What we're seeing is those two things are just offset by what we see in convenience stores, where the traffic is strong, and unfortunately, certainly with healthcare. And so we would expect in the fourth quarter that our CNF business would be down for all those factors. But look, the situation continues to evolve in ways that you would probably anticipate. In terms of how we think of marketing for the fourth quarter, that's a good question. I mean, The first thing I would say is that as we look around the world, we have made sure that whatever marketing we have, that the messaging is appropriate. It's a unique time, and we need to make sure whether we're talking about our brands on social media or we're doing it through broad scale like TV. First of all, our messaging has to be appropriate for the time, and I can tell you we've done that worldwide and that we feel like it is. Second is that Part of the appropriate of that message, I think, includes not talking about stocking up and that kind of thing. We see consumers doing that already. Having said that, for us, brand building is a long-term investment. It's not only what we do this quarter, so we'll continue to build our brands in appropriate ways because the impact is not only for now, but it's three months from now and six months from now. In addition, and this is only one man's opinion with very little data to back it up, I think it also can never send to normalcy for people as their lives are anything but normal in many parts of the world. For us, we think we have a responsibility to do that, whether it's delivering our products or whether it's advertising, you know, Cinnamon Toast Crunch.

Oh, one man's opinion with little data to back it up. That's what I do for a living. So, thank you, everyone.

Please stay safe. Thank you.

Thank you.

Our next question comes from the line of Robert Mostow with Credit Suisse. Please proceed.

Hi.

Thanks, Jeff. I'm trying to think through some really worst-case scenarios from a supply chain perspective, like a two-week period where people just are locked up in their houses, can't go to manufacturing facilities or distribution centers. Have you and John Church kind of thought through those scenarios? And if that happens, is there a possibility of, like, federal government assistance? Anything to keep the food supply chain moving?

Thanks. So, Rob, it's a good question, and certainly keeping the supply chain moving is at the top of our mind, and so I think it's an insightful question. As we think about it, the first couple of things I would say is, look, up until this point, the supply chain has been working remarkably well, and our service levels are well over 90%. And I will tell you, our retail partners have been very grateful for the work that we and others have done. And so, certainly up until this point in time, the supply chain has been working very well. Despite maybe if you see pictures of store shelves being empty, I can tell you that food continues to flow. We continue to make it. Our retailers continue to stock as quickly as they can. And that all is actually working pretty well. As we look ahead, you know, one of the things we need to do a couple things. One is that we need to make sure our employees remain safe. And the second is that we need to maintain the delivery of products. We need to do both. We can't really do one or the other. We have to do both. In terms of employee safety, I would say that, you know, while people are at work, we already follow very strict food safety guidelines and employee safety guidelines that are planned, hand washing and things like that. And, you know, the guidelines set forth by the FDA and the USDA. One of the things that we are doing incrementally is we have adjusted our leave policy to make sure that people who are sick can stay home and get paid and stay at home because we certainly don't want sick people coming into our manufacturing plants or offices. As I said, we put some policies in place to help them out. We've also worked through a number of contingencies, but to date, I think it's also important to note that the FDA, in a note they put out yesterday, reiterated the statement that, you know, there's currently no evidence of food or food packaging being associated with transmission of COVID-19. And so, we anticipate continuing production through most of the course of our normal actions. The only thing we've done differently at some of our sites is that we have encouraged social distancing. So instead of having everybody gathered in the lunchroom at one time, you know, we're encouraging people to do it at different times. And instead of having breaks at one time, doing breaks at different times. So we've been responsible in that way.

Okay, Jeff, thank you.

Yes.

Thank you. Our next question. Coming from the line of David Driscoll with DD Research, please proceed.

David Driscoll, Great, thank you, and good morning, everybody.

Good morning, David.

David Driscoll, I wanted to ask a little bit about the sales guidance. Kofi, can you talk a little bit about why the sales guidance is not actually raised? In your prepared comments, it sounded like the fourth quarter is going to be really good, but when I look at your total consolidated guidance for organic revenue for the year, there's no real change right there. So, can we start there?

Yep, absolutely, David. So just as context, the low end of our guidance would assume that the impact of COVID on the balance of the year is effectively net neutral. And it's important to maybe set as a frame of reference where we were at Q2, which is effectively our NAR business on the slightly ahead of expectations, our pet business, on expectations. And then we got behind on the other businesses. And although we're making progress on CNF, EU, AU, and OSLA, you know, clearly the expectation would have driven sort of an aggregate up to the lower end of the range as a start point on the top line. So I think where our midpoint then gets us is effectively the at-home channels in the in NAR and EUAU would partially offset the drag from OSWA and our expected traffic pressure in our away from home business on CNF. And then obviously at the high end, we would expect the trends we're seeing in March that are reflected in the midpoint of our range to stick through the balance of the year.

That's super helpful. And then just two quick follow-ups. On Ken's question, I like the question about what you do on your brand building, but specifically for me, the twist is your promotional activity. Given that there's so many out of stocks and there's these runs on the grocery stores, would it be almost a requirement that you dial down your promotional activity? I think Ken was focused on advertising, but I want to look at the promotions because why would you want to encourage even more product movement if you put big discounts on cereal per se? So wouldn't it be logical to reduce promotional activity because you know the product is going to move in the fourth quarter? And then just one quick question on pet. Is there any concern here that lower economic activity negatively impacts premium pet sales? Thank you.

Hi, David. This is John. I'll take the first question. In terms of promotional activity, what I would say is we're in very close communication with all of our retail partners. And, again, it's a very dynamic time. So a lot of those discussions right now are about servicing the business. and really the day-to-day. At the same time, we are talking about promotional calendars, and I think each retailer is starting to think that through, both short-term and long-term. Some of our retail customers we have pulled back merchandising in April jointly, and others were just beginning that conversation. So, again, ultimately it's a partnership. We're working hand-in-hand. Communication with retailers right now is the best I've ever seen in terms of partnership. We're all trying to do the same thing, and it's feed our consumers. So that'll be a conversation I think that'll continue. And again, we're starting to pull back a bit in April. I think that conversation, again, will continue as we move forward.

And then with regard to pet, David, you know, look, during the last recession, we didn't see a pullback on pet food. And as we looked at Blue Buffalo when we bought it, one of the things we liked about it was that, you know, demand for pet food seems to be pretty inelastic. And What we've seen so far in the fourth quarter is not to the same degree as what we've seen in North America retail, but, you know, people love their pets and they want to make sure they take care of their pets. And so we feel like our retail takeaway for pet in the fourth quarter is going to be robust. Now, remember, we have comps to go against. We built a lot of inventory due to a loss last year in the 53rd, you know, an extra month. So there's a lot going on. But I would say demand for pet food we continue to see very strong and to the extent that the US has some economic hardships as a result of this virus, we would anticipate the pet food category would still be a robust category. Thank you.

Thank you. Our next question comes from the line of Alexia Howard with Bernstein Company. Please proceed.

Good morning, everyone. Hi. So can I ask about, it may be too early to tell, but are you seeing any sort of channel shift into the e-commerce channel as a result of COVID-19? And if you're not seeing that yet, are you anticipating that that could happen and how are you gearing up for that? Thank you.

So again, what we saw in, I'm assuming you're talking about the U.S., but I'll actually start with China. What we did see in China was a pretty significant shift to the e-commerce channel, and we were well prepared for that, and we serviced our customers both in-store and online, but we did see, as you can well imagine, an increase in the e-commerce channel. And I'll let John Doody talk about what we've seen and what we expect in the U.S.

Yeah, so I would say, like I say, we've seen broad-based demand across all channels. Certainly e-commerce is spiking. Your big picture, it's still a relatively small channel in the U.S., so even though we're seeing more demand there, it's something we can clearly service, and we're working with those customers to make sure they have the product that they need. But again, as this thing has progressed over the last couple of weeks, I think you saw certain channels strengthen first, and as of the last week or so, I'd say we see broad-based demand across all channels in the U.S.,

Okay, and then as a quick follow-up, are you able to quantify how much your marketing spending was up this time around and what you anticipate for the fourth quarter?

Sure. Alexia, this is Kofi. So in the third quarter, we were up in the high teens percent in line with what we sort of telegraphed at the end of our Q2 earnings release. I would expect our fourth quarter will look similar to slightly up in relation to the third quarter.

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

Thank you. Our next question comes from the line of David Palmer with Evercore at Fireside. Please proceed.

Thanks. I think you mentioned that orders and perhaps this candidate will show something many times greater than the first week of March in terms of takeaway. The question I would have first is, It's one of leverage on sales. You know, what sort of rules of thumb would you have for us in terms of the cash flow and earnings contribution from these bigger increments of sales growth, 5, 10 points? We can think of great flow through from great capacity utilization, but we can also consider some elements of higher expenses as the big rush happens. And obviously there's going to be supply chain strains with availability of people. And then I have a quick follow-up.

Yeah, I think we would expect on balance to get some additional leverage out of the volume moving through our plants, which are obviously running close to capacity. And then I'll let you direct your follow up.

Yep. And then as far as, you know, take home, the at-home meals are something like 80% of American consumption anyway. So, the pain and suffering we're seeing in restaurants, which is very substantial, that their proportion of pain is not as much of the at-home gain once we get past this big stocking up period, both at the at-home level and the supermarket level. So the question is one of how do we think we're going to be looking at in terms of consumption increase over the course of this calendar 2020, how should we be thinking about that benefit and the lapse for the typical food company You know, is it something like a single-digit type of number? I mean, any sort of rules of thumbs about how you're thinking about this and modeling this as we look across the calendar 20 landscape? Thanks.

Well, listen, you know, as you well know, I hate to dodge a question, but this one I'm going to have to take a pass on because trying to model our current situation, I'm not really sure what model we would use, to be honest with you. What we do believe is that over the next couple of months, I mean, you talked about calendar 2020. I would say over the next couple of months, it's very clear to us that restaurant traffic will be down. It's very clear to us that schools and university feedings will be down and that consumption is going to shift to at home. And so those are the trends. We don't have a lot more insight than you do in terms of the data, but those trends are clear to us and that at home food is going to be higher. And so I'm not trying to dodge it just to be cute. Look, it's just evolving so quickly. And, you know, what we don't know is the depth, and we don't know the duration. And, you know, a couple months in, maybe we can give you a better view of what's going to happen. For right now, to be honest, our primary focus is keeping our employees safe and making sure that we can deliver all the food that our consumers and retailers are demanding of us. And so far, we've done a really good job on both counts.

Thank you very much. Thank you.

Our next question comes from . Please proceed.

Hi, good morning. So, Jeff, quick clarification. If we were to take the midpoint of your guidance for fiscal 20, what does that imply in terms of qualitatively speaking for the North American business for the balance of the year? Does that mean that, you know, basically the month of March we see a big bump, and then what would that mean to get to the upper end of your range for your guidance? Would that imply that this endures into April and May? So that would be the first part of my question.

So let me give you a broad stroke and kind of reiterate a little bit of what Kofi said and that for us to get to the high end of our guidance, it would assume that we would see elevated levels of demand for the remainder of the quarter in our at-home food consumption and that and we'd see a drop in our consumption in CNF. And then at home demand would be both here in the U.S. as well as Canada and Europe. The midpoint would assume that we've seen strong demand to date, but that demand would tail off either because consumers are stocked up or retailers are stocked up or the virus is under control in a relatively short period of time. So that would be the midpoint of our estimates.

Okay, very helpful. And for Kofi, as we think through the puts and takes, what Dave Palmer was asking about the shift to food at home from food away from home, if we net that together, would we expect a net sales gain? And more importantly, from the EBIT contribution, would there be some stranded costs from factories potentially not being utilized? Or does the margin mix fully kind of offset that? Not sure if they go over the same supply chain or not. Thank you.

Yeah, well, certainly in North America, it's a commingled supply chain. So I think net-net, we would expect the balance of our at-home business increase to more than offset any potential drag. So I would just reiterate, we expect our plants to be close to fully utilized during this period.

Great, thank you.

You bet. Thank you.

Our next question comes from one of Michael Lavery with CyberTandler. Please proceed.

Good morning. Thank you. I'm a new Chief Digital and Technology Officer and just would love if you could give maybe a little sense of how we might expect changes there, how some of the ways are you're using data and digital and What kind of push might be coming that a new hire could help drive?

We're really pleased to have Jaime Montemayor on board as our new Chief Digital Technology Officer. He's had a heck of a first few weeks as everybody in the world starts working from home and we keep our systems going. Jaime is going to be terrific. he'll continue the work that we've already started. And I think, for me, whatever you do on the digital technology front needs to follow your business strategy and what you're doing from a business standpoint. And to the extent we're doing strategic revenue management and we're doing more specific marketing at scale, so through things like Box Tops for Education or our websites or through e-commerce, I think on the revenue generation front, what you will see is the enablement technology enabling us to do things we wouldn't be able to do before in better ways than we were able to do before. And then correspondingly on the cost side, because I think there will be benefits eventually on the cost side, things like global procurement. We have been doing that. We've seen tremendous savings from that and actually been able to generate the same kind of HMM with lower capital by by taking our sourcing globally, that capability will only be enhanced by the use of technology and the intelligence that affords in order to be able to do that more effectively. So the way we're thinking about it is that we're going to do the activities that we've done before, but the use of technology will be able to do it in a way that's more efficient and more effective than we've done it before. And so we're not chasing technology for its own sake, but using it to build on business strategy we already have in place.

That's helpful, caller. Thank you. Thanks.

Thank you. Our next question comes from the line of Ralph Dickinson with Jefferies. Please proceed with your question.

All right, great. Thank you so much. Just a question on near-term demand relative to manufacturing capacity. What we've heard, obviously, through all the media outlets, kind of what I'm hearing today is, you know, food supply chain remains strong, which I believe it does. But just kind of given that, you know, the near-term demand is substantially, you know, higher than for at home, you know, right now relative to basically any time in history, how do you think about, you know, meeting that demand you know, in the next month or two as, let's say, some inventories roll out. So really just kind of gaining some perspective on just the food chain in general and specific to General Mills, you know, just vis-a-vis demand. Thanks.

Hi, this is John Moody. So maybe we'll take a crack at that for how we're thinking about it in North America. I would say, first of all, again, It's about our first priority is the safety of our employees and food safety, and we're very focused on that. Our plants are running very well right now, again, near capacity and actually running ahead of the throughputs that we had planned over the last couple of weeks, which is terrific. We have a control tower in place across North America that's actually looking at all of our businesses, so balancing our North America retail businesses, our convenience and food services, and pet as well. And that control tower is a live group of people and systems that are working 24-7 and really balancing where we're seeing demand, what lines are running, and what products are running. The other thing I would tell you is that we're working very, very closely with our retail partners, and the partnership has been terrific. So we're talking about how we can simplify the supply chain. In some cases, that might mean running fewer SKUs, so running the big SKUs of soup and not running some of the tail brands as there's significant time required to change lines, talking about shipping full pallet quantities as opposed to mixed layers on pallets to customers, and then making tradeoffs around DSD, direct store deliveries for our retailers. That's actually a very good thing. For us, it gets to be a bit more challenging as it takes throughput out of our system. So we're having live conversations. I mentioned earlier I've had conversations with, top retail senior execs that are big customers, and the partnership's really good. So as of today, again, it's something that we're looking at on an hourly basis. We continue to stay tight with our retail partners, and we believe that we'll be able to serve our consumers for the short and long term.

Super. Very helpful. Thank you.

Thank you. Our next question. comes from the line of Brian Fleming, Bank of America. Please proceed.

Hey, good morning, everyone. Brian. Brian. Kofi, just a question on, I guess, on just the commodity cost cost-back. And I think in the quarter, you indicated it came in maybe a little bit favorably. I know, obviously, oil has moved a lot. But maybe if you could just give us a perspective right now in terms of kind of what the key variables are that are moving, you know, like packaging at commodities and not necessarily looking for, you know, guidance for next year, but just kind of how that cost basket is evolving now and how we can make you think about it going forward.

Yeah, I think, Brian, that's a great question. I would just start by reminding you we're probably at about 90% plus hedged at this point, so we have a pretty fixed structures to the balance of the year. I think that said, I think I would just refer you back to my earlier comments. I would expect our inflation to round up to 4%. So it is slightly favorable to our expectations at the start of the year based on sort of the trend line and what we're realizing in our cost base.

All right, thank you. You bet.

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

Hi. Good morning. Good morning, Chris. Hi. Just two questions for you, if I could. I'm just curious how, if you looked at your non-food service businesses in Asia, how they performed in the quarter, you mentioned Wanchai Ferry being a double-digit. Has that informed your modeling for the U.S. business in the fourth quarter? And I had a second question, which is that did you start to see inventories build in the third quarter, late in the third quarter, in anticipation of the stock productivity, the pantry loading? Did that affect North American retail reported sales in the quarter? Thank you.

Yeah, so on the first question, as what we've seen in Asia, does it inform how we think about this now? I mean, I think it informs how we think about what we're going to see, but I don't know there's going to be a one-to-one correlation between what we saw in China. I mean, every market's a little bit unique in how they transfer food and food habits and so forth. But certainly it informs our view, and yeah. tells us that away from home consumption is certainly going to increase, we believe, over the short term, based on what we've seen there. So it has informed our view on that. In terms of retail inventories, no, we, you know, we did not stock up retail inventories before the end of the third quarter in anticipation of what was going to happen in the U.S. We didn't take them down either. We were kind of running, you know, normal inventory levels. And, you know, The change of pace on consumer habits and the spread of the virus has been the likes of which we have never seen. And so we're reacting real time and reacting very well. But, no, we did not come into the quarter with elevated levels of inventory in the U.S. or, frankly, anywhere. And, Chris, as Jeff Seaman, I just remind everyone that's listening, you know, our quarter ended on February 23rd. So while that is only three weeks ago, which is hard to believe, you know, there really wasn't anything in the U.S. that was happening at that time. It's really all happened subsequent to the end of the third quarter, excuse me.

That's a good point. Thank you. Okay.

Yeah. I think maybe we have time for just speaking one more. All right. On our last question, Councilman, I have Thaisa Aoui with Deutsche Bank.

Please proceed.

Yes, hi, good morning.

Morning.

Morning.

Hi. So I wanted to ask about, you know, just outside of stocking up and sort of lapping that stocking up, is how do you think about, you know, packaged food and specifically your categories and your brands and how those might perform in a potential recession, you know, whether or not it's prolonged? I don't know if you've had time to think through it. you know, or if you've been, if you've sort of run models planning for it. But I just love your initial take on how we should think about, you know, a recessionary scenario and how your categories and brands might perform in that scenario. Thanks.

Well, so this is Jeff. I would say first is that the honest truth is over the past month, you know, we've been focused on the near term and delivering what we need to for the near term and executing really well. And It's not like we haven't had any thought to the future, but frankly, to get to the future, we need to execute on the now. So we have been wildly focused on that. I would say that for the relatively current period, John Newdy, I think, mentioned it, but our brands are actually well positioned in that. We're one or two in our category, and as people look for things they know in times like these, our brands tend to do fairly well because it offers comfort because it's a brand that they know and they trust, and to the extent that retailers are cutting down on the number of SKUs they have in the short term in order to make sure they sell through as much product as possible, it's really helpful to have the top turning brands in the categories, which we do. So in the short term, we feel like we're in a good position to both serve our consumers and serve the customers that are eventually going to serve the consumers. In the long term, look, it's been so long since we had a recession, and especially here in the U.S., But certainly during that time, people tend to eat in more, and General Mills did quite well. But that was a decade ago. We'll see how it plays out this time.

Okay, thank you.

Great. I think that's all the time we have, so we'll go ahead and wrap up the call for this morning. Thanks, everyone, for your time and attention. We really appreciate you being with us this morning. Really hope that everyone stays safe and healthy. If any of you have follow-up questions, please, I'll be around all day, so don't hesitate to reach out. Thanks again.

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