Greetings. Welcome to the General Mills Second Quarter Fiscal 2020 Earnings Conference Call. During today's presentation, all participants will remain in a listen-only mode. Afterwards, we will conduct a question-and-answer session. This conference is being recorded Wednesday, December 18, 2019. It is with pleasure that I now turn the call over to Mr. Jeff Siemon. Please go ahead, sir.

Thanks, Bridget, and good morning to everyone. I'm here this morning with Jeff Harmening, our Chairman and CEO; and Don Mulligan, our CFO. Also joining us this morning for Q&A is Kofi Bruce, our Vice President of Financial Operations who will take over for Don as CFO on February 1st, as well as Jon Nudi, who leads our North America Retail segment. I'll turn it over to the team in a moment but before I do let me cover the usual housekeeping items. A 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 the copy of the slides that supplement our remarks this morning on our Investor Relations website. Please note that our remarks will include forward-looking statements that are based on management's current views and assumptions. In the second slide in today's presentation risk factors that could cause our future results to be different than our current estimates. And with that, I'll turn you over to my colleagues, beginning with Jeff.

Thank you, Jeff, and good morning, everyone. I'll kick off this morning's remarks with our key messages on slide 4. 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. Importantly, we will remain on track to achieve our fiscal 2020 goals for sales, profit, earnings per share and we're raising our guidance for free cash flow conversion. Slide 5 summarizes our Q2 financial results. Net sales were flat to last year at $4.4 billion. Organic net sales grew 1% led by strong growth in Pet. All five segments contributed to profit growth with adjusted operating profit up 7% in constant currency, driven by HMM cost savings, lower consumer promotion expense and favorable manufacturing leverage, partially offset by input cost inflation and higher media 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 constant currency, driven by higher adjusted operating profit, lower net interest expense and a lower adjusted effective tax rate. On Slide 6, you can see our three priorities for fiscal 2020. 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 2020. We improved top line growth in North America retail in the first half compared to fiscal 2019 and we generated double-digit growth in the Pet segment. I will 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 for 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 2020 leverage target and we're well on our way to achieving our goal of 3.5x of net debt to adjusted EBITDA by end of year. With these priorities in mind, I will 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.

Thanks, Jeff, and good morning, everyone. Let me begin on Slide 19 by summarizing our joint venture results in the quarter. Cereal 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. Haagen-Dazs 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.

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 Foodservice 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 the breadth of experience, his track record of delivering exceptional results and his passion for developing talent in our organization.

Hi. Good morning, everyone and Don, thank you for all your help over the years. I wanted to ask a couple of 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 in 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.

This is Jeff Siemon. You're correct. The additional month translates to five extra weeks in the fourth quarter. In terms of our definitions, all changes related to Blue Buffalo are included in our organic sales. The extra 53rd week in the other segments is counted separately in the inorganic calculations.

Okay so nothing has changed there just to make sure.

Thank you for the question, Ken. Contrary to what has been reported, we have not experienced any negative impact on our businesses, as demonstrated by the strong Q2 results for Blue Buffalo, including the Wilderness line, which is grain-free. Our growth this quarter was driven by products like Wilderness and the Life Protection Formula. It's important to remember why we entered this market; we acquired a fantastic brand that appeals to various diet types, both grain inclusive and grain-free, and this is evident in our E-commerce and conventional retail results. While there has been much discussion about grain-free products, we have not observed any significant change in our business trends, even within Pet Specialty. Additionally, it's crucial to note that the FDA has not made any definitive connections or conclusions regarding these matters, although they have raised awareness. We collaborate closely with the FDA and the broader pet industry concerning our human food products as well. There has been a slowdown in the grain-free segment, but several factors influence this, including a potential shift to Blue Buffalo and changes in distribution channels. Despite the overall slowdown in the grain-free segment, our Blue Buffalo and grain-free products have not reflected that decline.

Thanks for the question. Jeff, I also wanted to stick with the topic of DCM and maybe just looking at it differently. Can you frame the situation as you see it maybe in terms of options for the portfolio and supply chain? Whether it's with reformulations or anything else. Like how do you think about the optionality there?

I think I'll start by saying that Blue Buffalo is well-received across all diet types, which is important to mention. Additionally, we have some product lines that, although technically grain-free, are also high in protein. For example, Wilderness is grain-free but high in protein, and many consumers are attracted to that feature. We currently do not have plans to reformulate any products, but we have the flexibility to make adjustments if necessary. At this time, we haven't observed any need for changes, but if the situation arises, we are prepared to adapt.

We continue to see strong returns on our investments in global sourcing. Our HMM is on track and will completely offset our 4% inflation this year. It is running consistently each quarter. We expect inflation and HMM to move in tandem for both the first and second halves of the year, which is contributing to elevated HMM results, partly due to the global sourcing mentioned.

Good morning, everybody. 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. 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 and 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 are 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 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 of the improved operating margin as well.

As we look ahead, I want to emphasize that we are very encouraged by the growth we've seen in pet distribution, which has increased by 45% over the past year. We don't believe that growth will stop once distribution levels off. This trend mirrors what occurs in human food; often, new products continue to find their audience for years. Therefore, it's not unexpected that we anticipate sustained growth in the pet market and within channels where we are already established. Looking towards fiscal 2021, I can assure you that even with considerable distribution in place, pet parents will still be discovering Blue Buffalo, particularly in the food, drug, and mass retail sectors. We expect to see ongoing growth there. In the pet specialty sector, we aim to improve performance by implementing tailored promotions and introducing new product innovations, with Carnivora being just the start.

Dara, this is Jon Nudi. I will jump in and take both those questions. On cereal, we feel really, really good about our performance to date. The quarter was a terrific one. We were up 5% from an RNS 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 cereals in over a decade with our total Cheerios franchise up 6.5%. Jeff mentioned some of our kids' cereals and Reese's Puffs and Travis Scott collaboration. So feel really good about our marketing and our big brands, at the same time our innovation is quite strong as well. In fact, we have the top four 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 feel really good about the fundamentals. And 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 cereal. 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 two that we delivered in fiscal 2019. We took a bit of a step back. We were down 3% through 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'll be an inflection point. And also in the summer of fiscal 2019, we brought up the second line on Oui. And as a result, we spend a tremendous amount in marketing support to really drive that business. In fact, in Q2 last year, we were up almost 40%. So our comps normalize in the back half on Oui. And that will help us from a comp standpoint. We feel really good about our core business. Original style Yoplait or Yogurt was up 1% in the quarter. Go Gurt 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 are launching a new nondairy Oui which has coconut-based. So we've got a Starburst promotion as well. So we believe that Oui are still on track to meet our objective of improvement from the minus two and we see Yogurt strengthen as we move through the back half.

Hey, good morning, guys. So two questions. First, just in U.S. Retail Cereal 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 it was also an easy 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, I was just hoping for a bit of a state of the union there on your cereal performance to 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 U.S. Yogurt 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 to growth in the back half of the year and expectations? That would be helpful. Thanks.

Yes. Regarding pet specialty, the results were not particularly surprising to us. However, that doesn’t mean we are satisfied with them, and we are actively working to improve the situation. The reasons for the disappointing results in pet specialty are primarily twofold. First, two of our largest players saw a significant decline in distribution, and we expect to start seeing improvements as we move into the latter half of the year. Second, we have not secured many off-shelf marketing placements in those channels, which we are also looking to rectify. This situation is not unexpected. Additionally, the E-commerce channel has a notable impact on pet superstores, and we have seen solid performance in E-commerce over the years, including this last quarter, which likely contributes to some of the declines. We are focused on this important channel, and while we are not surprised by the results, we are not pleased either. Our objective is to enhance our performance in the near term.

Hey, good morning, folks. Congratulations on your pending retirement Don and welcome Kofi. 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 are 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 in 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?

We continue to see strong returns on our investments in global sourcing. Our HMM is on track and will completely offset the 4% inflation we're experiencing this year. It is performing consistently quarter after quarter. We anticipate that inflation and HMM will align closely in both the first and second halves of the year. This trend indicates that the elevated HMM results are partially due to the global sourcing you mentioned.

Hi, thank you for the question. Regarding the guidance for the second half of the year, I believe consensus is anticipating that operating profit will remain flat or decrease. Is that what you're considering for the third quarter specifically, especially due to the comparisons and the $25 million? I wasn't clear from the script; it seemed like you had a different perspective, but I couldn't quite grasp it. Also, I saw in the press release that the reduction in consumer promotional expenses contributed to the increase in gross margin. Does this include trade promotions, or are you referring specifically to consumer promotions? Additionally, to what extent is this being balanced by higher media expenses? Could you provide more clarity on how much media spending is expected to increase for the year? There are quite a few questions in there, but yes.

Yes. So Robert, 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'd tell you that we've got probably more ideas than ever in terms of where we can get behind and there are proven drivers and 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 will build our brands where we have media as well.

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.