Greetings, and welcome to the General Mills Quarter Two Fiscal 2021 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded on Thursday, December 17, 2020. I would now like to turn the conference over to Jeff Siemon. Please go ahead.

Thank you, Frank, and good morning, everyone. We appreciate you joining us today for our question-and-answer session on our second quarter results. I hope everyone had time to review our press release, listen to the prepared remarks, and view our presentation materials, which were made available this morning on our Investor Relations website. It's important to note that in our Q&A session, we may make forward-looking statements that are based on management's current views and assumptions, including facts and assumptions related to the potential impact of the COVID-19 pandemic on our results in fiscal 2021. Please refer to this morning's press release for factors that could impact forward-looking statements and for reconciliations of non-GAAP information, which may be discussed on today's call. I'm here virtually with Jeff Harmening, our Chairman and CEO; Kofi Bruce, our CFO; and Jon Nudi, Group President of our North America Retail segment. We are in different locations, so we will make sure that technology works well for us and everything goes smoothly. And with that, let's go ahead and get to the first question. Frank, you can get us started.

Thank you. Our first question comes from Ken Goldman with JPMorgan. Please proceed.

Hi. Good morning. Thank you. Two for me if I can. First, quickly, the trade load of pet food, was this the catch-up from under-shipments in prior quarters? Or was this in advance of what could be maybe an under-shipment next quarter or maybe just heightened demand? I'm just trying to get a sense of what this means for your third quarter since you didn't call it out as a headwind?

Thank you, Ken. First, I want to highlight that we had an excellent quarter in pet food overall and a strong first half of the year. We've demonstrated that even after our expansion in food, drug, and mass channels, we can continue to grow this brand. Regarding our shipping in relation to demand, in the first quarter of this year, we shipped less than the demand. Our reported growth was 6%, while our movement was likely in the high single digits. In the second quarter, the situation was somewhat reversed; our reported net sales growth was 18%, but our movement was probably in the double-digit range. For the first half of the year, our reported net sales have increased by about 13%, while our movement is up around 10% or 11%. So, we have slightly outpaced movement in terms of shipments this year. I still anticipate a strong third quarter. Our movements remain robust, and we will see the impact on reported net sales. However, I expect our shipments to be solid, and movement to continue to be strong, as the category is currently experiencing mid-single-digit growth, primarily driven by premiumization. Given that Blue Buffalo is the leading brand in this segment, we are performing well.

Thanks. And then my follow-up, you're guiding to a flat EBIT margin year-on-year in the third quarter. But in 3Q 2020, you did have a pretty big hit from COVID in China. I think you said at the time that Häagen-Dazs China alone was a 150 basis point headwind to your total operating profit margin in the quarter. Correct me if I'm wrong on that? And you had organic sales growth that quarter of 0%, which was pretty low for you guys. So, there was no fixed cost leverage. You turn around a year later, China is doing great. You have all this fixed cost leverage from another 7% organic growth quarter coming. Why shouldn't we be modeling an EBIT margin, maybe a little bit higher than that 16.2-ish percent number you did a year ago at this time?

Sure.

Ken…

Yes. Go ahead, Kofi.

Go ahead. Sorry. Sorry, Ken. Kofi here. Thanks for the question. As we mentioned in the prepared remarks, one of the things we're flagging is an expectation that we will see some of the external supply chain costs shift into Q3, which will be an offset to some of the expected leverage benefit we would expect to see with the volume that we're guiding to for the quarter.

Great. Thank you.

Our next question comes from Andrew Lazar with Barclays. Please proceed.

Good morning, everybody.

Good morning.

Good morning, Andrew.

Jeff, in your prepared remarks, you called out – and I think you did last quarter, too, but you called out some interesting results in China, where traffic in the company's retail shops is coming back towards normal levels. But sales of at-home consumption items like Wanchai Ferry still remain quite elevated. So, of course, every market is not like-for-like. But do you see the dynamic in markets like China and others, maybe Australia, that are well ahead of where we are in sort of getting the virus under control as reasonable indicators or corollaries for some of what perhaps gives you a little more comfort on why there's conviction in some of the at-home items staying elevated even as things kind of normalize here in the U.S.? I'm trying to get a sense of what takeaways you can conclude from some of those markets as it relates to the U.S.?

Yes. Andrew, it's a very good question and also a good memory from what we talked about in Q1. I mean, we – I put these in my prepared remarks, because there's a lot of speculation among us as CPG people on food, as well as investors and analysts about what's going to happen post-pandemic. And we're all looking forward to that day. But there are very few data points on what is actually happening, when governments aren't locking down restaurants and bars and things like that. And so one of the things we can – there are a couple of data points we can point to that don't guarantee what's going to happen afterwards, but at least there are data points of what's actually happened rather than speculation on what might happen. And one of those places is China, where restrictions have been lifted five or six months ago, and we're still seeing slight declines in our foodservice business. While our Wanchai Ferry dumplings business, which is a frozen business at-home, remains up double digits. And while it's not up as high as it was at the beginning of the pandemic, it's still up double digits and significantly above where it was pre-pandemic. And we think that's important because, at the very minimum, what it points to is the consumer eating habits, while they may change from where they are now once we have a vaccine and once we're post-pandemic, doesn't necessarily mean they're going to go all the way back to where they were before, or at a minimum not going to go back as fast. We're seeing a little bit of the same thing in Australia, where our current movement in Australia is not what it was at the beginning of the pandemic when they were on a lockdown. But we have seen growth in our business in Australia, even in the last few months as the restrictions have been eased. And so, we point these things out and I point these things out, because while there's a lot of speculation about what might happen, there are at least a couple of places where we're watching what is happening. And that would point to continued levels of pretty high demand even once we're – we have a vaccine and once the lockdown and restrictions have been lifted.

Okay. Great. Thanks for that. And then just quickly, you discussed not yet having had the opportunity to kind of fully replenish retail inventories in a lot of areas as consumption remains pretty elevated. Would you anticipate more of that retail inventory refill to be able to happen in fiscal second-half, such that sales maybe broadly, call it, in North America Retail, could be ahead of in-market consumption? Or are we still at a place where significant refill of inventories at retail is just tough given where consumption levels remain? Thanks so much.

Yes. Andrew, let me start by addressing this question. I'm going to pass it to Jon Nudi for specifics on North America Retail. Generally speaking, for this quarter, we have not built inventories in the second quarter across our enterprise. However, it really depends on the segment. For instance, in the Pet category, we did ship ahead of demand and rebuild the pipeline. In contrast, in consumer convenience and foodservice, certain distributors are not carrying as much inventory due to school closings and other factors. We may be slightly behind demand for the quarter. In North America Retail, our movement and shipments were both around 9%, indicating very little movement. It might be beneficial for Jon Nudi to share insights on what we observed in Q4 last year and Q1 and Q2, along with the implications for the rest of the year.

Great.

Yes. Thank you, Jeff, and hello, Andrew. In North America Retail, we experienced a shipment lag of about 9% behind consumption in the fourth quarter of fiscal 2020. During the first half of fiscal 2021, we managed to close about 4% of that gap, leaving us with approximately 5% remaining. We are optimistic that we will resolve this by the end of the fiscal year. Most of our categories are in good shape in terms of capacity and service, although we do face significant issues with certain products like soup, dessert mixes, and taco shells. We expect improvements by the third quarter, and by the end of the fourth quarter, we believe our inventory levels will be back to where we need them to be.

Thanks everybody.

Thank you.

Our next question comes from Laurent Grandet with Guggenheim. Please proceed.

Hey, good morning, everyone.

Good morning.

Yes. Good morning. I do have some questions on pet food. So wet pet food was plus 25% in the quarter; treats up plus 40%. With the addition of pet food and wet cat food, I mean, what to expect for wet pet food, this coming calendar year? And also, I think you said in the past that you would be launching new treats at the beginning of the calendar year. Could you please update us on this initiative? Thanks.

As I reflect on our pet food business, I am particularly pleased with our growth across various segments. When examining product types, our dog food offerings—both wet and dry, as well as treats—are all experiencing growth. Similarly, in cat food, whether it's dry, wet, or treats, we are also seeing growth in all segments. Across channels, we are growing in the food, drug, and mass markets, and we've recently returned to slight growth in specialty, with significant growth in e-commerce. This highlights the overall health of our pet food business as we succeed across different segments and competitive channels. Looking ahead, we anticipate growth driven by the premiumization and humanization trends in pet food. We are particularly excited about our upcoming tasteful launch. The wet cat food segment is valued at $5 billion, and our market share is around 2 to 2.5, compared to 10 for our dry dog food. This indicates we have ample opportunity for growth. What we're introducing will taste excellent, as we understand that cat owners seek wholesome and natural options that also appeal to their cats' selective tastes. Additionally, we have treat launches scheduled for the third quarter and more innovations in the pipeline for both treats and cat food. We are optimistic about our ability to compete effectively, given our innovation strategy and the ongoing trends towards premiumization and humanization in the pet food market.

Thanks, Jeff. And if I may, I’ve a second question on Europe. Sales are improving in Europe. And you mentioned in your prepared remarks, Old El Paso and Häagen-Dazs being a major element of that recovery. So now, actually, we saw also trends improving in yogurt. Could you please provide us some more business update about that significant piece of your European business?

Yes. So I'm really pleased with our European results. I mean, we grew share broadly in France. We grew share in Australia, and we held share in the UK. So our European business is doing well. The things that led to growth, as you say, are our Häagen-Dazs business and our Old El Paso business, which have good margins, which is why you see our profitability up in the quarter outpacing our sales growth. But our yogurt business, particularly in France, continues to grow. I'm really pleased with the performance of our French yogurt business. We're growing share, but we're also growing in the absolute. We're just not growing as fast as we are in Häagen-Dazs and in Old El Paso. But we are growing our yogurt business, particularly in France. In fact, our yogurt business throughout the world with the exception of the UK where we discontinued a sub-line in adult yogurt. Outside of the UK, whether it's Canada, whether it's the U.S., whether it's France, our biggest markets, we're actually growing our market share in yogurt. And so we feel good about our performance there.

Thanks, guys, and happy and safe holidays for you.

Thank you.

Same for you.

Our next question comes from Alexia Howard with Bernstein. Please proceed.

Hello there. Can you hear me okay?

Yes.

It's fine.

Good morning, everyone. So sticking with the European theme, I can't help but notice that in the U.S. Retail segment, you've obviously got very robust takeaway and would expect given the pandemic, things are going very strongly there. Europe looks kind of more normal. The sales growth is not so big. I'm just wondering structurally, what the differences are between these two markets? And why we would be sticking to things out through the pandemic so differently between the two regions?

It's a very fair question, Alexia. Let me explain it for you. When we look at our retail sales in Europe for the quarter, they have increased by 11%. In the U.S., the increase is 9%. So, if we compare retail sales of branded products, the trends in Europe are quite similar to those in the U.S. There are some differences in our product portfolio, like a larger yogurt business in Europe compared to the smaller one in the U.S. However, overall retail growth is comparable. It's important to note that our European results also include a significant foodservice business, such as Häagen-Dazs shops and our foodservice dough business, which are not part of our North America Retail segment. Also, we have other acquisitions related to yogurt, dough, and some private label brands that are not growing as rapidly, which we don't have in the U.S. Therefore, if we look purely at retail performance, Europe and the U.S. are showing similar behavior, but additional businesses in Europe that overlap with the foodservice sector and private label are affecting the overall sales results, though profitability in Europe remains strong.

Very helpful. Thank you. And then as a follow-up, for most of the promotional activity, obviously, that was on in the early part of the pandemic. Just curious about by the promotional activity is coming back. Are the retailers expecting you to spend back a little bit more than you normally would do because they want some of that money back that wasn't spent earlier in the year? But I'd like to talk about those dynamics, and then I'll pass it on. Thank you very much.

So, Alexia, this is Jeff Siemon. I think I heard promotional activity in our retailers looking for us to spend back or spend more incrementally. I think, it was a bit choppy, but I think that was the question?

Yes, Jon Nudi, do you want to pick up on that?

Yes, absolutely. So, for the U.S., in particular, in Canada as well, we're seeing less promotional activity, really through the first half of our year. It's primarily driven by a decrease in depth of promotion. So, frequency looks pretty similar across the majority of our categories. But again, promo frequency is down in capacity-constrained categories, though. So, again, it's really a category-by-category dynamic that's going on. Things like soup, we chose to pull a significant amount of merchandising, really through our first half to make sure that we had product available as we get into key season. Desserts would be the same thing as well. So, as we move to the back half, we think in the majority of our categories, you're going to see promotion levels normalize versus what we've seen prior to the pandemic. I think we'll still see lower levels of depth of discount in some of the categories that are capacity-constrained. And I'll tell you; again, it's a balancing act. Obviously, we want to be competitive. Our retailers want to be competitive. But I think everyone wants to do it profitably as well. So, it's a dynamic discussion that's going on with our retail partners and something we'll continue to assess as we move through the back half of the year.

Right. Thank you very much. I will pass it on.

Thank you.

Our next question comes from Robert Moskow with Credit Suisse. Please proceed.

Hi. I had a couple of questions. Jeff, the first one was on e-commerce. I've seen some predictions that e-commerce could be as much as 20% to 25% of the grocery industry over time. And I think that's based on the investment that the retailers are making and the expectation that consumers enjoy getting the convenience during the pandemic. Can you talk a little broadly about how your business model might change if that becomes that big of a penetration? Or does not much have to change? We just have kind of keep up with retailers' demand?

So, Rob, let me provide a bit of an overview and then we can discuss future developments. Eighteen months ago, approximately 5% of our global business was via e-commerce, and that percentage has now increased to 10%. This represents a significant change over a relatively short time. This trend is evident not only in our U.S. operations but also in markets like China, Korea, and Europe. It’s a widespread global shift. Regarding future developments, it's worth noting that even though 10% of our business occurs through e-commerce channels, in the U.S., our largest market, about 85% of those sales are still made through physical stores. This is important because until now, our business model has not changed greatly, as most of our e-commerce sales are facilitated through store and grocery locations in the U.S. or Häagen-Dazs shops in China. I don’t anticipate that our model will change significantly in the next couple of years because the click-and-collect model, where consumers pick up their orders themselves, is far more profitable for our retail partners. I believe this model will continue to dominate in the near future. Looking five years ahead, it's hard to predict exactly how things will evolve. However, I do expect e-commerce to keep growing and adapting. In the nearer term, I think we are strategically well positioned. We excel in our categories thanks to our strong brands and capabilities, and our business model remains largely consistent with what we have previously experienced.

Okay. Great. And a follow-up for you, different subject, a lot of us are trying to figure out the cost profile of the industry getting into fiscal 2022. And I would imagine some costs that you had related to COVID mitigation of plants would come down. Is there any way to broadly think about your cost profile like a year from now? And what costs might come out? And maybe even comment on other efficiencies that you're looking at? Thanks.

Kofi, do you want to tackle that one?

Absolutely. And I'll try to steer clear of getting too deep into fiscal 2022, given a humble respect for the uncertainty of the environment we've got right in front of us. But I think you have the general structure, right. There are certainly costs that we have been bearing as we deal with some of the health and safety protocols to support safe operation in this environment. Some of those could potentially go away. But I think the other and more important is, as you think about the operational costs that we're incurring to service higher levels of demand, the way that we have pursued supplementing our capacity allows us to scale down to the extent that demand comes off its peak, even if it remains elevated. So, I think we've left ourselves with agility to not build a lot of these costs into our structure. So, I think that's the posture we've taken as we've looked at how to service demand in this environment.

Thank you.

You bet.

Our next question comes from Bryan Spillane with Bank of America. Please proceed.

Hey, good morning, everyone. My question is, if we're going into a scenario, where demand remains elevated for the next few years. If we look at North American Retail and the mix of business now, like Meals and Baking has really driven a lot of the growth or the extra growth, I should say. Would you expect the mix to change, so if we kind of transition to kind of a new normal where there's more flexibility, people working at home, and we're kind of past the pandemic? I'm just trying to understand whether or not you think the mix of what's driving the growth in North America Retail would change going forward? Or do you think that things like Meals and Baking would continue to stay at elevated levels?

That's a good question, and it's one we're currently trying to understand as we look to the next quarter and our anticipated mix. What I can say is that many more people have taken up baking, especially among young families and Hispanic households, leading to an increase in household penetration. People are baking more and gaining confidence in it, which suggests that baking might remain popular. With more people working from home, there could be a longer-term benefit for breakfast and lunch occasions. While our mix may change, our meal and baking businesses in the U.S. are performing well in terms of margins, similar to cereal. Therefore, even if the mix shifts, I believe we can still grow profitably. While it's too early to predict, I'm confident we can navigate any changes in the mix to achieve growth while maintaining profitability.

All right.

Thank you.

Have a great holiday everyone.

You too.

Our next question comes from David Palmer with Evercore ISI. Please proceed.

Thanks. Good morning. I wanted to talk about reinvestment in growth. I know it's a broad topic. It could be advertising. It could be other capabilities. But, how are you thinking about that? Obviously, you have opportunity to do that this year, even stretching back to fiscal 4Q of last year. But what is the level of that reinvestment in fiscal 2021? And what is that supporting? And any color would be helpful. And I have a quick follow-up.

Kofi, you want to take that one?

Sure. As you look at the brand-building activities, particularly through media, we have seen an increase of about double digits in the first half in terms of support for key platforms and ideas. We are carefully monitoring the return on investment from these brand-building activities. The capabilities related to data and analytics are becoming apparent in our administrative expenses. I believe these will be investments that yield benefits over the medium term. Ultimately, this is about ensuring the sustainability of the growth trends we are observing and securing the penetration gains we have achieved in this environment.

I think there is a sense of cynicism or skepticism regarding the food industry. Observers note that food companies, including Mills, reduced their advertising budgets for much of the 2010s. Now, there's a plan for reinvestment, but there’s concern that advertising may not be effective for these categories like it once was. Are you approaching this reinvestment differently to enhance the return on investment? Any additional insights on this would be appreciated. Thank you.

Yes, David, I read your report. While I don’t agree with everything in it, I appreciate that you shared your thoughts. We've been measuring ROIs for a long time, and we believe we have a good grasp on it. Advertising has definitely evolved; we no longer have just three channels on TV. Now, there are various ways to advertise, such as through gaming, Instagram, Hulu, and others. The way people consume media has changed, but what drives ROI hasn’t. It's about the marketing behind big brands with compelling ideas that resonate with people, like heart health on Cheerios or Jennifer Lopez promoting Yoplait and calcium in yogurt relevant to the viewers. We market Totino's through gaming where the audience is most engaged. Advertising Honey Nut Cheerios' heart health in gaming wouldn't be effective. The key elements remain: big brands, impactful ideas, and strategic placements. What has changed is the sources of information. We adapt to these changes like everyone else. A unique advantage we have is access to a significant amount of first-party data from bettycrocker.com, pillsbury.com, and Box Tops. By leveraging this data and analytics alongside our strong brands and effective ideas, we are confident in our ability to generate solid ROIs.

Great. Thank you.

Yes.

Our next question comes from Faiza Alwy with Deutsche Bank. Please proceed.

Yes. Yes, hi good morning. So a couple questions around topics that have already been discussed a little bit. The first one is just, Kofi, around margins. I was hoping that you could help quantify some of the puts-and-takes on the gross margin line. And I think in 4Q, you had said that you had incurred around $100 million of COVID-related costs. And you talked about those extending into fiscal 2021. So I was wondering if you could quantify how much of those have extended? And how much of these might stay post-pandemic? And maybe there has been some benefit from internal operating leverage. I know we've talked about lower promotions. Maybe there's some positive mix, because some of your higher-margin categories have been growing faster. And raw materials seem to have raw material pricing, there's been some favorability there. But I was hoping you could just unpack some of these factors. And what you've seen in the first half. And again, how we should think about those factors in a more normalized environment?

Sure. Let me give you an overview of the cost structure regarding gross margin. We anticipate about 3% input cost inflation and we're on track with that. We also have higher operational costs to meet demand in this environment, which is one of the aspects we identified as related to the pandemic. Additionally, our investments in brand capabilities and health and safety costs are also linked to COVID-19. Honestly, it's becoming more challenging to separate the costs associated with COVID. This year, we haven't been doing that because the impacts of COVID affect so many areas of our business, and obtaining detailed visibility is quite difficult. As you mentioned, the mix of business certainly contributes positively, and we are experiencing significant growth in our highest-margin sectors, particularly in pet and North America retail, which is driving much of the company's growth and positively impacting our gross margin mix.

Okay. Okay. Thank you. And then just a follow-up. I think, Jeff, you mentioned in your prepared remarks that you have, sort of, incremental flexibility around bolt-on M&A and share repurchases at the right time. And I was hoping you could expand on that. So, are you waiting for the pandemic to essentially go away before you take some actions around on the M&A front? Are you more active in the M&A market than you were maybe a year ago? I know you previously talked about some type of portfolio optimization or some divestments. And are there any particular categories where you would maybe like to expand in? So, just more color around those topics.

Sure. Let me provide a brief overview. As we consider capital allocation, the primary focus is on the business. We have increased our capital spending this year for growth projects, particularly in cereal, fruit snacks, and Mexican food. Additionally, we promised to increase our dividend once we reduced our leverage, and we've raised our dividend rate by 4% this year. Looking ahead, we aim to establish a more traditional capital allocation process now that our net debt-to-EBITDA ratio is approximately 2.9, which offers us significant flexibility in creating value for shareholders. We will continue to reshape our portfolio through acquisitions and divestitures. If there are suitable bolt-on acquisitions that would enhance our growth and benefit shareholders, we have the flexibility to pursue them. Conversely, if there are no immediate M&A opportunities, we can also buy back shares as needed. We are not required to wait for the end of the pandemic to engage in M&A or share buybacks; our balance sheet now allows us to undertake these activities and deliver value to shareholders in several ways. We have demonstrated our ability to create value through M&A, particularly with Blue Buffalo, and share buybacks can also add value. Kofi, do you have anything to add?

No, I think we continue to be very pleased with the progress we're making on debt deleverage. And so I think as we look at that as the gate that probably most matters, we are very quickly getting back to a place where our capital structure is in the right long-term target zone. And then I would just also add that we do have an existing share repurchase plan with a fair amount of authorization remaining up and standing. So, there really isn't any additional gates should we decide that share repurchases make sense.

Our next question comes from Jason English with Goldman Sachs. Please proceed.

Hey. Good morning, folks. Congrats to another strong quarter.

Thank you.

I want to revisit the gross margin question. I apologize for getting a bit distracted by my son during your answer. I think I heard you mention in response to Ken Goldman's question about margins going flat next quarter that there will be external costs shifting into next quarter. How do external costs shift? I would assume they remain constant if you're using external providers. Are you suggesting that gross margins will hinder margin progression as we move into next quarter?

Jason, I totally get the interruption from your son. I've had them even on investor calls. So I totally get it. And thanks for your question. Yes, so as you think about next quarter, the way to think about external supply chain cost shifting is that, we were able to service more of our demand through internal capacity in Q2. We didn't need to rely as much on it. But as we go into Q3 with an expectation of demand remaining elevated and recognizing and linking to the fact that we didn't see as much inventory replenishment in North America retail, we would expect to have to lean more heavily on external supply team in Q3, as we expect to make some progress against that inventory rebuild. The other component to your point, so most of that would – outcome at gross margin that would be potentially some additional costs that come through at the admin line as we advance some of the investment in capability.

Thanks. That's helpful. And one more quick question on pet food. First, congrats on the strong quarter results in pet food. It certainly surprised me more robust than I was expecting. Can you give me a performance by channel? Like, how are you doing on e-com versus Pet Specialty versus what we see in the Nielsen-measured channels?

Did you get disconnected as well?

No. We're still on.

You are disconnected, we will be back…

Hey, pardon me. We're returning to reach Mr. Siemon back.

Can you hear – this is Jon Nudi. Can you hear me?

Can you hear me, Jon, you are there?

I think I heard Jeff still talking. I think you all are on.

I can’t hear Jeff.

We’re trying to reach Jeff back. Thank you.

Kofi, do you want to take a crack at that answer?

Yes. Yes, sorry. Just want to make sure, I am still on, so question was kind of our channel. As we look at our Q2, we saw Pet Specialty probably lagging the other two channels; e-commerce, up double digits as we look at the shape of our business. That's about one-third of our sales in Pet, and FDM at almost 40%, as we look at the measured.

Got it. The 40% FDM. Got it. Thank you. I appreciate it. Best of luck. And I hope we’ll get Jeff back soon.

Yes. Yes, sorry about that.

And we're back.

Okay Frank, we can go ahead with the next question.

Our next question comes from David Driscoll with DD Research. Please proceed.

Thank you for joining us. I wanted to ask about pet food. Jeff, when you acquired the business, the previous team projected double-digit top line growth. After it was integrated into General Mills, you maintained that double-digit guidance. However, there has been considerable doubt regarding the business's ability to sustain this growth under General Mills. In response to an earlier question, you mentioned that underlying demand is around 10-11%. Can you confirm that BLUE has the potential to continue achieving double-digit growth? Additionally, could you elaborate on the factors that might support this growth moving forward? I hope this isn't merely a pandemic-related inquiry, and that you have solid insights, especially since pets don’t dine out. I have a follow-up question as well.

Yes. First, let me go with what I know, and then we can talk about what we think. What I know is that the growth in Blue Buffalo really isn't pandemic-related, and even though, anecdotally adoptions are up for pets and certainly among millennials. That's actually was not driving the growth of the category, and it's not driving the growth of Blue Buffalo. The category is being driven by the premiumization of pet food. And we know that because the dollar growth is up mid-single digits in the category, and the pounds are only up low-single digits. So that delta continues to be important as pet parents switch from whatever they're feeding their pets before to more premium pet food. And so that's what we know and we know that Blue Buffalo is a great brand. We also thought when we bought Blue Buffalo that we'd be able to execute well with our rollout of the Food, Drug and Mass channel because we've done it with Annie's. And we got a lot right. We got a few things wrong, but we learned a lot through Annie's. And so we're going to apply that to Blue Buffalo. And so, now we've got a really good all-channels business. And one of the things we learned with Annie's was that great brands travel across channels and that just because you have something in a grocery store, it doesn't mean that every consumer knows that it's there yet. It takes a long time to gain awareness. There are some places that we've looked, we probably only have 20% awareness in some accounts that Blue Buffalo actually exists at that supermarket chain. And so, that has given us confidence, not only that we could execute a Food, Drug and Mass rollout, but that Blue Buffalo would be good across channels and that we continue to grow, even once we gain full distribution because we've seen this movie before on Annie's. And that's what's playing out. As to how we grow into the future, I can't promise that we're going to grow double-digits in the future. We had a very good quarter this quarter. I think we'll have a good quarter coming up. But what I can tell you is that, I am confident we have the best premium brand in the pet category. I'm confident that the premiumization of pet food will continue so that we're very well positioned. We have a robust pipeline of renovation and new products and that we can continue to grow in Food, Drug and Mass. And so all those things lead me to believe that not only has been Blue Buffalo been a good acquisition for General Mills, but that it'll continue to perform well. And whether that's high-single-digits or double-digits will remain to be seen. But I think that we were all confident when we bought Blue Buffalo that we could do a lot of good things with this business. And we're at least as confident now as we were the day that we bought it three years ago.

Congratulations on your strong performance. We've noticed that many businesses have faced challenges, so well done on that front. My follow-up question is about the marketing model. Blue Buffalo previously invested heavily in in-store promoters, known as Pet Detectives, and had top-tier advertising levels. How has that strategy evolved during the pandemic and in light of the challenges faced by pet specialty stores? Have you shifted funds from in-store promotions to advertising? Is the overall budget reduced? I'm curious to understand how you'll continue to drive growth in this business going forward.

The pandemic has changed many things, including how consumers access stores. However, our commitment at Blue Buffalo to educate pet parents about the value of our products remains unchanged. Historically, we've relied heavily on in-store models, and while we will continue to use this approach, we've started to supplement it with TV and digital advertising, as well as digital marketing. Moving forward, you will see our dedication to building the brand and expanding our marketing efforts. The mix of our marketing strategies will adapt over time, but we believe that an omnichannel approach—combining in-store presence with online engagement—will become increasingly crucial for our business. We've achieved success with North America Retail in this area and are applying these insights to Pet while also exploring new opportunities. We will likely discuss this in more detail in the next quarter. It's a great question, and I assure you that while our marketing model will evolve as our methods of reaching pet parents change, our commitment to brand building will remain steadfast.

Appreciate the thoughts. I'll pass it along. Thank you.

Our next question comes from Rob Dickerson with Jefferies. Please proceed.

Great. Thank you. Jeff, maybe just a broader question just around the strength of brands, right, and I guess more specifically, your brands and the market share you've been able to hold or take within the U.S. really over the past nine months vis-à-vis private label, right? There's been a lot of discussion in why private label has maybe lagged some of these stronger brands or master brands. Upfront, it seems like it may have been supply chain issue. It would seem like the supply chain issue maybe has drifted a little bit, speaks more broadly and positively to brands overall. But then at the same time, we hear companies saying, okay, well, if we go into a recession, consumers will continue to look to consume food at home because it's a less costly option. But it also sounds like you're suggesting they still won't go to private label. So I'm just trying to right-size, how we should be thinking about brands overall with respect to the economic backdrop, and then compared to private label. Sorry. There's a lot there. But thanks.

There's a lot to unpack here. Let me refer back to the last Great Recession, as I was involved in marketing during that time. Firstly, when economic difficulties arise, the initial change consumers make is not towards private label products. The primary shift is from dining out to eating at home, as the cost advantages of home-cooked meals are much more appealing to consumers. This leads to growth in various categories. During the last Great Recession, we managed to maintain our market share while private labels also gained some ground. The real losses in market share came from average brands. Fast forward to now, we are seeing ongoing growth in our categories both in the U.S. and internationally in Europe and Brazil, attributed to our strong brands and effective supply chains. Retail customers recognize that we are driving growth and want to maintain that momentum. Currently, we have observed a decline in private label shares across different food sectors, including pet food and human food, even in Europe. Looking ahead, while consumers might consider switching to private label, if a situation similar to the last Great Recession arises, we expect to at least hold our market share. I think it's essential to reflect on past trends as it provides valuable insights into potential future outcomes.

Okay. That's fair. I have a follow-up question. Over the past five years, there has been a continuous effort towards optimizing SKUs, which is quite common in the industry. Recently, it seems this effort has picked up pace due to various circumstances over the past nine months. When you talk to the retailers, do you find that they are increasingly concentrating on high-velocity, scalable, and more profitable items, giving larger brands an upper hand compared to smaller brands that are trying to break through? There are certainly more variables at play now than usual. Thank you.

Jon, do you want to take this one?

Yes, Rob. A couple of points. The variety of SKUs should be examined on a category-by-category basis. We paused a substantial number of soup SKUs at the onset of the pandemic. We discovered that while some SKUs can be eliminated, others are crucial because variety is important to consumers. It's essential to start with the consumer and understand their needs. We are observing a broader trend with retailers, especially since Jeff noted that 85% of e-commerce operates on a click-and-collect model. These orders are fulfilled directly from the shelves, and retailers are becoming more efficient by moving towards fewer SKUs on the shelf that have higher sales velocity. This approach benefits our brands, which typically rank as either number one or number two in their categories. We have been dedicated to strengthening our brands, and for the third or fourth consecutive year in North American Retail, we have increased our market share in most categories. Therefore, we believe we are well-positioned for the upcoming changes on the shelf.

All right. Great. And happy holidays. Thank you.

You too, Rob. Thank you.

Thanks, Rob.

All right. Frank, unfortunately, I know we weren't able to get to everybody on the queue, but I think we're going to wrap it up here and wish everyone a very safe and healthy holiday. Thank you for your time. I appreciate the interest in General Mills, and we'll be in touch soon.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.