Greetings and welcome to the Fiscal 2021 Q3 Earnings Call. As a reminder, this conference is being recorded Wednesday, March 24, 2021. I would now like to turn the conference over to Jeff Siemon, VP of Investor Relations. Please go ahead.

Thanks, Jennifer, and good morning to everyone. On behalf of my colleagues at General Mills, thanks for joining us. We are looking forward to having our live Q&A session on our third-quarter results. I hope everyone had a chance to review our press release, listen to our prepared remarks, and view our presentation materials, which are made available this morning on our Investor Relations site. Also, refer to the press release we issued yesterday announcing our proposed sale of our European Yoplait operations to Sodiaal. I will note that in regard to that transaction, we have a memorandum of understanding, and that is still subject to appropriate labor consultations, regulatory filings, and other customary closing conditions. We expect to close that proposed transaction by the end of the calendar year. Furthermore, it’s important to note that in our Q&A session today, we may make forward-looking statements 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 ‘21. Please refer to this morning’s press release for factors that could impact our forward-looking statements and for reconciliations of non-GAAP information, which may be discussed on today’s call. I am here virtually with Jeff Harmening, our Chairman and CEO; Kofi Bruce, our CFO; Bethany Quam, Group President for our Pet segment; and Jon Nudi, Group President for North America Retail. We are holding this call from different locations, so hopefully, technology cooperates and everything goes smoothly. With that, we can get into the first question. Jennifer, you can get us started.

Thank you. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.

Good morning, everybody. Thanks for the question.

Good morning, Andrew.

Great. I think I would like to stick with the 2-year growth CAGR methodology that you laid out and discussed in the prepared remarks. Thinking about it that way would imply fiscal 4Q organic sales growth that would look to be roughly in line with what you reported in fiscal 3Q. I realize some of this is likely a bit of a shift of inventory refill from that you expected in 3Q into 4Q, but it would seem to suggest you believe sales growth—the sales growth deceleration as reopening occurs is likely to be maybe slower than many currently expect. So, I am just trying to get a sense of if that’s a fair characterization of your thinking at this juncture. And if it is, sort of what’s informing that viewpoint? Thank you.

Yes. Thank you, Andrew. This is Jeff Harmening. You have that exactly right. As we look at the third quarter of this year, demand was high all over the world, including the U.S., fueled by clearly the pandemic as well as stimulus spending, and in addition to that, some weather-related events. As we look at Q4, we really believe that our sales, both in terms of pounds and pricing, are going to be higher than it was pre-pandemic, and we are seeing that in the first couple of weeks of the month. We are confident consumer behaviors aren’t changing as quickly as some would think. What fuels that, Andrew, is really—if you look at last year, in 2020, our foodservice business in general, in the U.S., the industry declined about 25%. Quick-service restaurants, schools, and healthcare saw significant declines, but we have seen quick-service restaurants bounce back, and schools are gradually coming online, as is healthcare. So, there's a lot of bounce back relatively quickly. However, casual dining is going to take longer to recover. About half of the decline we have seen over the last year in away-from-home eating is really driven by travel, leisure, and business, along with industry canteens and workplaces. Clearly, that’s going to take a longer time to come back, if it ever does at all, because we will not be working the same way. People are looking for flexible schedules, and while vacation plans may be increasing, business travel may not return to previous levels as technology has caught up, allowing many tasks to be done remotely. Thus, we are confident in our belief for the fourth quarter based on what we have seen over the past year and in the early weeks of this quarter.

Great. Thanks very much. I will leave it there.

Thanks.

Our next question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.

Hi, thank you. Two for me. First, how should we think about your appetite for being aggressive on share repurchases? Just looking back prior to the Buff deal, there were some years the company spent upwards of $1.7 billion on buybacks. Should we think this level is at least within the realm of possibilities, or do you want to keep a little more dry powder around? That’s my first one.

Sure, Ken. This is Kofi. Good morning, and thanks for the question. Look, I think we are absolutely in a position where we ended the quarter with a really strong balance sheet. Our leverage ratio at 2.8x net debt-to-EBITDA means we have continued to make great progress against our capital goals. I expect we will restore our full capacity to use all of our cash return levers. An important signal is that we have already started. While I can’t commit to anything beyond what we have done, we continue to have the flexibility to act and use the balance sheet in alignment with our capital allocation policy. Share repurchase is the last of those levers, so that is where we would look to manage leverage and steer any excess free cash flow.

Thank you for that. And then Bethany, within the broader pet food segment, the refrigerated sector is small but growing quickly, not really showing a lot of signs of slowing down except for some supply chain issues. Has Blue Buffalo’s appetite to break into this subcategory changed at all, or is it still sort of a wait-and-see attitude? It’s not necessarily what you have said, but some of your predecessors may have kind of implied in talking about it?

Well, hi, thanks for the question. What we have really seen is that pet parents throughout this pandemic have really wanted to continue to offer their pets different forms of food. We have seen mixing between kibble and wet food, and our wet business is performing incredibly well, alongside fresh options. It’s still a small part of the category, but the trend is pet parents continue to mix different types of food. So, we will continue to look at all those areas, and we will push the Blue Buffalo brand where we think pet parents want to see it.

Very good.

Our next question comes from the line of Chris Growe with Stifel. Please proceed with your question.

Hi, good morning.

Hi, Chris.

I just had a question for you on—first with the cost inflation and to better understand the kind of moving pieces in gross margin. I want to clarify the inflation, and there were some costs to secure incremental capacity. Were weather conditions a factor at all in the gross margin for you this quarter? And then I also just want to understand the rate of inflation and how fourth-quarter inflation might appear in relation to the third quarter?

Sure, Chris, I will be happy to address your question. As we flagged, there are higher costs to operate in this high-demand environment. I will tell you that part of our logistics network costs have risen due to responding to high demand. Specifically, we need to open new lanes of freight to reach our external supply capacity, which has also brought some incremental costs related to the weather in the quarter. While we are not giving guidance on Q4 inflation, I think it’s important to note that we are still expecting about 3% inflation for the full year. Initially, we anticipated 3% inflation, and we are rounding up to that expectation, and now we expect to round down this figure toward about 3% inflation moving forward. The critical thing for us is we are taking the opportunity to act with all of our Strategic Revenue Management and Holistic Margin Management levers to set ourselves up to anticipate higher inflation as we step into fiscal '22.

Okay. Thank you for that. I had a separate question, if I could on pet, so perhaps for Bethany. But regarding incremental promotional costs around Tastefuls, does that continue? Do you see a step-up sort of increase in promotional spending for that business? And then that’s also a division with higher costs. Is that one where we might see some pricing coming through? Has that already emerged at all in the industry, not looking for forward commentary there, but have you seen that yet?

Well, starting with the support, as we launch a new business, we incur costs to do that. We see ourselves spending at a rate that’s appropriate for the category. And again, we can work within the entire portfolio. Those are launch costs we are discussing right now. Premiumization is absolutely continuing in every area of the category. The premium cost per pound on wet cat food is definitely higher than what you see in dry, but every sector of the category continues to see premiumization in terms of cost per pound.

Chris, this is Jeff Siemon. I would just add to the original question about costs in the quarter. On a year-to-date basis, the pet segment is at about a little over 24% margin versus 22.5% last year. So, while the quarter may have had some incremental costs, we still feel very good about where we are year-to-date from a margin and growth standpoint.

Okay. Thank you for that, and I appreciate it.

Our next question comes from the line of Michael Lavery with Piper Sandler. Please proceed with your question.

Thank you, good morning.

Good morning.

Just following up on the pet segment, you’ve had some accelerating volume growth over the course of the year. Can you give a sense of how much of that is driven from pipeline fill behind new launches versus more of a run-rate type momentum?

Yes, thanks for the question. We have continued to see the movement of the business accelerate. In Q2, we talked about movement when we reported an 18% sales increase being slightly ahead of our inventory, but our movement accelerated as we went into Q3. We feel pretty good about the levels of inventory at this point.

Okay, great. And then just following up on the inflation question looking ahead a little bit, can you give a sense of how you are preparing for ‘22? How much do you think the current kind of run in prices might be sticky versus waiting to take some positions if things change? What’s your high-level thinking on that?

Certainly, at a high level, we are preparing for higher inflation, and I don’t want to get too far ahead. We will come back and talk to you in Q4 about fiscal ‘22 inflation expectations, but I will reiterate we are taking actions on the basis of that preparation specifically around our HMM and our strategic revenue management plans, using all levers of strategic revenue management.

Okay, great. Thanks so much.

You bet.

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

Hi, Kofi and Jeff. I think I’m going to get the same answer as Michael just got, but inflation is accelerating higher than you thought. I know you have multiple levers to offset it, but within SRM, I think list price increases are one of those levers. So, is it fair to say that that will have to be utilized more than originally contemplated? A lot of retailers are talking about inflation right now, and a lot of your competitors are discussing it. Is it fair to say that there is more willingness to pass it through? I know it’s never easy, but it’s not just you who is facing the inflation?

This is Jeff. Let me take that question. I’ll start by saying that inflation is very broad-based, and it’s actually global. We are seeing it across the globe and across different commodities and logistics, including aluminum and steel. Whenever you see this kind of broad-based inflation—it’s global—we will realize net pricing. We will certainly leverage HMM first, but in an environment like this, just like a few years ago, our retailers and competitors are facing it as well, and we will realize pricing. We will utilize all of the tools, including list pricing, price pack architecture, and managing trade. Pricing considerations will depend on the category and geography. We will employ all these levers. It becomes a quick transition from macro to micro, so we will be adjusting based on the category specifics. I want to assure you we will use all the levers at our disposal, and we will begin that process here in the fourth quarter.

Yes, and let me just add for additional context, a reminder that our first lever is holistic margin management, right? Our cost of goods sold productivity has been averaging about 4% annually. We are not solely relying on SRM to address this issue; we expect to achieve productivity as well.

Okay, I will leave it there. Thank you.

Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Hey, good morning, folks. Thank you for taking.

Good morning.

I guess I was going to keep coming back at sort of the same point of question, and that’s just really trying to understand the margins here. Kofi, I think clearly, great margins this quarter, but I think your guidance for profit margins might actually drop below fiscal '19 levels in the fourth quarter. I am trying to wrap my head around that, given your talk of HMM savings exceeding inflation. For the year, you are apparently experiencing net deflation, yet you’ve got phenomenal volume leverage and huge pricing rolling through—the best pricing in years. What’s the offset here? I would expect meaningful margin expansion for the year, not profit actually declining below pre-COVID levels. What are the other offsets? Can you help us quantify them? Which of those offsets might be transitory due to COVID, with costs potentially dropping over the next 12 to 24 months?

Sure. Let me address the key drivers here. Foundationally, consider the higher operating costs we’ve incurred related to securing additional capacity from external supply chains. We have also experienced inflated logistics costs due to operating in a high-demand environment. Specifically, we have needed to open new freight lanes to support our external supply capacity, which has added costs linked to higher spot market rates. Currently, we are seeing about mid-single-digit inflation regarding freight. These two factors are largely connected to demand levels. As supply and demand balance out and our inventory levels stabilize, we expect those costs to diminish. We are also comparing against a remarkably strong Q4 from last year, where a good portion of our leveraged growth was driven by inventory adjustments made by both us and retailers to meet demand.

That’s really helpful. Is there any way to quantify those transitory logistics costs that could fall away? As we model this, we’d like to consider the right dynamics and contingencies.

Yes, I don’t want to get overly specific on Q4, but I think it’s fair to say that as you think about the offsets to some key drivers and leverage, there are more than sufficient measures to offset some of the leverage benefits we expect to see this year.

Okay, thank you.

You bet.

Our next question comes from the line of Faiza Alwy with Deutsche Bank. Please proceed with your question.

Yes, hi, good morning. I wanted to follow up on Andrew’s question and see if you could discuss how you think consumption patterns will trend from here, specifically in relation to the snack bar category, which is one of your global platforms. Jeff, you talked about how you don’t expect consumer habits to change. I’m curious how you’re thinking about the recovery in that category. The overall category is fragmented with several segments. Can you share your aspirations for how you'd like to engage with the overall category?

Yes. Thanks for the question. Let me clarify. We foresee demand remaining higher in the near future compared to pre-pandemic levels. While people are returning to dining out and school attendance, some volume will revert, but not fully. In my mind, I visualize an environment where at-home consumption won't drop back to the previous normal, but will still be higher than it was pre-pandemic. Some investors and analysts may think volume will quickly return to pre-pandemic states, but our observations, both domestically and abroad, suggest that a return to normal is likely to be more gradual and different. This idea also extends to our bars category; the decline is primarily because people haven’t been on-the-go. As activities resume, we’ve seen signs of improvement in that category. I’m pleased with our share performance across various markets, including the U.S., Europe, and Australia. I believe we are on a positive trajectory.

You really hit it, Jeff. The challenges with grain snacks and performance bars have been significant, with the latter down double digits year-to-date. We have focused intently on regaining share, and I’m proud to say we are actually growing our share despite prior struggles. One highlight has been the impressive resurgence of the Nature Valley base brand. We are actively investing in strong marketing initiatives, including the rollout of newly recyclable wrappers and the launch of our top product in the category this year. Overall, we feel optimistic about our performance, and as we return to more routine conditions, the bars category should return to growth.

Great. I wanted to also take advantage of Bethany being on the call. Bethany, could you give us more insight into the treat side of the business? Initially, there was an expectation that as Blue Buffalo expands into the food drug mass channel, it would be advantageous as that channel has a higher prevalence of treats. It seems to have been somewhat disappointing relative to your other successes. Could you share your long-term perspective on the treat business and whether you expect innovations or more marketing efforts? What more can be done to strengthen that aspect of the business?

Yes, you are absolutely correct; entering the food drug mass channel has introduced more competition among treats. Blue Buffalo resonates well with people who care for their pets and we will launch new innovation in the treats sector. This upcoming fourth quarter, we’re planning to launch a new bone alternative—crunchy biscuits that meet the Blue promise. We are actively working to enhance our position in the treats category. We know we can do better, which is why we have more innovations on the way and we’re also reworking price pack architecture. The treat segment is more responsive to merchandising than the food segment, and you noted our recent remarks reflecting how the whole portfolio will show up. Our merchandising efforts will highlight new bones, sticks, and sizzlers while covering all treat types. We’re committed to driving growth in this large category, and we expect to increase our market share.

Great, thank you so much.

Our next question comes from the line of Nik Modi with RBC Capital Markets. Please proceed with your question.

Good morning, everyone.

Good morning, Nik.

I wanted to ask about new items. My understanding is General Mills is going to be quite active in this area in 2021. Within the context of SKU rationalization occurring at retail, how do you foresee that playing out as you try to get new products onto the shelf? I have a quick follow-up after that.

Jon, do you want to take that?

Yes, sure. There is certainly some SKU rationalization occurring, driven largely by click-and-collect operations. At the same time, consumers continuously look for fresh products and innovation. Retailers are quite engaged in this as well. In fiscal '21, our new products have performed anomalously well; we have three of the top launches in our cereal segment and three of the top launches in other categories. We’ve developed a strong track record, and that history helps us sell in new products. The bar is higher; we must deliver great products consistently. Our increasing share distribution and strong performance in key categories support this approach. We’re excited about what we have planned for fiscal '22 and will share more as we approach the new year.

As we think about SKU rationalization and how retailers prioritize brands, would you expect additional space over the next 12 months due to these changes?

Certainly. Our top-performing SKUs are gaining space, which is beneficial for us. Retailers are focusing on the SKUs producing the highest turnover as they adapt to both in-store and click-and-collect shopping. Our strong performance and proven capability to deliver successful launches give us an edge when gaining space. Our continued innovation is crucial as we position ourselves effectively.

Excellent, thank you. I will pass it on.

Our next question comes from the line of Jonathan Feeney with Consumer Edge. Please proceed with your question.

Good morning, and thanks. Given the clear rise in visible costs here, I’m surprised there is not more dedicated effort to raise pricing. Is this a tactical decision within your organization, or is it a response to discounting and private label growth, or perhaps concerns about the marketplace? When we look at your input costs and everything reflected in the headlines, it feels reminiscent of a 2006-type environment, but we aren’t seeing substantial movement in pricing yet.

Jon—go ahead, Kofi.

Hey, Jon. I think we are responding right now to the expectation that inflation will be rising. As Jeff mentioned earlier, we are experiencing broad-based global inflation, and we are actively working on the SRM front across all our businesses. I believe you’ll see us taking action, and in some of our segments, those actions may already be in effect.

I understand it’s a sensitive topic. Thank you very much.

Our next question comes from the line of Laurent Grandet with Guggenheim. Please proceed with your question.

Hey, good morning, everyone.

Hi, Laurent.

I’d like to come back on the pet segment and better understand the dynamics in price/mix as it was negative in the quarter. In the third quarter, you launched premium weight and treats, but in your update, you indicated considerable growth in pet specialty markets that likely allow for premium pricing. Could you clarify what was driving this negative price/mix in the quarter and how we should think about price/mix in that segment moving forward? Thank you.

Thanks for the question. For the first nine months of the year, sales are up 13% and profits are up 22%. We feel optimistic about our business trajectory. Our mix can shift based on the channel we are in. As we build out the pet business across various channels, we could have a variance based on product mix. We have invested in the different components of this business. I feel confident about our long-term price/mix performance; premiumization is driving the pet category, and Blue Buffalo is primarily focused there. We will ensure we maintain the right price/mix, which can vary by quarter, channel, and product type.

Laurent, this is Jeff Siemon. As a reminder, especially in the first half of the year, we were comparing against last year's first half, which saw significant expansion of our Wilderness line into food, drug, and mass channels—this carries a high price/mix. That expansion provided a headwind throughout the first half, perhaps slightly into the second half as well. Moving forward, we have now fully compared all that expansion with our current offerings. With the innovation and news being driven in the wet and treats segments, both of which are positive for price/mix, we feel good about future trends.

Thanks. A completely different topic; could you provide some insights into your operations in Canada? Should we expect the same type of profitability as in the U.S.? Is it growing faster? Any color on your strategy there?

We have a strong market presence in Canada. Jon Nudi will provide more details.

Yes, Laurent, we really like our business in Canada. Our yogurt business is about a third of our total Canadian operations. Liberté represents about 60% of our yogurt business in Canada, while Yoplait accounts for the other 40%. We have established ourselves as the leading brand in Greek yogurt in Canada. A few years ago, we focused on capitalizing on that trend, ensuring strong market share. We plan to offer more insights on new products and forthcoming initiatives, but we are pleased with our Canadian operations' current performance.

Thank you. I will pass it on.

Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

Thanks. In the U.S., some markets are reopening faster than others, like Texas and Florida. I’m wondering, as you analyze those micro examples, what sorts of 2-year trends are emerging? And are there insights you’re gathering regarding the reopening's impact on individual categories, retail, pet, and within the retail sector? I also have a follow-up.

Yes. This is Jeff. As we look back at the past year, we have seen at-home trends across various markets where some regions are more open than others. We noticed sustained elevated demand across all markets, even in those more open. Markets that are a couple of points less enjoyable for at-home consumption began to align. Nevertheless, there has been much discourse surrounding reopenings recently, which complicates understanding trends due to various elements like recent weather shifts. For instance, Texas had considerable snowstorms lately, increasing at-home demand contrary to expectations. Thus, while long-term demand remains elevated across markets, the short-term data is challenging to parse.

I understand. Towards this past fiscal year, would you be able to summarize any COVID-related costs—both direct and indirect? For example, the elevated trucking costs you cited, freight and logistics being under considerable pressure—essentially an indirect COVID-related cost. Are there gross margin headwinds you anticipate entering fiscal '22 associated with that?

Yes, certainly. I would mention some additional COVID-related costs like those tied to employee leave policies and security protocols from earlier times. Most of these costs should normalize as situations transition back to a more typical environment. It wouldn’t be prudent to anchor future expectations solely on this cost base while you are envisioning fiscal '22. Demand for at-home consumption may decline in comparison to this year but will still remain elevated above pre-COVID levels. While I won’t quantify specifics now, we will elaborate more as we approach fiscal '22.

Jennifer, that’s all the time we have for questions. Let’s wrap up now. I appreciate everyone taking the time to engage with us today. If any follow-up questions arise, please reach out in the upcoming days. We hope everyone stays safe and healthy, and we look forward to talking again next quarter. Thank you.

This does conclude today’s conference call. We thank you for your participation and ask that you kindly disconnect your lines. Have a good day, everyone.