通用磨坊 (GIS) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the General Mills First Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Tuesday, September 18, 2018.

I would now like to turn the conference over to Mr. Jeff Siemon, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Selena, and good morning, everybody. I'm here with Jeff Harmening, our Chairman and CEO; and Don Mulligan, our CFO. In addition, Jon Nudi, who leads our North America Retail segment, is also with us for the question-and-answer portion of the call.

And I'll turn things over to them in a moment, but before I do, let me cover a few housekeeping items. Our press release on first quarter results was issued over the wire services earlier this morning. And you can find the release and a copy of the slides that supplement our remarks this morning on our Investor Relations website.

Please note that our remarks this morning will include forward-looking statements that are based on management's current views and assumptions. And the second slide in today's presentation lists factors that could cause our future results to be different than our current estimates.

In addition, you'll note in the release that this is the first quarter we are incorporating operating results for Blue Buffalo, which we are reporting in a new Pet operating segment. And as we mentioned on our fourth quarter call, we are reporting -- we're reporting Blue on a 1-month lag to our corporate calendar, which means the Pet segment's first quarter includes results through July.

Finally, I'll note that beginning this quarter, we've adopted the new accounting requirements for the presentation of pension, postretirement and post-employment benefit expenses. This change separates service costs from other benefit-related expenses or income, which have moved out of corporate items and into a new line below operating profit. Just to be clear, there is no impact to net earnings attributable to General Mills. For those of you looking to update your models, we posted a revised fiscal 2018 quarterly income statement to our Investor Relations website yesterday.

And with that, I'll turn you over to my colleagues, beginning with Jeff.

Thanks, Jeff, and good morning, everyone. I'm pleased to say that we're off to a good start in fiscal 2019. We drove organic net sales growth for the fourth consecutive quarter nearly 0.5%, which, in this presentation, rounds down to flat. The Blue Buffalo transition is progressing well, and we continue to expect double-digit top and bottom line growth for that business this year, excluding the acquisition-related charge. First quarter adjusted operating profit and adjusted diluted EPS results finished ahead of our expectations, and we remain on track to deliver our full year fiscal 2019 targets.

Slide 5 summarizes General Mills' first quarter financial performance. Net sales totaled $4.1 billion. Organic net sales were up modestly, driven by a positive net price realization and mix across all 4 legacy operating segments. Adjusted operating profit of $641 million was up 3% in constant currency, including an 8 point headwind from a onetime purchase accounting charge related to the Blue Buffalo acquisition. Adjusted diluted earnings per share of $0.71 were in line with year-ago levels in constant currency despite a $0.06 negative impact from the purchase accounting charge. As I mentioned, these results were ahead of our expectations on the bottom line.

We're making good progress against the 3 key fiscal 2019 priorities we outlined on our Q4 earnings call. As a reminder, those priorities are: first, to grow our core by continuing to compete effectively through compelling consumer news, innovation and in-store support and by accelerating our differential growth platforms; second, to successfully transition Blue Buffalo into the General Mills family; and third, to deliver on our financial commitments, leveraging our holistic margin management program to drive efficiency, increasing our price/mix through our enhanced strategic revenue management capability and maintaining a sharp focus on working capital and cash flow.

Let me share a few highlights of our first quarter progress against each of these priorities, starting on Slide 7. Growing our core in fiscal 2019 represents a step-up from our fiscal 2018 organic growth rate, and we've identified a few specific areas where we expect to deliver improved performance in 2019. These include improvements in our U.S. Yogurt and emerging market businesses, greater contributions from innovation, a stabilization of U.S. Retail distribution trends and increased price/mix benefits as we leverage strategic revenue management. Through the first quarter, we've seen improvements in almost all of these areas. U.S. Yogurt and our emerging markets posted better net sales results compared to fiscal '18.

Our first half new product launches are off to a good start, including our new YQ and Petite Oui yogurt launches in the U.S. and new Häagen-Dazs cups and Stickbars in Europe and in Asia. And our U.S. distribution was down just 1% in Q1 after declining mid-single digits in 2018. Our organic price/mix was up 1% in the quarter, which was in line with last year's results, and we expect our SRM actions will generate increasing price/mix benefits as fiscal 2019 unfolds. One of the reasons we believe we can achieve our price/mix goals in fiscal '19 is that we're seeing price/mix contributions building in the broader industry in recent quarters.

As you can see on Slide 8, total U.S. food and beverage retail sales were up nearly 3% in the first quarter in Nielsen-measured outlets, almost 2.5 points better than a year ago. And that's being driven by more than 2 points of positive price/mix. In fact, price/mix in the industry has increased in each of the last 4 quarters, which isn't surprising given the uptick we've seen in input cost inflation. What's even more encouraging is that the industry volumes have improved a bit over that time.

At the same time as industry trends have improved, we've seen our competitiveness improve significantly as measured by our market share performance. Slide 9 shows our market share evolution in our 9 largest U.S. categories, which collectively represent more than 80% of our U.S. Retail sales. After gaining share in only 2 of 9 categories in fiscal 2017, we've significantly improved our competitiveness over the last 15 months through stronger news, innovation and in-store execution, resulting in steady share improvement in fiscal 2018 and market share gains in 8 of the 9 top categories in the first quarter of 2019.

Let me give you a few specific examples of how we're competing effectively across some of our key platforms around the world. We grew our cereal business in fiscal 2018 in the U.S. Retail and away-from-home channels and outside North America through our CPW joint venture. Our U.S. cereal business grew market share yet again in the first quarter, driven by continued strong performance on our taste brands. Trix posted more than 60% retail sales growth behind the relaunch of our classic Trix colors and marshmallow news helped Lucky Charms post 9% retail sales growth on top of last year's 16% growth rate.

Our new Cheerios Oat Crunch offering already captured 0.5 point of share in the category in August as we continue to deliver new benefits on the country's largest cereal brand. And our first quarter success extended to away-from-home outlets with cereal net sales in the Convenience Stores and Foodservice segment up low single digits, driven by continued strong performance in K-12 schools and colleges and universities.

U.S. Yogurt continues to improve behind our strategy to expand into faster-growing segments of the category. We entered the "simply better" segment in fiscal 2018 with the introduction of Oui by Yoplait. Distribution of Oui is still growing this year driven by new varieties of our core Oui platform and our launch of Oui Petites, a new subline featuring indulgent flavors such as milk chocolate and sea salt caramel.

In July, we added our presence in "simply better" yogurts with YQ, a new yogurt made with ultrafiltered milk that appeals to modern weight managers seeking high protein, less sugar, simple ingredients and great taste and is 99% lactose-free. And as yogurt consumers increasingly shift away from Greek, we've seen considerable improvement for Yoplait Original, including growth on our single-unit cup business, and we're also growing our largest kid yogurt business, Go-GURT, behind fun news and engaging brand messaging. We're bringing our U.S. innovation strategy to Europe this year with the introduction of "simply better" glass pot offerings in both the U.K. and France under the Liberté and Panier brands, and we've continued to innovate in high-growth areas such as organic and nondairy yogurts.

In addition to our global platforms, we've been driven good performance on our regional businesses so far in fiscal 2019. In the U.S., we've entered the soup season with good momentum on Progresso, including low single-digit retail sales growth and market share gains in the first quarter. Retail sales for our fruit snacks were up mid-single digits in Q1 as we've shifted the focus of our messaging to a teen target. And Totino's hot snacks posted high single-digit retail sales growth, thanks to brand-building and innovation that connects with our millennial male consumer.

We're also growing in China on our Wanchai Ferry dumplings business. We've had good success with our new premium dumpling offerings and our advertising campaign focused on Wanchai Ferry's superior taste. And we're encouraged by the improved performance we saw in Brazil in the first quarter across our Yoki snacks businesses, especially popcorn, where we gained record shared behind our seasonal brand campaign and stronger in-store execution.

In addition to competing effectively, the second component of our growing our core in fiscal '19 is accelerating our 4 differential growth platforms. We generated 3% year-to-date global retail sales growth on Old El Paso, led by our performance in the U.S. On this base-driven nonseasonal business, year-round consumer support is critical, so we added incremental media behind our Anything Goes in Old El Paso campaign and is working. Retail sales were up 6% and baseline sales grew high single digits in the U.S. in the first quarter. We're also benefiting from strong new items, including our new hint of lime shells, crispy taco seasoning and mini tortilla bowl kits, which have helped grow distribution for the Old El Paso brand.

In our Natural & Organic portfolio, we continue to optimize our assortment through SKU rationalization. While this has dampened total growth, we are seeing strong performance on our core products, including 13% retail sales growth on Annie's Mac and Cheese and mid-single-digit growth on Annie's organic fruit snacks and graham crackers in the first quarter. We're seeing good performance elsewhere in this portfolio, too, including EPIC snack bars and Cascadian Farm frozen products, which are both growing double digits.

Year-to-date measured channel retail sales for our global snacks bars business were in line with last year with stronger growth in non-measured markets and channels. Outside North America, Nature Valley and Fibre One innovation and distribution expansion drove strong double-digit retail sales growth in Europe and Australia. Our Pillsbury Cookie Cake bars are growing rapidly in India, and we're expanding brand penetration and growing distribution in Mexico and other parts of Latin America.

Within the U.S., LÄRABAR posted another quarter of double-digit retail sales growth while Nature Valley retail sales were down 1%. Fibre One, on the other hand, has underperformed our expectations with retail sales down more than 20%, driven by intense competitive pressures and distribution declines. We have more work to do on Fibre One in the U.S., and we expect improved performance on our U.S. snack bars business in the back half of the year, leveraging media and innovation to support Nature Valley, LÄRABAR, EPIC as well as Fibre One.

Häagen-Dazs ice cream, our final accelerate platform, posted 8% global retail sales growth on top of double-digit growth in the same period last year. In the U.K., our second largest Häagen-Dazs market in the world, we drove 26% retail sales growth and achieved record sales and penetration behind our Wimbledon activation. Globally, we're benefiting from good innovations such as our new peanut butter flavors in sticks and pints as well as in our new packaging design and other brand-building support. So while our year-to-date performance across key platforms has been mixed, we feel good about our ability to improve our top line performance over last year in total and to grow our core in fiscal 2019.

Now let's shift gears and talk about our second key priority for fiscal '19, successfully transitioning Blue Buffalo into the General Mills family. I am pleased to say that the combination of the 2 organizations has gone smoothly so far, and I've been impressed by the quality of the Blue team in Wilton, Connecticut and across the country.

Our transition philosophy has been clear from day 1: bring General Mills' capabilities to bear where they can add value and stay out of the way where they're not needed. We're seeing early wins across key areas including supply chain, sales, innovation and strategic revenue management. From a sell-in standpoint, net sales for Blue Buffalo were up 14% on a pro forma basis in Q1, including a stub period at the end of April after we closed the acquisition. Excluding those additional days, pro forma net sales were up mid-single digits.

Looking at in-market performance, we continue to see strong pet parent sell-through on a like-for-like basis with total retail sales up 9% in the quarter. We expect the timing of channel expansion will continue to drive variability in our quarterly net sales results this year. For example, at this time last year, Blue Buffalo was launching their initial wave into food, drug and mass customers, and we saw a dramatic growth as they filled the customer pipeline. We'll lap that growth in the second quarter of this fiscal year. However, even with the variability of the year, we continue to expect Blue Buffalo will deliver double-digit top and bottom line growth for the full year, excluding the impact of purchase accounting.

On Slide 16, you can see the key components of our 9% retail sales growth and how they break down by channel. Our expansion into the food, drug and mass channels is progressing well with retail sales for Blue up 20% since May. And Blue's market share continues to grow, reaching high single digits for our initial wave of customers and double digits at a few customers who have really gotten behind the Blue brand.

Pet food category retail sales declined mid-single digits in the pet specialty channel in the first quarter as pet parents continued to shift to e-commerce in the food, drug and mass channels. And with less support from some retail partners, Blue's retail sales were down double digits, lagging the category. And Blue continues to win in the rapidly evolving e-commerce channel with retail sales of more than 35% in the quarter and market share increasing as well.

As we look ahead to the rest of fiscal 2019, we have plans to accelerate our growth in Pet while maintaining our channel-specific approach. We'll continue to execute our food, drug and mass expansion in a thoughtful way, ensuring we're learning from each new customer launch. We're also focused on improving our trends in pet specialty. Billy Bishop and his team have recently held top-to-top meetings with the new CEOs at our largest customers in the channel and reinforced our commitment to their business.

Looking ahead, we think there's an opportunity to drive improved performance for pet specialty and for Blue by improving in-store execution, continuing to support our pet detective program and maximizing visibility of exclusive innovation that we're launching into specialty channel this year, and we think we can help our customers' categories as we do this. Finally, we'll continue to drive robust growth in e-commerce. We're partnering with the biggest e-commerce pet retailers to drive visibility for Blue on the digital shelf, which will help solidify its position as the #1 pet food brand online.

Our third key priority this year is to deliver our financial commitments, and we're off to a good start here as well. We're on track to deliver $450 million of cost of goods HMM savings, led by benefits from our global sourcing team. We're capitalizing on opportunities to drive improved price/mix, leveraging the analytical insights generated by our strategic revenue management group. We continue to maintain a sharp focus on cash, resulting in another reduction in core working capital in the first quarter. And as I said earlier, we finished the quarter ahead of plan on the bottom line.

With that as an overall summary, let me pass it to Don to provide more details on our financials and our segment-level results.

Thanks, Jeff. Good morning, everyone. Jeff provided a summary of our first quarter financial results. Now I'll share a few additional details, starting with the components of net sales growth on Slide 20.

Organic net sales rounded down to flat versus a year ago, driven by positive net price realization and mix across all 4 legacy segments, offset by lower contributions from volume. Foreign currency translation did not have a material impact on net sales. And the net impact of acquisitions and divestitures yielded a 9 point benefit to net sales.

Turning to our segment results on Slide 21. North America Retail net sales declined 2% as reported and were down 1% on an organic basis. Consumer takeaway was a bit stronger with Nielsen-measured retail sales flat in the quarter. Net sales in the U.S. Snacks operating unit were down 4% due to declines on Fibre One snack bars, partially offset by strong innovation performance on LÄRABAR and EPIC bars. Canada net sales were down 4% as reported and 2% in constant currency. Net sales for U.S. Meals & Baking were down 2%, primarily driven by the comparison to last year's first quarter that included co-packing sales related to the Green Giant divestiture.

U.S. Yogurt net sales were also down 2% as declines on Greek and light were partially offset by Oui and YQ innovations in our "simply better" segment and solid performance on Go-GURT and Original Style yogurt. Retail sales results for yogurt were stronger with Nielsen-measured takeaway nearly flat in the quarter. U.S. Cereal posted 1% net sales growth behind effective product news on Lucky Charms, Trix and other core brands. Constant currency segment operating profit increased 3% in the first quarter due to benefits from net price realization/mix, lower SG&A expenses and benefits from productivity initiatives, partially offset by higher input cost inflation.

In Convenience Stores and Foodservice, first quarter organic net sales increased 4%. Our Focus 6 platforms delivered 4% sales growth, led by Chex Mix snacks and Pillsbury Stuffed Waffle in convenience stores as well as frozen pouch breakfast and bowlpack cereals in K-12 schools. Segment operating profit increased 14% in the quarter, driven by net sales growth on the higher-margin Focus 6 platforms and increased cost savings, partially offset by higher input cost inflation.

Organic net sales for our Europe & Australia segment were up 1% in the first quarter, driven by strong performance at our ice cream snack bar platforms. At Häagen-Dazs, net sales were up double digits as we continue to expand our distribution in Australia and Europe with snack bars -- with Stickbar, MiniCup and pint innovations and as we execute local brand activations in key markets to better engage with consumer and drive trial.

Snack bars also grew double digits, thanks to excellent performance at our Nature Valley and Fibre One brands as we continue to increase household penetration behind distribution gains, effective messaging and strong innovation. First quarter segment operating profit increased 12% in constant currency due to favorable sales mix and lower SG&A expenses, partially offset by raw material inflation and currency-driven inflation on products imported into the U.K.

Our Asia & Latin American segment posted an 8% increase in organic net sales in the first quarter with good growth in Brazil, China and India, the segment's 3 largest markets. Our performance in Latin America has improved dramatically from last year as we've transitioned past our Brazil enterprise reporting system implementation and benefited from our new Yoki brand campaign and terrific performance on snack bars.

In Asia, Häagen-Dazs posted strong growth behind effective consumer activation, including our Let's Peach Party campaign in key markets. Wanchai Ferry in China strengthened due to innovation on core dumplings and improved in-store execution. And our snack bars platform continued to deliver excellent results in India and the Middle East. Segment operating profit in Asia & Latin America was $12 million compared to $16 million a year ago due to input cost inflation and higher SG&A expenses.

For our Pet segment, first quarter net sales totaled $343 million. Jeff mentioned that this was up 14% on a pro forma basis, including 7 additional days from the stub period in April and was up mid-single digits without the extra days. We expect pro forma net sales growth to accelerate in the second half of the fiscal year as we execute against our growth plans in FDM, pet specialty and e-commerce channels. Segment operating profit of $14 million was $62 million below prior year on a pro forma basis, driven by $56 million of noncash purchase accounting charges, including an inventory adjustment and intangible amortization as well as significant input cost inflation and start-up costs related to 2 new production facilities.

Year-to-go Pet segment operating profit will be driven by accelerated top line performance, positive mix, benefits from a recent price increase, HMM initiatives and the ramp-up of acquisitions synergies. Finally, as Jeff mentioned, we continue to expect double-digit top and bottom line growth for the Pet segment in fiscal '19, excluding purchase accounting charges.

Turning to margin results on Slide 26. First quarter adjusted gross margin and operating profit margin were below last year, driven by input cost inflation and the onetime purchase accounting inventory adjustment, partially offset by positive net price realization and mix, COGS HMM savings and lower SG&A expenses. Excluding the onetime purchase accounting charge, adjusted gross margin was down 30 basis points and adjusted operating profit margin increased 50 basis points. For the full year, we continue to expect input cost inflation will be 5% of cost of goods, 1 point above fiscal '18 levels, and we expect price/mix benefits from our SRM actions will build in the coming quarters.

Slide 27 summarizes our joint venture results in the quarter. CPW net sales were down 2% in constant currency due to declines in Latin America, partially offset by strong performance in the Asia, Middle East and Africa region. Häagen-Dazs Japan net sales declined 14% in constant currency, driven primarily by declines on core MiniCups and a comparison against 14% growth in the year-ago period. Combined after-tax earnings from joint ventures totaled $18 million compared to $24 million a year ago, primarily driven by our $5 million after-tax share of a restructuring charge at CPW, which is excluded from our adjusted earnings.

Slide 28 summarizes other noteworthy income statement items in the quarter. Corporate unallocated expenses, excluding certain items affecting comparability, increased by $22 million in the quarter. The benefit plan non-service income totaled $21 million compared to $20 million in the same period last year. Net interest expense increased $61 million, driven primarily by debt raised to fund the Blue Buffalo acquisition. The adjusted effective tax rate for the quarter was 22.7% compared to 30.5% a year ago, primarily driven by net benefits related to U.S. tax reform. We continue to expect our full year adjusted effective tax rate will be in the range between 23% and 24%. And average diluted shares outstanding were up 3% in the quarter.

Slide 29 provides our balance sheet and cash flow highlights in the quarter. Our core working capital balance totaled $671 million, down 31% versus last year's first quarter as benefits from our terms extension program more than offset higher receivable and inventory balances from Blue Buffalo's addition to our balance sheet. First quarter operating cash flow grew to $607 million, primarily reflecting net improvements in working capital. Capital investments totaled $113 million and we paid $294 million in dividends in the quarter.

Let me close today's remarks by reiterating that we remain on track to deliver the fiscal '19 guidance we outlined at our Investor Day in July. Reported net sales are expected to increase 9% to 10% in constant currency, including the addition of Blue Buffalo. We expect organic net sales to range between flat and up 1%. We estimate constant currency adjusted operating profit will increase 6% to 9% from the base of $2.6 million reported in fiscal 2018. As Jeff Siemon mentioned upfront, this 2018 base has been revised to reflect the change in presentation of benefit plan non-service income.

Constant currency adjusted diluted EPS is expected to range between flat and down 3% from the base of $3.11 earned in fiscal '18. We currently estimate foreign currency will be immaterial to full year net sales, operating profit and EPS. And we're targeting free cash flow conversion of at least 95% of adjusted after-tax earnings.

With that, let me open the lines for questions. Operator, can you please get us started?

(Operator Instructions) And our first question comes from the line of Andrew Lazar of Barclays.

Just 2 quick things. And if I missed this, I apologize. I think -- was there anything, I guess, in 1Q that perhaps helped lower relative SG&A, a bit more than we all on the outside might have thought? And if so, maybe how much of that might be timing-related? And when do you think that comes into play, the impact to SG&A, as we go through the year? And then second, I think, Don, last quarter, you had mentioned that perhaps you expected gross margin to be roughly flattish year-over-year for the full year. Is that still an expectation that you think makes sense here, given what we saw in the first quarter?

Yes. Sure, Andrew. I'll tackle both of those. For SG&A, I guess I'll back up and just talk about the results more broadly versus our expectations. And as Jeff said, we were pleased to start the year with a stronger profit performance than our expectations. Frankly, I think it's a testament to the organization's focus on cost discipline while we drive improved top line. Just to set the stage, the sales did come in where we expected. The mix by business is different, but in total, we were on plan. So our overperformance on the bottom line was across P&L -- many P&L items, including SG&A. Gross margin was better due to favorable mix, project timing and inventory absorption. Andrew, to your question, SG&A benefited from lower corporate spending, some of our departmental spending, which will be phased later in the year, some stock-based comp being lower and media being slightly lower than planned. Plus below that, the tax rate came in a bit favorable to our plan and was fully under our 23% to 24% range for the full year. So we feel good about how we came out of the first quarter with the lead. But we know it's a dynamic environment and that really did factor into our thinking about the full year guidance. So if we go back to SG&A, the key factors were the phasing of our corporate spending, which will phase more in the back half of the year or the back part of the year now, and the stock-based comp and media. Of those, I think the stock-based comp will stick for the year. But the others, I think, will tend to unwind as the year unfolds. In terms of gross margins, what we saw in the quarter was that it reflects higher inventory levels -- or higher inflation levels that haven't yet been fully offset by benefits of price/mix and HMM. And as I mentioned in my comments, we expect price/mix to improve as the year unfolds. And we also expect HMM to increase as we get continued and incremental benefits from our global sourcing activity. That all said, I think, per our guidance at the beginning of the year, our operating margins will be down somewhat for the year, if you look at what our guidance for sales versus our guidance for operating profit would indicate. And I think just based on how we're seeing some of the investment against the business, Andrew, I think there's probably going to be a little bit more pressure on gross margin than we originally expected. As we've looked at what investment, what growth vehicles are working for us, as we look through the frame of our total brand investment, we're seeing some activity that's probably going to put a little bit of pressure on our gross margin, but we think is going to have a good payback on the top line for us.

Our next question comes from the line of David Driscoll of Citi.

Just a quick follow-up on Andrew's question on gross margin. So I understand your full year comments. But wouldn't the second quarter maybe somewhat negatively impacted by the factors that you've described? So the price/mix benefit is more back half of the year, but the inflation, I think, is relatively even throughout the year. So gross margin down in second quarter and then it gets positive in the back half. Just that little modeling clarification would be helpful. And then I have a question on Blue Buffalo, please.

Yes. I think that you're right, David. The flow will be such that we'll see a larger benefit both from HMM and price/mix in the back half of the year. So we'd expect to see some of the gross margin pressure continue in the second quarter.

Okay. And then on Blue Buffalo, you reiterated your double-digit sales growth guidance. Takeaway was up 9%. So can you just talk a little bit about why you're so confident in the double-digit sales growth? And then maybe within that answer, just talk a little bit more about pet specialty and why you think you can improve the trends there.

Yes, David. So this is Jeff. I'll take that. I mean, we were -- there are a lot of moving parts in our business in general and specifically to Blue Buffalo with extra weeks and sell-ins and sellouts. But the key for me, I think, in all of that, you hit the nail on the head, which was 9% takeaway. And when consumers are buying, it usually -- usually good things follow. And we have 9% growth. And I'm confident because we're generating that kind of growth and we still only have 3% household penetration among pet parents. We have a lot of room to expand in food, drug and mass. We're only at 30% distribution. And in pet specialty, we think that we cannot only improve our business, but in the process, help our retail customers. And we'll do it the way that General Mills builds categories. Look, the more we look at this category, the more we like it, the more it feels like categories we understand and know how to drive. And we'll improve in pet specialty through things like innovation, through shelf management, through merchandising, through consumer promotions. All the levers that we know in the rest of our food business, they all apply to Pet and they all apply to the pet specialty channel. And so we feel like we know how to do this, and we're committed to working with the new leadership in the pet specialty channel to help Blue Buffalo, which we think, in turn, can help their business as well.

And then Jeff, just one follow-up on your comments there. In the second quarter, I think you called out in your script the year-ago sell-in from the initial FDM customers. Does that mean that Blue Buffalo sales will be flattish in this upcoming second quarter because of that real tough compare? Could they actually be down? Just any magnitude of guidance would be helpful.

Yes, David. I think when we think about the Blue Buffalo business, we do have confidence and a line of sight to the growth for the whole year, double-digit top and bottom line. But one of the things that's also very clear to us is it's going to be variable, both on the top line and the cost side, on the top line, due to changes in sell-in and inventory. And if you look at the quarterly results from last year, you'll see that our second quarter was a big one for Blue Buffalo because they had a lot of sell-ins. So I would anticipate that in the second quarter -- I'm not going to give the absolute level of sale, but I would anticipate that our sell-through to consumers will far outpace our RNS realization that we show on the income statement. And as we continue to expand in the food, drug and mass channel, I think that will reverse over time. And then the same will be true on the cost side. As we're building new plants in Richmond, as we do have a new treat facility up and going in Joplin, as we're building new distribution centers, the timing of those costs isn't always associated with the revenue. And so we'll see a lot of variability, and we'll just have to get used to that as we continue those expansions. It's all part of the expansion. We saw similar things with Annie's, Annie's which just happened to be a smaller business. And so we'll make sure we flag it to you. But I think you have the general sense of how things are going to flow, right?

Our next question comes from the line of Chris Growe of Stifel.

I just had a question for you, if I could. In relation to the U.S., where your sales were down in North American Retail 2%, but you gained share on the majority of your categories. So it just seems that you need stronger sales growth across your categories to really accelerate your revenue growth. I guess my question then would be, do you expect your categories to grow in fiscal '19? And I guess, what are the initiatives you have in place, I'm sure it's innovation-driven, marketing-driven, to help accelerate the growth of these categories, which seem to be a bit of an impediment to your sales currently?

Chris, it's Jon Nudi. So we saw our categories in Q1 grow about 1%. We were flat. So if you put non-measured channels on top, we expect -- we believe that we grew about 1% in total consumer movement. So as we look forward, we think the categories will continue to grow. We feel really good about our plans as we move through the rest of the year. It really starts with supporting our big brands and we feel good about our media plans and our above-the-line promotions as well. I feel really good about innovation. In fact, in Q1, we saw 15% more innovation or RNS coming from innovation than the year prior. We believe that our plans would get even stronger as we move through the year. And then distribution will continue to build as well. As Jeff mentioned, we were down about 1 point from a distribution standpoint in Q1. We expect to get back to positive as we move throughout the year. And even in Q1, our share of distribution was actually positive as retailers are cutting back on the number of SKUs on shelf. So we feel good about our plan for the year. In Q1, we saw about a 2 point gap between total movement and RNS. And really, that was related to pipeline and inventories at our customers. In fiscal '18, we saw about a 1 point gap, and we expect that to be the case again in fiscal '19. So you'll see some of that work back our way as we move throughout the year. So again, we feel that our category is going to grow. We feel good about our ability to compete. We've seen that in Q1 and we believe that we can deliver for the year.

Okay. And just one other question, if I could, was -- and forgive me if I missed this, Don. But how much was inflation up in the quarter? And then I'm just curious on your SRM initiatives. Price/mix was positive this quarter. Are there more price increases that go into place, something you want to get into each of those? Not looking for that, but just to understand, is it that? Or is it more around reduced promotional spending or wait-outs, that kind of thing, to help achieve stronger pricing through the year?

Yes. Inflation is fairly level through the year, so the 5% is pretty consistent. It may move a couple basis points from here or there, but it's pretty steady through the year. And as I said, HMM will grow as global sourcing initiatives to contribute. So the gap between inflation and HMM will diminish as the year unfolds. SRM will be the other driver of price realization and mix. And we're looking at all the levers, whether it's list price or price-pack architecture, the trade optimization and mix. And as we look at the year, I think we talked about this in July, we see each of those contributing about equally as the year unfolds. And you will see an increasing contribution from that as well as in quarters past.

And I'd like to build on Don's comment. Just to remind you, I mean, we saw good price/mix, net price realization on all 4 of our legacy segments as well as Blue Buffalo. And so this strategic revenue capability management that we're rolling out is we're really taking it global. And I like what we're seeing across all of our different segments.

Our next question comes from the line of Michael Lavery of Piper Jaffray.

When you look at the distribution losses, can you give us a sense of where -- in what categories you think that should turn and become a positive tailwind and how to think about the timing for something like that?

Michael, it's Jon. In the U.S., again we've made big strides over the past year. We were down 5 points of distribution in fiscal '18. Again, at Q1, we were down 1, but share of distribution actually grew. If you look at the categories that we're lagging right now, the biggest one is yogurt. And as Jeff mentioned, we're actually seeing much improved trends. In fact, we grew share 0.5 point in Q1. So as we continue to build momentum and really prove that we can deliver in the category, particularly bring innovation in segments like "simply better," we expect our distribution to build in yogurt and improve as we move throughout the year. So that would be the biggest delta that we see as we move forward.

And when you mentioned innovation, obviously, you've had some launches early fiscal '19 already. If you're looking at distribution from -- gains from innovation, would you have a similar amount of innovation coming? Or is it a step-up? What's the right way to think about the back half?

Yes. So if you think about our yogurt launches, the biggest one was YQ by Yoplait, which is off to a good start. That just launched in July, so we're still building distribution. I think, at this point, we're still only around 30% or 35% ACV. So we expect that to continue to build. Oui Petites is another one that we'll build, too. So we expect both of those to continue to build throughout the quarter and throughout the rest of the year.

Okay, that's helpful. And just a last one on the pricing. I know, last year, there was some accrual timing that distorted a little bit of the pacing or made the optics a little bit funny. Is there anything going on in this quarter that is similar to that?

Nothing material to note.

Our next question comes from the line of Alexia Howard of Bernstein.

So can I just ask about the Blue Buffalo profitability track here? It looks as though, on an underlying basis, when you strip out the onetime items, it was probably down a bit in the first quarter. Is it mainly that the plant start-up costs really pressured profitability in the first quarter and that, that will improve as we move through the year? And then can you quantify exactly how much Blue Buffalo benefited overall EBIT for the quarter as well?

Alexia, let me get the first question. If you strip out the purchase accounting impacts, both the inventory and the ongoing amortization, the profit margins for Blue Buffalo will be about 20%. And that's versus a full year number last year of about 23%. There's about 1 point or so that are from plant startups embedded in there. So the profitability as a percent of sales is actually pretty close to what it was for the full year last year. Now we think that's going to improve as the year unfolds. And I mentioned the driving factors. We're going to see increased price/mix benefits. We've announced some pricing a couple of months ago. And as we expand further on FDM, we'll get the product mix benefit of more wet and treat products. HMM and synergies are weighted to the back half. That includes opening a new warehouse that's going to help offset some logistics inflation. And we expect stronger volume growth as well, which will leverage fixed costs. So all those will benefit the margins as we -- as the year unfolds.

Let me just -- this is Jeff Siemon. I'll just jump in your second part of your question. So Pet segment was $14 million in profit. That's about a little over 2% of the operating profit growth for the quarter off of a base of a little over $600 million last year.

Great. And just as a quick follow-up, with marketing spending down year-on-year in the quarter, is that expected to continue? And then I'll pass it on.

Yes. Media spend -- the advertising spend was down in the quarter. And Alexia, that's part of, as what we talked about, our total brand investment, where we're looking at a number of different vehicles and it's really by brand. And I think the testament to the fact that, that's working is that we've had 4 quarters of organic sales growth. And so we'll continue to make sure we're using the right vehicle for the right brand.

Our next question comes from the line of Dara Mohsenian from Morgan Stanley.

So Jeff, just at a high level, following up on that question. A&M levels have been down pretty significantly in aggregate year-over-year over the last few quarters if you go back to the back half of last fiscal year also. And I'm a bit surprised by that just given the shift back to top line focus and a desire to drive accelerating organic sales growth going forward. So help me understand what's sort of driven that drop in the last few quarters. I understand some of it's going to other areas. But also as you look out over the next couple of years, should that line item move up? Do you expect to continue to get leverage? What are you thinking going forward? And why has there been such a big drop in the last few quarters there?

Yes. Thanks for the question. I mean, I think -- let me start with the answer from a little different perspective, which is, look, our focus is on driving organic sales growth and driving that in the most efficient, effective way possible. And sometimes, that's through media spending. Sometimes that's through other types of commercial spending, things like in-store displays or coolers or adding to a sales organization in India. But in this current year, what I'm pleased is in the first quarter, we kind of grew as I thought we would, which is we've improved our distribution here in the U.S., we've improved our new products as a percentage of sales, we've grown in all 3 of our top emerging markets in India and Brazil and China. And so there are a lot of paths to growth, and we're focusing on doing it the most efficient and effective way possible. It just turned out that in the first quarter of this year, our media spending was down a little bit even if our commercial spending was solid and we had good new product programs. And so as we look out into the future, we'll continue to -- we're pretty pragmatic, and we're looking to grow at the most efficient and effective way possible. And if that's media spending, we'll spend more in media. If it's more on in-store support on freezers for Häagen-Dazs, we'll do that. If it's building distribution on our new products, we'll do that. And so you'll see us pull a variety of levers. And so as we look out, I'm not going to give an advertising and media perspective only because I think what we need to do is to provide a growth perspective and then provide the means to get there.

Our next question comes from the line of Jonathan Feeney from Consumer Edge Research.

One, I apologize for the deep, detailed question, but I want to -- I think it's important to want to understand what's going on in Blue Buffalo. You gave us a lot of real helpful data. With the shift, the comparison from the period where they -- last year, they reported a June end and a September end. Obviously, it gets a lot tougher as you pointed out in your remarks. But I'm trying to understand, I guess, how that extra month compares. Like how much more difficult this comparison is Q2 versus Q1? And any comments you could make -- obviously, everything is 1 month shifted forward, October comes in. How big was that? And what was the kind of trend with that we can think about right now?

Jon, this is Jeff Siemon. I would just tell you that if you think about the sell-in last year to the first wave of FDM customers, that really peaked in August, September, which are the first 2 months of Q2 for Blue Buffalo for -- because they're on a month lag on our calendar. So July -- our first quarter for Blue Buffalo ended in July. Sell-in, in that first pipeline fill was really August, September, so we'll get the brunt of that difficult comparison here in Q2.

And Jonathan, this is Don. To put some numbers to it, we -- as Jeff Siemon noted upfront, we posted the pro forma results for Pet for our F '18. And what you'll see in that, Q1 sales last year for Blue Buffalo were $302 million. In Q2, it jumped to $360 million. And then in Q3, it was $330 million. So clearly, there was a pretty significant shipment to the new customers in what is now our second quarter.

Right. Which is -- I guess, which tells us it's right about in line with what the reported numbers were for Blue Buffalo independently. There isn't much monthly shift there.

Yes.

And could I ask one follow-up, Don? As far as the total -- where are you as far as the total channel -- ACV expansion, if anywhere, if you can comment on that, plans, uptake, progress report as to where we stand as far as total distribution growth?

Yes. So this is Jeff. Let me intercept that question from Don and take that. We're a -- if we look at the food, drug and mass channel, we were about -- we only have about 30% ACV, and we only have it with the Life Protection Formula only, roughly half of the Blue Buffalo product line. So as we look ahead, there is a tremendous amount of expansion in front of us in the food, drug and mass channel. And we think we can perform better in pet specialty, and we're performing really well in e-commerce. So we see a lot of -- we think that we can drive growth in all 3 of those channels for the -- we can drive improved performance in all 3 of those channels, certainly drive growth in food, drug and mass and e-commerce for the rest of this year.

Our next question comes from the line of Robert Moskow of Crédit Suisse.

I guess, 2 questions. One is just very broadly, it's surprising to me to see such a big difference between your reported sales and the Nielsen trends, given that you launched a lot of new products, which I expect would fill the pipeline. And also you have e-commerce growth, which, I guess, is not captured by Nielsen. You've mentioned some distribution kind of differences. Is that really the answer? It's really like yogurt distribution? Is that really what the difference is? And then I have a quick follow-up.

Yes. Rob, this is Jon. I guess, again for the U.S., we are planning for and have seen historically about a 1 point gap between movement and RNS. And in Q1, it was 2 points. So again, it was about 1 point different than what we've seen and what we expect to see for the year. So again, we think that will come back to us. But beyond that, as retailers continue to draw down inventories and focus on working capital, we do expect to see that 1 point gap for the year.

Okay. And then a follow-up, I think, Don, you said that you would expect -- given the performance of new products, you expect a bigger investment behind them in second quarter that will pressure gross margin. Can you give me a sense of what that means? Is that more marketing support? Or is it that these new products are lower gross margin mix in nature? Is it pricing? What kind of investment?

So it wasn't necessarily related to new products. I was talking about the gross margin. It was really the flow of our HMM versus inflation and our pricing build over the course of the year.

Okay. But I think you said a bigger investment also in your response to Andrew Lazar's question.

No. The point was as we think about our total brand investment, that you're going to see it hit numerous places in the P&L, not just in media. And I referenced the fact that packaging for it would be an example of something that would hit gross margin. And certainly, as we talked about, Oui has been one of the strongest marketing aspects of it.

One of the others is customer activation funds and where we're getting in-store taco truck visibility or other activations we're getting the brand visible in store, that falls above the net sales line, which should also obviously pressure gross margin.

Yes. That wasn't necessarily unique to Q2. That was just more of a comment as we think about the full year.

Okay. So maybe it's a shift in media -- lower media and more towards these types of activities?

Yes, for sure, year-over-year, we'll see that. Yes.

Our next question comes from the line of Bryan Spillane of Bank of America.

Two questions for me. One, just related to the pricing -- the comments you've made about price/mix will build through the balance of the year. So I guess, one, just how much of that has already been, I guess, discussed with and sold in? And how much still has to sort of be negotiated or sold in? If we can get a sense for that. Just trying to get a sense for how much could still be open to, I guess, some variability. And then the second, related to that, is just -- you kind of made the commentary about, just in general, there's the retailers -- at retailers, there's more price/mix going in. And just why -- what factors are sort of allowing that to happen? Is it -- that more companies are coming through with SRM tools and being smarter about the way they can sort of negotiate pricing or if there's some other factor that's sort of enabling that to sort of go into the market?

As we look at the broader food and beverage trends, I think there's been a lot written about pricing and particularly about how tough it is to get pricing in this environment with everything being so competitive. And it is a competitive environment, but I think that's only part of the story. The other part of the story is we're actually seeing quite a bit of inflation for the industry, and we're seeing it in a number of areas. So we're seeing it in raw materials. We're seeing it in logistics. We're seeing it in wage increases. And our retailers are saying the same things. And so I think that, to be honest, in some cases, the part of the conversation that has been lost -- the part that it's a competitive environment has not been lost. But the part that there's inflation across a wide spectrum of types of input cost, I think, has been lost a little bit. And we all see that and our competitors see that and our retailers see that, I think. So I think that the pricing mix we've seen in the marketplace -- and a couple of points of pricing is not a tremendous amount and it's certainly not egregious as -- when it comes to the kind of inflation that we're seeing overall. And so I think that actually explains why we're seeing a little bit of pricing in the market because both we as manufacturers and our retail customers are all seeing their costs go up on a variety of fronts. As we look at our price -- as we look into the future, we'll continue to work all 4 levers of price realization. And so whether that's list pricing or trade or sizing or what have you, we will look at all the different elements. And we've sold a lot in already, and I'm sure there may be some to come. But we've sold a lot in already all over the globe, and so we got a pretty good line of sight as to what to expect for the rest of the year.

All right. That's helpful. And I just had one follow-up. There was a couple of comments made about 2Q, I guess, with regard to spending and margins. And so just as we're looking at sort of the bottom line, would we expect that the earnings growth or the earnings performance in the second quarter would still be -- the expectation would be that it would sort of be below the full year range? Or does it all net out to being something close to what you're expecting for the full year in terms of earnings growth?

Yes. But we're not going to forecast in the quarter. I think we gave some sort of guidance on some of the Q2 factors we see in response to David's question on how Q2 will unfold on gross margin versus what we saw in Q1 and then some comments on Blue. I don't think that we're not going to go any further that in terms of discussing the quarter.

Our next question comes from the line of Jason English of Goldman Sachs.

I guess I wanted to come back with another question on the media horse because I don't think we've beaten it to death just yet. Can you quantify how much your A&P was down this quarter, both all-in with Buff and on a base business perspective?

Yes. All-in, they contributed to SG&A. It was down mid- to high single digits all-in and double digits on the base business. Again, I would just make sure that we also put that in the context of that we grew organic sales growth for the fourth consecutive quarter. So the levers that we are investing are paying off for us.

No doubt. And to a couple of questions or in response to a couple of questions, I think you referenced a bit more trade spend going in than maybe you initially planned for the year in terms of customer activation. As we think about the full year and we think about the totality of your consumer-facing spend, both from a trade perspective and from an A&P perspective, is this still tracking in line with what you initially expected? Or is it going to be higher or lower than what you set up as your initial expectation coming to the year?

Yes. Jonathan (sic) [Jason], it's in the same range as we had planned, instead of maybe in different buckets. And again, I wouldn't necessarily call it customer activation trade. It may hit that line, but it's different than the promotional spending or the price discounting that most people associate with trade. But I just want to make sure that's clear. But the total brand investment is going to be very near what we had in the plan, in the same range as the plan. And that what's obviously informed part of our reaffirmation of our guidance.

And let me build on Don's point as we roll around in the details of media spending and trade by quarter and so forth. I mean, what I feel great about is that we did what we said we were going to do in the first quarter. And we said we were going to grow organically and we did. We said we're going to grow Blue Buffalo, we did. We said we were going to meet our financial commitments, we did. We grew at 8 out of the top 9 categories in the U.S. We grew in Brazil despite a trucking strike. We grew in China. We grew in India. We grew in Europe. We grew in C&F and across our core categories and we realized pricing. And so I do appreciate the specific nature of questions about media, but the fact is we delivered what we said we were going to deliver in the first quarter of this year, both in the top line and the bottom line, across our established business, across Blue Buffalo. And if we can do that for 3 more quarters, we're going to have a good year.

All right. Selena, I think that's probably all the time we have, given that we're at the bottom of the hour. So thank you, everybody, for joining us this morning, appreciate the engagement. I'm available. I know we probably didn't get to everybody quite on the queue, so please don't hesitate to reach out with additional questions today. Thanks very much.

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