通用磨坊 (GIS) 2019 Q4 法說會逐字稿

Greetings, and welcome to the fourth quarter fiscal 2019 earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded, Wednesday, June 26, 2019.

It is now my pleasure to turn the call over to Jeff Siemon, VP, Investor Relations.

Please go ahead, sir.

Thanks, Tanya.

And on behalf of General Mills, thanks, everyone, for joining us this morning.

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 joining us for the Q&A portion of the call.

I'll hand the call over to them in a moment but before I do, let me cover a few different housekeeping items.

A press release on our Q4 and full year fiscal 2019 results was issued over the wire services earlier this morning, and you can find the release and a copy of the slides that supplement this morning's remarks on our Investor Relations website.

I'll remind you that our remarks this morning will include forward-looking statements that are based on management's current views and assumptions.

The second slide in today's presentation was factors that could cause our future results to be different than our current estimates.

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

Thank you, Jeff, and good morning, everyone.

In fiscal 2019 we executed well, successfully transitioned Blue Buffalo into our portfolio and delivered on our financial commitments.

We met our sales growth guidance, and we exceeded our guidance for profit, for earnings per share and for cash flow.

We also delivered double-digit top line and bottom line growth for Blue Buffalo as we said we would at the beginning of the year.

And while we're pleased with these results, we know that there's still room for improvement.

Turning to fiscal 2020, we'll continue to pursue our Consumer First strategy and our Compete, Accelerate, and Reshape growth framework.

We'll drive innovation and invest in our brands and capabilities to accelerate organic sales growth.

We'll continue to execute our HMM and strategic revenue management or SRM programs and maintain our strong margins.

And we'll continue our cash discipline to reduce our leverage.

On Slide 5 you can see the key financial performance metrics for our fourth quarter and the full fiscal year.

For the fourth quarter, net sales totaled $4.2 billion, up 9% in constant currency.

Organic net sales declined 1%, driven by lower volume.

Adjusted operating profit grew 5% in constant currency driven by the addition of Blue Buffalo and strong HMM savings, partially offset by higher inflation and other supply chain costs.

It should be noted that this profit performance compared against, by far, our strongest quarter of growth last year when adjusted operating profit was up double digits.

Adjusted diluted earnings per share totaled $0.83 and grew 6% in constant currency.

For the full year, net sales totaled $16.9 billion, up 9% in constant currency.

Organic net sales were in line with year-ago levels with growth in our Asia and Latin America and Convenience Stores & Foodservice segments, offsetting declines in North America Retail and Europe and Australia.

Adjusted operating profit for the year totaled $2.9 billion, up 10% in constant currency due to the addition of Blue Buffalo.

Full year adjusted diluted EPS totaled $3.22, an increase of 4% in constant currency.

A year ago, we laid out 3 key priorities for fiscal 2019: grow the core, transition Blue Buffalo and deliver our financial commitments.

Let me spend a few minutes summarizing our performance against each of these priorities over the past year.

We outlined 5 keys to growing the core in 2019, including improving our U.S. Yogurt and emerging market businesses, strengthening our innovation, stabilizing distribution in the U.S. and increasing benefits from price/mix.

I'm pleased to say that we made measurable progress against each of these areas.

At the same time, we experienced challenges in a few other areas, most notably, U.S. Snacks, which held us back from fully realizing our top line ambitions.

We have plans in place to improve our organic sales growth in fiscal 2020, and you will hear quite a bit more about those plans at our Investor Day in 2 weeks.

We competed more effectively in fiscal 2019 as measured by our market share performance.

We held or grew share in 7 of our top 10 U.S. categories, which represent roughly 85% of our Nielsen-measured sales, thanks to solid innovation and brand building, proactive execution of our SRM initiatives and improved distribution trends.

This included encouraging share gains in some of our largest categories, including Cereal, Yogurt and refrigerated dough.

Of the 3 categories where we lost share, soup was down just 10 basis points after a year where we delivered strong share gains.

On fruit snacks, we were capacity-constrained in a growing category in fiscal '19.

We have capacity coming online in early fiscal '20 that will unlock growth for our brands in that segment.

Our biggest opportunity is clearly in U.S. snack bars.

At Investor Day, Jon Nudi will go into more depth on our plans to improve Nature Valley and Fiber One performance in fiscal 2020.

With that as a background, let me spend a bit of time summarizing our grow the core performance in fiscal '19 on our large global platform starting with Cereal.

We are encouraged by our continued positive momentum in Cereal across U.S. Retail, Convenience Stores & Foodservice and our Cereal Partners Worldwide joint venture.

In U.S. Retail, the Cereal category has sequentially improved for 8 consecutive quarters.

We grew our retail sales for the second year in a row, and we extended our leading market share position through good brand building and very good innovation.

On Lucky Charms, compelling consumer news and refreshed advertising helped drive a second consecutive year of retail sales growth, and we had a great year on innovation led by Cheerios Oat Crunch, Cinnamon Toast Crunch Churros and Fruity Lucky Charms.

In fact, 5 of the 7 largest new products in the category in fiscal '19 were Big G cereals.

We're encouraged by early results of our April launch of Blueberry Cheerios and look forward to another strong year of innovation and brand building in fiscal 2020.

Beyond U.S. Retail, we drove strong performance on our Cereal platform in the Convenience Stores & Foodservice segment in 2019.

With net sales of low single digits, we saw good results on bowlpack cereals in K-12 schools and bulk cereal in colleges and universities.

In our CPW joint venture, constant currency net sales increased low single digits for the year with broad growth in Asia, the Middle East, Continental Europe, the U.K. and Australia.

I'm also pleased with the improvements we made in our U.S. Yogurt business in fiscal '19.

As you can see on Slide 10, we've improved our trends significantly over the past 2 years.

We also grew share for the full year, a first since fiscal 2015.

We improved our core Yogurt business, which represents more than 50% of our retail sales and includes brands such as Go-GURT and Original Style Yoplait.

All family messaging on equity flavors such as Sour Patch Kids drove mid-single-digit retail sales growth on Go-GURT.

And Original Style Yoplait stabilized behind more real fruit news.

We continue to post impressive retail sales growth in the simply better Yogurt segment, including a 48% increase on Oui and contributions from YQ.

In fiscal '20, we expect further improvements in U.S. Yogurt as our strong consumer marketing plans and innovation continue to drive growth while the declines in our Greek & Light product lines are less a drag on our results.

Shifting to our accelerated platforms, Häagen-Dazs, Old El Paso, Snack Bars and Natural & Organic.

We grew retail sales on 3 of the 4 platforms in 2019.

Häagen-Dazs retail sales were up double digits as we broadened distribution of Minicups and StickBars across Europe and Asia and launched compelling innovation, including our new Barista line of coffee-inspired flavors as well as peanut butter Pints and StickBars.

Old El Paso retail sales grew low single digits led by strong performance in North America.

Our U.S. Retail sales were up 6% behind our Anything Goes campaign as well as in-store taco stand displays which showcase a variety of offerings to make Taco Night easy.

Retail sales results continue to vary across geographies for Snack Bars.

Fiscal '19 results in the U.S. underperformed our expectations with retail sales down mid-single digits.

Fiber One declined significantly in fiscal '19 as we fell out of step with modern weight managers.

And on Nature Valley, our innovation and in-store execution did not meet our objectives.

On a positive note, EPIC and LÄRABAR continued to increase availability and retail sales for our treat bar product line were up 50% as we expanded into more stores and offered incremental pack sizes.

Importantly, we continue to drive strong performance on Snack Bars outside of North America with retail sales up 30%.

In Europe and Australia, we've posted 26% retail sales growth, and even more impressive, we posted retail sales and share growth across all markets.

Retail sales for Bars in our Asia and Latin America segment were up 47%.

Asia drove outsized growth behind distribution gains and portfolio expansion on Nature Valley and sweet treat Snack Bars.

On our Natural & Organic platform, retail sales were up low single digits in F '19, as decline from our exit of some tail offerings in channel-specific product lines were more than made up for by strong growth on our core products, including Annie's Mac and Cheese, Bunny Grahams, Muir Glen tomatoes and EPIC meat bars.

We continue to invest to accelerate growth across these 4 platforms in fiscal '20, and you'll hear more about it from our segment leaders about those plans at our Investor Day in 2 weeks.

Our second growth priority was to successfully transition Blue Buffalo while maintaining momentum on the business.

I think we can confidently say that we delivered against this priority.

We delivered our F '19 pro forma growth guidance with an 11% increase in the top and bottom lines versus the prior year, adjusted for purchase accounting.

We continue the momentum on Blue with retail sales of high single digits, led by the food, drug and mass, or FDM channel, and strong growth in e-commerce.

And we significantly expanded distribution in FDM, reaching 65% ACV for the final month of the fiscal year.

Aggregate year-to-date retail sales from Blue were up high single digits and we continue to gain market share in the category.

Looking at results by channel.

Blue retail sales and FDM were up triple digits, and we continue to grow and gain share across customers in this channel.

Perhaps most importantly, for customers where Blue has been in distribution for at least 12 months, retail sales grew nearly 30% in the fourth quarter versus last year.

In the month of April, Blue was the market share leader in a number of FDM accounts and held double-digit market share at 3 large customers.

In Pet Specialty, retail sales for Blue declined double-digits in F '19, consistent with our expectations.

This channel remains important for Blue, and we'll continue to partner with Specialty customers to bring product variety, unique innovation and education to serve pet parents in the channel.

For example, we're launching Carnivora, a new super premium product line under the Blue banner and the Pet Specialty channel later this summer.

In e-commerce, which makes up roughly 1/4 of Blue Buffalo in net sales, we saw category retail trends slow in the back half of the year.

Still, Blue's retail sales continued to outpace the category, and we extended our market share leadership in this channel.

E-commerce sales, retail sales for Blue were up 21% in fiscal '19, and we see more growth ahead as pet parents increasingly look for pet food online, where Blue is the #1 brand.

Overall, we're happy with Blue Buffalo's performance in year one, and we see a long runway of growth ahead for this important business.

For our third fiscal 2019 priority, delivering on our financial commitments, I am proud to say that we did just that.

We exceeded our guidance for operating profit, for earnings per share and free cash flow conversion in F '19.

We generated 2 points, the positive organic price/mix by leveraging our enhanced SRM capability, including positive price/mix in each of our segments.

We also delivered record levels of HMM.

And our strong cash flow focus allowed us to pay down $1.3 billion in debt, helping reduce our net debt to adjusted EBITDA ratio to 3.9x.

This was ahead of our initial F '19 goal and bolsters our confidence that we can reach our target of 3.5x by the end of F '20.

With a clear understanding of our work in fiscal '19, and where we can still improve, we've outlined 3 priorities for fiscal '20, which can be found on Slide 15.

Our first priority is to accelerate our organic net sales growth.

We'll improve growth in North America retail by maintaining momentum on Cereal, continuing to improve U.S. Yogurt and improving U.S. Snacks through sharpened execution, strengthened innovation and increased capacity on platforms where we were constrained a year ago.

We'll also see accelerated sales growth as we bring Blue Buffalo into our organic sales base and we continue to drive strong growth for that business in F '20.

Blue Buffalo will shift to a May year-end to align with our corporate calendar, which will add an extra month of results in F '20.

On a like-for-like basis, we expect Blue Buffalo net sales to increase 8% to 10% in F '20, and we're targeting double-digit growth on a reported basis.

Our second priority is to maintain our strong margins.

Benefits from our long-running HMM cost savings program and contributions from our SRM actions will continue to provide fuel to invest in brand building on our highest priority and highest return categories, including Cereal, Pet, our accelerated platforms and U.S. Yogurt.

In addition, we'll invest to drive deeper data and analytics to support our e-commerce and SRM capabilities.

As our -- and our final priority for F '20 is to maintain a disciplined focus on cash to achieve our fiscal '20 leverage target.

With these priorities in mind, we expect to deliver on the fiscal 2020 guidance laid out on Slide 16.

Namely, we expect organic net sales to increase 1% to 2%.

We're targeting adjusted operating profit growth of 2% to 4% in constant currency.

We expect constant currency adjusted diluted earnings per share to increase 3% to 5%, and we're targeting free cash flow conversion of at least 95% of adjusted after-tax earnings.

I am confident in our strategies and our plans for F '20.

With that, I'll turn it over to Don to review our F '19 financial results and the 2020 financial outlook in more detail.

Thanks, Jeff, and good morning, everyone.

Jeff provided a high-level summary of our fiscal 2019 financial results.

I'll share a few additional details, starting with the components of net sales growth on Slide 18.

Organic net sales were down 1% in the fourth quarter, driven by a lower contribution from pound volume.

Organic net price realization and mix was flat in the fourth quarter, compared to 3 points of positive price/mix in the same period last year.

Foreign currency translation was a 2-point headwind to net sales, and the net impact of acquisitions and divestitures added 10 points to net sales in the quarter, primarily driven by Blue Buffalo.

As Jeff mentioned, full year organic net sales were flat to last year, with volume down 2%, offset by 2 points of positive price/mix.

And on a 2-year basis, we saw both organic volume and price/mix improve sequentially from the first half to the second half of fiscal '19.

Turning to our segment results on Slide 19.

Full year North America Retail organic net sales were down 1%, and lagged Nielsen-measured retail sales growth by about 1 point, which was in line with the expectations we outlined at the beginning of the year.

Our SRM actions drove 1 point of positive organic price/mix for the full year, which was 2 points ahead of last year's results.

Fourth quarter organic net sales rounded down to a 2% decline, driven primarily by declines in U.S. Snacks in Canada.

We saw unfavorable price/mix in the quarter, driven by higher promotional expense as we returned to normal merchandising levels this quarter after having relatively little in-store activity in last year's Q4.

Second half price/mix was favorable by 1 point, in line with the full year results.

And fourth quarter retail sales trends were slightly positive in U.S. Nielsen-measured outlets, with market share gains in the majority of our top U.S. categories.

Full year segment operating profit increased 3% in constant currency, primarily, due to benefits from cost savings initiatives and lower SG&A expenses, partially offset by lower net sales and higher product cost, primarily driven by input cost inflation.

Fourth quarter segment operating profit decreased 2% in constant currency, compared against high single-digit growth last year.

In Convenience Stores & Foodservice, organic net sales were up 2% for the full year, led by mid-single-digit growth by our Focus 6 platforms.

In fact, each of our Focus 6 platforms grew net sales in fiscal '19, including strong performance on frozen pouch breakfast and bowlpack cereals in K-12 schools, Pillsbury Stuffed Waffle and Chex Mix snacks in convenience stores and cinnamon rolls and other frozen baked goods in foodservice channels.

Organic net sales were also up 2% in the fourth quarter, driven by continued growth on all Focus 6 platforms.

Segment operating profit increased 7% for the full year, primarily due to benefits from cost savings initiatives and positive net price realization and mix, partially offset by higher product cost, again, primarily driven by input cost inflation.

Fourth quarter segment operating profit was down 1% compared against double-digit growth last year.

In our Europe and Australia segment, organic net sales were down 1% for the full year.

Declines on Yogurt and the negative impact of a continued challenging retail environment in France were partially offset by growth on Snack Bars and Ice Cream.

Nature Valley and Fiber One snacks delivered strong double-digit retail sales growth in fiscal '19, as we secured distribution gains and brought successful innovation to market.

Häagen-Dazs retail sales also grew double digits as we expanded distribution on Minicup, StickBar and Pint innovations.

Fourth quarter organic net sales were down 3% for the prior year period that grew mid-single digits.

Segment operating profit decreased $19 million for the full year, driven primarily by higher input cost, including significant commodities inflation and currency-driven inflation on products imported to the U.K., partially offset by lower SG&A expenses.

The bulk of that full year decline, $15 million, was in Q4, reflecting the difficult comparison against 55% profit growth a year ago.

Our Asia and Latin America segment delivered broad-based sales growth in fiscal '19, including increases in China, Brazil and India, the segment's 3 largest markets.

Full year organic net sales increased 6%, driven by growth on Nature Valley and Betty Crocker snacks in the Middle East, India and Latin America as well as strong performance on Häagen-Dazs across Asia and Wanchai Ferry in China.

These results exclude the impact of the sale of La Salteña in Latin America and the sale of our Yogurt business in China to a new Yoplait franchisee.

Fourth quarter organic net sales increased 1% over the prior year period that saw a double-digit like-for-like growth after adjusting for the calendar reporting change in Brazil.

Segment operating profit increased $33 million for the full year, driven by organic volume growth, positive net price realization mix and lower SG&A expenses, partially offset by higher input costs.

Fourth quarter segment operating profit increased $13 million.

Slide 23 covers our Pet segment results.

As Jeff mentioned, we achieved our full year targets of double-digit top and bottom line growth for Blue Buffalo, excluding purchase accounting charges.

Fourth quarter net sales increased 38% on a pro forma basis, driven by significant distribution expansion in the FTM channel and the difference in shipping days from the month of acquisition.

Fourth quarter segment operating profit increased 82% on a pro forma basis and grew 88% excluding purchase accounting charges, driven primarily by robust volume growth and benefits from SRM action that we implemented earlier in the year.

Slide 24 summarizes our fiscal '19 margin results.

As we anticipated, our fourth quarter margins were down compared to significant margin expansion a year ago.

For the full year, adjusted gross margin decreased 10 basis points, and we delivered 30 basis points of adjusted operating profit margin expansion driven primarily by record levels of COGS HMM savings, strong cost control in SG&A and the addition of the higher-margin Blue Buffalo business, partially offset by input cost inflation and higher product costs.

Slide 25 summarizes our joint venture results in fiscal '19.

TPW delivered its third consecutive quarter of top line growth and finished fiscal '19 with constant currency net sales growth of 1%.

Full year Häagen-Dazs Japan net sales were down 7% in constant currency, driven primarily by seasonal innovation timing and declines in Minicups and crispy sandwich varieties.

Combined after-tax earnings from joint ventures totaled $72 million in fiscal '19 compared to $85 million a year ago.

The decline was driven primarily by our $11 million after-tax share of CPW restructuring charges as well as the lower sales in Häagen-Dazs Japan.

Slide 26 covers other noteworthy income statement items in the quarter.

Corporate unallocated expenses, excluding certain items affecting comparability, increased $62 million in the quarter, driven primarily by higher incentive expense and favorable onetime items in the same period last year.

Net interest expense was $12 million below last year's fourth quarter, that included a $34 million expense related to the bridge term loan financing for the Blue Buffalo acquisition.

That expense is excluded from our adjusted earnings.

Full year net interest expense was modestly better than our expectations as strong cash flow allowed for accelerated debt reduction.

The adjusted effective tax rate for the quarter was 20.6% compared to 26.7% a year ago, primarily driven by the net benefits related to U.S. tax reform.

Our full year adjusted effective tax rate came in just below the low-end of our guidance range, primarily due to earnings mix.

And average diluted shares outstanding were up 3% in the quarter.

Slide 27 captures our balance sheet and cash flow highlights for fiscal '19.

Our year-end core working capital balance totaled $385 million, down 34% versus last year, driven primarily by continued benefits from our terms extension program and a bit from lower inventory balances.

Full year operating cash flow totaled $2.8 billion and capital investments were $538 million, resulting in free cash flow of $2.3 billion or 115% of our adjusted after-tax earnings.

And our strong cash discipline enabled us to pay $1.2 billion in dividends, while reducing more than $1.3 billion in debt this year.

Shifting to fiscal '20.

Slide 28 captures our key financial assumptions for the year.

Our fiscal 2020 results will include a 53rd week in the fourth quarter.

Contributions from the 53rd week, the impact of divestitures executed in fiscal '19 and currency translation are collectively expected to result in reported net sales growth finishing 1 to 2 percentage points above our organic growth -- sales growth guidance.

Blue Buffalo will shift to a May year-end in fiscal '20, and therefore will include an extra month of results which will impact our fourth quarter.

As we've done with previous calendar alignments, we will include this adjustment in our fiscal '20 organic net sales results.

We're planning for growth investments in brand building and global capabilities like e-commerce and SRM to drive improvements in our organic growth profile in fiscal '20 and beyond.

We expect Holistic Margin Management savings and input cost inflation to each total roughly 4% of cost of goods sold.

We're roughly 50% covered on our global commodity positions at this point in the year.

Below the operating profit line, we estimate benefit plan income for the nonservice components of our plans will total approximately $120 million, up roughly $30 million from fiscal '19 due to lower interest expense and higher recent asset returns.

We expect net interest expense to total approximately $500 million, and we're planning for the adjusted effective tax rate in fiscal '20 to be in line with fiscal '19 rate.

And we anticipate average diluted shares to increase approximately 1%.

Based on these assumptions, Slide 29 summarizes our fiscal '20 outlook for our key financial metrics.

Organic net sales are expected to increase 1% to 2%, driven by improved growth in North America Retail, 8% to 10% like-for-like growth for Blue Buffalo and double-digit growth, including the extra reporting month.

And growth consistent with F '19 for our Convenience Stores & Foodservice, Europe and Australia and Asia, LatAm segments.

We estimate constant currency adjusted operating profit will increase 2% to 4% from the base of $2.9 billion reported in fiscal 2019.

Constant currency adjusted diluted EPS is expected to increase 3% to 5% from the base of $3.22 earned in fiscal '19.

We're targeting free cash flow conversion of at least 95% of adjusted after-tax earnings, and we do not expect currency translation to have material impact on fiscal '20 adjusted operating profit or adjusted diluted EPS.

With that, let me turn it back over to Jeff for some closing remarks.

Thank you, Don.

And as we look at next year, what I would like to say is that I'm pleased with the way we executed this year.

I'm pleased that we transitioned Blue Buffalo effectively into the General Mills family and especially pleased that we delivered on our financial commitments.

We have strong plans in place for fiscal '20 to drive improved organic sales while maintaining our strong margins.

I remain confident in our strategies and look forward to taking another step forward in fiscal '20 on our path toward sustainable long-term growth.

With that, I think we'll open up the line for questions.

Operator, can you get us started?

(Operator Instructions) Our first question comes from the line of Ken Goldman with JPMorgan.

I wanted to ask a quick question about the 13th month for Buff this coming year.

Without going into the nitty-gritty, my math is that the extra month adds maybe 70 to 90 basis points to your expected organic top line growth rate.

I just wanted to make sure that's correct, or at least reasonably correct.

And is it also safe to assume that the extra month will entirely benefit 4Q '20?

Yes, Ken, on your last question, yes.

It will all -- the extra month will all come in Q4.

As far as the contributions to the organic growth, I mean, there is really 3 components.

We said that C&F, Europe, Australia and Asia and LatAm will grow at the same rate -- grow, but at the same rate as this year.

So the increase for next year is really -- we're seeing it step up from a combination of Blue's like-for-like growth at 8% to 10% we talked about, the extra month and the base business.

And frankly, they're all about equally weighted, so you're probably a little high on what you're guessing for -- what you're estimating for the month, and you should look for all 3 of those to have roughly equal weighting in that improvement from this year.

Okay, that's helpful.

And then a quick follow-up.

Jon, I know you -- or I know Jon is going to discuss Snacks at the Investor Day, but it really seems to be worsening, at least, in what we are seeing in Nielsen, right?

For a while, it was really Fiber One, then Nature Valley started getting worse and now even LÄRABAR in measured channels is trending negatively.

I know we don't see everything in these -- in Nielsen and IRI, but is there a structural issue you think that's causing really most of your major brands to sort of decline at once here?

Yes, ken, thanks for the question.

I think the short answer is probably not.

In fact, LÄRABAR grew 11% for the year.

And I think there were some comps as we got into Q4.

And LÄRABAR, a big portion of that business, is actually in nonmeasured channels where we continue to do quite well.

And we are very focused and frankly not satisfied with our performance on both Nature Valley and Fiber One, and that's really what we need to turn around in the coming year.

Nature Valley's really about getting back with meaningful innovation.

We just launched a Krispy Kreme wafer bar that we're excited about, and it's very early days but the early returns are good.

And frankly, we didn't execute very well.

We missed some key windows from a merchandising standpoint.

Back to school on Nature Valley, we feel like we've got good plans in place to get after it this year.

Fiber One's been a structural issue over the last few years.

Consumers, weight managers, they've really changed in terms of what they're looking for in terms of the macros of our product.

So we just reformulated that product.

It's flowing in the market now.

Again, early days but encouraging signs there as well.

So what I would tell you, we like LÄRABAR, we don't believe there's a structural issue there.

We love EPIC, that continues to grow nearly 50% this past year.

It's really Nature Valley and Fiber One that we are focused on as we move into fiscal '20.

And to build on Jon's point.

I agree with Jon's perspective that it's not structural.

It's some of our innovation and execution.

In fact, to that end, we're confident we'll sequentially improve in the first quarter in the first half of next year on Snacks and that will accelerate even further in the back half of the year.

Our next question comes from the line of Rob Dickerson with Deutsche Bank.

A set of questions just around expectation on brand support in fiscal '20.

It seems like what's implied, obviously, the guidance is for essentially operating margin, call it, to be flat year-over-year.

But at the same time you do have -- you've noted margin mix benefits should be coming from -- at least from Blue Buffalo.

I'm just curious to hear as you think about total company vis-à-vis kind of the Blue Buffalo benefit, hopefully, it would imply that maybe there's still some margin contraction potential in other parts of the portfolio.

And I'm not sure if that given increased brand support levels?

Or if there's maybe just flex in the overall P&L as we think about next fiscal year?

Well, there are 2 questions in there.

One's about brand building support and the other's about margins.

So let me take the first, and I'll push it over to Don for the second.

In terms of brand building support, what you will see is us increasing our investment behind our brands, especially our priority brands and businesses as we look at next year.

And so well, I made some remarks.

When you think about Cereal, what we like -- we like what we see in Cereal.

Obviously, U.S. Yogurt is improving and we want to keep that trend up.

We need to get Snacks back on track.

You'll see us invest behind some really good ideas in -- on bars and on snacks.

And then our accelerator platforms.

So the things that are the biggest priority for us, you'll see us improve our brand building, not only because they're a priority but because we get good returns, and we got some really good marketing on a lot of those businesses.

So from a brand building perspective and then the same will be true at Blue Buffalo.

And Blue Buffalo, we're really encouraged by the trends we see in food, drug and mass and we've got great marketing on Blue Buffalo.

So you'll see us invest behind all those businesses as well as capabilities to drive growth.

We talked about SRM, and we're pleased with what we've done, but there's more we can do.

And with e-commerce, whether it's on Blue Buffalo or whether it's on our core business, we think that there's more we can do to invest in those capabilities.

I don't have a lot to add.

Jeff touched on where the investment is going to go to drive the top line.

And as you alluded to, and as Jeff commented in his opening remarks, our focus is maintaining our strong margins, and that's what the plan geared to do.

Our next question come from the line of Andrew Lazar with Barclays.

I guess with Blue Buffalo entering the base in fiscal '20 and including the calendar shift, it would seem that maybe that could drive about, call it, 1 point of organic growth in fiscal '20, and I guess that suggests the legacy can be anywhere from flat to up 1 to hit your targeted organic sales growth range next year.

I think organic was flat in fiscal '19, and you obviously got another year of significant reinvestment on cap this coming year.

So I guess my question is, what would potentially hold back the organic, if you will, on the legacy portfolio, potentially to just flat again?

Is it not knowing maybe how quickly Snacks and Yogurt responds?

Or any additional, sort of, competitive concerns out there that are worth mentioning?

Or is it really just, again, trying to be prudent and conservative in the way you're thinking about how organic growth sort of builds on the legacy?

Yes, so I mean 2 questions -- 2 responses, Andrew.

One is on how we guide and the second is about, kind of, what our expectations are.

On how we guide, I mean there's a natural tension there because on the one hand, it occurs to us that doing what you said you are going to do is pretty important.

And so we set our guidance accordingly.

On the other hand, nobody really likes a sandbagger, either in business or in golf.

And so we don't -- we are not trying to be too conservative either.

We want to set targets we think are going to be realistic that are going to drive value for shareholders, but that we're going to hit.

So that's the way we think about it.

In terms of our organic sales growth next year, I -- really Blue Buffalo's going to make a big contribution, but we think the North -- we've got great plans for North America Retail.

And that we think North America Retail, that's where we can see improvement behind maintaining momentum on Cereal, which we feel good about; improving our Yogurt business; and improving U.S. Snacks.

And so with those 3 things improving to the extent that we can hold with growth on Convenience & Foodservice, hold our business in EU/AU where it is on growth and continue mid-single-digit growth on Asia and Latin America, that would -- that tells me that growing Blue Buffalo and improving our top line sales in -- are 2 areas we can look for, for growth.

Great.

Okay.

And then just a quick one.

I realize portfolio mix in North America Retail can swing the pricing number around from quarter-to-quarter quite a bit.

If we're thinking about fiscal '20, maybe we can talk a bit about just how you see the contribution from volume and price playing out in North America Retail?

Let me take it to a company standpoint, and then I'll pass it to Jon for North America Retail.

From a company standpoint, first, I will take you back to fiscal 2019.

At the very beginning of that year, we said we were going to see about 4% inflation and we -- and -- but we needed some pricing and I think it's fair to say there were some skepticism as to whether we can do that or not, broadly.

And we're pleased that we were able to do that.

And we said, look, a little pricing goes a long way.

It was about 2% versus 1% the year before.

I would say that -- and we're not going to give how much pricing we're going to get next year, but what I will say is that we would expect to get a little bit of pricing next year, starting in the first quarter.

And we see a little bit of inflation.

So for the company as a whole, we see return, we see some inflation in the coming year as Don indicated, and we think that we will get some pricing as well.

So with regard to North America, Jon, you might want to comment a little bit on this year and kind of what you expect?

Yes, sure.

So Andrew, you're right in the fact that there are some fluctuations between quarters.

For the back half of fiscal '19, we were -- drove about 1 point of price/mix and that was the same as for the year as well.

So we feel really good about our ability to leverage our SRM toolkit and really drive some pricing in the market.

And we have good confidence as we move into fiscal '20 that we'll continue that through Q1 and really through the fiscal '20 as well.

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

I guess just 2 quick ones for me.

Maybe just following on Andrew's question.

If we, kind of, take a little bit of pricing and what you're expecting in terms of HMM savings, would it be safe to say that the expectation around gross margins are kind of flattish as we're looking at 2020?

And then the second question I had was just simply, I don't know if you gave it before, but just what you're expecting for CapEx for 2020?

We didn't give guidance on the latter, but it's going to be about 3.5%, so pretty much in line as a percent of sales of this -- from this year.

As far as the construct of the P&L, you'll actually see some gross margin expansion.

The key contributors you mentioned about the price -- the positive price/mix that we expect to get, that Jeff alluded to.

We also, obviously, have the onetime benefit of rolling over the inventory step-up charge that was in F '19.

So we will see gross margin expansion.

The investments that Jeff talked about in our brands and in our capabilities will be SG&A investments.

So you'll see SG&A go up as a percent of sales, again, as I answered in the earlier question leading to stable operating margins.

And just fair to say that for '20, there's less of a, I guess, a need for pricing to, sort of, drive the gross margin relative to the position that you were in a year ago?

A little less.

We noted our HMM and inflation projections for '19 are a little more in balance than when we came in -- from '20, excuse me, are a little more in balance when we came in for '19, yes.

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

I have a couple of questions on Buff.

First, real quick housekeeping.

And sorry, maybe I'm still a bit dense this morning but I was having a hard time following the puts-and-takes on your growth expectations for Buff.

Could you just give me a number of what you expect that business to grow at in 2020?

Yes, on a like-for-like basis, 8% to 10%.

And what is in like-for-like, like does that exclude just the extra month?

Correct.

Got it.

Okay.

And on the online component, you guys showed a 21% growth this year, which is, obviously, quite strong.

But it was a pretty big deceleration from the 30% growth in the first half.

It kind of suggests that you're probably tracking, sort of, low double digits.

And I guess my question's what's driving that?

Is that the whole channel has slown?

Or has your market share start to drift lower?

And regardless of kind of what the driver is, if you can give us maybe your thoughts on the explanation of what's causing that?

Yes, so in the fourth quarter, our sales in e-commerce were about 14%, and the category itself grew less than that.

So it really was about 10% or 11%.

So we gained share, and gaining share commensurate with what we've seen throughout the year, so it was really not a slowdown in our competitive positioning within the category.

We feel great about that.

The channel itself slowed.

And I think there are probably a couple components of that.

The first is that there were players in that channel who were trying to take more profit in the category and then their sales slowed.

I will also say if you look at Nielsen, you can see that not only did Blue Buffalo pick up in the last quarter of the year, but the FDM channel picked up significantly in the last quarter of the year behind, I would say, Blue Buffalo loss.

And so that is certainly another component.

What I expect going forward, and we'll talk about more on Investor Day, I -- pet food is really something that's built for e-commerce and whether that e-commerce takes place with pure players or whether it takes place with our traditional retail customers, I would expect that, at some point, what we're going to see is that the e-commerce channel itself will start to reaccelerate and that we'll accelerate with it.

But it's not -- to answer your question, it's not Blue Buffalo getting less competitive.

We feel great about our position related to the category itself.

That's really helpful.

And last quick question and I'll pass it on, I promise.

You delivered phenomenal margins on Buff in the fourth quarter.

I know there was probably some leverage with a bit of the pipeline fill that maybe not -- won't sustain, but at the same time, you've got new capacity coming online next year, you've got to fall away some of these start-up costs.

How should we think about the sustainable profitability of that business in context to what we saw in the fourth quarter?

Well, you are right, Jason.

We had some particular benefits in the fourth quarter from the building that the inventory in the pipeline as we launched in FDM.

That was particularly beneficial from a profit standpoint.

I think we ran 27% margins in the fourth quarter.

We would expect margin expansion from full year F '19 going into full year F '20 and primarily driven by the fact that we are going to have the inventory step-up in the numbers.

So we expect Blue to be driving very solid margins and certainly be as margin accretive as we expected when we purchased the business a year ago.

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

I have a couple of follow-ups, if I could, please.

Just to follow on Jason's question.

We talked about e-com there for Pet.

Where are you sourcing the market -- where is FDM, if you will, sourcing a lot of the market share gain for Blue Buffalo?

Is that -- and we saw, of course, that your Pet Specialty channels were down as well.

Is that the main area where it's coming from?

I guess you also would associate with e-commerce as well, given that slowed in the second half of the year?

Yes, what we're seeing -- thanks for the question, Chris.

What we're seeing is that the growth in our FDM channel is highly incremental, and we -- it looks to us about 70% incremental to everywhere else.

And what I will also say is that our household penetration continues to rise.

And that is the highest predictor of future success, is your growth household penetration.

And so as we look at the FDM channel, what -- our volume is really being sourced from other brands within the FDM channel.

And you can see that the FDM channel itself is growing in terms of dollars.

And so as we've expanded into the FDM channel, one of the things we're most pleased with is that our business is not being sourced from the other members of the Wholesome Natural segment as much as it is brand in the middle.

And so the whole segment is rising, the whole natural segment is rising.

And that tells us there is a great demand for these kind of products and Blue Buffalo's the market leader.

And that's kind of what we expected with our launch into FDM, and we're really pleased that it's working out that way.

Okay.

And then just one other question, I think a bit for Jon Nudi.

Just so I have it straight, you of cost inflation broadly offset by HMM in the year, but you also do expect SRM to be a positive contributor.

I think you said pricing to be up around 1%.

So that's obviously one question or just one clarification.

But related to that, I also want to better understand the shift in price/mix from Q3 to Q4, just the implication for fiscal '20.

There's a bit of a comp issue in there, I think, with the prior year, but it is a pretty big move from positive pricing in the mix to negative pricing in the mix in Q4.

Just to understand kind of the basis on why that changed so much.

Yes, absolutely, Chris.

So you're absolutely right, we had some fluctuations between quarters.

Again, importantly to remember for the year we drove 1 point of price/mix; and for the back half, we drove 1 point.

There were certainly differences between Q3 and Q4, and the biggest driver of that was trade timing and really the comp to last year.

Last April and May, we had very little merchandising in some of our major businesses.

We got back to just normal levels of merchandising this year and that drove some trade expense.

So again, we are very confident in our ability to take pricing and really leverage our SRM toolkit, and we expect that to continue as we move into fiscal '20 as well.

Those trade timing issues should be settled out now, is that right, for fiscal '20?

Yes, that's right.

Again, and we were just getting back to normalized levels.

Our comps last year, again, we didn't have a lot of merchandising, particularly in the months of April and May.

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

Wanted to ask a few Blue Buffalo questions.

Could you talk about the pacing of sales in 2020?

Obviously, in '19 there was a lot of distribution gains, but I'd just like to hear your thoughts on how this lays out in '20, in even just rough form, so we have a good way to track.

And I assume that there are additional points of distribution that you still expect to gain, like everything wasn't gained just in the fourth quarter.

So if you could start there.

Yes, David, thanks for the question, and I'll take this one.

As far as the phasing, we'll probably see the strongest growth in Blue in the middle part of the year, Q3 -- Q2 and Q3.

Q1 will be hampered a little bit by the fact that we had an extra week in our fiscal '19 Q1.

And obviously in Q4, we lap the launch in Walmart and the expansion of Wilderness.

The other factor in Q4 is that we are going to get the benefit of the extra month, which, as I mentioned in an earlier question, all falls in Q4.

So on the like-for-like basis, that 8% to 10% we talked about, strongest in Q3 -- Q2 and Q3, a little less in Q1 and Q4 for the reasons I mentioned and then the full benefit of the calendar change in Q4.

So I hope that helps.

To your other point, we do expect to continue to see distribution gains, clearly not at the rate we saw this year, given the fact that we've made a big launch in Walmart, but you'll continue to see us -- and matter of fact, if you look at the latest Nielsen, we're already up versus the 65 that we had at the end of April.

So we're in the low 70s already.

So we expect to continue to expand that as F '20 unfolds.

And following on Blue.

Can you talk about the growth in wet and treats?

One of the benefits that was expected was to see wet and treats grow significantly as you enter into the food and mass channels because of the frequency of shopping.

Are you seeing the traction there that you wanted to see, and what are your expectations in F '20?

Yes, we are seeing the traction we wanted to see as we launched into the FDM channel.

In fact, our proportion of wet and treats is higher in FDM than it is in Pet Specialty, and that's what we thought we would see as we entered the channel.

Again, it gives us confidence that we understand the business and how it's going to evolve.

What I would tell you is that we also think there's a big opportunity to innovate in the wet and treats area, and you won't see that as much especially in the first half of F '20.

It'll really be on continued distribution and the growth in wet and treats in the distribution.

But we think there's a second act for that, and that second act really is around innovation in both of those important segments.

I would also say -- it wasn't asked but as we look at the expansion in food, drug and mass, we expanded distribution in Muir Glen, but we also launched in Wilderness, and we're really pleased with both of those expansions.

They are right on track, and they're growing well.

And so we see continued growth from those.

Last question from me on Blue.

We have this African swine fever that's expected to impact protein prices.

Protein, I think, is the largest piece of the cost of goods for your Blue Buffalo business.

Can you talk about how that would be expected to impact?

Are you able to hedge?

Do you think you have to take pricing?

Just trying to gauge where the level of concern is on this, or if there is almost any concern.

David, yes, we're not concerned about that when it comes to Blue Buffalo.

There -- while there is some pressure on protein, it's less on chicken, which is the major protein in Blue's portfolio.

Now African swine fever is impacting our pork prices and we are seeing that in our Asian business in our China business, but less so with our Blue business.

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

So can I stick with the pricing and inventory question on North American Retail?

I'm really just curious about why in measured channels, on average across your U.S. portfolio, the pricing was fairly flat.

Obviously, you said that because of comparables, your net price/mix was down 2%.

But I'm just kind of curious about why that pricing being down for you wasn't passed on to the consumer.

And then just on the inventory front, it looks as though the flat sales in Cereals and Yogurt was below the kind of trends of 3.5% sales growth, 1.5% sales that we saw in measured channels.

Was that to do with pricing dynamics, nonmeasured channels or maybe retailer inventory reduction?

Sure, Alexia.

So as we look at the quarter, Q4 came in for North American Retail very much as we expected.

It was actually our strongest quarter of the year from a Nielsen standpoint.

So we feel good about the momentum that we're driving in the market.

We had about 1.5 points gap between Nielsen movement and what we reported in net sales.

And what I pointed out was an inventory drag that we've seen all year as retailers are working on reducing their working capital and pulling inventories down.

There was about 0.5 points related to merchandising timing, and again, this expense that was in Q4 as we got back to normalized levels of merchandising.

So that was really the one thing in Q4 that really affected both price/mix as well as our reported net sales.

Again, as we look at our momentum in the market, we look at our share position, we feel really good about the momentum that we have as we move into the coming year and feel good about our plans as well.

Alexia, it's Jeff Siemon.

I would just add that if you look at the full year North America Retail, Nielsen's versus shipments was directly in line with what we said at the beginning of the year, which is we'd lag by about 1 point.

And that's what we saw for the full year.

Do you expect those retailer inventory reductions to continue if they've been fairly consistent through the course of fiscal '19?

We do.

I mean again, we definitely see our retail partners focus on working capital, and we think they'll continue to make -- take -- I mean put initiatives in place to reduce inventories over time.

Will it be at the same -- to the same extent as this year?

I don't know, but we expect it to continue.

Our next question comes from the line of Ken Zaslow with Bank of Montréal.

I just have a big overall question.

Your long-term growth algorithm is mid-single-digit operating profit.

You had a year that you kind of consolidated and figured out a lot of the issues, you moved past so many things, and then in 2020 you're still looking for 2% to 4% operating profit growth.

What do you -- can you kind of compare and contrast why there is a difference between your long term and when you'll return to that, and why not in 2020?

Yes, I think the way I look -- Ken, this is Jeff.

The way I look at it is that we keep making improvements towards our long-term algorithm, and I think we took a step this year when we acquired Blue Buffalo, and we'll take another step forward in fiscal '20.

And I think the most important part of getting to mid-single-digit operating profit really is to drive organic sales.

And between Blue Buffalo and what we expect with NAR next year, we think we'll take another step forward with driving our organic sales to 1% to 2%, which is higher than we've done in any of the past few years.

And we're disciplined as we look at cost of doing it.

And then we'll look to take another step the following year, and so for me the steady progression is the key, and it really starts actually with organic sales.

So you -- I know this is way out there and you just gave 2020, but you would expect though, outside any exogenous factors that 2021 would it be at least back into that range?

And I know that's a little far out, but I'm just trying to figure out like when the long-term growth rate we can start to assume that, that is a viable place to start.

Is that a fair way of looking at it?

I'm not trying to box you in, I'm just trying to think about it.

Ken, this is Don.

We just gave 2 fiscal '20 guidance so we're going to hold off on talking anything beyond fiscal '20 at this point.

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

Most of my questions have been asked.

But I guess, I'll ask a follow-up to Ken Zaslow's question.

I mean you have now operating margins in the low 20% range for Blue, North American Retail and Convenience Stores & Foodservice.

It just feels like these margins don't have much room to go higher, and you have reinvestment needs that seem to be kind of ongoing.

Retailers have invested a lot in data analytics, and it seems like there is a data war that you will need to keep putting money into.

Maybe you can give me -- give me an update in the data war maybe.

Are you getting closer to investing in SRM at the appropriate level?

And then just bigger picture, is it possible that if sales growth stays in the low single-digit range, maybe it just is going to be a lot harder from an algorithm standpoint to see mid-single-digit operating profit growth.

Right.

Rob, I'll start with the larger picture and make a couple of comments on data analytics and I'll let maybe Jeff go into a little bit more about how we're thinking about that.

But in terms of the margins, just building up Jeff's answer to Ken's question, is it really is going to be triggered off continuing to accelerate our organic growth.

Your comments on NAR, C&F and Blue Buffalo's strong margins is well taken.

It's not that those businesses don't have opportunity, but they're already very healthy, and frankly, driving growth in those businesses' top line growth is a very attractive proposition, even at the current strong margins.

As we look longer though, we do know we have opportunity internationally, and as we think about margin expansion beyond fiscal '20, we think the International is where the percentage margin benefit can come from.

As far as the data analytics, our investments, we will continue to invest in our brands and in our capabilities.

We're targeting now continuing to build out what we are doing with e-commerce and SRM by getting deeper into the data analytics.

It's something that has served us well, and we will continue to invest.

And actually we thinks it's a key driver to our ability to drive that and accelerate that top line growth.

Yes, I'd build on what Don said.

I mean it's interesting you characterize the data as a war, and I'm not really sure I view it that same way.

I mean I think that our ability to use data to drive our Consumer First strategy is actually a potential for high competitive advantage because it requires a scale.

And we have proprietary data through our 3 big websites.

We think we'll have proprietary data through Box Tops for Education, we'll talk about -- a little bit about that in the coming weeks.

And data analytics is something where scale matters, and not only for a retailer, for us.

And we think that the fact that some of our retailers are getting more sophisticated with data actually helps us because we think that we'll be able to utilize that better than some of the other players, especially, some of the smaller players in the market.

And so I understand that it makes people nervous when we start talking about data and when our retailers start talking about that, but I don't view it as a war.

Actually, I think it's a net opportunity for us.

Okay.

Well, maybe you're winning the war, Jeff.

Okay.

I think we've hit the bottom of the hour, so I know we didn't get quite to everyone, but we appreciate the time that you all spent this morning.

We are around all day for follow-up questions for those of you that we didn't get to.

Thanks again for the interest in General Mills and hope everyone has a wonderful day.

Thanks, Tanya.

That does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your line.