通用磨坊 (GIS) 2021 Q1 法說會逐字稿

Greetings, and welcome to the General Mills First Quarter Fiscal 2001 (sic) [2021] Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, September 23, 2020.

It is now my pleasure to turn the conference over to Jeff Siemon, Vice President of Investor Relations.

Please go ahead, sir.

Thanks, Frans, and good morning, everyone.

Thanks for joining us today for our Q&A session on first quarter results.

I hope everyone had time to review our press release, listen to the prepared remarks and view our presentation materials, which are available on our Investor Relations site.

It's important to note that in this Q&A session, we may make forward-looking statements that are based on our current views and assumptions, including facts and assumptions related to the potential impact of the COVID-19 pandemic on our results in fiscal '21.

Please refer to this morning's press release for factors that could impact forward-looking statements and for reconciliations of any non-GAAP information which may be discussed on today's call.

I'm here virtually with Jeff Harmening, our Chairman and CEO; Kofi Bruce, our CFO; and Jon Nudi, Group President of our North America Retail segment.

We're holding this call from different locations, so we'll cross our fingers that technology cooperates.

And with that, let's go ahead and get to the first question.

Frans, can you get us started, please?

(Operator Instructions) And our first question is from the line of Chris Growe with Stifel.

Congrats on the very strong quarter there.

Yes.

I had just 2 quick questions for you.

I do want to ask, as you look ahead, you do outline a high single-digit growth rate in your categories that you expect in North American retail in the second quarter.

You've had very strong market share gains to date.

Should we assume those market share gains, maybe not the same degree, but those continue?

Is that part of your expectations?

And I guess I was also curious if you're incorporating or what stage you're in terms of building inventory, North American retail, or are your inventory levels back to where they need to be?

Or is there more work you can do kind of prior to the holidays to get those inventory levels up higher?

So Chris, this is Jeff Harmening.

And let me answer the first one in summary and then hand it over to Jon Nudi for any additional commentary and then for the inventory question.

I'm really pleased with how we've competed across the world, including North America Retail in the first quarter.

I think that's one of the reasons our quarter was so good.

And as we look at the second quarter, I would expect the same.

I would expect us to compete effectively, including in North America.

And I'm not going to go category-by-category.

But I think in general, we -- in general in the first quarter, we actually increased our market share position.

And I don't see any reason why we can't do the same thing in the second quarter of this year because we really are kind of firing on all cylinders executionally, and we've got good marketing and innovation and renovation to back that up.

So that's kind of the summary.

Jon Nudi, any commentary on that?

And then maybe some thoughts on inventory, retail inventory.

Sure.

Chris, in terms of competing effectively, I agree with Jeff, we really like our marketing, we like our new products.

The only other thing I'd add is our share distribution is up nicely, and that's a key metric that we look at.

So we do believe we'll be able to compete effectively.

In terms of inventory, if you remember in Q4, we had our [RNS] about 9 points behind our movement.

As we move through Q1, we saw -- we got back a little over 3 points of that.

So we do believe there will be some more inventory coming our way as we move throughout the year.

Important to note that won't all come in Q2.

We still have some platforms like soup and baking mixes that we're capacity-constrained on.

So we think that by Q4, we should be back to healthy service levels, and that inventory will flow through the rest of our fiscal year.

And Jon, was just curious.

Will that limit your promotional ability in some of those categories in particular where you're capacity constrained in terms of getting back to more of a normal level of promotional spending and advertising and that kind of thing?

Is that limiting you because of your capacity situation in some categories?

Chris, I would say, in the categories that we're constrained, generally, the entire industry is.

So I think you'll see our marketing levels remain strong.

We believe that building our brand is something that we need to be consistent on, and that we'll be good for the short term and the long term.

I think from a promotional standpoint, you'll still see similar frequency to last year, but in some cases, less depth.

And as we're working with our retail partners, that's what we're focused on at this point.

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

I had a longer-term portfolio question for you, Jeff.

You talk -- publicly talking about the desire to maybe rationalize the portfolio through divestitures by about 5%.

The categories that I would have thought would be kind of candidates for divestiture are the ones that are performing the best in this environment.

Baking and soup, I would kind of thought might be part of those considerations, just for an example.

Is there anything that's happened during the pandemic that has altered your view as to what parts of the portfolio you would consider divesting?

So Rob, thanks for the question.

You're breaking in and out, so I will -- but I'll try to answer the question I think you asked.

But if I missed it, just know that it's because I'm not trying to avoid it, you're just breaking in and out.

On the portfolio shaping, broadly speaking, I would see us continue to look at portfolio shaping, both in terms of divestitures and acquisitions.

There's nothing strategically that makes me think that we should change our general approach to divestitures and acquisitions.

Clearly, the timing on that has changed as we have been in a -- as we have gone through this pandemic.

And the longer-term question of what consumer trends have changed, I think, is yet to be answered because we're still in the middle of a pandemic.

And so we're -- we still think that portfolio shaping, both divestitures and acquisitions, will be a part of our future.

But of course, we're only going to do those things to the extent we think they're going to create shareholder value.

Importantly, and I know you know this, Rob, but I just feel compelled to say it.

We -- from the beginning, we haven't felt compelled to do divestitures because we think we need to raise cash to pay down debt.

And I think today is further evidence of that as our net debt-to-EBITDA got down to 3 and we resumed dividend growth.

So as we look at divestitures, I will make sure that they are constructive for our shareholders.

And there's certainly not a reason -- the reason to do that is not to pay down debt because we've already done a nice job of that and are already on target.

Great.

Can I ask a quick-follow-up for Kofi?

One of your competitors set up some expectations for how much incremental sales they expect this calendar year from the pandemic, a percentage that you expect to retain in calendar 2021.

And then by 2022, I think a very conservative expectation is that there are no further retention.

Are you looking at your forward outlook the same way?

Are you trying to think about, I don't know, maybe calendar '21, how much you retain from what happened into 2022?

And then looking out -- well, my fiscal years are screwed up.

But are you looking at it in the same manner?

Or are you looking at it differently?

Well, I think it's -- Rob, this is Kofi.

Thanks for the question.

It's probably the question of the moment.

And I think it's important for us to stay grounded in what we actually know right now, which for us, I think we need to prepare for scenarios in which sustained levels of at-home consumption remain for a period of time.

I think it is hard to make a call on duration at this point, with all due respect to any of our competitors who are doing so, especially that far out.

So there is a reason why we haven't given guidance, and it is not for a lack of confidence in our ability to compete, but more a reflection of the uncertainty of the environment and the duration and the expected duration of at-home demand.

But I think -- know that our posture is to be prepared for whatever shows up and be prepared to compete.

And I think you saw us put a pretty good down payment on that in Q1.

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

That's actually a good segue into my question, which is you've talked about incremental capacity coming on stream, both internally and externally.

I'm curious maybe how much of this addition is internal, and maybe in sort of what categories these sort of internal capacity is expected to come online from.

And I really ask because my assumption is that you would not necessarily add internal capacity if there was not at least some anticipation of elevated demand being somewhat sticky, which, of course, is a big topic of debate among investors.

The third party manufacturing, I guess, can be a little bit more flexible in that regard.

But the internal side, of course, is -- kind of sticks with you.

There's capital involved and things of that nature.

So that would be helpful.

Andrew, this is Jeff.

Let me answer -- let me take a summary perspective on this.

And then Kofi or Jon, if you have anything to add, please feel free to add in.

I would say, during this quarter, we are adding both internal and external capacity.

On the internal capacity, the places where we're adding capacity are things where we actually saw quite a bit of demand even pre-COVID.

And so we have some cereal businesses, fruit snacks businesses, where we saw demand really for a number of years that was growing, and we had reached our internal capacity to run that actually even before COVID.

And so we made the decision, in many cases, 12 months ago or 18 months ago, to add capacity to those.

And we'll have some of those coming online in Q2 and some coming online in Q3.

But there are areas that have seen -- that saw sustained growth even before COVID.

Even if we would have wanted to, in the second quarter for many of our seasonal businesses, where we're adding a lot of capacity here in Q2 and really differential capacity, I would say we're going external, not due to lack of confidence, but primarily because it provides greater agility.

It's faster to get into the capacity.

And then to the extent we don't see the capacity stick, then it's easier to get out and we don't spend the capital doing it.

And so the places where you see us spending on external capacity in the second quarter are really our seasonal businesses, which is why we called out the margin pressure in Q2.

But it allows us to react quickly to growing demand.

And if we see that stick, we can make other decisions down the road.

Our next question from the line of Ken Goldman with JPMorgan.

You highlighted that you're taking a number of approaches to, I think, maximize the stickiness of demand.

You mentioned higher e-comm spending, higher marketing.

And then you also talked about renovation and innovation.

I understand what you're doing differently with e-comm and the spend on marketing.

I wasn't quite clear, though, if you're doing anything necessarily new in terms of renovation, which you've been doing well for years; and innovation, which is always a company priority.

So I'm just curious if you could help us understand what's new in those areas versus pre-pandemic.

Yes, Ken.

I think, this is Jeff, your observation is a good one.

I would say that I don't know on renovation that we've -- we're doing anything new pre-pandemic.

I think actually, the point is actually the one you made, that over the last few years, we made a lot of changes to a lot of products, some of which -- only some of which we actually highlighted during the presentation.

But I think the point is that because of all the renovation we've done, as we're bringing new consumers into our franchise, and you saw during the presentation we're bringing a lot of new consumers into our franchise, and one of the things we're finding is that the repeat rate of those new consumers is about the same as the unit we already have, which is actually highly unusual and very encouraging.

The other thing we would say is that the new households we're getting are -- happen to be a different demographic, which is to say, younger and more Hispanic, which we underindex.

And we're actually excited about that.

But the point about renovation, you're right.

I don't know that there's anything new other than what we have been doing for the last few years is really paying off as new consumers come into the franchise.

And I think you can see us -- you'll see us continue to renovate our products because we feel that if it's paying dividends now, the work that's been done before.

And Jon, is there anything you'd like to add to that?

No.

I completely agree with that, Jeff.

I think the only thing I'd add, too, is we've gotten, I think, smarter in terms of renovation.

Instead of blanket renovations across categories, for example, a few years back on cereal, taking out artificial flavors and colors, I think we're very targeted now.

So if you look at yogurt, we're seeing great growth in original style Yoplait because we know that consumer cares a lot about fruit.

We put more fruit in, and we're seeing great growth in the top line and we're growing share.

So the renovation work continues, I think we've gotten smarter, and I think we'll continue to benefit as we move forward as a result.

And then a quick follow-up.

You highlighted the normal capital allocation strategy.

You mentioned share repurchases.

Barring a deal, should we expect your repo to accelerate reasonably quickly?

I know you're not -- or no food company necessarily is super happy with their stock prices, given where their fundamentals have been.

So I'm just curious how your outlook is or your appetite is for that right now.

Yes.

So this is Kofi.

Thanks for the question.

Look, our job that we declared at the beginning of the year on the balance sheet was really to get our debt-to-leverage back to below 3x to restore the strategic flexibility of the balance sheet.

As you can imagine, coming off of last year, we would expect a little bit of sort of choppiness in the cash flow.

So I think our first point of confidence is really to restore dividend growth and continue to make progress on deleverage.

We'll assess the other capital allocation priorities based on the progress we make throughout the year.

Our next question is from the line of David Driscoll with DD Research.

Great.

I wanted to ask about the pet business.

The 6% sales growth perhaps understates the true strength in this business.

Can you guys talk a little bit about what's happening in pet, and get your expectations on a go-forward basis?

I would note that there is significant live animal sales.

I mean we think live animal sales are surging at pet stores.

Your e-commerce operations, pursuant to your comments just a few weeks back, sound like they're doing terrific in pet.

And then because the pets eat at home every day, I'm hoping this allows you to be a bit more free with your forward comments.

And really explain -- that 6% -- again, the core of it is, I think that's understating the true strength of growth within that operations, but would appreciate your insights.

Yes.

David, this is Jeff.

And yes, thanks for the question.

I appreciate that.

First, I would say, we were actually quite pleased with our pet growth in the first quarter, and it ended up almost exactly where we thought that it would end up.

A couple of pieces of context.

And first, you are right that the growth that you -- our reported net sales growth does understate our growth for the quarter as it relates to pet sales out because, recall that in the fourth quarter of last year, there was a big stock-up.

And we actually saw that flow through to June.

And so our retail sales out in June were probably low single digits, and they accelerated dramatically in July and August to high single digits.

And so that tells us that the destocking -- the stock-up the consumers had in the fourth quarter is actually now behind us, and that it did have an impact on our first quarter.

And were it not for the impact of the -- from the fourth quarter and the carryover, you probably would have seen -- certainly had seen high single-digit sales of our pet food business on a reported basis in the first quarter.

So they are understated by a little bit for reasons that we well understand from before.

And the other I would say is that our like-for-like comparison to growth from a year ago was actually 16%.

And so the question is can we grow once we lap distribution?

At least one quarter in, we feel good about our answer to that, which is yes.

And we have grown it through growing same-store sales where we already are.

We've grown it through our e-commerce business.

The drag from pet specialty has actually reduced from where it was before.

So we feel very good.

We've also grown share in all the segments we compete in in cat and dog, whether it's in dry cat food or wet dog food or treats, we've actually grown in every subsegment.

So we feel very good about our pet business.

And I would think that, in the second quarter, we'll see strong growth in pet.

If I could just sneak in one follow-up.

The cereal business seems to have shown a deceleration in sales growth in the reported Nielsen data.

I'm curious if you guys have any explanations about just the summertime and cereal sales, and if you think that the rate of growth in the cereal category and your cereal business will pick up during the final portion of the calendar year here.

But I'm thinking that there's some quirks that happened in August and back-to-school.

I don't know if Jon has any comments or explanation there, but it would be very helpful.

Jon, go ahead.

Why don't you go ahead and field that one?

Yes, sure.

David, thanks for the question.

So let me start by just saying we feel really good about how we competed in cereal through Q1.

So the category was up 4[%].

So it did decelerate, I'll get to that in a second.

We were up 6[%], we grew about 50 basis points of share.

And it was actually the 21st straight month that we gained share in the category.

We now have 4 of the top 5 brands in the category.

We had share increases on 6 of our top 7 brands.

We're the top 3 new items in the category with Cheerios Oat Crunch and the Cheerios and Trix Trolls.

And we really like the marketing.

Our heart health messaging on Cheerios continues to work.

Cinnamon Toast Crunch continues to really rock behind a great kid message.

And we have a new partnership with Chrissy Teigen and John Legend on Chex Mix.

So again, we love the fundamentals of the business.

To your question, the category definitely decelerated from Q4 where we saw growth in the 20% range.

And as we really dug into it, one of the things to keep in mind is the comp.

So if you think about last summer, kids were at home.

This summer, they were as well.

As we move into the fall, we know that only about 25% of kids are actually back at school full time.

And we know that when kids are at school, they tend to eat breakfast and lunch, in many cases, at school.

So we would expect the category to pick up as a result in Q2.

We're starting to see that the early days of back-to-school period here.

And we'll continue to watch that very closely.

But again, we do expect the category to accelerate presumably through Q2.

Our next question is from the line of Nik Modi with RBC.

Just wanted to get behind some of the category growth assumptions that you laid out for the upcoming quarter.

What is kind of the backdrop or the premise of how you think the mobility trends, I guess, or how the pandemic is going to affect that particular number?

So I just wanted to kind of understand how you're thinking about how this is going to play out through the end of the year.

And then just kind of piggybacking on that, just with all the news in Europe and more lockdowns and national shutdowns, is there any perspective you can provide us on any early impact that that's having on your business?

So let me answer it from a macro perspective.

Then, Jon Nudi, if you have any perspective from the U.S. point of view.

I think what you're seeing in Europe right now and what you're seeing in the U.S. goes to the trickiness of trying to be predictive during a pandemic as situations change pretty significantly and pretty quickly over time, which is why we haven't given guidance.

Certainly, the -- we would expect, holistically, demand for food at home would be elevated for a period of time.

Exactly how much that's going to be elevated globally is uncertain.

But particularly in the U.S. and Brazil, where we have big businesses, and even in Europe, we think food at-home demand will remain elevated.

In China, it's a little bit different in that the at-home consumption is still growing, but away-from-home consumption continues to get better, as witnessed by our double-digit growth in China this quarter due to the fact our Häagen-Dazs shops have improved.

And so the -- what I would say, holistically, it's really hard to determine what's going to happen, but we do think that food at home is going to be elevated for a period of time, perhaps longer than had been originally anticipated.

And given that our business, at least pre-pandemic, was about 85% at-home and 15% out-of-home, that would bode for an extended period of growth for our business holistically, even if there are some segments, like our convenience and food service, which will feel the pressure of that over time.

Jon Nudi, any thoughts that you have about the U.S.?

No, I generally agree with your global thoughts.

I mean I think the thing that we're seeing is that the general direction of categories remains unchanged.

So baking and soup and categories like those remain elevated.

Snack bars remain -- has headwinds at this point given the away-from-home nature of that product.

So while we see the growth rates change a bit between Q4 and Q1, as we head into Q2, I think the general direction of those categories are the same.

And as Jeff mentioned, until we get a vaccine at scale, we'd expect continued growth across many of our categories.

And again, our job now is to compete effectively.

We can't control the category growth rate.

What we can control is how we compete in the categories, and that's what we're laser-focused on at this point.

Our next question from the line of Faiza Alwy with Deutsche Bank.

So I wanted to ask a little bit about e-commerce and some of your investment spending there.

So you've previously talked about investment and enterprise capabilities like e-commerce, data analytics, digital category management and customized basket.

And I was wondering if you can talk about where you are in terms of those capabilities at the moment.

And I know you've also talked about how you've been able to accelerate some of that spending.

So as we look out into 2021 or even further, like how much of these costs do you expect to continue?

And how do you think about measuring a return on these investments?

Is it immediate?

Or is it more sort of longer term?

And as part of that, I was hoping you can talk about what you saw in e-commerce this quarter or what percentage of sales are now online, particularly in the U.S. outside of that.

So this is Jeff.

Let me -- you have a number of really good, insightful questions.

I could probably take the next 0.5 hour going through all of those.

But let me try give a shorthand version and ask Jon Nudi to comment on the U.S. piece.

Just in terms of our business through e-commerce for the company globally, it's about 9% right now, whereas a year ago, it was about 5%.

And simple math says we've almost doubled our e-commerce business due to a change in consumer behavior.

And while that growth rate may or may not continue over the next year, we think the growth in e-commerce actually will continue, which is why we continue to invest in it.

It's important that we invest in e-commerce ahead of the curve, especially getting consumers on e-commerce for the first time because it tends to be relatively sticky.

Once you have Honey Nut Cheerios in your basket, you tend to go with Honey Nut Cheerios.

And so being first in the basket is certainly something important with e-commerce.

And so for us, investing in that right now is important.

I think it's important to know that we've been successful in e-commerce over the last few years, and we overindex in the vast majority of our categories around the world.

So that investment has paid off.

It's also important to note that the economics for us, for our business going through e-commerce channels versus just grocery stores is about the same, predominantly because most of our sales through e-commerce actually still go through grocery stores.

And so we -- the investments that we have to make are not really in physical infrastructure or distribution centers or packaging changes, they really have to do more with digital capabilities, and the payback on those tend to be relatively fast.

So with that, anything, Jon, that you'd like to add to that?

The only thing I'll add is just the facts around the North America retail business.

So that prior to pandemic, about 4% of our sales were the e-commerce.

Today, it's about 8%.

So again, saw similar acceleration of doubling that Jeff mentioned.

We like, again, the consumers that they're coming in on e-commerce.

We know that they're satisfied, and we expect this to continue to grow.

And as Jeff mentioned, we do overindex versus bricks and mortar.

We know that big brands work, so we're going to continue to invest both in capabilities as well as marketing and retention of these consumers as we move forward.

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

Congrats on another strong quarter.

I guess my questions are going to be on cost and margins.

First, on the margin front, I know you've signaled the second quarter down.

Just simple math for the rest of the year, your full year margins to be sort of flat implies down around 60 bps for the next 3 quarters combined.

Is that how we should think about it the next 3 quarters, down in that magnitude?

Or is it going to be outsized compression in the second quarter?

Jason, thanks for the question.

This is Kofi.

Let me just start by kind of harking back to the principles we set at the beginning of the year.

I think Jeff said it well.

We come in with an expectation of keeping flexibility in our operating model and an eye towards keeping our margins roughly in line year-over-year for the full year.

Look, if we are in a sustained higher demand environment, we are going to be in a position where we will invest to capture the incremental sales.

We will drive higher dollar profit even if the percent margins maybe don't expand significantly.

And so I think the thing to frame up here is that there are kind of 4 headwinds that will play out, and I'll get to Q2 versus Q1 after I lay these out.

The first in order of sort of magnitude would be we expect COGS inflation to be about 3%, which is about 1 point off of -- lower than it was last year.

And we expect some significant cost to capture the elevated demand, specifically some things around external supply chain and manufacturing premiums as well as internal capacity.

And again, these are -- the external supply costs are ones we can shed if the demand doesn't materialize.

Brand and capability investments is third.

And then health and safety costs will continue this year, even as we see the run rate tapering off of what we saw in Q4.

So as we get to Q1 versus Q2, what we're seeing is, and expect to see, is a significant step-up in external manufacturing costs in Q2.

And that specifically, as we go into key season on meals and baking businesses that we're significantly constrained in U.S. and Europe.

And as we're stepping into that -- those key seasons, we will need a lot more external capacity to rebuild supply for the demand levels we expect.

And the other thing I'd note is our comparison for adjusted operating profit margin is much more challenging as we get into Q2.

The comp was 17% versus last year on Q1.

And it's about 150 basis points more difficult as we look at our Q2 versus last year's Q2 where it was 18.3%.

And we had a number of timing benefits that helped us last year, specifically as we were building some inventory in advance of labor negotiations and a little bit of shipment timing on some of our other businesses.

And then I think as a last note, just to help you kind of on the balance of the year, I'd note that in Q4, we're going to be having an extra month of pet results to comp, the 53rd week, both of which were favorable to our operating margin.

So posture, I'd say is we'll know a lot more, Q2 will be critical, to your point, for our assessment on the balance of the year.

And we'll be able to make a call once we see the amount of elevated demand and how the ESC costs play out in Q2.

Okay.

I'll follow up with Jeff offline to see if he can help.

But one thing you didn't list in that was freight cost.

And I know that they kind of bit you guys a couple of years ago.

Spot rates are moving up pretty hard.

But remind us, how big is that -- of a percentage of spend is that for you?

And where do you stand in terms of contracts and spot?

And should we be concerned that there's a step up in that cost basket view in the coming quarters, year, et cetera?

Sure.

Sure.

So we have -- about 95% of our freight is going through at contract rates, which are below spot prices; and the remaining 5% are at market rates.

So that's what we're seeing at this point.

Obviously, this is an environment where we're going to need to just proactively keep monitoring freight.

But at this point, we're continuing to execute most all of our freight needs through contract levels.

Jason, this is Jeff, just to answer the first part of that question.

So about 11% or 12% of our overall cost of goods would be freight, either the logistics of shipping our products to our customers, but also the freight component of inbound raw materials and packaging materials.

Our next question is from the line of Ken Zaslow with Bank of Montreal.

On the cereal category, as consumers are shifting towards eating breakfast at home, what do you make of the need for merchandising and promotion?

I guess I'm surprised by the extent that the category is becoming promotional and merchandising as aggressively.

It seems like consumers want to eat cereal, and it seems like you're able to price at a -- more at a full price level and not needing to merchandise, but the category seems to have become a little bit more promotional than I would have thought.

Can you give me your thoughts on that?

That would be helpful.

So yes, Jon, take...

I'm sorry.

Yes.

I figured that was coming my way.

So thank you, Ken.

So a couple of things.

One, as we look at the category, again, we see some -- every quarter, you see promotional levels changing.

We don't see anything dramatically different.

We still think the category is generally rational.

What I would say is as you look at the category and think about pricing, it's not just promotion price.

Really, we're leveraging our entire strategic revenue management toolbox and really focused on pack price architecture.

So if you get into the category, we see a lot more cereal sold in larger sizes.

And we think that's a really important way to drive price in the category.

So we work with our retail partners.

Obviously, it's a big category.

It's $9 billion that drives a lot of people into the center of the store.

So our retailers do want to promote cereal.

It's important for them.

We'll continue to work with them.

The important thing is that we do believe the category is rational.

And at the end of the day, when all of the competitors in that space are marketing and innovating, the category tends to do well.

And we're starting to see some good marketing and some good innovation really across all the major competitors in the category.

At this point, we're not seeing anything differential from a promotion standpoint.

Great.

Just another -- just a very small question is, when does the freight cost contract get renewed.

What time of year?

And how do we think about that?

Just that part of it.

I get that you're 95% contracted.

I just want to know when the contracts get renewed.

And how do I think about that?

Ken, our contracts tend to run on our fiscal year.

So it would kind of start in June, end in May.

Roughly that timing.

Our next question is from the line of John Baumgartner with Wells Fargo.

Jon, I wanted to touch on North America execution and specifically the concept of non-price promotion.

To what extent has it been activated at this point?

What sort of forms is it taking?

And how are you thinking about its contribution moving forward?

Is there anything worth pointing out in terms of maybe how that specific execution differs from your competitors?

And to what extent does it maybe enable you to sustain this market share success going forward?

Thanks, John.

So just to clarify, are you speaking about marketing and e-commerce and the other non-price drivers?

Is that your question?

More so just the bricks-and-mortar sort of non-price promotion, whether it's -- I've seen, I guess, Pillsbury refrigerated coolers in the aisles, anything kind of in that bucket holistically.

Yes.

So it really runs the gamut.

And so if you think about in North American Retail, we compete in 25 different categories.

And one of the things we've been really trying to do is, again, understand our consumers in each category and understand what our retailers are looking for in each of those categories.

And again, it runs the gamut.

If you think about refrigerated baked goods, we couldn't be more pleased with how that business is performing, up, again, north of 30% in Q1 off a very strong Q4.

On that one, we know that taste matters.

So we spent the last few years renovating the product, actually putting, in some cases, fat back into our biscuits to make them taste better, and we're seeing our sales increase.

And we know that retailers have a limited space.

So that is an area that having extra display spaces via bunkers makes a lot of sense.

So working with retailers to put the right promotional plans in place as well as the right vehicles in the store at the right times of the year.

So it really -- one of the things we've been trying to focus on is being granular, and again, getting to really understand where consumers are in each category and giving what retailers are looking for.

When you think about cereal, it's a different category, and that's really been about driving it via strong marketing and partnerships.

We moved back to a heart health message on cereals.

And we had a tough run for a couple of years in cereals, now we're growing share month after month by really knowing what turns the dial.

So I can't speak to one broad thing across all of our categories.

What I would say is I think our teams are doing a really good job of deeply understanding our consumers, the problems that they have and what they're looking for.

And then I think we've done a better job really working category-by-category with our retail partners as well.

And we'll continue to do that.

The last thing I would say is that I do think we have some great capabilities.

So we mentioned in the prepared remarks about pillsbury.com and bettycrocker.com, 2 of the top 5 food websites for recipes.

We're leveraging those differently than we have in the past.

So really talking about how we bring simple meals together, teaching consumers how to cook during this time, which I think is important.

And then finally, in terms of first-party data, Box Tops for Education is something that we're really excited about.

So we took a program that's been really successful for over 20 years.

We've given almost $1 billion to schools.

But frankly, it was losing some relevancy.

So we digitized it and the data that we're getting is absolutely incredible.

So we have over 25 million receipts.

We get a full scan of the receipt.

And as you can imagine, that data is very valuable as we build personalized relationships with our consumers while serving them up offers to keep them in our products, at the same time understand how we might be able to move them from some competitive items over time as well.

So it runs the gamut, and it's really about understanding consumers and then partnering with the retailers.

So you mentioned a lot of these one-off successes that you accumulate, but you've been investing in data for the last couple of years.

Is there a way to think about where you feel you are right now in terms of collecting data, scraping data, versus actually making sense of it and putting it in market?

It seems like you're there now, but -- I mean, is it still kind of early days in terms of grasping an understanding of it?

Or is there -- you're kind of more evolved along that plan at this point?

I would say we're probably still in the early innings.

One of the things Jeff did recently was hire a new Head of Data and Analytics for the company.

And Jaime's going to -- been a huge help in a short amount of time.

One of the things that we're doing, too, is partner externally, probably more than we have in the past with some big tech companies that are really helping the space.

So what we think we have is some really unique first-party data.

I think we're getting after it more aggressively than we have in the past.

So I think a lot of the benefits are still to come.

Our next question from the line of David Palmer with Evercore ISI.

Just looking out to fiscal '22, that might be, God willing, the first post-COVID year, it's interesting to think about whether we should be thinking about higher sales and profit in that year than we would have thought for that year pre-COVID.

And so far, The Street profit estimates for that year have come up less than 1%, EPS more like 3%, presumably due to the reduced debt and interest expense.

I know you're not going to give out that out-year guidance.

But what are you thinking about the biggest legacy influences, both positive and negative, from COVID for those out-year earnings?

Yes.

So thanks for the question.

That's the first fiscal '22 question I have received.

My original instinct is to say I'll just try to make it through Q2.

But I appreciate the question.

It actually is a good question.

I think one of the reasons we highlighted what we're doing in terms of advertising and renovation and innovation and so forth is that we, like you, hope that COVID comes to an end in fiscal '22, notwithstanding that our sales have been higher during the pandemic.

I mean it will be great once we're -- once this is behind us.

So one of the things that we're spending a lot of time on is making investments that will help maximize our growth in the future.

And even if I can't tell you what our growth is going to be, I would hate to sit here a year from now and tell you that we didn't make the right investments in data and analytics, the right investments in marketing or the right investments in innovation or renovation.

I feel like we're doing all those things.

And to Jon Nudi's point earlier, we're really kind of going category-by-category.

And it's not only in the U.S., but also we're doing the same thing in China with Häagen-Dazs and Wanchai Ferry.

We're doing the same thing with Brazil with brands like Kitano, in Europe with Old El Paso and Häagen-Dazs and Nature Valley.

So we're taking that same approach throughout the world.

And even in places like convenience and foodservice, where the business is down, we're making some investments in things like individually wrapped products, which we think are going to be around for a while.

And so while we can't tell you what fiscal '22 will bring in the absolute, what I can tell you is that we're doing everything we can now to sustain the growth momentum that we currently have and do it in a way that's going to be efficient and effective for long-term value for shareholders.

And one thing, just a quick follow-up that I think is on people's minds is that retailer digital connectivity with consumers, you have been among the highest in incremental digital engagement in your digital channel sales, and you tend to be better indexed in terms of click-and-collect and e-commerce.

But I think there's a concern broadly for food companies that the connectivity of retailers will lead to eroding pricing power in some way, that it's at least another way for key retailers to extract promotion dollars in terms of data sharing and the like.

What are your -- how would you push back on that concern?

I guess I would say that we plan on winning in any environment, including the one you just described.

And we've done a good job so far with e-commerce, but it's a moving target, which is why we hired someone externally for our digital and technology program, which is why we continue to invest in it, which is why we have programs like we have our own data like bettycrocker.com and pillsbury.com with 7 million unique visitors a month, and where we're building up Box Top for Education digitally so we have access to our own data.

And so I think in an e-commerce world, just like retailers with manufacturers, there'll be winners and losers when it comes to manufacturing the products, and we intend to be on the winner part of that equation, which is why we're investing.

And as I said, we feel good about what we've done so far, but we're not arrogant because it's a moving target, and we'll need to continue to invest and make progress against that if we're going to win into the future.

And so while we're pleased with what we've done so far, rest assured that we're not resting on our laurels because there's a lot more work to do.

Our next question is from Michael Lavery from Piper Sandler.

It's a 2-part question on brand spending and just how you're executing that.

First, just trying to understand a little bit of what's new and what's changing.

I know you've talked about the website traffic being up and the Cheerios heart health and Box Tops and some things that have been pretty well established, but it sounds like you're making some spending increases.

What else is in the mix there that we should be looking for?

And a little bit related, the second part is just how do you know how much is enough?

It sounds like it's a pretty significant swing factor in the margin outlook for the year.

How do you think about the returns and just knowing where the right level is versus letting some of the -- what might be upside fall down to the bottom line instead?

Yes.

So one of the things that I can assure you is we're always measuring return on investment.

And when we say we're investing in our brands, we're not just spending on our brands, we're actually investing.

And when you're investing, that would indicate that you're getting a return on that investment.

Otherwise, it's just spending.

So I want the people listening to know that when we're spending on our brands, we're making investments and we're working behind things that are working and are going to drive growth for our business, both in the short term and long term.

And that's true of Häagen-Dazs in China.

That's true of Kitano in Brazil, and that's true of Old El Paso in Europe just as it is with Cheerios here in the U.S. And so first, we're always measuring what our spending is.

The second is that we went -- even though we're growing our consumer spending double digits in the first quarter, and we look to have our marketing spending grow faster than sales this year, there were a few years where that wasn't the case.

And so we're really rebuilding our marketing spending.

And we're not at levels we were even probably 5 years ago.

And so I really don't think we're spending too much.

We feel like we're being prudent and spending more on the right things, on things that drive the business are really important.

And we've prioritized the brands we're spending on, and you see that.

And so I feel -- and we're changing the channels and the way we talk to consumers, we become an active part of culture.

Jon Nudi gave some examples of that, of what we're doing in the U.S. But I can tell you, we're doing that in the Middle East as well.

So we feel as if the spending is going in the right places, we're able to measure it.

And as long as we can keep driving growth in our business, we'll keep spending behind our brands, and we feel like we've got particularly good marketing at this point.

No, that's helpful.

Is it fair to think that you're assuming some top line deceleration over the course of the year, that if that held up similar to 1Q levels, you could see some margin upside come through?

Yes.

We'll see the -- I'm going to be a little evasive here, but only because we don't know what the next 3 quarters are going to bring in terms of upside demand because the nature of the pandemic would indicate that it's going to be uncertain.

We feel that demand is going to be elevated as -- more than it was pre-pandemic.

So we're pretty confident of that, and at least for the next couple of quarters.

How much that is and how that -- long that lasts, I mean, we'll have to see.

I think Q2 will be a pretty good indicator, and we'll know a lot more after the second quarter, primarily because for us, it's a -- we are in the middle of pandemic, but also it's a big quarter for us, and we have a lot of seasonal business in that quarter.

And so after the second quarter, I think we'll be able to give more color for the rest of the year of how we think the rest of the year will play out.

But it's really a hard environment to predict, and I hate to project certainty in such an uncertain environment.

But with clarity, what I can tell you is that we're really pleased with how we're competing.

And we fully intend to do that for the rest of the year, and we do think that demand will be elevated.

Okay.

I think that's all the time we have.

I know we didn't get quite to everyone, so please feel free to follow up with me over the course of the day to cover any additional questions.

But thanks to everyone for your interest and your time and attention, and we look forward to talking again next quarter.

Have a great day.

That does conclude the conference call for today.

We thank you all for your participation and kindly ask that you please disconnect your lines.

Have a great day, everyone.