Q3 2020 Earnings Call
During the presentation, all participants will be in English and only a month.
Afterwards, we will conduct a question answer session.
At that time, if you had a question. Please press the one fell a bit of 400 telephone.
If at any time during the conference here too we should operator, you May press the star followed by the zero.
As a reminder, this conference is being reported Wednesday March 18th 2020.
Now, let's turn the call first <unk> Vice President of Investor Relations. Please go ahead.
[music], Thanks, Nelson and good morning, everyone, you ever Jeff Harmening, Chairman and CEO and could be Bruce our CFO.
Also joining us this morning for Q1, eight as John Eudy, who leads our North America retail segment.
On the call over to them in a moment deployed do let me first touch on a few items upfront.
A press release on third quarter results went out earlier. This morning, and you can find the release and a copy of the slides from this morning on our Investor Relations website.
Important to note that our remarks. This morning will include forward looking statements that are based on management's current views and assumptions.
Excluding facts and assumptions, Jeff and co people share related to the impact of the cobot 19 virus outbreak on a result in fiscal 2000.
Second slide at today's presentation listen number of factors among them the impact of Cobot 19.
Could cause or future results to be different than our current estimates.
And with that I'll turn it over to my colleagues beginning with Jeff.
Thanks, Jeff and good morning, everyone.
Our key messages today are listed on slide four.
So we cover our execution against fiscal 20 priorities. Our Q3 results interrupted outlook given this extraordinary period of time I'd like to take a minute to discuss what we're saying with respect to the cobot 19 virus outbreak and share with general Mills is doing to address our most important objectives, which are the continued health and safety of our employees.
And our ongoing ability to serve consumers around the world.
He asked 154 years General Motors played a critical and making food to meet the needs of our consumers.
And in recent weeks I can tell you that I'm proud of the way we partnered with a retail customers.
To address the increased demand for food at home.
We're taking steps to flatten the curve and limit exposure to the virus, while continuing to safely operate or business.
We've asked all our employees to partake in social dispensing practices and we've acquired those who can to work from home through at least April 1st.
For the safety of all involved we've also restricted business travel and visitors at our facilities.
With that Im on slide five summarizes how Kobin 19 has impacted our business in recent weeks and what we expect to see in the coming much.
As we mentioned last month, the cagney nearly half of our haagen dazs shops in greater China had been temporarily closed.
In total we saw a 90% decline in traffic and shops and substantial declines another foodservice outlets in China in February resulting in a significant reduction in haagen dazs sales in Asia for them up.
This was a 50 basis point headwind to total company organic net sales growth and an estimated 150 basis point headwind to adjusted operating profit and adjusted diluted earnings per share growth in the third quarter.
As a virus continues to spread we expect to see reduced consumer demand for away from home food in the near term impacting both our Asia, and Latin America, and convenience stores and food service segments.
In Asia, while most of our shops are now open again, many have reduced hours in service and store traffic is still down roughly 60% during the March.
At the same time, we expect to see greater near term demand for food at home, primarily impacting our North America, retail and Europe, and Australia segments.
While it is still early we've seen increased customer orders and higher retail sales take away and Nielsen measured channels since the beginning of March.
Our U.S. retail sales results for the weekend at March seven.
We're up low double digits, including pet and we anticipate take away for the week ending March 14th will be many times higher across all channels.
Well, we assume that short term stock up demand will ebb in the coming months, our expectation is that overall at home food demand will remain elevated in Q4 and the bulk of any unwind will happen in fiscal 21.
There's a great deal of uncertainty and this component of our forecast and if we see a material change and outlook. We will provide an update before the end of the fiscal year.
Importantly, our supply chain as operating effectively around the world and we've been able to service the vast majority of customer demand to date.
Our outlook assumes we continue to operate or supply chain with minimal disruption, but this could change if the virus situation worsens materially.
Given this heightened level of uncertainty regarding coven 19, our full year guidance a copy what cover and a few minutes reflects a wider range for sales profit an S. Then we would typically carry with just one quarter remaining in the year.
Well those assumptions in mind, let me now I'll turn it over to coffee to review, our third quarter financial performance and updated outlook for the year coffee.
Thanks, Jeff and good morning to everyone.
Slide seven summarizes our financial results for the third quarter.
Net sales were flat to last year at $4.2 billion.
Organic net sales were also flat with another quarter of strong growth in pet largely offset by declines in North America retail and convenient stores in foodservice.
As expected constant currency adjusted operating profit was 8% below prior year results.
Driven primarily by higher eschewing expenses, including higher media investment.
Third quarter adjusted diluted earnings per share totaled 77 cents down 6% in constant currency driven by lower adjusted operating profit, partially offset by lower net interest expense.
Slide eight summarizes the components of net sales growth in the quarter.
Organic net sales were inline with last year with positive organic price mix, largely offset by a modest decline inorganic pound volume.
Foreign exchange was flat in the quarter.
Turning to segment results on slide nine.
North America retail performance in the third quarter compared against our strongest quarter from a year ago on the top and bottom lines.
The results included.
Third quarter organic net sales, which were down 1%, primarily driven by U.S. meals and baking.
In the first nine months of the fiscal year organic net sales were in line with year ago levels.
She was a one point improvement over our fiscal 19 organic net sales growth.
We drove sequential net sales improvement in U.S. snacks, and U.S. yogurt in the third quarter.
Well, our U.S. cereal results step back versus the first half growth rate as we expected.
Looking at our fiscal 20 year to date in market results. We grew share in six of our top 10 categories, which comprise roughly 85% Nielsen measured retail sales in the U.S.
And third quarter constant currency segment operating profit declined 9%, primarily due to a significant increase in media expense as well as lapping double digit profit growth in last year's third quarter.
Turning to convenience stores and foodservice on slide 10.
Organic net sales declined 2% in the quarter driven by non focused six flour and mix businesses.
Net sales for the focus six platforms grew 2% led by cereal frozen baked goods and yoga, which continued strong contributions from our not are new to outs equivalent grain cereal offering in schools and bulk yoplait yogurt.
Third quarter segment operating profit was down 5% driven by higher input costs.
Slide 11 summarizes our results for Europe and Australia.
Third quarter organic net sales were down 1% driven by declines in yogurt in ice cream, partially offset by growth in snack bars in Mexican food.
In terms of end market performance in the quarter retail sales were up double digits for snack bars and up mid single digits for Mexican food.
Third quarter segment operating profit declined 11% in constant currency driven by higher input costs, partially offset by lower SGN a expenses.
In Asia, and Latin America.
Third quarter organic net sales essentially matched year ago results.
Net sales in Latin America were up low single digits in constant currency.
Driven by continued improved performance in Brazil, after a slow start to the year.
Net sales in Asia were down low single digits in constant currency in the quarter.
As Jeff mentioned earlier, the covert 19 outbreak had a significant negative impact on foot traffic haagen, dazs shops, and foodservice outlets in Asia.
And the majority of our stores were temporarily closed in China.
As a result February slower ice cream that sales in Asia, where a 500 basis point drag on the segment's net sales growth in the third quarter.
This headwind was partially offset by strong growth on Wanchai ferry dumplings in China, driven by increased at home food consumption in February.
Third quarter segment operating profit in Asia, and Latin America was down 64% in constant currency.
Driven by higher as Jean <unk> expenses, and lower Asia ice cream that sales, partially offset by higher net sales in Latin America.
Our third quarter Pet segment results are summarized on slide 13.
I'm pleased to say, we had another great quarter up growth, what's net sales up 11%.
Driven by strong growth in food drug and mass or FDM channels and positive price mix.
This net sales performance was led by strong double digit growth on blues, two largest product lines like protection Formula and wilderness.
Looking at end market performance, our year to date, all channel retail sales were up low double digits.
And we continued to gain share in the U.S. pet food category.
On the bottom line third quarter segment operating profit grew 29%.
Driven by higher net sales, partially offset by higher media expense.
Slide 14 summarizes our joint venture results in the quarter.
So real partners worldwide posted top line growth for the six consecutive quarter with constant currency <unk> net sales up 1%.
That growth was broad based led by the UK Middle East, Mexico and Turkey.
Haagen Dazs, Japan net sales declined 5% in constant currency driven by lower volume, partially offset by positive price mix.
Third quarter combined after tax earnings from joint ventures totaled $11 million down 8% from last year, driven by phasing of brand investment at CPW and lower volume H.D.J., partially offset by positive price mix in both businesses.
Turning to total company margin results on slide 15.
Third quarter adjusted gross margin was down 30 basis points, driven by higher input costs, partly offset by positive net price realization and mix.
Adjusted operating profit margin was down 130 basis points in the quarter driven by higher SGN, a expenses, including a significant increase in media investment.
Slide 16 summarizes other noteworthy Q3 income statement items unallocated corporate expenses, excluding certain items affecting comparability increased $8 million in the quarter.
Net interest expense decreased $21 million, driven by lower average debt balances and lower rates.
With a good progress on debt Paydown and favorable interest rates. We now expect full year net interest expense to total $470 million approximately.
The adjusted effective tax rate for the quarter was 21% compared to 19.9% a year ago, driven by certain discrete tax benefits in fiscal 2019.
Partly offset by changes in country earnings mix in fiscal <unk> 20.
And average diluted shares outstanding were up 1% in the quarter.
Now turning to our fiscal year to date results on slide 17.
Net sales totaled $12.6 billion down 1% versus last year.
Driven by unfavorable foreign currency exchange.
Year to date organic net sales were in line with last year.
Positive price mix offset by lower volume.
Adjusted operating profit was up 2% in constant currency driven by positive price mix, partially offset by higher SGN, a expenses, including higher media investment.
Year to date adjusted diluted earnings per share of $2. A 51 cents increased 5% in constant currency driven by higher adjusted operating profit lower interest expense and higher non service pension income.
Partially offset by higher net shares outstanding.
Slide 18 provides our year to date balance sheet and cash flow highlights for fiscal 2000.
Nine month cash from operations was $2.2 billion up 7% from the prior year, driven primarily by higher earnings.
Our core working capital balance totaled $342 million down 31% from a year ago, driven by continued improvements in accounts payable.
Capital investments in fiscal year to date totaled $269 million.
Given the timing of year to date spending we now expect full year capital spending to finish a bit under 3% of net sales.
Nine month free cash flow totaled $1.9 billion up 14% from last year.
This strong free cash flow performance enabled us to pay $895 million in dividends and reduced debt by $862 million in the first nine months of our fiscal 20.
Now, let's turn to our outlook, including our fourth quarter expectations, which are summarized on slide 19.
We expect Q4 organic net sales growth to step up significantly driven by improved performance in North America would retail as well as an extra month the results in pet as we align that business to our fiscal year end.
Q4 reported net sales will benefit from a 50 threerd week in May.
This accelerated net sales growth will drive a strong increase in gross profit dollars in the quarter, which will be partially offset by a significant increase in growth investments in brand building and capabilities.
And as Jeff indicated with regards to the impact to covert 19 will remain agile as the demand for at home versus away from home food evolves across our markets.
Our outlook assumes that we continue our strong supply chain execution through the end of the year without significant disruption.
With that as a backdrop, our updated fiscal Twentytwenty guidance is outlined on slide 20.
We continue to expect organic net sales to increase 1% to 2%.
The combination of currency translation.
Impacted divestitures executing fiscal 19 and contributions from the 50 Threerd week in fiscal 20 is expected to increase reported net sales by approximately 1%.
Constant currency adjusted operating profit is now expected to increase 4% to 6%.
Which is ahead of the previous range of 2% to 4% growth.
The primary drivers of our increased profit outlook in crude increased holistic margin management productivity savings.
A modest reduction in our input cost inflation forecast.
And continued tight control over administrative expenses.
Constant currency adjusted diluted earnings per share are now expected to increase 6% to 8% from the base of $3.22 earned in fiscal 19, which is ahead of the previous range of 3% to 5%.
The primary drivers around increased EPS guidance or the increased forecast for adjusted operating profit and the expectation for reduce interest expense that I mentioned earlier.
We continue to estimate that foreign currency will be immaterial to adjusted operating profit and adjusted diluted EPS.
We continue to expect to convert at least 105% of adjusted after tax earnings into free cash flow.
And we'll maintain our disciplined focus on cash to achieve our targeted year and leverage ratio of three and a half times net debt to adjusted EBITDA.
With that I'll turn it back over to Jeff to cover our progress against our fiscal 20 priorities.
Thanks, Colby on Slide 21, you can see our three key priorities for fiscal 2020.
As I reflect our results for the first nine months of the year I'm pleased to be able to say that we have a good line of sight to deliver on all three.
First we're on track to deliver accelerated organic sales growth compared to our fiscal 19 results, we expect to improve organic growth and north North America retail by a full point versus last year and to deliver double digit organic growth in the pet segment.
After getting off to a slow start in the first quarter in our remaining three segments. Our topline trends have improved in the last two quarters and we've continued to work to get those businesses back to growth.
Second we expect to deliver a positive year on margins with good results on Hmm productivity and positive price mix from our strategic revenue management efforts, allowing us to significantly increase growth oriented investments and brand building and and capabilities.
And third as coffee just mentioned, we're on track to achieve our fiscal 2020 leverage reduction target.
But these priorities in mind I'll share a few examples of our year to date performance highlighting what is working well and we're working to improve.
Beginning with North America retail focusing on cereal yogurt and snacks.
I'm quite pleased with our performance in U.S. cereal state following two years of modest retail sales growth in fiscal 18 at fiscal 19, our results of accelerated to 1% growth in the first nine months of fiscal 20.
We strengthened our share leader position in the U.S. through a remarkable brand building and strong execution against the fundamentals.
For example, we've invested behind compelling consumer ideas, such as our Cheerios Heart Health campaign, which drove a 4% year to date retail sales growth on the cheerios franchise.
Retail sales for the cinnamon toast Crunch franchise were also up 4%. So far this year driven by strong media support on the core as well as continued success of recent innovations such as Churros and shot that toast crunch.
And our innovation continues to add to our growth of blueberry Cheerios, a new oats and honey variety of curios oak Crunch, and peanut buttered shacks, representing the three largest new products in the category in the third quarter.
Now, let's turn to U.S. yogurt on slide 23.
Our strategy to get yogurt back to growth centers on continuing to grow our core product lines through brand building and product news, while at the same time innovating and faster growing spaces that will soon become sizable enough to offset declines were seeing in retail and our tail.
Well our year to date results modestly lag our fiscal 19 trends driven by more significant tail distribution losses, and the phasing of support on our we buy Yoplait product line. We're encouraged by more recent performance. We continue to drive growth in our core with year to date retail sales up 2% for your original style yogurt and up 6%.
Our Gilbert.
We've seen sequential improvement in our distribution trends in the last two months, while continuing to grow turns per point of distribution this fiscal year.
Our second half innovation is off to a good start while it's still early our limited edition Star burst line of original style Yoplait and our new coconut based dairy free offering by we buy your play are the two largest launches in the category since January.
And we're increasing our brand building support on our core including we buy you apply we saw retail sales improve in the third quarter behind a stronger consumer support plan.
For us snacks on slide 24, we drove retail sales improvement through the first nine months of fiscal 20, and we expect further improvement in the fourth quarter behind innovation renovation brand building support and improved distribution.
Nature Valley performance has benefited from our successful wafer bar innovation, which is the biggest launched in the snack bar category this year as well as improved merchandising execution.
On fiber one our renovated products and refresh marketing campaign have made the brand more relevant for modern way managers.
These two brands are also beginning to lap significant distribution losses from a year ago, which should further improve the retail sales trends and our treat bars featuring household favorite brands, such as cementos Crunch Lucky charms and Golden grams are continuing to enjoy outsize growth year to date retail sales up over 100%.
On fruit snacks, we drove 5% retail sales growth and strengthen our leading market share position in the first nine months of the year behind excellent performance on Gushers and Disney equity fruit snacks.
With benefits from better distribution trends contributions from nature Valley innovation and fiber one renovation and increased brand building investment behind bars and fruit snacks, we remain on track to improve U.S. snacks performance central still 20.
Overall, we're making progress in North America retail to the first nine months of the year year to date organic net sales results are a full point better than last year, and we're competing effectively holding or growing share in six of our top 10 categories and we're stepping up investment behind our brands to build momentum as we close out fiscal 2000 and head into fiscal 2001.
Turning to our pet segment on Slide 25, we continue to drive double digit all channel retail sales performance on blew through three quarters from a channel standpoint, you did a retail sales were up significantly in food drug mass as we benefited from our expansion into new customers and the launch a willingness and food drug and mass in last year's fourth quarter.
Importantly, retail sales for food drug mass customers, who have carried blue more than 18 months were up 31% in Q3.
As expected you to date retail sales and pet specialty were down versus last year, we continue to support the channel through unique programs and innovation.
And as we shared at Cagney last month for launching two new lines into select pet specialty retailers and the second half, including baby Blue, which brings solutions to new and younger pet parents at a time when they are most engaged and true solutions a line of pet food formulated to treat comment pet elements.
And Blue Buffalo continues to drive strong you today retail sales growth and the rapidly evolving ecommerce channel.
Looking ahead to Q4, there are two factors that will have a material impact on our pet segment results. This year first we'll lap last year's distribution expansion and wellness launch into food drug mass, we show significant pro forma growth and positive price mix and last year's fourth quarter second as Tony mentioned more important extra mother results in our pet segment and this years Q.
Before as we align the segment to general Mills may at year end.
For the full year, we remain on track to deliver 8% to 10% like for like growth for the pet segment, excluding the benefit of the calendar differences in fiscal 20, we're excited about the growth prospects ahead and continue to remain confident in the long term opportunities for Blue Buffalo.
In total were encouraged by performance in North America retail and pet this year.
For other three segments, we had a slow start to the year and while we've improved organic sales since the first quarter. There's clearly more work to do to get these businesses back to growth.
As we look ahead will remain agile across all segments as we navigate the changing consumer demand patterns and at home versus away from home food driven by the Kobin 19 virus.
In addition for convenience stores and foodservice, we're focused on continuing to drive growth and the focus six platforms, while improving our performance and flower and mix.
In Europe, and Australia, we expect to regain some lost distribution on haagen Dazs in France in Q4 and at the same time, we anticipate some short term headwinds in the UK driven by reduced distribution and lower levels of quality merchandising.
Our priorities for this segment are to continue to invest behind or accelerate platforms, including snack bars old El Paso, and haagen dazs, while working to stabilize you ever through focus on our core lines, including particularly to yup and peril delay.
In Asia, and Latin America will continue to drive growth on our accelerate platforms, including Haagen ice cream and nature Valley snacks, while investing behind important regional brands, such as Wanchai ferry in China, and Yoki and Kitano in Brazil.
I'll close our remarks this morning by summarizing today's key messages.
First and most importantly, our top focus remains on the health and safety around employees as well as serving our consumers as we manage through the rapidly evolving situation with over 19.
Second we're executing extremely well and we're on track to deliver our fiscal 2000 priorities and what is proving to be highly dynamic environment.
Third our third quarter results were broadly in line with our expectations expectations, excluding the impact of the coven 19 virus in Asia and finally, we're raising our guidance on profit and EPS with that let's open the Mike for questions. Operator can you. Please go to started.
Thank you.
If you would like to register a question. Please press the one probably the foreign your telephone you with your Athree Timeframes to acknowledge your request. If your question has been asked quite another and you'd like to withdraw your registrations distressful run off in Threeq.
Once again for your question is the one follow up before our first question comes from the line of Angela dose our with Barclays. Please proceed.
Good morning, everybody.
Morning Your line.
One question I think is whether some of them.
Anticipated trial that that general mills, and others are getting as a result of the sort of current situation. You know maybe some portion can be sustained longer term as consumers add some items, maybe their ongoing shopping basket, but they wouldn't have otherwise done.
I see some of the improvements made by certain brands to improve product quality and sort of relevance over the past couple of years I know, it's a hard one does obviously answer now.
But maybe you can share some of your thoughts on this a maybe a little context are a bit of maybe what your consumer insights might say about some of the improvements are the areas where the company has made what you think or some of those.
Improvements in in in terms of things like product trial, and repeat rates, where you've made maybe significant changes and relevance things like that.
I appreciate it.
Dynamic and some of this is we'll have to see but maybe just some of your thoughts on that would be really helpful. Thanks. So much.
Yes, Andrew as it relates off or this is Jeff is really thoughtful question. Let me let me give you a couple in size from from China, and then I'll pass it to John duty to maybe give you a couple of insights from North America retail and in China. You know as we've said our shops business has been down over the last month, but interestingly, our our frozen dumpling business has been up double digits, and particularly with delivery at home.
And well, it's very clear that we've increased household penetration in China and that demand continues to be strong even as our shop business open up and China gets back to work and so I'm not sure lessons, we learned in China will hold everywhere, but at least what we're seeing in China is that.
Our household penetration on one phase check for dumplings has increased and the there is strong growth following.
Following the fact that people are starting to get back to work we have done a lot of work in a in the U.S. on some of our product lines in particular snacks relet job annuity comment on that.
Yes, so a good morning, Andrew I guess, the first thing right. Obviously, it's a really fluid situation. So the bulk of our time spent on working with the retail partners and servicing the business.
Being said as Jeff mentioned, we've worked hard over the last few years to renovate the majority of our product lines, you think about refrigerated baked goods, we've touched the bulk of that business, which is big important and profitable for us cereals been renovated as well. So we do believe it's an opportunity perhaps as consumers come back and try or products again after so.
Over the years too.
You'll see the products in the improvements we've made and ultimately hopefully drive penetration for the long term.
I appreciate your thoughts thanks, everybody.
Thank you.
Our next question.
It comes from the line of Ken Goldman with JP Morgan Company. Please proceed.
Hey, good morning, Thank you for.
For the questions. Two for me first just wondering if you could elaborate a little bit on what you've seen the last week or two.
In your convenience store business I know, it's hard to know you're you're not exactly timing your shipments with their takeaway, but any any color there would be helpful.
Just obviously given that consumers are or on the road a little bit less than the second question is you talked a lot about increased marketing and I totally appreciate the benefits of that in the long run can you walk us through a little bit maybe of how that conversation goes internally when you have increased demand naturally already.
Whether you're thinking about pulling back at all on some of that marketing.
And maybe letting some of that cash flow either drop to the bottom line or be reinvested in capex or other ways. Just trying to think about how you balance those those factors. Thanks so much.
So Ken and as you as we look at channels I mean, clearly clearly the situation is evolving quickly and I'll give you what insights, we have which may not be sufficient but.
Look as we look at at March So far we haven't seen a big fall off in our convenience and foodservice business through today, but clearly the situation continues to evolve and you like us.
And Thats, a big piece of our business and we also see the restaurant traffic is down and what we're seeing as those two things. There is some offset by what we see and convenience stores, where the where the traffic is strong and unfortunately, certainly with health care and so we would expect in the fourth quarter that our cnf.
Business would be down for all those factors add but look the situation continues to evolve and ways that you would probably anticipate in terms of how we think a marketing for the fourth quarter. That's a good that's a good question I mean, the first thing I would say is that as we look around the world. We have we have made sure that whatever marketing we have that the messaging as appropriate.
It's a it's a unique time and we need to make sure whether whether we're doing we're talking about our brands on social media or we're doing it through broad scale like TV first of all our messages has to be appropriate for the time I can tell you we've done that worldwide and that we feel like we feel like it as second is that part of the appropriate that message I think includes not talking about stocking.
Up and that kind of thing, we see consumers doing that already having said that for US brand building has a long term investment is not only what we do this quarter. So we'll continue to build our brands and appropriate ways. All because it is the impact is not only for now but it's three months from now in six months from now in addition, and this is only one man's opinion with very little data back it up I think it also can.
And ever since and normalcy.
People as their lives or anything but normal in many parts of the world and so for US. We think we have responsibility to do that weather is delivering our products or whether its advertising cinnamon toast crunch.
Yes.
One man's opinion with little Dave to back it up Thats, what I do for a living so.
Yes.
I.
Please stay safe.
Thank you for India.
Thank you.
Our next question.
Comes from the line of Robert Moskow with Credit Suisse. Please proceed.
Hi, Thanks, Jeff.
I'm trying to think through some really worst case scenarios.
Perspective.
Two week period, where people just are locked up in their houses can't go too.
Manufacturing facility.
And centers.
John shirts kind of thought through those scenarios and if that happens.
Yes.
At all government assistance.
Anything to keep the food supply chain. Thanks.
So we so Rob it's a good question and certainly keeping the supply chain moving as at the top of our mine and so I think it's I think its items and insightful question as we as we think about it. The first couple of things I would say look up until this point the supply chain has been working remarkably well at our service levels are well over 90%.
And I will tell you are our retail partners have been very grateful for the work that we and others have done and so certainly up until this point in time to supply chains and been working very well. Despite maybe we should see pictures of store shelves being empty I can tell you that food continue to flow we continue to make it our retailers continue to stock as quickly as they can and.
That all is actually working working pretty well as we as we look ahead one of the things that we we need to do a couple things one is we need to make sure our employees remain safe.
And the second is that we need to maintain that need to maintain the delivery of products made to do both we can't really do one or the other we have to do both in terms of food in terms of employee safety.
I was I would say that while people are what we already we are follow very strict food safety guidelines and employee safety guidelines at our plants handwashing and things like that.
And.
And the guidelines set forth by the FDA in the U.S. da.
One of the things that we are we're doing incrementally as we have we've adjusted our the policy to make sure that people who are second stay home and.
And get paid then stay at home because we certainly don't want sick people coming into our manufacturing plants or offices.
And the.
That said, we put some we put some policies in place to help them to help them out. We've also worked through a number of contingencies, but.
To date I think it's also important to note that the FDA and a note they put out yesterday reiterated that.
The statement.
There's currently no evidence of food or food packaging being associated with transmission of covert 19, and so we anticipate continuing production through most of our the course of our normal actions. The only thing we've done differently as some of our sites is that we have encouraged social distancing. So instead of having everybody gathered in the lunching at one time, we're encouraging people to do it at different times.
And occur and so having breaks out one time doing breaks at different times. So we've been responsible in that way.
Okay. Thank you.
[music].
Thank you.
Our next question comes from the line of David Driscoll with TD Research. Please proceed.
Great. Thank you and good morning, everybody.
Hi, David.
Wanted to ask a little bit about the sales guidance can you talk a little bit about why the skills guidance is not actually raised in your prepared comments it sounded like the fourth quarters going to be really good but when I look at your total consolidated guidance for organic revenue for the year Theres No real change right. There. So can do we start there.
Yep ABS, absolutely David So just as context.
The low end of our guidance would assume that the impact of co bid on the balance of the year is effectively a net neutral and it's important to maybe set as a frame of reference where we were at Q2, which is effectively are now our business on this to slightly ahead of expectations there.
Pet business onto slightly on on expectations and then we got behind on the other businesses and although we're making progress on Cnf EU an awesome.
Clearly the expectation would have driven sort of an aggregate us the lower end of the range has a start point on that on the top line. So I think where our midpoint then gets us is effectively the at home channels.
And.
In NRE and you AIU wood.
Part of what would partially offset the drag from us and our expected I'm traffic pressure in our away from home business on on Cnf and then obviously at the high end, we would expect the.
The trends we're seeing in March that are reflected in the midpoint of our range to stick through the balance in the year.
That's super helpful. And then just two quick follow ups on on Kens question I'd like to question about what you do on your your brand building, but specifically for me. The twist is your promotional activity.
Given that there's so many out of stocks and there's these runs on the grocery stores.
We almost a requirement that you dialed down your promotional activity I think Ken was focused on advertising, but I want to look at that promotions as why would you want to encourage even more product.
If you put big discounts on cereal per se, so wouldn't it be logical to reduce promotional activity. Because you know the product is going to move in the fourth quarter and then just one quick question on pad is there any concern here that lower economic activity negatively impacts premium pet sales. Thank you.
Hi, David This is John ill take the first question in terms of promotional activity.
What I would say is we're in very close communication with all of a retail partners and again, it's a very dynamic time. So a lot of those discussions right now are about servicing the business and really the day to day at the same time, we are talking about promotional calendars and I think each retailer is starting to think that through both short term and long term at some of our retail customers we.
Got pulled back merchandising in April jointly and others were just beginning that conversation. So again ultimately it's a partnership we're working hand in hand that communication with retailers right. Now is the best I've ever seen in terms of partnership we're all trying to do the same thing and its feet or consumers. So that'll be a conversation I think that will continue and again, we're starting to pull back a bit.
In April I think that conversation again will continue as we move forward.
And then with regard to pad David.
Look during the last recession, we didnt see a pull back on pet food and as we looked at Blue Buffalo When we bought at one of the things we liked about it was that demand for for pet food seems to be pretty inelastic and what we've seen so far in the fourth quarter is not to the same degrees, where we see in North America retail, but but people love their pets and they want to make sure that take care of their patent so.
We feel like our retail takeaway for for pad in the fourth quarter is going to be robust now remember we have comps to go against we built a lot of inventory due to a launched last year in the 50 Threerd.
Next few months of there are a lot there's a lot going on but I would say demand for pet food, we continue to see very strong and.
To the extent that that the us.
Has some economic hardships as a result of.
This virus, we would anticipate the pet food category it would still be a robust category.
Thank you.
Thank you.
Our next question.
Comes from a line of Alexia Howard with Bernstein Company. Please proceed.
Good morning, everyone.
Good morning, Alright, alright.
All right so.
Ask about it maybe too early to tell that.
Are you seeing any channel shift into the E Commerce channel as a result of 'cause it 19.
If you're not seeing that yet you anticipating that that could happen. Then how are you gearing up for that thank you.
So again, what we what we saw in I'm, assuming you're talking about the U.S., but I'd like to start with China. What we did see in China was a pretty significant shift to the to the ecommerce channel and we were well prepared for that and we service our customers both in store and online, but we did see as you can while imagine an increase and the ecommerce.
Channel and I'll, let John duty talking about what we what we've seen that where we expect in the U.S.
So I would say alexey, we've seen broad based.
Demand across all channels, certainly ecommerce is spiking.
Your Big picture, it's still a relatively small channel in the U.S.. So even though we're seeing more demand there. It's something we can clearly service, we're working with those customers to to make sure the product that they need but again as this thing has progressed over the last couple of weeks I think you saw certain channels strengthen first and as of the last week or so I'd say we.
See broad based demand across all channels in the U.S.
Okay, and then a quick follow up.
Sure sure marketing funding was at this time around.
The fourth quarter.
Sure Alexia this is kofi so in the third quarter, we were up in the high teens percent and inline with what we sort of telegraphed at the end of our Q2 earnings release I would expect our fourth quarter will look similar to slightly.
Up in relation to the third quarter.
Thank you very much.
Correct.
Thank you.
Our next question comes from a line of David Palmer with Evercore.
Yes, Hi. Please proceed.
Thanks, I think you mentioned that orders and perhaps this candidate will show up something many times greater than the first week of margin in terms of take away.
The question I would have first is is one of leverage on sales what sort of rules of thumb would you have for us in terms of the cash flow in earnings contribution from these bigger increments of sales growth 510 points.
We can think of great flow through from great capacity utilization, but we can also consider some elements of higher expenses as the big Rush happens and obviously, there's going to be supply chain strains with availability of people and then I have a quick follow up.
Yeah, I think we would expect on on balance to get some additional leverage out of the volume moving through our plants, which are obviously running.
Close to capacity.
And then I'll, let you direct your follow up.
Yes, and then as far as.
Got it take home.
The at home.
Meals or something like 80% of American consumption anyway, so the pain and suffering we're seeing in restaurants, which is very substantial.
That they're proportion of pain is not as much of the at home gain once we get passed this big stocking up period, both of them at home level and the supermarket level.
So the question is one of how do we think we're going to be looking at in terms of consumption increase over the course of this calendar 2020, how should we be thinking about that benefit and the labs.
For the typical food company.
You know, it's something like a single digit type of number I mean, any sort of rules of thumb about how you're thinking about this and modeling. This as we look across the calendar 2008 landscape. Thanks.
Well listen that you know I as you will know I hate to dodgy question, but this one I'm just going I'm going to have to take a pass on because trying to model our car situation I'm not really sure what model, we would use to be to be honest with you. What we what we do and what we do believe is it over the next couple of months I mean, you talked about calendar 2020, I would say over the next couple of months is very clear to us.
That restaurant traffic will be down, it's very clear to us that schools and University.
Feedings will be down and that consumption is going to shift to to at home and so those are the trend I mean, when we don't have a lot more insight and you do in terms of the data, but those that those trends are clear to us and that at home food is going to be higher and so I'm not trying to Dodge it just to be Q. We look at it just evolving so quickly and what we don't know is that.
And we don't know the duration and.
A couple of months and maybe we can give you a better a better view of what's going to happen for right now to be honest, our our primary focus is keeping our employees safe and making sure that we can deliver all the food that our consumers and retailers are demanding of us and and so far we've done a really good job on both counts.
Thank you very much.
Thanks.
Our next question.
So I want to.
Strycula with you've yes. Please proceed.
Hi, good morning.
So.
Just quick clarification, if were to take the midpoint of your guidance for fiscal 20, what does that imply in terms of qualitatively speaking.
For the North American business for the balance of the year does that mean that basically the month of March we see a big.
Bob and then what would that mean to get the upper end of year range for your guidance would that imply that this in jurors into April and May So w. The first part of my question.
So let me, let me give you a broad stroke and.
To reiterate a little bit of a coffee said and that for us to get for it to get to the high end of our guidance. It would assume that we would see elevated levels of demand for the remainder of the quarter and our at home food consumption in that and we'd see a drop in our consumption and cnf and that at home demand would be both here.
We're in the U.S. and as well as Canada and.
In Europe.
The.
No the midpoint would assume that.
We've seen strong demand today, but that demand would tail off either because consumers are stacked up or retailers are stacked up or the virus is under control on a relatively short period of time, so that would be the midpoint of our our estimate.
Okay very helpful and for coffee as we think through the puts and takes what they Palmer was asking about the shift to food at home from food away from home, if we net that together.
What do we expect net sales gain and more importantly from the EBIT contribution would there be some stranded costs for an factories potentially not being utilized or does the margin mix fully kind of offset that.
Not sure if they go over the same supply chain or not thank you.
Yes.
I'll certainly in North America, I'd say co mingled supply chain.
So I think net net we would expect.
The balance of our at home.
Business.
Increased to two more than offset any of the any potential Drake.
So I would just reiterate our plant we expect our plants to be fully.
Close to fully utilized during this period.
Great. Thank you.
You bet.
Thank you.
Our next question.
Comes from the line of Michael Lavery slip hyper Sandler. Please proceed.
Good morning, Thank you.
Yes.
Yes.
You have a new chief digital and Technology Officer, and just would love if you could give maybe a little sense.
How we might expect changes there how some of the ways, our you're using data and digital and what kind of push might be coming that the.
Higher helped drive.
So so yeah, we're really pleased with the have I'm a month of my you are on board as a need our new Chief Digital Technology Officer is that a heck of a first few weeks as as everybody in the World stars working from home and we keep our systems going.
Hi, I'm is going to be terrific and he'll continue the work that we've already started and and I think for me. The whatever do you do on the digital technology front need to follow your business strategy and what you're doing from from a business standpoint and to the extent, we're doing strategic revenue management and we're doing more.
Specific marketing scale suffering through things like box out for education or our websites.
Or through through E Commerce, I think on the on the revenue generation from what you will see as the enablement technology, enabling us to do things, we wouldn't be able to do before and more and better ways and were able to do before and then correspondingly on the cost side, because I think their benefit there will be benefits eventually in the cost side of things like global procurement, we have been doing that.
We've seen tremendous savings from from that actually been able to generate the same kind of hmm with lower capital by by taking our sourcing globally that all that capability will only be enhanced by the use of technology and then tells us that.
Boards in order to be to do that more effectively so the way we're thinking about it is that we're going to do the activities that we've done before but the use of technology will be we'll be able to do it in a way there's more efficient more effective than we've done it before and so it's not tech is not right to chasing technology for its own sake, but using it to build on business strategy, you've already had in place.
That's helpful color. Thank you.
Thanks.
Thank you.
Next question.
Comes from the line of Rob Nicholson with Jefferies. Please proceed with your question.
Hi, great. Thank you so much.
Just a question on.
Near term demand relative to manufacturing capacity.
So what we've heard obviously through all the media outlets.
What I'm hearing today is no food supply chain remains strong.
Which I believe it does.
But just kind of given that you know the near term demand is substantially higher than.
For at home right now relative to.
Basically anytime in history.
How how do you think about.
Meeting that demand.
In the next month or two as let's say some inventories.
Rollout, so really just kind of gaining some some perspective on just the food chain in general.
And specific to general Mills.
To be demand thanks.
Hi. This is this is John the Smith will take a crack of that for how we're thinking about North America I'd say.
First of all again, it's about the first priority is the safety of our employees and food safety and we're very focused on that.
Yes, it running very well right now again near capacity and actually running ahead of the throughput. So we had planned over the last couple of weeks, which is terrific. We have a control tower in place across North America, that's actually looking at all of our businesses. So balancing our north America retail businesses or convenience and foodservice and pet as well.
Control Tower is a live a group of people and systems that are working 24, seven and really balancing where we're seeing demand what lines are running and what products are running the other thing I would tell you that we're working very very closely with our retail partners.
The partnership has been terrific. So we're talking about how we can simplify the supply chain in some cases that might mean running fewer skus are running the excuse of soup and not running some of the tail brands as a significant time required set to change lines.
Talking about shifting full pilot quantities as opposed to mix layers on pellets to customers and then.
Making tradeoffs around DSD drugstore deliveries for retailers, that's actually a very good thing for us. It gets it gets me a bit more challenging as it takes us through put out of our system. So we're having lived conversations I mentioned earlier of I've I've had conversations with.
Retail senior execs that are big customers and the partnership's really good so.
Today again, it's something that we're looking at an hourly basis would you say tight with a retail partners and we believe that we'll be able to serve our consumers for the short and long term.
Super very helpful. Thank you.
Okay.
Thank you.
Our next question.
Comes from the line of Bryan Spillane with Bank of America. Please proceed.
Hey, good morning, everyone.
Brent online Brian.
Just a question on.
Just the commodity costs cost basket I think in the quarter.
You indicated it came in maybe a little bit favorably I know, obviously oil it moved a lot, but maybe if you could just give us a perspective right now in terms of.
Hi.
Variables are that are moving.
Like packaging at commodities and not necessarily looking for guidance for next year, but just kind of how that cost basket is evolving now.
And how we can maybe think about it going forward.
Yes, I think Brian Great question I would just start by mining you were probably at about 90% plus hedged at this point, so we have a pretty fixed.
Structure through the balance of the year.
I think that said anything I would just referring back to to my earlier comments I would expect our inflation to round up to 4%. So it is slightly favorable to to our expectations at the start of the year based on sort of the trend line and what we're realizing in our.
Cost base.
Great. Thank you.
Thank you all right next question comes from a line of Chris Growe with Stifel. Please proceed.
Hi, good morning.
Good morning, Chris.
Hi, just two questions for you if I could.
Just curious how if you looked at your non food service businesses in Asia, how they performed in the quarter you mentioned Wanchai ferry being up double digits does that have formed your modeling for the U.S. business in the fourth quarter.
And I had a second question was just that did you start to see inventory build in the third quarter late in the third quarter anticipation of this bucket lack of activity. This pantry loading that affect north American retail reported sales in the quarter.
Thank you.
Yes, so on the first question as what we've seen in Asia doesn't inform how we think about this now I mean, I think it and I think it informs how we think about what we're going to see but that I don't I don't know there's going to be one to one correlation between what we saw in China, I mean every markets a little bit unique and how they transfer food and food habits, and so forth, but certainly it informs our view.
And.
And.
Tells us that away from home consumption is certainly going to do increase we believe over the short term based on what you're seeing there. So it hasn't formed our view on that in terms of retail inventories no. We are we didnt have we did not stock at retail inventories before the end of the third quarter in anticipation of what was going to happen in the U.S., we didn't take them.
Down either you or kind of running normal inventory levels and.
The change of pace.
On consumer habits, and the spread of the virus has been the likes of which we have never same and so we're reacting real time and reacting very well, but no. We did not come into the quarter with with elevated levels of of inventory in the U.S. or frankly anywhere.
This is Jeff seem and I'd, just remind everyone that listening our quarter ended on February 20, Threerd. So well that is only three weeks ago, just hard to believe.
There really wasn't anything in the us that was that was happening at this at that time.
It's really all happened subsequent to the end of the for third quarter excuse me.
That's a good point thank you okay.
Yes, I think maybe we have time for does just sneak in one more.
Our last question comes from one of Hi, how are we with Deutsche Bank. Please proceed.
Yes, hi, good morning.
Hi, good morning.
All right. So I wanted to ask about just outside of stocking not been sort of lapping that stocking up that's how do you think about packaged food and specifically your categories and your brands and how those might perform in a potential recession.
Whether or not it prolonged I don't know if you had time to think through it.
If you Ben if you sort of gone model planning for it but I just love your initial take on how we should think about.
Recessionary scenario and how how how yard categories and brands might perform in that scenario.
Well that so this is Jeff I would say first is that the the honest truth is over the past month, we've been focused on the near term and delivering what we need to for to deliver and for the near term and executing really well and it's not like you haven't had any thoughts of the future, but but frankly to get to the future we need to execute on the on the now so we had been given wildly focused on.
On that I would say that for that for the relatively current period, John newly I think mentioned, but you know our brands are actually well positioned in that.
Our one or two on our category isn't as people look for things I know in times like these are brands tend to do fairly well because it.
It offers comfort because as brands are they know and they trust and to the extent that retailers are cutting down on a number of skews. They have in the short term in order to make sure they sell through as much product as possible. It's really helpful to have the top turning brands in the category was categories, which we wish we do so in the short term we feel like.
We're in a good position double serve our consumers and serve the customers that rattler eventually in the certainly consumers in the long term look it's been so long since we had a recession and especially here in the U.S., but certainly during that time people tend the and more and and general Mills did quite well, but that was you know that was a decade ago, we'll see how it plays out this time.
Thank you.
Great I think I think thats all the time, we have so we'll go ahead and ramp up the call for this morning, thanks, everyone for your time and attention.
I appreciate you being with US this morning.
We hope that everyone stays state stay safe and healthy.
Many of you have follow up questions. Please I'll be around all day, so don't hesitate entity to reach out thanks again.
That does conclude the conference call for today, we thank you for your participation I'd ask that you. Please disconnect your lines.
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Okay.
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