Q1 2020 Earnings Call
Greetings and welcome to the first quarter fiscal 2020 earnings conference call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.
If at any time during the conference you need to reach an operator, please press the star zero.
As a reminder, this conference is being recorded Wednesday September 18 2019.
I would now like to turn the conference over to Jeff Siemon, Vice President of Investor Relations. Please go ahead.
Thanks, Melissa good morning, everyone. Thanks for joining us for the General Mills first quarter earnings call.
I'm here with Jeff Harmening are chairman and CEO , Don Mulligan, our CFO and Jon Nudi, who leads our North America retail segment here for the Q and a portion of the call.
Before I turn it over to them, let me cover a few housekeeping items.
A press release on our Q1 results. This morning was issued over the wire services and you can find the release and a copy of the slides that supplement our remarks. This morning on our Investor Relations website.
Please note that our remarks. This morning will include forward looking statements that are based on management's current views and assumptions. The second slide in todays presentation lists factors that could cause our future results to be different than our current estimates.
And with that let me turn it over to my colleagues beginning with Jeff.
Thank you, Jeff and good morning, everyone. Our first quarter net sales performance included encouraging improvement in North American retail and strong growth in our pet segment, driven by good innovation and effective brand building investment.
We got off to a slower start in our other segments and we expect topline improvement in those segments and for the company starting in the second quarter.
On the bottom line, we delivered profit and earnings growth ahead of our expectations, while continuing to invest in our brands and our capabilities. We remain on track to deliver our fiscal 2020 goals, including accelerating our organic sales growth, maintaining our strong margins and reducing leverage.
Slide five summarizes our first quarter financial results.
Net sales totaled $4 billion down 2% organic net sales declined 1% with lower volume, partially offset by a positive price mix across all operating segments.
Adjusted operating profit grew 7% in constant currency driven by a onetime purchase accounting adjustment in the pet segment and last years first quarter.
Adjusted diluted earnings per share totaled 79 cents and grew 13% in constant currency driven by higher profit and below the line favorability.
As a reminder, we outlined three key fiscal 2020 priorities on our Q4 earnings call.
First we'll accelerate our organic sales growth, we're working to improve growth in North America retail by maintaining momentum on cereal and improving us yogurt and use snacks.
We're also focused on driving another year of strong growth on Blue Buffalo, We delivered solid results for these segments in the first quarter. The results in our remaining three segments were below our expectations in a few moments I'll share how will step up the company's organic growth rate starting in Q2.
Our second priority is to maintain our strong margins and we delivered positive real positive results here in Q1.
And our final priority for 2020 is to maintain a disciplined focus on cash to achieve our fiscal 2000, a leverage target and we had a good start to the year on this measure as well.
With these priorities in mind I'll cover our Q1 segment results in detail with a particular focus on the topline before turning it over to Don to review our performance on margins and cash flow.
Turning to the components of net sales growth on slide seven organic net sales were down 1% from a year ago, driven by lower volume, partially offset by a positive price mix across all five segments Foreign exchange was a one point drag in the quarter.
First quarter organic sales for North America retail were flat compared to the prior year, which was a two point improvement on our fourth quarter trend.
And we delivered net sales improvement across most of our operating units.
In us cereal, we maintained our prop positive momentum with net sales up 1%.
We saw early traction and use snacks with net sales down 1% compared to a 4% decline in fiscal 2019.
US yogurt net sales were flat to last year and I'm happy to say that our strategic revenue management actions drove one point of positive price mix.
Constant currency segment operating profit increased 2% in the first quarter driven by benefits from Hmm cost savings and positive price mix, partially offset by input cost inflation and higher brand building investments.
Our end market performance in North America rate more North America retail also stepped up in Q1.
As you can see on slide nine we have driven a steady improvement in our two year retail sales trends since fiscal 17.
In the first quarter, our use Nielsen measured retail sales were flat versus a year ago, and we held our held or grew share in five of our 10 largest categories, including cereal refrigerated dough and soup.
We know we still have room to improve including some key categories like yogurt and snacks and we'll continue to focus there to strengthen our overall growth profile.
Let's dive a bit deeper into our first quarter performance in North America retail starting with cereal.
We grew us year retail sales in fiscal 18, and 19 and a result accelerated in the first quarter with retail sales up 1%.
We outpaced the category expanding our share leadership position through increased investment behind a compelling consumer ideas.
Such as our Cheerios Heart health campaign, and strong in store execution and events.
We also had another impressive quarter and innovation with the top five new products in the category, including Blueberry Cheerios and cinnamon toast Crunch Churros.
Im very pleased by our performance in us cereal and Im excited about the plans we have for the rest of the year to continue our momentum.
We're executing well on the fundamentals of innovation and brand building and we'll continue to drive the levers in the rest of the year.
Last year, we improved us yogurt retail sales behind our strategy to expand into faster growing segments of the category and to support our core with brand building investment and on trend equity news in fiscal 20 will continue to improve us yogurt with a strong lineup of innovation brand building and product news.
Through the first three months of the year yogurt retail sales were down 2%, we drove retail sales growth on the core with original style yoplait flat to last year and Gogurt up 13% due to increased distribution on Gogurt Duckers Andover simply as well as strong back to school merchandising.
The simply better segment, which now represents 12% of the category continues to be an attractive growth space, we drove 8% retail sales growth on our products in this segment behind our better tasting why Q product re formulation, which now prominently features the protein benefit on the updated packaging.
And we launch into the growing beverage segment with our new Yoplait smoothies in total we like the news and innovation, we're bringing to the US yogurt category. This year to drive further improvement in our retail sales trends.
Turning to use snacks, we have a long track record of growth on this business. However, fiscal 19 was certainly a more challenging year.
In fiscal 2008 were focused on improving our performance behind innovation renovation brand building support and in store execution.
In the first quarter retail sales were down 2% cutting our fourth quarter declines in half.
Retail sales trends for nature Valley improved each month during Q1, driven by positive results of our wafer bar innovation and a stronger back to school merchandising season.
Retail sales for fiber one have also improved each month since we reformulated the product line can be more relevant for modern wait managers.
While we are still lab distribution losses from earlier this calendar year, our grocery turns per point of distribution has stepped up in recent months.
For the remainder of the year, we'll continue to execute our F 20 plans on bars, and we expect to see continued retail sales improvement.
We're focused on competing effectively everywhere, we play, including our profitable $4 billion us meals and baking operating unit.
First quarter retail sales for old El Paso grew 5% due to increased distribution consumer news and merchandising as well as price realization across channels. We returned suit to both retail sales and share growth in the first quarter, we drove retail sales up 2% due to broad based strength in the Super portfolio and we have solid plans in place for the upcoming soup season.
We had a great year on refrigerated dough in fiscal 19 and that performance has continued into this year.
First quarter retail sales were up 2% and market share increased by a full point driven by distribution gains and in store execution behind innovation.
In total we're off to a good start on these businesses and we think we will think will step up to have a successful year on us meals and baking.
Overall, we're encouraged by our first quarter results in North America retail and we're focused on the right priorities to improve organic sales growth in fiscal 2020.
Shifting gears to Pat I'm pleased to say that we had a great first quarter with net sales up 7%.
This includes lapping an extra week of reported results in last years first quarter.
Excluding this timing difference net sales or up in the mid teens.
Our growth was led by our expansion into the food drug and mass channel and we generated seven points of positive price mix in the quarter.
Looking at end market performance, we drove all channel retail sales up low double digits and we grew share again in the quarter.
First quarter segment operating profit totaled $81 million compared to $14 million a year ago, driven by the $53 million purchase accounting adjustment in last year's Q1, as well as higher net sales this quarter.
On Slide 15, you can see how the key components of our double digit retail sales growth breakout by channel.
Retail sales were up more than 100% in the food drug and mass channel as we benefited from our expansion into new customers and the launch of wilderness and food drug and mass in last years fourth quarter.
Importantly, retail sales for food drug mass customers, who have carry blue more than 12 months were up 50% versus last year.
As we expected retail sales in pet specialty continued to decline by double digits. This is an important channel for blue and we continue to support the channel through unique programs and innovation.
For example in the second quarter were launching carnivores, a new super premium offering for pets exclusively into the pet specialty channel. We also have plans to execute exclusive programs. In this channel later this year, including our new Baby Blue program, which will tell you more about next quarter.
And Blue continues to win in the rapidly evolving ecommerce channel with retail sales up 20% in the quarter, resulting in further market share gains.
We remain on track to deliver 8% to 10% like for like growth for our pet segment. This year.
We're also focused on a successful leadership transition as Billy Bishop moves into a founder and branded advisor role in January and Bethany Quam currently president of our Europe , and Australia segment assumes day to day management of the Pet segment. We remain confident in this business and are excited about the growth growth prospects ahead.
And the convenience and foodservice segment organic sales were down 4% in the quarter, primarily driven by lower bakery flour volume and the negative impact of flour index pricing both of which resulted from a decline in underlying week process prices during the quarter.
Despite near term pressure from flower, we continued to drive good growth on our higher margin focus six platforms net sales for these platforms were up 2% in the first quarter driven by strong performance in the K through 12 schools, including our new two ounce equivalent grains cereals, and our bulk yoplait yogurt.
Segment operating profit in Q1 declined 6% from year ago levels that were up 14%.
In Europe , and Australia organic sales declined 5% due primarily to a challenging retail environment in France impacting yogurt and ice cream.
Where we were unable to secure agreements with some key accounts on inflation driven price advances, resulting in lost distribution. Additionally, we had a headwind in the UK and France, driven by changes in merchandising timing on a positive note. We drove good retail sales growth on snack bars and old El Paso behind innovation and consumer news.
First quarter segment operating profit decreased 15% in constant currency, driven primarily by the timing of brand building expense and lower volume, partially offset by positive price mix.
In Asia, and Latin America organic sales declined 3% sales in our three key emerging markets, Brazil, India, and China fell short of our expectations in the quarter in Brazil, we saw retailers drawdown inventories early in the quarter.
In India, we changed our route to market to focus on more strategic and profitable distribution and in China, We saw lower volumes on haagen dazs due to slower consumer traffic in shops and on Wanchai ferry due to pricing actions actions, we implemented to cover significant pork inflation.
First quarter segment operating profit in Asia, and Latin America totaled $10 million down $2 million versus a year ago, primarily due to lower net sales.
Looking ahead, we expect to drive improved organic sales trends for the company beginning in Q2.
Slide 19 summarizes our key focus areas by segment.
In North America retail will continue to focus on maintaining momentum in new a cereal, while improving us yogurt and snacks.
In pet will continue to drive strong retail sales growth in the food drug and mass and e-commerce channels, and we'll execute exclusive innovation and programs in pet specialty.
In the remaining three segments will see acceleration in organic sales growth starting in Q2.
And convenience and foodservice improvement will be led by our focus six platforms will event, where we'll benefit from strong innovation in schools and convenience stores. We also expect bakery flour volume will improve but we continue to expect index pricing, our flower, which is profit neutral to be a drag on net sales.
In Europe , and Australia, where benefit from increased Merchandizing and will continue to drive strong performance on snack bars and old El Paso will also lapped the impact of our distribution loss on haagen dazs in the second half of the year.
In Asia, and Latin America, the retail inventory in Brazil, and distribution headwinds in India that we experienced in Q1 are largely behind us and we expect to see improvement in the second quarter, driven by new strategic revenue management actions and increased levels of innovation from Haagen, Dazs cones, and Asia, Betty Crocker ready snacks in the middle East and new spicy dumplings in China.
With that I will turn it over to Don to review, our Q1 performance on margins and cash flow Dom.
Thanks, Jeff and good morning, everyone.
Let me begin on slide 21 by summarizing our joint venture results in the quarter.
CPW posted top line growth for the fourth consecutive quarter with constant currency net sales up 2%.
CPW growth was broad based with continued momentum in the UK, Australia, and the Asia Middle East Africa regions.
As well as a return to growth in Latin America.
Haagen Dazs, Japan net sales grew 6% in constant currency driven primarily by growth in core mini cups.
In a comparison to a double digit decline in last year's Q1.
First quarter combined after tax earnings from joint ventures totaled $22 million compared to $18 million, a year ago, driven by lower restructuring charges at CPW and higher net sales.
Partially offset by higher brand building expenses.
Turning to total company margins on slide 22.
First quarter adjusted gross margin and adjusted operating profit margin were up 160 basis points at a 130 basis points respectively.
Driven by benefits from project positive price mix that all segments and last year's 53 million dollar purchase accounting inventory adjustment in the pet segment.
Input cost inflation and holistic margin management cost savings were largely offsetting in Q1.
And for the full year, we continue to expect input cost inflation and hmm to be 4% of cost of goods.
Slide 23 summarizes other noteworthy Q1 income statement items.
Corporate unallocated expenses, excluding certain items affecting comparability increased by $22 million in the quarter.
Net interest expense decreased $15 million, driven by lower average debt balances and lower interest rates.
The adjusted effective tax rate for the quarter was 20.9% compared to 22.7% a year ago, driven by international discrete tax benefits in fiscal 2000.
In Q1 average diluted shares outstanding were up 1%.
Slide 24 provides our balance sheet and cash flow highlights in the quarter.
Our core working capital totaled $624 million down 7% versus last years first quarter.
Driven by continued improvements in accounts payable.
First quarter cash flow from operations was $572 million down 6% from last year, driven largely by slower core working capital reduction versus last year's Q1, partially offset by higher net earnings.
Capital investments totaled $70 million.
And we paid $298 million in dividends in the quarter.
As detailed on slide 25, we remain on track to deliver our fiscal 20 guidance.
We expect organic net sales to increase 1% to 2%.
With an updated view on foreign currency.
We now expect the combination of currency translation.
The impact of divestitures executed in fiscal 19 and contributions from the 50 Threerd week in fiscal 20 to increase reported net sales by approximately 1%.
Constant currency adjusted operating profit is expected to increase 2% to 4%.
Constant currency adjusted diluted EPS is expected to increase 3% to 5% from the base of 322 earned in fiscal 18.
We currently estimate that foreign currency will be immaterial to adjusted operating profit and adjusted diluted EPS.
We continue to target free cash flow conversion of at least 95% of adjusted after tax earnings.
And we remain on track to achieve our leverage goal of 3.5 times net debt to adjusted EBITDA by the end of the fiscal year.
Now I'll turn it back over to Jeff for some closing comments.
Thanks, Don and before we close let me add a little bit more color on our Q1 results relative to our expectations.
We feel very good about our performance in North America retail and in pet where our Q1 organic sales results were modestly ahead of our expectations.
For our other three segments, we expect to coming into the year that Q1 will be the slowest quarter of growth driven in part by the fact that we were lapping our strongest quarter of growth for each of these segments last year.
Our Q1 results in these segments were a bit below our expectations largely driven by the shortfall in flower and convenience and foodservice and the retail inventory reduction in Brazil.
We had expected and continue to expect to see growth ramp up in these segments. Starting in Q2, driven by the factors I mentioned a moment ago.
On the bottom line, our Q1 profit and earnings per share results were ahead of our expectations and based on those Q1 results and our plans for the remainder of the year I am pleased to say that we remain on track to deliver our full year fiscal 2020 goals with that let me open up the line for questions. Operator can you. Please get us started.
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Our first question comes from the line of Andrew.
LSR with Barclays. Your line is open. Please proceed.
Hi, good morning, everybody.
Hi.
I guess first off with with organic sales in fiscal one Q.
Particularly in the three segments, you talked about a bit below expectations I guess in order to get back to your own sort of original internal plan for the year would you expect that to come from really more a recovery in the international in Cnf segments score.
Door anticipate North America retail impact need to maybe better a little bit more of the week around accelerating than initially planned.
So Andrew the.
The first thing I'd say is that we we did reiterate guidance for the full year of 1% to 2% growth and we feel good about that because as I said, primarily the two things that were different than what we expected. We're we're flour index pricing on a flower and retail inventory in Brazil, and the retail inventory in Brazil, We think will will correct itself starting in the second quarter, which leaves the retail flower pieced index pricing on flour really the biggest difference versus expectations as we head into the rest of the year, we fully expect it without giving guidance on each and every segment. We fully expect that the segments that were below our expectations will improve significantly in the second quarter and I would say we've got good momentum on pet and we've got good momentum on North America retail, which are most profitable businesses and I don't see any reason why that momentum should continue into the second quarter as well.
Got it that's helpful. I appreciate it and then just lastly would be.
I think if it's growing team you had mentioned that about in North America retail and maybe this is best for for John I think seven of 10 categories held or gained share I think this quarter. It was five of 10.
I know that can move around probably quarter by quarter, but anything to read into that that we need to think about as we go forward through the year. Thanks, so much.
Yes, Hi, Andrew I guess overall I'd say the short answer is no. We feel really good about the trajectory of our business that at Investor Day. We said we wanted to do three things. One is continue our momentum on cereal and we did that in Q1 up 1% and feel really good about that and then we want to improve our performance and snack bars and in yogurt and we were able to accomplish that as well. So again, we feel very much like we're on track again quarter to quarter, you have some levels and share but overall, we feel like we're performing well and are on track for what we expect for the year.
Thank you.
Our next question comes from the line of John .
Bomb Gardiner with Wells Fargo. The line is open. Please proceed.
Good morning, Thanks for the question.
You know John just just looking at the the narrowed gap between shipments and take away in North America in the quarter I think the outlook for fiscal 2000. He was that you continue to see retailer Destocking. So are you seeing anything they're improving a bit sooner than expected or were there any discrete benefits in terms of Q1 shipments that may be reverse or moderate going forward.
Yes, Hi, John .
As we mentioned the facility was sold at a point gap between our in us and Nielsen really driven by retailers focusing on reducing the working capital in inventories, we expect that to continue its not readily apparent but due to rounding we still saw about a half point gap in Q1 between our in US and movement and we do expect to see a gap throughout the year and again, we'll have to see how much that is as the year plays out.
Okay, and then just a follow up on US yogurt, one pillar to that strategy is stabilizing yoplait light, but I mean, you're still cycling through some some pretty big year on your distribution losses. There. It's been flat sequentially I guess since January I'm curious looking at the recovery in Gogurt, which also went through distribution losses, you're back to mid single digit growth. There do you have a sense of confidence that maybe once you get to the back half of fiscal 20, you'll play like does begin to take at least could stabilize back to the dollar growth overall, Ms that kind of finding the bottom for distribution at this point.
Yes, again, the sort of this I think is yes, I mean, as we look at our business our biggest businesses original style Yoplait Red Cup.
Now was flat actually grew slightly in Q1, and then gogurt. So really important can business for us as well so we'd say that's the core.
The tail was really light in Greek and Greek for all intents and purposes.
That's very little top left there.
And then light we do believe is stabilizing and we've got some marketing that were going to be rolling out throughout the year that we think can prove that but if you look at our yogurt business.
As you focus on again original thought you'll play and Gogurt and then simply better segment, which is where we think the categories going.
12% of the category today things like we like to you, it's growing double digits and where the share leader and we continue to introduce new products segment as well. So we feel good about our plans for yogurt.
Again coming out of Investor Day, We said, we wanted to improve off of that down to in fiscal 19, we were able to do that in Q1.
I feel like we have good plans in place to move forward.
Great. Thank you for your time.
Yes.
Thanks.
Our next question comes from the line of Ken Goldman with JP Morgan. Your line is open. Please proceed.
Hi, good morning, and thank you.
I wanted to ask two questions number one.
In terms of organic volume I know you don't want to be too specific on quarters, but.
You did talk about the second quarter of getting a little bit better you do have an easier comparison there are some some some better factors as you mentioned in terms of Brazil, and so forth is it reasonable for us to model in at least flat organic volume as you see it in the second quarter now or is that is that a little bit optimistic.
Yes.
I think there were certainly going to get better organic volume and I see that you'll you'll see the biggest change in that it actually in convenience and foodservice because we.
Flowers pretty heavy and we lost a lot of volume and and convenience and foodservice and so as we get our pricing back in line and we share innovation kicking in convenience and foodservice actually you'll see a pretty good volume gain there because because we won't have as much a negative drag from flower and we've got some good innovation in K through 12 schools.
Okay. Thank you for that and then.
I wanted to ask on.
Jeff and John .
You did talk about snacks, getting a little bit better from a percent basis, but if you look at the comparison look at the two year. It did actually worsened a little bit from the fourth quarter of 19 I'm I'm. Just curious when can we think about real turnaround and snacking. When the you know the absolute dollars start to rise and we start seeing legitimate improvement there because it feels like the improvement this quarter, perhaps was just an easier comparison a little bit.
Yeah. So so Ken this is John if you look at our snack business really three key businesses. The first snack bars, and I want to dig into that a little bit more detail.
The second one is fruit snacks and the third is salty and fruits salty had a good Q1 combined they grew year over year, we need to make sure that we continue that as we move forward. If you remember we had capacity constraints with fruit in fiscal 90, we now have capacity. So we feel like we're going to accelerate on fruit as we move throughout the year. So we feel good about those businesses I think the story is going to really be about snack bars and as Weve talked it's really about nature valley and fiber one.
On a nature valley in fiscal 19, our innovation wasn't where it needs to be and we missed the key back to school merchandising window.
As you look at Q1 on nature Valley, we had a very good back to school in fact incremental and displays were up double digits in the month of August and our innovation is Chris becoming wafer bars, which is off to a really good start. So you saw a sequential improvement month by month and nature Valley and we expect that to continue and fiber one that's been again, a challenging business for us over the last three or four years with significant declines we renovated the product in the spring.
As our seems really encouraging results. So if you remember we went to 70 calories on Fiberlan brownies five grams net carbs two grams sugar.
And really get back in line with modern weight managers going from five weight watchers points to two and the early results are quite encouraging in fact, we've seen our turns per point of distribution of double digits.
Distribution is down year over year, so that will be a bit of a drag I think the inflection point from a distribution standpoint, we're really be the turn of the calendar year as we lap some significant distribution declines of both nature Valley and fiber. One. So we are encouraged we believe that we're very much on or maybe slightly ahead of where we expected to be at this point on snacking and feel like will improve as we move throughout the year.
Thank you.
Next question comes from the line of David Palmer with Evercore I see ISI. Please proceed.
Thanks. Good morning, just a question on pet I'm, just looking at the numbers that we see in scanner data and also looking got those statistics you had on the other channels and wondering what you think we will be seeing in the coming quarters. We're we're seeing that asking you count going up a lot ACB is going up a lot and then you mentioned specialty is down double digits, but you have some new offerings going there and then e-commerce . So.
Could you give us a sense of what we're going to see throughout this fiscal year or by channel and maybe the complexion of the growth. Thanks.
Yeah, David I think you will you will you will see us continue to grow in the food drug and mass channel, especially through the second and the third quarter behind distribution build that we have on life protection Formula So increased distribution there as well as the rollout of wilderness across previously existing customers and we're really pleased to see it in the food drug and mass channel, we have year over year growth, which I think is really important so not only we gained a deemed distribution, but as consumers are starting to find a more in that channel, they're really going to blue Buffalo. So we we like the growth we see in food drug and mass and certainly over the next couple of quarters. We could we see continued growth in that channel in the pet specialty channel as you as you noted we had double digit declines in in the first quarter. We were certainly we certainly think that we'll probably still decline in those channels over the coming quarters, who hope, we'll get a little bit better as you can see we've got some innovation and things like carnivores and like baby Blue, we're still debt lapping some distribution losses, but we're starting to see.
See some traction on some of our innovation and some of our marketing ideas and so as we go throughout the year. We would certainly expect for that channel will it get a little bit better and then with ecommerce we feel good about what we're doing in ecommerce I think I mentioned at the end of last year that the ecommerce channel for pad had slowed a little bit, but we would we would see an increase in this coming year, we thought and that's exactly what we're seeing in our performance as good an ecommerce we we have a.
Hi, do you have confidence that we will continue to grow and be the market leader in ecommerce channel.
And the only thing that I would add to that as you recall at our Investor day, we talked about the calendar differences in this year. So we had a one week drag in the first quarter the Jeff alluded to in our comments and then we'll have a one month addition in the fourth quarter will also then be lapping the rollout to Walmart in the beginning of the wilderness expansion.
So we as we said in Investor Day, we expect Q2, and Q3 to be our strongest organic growth quarters extra calendar changes.
Thank you.
Our next question comes from Laurent Grandet with Guggenheim. Your line is open. Please proceed.
Hey, good morning, Jeff and Don Thanks for the opportunity so.
Let me let me first focus on on the other segments in your Perm Rock, you mentioned officer, Doorstop, and Thats, who we are taking action to address top line improvement in second quarter.
I know you alluded to some of those in EMEA in your comments, but could you please elaborate a bit more.
On those three different sub segments and I will have a second question. Please.
Lets us go round and in Europe , Australia, what will improve in the in the second quarter is that.
We will return to our increased merchandising levels, because we really had lower merchandising levels in the first quarter viewed to be a year ago and so we had our strongest quarter of the year last year, and Europe , Australia, and it was driven by two things a strong ice cream season and and.
And higher merchandising levels will return to higher merchandising levels and in the second quarter. So we have a high degree of confidence that in the UK and France two of our biggest markets. Our performance is going to improve we'll still be lapping some distribution losses on haagen dazs. So it won't get all the way to bright, but it will improve significantly in Asia and Latin America. The biggest thing that will change is going to be the trajectory in Brazil, what we thought going into the year that are imminent that retailer inventories would climb in the first quarter because last year, we had a trucker strike as you may or may not recall and while that is materializing as materializing later than we had anticipated and we will see that pickup in the second quarter of this year. In fact, we've already started to see it and so Brazil will be the biggest the biggest change the other we mentioned India that Andy we pulled back on some distribution in the first quarter. We are planning on doing that we pulled back faster than we thought and the what we see in the first quarter. It makes for a tough first quarter it should make our second quarter better because.
As we have we have already taken that distribution now and then and convenience and foodservice. We certainly have a lot of confidence in that business and we've been growing that business over the last year or two I will pick back up in the second quarter. It really it really is a matter you can see our focus six grew 2% that becomes a bigger part of our portfolio as as kids go back to school on our K through 12 business is strong we've got great innovation, there and we've adjusted our flour pricing so that will be less of a drag and so we have a we have a high degree of confidence that return to momentum in our convenience and foodservice business.
Thanks, Jeff.
Second question is.
And then no disrespect to your retirement and then spent but.
One of the major events during the quarter was the announcement of BV show moving to another.
Advisory rule.
No offense, even though their own.
Okay.
Lots of questions about these from investors I mean could you give us a bit more comfort that disposition would be as smooth as it can be unexpected further the rule of advisor that BD, we that we take.
Yes, so that knowledge.
It's a it's a fair question Don commentary on Don not included.
I think on.
For Billy billion I've been talking about this for quite a while this transition. So this is not a surprise transition for US we had talked about the timing many months ago and one of the first with a one of the things that allowed us to do is to get what I consider to be a great backfill and for for Billy and Bethany Quam, who is a terrific brand builder and knows the sales channel and marketing and really helped us get back on track and seeing that a few years ago and so it allows but who I think is a is a somewhat grade back in place. The other thing I would tell you its interesting when we decided to buy blue Buffalo and I first met Billy almost two years ago. There were a few things that made this it seemed like attractive attractive opportunity, one which is the gross base of pet and the growth of natural organic but beyond that when below 9 billion I talked it was interesting how similar the culture is a blue Buffalo were to general Mills and also how their strategy for growth paralleled our strategy for growth and how they think about brand building is very similar to ours and so the underpinning of that hasn't changed with a new leader coming in and the growth strategy to bill.
As outlined is one that we very much believe them and we believe animal before we bought blue Buffalo and so and the way they build the blue Buffalo brand and they think about their brand is the same way, we think about building our brands and the kind of leadership that Billy provided we think that Bethany will provide in terms of advisor <expletive> in terms of advisor I'm excited to have bill it come on come on board as well as well as his dad, they'll senior as well as their brother, Chris and so the business will still be invited in an advisory capacity.
And they provide a lot of pet experience a lot of marketing experience low new product experience and this advisory role nothing new for US gene Con state on 400 visor for many years and Cascadian farms and our American on Lora bar and so this role of advisors, especially of founders as really important they provide a lot of legacy knowledge about the business and we're thrilled that.
Billy and the data brother going to stay on that capacity.
Thank you very much.
Our next question comes from the line of Jason English with Goldman Sachs. Your line is open. Please proceed.
Hey, good morning folks and thank you for the question.
So I wanted to delve into a little bit more.
We heard that the court of oral launches reasonably well received by Petco, and petsmart and it sounds like you're going to get around four feet of space.
A couple of questions on that is that kind of consistent with your expectations be will only hit and you mentioned sort of a a low double digit retail sales offtake versus a mid single digit underlying shipment was some of that delta that spread that the result of early shipment sort of pipeline fill ahead of that.
And if youre getting for fee can you give us some sort of context of proportionate to what you have now like how much incremental all in space do you expect to that channel.
All right. So let me let me take those the series of questions, Jason and I will I will try to hit all of them in terms of kind of where we are excited about the launch most importantly, it really start shipping in August and that's important because August and the Blue Buffalo calendar actually falls in Q2, so none of the pet specialty results that we just talked about for Q1 include.
Carnivores.
Being in the market place and so Thats why we as we think about pet specialty.
We our initiatives to improve the growth in that channel really starting in Q2 and carnivore is a piece of that the growth expectations you talked about certainly be consistent with what we would have in mind. We think it will be incremental it is certainly accretive from a from a a price per pound perspective, because it is really premium priced even two to wilderness. So to the extent that there is deal from from other product lines. I mean, it will certainly be price accretive for for general Mills and.
There's one more question and how that on the night.
Sure.
The difference the difference in shipments really and consumption is that it really the extra week is so it's not it's not necessarily inventory build is really the extra week because our.
Our kind of our like for like sales were up mid.
Teens mid teens in terms of growth and so the difference between that and retail and what we reported but really one extra week and our our shipments lined up.
Pretty well with our external takeaway.
Got it okay.
I'm tracking that makes sense to me.
And in terms of the margin profile for the business relatively healthy even absent the.
The step up by the Lumpiness of the inventory step up costs.
Do you still is that business to profitability still being burdened by the plant startup expense.
And can you remind us sort of the cadence of that start up and what sort of margin acceleration, we should see as you ramp you ramp capacity in this new facility.
Yes, we've we've largely through Q1 now digested the plant startup costs.
So the benefit of the new plant will begin coming through as you alluded to we are pleased with the Q1 margin performance beyond just the step up just the increase of the lapping the inventory step up charge from last year, we had nice flow through on the incremental sales that we saw it on a like for like basis.
We expect that to continue for the year, we expect that this business along with our business to be too can be.
Most profitable segments, and I think you'll see that as the year unfolds.
And build on the build on Don's comment I think the other reason we saw good profitability in the first quarter was because of our pricing I know there's been a lot of discussion on pricing and Pat we saw seven points of price mix and.
And we saw all kind of all sizes of our of our pet products improve in pricing in the first quarter end, while we while we sold 85% more of the small bags, we sold 220% more of the larger bags.
And so the as we look at it our price per unit was up I think 15% or something like that so in addition to the in addition to what Don talked about in terms of the plant start up. We also we also saw good pricing in the first quarter.
Got it. Thank you very much guys I'll pass it on.
The next question comes from the line of Michael Lavery with Piper Jaffrey. Your line is open. Please proceed.
Good morning, Thank you.
We might go.
Could you just <unk> price mix, a little bit further obviously, there's a bit of a lift from.
Just better momentum on Blue Buffalo and some of what you just referenced within that segment as well, but are there any trade promotion timing shifts or anything we should watch out for in terms of pacing and then.
Separate from that can you just dissect a little bit what's the drivers is it is it some of the more weight outs or list pricing what are some of the mechanics of how you're building the good momentum you're getting there.
Well I would say, let me start with an answer I mean pricing in pad is probably the most complicated ventures because there are so many different sizes of formats available and so if I go too far in the weeds I'm afraid I'm, we may lose everybody, but I want to say is that as we look at it we did take list pricing last January so we did see some less pricing. We also saw some positive mix by bringing wilderness, yet and the other thing you know I mentioned you know our small our small size is less than five pounds. We actually we actually increased the price of that over the quarter by 15% and or the price per pound is pretty high on a small bags and we we sold a lot more of the larger bags that 10 to 20 pounds and we increased the dollar sales rose by 220% in the pricing of that was up nine and so there are a whole lot of things going on but I think thats why I read it back up to we get we get seven points of price mix and total and some of it was less pricing and some of it is mix and.
We think we'll continue to see some pricing into the next quarter on.
On list pricing and we'll see some more on the.
The mix as well.
And I apologize that's that's very helpful color I, maybe of where the quarterly payment total company with that being a piece can you just touch on some of the broader levers just as far as the rest of the portfolio.
Yes, Michael this is Don.
We continue to expect the price mix going to be a positive contributor all year.
Each of our segments have plans in place to drive price mix some through price them through mix them through a combination I think if you look quarter to quarter.
Jeff touched on some of the dynamics, you'll see you'll see in pad one of the things I would highlight is the other thing that we touched on was the shift in timing of our promotional activity uhhuh, particularly in the UK and France, which is going to shift more into Q2 and Q1 on a year over year basis.
That'd be the other thing that I would I would point to.
We also do not expect wheat prices to rebound so the the drag that we saw from wheat prices in the first quarter in in in Cnf. We'll we'll continue expect volume to improve later flower, but not necessary that the pricing component.
So some of the main.
Other that I think you're going to see.
Fairly fairly consistent and positive pricing through the year not certainly at the level of the of the plus three you saw in the first quarter, but for the full year, we still expect it to be positive.
Okay, great. Thank you very much.
Okay.
Our next question comes from the line of Robert Moskow with Credit Suisse. The line is open. Please proceed.
Hi, good morning.
Hi, there I just two questions. One is you know your share gains in breakfast cereal have been really impressive the execution has been great.
Should we expect tougher comparisons for the rest of the year.
In terms of market market share gains for breakfast cereal, just because you're lapping some launches or do you think that you can continue that momentum and then second question is on convenience and foodservice you know I I get the the.
The impact of the flower, but you'll your profits are down to in the quarter and I was just wondering I thought I remembered last year that that you had taken pricing maybe ahead of inflation in your convenience store a part of the business and I thought that there was kind of a risk that okay. At some point that that pricing would have to come back down.
Am I, miss interpreting that or or should we assume that your.
Your your pricing in convenience and Foodservice X flower is is still in line with inflation. Thanks.
Rob This is John will take you a cereal question first.
I would say, we feel really really good about our cereal business in the U.S.. We grew in absolute terms for the third consecutive quarter, we've actually grown share for seven of the last eight quarters, that's really behind very strong fundamentals starting with brand building I'd tell you that were more clear than ever on who our core consumers are for each of our brands whether that be you'll boomers for having that shields, where we're serving up cholesterol messaging and heart health, whether it's being on Reese's puffs collaborating with Travis Scott or finally on wheaties doing things like partnering with Sirona Williams in the U.S. Women's National Soccer team I think our marketing is as strong as it's been for quite some time and that's really driving their baselines and then Jeff touched on the in the upfront remarks on innovation, we had five of the top six products in the category fiscal 19, and our innovation of fiscal 20 is off to a good start with Bluebird cereals, and peanut butter. Chuck. So we would expect to continue to perform well and we fully intend to continue to hold and grow our share leadership in the category.
Got you.
And Rob on Cnf. Your recollection is correct. We did we start taking pricing at the end of our F. 18, we saw the benefit of that in our Q1 of F. 19, that's what are the contributors to the fact that we grew profit 14% last year, we do top line for and the bottom line 14.
And said pricing where that pricing has held we are lapping it though but we did have positive two points of price mix in Q1.
Which is a reflection of the fact that pricing has held.
And and we we continue to expect with food service to a positive price mix for the full year.
Okay. So so we shouldn't expect kind of a give back on profits as a result of that it's like you've you've taken the pricing you've held it in your you are now.
In line with inflation, Yes, Thats correct. We will just in Q1. It was just it was just lapping the initial.
Initial imitation of the price increases got it okay. Thanks.
Thanks.
Our next question comes from the line of Alexia Howard with Bernstein. Your line is open. Please proceed.
Good morning, everyone.
Good morning.
Hi.
Just a couple of quick questions here.
Thank you.
I think one of the larger players talked about.
Increasing competitive increasingly competitive pricing.
Channel.
Particularly around trials sites bag.
Is that something that you saw or.
Is it really just not something that particularly directing competition with you.
Clearly youve managed to take pricing and mix.
Kind of across the board. So I'm just curious about the competitive dynamics in that and then sticking with Pat.
Are you able to make any preparations for the likely increase in metals prices next year because of African point.
Or do you believe that your mix of mill.
It is likely to.
You mean that youre really not that exposed to that potential increase in input costs. Thank you very much I'll pass it on.
Yes, so let's see on the on the pricing first I would say from a from a macro perspective kind of starting with the consumer you don't win in the in the pet segment by by taking prices down you win in the pet segment by delivering what pet parents are looking for which is one of the reasons why private label is so low and pet people are looking to feed their their pets, the best quality product and we think in many cases thats blue Buffalo, So that's kind of our starting philosophy.
In terms of the small sizes.
I can I can understand the commentary because our small sizes were by maybe you are one of our competitors because our small size growth was up 85% and the food drug and mass channel, but our growth overall was up 137% and the our small sizes are still in many cases, a 100% premium to our largest competitor so they're still premium priced and the prices in the first quarter on the small size were actually up.
Double digits on a price per pound basis, so the way when I look at it yes, we have more more small sizes, but that's because we are growing more quickly and in a new channel. It is certainly not our intention and it didnt. It didnt manifest itself in the first quarter that we're going to be more competitive on price and I think thats why I spent some time also referencing.
The price mix for us was up 7% so in terms of being more competitive I suppose if you consider that we entered pretty pretty forced land into a new channel, yes, it's more competitive in that sense, but but on a pricing says actually actually now.
Okay, Great and then we Africans winds Weaver.
Yes.
To the extent that.
We're not going to give a forecast for next years inflation will take that in consideration as we build the plan for next year.
You know to the extent that we see we see inflation, we would have cost actions or pricing actions to offset it.
Okay, great. Thank you very much I'll pass it on.
Our next question comes from the line of Ken Zaslow with Bank of Montreal. Your line is open. Please proceed.
Hi, good morning, everyone.
Good morning, John .
Can you are there any more initiatives, what's the runway on Hmm you don't talk as much about that as you used to so I'm just trying to figure out I know, it's a consistent.
Cost savings opportunity, but is there incremental opportunity is it still going at the same pace can you just give a little bit of parameters around that and how much.
Cost opportunity that will be not just for this year, but going forward.
Yes, Ken Thanks for raising that each amendment is certainly one of our I think our key capabilities and in one that.
Sometimes we take for granted so I appreciate you raising it because it is a strong contributor to our to our profit picture again, it will be roughly 4% of our Cogs. This year fully offsetting what is what is a bit of elevated inflation period.
As you as you well know.
The most recent new capability or aspect of global sourcing or of Hmm that we implement it was our global sourcing.
That continues to pay dividends not only in our in our savings, but you saw it in our in our working capital as well with continued extension that are on our terms in accounts payable.
So it has a double benefit for us and we continue to add new capabilities and is as those.
As those manifest themselves and we have line of sight to the to the incremental savings that are available we will certainly be.
It will be.
The vocal about that externally.
As you look today, we are very comfortable with the 4% of sales or 4% of Cogs excuse me as a.
As a solid run rate for each of them initiatives.
And then just my follow up is can you talk a little bit about ecommerce I didn't hear any details on that.
Im assuming its still growing but any sort of commentary on that would be helpful. As well I'll leave it there.
Second this is John Eudy, I'll talk about North America retail, we continue to see nice momentum and ecommerce it was up about 50% in Q1 in North America.
We continue to over index online versus bricks and mortar as our capabilities are strong and again, we're working hard to make sure. We're on top of the basket.
And we feel like we've got great capabilities that are again, helping us to be advancements space is growing nicely, we think we're well positioned.
Great. Thank you.
Our next question comes from the line of Bryan Spillane with Bank of America. The line is open. Please proceed.
Hey, good morning, everyone.
Just one question for me I think at the top.
You talked a bit about just how in the first quarter.
Sales were a little bit below expectations for the reason you cited in the places where you did but actually profits running ahead of plan. So I guess could you talk a little bit about what's driving that but I guess more importantly.
As we look through the rest of the year to the extent that profit profitability is running ahead of plan with the bias be to spend that back, especially given the success that you're having.
Continuing the improvement, especially in North American retail just provide more flexibility in case stuff goes wrong, but just trying to get a sense of how we should we should interpret that.
Sure Brian .
I'll do the full year first and you think about the years, we as we talked about in the in July we expect our strong margins to be stable for the full year.
Theres a couple of factors to take into account what is the purchase accounting adjustments after the Q1 plus.
I talked about positive price mix, which would be a benefit all year.
Hmm inflation will be largely offsetting through the year.
And our brand building investment.
It was up in Q1 and that will actually increase during the course of the year.
So our strongest margin will be in Q1, largely because of the because of the lapping the purchase accounting.
But also because the brand building while it was up will increase during the course of the year. So so that's the way I think about the years, how the margins are going to unfold.
Okay, great. Thanks, and if I could just follow up just in China. I think you made a mention about maybe slower traffic in the shops.
For I guess haagen Dazs in China, just is there anything.
That we should be thinking about there in terms of just the macro environment getting slower I think before you started the year you talked about maybe pork price pork costs being up for Wanchai ferry just little bit more color on whats happening in China, and just how we should think about that would be helpful. Thank you.
Sure, Yes and.
In China the growth did slow in our in our shops in the first quarter and that's not that was not unexpected because we have seen the economy slowing path. It's still growing so when we say that growth has slowed it has slowed but it is still growing which I think is important and we've adjusted some of our tactics for our haagen dazs shops to drive more traffic starting in the second quarter and then on Wanchai Ferry, we took prices at the end of last year, because we saw the African swine fever.
And in the pork prices go up so we took some pricing we did so a little bit ahead of our competition, we've seen them starting to take pricing that so as we head into the second quarter, we see improvement in our Wanchai ferry business and so in China, We saw our business in China declined a little bit, but not really a lot behind our expectations. Because we saw that in macro these macro forces at play and so our ability to get our China business back to growth really doesn't depend on a change in a macro environment. It really relies on taxes, we have taken to drive more consumers in store and on our competition catching up with us on price on Wanchai Ferry, which is why we have confidence that we can improve that but getting into the second quarter.
Okay, great. Thanks, everyone.
Yes.
Number one our next.
Our next question comes from the line of Steve This to rise to low with GBM. Your line is open. Please proceed.
Hi, good morning, everybody.
So.
One quick question for Don and then.
And then a follow up so on the gross margin piece done if we strip out the blue Buffalo contribution is it right to think that gross margins were up roughly about 30 basis points in the first quarter on a like for like basis and given the brand building that you're doing can you speak to what specifically it is throughout the balance of the year and why that steps up and should that mean that maybe the run rate for the balance of the year is closer to like flattish and then I've a follow up thanks.
Yes.
The math is right on Q1.
So the $53 million.
Step up in inventory that were rolling over is about 130 basis points. So it doesn't account for most of the gross margin improvement.
As the year as the year unfolds, we're going to we're seeing a slight step up in our in our media that will increase we're also.
Can you to build capabilities around data and analytics to get.
Deeper in that area I think we talked about that a little bit in July we we built e-commerce capabilities. We continue invest there we do invest in strategic revenue management, all around how we manage and drive decisions through data and you'll continue to see those capabilities being invested behind as the year unfolds.
Okay, and my follow up for Jeff.
So do we see that incremental spend for brand building and data analytics is that going to be more M&A or is that still for an accounting purpose roll through.
Cogs and then a strategic question is the inventory drawdown that we're seeing in the US is that it all tied to devolution of click and collect meaning how retailers are merchandising.
Their stores in inventory number just carrying fewer days on hand, because of how click and collect impacts their business could you comment there. Thank you.
Yes, so on the on the brand building side I would say without getting into specific on where it goes on a line of PNM, but we're talking about a brand building or not is not increase is not increased price promotion. It really is brand building and whether we do that through our customers or whether we do that through some sort of mass media as Jon Nudi highlighted I think our North America retail marketing and really good right now, especially in cereal, but even for some of our other businesses and on pad and so to the extent that we see an opportunity to improve our brand building behind things like Pat or old El Paso or cereal, we'll continue to do that because we're seeing some pretty good returns and we like what we're doing so I'm not going to get go line by line, but but that's what we see the.
And then your.
Your second question inventory.
John on inventory when I'm talking about yes, sure. So Steve I'd say that the inventory reductions probably less tied to click and collect but related data and analytics and just technology I think our retailers have better tools now to really.
Understood how much the inventory they need to have in the warehouse as well as on the shelves and they're leveraging that technology to bring down bring down their inventories and still have good in stock position. So again, I think its technology and data analytics not not necessarily click plot.
All right. Thank you.
Okay, I think that gets us to full time, thanks, everyone for Reengagement and will be available throughout the rest of the day for any follow ups.
Have a great day. Thank you.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.