General Mills : Transcript – Prepared Remarks

General Mills, Inc. Fiscal 2020 Fourth Quarter Earnings Results June 30, 2020

General Mills, Inc.-Fiscal 2020 Fourth Quarter Earnings Results, June 30, 2020

C O R PO R A T E P A R T I C I P A N T S

Jeff Siemon,Vice President, Investor Relations

Jeff Harmening,Chairman and Chief Executive Officer

Kofi Bruce,Chief Financial Officer

P R E S EN T A T I O N

Jeff Siemon

Thank you for joining us to hear our prepared remarks onGeneral Mills'fourth quarter fiscal 2020 earnings. Later this morning we will hold a separate live question-and-answer session on today's results,which you can hear via webcast on our Investor Relations website. In a moment,I'll turn the call over toJeff Harmening, our Chairman and CEO, and Kofi Bruce, our CFO, but before I do let me first touch on a few items up front.

On our website you will find our press release on fourth quarter results that went out earlier this morning, along with a copy of the presentation. It'simportant to note that our remarks will include forward-looking statements that are based on Management's current views and assumptions, includingfacts and assumptions Jeff and Kofi will share related to the potential impact of the COVID-19 pandemic on our results in Fiscal'21. The secondslide in today's presentation lists several factors, among them the impactof the pandemic, that could cause our future results to be different than our current estimates.

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

Jeff Harmening

Thanks, Jeff, and good morning everyone. Before we get into our results, I'd like to take a moment totouch on two topics that are top of mind for many of us right now.

First, I want to voice General Mills'strong support for the inspiring movement for social and racial justice that was tragically elevated by the horrible killing of George Floyd here in our hometown of Minneapolis a month ago. While Minnesota is a focal point, we know this is not just onecommunity's problem. It's clear from George Floyd's death, and the many that preceded it, that systemic injustice and racism still exist in our country and in societies around the world. We have a lot of work to do to start the healing, to help our communities rebuild, to emphasize that Black Lives Matter, and to help drive lasting change for social and racial justice.

The events of the last month reinforce the importance of our ongoing work to build a culture of belonging at General Mills. Our people are the true heart of the Company, and we are focused on creating an environment where all employees feel they can share their unique perspectives and ideas and know they will be treated with respect. That begins with a commitment to foster courageous conversations and to

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General Mills, Inc.-Fiscal 2020 Fourth Quarter Earnings Results, June 30, 2020

take courageous actions. We stand united against acts of racism and are committed to humbly learning and finding authentic ways to be a part of the solution.

The second topic I want to address is the impact the COVID-19 pandemic has had on our employees and our communities. In this time of uncertainty regarding personal health, the economic outlook, and access to food, General Mills, more than ever, is dedicated to making food the world loves and needs. I offer my sincerest'thank you'to each team member, customer, front line worker and peer company who has worked tirelessly to support our communities, our families, our friends, and our neighbors during this difficult time. You have stepped up in an incredible and safe way to ensure a reliable food supply and we thank all of you.

As we turn to the business of our Fiscal '20 results and 2021 objectives,I'dlike to start with a few key messages on Slide 5. Throughout Fiscal 2020-before and during the pandemic-our most important objectives have not changed; they are the continued health and safety of our employees and our ongoing ability to serve our consumers around the world.

Fiscal '20 was a year of significant challenge and change in the worldaround us, andI'mextremely proud of the way General Mills adapted and executed to meet the significant changes in demand in the fourth quarter and deliver outstanding performance. Importantly, we closed the year having achieved each of our Fiscal 2020 priorities and we exceeded all the key financial targets we laid out a year ago.

Looking forward to Fiscal '21, we are not providing guidance for our headline financial measures due to the significant uncertainty in the balance of at-home versus away-from-home food demand. Even so, we'veset three key priorities that will keep us focused on what we can control and allow us to deliver competitive performance in the short term while continuing to advance our long-term strategic goals. First, we will compete effectively everywhere we play; we'll drive efficiency to fuel investment in our brands and capabilities, and third, we will reduce our leverage to increase our financial flexibility.

There is no doubt that the COVID-19 pandemic has profoundly impacted our business over the last few months. We've seenan unprecedented increase in demand for food at home and a corresponding decrease in away-from-home food demand. Prior to COVID-19, at-home food represented approximately 85% of our net sales and away-from-home food represented the remaining 15%. In the fourth quarter of Fiscal'20, elevated home food demand accelerated net sales growth, most notably in our North America Retail segment where a significant share of net sales comes from categories that were most impacted by at-home eating, including Meals, Baking, and Cereal. The impact of elevated at-home demand was less pronounced in our Europe & Australia segment, reflecting its lower proportion of net sales in those categories. The Pet segment experienced increased demand early in the fourth quarter from stock-up purchasing, which partially unwound by the end of the quarter. Lower away-from-home food demand reduced growth for our Convenience Stores & Foodservice, and Asia & Latin America segments.

We have implemented employee safety measures, based on guidance from the CDC and WHO, across our supply chain facilities, including proper hygiene, social distancing, mask use, and temperature screenings. As of today, all of our manufacturing facilities are open and continue to operate without significant disruption.

The significant surge in demand has reinforced the importance of supply chain excellence, something that has been a hallmark of General Mills for decades. We've increased the agility of our supply chain, including partnering with customers to prioritize production of key products to reduce downtime and increase capacity. With the uptick in consumers eating at home, we've seenbroad-based improvements in household penetration for our brands, andwe're encouraged by early indicators on repeat. We've seenmany more consumers buying their food online in recent months. We modified our fourth quarter plans to

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General Mills, Inc.-Fiscal 2020 Fourth Quarter Earnings Results, June 30, 2020

increase engagement with consumers online, resulting in a significant acceleration in our eCommerce sales growth.

Our ability to adapt to these changes allowed us to deliver outstanding performance in the fourth quarter as you can see on Slide 7. This included 16% growth in organic net sales, 24% growth in constant currency adjusted operating profit, and 33% growth in constant currency adjusted diluted earnings per share.

We strengthened our business in many ways in the fourth quarter, including increasing our agility, deepening our relationships with our customers, getting our brands in front of many new consumers, enhancing our competitive position in our categories, and investing meaningfully in our people, our brands, and our capabilities. These changes set us up to deliver continued strong results in the months and years to come.

A year ago, we outlined three key priorities that were critical to delivering a successful year inFiscal '20: accelerating our organic sales, maintaining our strong margins, and reducing our leverage.I'm pleased tosay that through nine months, before the full impact of the pandemic hit our business, we were on track to deliver on each of these priorities, and with the acceleration in Q4, we ultimately exceeded our expectations for all three.

Let me take you through a few examples of how we delivered against our Fiscal '20priorities, beginning on Slide 9. We started the year knowing that improving growth in North America Retail segment and delivering another strong year in Pet were going to be critical to accelerating our overall organic sales growth, and both our teams came through with great results. Our North America Retail team delivered a truly exceptional year in Fiscal 20. Prior to COVID-19, we were already on track to improve organic sales growth for the year. At-home food demand accelerated dramatically in Q4, with retail sales for our U.S. categories up 32%, driven most prominently by the Meals, Baking and Cereal categories. And our supply chain stepped up admirably to service this demand, keeping our trusted, leading brands in front of consumers and enabling U.S. Retail to deliver its best full-year market share performance in a decade. This performance was led by our U.S. Meals and Baking operating unit, which generated 68% retail sales growth in the fourth quarter, including strong results for Pillsbury Refrigerated Baked Goods, Progresso Soup,Totino'sHot Snacks, Betty Crocker Desserts, and Gold Medal Flour.

In U.S. Cereal, we delivered a third consecutive year of retail sales growth and extended our leadership position in the category, gaining 70 basis points of share for the full year. This performance was due to strong brand building, especially across the Cheerios franchise, which grew retail sales and market share in Q4 behind the success of its Heart Health messaging, and once again we launched the top two new products in the category for the quarter, with an Oats & Honey version of Cheerios Oat Crunch and Trix Trolls.

OnU.S. Snacks, we said we'd improve inFiscal'20 with a focus on bars and fruit snacks, andI'mpleased to say we achieved that goal. We drove 11% retail sales growth on fruit snacks behind increased capacity and exciting equities such asDisney's Frozen 2, and we made important improvement in our Snack Bars market share throughout the year, including share growth in the fourth quarter, led by improved innovation, merchandising, and distribution for Nature Valley.

In U.S. Yogurt, Fiscal'20 retail sales declined 1%, largely in linewith last year'sperformance. Our core business performed very well, including retail sales growth of 5% on Original Style Yoplait and 8% on Go-Gurt. Our second-half innovation was particularly strong with Original Style Starburst and dairy-free Oui by Yoplait finishing as the two largest new items in the category in the second half. We continued to experience declines on the tail of our yogurt portfolio, including light and Greek varieties, but with a strong

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General Mills, Inc.-Fiscal 2020 Fourth Quarter Earnings Results, June 30, 2020

core and relative innovation making up a greater portion of our portfolio, we expect to see further improvements in our U.S. Yogurt sales as we go forward.

Finally, we returned our Canada operating unit to growth behind improved in-market execution, resulting in 60 basis points of share gains.

As you will see on Slide 11,North America Retail'srelentless focus on execution, coupled with our strong portfolio of leading brands, resulted in market share growth in 9 of our top 10 U.S. categories in the fourth quarter, and 7 out of 10 for the year.

As I mentioned, our Pet segment continued to drive strong growth in Fiscal'20, with all-channel BLUE retail sales up double digits, resulting in another year of market share gains. Our consistent, strong investment behind brand awareness and pet parent education, combined with our successful expansion into additional Food, Drug, and Mass, or FDM, retail outlets, contributed to a nearly two-point increase in household penetration. We remain delighted to have BLUE in the General Mills portfolio and we'reexcited about the growth opportunities that lie ahead for the brand.

Beyond accelerating organic growth, our two additional Fiscal '20 prioritieswere to maintain our strong margins and reduce our leverage. As you can see on Slide 13, we beat those goals. We expanded our adjusted operating profit margin by 40 basis points to 17.3% of net sales. We delivered another strong year of holistic margin management savings at 5% of COGS, realized favorable price/mix, managed our administrative costs efficiently, and capitalized on volume leverage. These efforts overcame 4% input cost inflation, a mid-teens increase in annual media investment, accelerated investments in our global capabilities, and incremental safety and operating costs due to COVID-19.

We made tremendous progress on reducing our leverage, driven by earnings growth and excellent management of working capital. We closed the year at a 3.2 times net debt-to-adjusted EBITDA, significantly ahead of our Fiscal '20 target.

With that, I'll transition it to Kofi to take you through our Fiscal '20 resultsand our 2021 financial assumptions.I'llthen come back at the end to highlight our Fiscal 21 priorities and how we intend to win.

Kofi, it's over to you.

Kofi Bruce

Thanks, Jeff, and hello everyone.

Let's start with our fourthquarter financial results on Slide 15. Net sales of $5 billion were up 21%, including a roughly 10-point benefit to reported net sales from calendar differences in Q4, including the 53rd week and the extra month of results in our Pet segment. Organic net sales grew 16% in the quarter, including the impact of elevated consumer demand driven by the COVID-19 pandemic as well as the extra month for Pet.

Adjusted operating profit increased 24% in constant currency, primarily driven by higher net sales, partly offset by higher SG&A expenses, including a 39% increase in media investment. Adjusted diluted earnings per share totaled $1.10 in the quarter and grew 33% in constant currency, driven by higher adjusted operating profit, higher after-tax earnings from joint ventures, and a lower adjusted effective tax rate, partly offset by higher diluted shares outstanding.

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