Greetings, and welcome to the General Mills Quarter Two Fiscal 2021 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Thursday, December 17, 2020. I would now like to turn the conference over to Jeff Siemon. Please go ahead.

Thank you, Frank, and good morning, everyone. We appreciate you joining us today for our question-and-answer session on our second quarter results. I hope everyone had time to review our press release, listen to the prepared remarks, and view our presentation materials, which were made available this morning on our Investor Relations website. It's important to note that in our Q&A session, we may make forward-looking statements that are based on management's current views and assumptions, including facts and assumptions related to the potential impact of the COVID-19 pandemic on our results in fiscal 2021. Please refer to this morning's press release for factors that could impact forward-looking statements and for reconciliations of non-GAAP information, which may be discussed on today's call. I'm here virtually with Jeff Harmening, our Chairman and CEO; Kofi Bruce, our CFO; and Jon Nudi, Group President of our North America Retail segment. We are in different locations, so we will make sure that technology works well for us and everything goes smoothly. And with that, let's go ahead and get to the first question. Frank, you can get us started.

Thank you. [Operator Instructions] Our first question comes from Ken Goldman with JPMorgan. Please proceed.

Hi. Good morning. Thank you. Two for me if I can. First, quickly, the trade load of pet food, was this the catch-up from under-shipments in prior quarters? Or was this in advance of what could be -- maybe an under-shipment next quarter or maybe just heightened demand? I'm just trying to get a sense of what this means for your third quarter since you didn't call it out as a headwind?

So, thanks, Ken. So, first, I'd start with saying, we had a tremendous quarter in pet food in general and a really good first-half of the year. And I think we've proven that despite the fact that we've lapped our food, drug, and mass expansion that we can continue to grow this brand. As it relates to the topic of how we shipped relative to demand, I would say, in the first quarter of this year, we shipped behind demand. Recall our growth -- our reported growth was 6%, even though our movement was probably in high single-digits. They're a little bit of the reverse in the second quarter, where our reported net sales growth was 18%, but our movement was probably in the double-digit range. How I think about it for the first-half of the year then, our reported net sales are up about 13%. Our movement is probably up about 10%, I would say, maybe 11%, but probably about 10% or 11%. So, we have shipped a little bit ahead of movement as it pertains to this year. I would still expect us to have a strong quarter in the third quarter. Our movements remain strong. We'll see what the reported net sales impact is. But I would expect our shipments to be strong and our movement to continue to be strong because what we're seeing in the category right now is mid-single-digit growth, really led by premiumization. And because Blue Buffalo is the best brand in that and the biggest brand in that segment, we're performing well.

Thanks. And then my follow-up, you're guiding to a flat EBIT margin year-on-year in the third quarter. But in 3Q 2020, you did have a pretty big hit from COVID in China. I think you said at the time that Häagen-Dazs China alone was 150 basis point headwind to your total operating profit margin in the quarter. Correct me if I'm wrong on that? And you had organic sales growth that quarter of 0%, which was pretty low for you guys. So, there was no fixed cost leverage. You turn around a year later, China is doing great. You have all this fixed cost leverage from another 7% organic growth quarter coming. Why shouldn't we be modeling an EBIT margin, maybe a little bit higher than that 16.2-ish percent number you did a year ago at this time?

Sure.

Ken…

Yes. Go ahead, Kofi.

Go ahead. Sorry. Sorry, Ken. Kofi here. Thanks for the question. As we mentioned in the prepared remarks, one of the things we're flagging is an expectation that we will see some of the external supply chain costs shift into Q3, which will be an offset to some of the expected leverage benefit we would expect to see with the volume that we're guiding to for the quarter.

Great. Thank you.

Our next question comes from Andrew Lazar with Barclays. Please proceed.

Good morning, everybody.

Good morning.

Good morning, Andrew.

Jeff, in your prepared remarks, you called out – and I think you did last quarter, too, but you called out some interesting results in China, where traffic in the company's retail shops is coming back towards normal levels. But sales of at-home consumption items like Wanchai Ferry still remain quite elevated. So, of course, every market is not like-for-like. But do you see the dynamic in markets like China and others, maybe Australia, that are well ahead of where we are in sort of getting the virus under control as reasonable indicators or corollaries for some of what perhaps gives you a little more comfort on why there's conviction in some of the at-home items staying elevated even as things kind of normalize here in the U.S.? I'm trying to get a sense of what takeaways you can conclude from some of those markets as it relates to the U.S.?

Yes. Andrew, it's a very good question and also a good memory from what we talked about in Q1. I mean, we – I put these in my prepared remarks, because there's a lot of speculation among us as CPG people on food, as well as investors and analysts about what's going to happen post-pandemic. And we're all looking forward to that day. But there are very few data points on what is actually happening, when governments aren't locking down restaurants and bars and things like that. And so one of the things we can – there are a couple of data points we can point to that don't guarantee what's going to happen afterwards, but at least there are data points of what's actually happened rather than speculation on what might happen. And one of those places is China, where restrictions have been lifted five or six months ago, and we're still seeing slight declines in our foodservice business. While our Wanchai Ferry dumplings business, which is a frozen business at-home, remains up double digits. And while it's not up as high as it was at the beginning of the pandemic, it's still up double digits and significantly above where it was pre-pandemic. And we think that's important, because at the very minimum, what it points to is the consumer eating habits, while they may change from where they are now once we have a vaccine and once we're post-pandemic, doesn't necessarily mean they're going to go all the way back to where they were before, or at a minimum not going to go back as fast. We're seeing a little bit of the same thing in Australia, where our current movement in Australia is not what it was at the beginning of the pandemic when they were on a lockdown. But we have seen growth in our business in Australia, even in the last few months as the restrictions have been eased. And so, we point these things out and I point these things out, because while there's a lot of speculation about what might happen, there are at least a couple of places where we're watching what is happening. And that would point to continued levels of pretty high demand even once we're – we have a vaccine and once the lockdown and restrictions have been lifted.

Okay. Great. Thanks for that. And then just quickly, you discussed not yet having had the opportunity to kind of fully replenish retail inventories in a lot of areas as consumptions remain pretty elevated. Would you anticipate more of that retail inventory refill to be able to happen in fiscal second-half, such that sales maybe broadly, call it, in North America Retail, could be ahead of in-market consumption? Or are we still at a place where significant refill of inventories at retail is just tough given where consumption levels remain? Thanks so much.

Yes. Andrew, let me start by -- let me start with this question. I'm going to pass it to Jon Nudi for specifics on North America Retail. I would say, in general, for this quarter, as I look at our whole enterprise, we really haven't built inventories in the second quarter. But it really does depend on the segment. So, for example, we talked a little bit about Pet, where we did ship ahead of demand and rebuild pipeline. In the consumer convenience and foodservice is the opposite, where because of school closings and all the rest, we -- certain distributors aren't carrying as much inventory. And we probably are a little bit -- our RNS is behind demand for the quarter. And in North America Retail, because our movement was about 9% and our shipments were about 9%, we saw very little movement. But maybe it'd be helpful for Jon Nudi to kind of weigh in on maybe what we saw in Q4 last year and Q1 and 2 and then kind of what the implications are for the rest of the year.

Great.

Yes. Thanks, Jeff, and hi, Andrew. In terms of North America Retail, we did ship in Q4 of fiscal 2020 about 9 points -- shipments lagged consumption by about 9 points. As we move through the first-half of fiscal 2021, we were able to replenish about 4 points of that gap. So there's still about 5 points to make up. And we do believe by the end of the fiscal year, we'll get there. The majority of our categories were actually in pretty good shape from a capacity standpoint and a service standpoint. But we have a few that we're still -- have some significant issues with, things like soup and dessert mixes, auto pasi taco shells. We do believe we'll get better through Q3. And by the end of Q4, I think we'll be back to where we want to be from an inventory standpoint.

Thanks everybody.

Thank you.

Our next question comes from Laurent Grandet with Guggenheim. Please proceed.

Hey, good morning, everyone.

Good morning.

Yes. Good morning. I do have some questions on pet food. So wet pet food was plus 25% in the quarter; treats, up plus 40%. With the addition of pet food and wet cat food, I mean, what to expect, I mean, for wet pet food, I mean, this coming calendar year? And also, I think you said in the past that you would be launching new treats at the beginning of the calendar year. Could you please update us on this initiative, please? Thanks.

So Laurent, as I think about our pet food business, I mean, one of the things I'm most pleased with is that we're growing across our different segments. So if you look at it by product type, if you look at dog food, whether it's wet dog food or dry dog food or dog treats, we're growing in all those segments. If you look at cat food, whether it's dry or wet or treats, we're growing in all those segments. Then if we look across channels, we're actually growing across all the channels we participate in. We're growing in the food, drug and mass channel. We're growing in -- we actually returned to slight growth in specialty. And we're actually growing quite a bit in e-commerce. And so I think that speaks to the underlying health of our pet food business when we can grow in all the different segments, whether there's consumer segments or whether it's in the channels we compete in. When it comes to how we're going to grow forward, I mean, certainly, the premiumization of pet food and the humanization of pet food is a trend we see coming. We're really excited about this tasteful launch. And it's a – pet, cat, wet food is a $5 billion segment. And we probably have about a 2 or 2.5 share of that segment, whereas, our dog dry is 10 shares. So we have a lot of ground to makeup. And what we're introducing in the marketplace is going to taste great. And we know that pet parents of cats, they want to feed their cats something in wholesome and natural, but they also need to taste good, because frankly, cats are picky eaters and certainly they can be. And so we're excited about that. When it comes to treats, we are -- we do have some treat launches lined up here for the third quarter. So we're launching those as well. We also have some more innovation in our pipeline, both on treats and in the cat food area. And so we're pretty bullish about our ability to continue to compete effectively given what we see in our innovation pipeline. And frankly, the continued premiumization and humanization in the pet food category.

Thanks, Jeff. And if I may, I’ve have got a second question on Europe. Sales are improving in Europe. And you mentioned in your prepared remarks, I mean, Old El Paso and Häagen-Dazs being a major element of that recovery. So now, actually, we saw also trends improving in Yogurt. Could you please, I mean, provide us some more business update about that significant piece of your European business?

Yes. So I'm really pleased with our European results. I mean, we grew share broadly in France. We grew share in Australia, and we held share in the UK. So our European business is doing well. The things that led to growth, as you say, are our Häagen-Dazs business and our Old El Paso business, which have good margins, which is why you see our profitability, up in the quarter outpacing our sales growth. But our Yogurt business, particularly in France, continues to grow. I'm really pleased with the performance of our French Yogurt business. We're growing share, but we're also growing in the absolute. We're just not growing as fast as we are in Häagen-Dazs and in Old El Paso. But we are growing our Yogurt business, particularly in France. In fact, our, Yogurt business throughout the world with the exception of the UK where we discontinued a sub-line in adult yogurt. Outside of the UK, whether it's Canada, whether it's the U.S., whether it's France, our biggest markets, we're actually growing our market share in Yogurt. And so we feel good about our performance there.

Thanks, guys, and happy and safe holidays for you.

Thank you.

Same for you.

Our next question comes from Alexia Howard with Bernstein. Please proceed.

Hello there. Can you hear me okay?

Yes.

It's fine.

Good morning, everyone. So sticking with the European theme, I can't help but notice that in the U.S. Retail segment, you've obviously got very robust takeaway and would expect given the pandemic, things are going very strongly there. Europe looks kind of more normal. The sales growth is not so big. I'm just wondering structurally, what the differences are between these two markets? And why we would be sticking to things out through the pandemic so differently between the two regions?

Yes. It's a very fair question, Alexia. Let me try to unpack it for you because -- and it's a fair question. When you look at our retail sales in Europe during the quarter, they're up 11%. When you look at our retail sales in the U.S., they're up 9%. So actually, if you look at retail sales of branded products, what we're seeing in Europe is very similar to what we're seeing in the U.S. Now we have some product portfolio differences like a big Yogurt business in Europe, and it's smaller in the U.S. But we're seeing our retail growth about the same. Remember, though, that as you look at our results for Europe, our European business also contains a reasonable sized foodservice business. So think about Häagen-Dazs shops and our foodservice dough business, which are not contained in our North America Retail businesses. Also, we have some other businesses that we bought with Yogurt and with Dough and other things and corn, some private label businesses, which are not also growing not as fast, which obviously we don't have in the U.S. So, if you look at strictly retail-to-retail, I would say, Europe and the U.S. are behaving quite similarly, but we have some other businesses in Europe that would overlap into the foodservice area and a little bit in private label that drags down the overall sales result, but with still good profitability in Europe.

Very helpful. Thank you. And then as a follow-up, for most [Technical Difficulty], obviously, that was -- on in the early part of the pandemic. Just curious about by the promotional [Technical Difficulty] is less is coming back. Are the retailers expecting you to spend back a little bit more than you normally would do because they want some of that money back that wasn't spent earlier in the year [Technical Difficulty] but like to talk about those dynamics and then I'll pass it on. Thank you very much.

So, Alexia, this is Jeff Siemon. I think I heard promotional activity in our retailers looking for us to spend back or spend more incrementally. I think, it was a bit choppy, but I think that was the question?

Yes, Jon Nudi, do you want to pick up on that?

Yes, absolutely. So, for the U.S., in particular, in Canada as well, we're seeing less promotional activity, really through the first half of our year. It's primarily driven by a decrease in depth of promotion. So, frequency looks pretty similar across the majority of our categories. But again, promo frequency is down in capacity-constrained categories, though. So, again, it's really a category-by-category dynamic that's going on. Things like soup, we chose to pull a significant amount of merchandising, really through our first half to make sure that we had product available as we get into key season. Desserts would be the same thing as well. So, as we move to the back half, we think in the majority of our categories, you're going to see promotion levels normalize versus what we've seen prior to the pandemic. I think we'll still see lower levels of depth of discount in some of the categories that are capacity-constrained. And I'll tell you; again, it's a balancing act. Obviously, we want to be competitive. Our retailers want to be competitive. But I think everyone wants to do it profitably as well. So, it's a dynamic discussion that's going on with our retail partners and something we'll continue to assess as we move through the back half of the year.

Right. Thank you very much. I will pass it on.

Thank you.

Our next question comes from Robert Moskow with Credit Suisse. Please proceed.

Hi. I had a couple of questions. Jeff, the first one was on e-commerce. I've seen some predictions that e-commerce could be as much as 20% to 25% of the grocery industry over time. And I think that's based on the investment that the retailers are making and the expectation that consumers enjoy getting the convenience during the pandemic. Can you talk a little broadly about how your business model might change if that becomes that big of a penetration? Or does not much have to change? We just have kind of kick up with retailers' demand?

So, Rob, let me -- I'll provide a little back-to-start perspective, and then we can talk about what happens in the future. I mean 18 months ago; about 5% of our business globally was through e-commerce. And in 18 months, it's now jumped to 10%. So, it's doubled over that period of time. So, a pretty significant change in a short period of time. And that is certainly true of our U.S. business, but it's also true of what we're seeing in China and Korea and Europe as well. So, it's a fairly global phenomenon. As far as where it goes, I mean, I guess the other historical perspective I would also provide is at this point in time, even though 10% of our business is through e-commerce channels, at least here in the -- particularly here in the U.S., our biggest business, about 85% of those sales actually go through store still. And that's important, because up until this point in time, we certainly haven't had to change our model very much, because most of our e-commerce sales still go through stores and grocery stores here in the U.S. or Häagen-Dazs shops in China. And so our model hasn't changed much. I don't think over the coming couple of years, our model is going to be – is going to change very much because the click-and-collect model, where consumers pick things up themselves, is so much more profitable for our retail partners. That model, I think, is going to be a – still be a predominant one in the near future. How it looks five years from now? I mean, we'll see. I do think that e-commerce will continue to grow. I think it will continue to evolve. But I would tell you, at least in the near term, I think we're very well positioned. We over-indexed in our categories because we've got great brands and we've got really good capabilities. And the business model for us is not very different than what we've seen before.

Okay. Great. And a follow-up for you, different subject, a lot of us are trying to figure out the cost profile of the industry getting into fiscal 2022. And I would imagine some costs that you had related to COVID mitigation of plants would come down. Is there any way to broadly think about your cost profile like a year from now? And what costs might come out? And maybe even comment on other efficiencies that you're looking at? Thanks.

Kofi, do you want to tackle that one?

Absolutely. And I'll try to steer clear of getting too deep into fiscal 2022, given a humble respect for the uncertainty of the environment we've got right in front of us. But I think you have the general structure, right. There are certainly costs that we have been bearing as we deal with some of the health and safety protocols to support safe operation in this environment. Some of those could potentially go away. But I think the other and more important is, as you think about the operational costs that we're incurring to service higher levels of demand, the way that we have pursued supplementing our capacity, allows us to scale down to the extent that demand comes off its peak, even if it remains elevated. So, I think we've left ourselves with agility to not build a lot of these costs into our structure. So, I think that's the posture we've taken as we've looked at how to service demand in this environment.

Thank you.

You bet.

Our next question comes from Bryan Spillane with Bank of America. Please proceed.

Hey, good morning, everyone. My question is, if we're – go into a scenario, where demand remains elevated for the next few years. If we look at North American Retail and the mix of business now, like Meals and Baking has really driven a lot of the growth or the extra growth, I should say. Would you expect the mix to change, so if we kind of transition to kind of a new normal where there's more flexibility, people working at-home, and we're kind of past the pandemic? I'm just trying to understand whether or not you think the mix of what's driving the growth in North America Retail would change going forward? Or do you think that things like Meals and Baking would continue to stay at elevated level?

That's a – Bryan, that's a good question, an important one and one that – to be honest, we're trying to figure out the next quarter and what our mix is going to look like. I will tell you though that, what I do see is that there are certainly a lot more people have been introduced to baking. We know that household penetration has especially increased among young families, and especially among Hispanic families. And so, we know that people have baked more and they're going to be more confident in baking, which would point to perhaps baking remaining elevated. To the extent that people work from home that would speak to the breakfast occasion or lunch occasion as occasions that will have the opportunity to benefit longer term. And so, it is possible that our mix changes. We'll have to see when we get there. What I would like is that, our meals and baking businesses here in the U.S. are -- the margins are really good on those as they are in cereal. And so to the extent the mix changes, I think we would still have an opportunity to grow profitably. And so clearly, we're all interested to see what's going to happen in F 2022 and beyond. It's a little bit early to call, but I am confident that should we see a change in mix that we can navigate in that way that we can produce -- hopefully produce some growth, but also maintain profitability as we do it. Q – Bryan Spillane: All right. A – Jeff Harmening: Thank you. Q – Bryan Spillane: Have a great holiday everyone. A – Jeff Harmening: You too.

Our next question comes from David Palmer with Evercore ISI. Please proceed. Q – David Palmer: Thanks. Good morning. I wanted to talk about reinvestment in growth. I know it's a broad topic. It could be advertising. It could be other capabilities. But, how are you thinking about that? Obviously, you have opportunity to do that this year, even stretching back to fiscal 4Q of last year. But what is the level of that reinvestment in fiscal 2021? And what is that supporting? And any color would be helpful. And I have a quick follow-up. A – Jeff Harmening: Kofi, you want to take that one? A – Kofi Bruce: Sure. Just let me frame out -- as you look at, in particular, some of the brand-building activity that you would look at through media, we're up roughly double-digits through the first half in terms of support behind key platforms and key ideas. We do continue to watch with a hawkish-eye the return on investment on those brand-building activities. And I think the capabilities, as you think about those, in particular data and analytics, those are coming through in our admin line. I would expect those to be investments that have a payoff profile probably over the intermediate term. So this is really about setting up sustainability of some of the growth trends and being able to ensure that we have a good shot at holding on to some of the penetration gains that we're seeing in this environment. Q – David Palmer: I think there is almost a cynicism or skepticism out there for people watching the food space. They see the food companies -- and Mills was part of this. They cut back on advertising spending during much of the 2010s. And there's going to be this reinvestment now. But, I think the concern or the expectation is that maybe advertising doesn't work for these categories or it doesn't work like it used to. Are you doing things differently in the way that you're reinvesting now that you feel like the ROIs will be better? And any color there would be helpful. Thanks. A – Jeff Harmening: Yes. David, yes, I read your report. And I don't agree with all of it, but I respect the fact that you put out there what you think. We've measured ROIs for a long time, and we think we're pretty good at it. And if you're asking whether advertising has changed over time, the answer is, of course, it has, because there are no longer three channels in the TV set. And you can advertise in a variety of formats, whether it's through gaming or Instagram or Hulu or what have you. And so, of course, advertising has changed in terms of how people consume media. What hasn't changed, though, is what drives ROI. What drives ROI is marketing behind big brands on really good ideas that people care about, like heart health on Cheerios, like Jennifer Lopez marketing Yoplait and calcium on yogurt in places where people are going to watch it. So we advertise Totino's through gaming, because that's where people are -- that's where their eyes are, and that's where they are going on Totino's. Advertising Honey Nut Cheerios heart health on gaming probably wouldn't be the best idea. And so those are the things that I mentioned, big brands, great ideas that people care about and where you put it, that's actually remained the same. What's changed is that, where people go for information. And so we're following that just as everybody else is. What I think is different and probably underappreciated about, what we have is we have a lot of first-party data through bettycrocker.com and pillsbury.com and Box Tops. And when we combine, what we can do with that through data and analytics along with great brands and really good ideas, we're confident that we can generate good ROIs.

Great. Thank you.

Yes.

Our next question comes from Faiza Alwy with Deutsche Bank. Please proceed.

Yes. Yes, hi good morning. So a couple questions around topics that have already been discussed a little bit. The first one is just, Kofi, around margins. I was hoping that you could help quantify some of the puts-and-takes on the gross margin line. And I think in 4Q, you had said that you had incurred around $100 million of COVID-related costs. And you talked about those extending into fiscal 2021. So I was wondering if you could quantify how much of those have extended? And how much of these might stay post-pandemic. And maybe there has been some benefit from internal operating leverage. I know we've talked about lower promotions. Maybe there's some positive mix, because some of your higher-margin categories have been growing faster. And raw materials seem to have raw material pricing, there's been some favorability there. But I was hoping you could just unpack some of these factors. And what you've seen in the first half. And again, how we should think about those factors in a more normalized environment?

Sure. Sure. Let me just give you a sense here that the kind of -- in order of magnitude, the way to think about the cost structure on gross margin, we are expecting about 3% input cost inflation and continue to track to roughly that. Our higher operational costs to service demand in this environment, which is one of the categories that we would have flagged is being linked to the pandemic would follow that. And then, brand capabilities and investments, and then the health and safety costs also were linked to the pandemic. I think, candidly, it is getting harder to separate the COVID related costs. So we have not been doing so this year, in part because, COVID impacts, it permeates so many areas of our business, and there probably is a level of visibility that is hard to get much more granular than we have been. I think you're right, in the call about mix of business, certainly leverage, those things certainly help the margin profile, as we're seeing a lot of growth in our highest-margin businesses in pet and North America Retail driving a lot of the company's growth and that accreting to gross margin mix.

Okay. Okay. Thank you. And then just a follow-up. I think, Jeff, you mentioned in your prepared remarks that you have, sort of, incremental flexibility around bolt-on M&A and share repurchases at the right time. And I was hoping you could expand on that. So, are you waiting for the pandemic to essentially go away before you take some actions around on the M&A front? Are you more active in the M&A market than you were maybe a year ago? I know you previously talked about some type of portfolio optimization or some divestments. And are there any particular categories where you would maybe like to expand in? So, just more color around those topics.

Sure. Let me answer it kind of top-line. And then Kofi, if you want to come in and answer anything in more detail, please feel free to jump in. I would say, as we think about capital allocation, obviously, the first call is to the business. And we've increased our capital spending this year behind some nice growth projects, especially in cereal and fruit snacks and Mexican food. The second thing we said, we would do is, once we get our leverage down was to increase our dividend, and we've increased our dividend rate by 4% so far this year. So, we've done that. And so then it begs a question, what is going to happen going forward? The first thing I would tell you is that we would hope to get to a more -- what we would consider to be more normal capital allocation process now that our net debt-to-EBITDA ratio is in about the 2.9 range. So, it gives us a lot of flexibility, a lot of different ways that we can create value for shareholders. If we see some -- we'll continue to reshape our portfolio, and that's both on the acquisition front and the divestiture front. And so to the extent we see bolt-on acquisitions that we think will be accretive to our growth and good for shareholders, we now have the flexibility to do that. If on the other hand, there's nothing that we see on the horizon on the M&A front, we now have the flexibility to buy back shares if we need to do that. We don't need to necessarily wait for the end of the pandemic before we do either M&A or share buybacks. But now we have the flexibility on our balance sheet to resume those kind of activities and to create value for shareholders in a variety of ways, which we feel great about. And I think we've proven through our M&A and Blue Buffalo that we can add value through M&A. And clearly, share buybacks are something that can add value as well. So that would be the topline. Kofi, anything you want to add to that? A - Kofi Bruce No, I think we continue to be very pleased with the progress we're making on debt deleverage. And so I think as we look at that as the gate that probably most matters, we are very quickly getting back to a place where our capital structure is in the right long-term target zone. And then I would just also add that we do have an existing share repurchase plan with a fair amount of authorization remaining up and standing. So, there really isn't any additional gates should we decide that share repurchases make sense.

Perfect. Thank you so much.

You bet.

Our next question comes from Jason English with Goldman Sachs. Please proceed.

Hey. Good morning, folks. Congrats to another strong quarter.

Thank you.

I guess I want to come back to the gross margin question. And I apologize; I got a little bit distracted by my son in the middle of your answer. So, you may have actually commented on this. But I think I heard you in response to -- maybe to Ken Goldman's question, on terms of margins going to flat next quarter mention external costs shifting into next quarter. So, I guess, how do external costs shift? I would think that they're just kind of there, if you're using external providers. And are you effectively saying that it's going to be gross margins that stall out the margin progression as we go into next quarter?

Jason, I totally get the interruption from your son. I've had them even on investor calls. So I totally get it. And thanks for your question. Yes, so as you think about next quarter, the way to think about external supply chain cost shifting is that, we were able to service more of our demand through internal capacity in Q2. We didn't need to rely as much on it. But as we go into Q3 with an expectation of demand remaining elevated and recognizing and linking to the fact that we didn't see as much inventory replenishment in North America retail, we would expect to have to lean more heavily on external supply team in Q3, as we expect to make some progress against that inventory rebuild. The other component to your point, so most of that would – outcome at gross margin that would be potentially some additionally cost that come through at the admin line as we advance some of the investment in capability.

Thanks. That's helpful. And one more quick question on pet food. First, congrats on the strong quarter results in pet food. It certainly surprised me more robust than I was expecting. Can you give me a performance by channel? Like, how are you doing on e-com versus Pet Specialty versus what we see in the Nielsen-measured channels?

Did you get disconnected as well?

No. We're still on.

You are disconnected we will be back…

Hey, pardon me. We're returning to reach Mr. Siemon back.

Can you hear – this is Jon Nudi. Can you hear me?

Can you hear me, Jon, you are there?

I think I heard Jeff still talking. I think you all are on.

I can’t hear Jeff.

We’re trying to reach Jeff back. Thank you.

Kofi, do you want to take a crack at that answer?

Yes. Yes, sorry. Just want to make sure, I am still on, so question was kind of our channel. As we look at our Q2, we saw Pet Specialty probably lagging the other two channels; e-commerce, up double digits as we look at the shape of our business. That's about one-third of our sales in Pet, and FDM at almost 40%, as we look at the measured.

Got it. The 40% FDM. Got it. Thank you. I appreciate it. Best of luck. And I hope we’ll get Jeff back soon.

Yes. Yes, sorry about that.

And we're back.

Okay Frank, we can go ahead with the next question.

Our next question comes from David Driscoll with DD Research. Please proceed.

All right. Great. Thanks a lot. And glad you guys are back. So, I wanted to ask a little bit more about pet food. Jeff, when you bought the business, there was guidance from the old team at double-digit top line growth. When it became part of General Mills, you stuck with that double-digit guidance. But there was just enormous skepticism on the ability of that business as part of General Mills to keep going. I think in your answer to one of the first questions, you said underlying demand is running 10%, 11%. Are you able to say that BLUE has some runway here to continue to see that double-digit growth? And then can you just give us -- you've mentioned a bunch of things so far in the script, but can you just kind of hone in on some of the pieces here that would give us that double-digit growth for some time into the future. And what I like about this particular question is, I hope this is not a pandemic related question, and that you guys do have some very clear thoughts about it, because it says -- I think you guys have said yourself the pets don't eat at restaurants. So hopefully, that makes sense? And then I've got a follow-up, please. A – Jeff Harmening: Yes. First, let me go with what I know, and then we can talk about what we think. What I know is that the growth in Blue Buffalo really isn't pandemic-related, and an even though, anecdotally adoptions are up for pets and certainly among millennials. That's actually was not driving the growth of the category, and it's not driving the growth of Blue Buffalo. The category is being driven by the premiumization of pet food. And we know that because the dollar growth is up mid-single-digits in the category, and the pounds are only up low-single-digits. So that delta continues to be important as pet parents switch from whatever they're feeding their pets before and the more premium pet food. And so that's what we know and we know that Blue Buffalo is a great brand. We also thought when we bought Blue Buffalo that we'd be able to execute well with our rollout of the Food, Drug and Mass channel because we've done it with Annie's. And we got a lot right. We got a few things wrong, but we learned a lot through Annie's. And so we're going to apply that to Blue Buffalo. And so, now we've got a really good all channels business. And one of the things we learned with Annie's was that, great brands travel across channels and that just because you have something in a grocery store, it doesn't mean that every consumer knows that it's there yet. It takes a long time to gain awareness. There are some places that we've looked, we probably only have 20% awareness in some accounts that Blue Buffalo actually exists at that supermarket chain. And so, that has given us confidence, not only that we could execute a Food, Drug and Mass rollout, but that Blue Buffalo would be good across channels and that we continue to grow, even once we gain full distribution because we've seen this movie before on Annie's. And that's what's playing out. As to how we grow into the future, I can't promise that we're going to grow double-digits in the future. We had a very good quarter this quarter. I think we'll have a good quarter coming up. But what I can tell you is that, I am confident we have the best premium brand in the pet category. I'm confident that the premiumization of pet food will continue so that we're very well positioned. We have a robust pipeline of renovation and new products and that we can continue to grow in Food, Drug and Mass. And so all those things lead me to believe that not only has been Blue Buffalo been a good acquisition for General Mills, but that it'll continue to perform well. And whether that's high-single-digits or double-digits will remain to be seen. But I think that we were all confident when we bought Blue Buffalo that we could do a lot of good things with this business. And we're at least as confident now as we reward the day that we bought it three years ago. Q – David Driscoll: Well, you certainly get big congratulations from me on the performance there. We've seen other businesses and other companies struggle. So, good job on that one. My follow-up question is on -- staying with Pet is on the marketing model. BLUE used to have a really sizable investment in in-store promoters, the so-called Pet Detectives. And on top of this, the brand had industry-leading levels of advertising. How has that changed with the pandemic and the pressures that we've seen on pet specialty stores. Is -- fundamentally, have you shifted monies from those in-store promoters to the advertising side? Is the total budget down? I just have lost sight of that a little bit and like to understand how you're going to keep your foot on the gas pedal on this business going forward?

Yes. So the pandemic's changed a lot of things, including the ability of consumers to get into stores. What I will say is that -- what hasn't changed for Blue Buffalo and what will not change going forward is our commitment to keep educating pet parents on the value of Blue Buffalo. And as you say, there has been a huge in-store model to that historically. And we wouldn't see get -- necessarily getting away from an in-store model, but we began to supplement that, not only with TV advertising but also digital advertising and digital marketing. And so what I think you'll see is our dedication to growing the brand and growing our marketing will continue. How that marketing mix will change over time. And we think that an omnichannel approach to marketing where you have some in-store presence, but you can also meet pet parents where they are one-on-one online is going to be increasingly important part of our business. And we've done a really good job with North America Retail in that regard. And we're applying some of what we learned into Pet and plowing some new ground. We'll probably talk about that even more, maybe a quarter from now. But I think it's a really good question. What I can tell you is that the marketing model will continue to evolve, as our ways of reaching pet parents evolve, but our dedication to building the brand will remain unchanged.

Appreciate the thoughts. I'll pass it along. Thank you.

Our next question comes from Rob Dickerson with Jefferies. Please proceed.

Great. Thank you. Jeff, maybe just a broader question just around the strength of brands, right, and I guess more specifically, your brands and the market share you've been able to hold or take within the U.S. really over the past nine months vis-à-vis private label, right? There's been a lot of discussion in why private label has maybe lagged some of these stronger brands or master brands. Upfront, it seems like it may have been supply chain issue. It would seem like the supply chain issue maybe has drifted a little bit, speaks more broadly and positively to brands overall. But then at the same time, we hear companies saying, okay, well, if we go into a recession, consumers will continue to look to consume food at home because it's a less costly option. But it also sounds like you're suggesting they still won't go to private label. So I'm just trying to right-size, how we should be thinking about brands overall with respect to the economic backdrop, and then compared to private label. Sorry. There's a lot there. But thanks.

There's a lot there, because there's a lot there. What I would say is that -- let me go back to the last Great Recession, because I was actually marketing during that. The first thing I would say is that, any time you see economic turmoil, the first shift that consumers have toward value is actually not the private label. The first shift really is from away-from-home eating to at-home eating, because the economics eating at home are a lot more favorable for consumers than the economics of eating away-from-home. So that's the first big shift that takes place. So you see the categories grow. Then within that, what we saw within our categories, during the last Great Recession, we actually held share through the Great Recession. Private label actually grew as well. Private label actually grew share. And where we saw the share of losses was from middling brands. And so that is -- that's one of the things we saw during the last Great Recession. What we've seen now is that in the categories in which we compete, not only here in the U.S., but in Europe and Brazil as well, is that we continue to gain market share because we've got good brand strength as well as good supply chains. Our retail customers see that we're driving growth in the majority of our categories and they want to see that growth continue. And at least so far, we've seen private label shares decline, whether it's in pet food or human food or -- even in Europe. And so what we -- then the question is, what comes forward and we don't see any reason why consumers won't continue to buy big brands. They may -- consumers may decide to shift to more to private label, but if what happens during the last Great Recession happens again in our categories, we'll at least hold share during that period of time. So, that's -- I mean I like to try to get back to what has happened because everyone likes to speculate about what will happen and I do, too. But I think it's instructive way to go back and look to see what has happened.

Okay. Fair enough. And then just kind of a follow-up question that's related. Obviously, really over the past five years, right, there's been an incremental push into ongoing SKU optimization, that just kind of -- that's kind of nature of the beast always. It seems like there's been maybe a little bit of an acceleration or kind of pull-forward of that just given everything that's been kind of at hand over the past nine months, let's call it. Do you kind of feel that -- when you speak with the retailers that they're really increasingly focused on those high-velocity, kind of, more scale, more profitable items, such that kind of those larger brands still kind of have the advantage relative to some smaller brands trying to kind of eke in, right, while -- obviously, there are a lot more moving parts now than there may normally be and that’s it. Thanks.

Jon, do you want to take this one?

Yes. Sure, Rob. A couple of things. I mean, I think, the variety of SKUs really needs to be looked at category-by-category. So, as you know, we -- or we put on hold a significant number of soup SKUs as we went into the pandemic. What we learned was some of those we can do without, but some of them are important because variety matters to consumers. So, you have to start with the consumer and really understand what they're looking for. The broader trend that we're seeing, though, particularly with retailers -- and Jeff mentioned that 85% of e-commerce is click-and-collect. So, those orders are being fulfilled from the shelf. And for the retailers to really be efficient and run the shelf well, both for the customers coming in as well as the customers driving through, they are moving to fewer SKUs on the shelf with higher velocity and for us, we think that plays well for our brands. Our brands tend to be number one or number two in the category. We've been focused on building our brands. And this is the third or fourth consecutive year in a row in North America Retail where we've grown share in the majority of our categories. So, we think we're set up well for the dynamic that's going to play out in the shelf in the future.

All right. Great. And happy holidays. Thank you.

You to Rob. Thank you.

Thanks, Rob.

All right. Frank, I think that's -- unfortunately, I know we didn't -- we weren't able to get to everybody on the queue, but I think, we're going to wrap it up here and wish everybody a very safe and healthy holiday. Thanks for spending your time. I appreciate the interest in General Mills and we'll be in touch soon.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.