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General Mills Inc  (NYSE:GIS)
Q3 2019 Earnings Conference Call
March 20, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter Fiscal 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday, March 20th, 2019.

I would now like to turn the conference over to Jeff Siemon. Please go ahead.

Jeff Siemon -- Vice President of Investor Relations

Thanks, Alliston, and good morning to everyone. I'm here with Jeff Harmening, our Chairman and CEO; Don Mulligan, our CFO and Jon Nudi, who leads our North America Retail segment, who'll joining us for the Q&A portion of the call.

And I'll turn it over to them in a moment, but before I do, I'll cover a few housekeeping items. A press release on our third quarter results was issued over the wire services earlier this morning 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 today's presentation lists factors 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 -- Chairman and Chief Executive Officer

Thanks, Jeff, and good morning, everyone. There are three things I hope you'll take away from today's call. First, we had a strong third quarter, with solid execution, leading to positive organic sales growth and significant operating margin expansion. Second, a year-to-date performance and fourth quarter plans give us confidence that we will meet or exceed all of our key fiscal 2019 financial targets. Specifically, we are raising guidance for full year adjusted diluted earnings per share and free cash flow conversion, and we expect net sales will finish toward the lower end of our guidance range and adjusted operating profit will finish toward the higher end of the range.

And third, our improved execution and strengthened performance this year reinforce our view that the balanced approach to top and bottom line growth centered on our consumer first strategy will drive long-term value for our shareholders.

Now, I'll turn it over to Don to walk through our financial performance in the quarter. Then, I'll come back to provide an update on our fiscal 2019 priorities and share a few highlights of our year-to-date performance.

Donal Mulligan -- Chief Financial Officer

Thanks, Jeff and good morning, everyone. Slide five summarizes our third quarter financial results. Net sales of $4.2 billion increased 10% in constant currency, including contributions from the Blue Buffalo acquisition. Organic net sales increased 1% in the quarter, holistic margin management savings, positive net price realization and mix, continued strong cost control and the addition of the higher margin Blue Buffalo business helped drive significant margin expansion in the quarter, resulting in adjusted operating profit of $730 million, up 25% in constant currency.

An adjusted diluted EPS of $0.83, increased 6% in constant currency, driven by adjusted operating profit growth, partially offset by higher net interest expense, adjusted effective tax rate and average diluted shares outstanding.

Slide six shows the components of net sales growth in the quarter. Organic net sales were up 1%, driven by positive net price realization and mix across all segments, partially offset by lower contributions from pound volume. Foreign currency translation was a 2 point headwind to net sales and the net impact of the Blue Buffalo acquisition and the divestiture of our La Saltena business in Argentina, added 9 points to net sales in the quarter.

Turning to our segment results on slide seven, North America Retail organic net sales were up modestly in the quarter, rounding down to flat. Our consumer takeaway trends improved in the quarter and tracked more closely to our shipments, with US Nielsen-measured retail sales flat versus last year and share gains in the majority of our top US categories.

Net sales results improved sequentially for all our US operating units. Growth on US Cereal and US Meals & Baking was offset by declines in the Canada, US snacks and US Yogurt operating units. This net sales performance benefited from recent innovation including, Pillsbury Sweet Hawaiian Baked Goods and positive initial results on Cinnamon Toast Crunch Cheerios. Plus, as we anticipated at our second quarter earnings call, stronger merchandising performance led to improved net sales results in US Cereal and US Snacks. And even with this greater merchandising, price mix continued to contribute 2 points to the segment's net sales growth.

US Cereal net sales exceeded our retail sales growth in the quarter, bringing year-to-date net sales growth in line with retail sales when adjusted for non-measured channels. US Meals & Baking net sales growth reflected strong performance on our key seasonal businesses, as well as growth on Totino's hot snacks, Old El Paso and Totino's and Annie's Mac & Cheese. Segment operating profit increased to 12% in constant currency, driven by benefits from cost savings initiatives, lower SG&A expenses and positive net price realization and mix, partially offset by input cost inflation.

In Convenience Stores and Foodservice, third quarter organic net sales increased 3% versus prior year. Our focused six platforms generated 4% net sales growth, led by strong performance on our Pillsbury stuffed waffle and Chex Mix snacks in Convenience Stores, as well as cinnamon rolls and other frozen baked goods in the Foodservice channels. Segment operating profit increased 15% in the quarter, primarily driven by benefits from cost savings initiatives and positive net price realization and mix, partially offset by input cost inflation.

Third quarter organic net sales for our Europe & Australia segment were down 2%, as declines on yogurt and the negative impact of a continued challenging retail environment in France were partially offset by growth on snack bars and ice cream. Nature Valley and Fiber One snack bars delivered another quarter of strong double-digit retail sales growth, as we secure distribution gains and brought successful innovation to market. Haagen-Dazs retail sales also grew double-digits as we expanded distribution on Stickbar, MiniCup and pint innovations.

Segment operating profit in Europe & Australia was down 1% in constant currency, driven primarily by higher input costs, including significant dairy inflation and currency-driven inflation on products imported into the UK, partially offset by benefits from cost savings initiatives, lower SG&A expenses and favorable net price realization and mix.

In our Asian, LATAM -- the Asia & Latin America segment, organic net sales increased 7% in the quarter. We drove double-digit retail sales growth on snacks in India and the Middle East, behind expanded distribution and compelling marketing on Pillsbury and Betty Crocker snack cakes. Nature Valley also performed well in the Middle East and Latin America as we continued to build distribution.

In China, our Wanchai Ferry business delivered another quarter of solid growth, driven primarily by Chinese New Year activations on core dumplings. Haagen-Dazs continued to grow across Asia and Latin America behind successful innovation, like new mochi and peanut butter flavors of pints and stickbars further development in e-commerce and continued expansion of Haagen-Dazs shops. Segment operating profit totaled $20 million compared to a loss of $2 million last year, driven primarily by organic net sales growth and lower SG&A expenses, partially offset by higher input costs.

For our Pet segment, third-quarter net sales increased 4% on a pro forma basis, on top of 15% pro forma growth in last year's third quarter. Significant growth in FDM and e-commerce channels was partially offset by declines in Pet Specialty. Segment operating profit of $73 million was $2 million below prior year on a pro forma basis, driven by plant start-up cost and intangible amortization. Excluding these two items, Blue Buffalo operating profit would be up high-single digits and margin up over 100 basis points versus last year.

Slide 12 covers our margin results in the third quarter. Adjusted gross margin increased 170 basis points and adjusted operating profit margin was up 230 basis points over the prior year. These strong margin results were driven by increased COGS, HMM savings, benefits from positive net price realization and mix, continued strong cost control in SG&A, and the addition of the higher margin Blue Buffalo business, partially offset by input cost inflation.

Slide 13 summarizes our joint venture results in the quarter. Cereal Partners Worldwide net sales increased 2% in constant currency, driven by solid growth in our Asia, Middle East and Africa, as well as Europe regions, partially offset by declines in Latin America. Haagen-Dazs Japan net sales were down 5% in constant currency, driven primarily by declines on crispy sandwich and stickbars varieties. Combined after-tax earnings from joint ventures totaled $12 million in the quarter, compared to $17 million a year ago, primarily due to our $4 million after-tax share of a restructuring charge at CPW.

Slide 14 summarizes other noteworthy income statement items in the quarter. Restructuring, impairment and other exit costs of $60 million reflected our recently announced global supply chain optimization actions, including the planned closure of our yogurt facility in California. We recognized a $35 million loss on the divestiture of our loss of our La Saltena business in Argentina.

Corporate unallocated expenses, excluding certain items affecting comparability, increased by $24 million in the quarter. Net interest expense increased $42 million compared to last year's total that included $16 million in one-time expenses related to the Blue Buffalo acquisition, which were excluded from adjusted earnings. The adjusted effective tax rate for the quarter was 19.9% compared to 15.2% a year ago, primarily driven by year-to-date adjustment during last year's third quarter related to US tax reform. And average diluted shares outstanding were up 4% in the quarter.

Slide 15 summarizes our financial results through nine months. Net sales of $12.7 billion increased 9% in constant currency. Organic net sales were flat to last year. We've driven year-to-date expansion in adjusted gross margin and operating profit margin, resulting in an 11% constant currency growth in adjusted operating profit. And nine month adjusted diluted EPS increased 3% to $2.39.

Slide 16 provides our balance sheet and cash flow highlights through nine months. Our core working capital totaled $498 million, up 12% compared to the same period last year, due entirely to Blue Buffalo's addition to our balance sheet. Excluding Blue Buffalo, core working capital was down double-digits, driven by continued benefits from our terms extension program.

Operating cash flow totaled approximately $2 billion compared to $2.1 billion in the prior year, primarily reflecting little less benefit from changes in accounts payable. Capital investments totaled $368 million and we've converted 113% of adjusted after-tax earnings into free cash flow, helping fund nearly $800 million in year-to-date debt reduction, and we paid $884 million in dividends so far this fiscal year.

Looking ahead to the fourth quarter, we continue to expect significant top and bottom line growth for Blue Buffalo, as we benefit from our launch into new FDM customers and the expansion of our Wilderness sub-line into FDM channels. We expect organic net sales growth to moderate from Q3's results, as North America Retail shipments are expected to return to modestly lagging retail takeaway as they did in the first half and as our other three legacy segments compare against their strongest quarterly sales growth performance in fiscal 2018. Finally, we expect fourth quarter margins to be down versus last year, reflecting the comparison against significant margin expansion in last year's Q4, as well as higher incentive compensation and brand building investment this year.

I'll close my portion of our remarks by updating our fiscal 2018 guidance, which you can see on slide 18. We now expect constant currency net sales and organic net sales to finish toward the lower end of our previous guidance ranges of 9% to 10% growth and flat to up 1%, respectively. We now estimate constant currency adjusted operating profit to finish toward the higher end of our previous range of 6% to 9% growth. Net interest expense is now expected to total approximately $535 million for the full year. Our full year adjusted effective tax rate is expected to be in a range between 22% and 23%, or 1 point below our most recent guidance.

We're raising our guidance for constant currency adjusted diluted EPS to range between flat and up 1% compared to the previous range of flat to down 3%. We're also raising our expectations for free cash flow conversion to at least 105% of adjusted after-tax earnings, which is ahead of our previous guidance of at least 95%. And we continue to project currency translation will be a 1% to 2% headwind to full year net sales growth, and will not have a material impact on operating profit or EPS for the full year.

With that, let me turn it back over to Jeff to give some color on our performance against our fiscal '19 priorities. Jeff?

Jeff Harmening -- Chairman and Chief Executive Officer

Thanks, Don. On slide 20, you can see the three priorities we laid out at the beginning of the year: grow the core; transition Blue Buffalo; and deliver our financial commitments. I'm pleased to say that through nine months, we're on track to achieve each of these priorities.

At Investor Day in July, we outlined five keys to grow in the core, including improving our US Yogurt and emerging market businesses, strengthening our innovation, stabilizing our US distribution and driving greater price mix. Year-to-date, we've driven improvement in each of these areas compared to our 2018 performance.

We've returned to share growth in US Yogurt, emerging market organic sales were up high single digits through the first nine months of the year, well ahead of last year's growth rate. We've improved our sales from innovation, we're growing our share of US distribution and we're driving 2 points of positive price mix year-to-date versus 1 point last year.

These results are translating into stronger retail sales performance in our US business. On slide 22, you can see that we've driven steady improvement in our Nielsen-measured sales results, with the two-year trend reaching positive territory in the most recent quarter. We're also competing more effectively within our categories, with year-to-date market share gains in seven of our 10 largest US categories. While we know there is certainly still more work to do, we are encouraged by the significant progress we've made since fiscal 2017.

With that as a backdrop, let me share some specific examples of our year-to-date performance against our grow the core priority in each of our platforms around the world. We're encouraged by the improvement we're seeing in US Cereal, where category trends have improved consistently since 2017. We're also pleased with our US Cereal retail's performance in the third quarter, with measured channels' retail sales up 1% as we restore more normal merchandising levels and through nine months we're gaining market share and expanding our position as the number one manufacturer in the category.

These results have been fueled by strong innovation, holistic brand building activations, and benefits from price mix. Five of the top six new products in the category are Big G cereals, including Cheerios Oat Crunch, Cinnamon Toast Crunch Cheerios and Fruity Lucky Charms. Retail sales for our Chex franchise are growing year-to-date, thanks in part to our holiday season partnership with the Grinch movie and our strategic revenue management actions have helped drive 1 point of positive price mix for our Cereal business this year.

Beyond US Retail, we're also growing Cereal in our Convenience & Foodservice segment, with net sales up low-single digits through the first nine months of the year, led by strong performance in the K-12 schools.

Now, let's turn to the US Yogurt, where we've grown market share year-to-date. While our overall retail sales are below last year, we've positioned our portfolio for future growth, with our focus on fast growing simply better yogurt segment and our core Go-GURT and Original Style Yoplait product lines. Simply better is a small, but rapidly expanding part of our portfolio and we hold the number one position in this segment.

Our year-to-date retail sales grew at a strong double-digit rate behind Oui by Yoplait and our new Oui Petite launch. Go-GURT and Original Style Yoplait represent more than 50% of our portfolio. Year-to-date retail sales for these product lines were up low-single digits, driven by Go-GURT equity flavors and Dunkers innovation, as well as Original Style Yoplait and more real fruit news and all-family consumer messaging.

Our Greek and Light products were down double digits through nine months as we right-size distribution on shelf and for the remainder of our portfolio, including product lines such as Yoplait Whips and our Kid Cup business, year-to-date retail sales were down, but we expect trends to stabilize as we adjust our product assortment. Overall, we feel good about our US Retail Yogurt improvement this year and look to continue that improvement in fiscal 20.

Outside US Retail, we generated low single digit net sales growth for Yogurt in Convenience Stores and Foodservice channels in Q3, driven by our a Parfait Pro product that provides an easy way for operators to prepare on front offerings like coffee coolers.

We also like the way we're competing across many important regional businesses this year. In the US, Pillsbury refrigerated baked goods had a strong key baking season, with retail sales up 2% year-to-date and 3% in the latest quarter, fueled by our Made at Home media campaign and strong innovations like our new Sweet Hawaiian biscuits and Crescent rolls. In Convenience Stores and Foodservice, year-to-date net sales in the frozen baked goods platform were up mid single digits, driven by expansion of our frozen product line, including cinnamon rolls, cookies and puff pastries across all their channels.

Totino's Hot Snacks retail sales were up 5% through nine months, driven by a fully integrated video game partnership campaign and our expansion of value size offerings. And we continue to generate excellent growth on Wanchai Ferry in China with retail sales up 7% so far this year due to strong activation on the core, innovation and compelling marketing, like our New Year's ritual consumer campaign around the Chinese New Year holiday.

The second component of growing the core in fiscal '19 is increasing growth in our four global accelerate platforms. Global retail sales for Old El Paso, were up 3% year-to-date, led by the US, where retail sales increased 7%, due to gains in distribution and consumer investment. Our Making Taco Night Easy campaign continues to resonate with consumers and our highly successful in-store Old El Paso taco stand displays will be back in stores beginning in Q4 of this fiscal year.

Our broad portfolio of natural and organic brands resonates with consumers and positions us well to win across categories. Year-to-date retail sales increased 3%, with strong growth on Annie's Mac & Cheese and Fruit Snacks, as well as Muir Glen tomatoes, partially offset by decisions we've made to eliminate some unsuccessful category expansion volume.

On Annie's Mac & Cheese, we renovated our classic SKUs and increased our support behind the business, resulting in double-digit gains in distribution in retail sales. In fact, Annie's is now the number one boxed Mac & Cheese at a number of our customers. We're also driving solid performance on Annie's Fruit Snacks behind our new Sour Bunnies innovation. And we refreshed the packaging on our Muir Glen product line to showcase the premium nature of the products, which has translated into double-digit retail sales growth so far this year.

We continue to see two different trends behind our international and North America snacks bars businesses. International bars growth continued at strong double-digit rates. Europe & Australia is driving retail sales growth with strong in-store execution and distribution gains resulting in broad-based year-to-date share gains. Innovation has been a key driver to that growth, including Nature Valley Nut Butter biscuit lines, as well as Fiber One popcorn bars and cake bars.

In our Asia & Latin America segment, we had another strong quarter. In fact, we've doubled net sales in our bars business in Asia this fiscal year. This growth has been driven by the investments we've made in distribution expansion, innovation and consumer engagement. Pillsbury branded cookie cakes and pastries in India have been a cornerstone of this growth and we're building on that success by partnering with the Indian Premier League cricket in Q4, with an exciting lineup of in-store, on-pack and consumer promotions that feature some of the biggest names in the sport, just in time to kick off the season this coming weekend.

Retail sales for our US snack bar business were down mid-single digits year-to-date and we continue to work to improve our trends in this important platform. On Nature Valley, we are focused on improving the fundamentals and are looking forward to the launch of a new Krispy Kreme wafer bar that will start shipping in the fourth quarter.

Our Fiber One bars' performance in the US has remained challenged. As we mentioned on our Q2 call, we expect declines in the near term as we cycle through distribution losses especially on tail SKUs. Looking ahead to the next fiscal year, we have plans to renovate the Fiber One product line to increase its relevance with weight management consumers.

On a positive note, Larabar retail sales were up high single digits through the first nine months of the year, behind expanded distribution, innovation and brand support. And Protein One performance continued to strengthen as we've tapped into consumer need for on-the-go, great tasting snack bars with high protein and low sugar.

On Hagen Dazs, our final accelerate platform, retail sales through the first nine months of the year were up 12%, led by double-digit growth in Europe, driven by a MiniCup expansion in the UK and peanut butter innovation in both pints and sticks.

Now, let's move to the second priority this year, successfully transitioning Blue Buffalo into the General Mills family. We feel great about the progress we're making here and we're incredibly optimistic about the future of Blue, as we're still in the early innings of the pet food categories transformation toward wholesome natural products.

We remain on track to deliver double-digit top and bottom line growth for Blue Buffalo in fiscal 2019. Our FDM expansion is currently under way and is progressing as expected. I'll share more details on this effort in a moment. And we expect to see significant margin expansion for Blue Buffalo in Q4, driven by increased HMM savings, synergies, benefits from strategic revenue management actions we implemented earlier this year, and strong product mix driven by the FDM expansion.

While Blue Buffalo's quarterly net sales results have varied this year, driven by the timing of our channel expansion, we encouraged that the brand continues to win with pet parents. Aggregate year-to-date retail sales for Blue were up high single digits, and we've continued to gain market share in the category.

From a channel perspective Blue continues to drive strong performance and share gains in FDM. Through three quarters, Blue retail sales in FDM were up triple digits and we continue to grow and gain share, including importantly our first wave of FDM customers, where third quarter retail sales were up double digits versus the second quarter.

In Pet Specialty, year-to-date retail sales for Blue were down double-digits as we expected. This channel remains important for Blue and we'll continue to partner with pet specialty customers to bring variety, unique innovation and education to serve pet parents and the channel.

In e-commerce, which makes up roughly 25% of Blue Buffalo net sales, we saw category retail trends slow in the third quarter, still Blue's retail sales continued to outpace the category, leading to further market share growth. Blue's year-to-date e-commerce retail sales were up 24%, and we continue to see tremendous growth ahead in this channel as more pet parents look for pet food online where Blue is the number one brand.

Slide 32 provide some additional details about our fourth quarter expansion plans for Blue Buffalo. As I mentioned earlier, we're launching Blue into the new FDM customers in Q4, which will double the brand's ACV distribution by the end of the fiscal year. In addition, we're taking Blue's second largest pipeline, Wilderness, and making it available to FDM customers for the first time starting in March. The success we've seen with the Life Protection Formula line in FDM over the last 18 months as meant that Wilderness is being added incrementally across our FDM customer base. We expect the combination of launch of Wilderness into FDM and the expansion of Blue into new FDM accounts will result in sales growth of more than 30% in the fourth quarter.

In addition to growing our core and transitioning Blue Buffalo, we continue to have a good line of sight to achieving our third priority, delivering our financial commitments. The combination of significant COGS, HMM savings, increased price mix from our strategic revenue management efforts, strong cost and capital discipline, and continued improvement in our core working capital are translating to EPS and cash flow expectations that are ahead of our initial guidance from last July.

I'll close our prepared remarks this morning by reiterating today's key messages. We delivered a strong third quarter and with solid execution leading to positive organic sales growth and with significant margin expansion. We're doing what we said we'd do this year, and we're on track to meet or exceed all of our fiscal 2019 financial targets. And our results increase our confidence in our Consumer First strategy and our global growth priorities and reinforce our view that a balanced approach to top and bottom line growth is the right model to drive long-term value for General Mills' shareholders.

With that, let's open the line for questions. Operator, can you please get us started?

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Andrew Lazar with Barclays. Please proceed.

Andrew Lazar -- Barclays -- Analyst

Good morning, everybody.

Jeff Harmening -- Chairman and Chief Executive Officer

Good morning, Andrew.

Donal Mulligan -- Chief Financial Officer

Good morning, Andrew.

Andrew Lazar -- Barclays -- Analyst

Hi. Don, just a quick one for you. Just kind of back of the envelop math. It would seem that pricing in North America Retail, maybe because it could have accounted for maybe roughly one-half of the base business gross margin expansion that the Company saw in fiscal 3Q. Does this seen broadly right to you? And I think at CAGNY you had said that, maybe a higher portion of pricing moving forward would be of -- more of the list price variety and is that playing out broadly as you expected, including your thoughts on elasticity to volume? Thank you.

Donal Mulligan -- Chief Financial Officer

Sure. Yeah. As we -- we are delivering on the second half drivers that we outlined in our Q2 call, that we reiterated at CAGNY. And it's a combination of things, Andrew. It's increased HMM savings. We said global sourcing could drive higher benefit to us, we're seeing that come through. It is the product positive price mix that you referenced. We saw an uptick from 2% to 3% in the quarter, continued strong cost controls across SG&A, and the increased contribution from the higher margin Blue Buffalo business. So all those came through as we expected in the quarter. And I wouldn't necessarily pull one out. They are kind of equally weighted. I wouldn't pull one out as the particular driver, but they all benefited our margin and they all came through largely as we expected.

Andrew Lazar -- Barclays -- Analyst

All right. And then, elasticity, is that generally -- I think it was -- in North America Retail, it was positive 2% price mix, negative 2% volume. I don't know if that's roughly in line with how you expected it to play out or as improvements in Yogurt and snack bars continue, maybe that elasticity looks even a little less onerous as we go forward?

Donal Mulligan -- Chief Financial Officer

Well, I'll let Jon maybe speak to what we're seeing in the market, but if you look at our third quarter for North America Retail versus the first half, price mix was -- contributed 2 points again, but volume growth was 2 points better. So there was some strengthening of the volume, while we held our price contribution.

Jonathon Nudi -- Group President of North America Retail

Yeah. Andrew I'll just say, let's say, elasticities are playing out as we expected. And remember, obviously, we did take some car lot (ph) . We are really leveraging the full tool box of strategic revenue management as well, so pack price architecture as well as mix and promotional optimization. So, as you pull each of those levers, they have a different impact on volume and I would say, our models keep getting better and better and they are very much in line, our results are in line with what we expected.

Andrew Lazar -- Barclays -- Analyst

Thanks everyone.

Operator

The next question comes from line of John Baumgartner with Wells Fargo. Please proceed.

John Baumgartner -- Wells Fargo -- Analyst

Good morning. Thanks for the question. Maybe for Jeff or Jon, just wanted to come back to North America Retail, just given the improving yields in baseline takeaway and the elasticity that Andrew mentioned, but I guess in light of the shipments versus takeaway noise in Q4, can you speak to the performance just in light of the focus on non-price promo this year? I guess to what extent are you seeing improvement in terms of shelf sets or quality merchandising? And I guess what metrics should we be looking at in gauging the conversion of those efforts going forward?

Jonathon Nudi -- Group President of North America Retail

Yeah. Just generally, I guess, as we look at our business, I mean we feel like the fundamentals continue to get better. So, as we think about -- actually, outside of car lot again, I think that's driving several of businesses and big businesses at that, and again, as we make some of those moves, I think the distribution is playing out as well. So as we look holistically at our business, new products are working really hard for us and that's driving our business which we feel really good about. SRM is playing out the way that we'd hope as well.

And then in the middle of the P&L, HMM is really delivering too. So, as we look across our businesses, we like the momentum on the top line, like middle of the P&L and again things have been playing out as we expected. And importantly, again, I think we're looking for consistency moving forward and we think that we've got a business model now that will drive consistent top line performance across the business and make sure we deliver on the bottom line as well.

John Baumgartner -- Wells Fargo -- Analyst

And then, Jon, just on the Cereal business, when -- you outperform the category in the quarter, how we think about shipments versus takeaway in Q4? And then as the category itself has softened in terms of volumes, how much of that are you seeing from your increased substitution from your QSR breakfast or frozen breakfast versus something more just transitory in nature?

Jonathon Nudi -- Group President of North America Retail

So John, maybe I'll start with just the question about shipments versus takeaway. So for Q3, our RNS was ahead of our takeaway by a couple of points. If you remember back to Q2, it was actually the opposite. So for the year, our takeaway is actually very much in line with our reported net sales and that's in line for what we're seeing across the segment as well. So there's really nothing notable from an inventory standpoint.

Actually, we're encouraged by what we're seeing in the categories. So in Q3, we saw the best category performance. We've seen in several years they have done only 0.5 point. There's a lot happening underneath the category in terms of pack price architecture, both from ourselves as well as some of our competitors. But if you look at underlying your pull-through and the way that consumers are responding to innovation as well as our marketing, we're actually quite encouraged about the category and very encouraged about our business, which is performing much better than it has over the last several years.

John Baumgartner -- Wells Fargo -- Analyst

Good. Thanks Jon. Thanks for your time.

Operator

The next question comes line of Ken Goldman with JPMorgan. Please proceed.

Kenneth Goldman -- JPMorgan -- Analyst

Hi. Thank you. Good morning. Two from me, if I can. First, there's a few areas of the business that I think, it's fair to say, are not working quite as well as you'd like. I think you mentioned US Snacks, maybe Haagen-Dazs Japan. I think in the press release you talked about France and maybe Yoplait in France -- and I'm not sure which categories in France, but Yoplait across Europe & Australia maybe. Can you just give us a little bit of idea of when you expect some of those businesses to turnaround, which ones you think will be maybe a little less onerous in terms of turning around?

And then, I guess that leads to my next question, which is, typically, on your third quarters, you'll give at least some, what I would call, soft commentary on the out year. Is there anything that you can provide right now as we look into fiscal '20 that's helpful, not necessarily quantitatively, but just in terms of headwinds or tailwinds we should be thinking of as we think about modeling into next year?

Jeff Harmening -- Chairman and Chief Executive Officer

Let me take the first part of that question and I'll hand it over to Jon Nuti for maybe some additional commentary in US Snacks, and then, Don, maybe you can handle the second piece. On the growth for the year, first, I'll say, our growth has largely played out as expected, and even for the low end of our guidance range on sales, I mean it's a pretty narrow range to begin with. I mean it's a 1 point range of flat to up 1%. So we feel like we're in the range of what we thought at the beginning of the year.

As you mentioned, it's true. There are give and takes every year to where your volume is going to be. And so, yes, it's been a tougher year in France, particularly on yogurt, but really in France with inflation on ingredients and difficulty in achieving the price gains. But that's been offset by a really good year for us in the UK, where we are leading the growth of all food manufacturers in the UK. Obviously, the same thing in US Retail, where you know it's been a little tougher in Canada, but our Meals & Baking business has done really well. I mean we talked about Pillsbury earlier this year, but also Totino's and Old El Paso and we've been as pleased with that as we have with other things. So, there are always offsets like those. The one that really we feel like we need to do better on and we can do better on really starting next fiscal year is going to be our US Snacks business and I'll let Jon talk of just a couple of points on that.

Jonathon Nudi -- Group President of North America Retail

So, Ken, Jeff mentioned this upfront, as we look at our business, really two brands are challenges for us, Fiber One. I would say, it's more structural as modern weight managers are really looking at for different macros in the products that fit their diet. So, as Jeff mentioned, we are renovating Fiber One. I am, actually, quite excited about the product that we're going to roll out in Q1 and we'll -- Q1 of fiscal '20, and we'll share more on that as we get closer.

On Nature Valley, I would tell you, actually, we feel generally good about the underlying health of that business. The biggest driver of our under performance this year has really been innovation. And if you look historically, Nature Valley has really been driven by broad-based innovation that hits on really broad need states. This past year, the needs states we went after are a bit more narrow and a bit more niche in terms of the areas we focused on and the results are much smaller as a result.

As we look to next year, we've got a great new product coming out, actually in Q4 of this year, which is a Krispy Kreme wafer bars. We're really excited about that. The retailer response to it has been quite good and our consumer testing looks very positive as well. And then, we'll have some more news in the back half of fiscal '20 as well on Nature Valley. So I do believe, you'll see Nature Valley trends improve as we move into fiscal '20. And again, Fiber One, some big news coming there, but we've got some significant work to do on Fiber One.

Donal Mulligan -- Chief Financial Officer

Ken, if anything, forward looking out beyond F'19, we typically don't give guidance and we're not going to this year either until June, but I tell you, as Jeff alluded to at the beginning of our call, we are very pleased with the execution that we're seeing this year and we certainly expect that to continue to strengthen as we move into next year.

Kenneth Goldman -- JPMorgan -- Analyst

Thank you, everyone.

Operator

The next question comes from the line of David Driscoll with Citi. Please proceed.

David Driscoll -- Citi -- Analyst

Great. Thank you, and good morning, everybody.

Jeff Harmening -- Chairman and Chief Executive Officer

Good morning, David.

David Driscoll -- Citi -- Analyst

Wanted to ask couple of pet questions. So on the Wilderness brand, it's significant news that you're going to be taking it from exclusive to specialty, to moving it into FDM. When you did this with Life Protection, there was the very kind of methodical progressive roll out of Life Protection throughout the food and mass channels. Will the Wilderness roll out be similar, both in the pacing of how you roll it out to different retailers and in the size of the roll out? Would you expect to get a significant amount of shelf space that's incremental to what you currently have with the Life Protection in the food and mass channels?

Jeff Harmening -- Chairman and Chief Executive Officer

David, let me try to take those kind of one a time. And hopefully, I hit on all the things you asked, maybe even a little bit more. Just for context, we launched Life Protection Formula 18 months ago and now we're launching Wilderness into FDM. And in the Pet Specialty channel, Wilderness is roughly 40% of our sales. It's almost as big as the Life Protection Formula brand itself. So this launching of Wilderness into food, drug and mass is not a small endeavor. It's a big endeavor. And it's a big endeavor from a logistical standpoint, but also what it can do for our sales, which is one of the reasons we're confident we can grow 30% plus in the fourth quarter.

I mentioned in my comments, which might seem like it a throw away, but the fact we're performing well in FDM is really important and -- because as we bring in Wilderness, we're seeing the Wilderness launch being highly incremental to our assortment and our current customer base to Life Protection Formula because they see the growth that Blue Buffalo has driven for them in the category so far, and they know the importance of the Wilderness brand.

In terms of, we'll be -- we'll certainly be thoughtful about how we expand Wilderness, but one of the benefits I think of the General Mills brings to the Blue Buffalo businesses is being able to get into more customers faster. And so while we'll be thoughtful about where we bring in Wilderness, you'll see the ACV on Wilderness expand a lot more quickly than we did on Life Protection Formula. And that's not because were less thoughtful, it's just because we have greater capability with the combined Blue Buffalo in General Mills than we did before.

And I will also add for a bonus that, we said we'd get up to ACV of 65% by the end of April. I can tell you that at the end of February, we already at 58%. So, we are a long way through our goal already, gaining about 22 points of distribution in the month of February alone on Blue Buffalo and I think that just shows what the combination of Blue Buffalo and General Mills can achieve.

David Driscoll -- Citi -- Analyst

Okay. And then I deserve two related questions on this. The first one is that when you do the Wilderness move. Is there anything extra special that you're doing for these pet specialty retailers to ease the pain of taking this from exclusive to Pet Specialty and moving it into FDM? And then, to Don, on this stuff -- like in the fourth quarter, I think our math is working out -- and I really just want to check the math here, that we've got -- to get double-digit profit growth in Blue ex the inventory change, we have to have like fourth quarter Blue Buffalo profitability of like $120 million and that's like double last year's numbers. It's just such a big jump, I just want to make sure that we're not making a mistake this morning on the mathematics. Thank you, guys.

Jeff Harmening -- Chairman and Chief Executive Officer

Well, look David, importantly, I mean the Pet Specialty channel is really important to us. And just like the natural and organic channel was, when we rolled out Annie's and Larabar and things like that, and we've already have lots of discussions with our pet retail -- our Pet Specialty customers about what we can do for them. There are a lot of things we can do for them that are differentiated than what we do with other customers. And pet grooming would be one example and time that to pet food sales. And so whether it's through promotions, or whether it's through unique innovation, or whether it's through pet detectives and having people on the floor, there a lot of things we can do to drive sales in Pet Specialty. And we're actively working with our big customers to make sure that we can do that, because we want to make sure that Blue Buffalo is successful and available to pet parents no matter where they shop.

Donal Mulligan -- Chief Financial Officer

And David, on the profit growth, we do have a significant profit growth and we expect to see significant profit growth in the fourth quarter. It's going to be leveraging the 30% plus sales growth that Jeff alluded to. Once again, I wanted to make sure you capture the impact of the purchase accounting in the quarter as well, because we don't have to quite double our sales growth to -- or our profit growth excuse me, to get to our number for the full year.

Jeff Siemon -- Vice President of Investor Relations

And David, this is Jeff Siemon, I think, remember, our double-digit profit growth for the full year is excluding purchase accounting charges. So I would encourage -- that is -- that will be roughly $65 million to $70 million of total purchase accounting charges for the year. So we said we'd grow double-digit excluding those impacts.

Unidentified Speaker --

(Multiple Speakers)

Jeff Siemon -- Vice President of Investor Relations

Very strong double-digit growth. That's right?

Donal Mulligan -- Chief Financial Officer

That's right.

David Driscoll -- Citi -- Analyst

Thank you.

Operator

The next question comes from line of Steve Strycula with UBS. Please proceed.

Steve Strycula -- UBS -- Analyst

Hi. Good morning. A question for Jeff. So we've heard some noise that a large US e-commerce, e-tailer is pushing CPG manufacturers more to a third party marketplace system versus first party. For investors on the line, how do we think about the context of what this might mean for General Mills in terms of impacting business dynamics and ultimately how do we think about what the margin economics might be directionally for a third-party system relative to a first-party system? Thank you.

Jeff Harmening -- Chairman and Chief Executive Officer

Yeah. The first -- I will let specific retailers talk about their business specifically. I think it's better that they talk about it than we do. I am not sure I see the same trend that you talk about, but I think importantly, for e-commerce and food, I think there a couple of important things remember. In food, maybe unlike some other categories. I think there are going to be a lot of winners in e-commerce, with regard to food. It's not going to just be one pure play who is going to win in food. I see the strengthening of quite a number of our traditional retail customers and whether that is through delivery or a click and collect. I think the playing field for e-commerce is going to be kind of wide open. And I think there are going to be multiple winners, not just one.

The second I would say is that, we're well positioned in e-commerce and our sales are up more than 50% this year. And I mean everybody can quote big numbers in e-commerce, because it's growing rapidly, but I think as important is the fact, we're up 50% is that we are over index in the customers where we are in e-commerce, there are bricks and mortar and that because of the strength of our brands. And whether that is Cheerios or Nature Valley or Yoplait or Blue Buffalo, the reason that we over index for me is, is because we've got great brands and great brands travel across channels. And so, we think the economics for us in e-commerce is going to be good. And our goal is to win across our customer because there's certainly going to be more than one winner in e-commerce in food.

Steve Strycula -- UBS -- Analyst

Okay. That's helpful. And then, a quick follow-up to that. If I heard you correctly, in your prepared remarks, you said that for Blue Buffalo's e-commerce business, it's still growing solid double digits, but it maybe had slowed a bit sequentially. Was that more of a transitory issue, something that's happening in the supply chain, or should we just think that we are growing on top of very large numbers already and that's a natural cadence of the business?

Jeff Harmening -- Chairman and Chief Executive Officer

Yeah. That's a good question. I think the key for -- as we talk about e-commerce and Blue Buffalo, is that the category for e-commerce and pet food slowed in the third quarter. And Blue Buffalo is still gaining share and are still growing double digits, but our growth slowed primarily because the categories slowed, but within that context, we are doing well. And the question is, do I think that e-commerce is going to be transitory? And I think e-commerce may pick up again in pet, especially as we roll out across food, drug and mass, because if you think about the places where we are and the places where Blue Buffalo is going, there is certainly a strong e-commerce business and developing e-commerce business in food, drug and mass. And I wouldn't be surprised if that in the coming quarters e-commerce growth picked up again in pet due to the roll out of e-commerce capabilities across our FDM customers.

Steve Strycula -- UBS -- Analyst

Okay. Thank you.

Operator

The next question comes from the line of Rob Dickerson with Deutsche Bank. Please proceed.

Robert Dickerson -- Deutsche Bank -- Analyst

Great. Thank you. Good morning. So, two questions, one on pet, and then just one on margin expectation progression as we think into next year and given a little nuance in Q3 and Q4 this year. So I guess one on pet is just, I think we heard at CAGNY from you, expectation was, mass distribution gains shouldn't be margin dilutive, entering mass obviously with Wilderness now. So as we think through -- getting into Q4, right, where their is sell-in, but then really into '20, where we need to have the velocities obviously turn, so you can sustain the product on the shelf. I'm just curious, can you give just a brief overview as to what the strategy really is, right, at, let's say, one large mass customer to increase the buyer base above incrementally, not just share shift between channels, but why more people should be buying Blue Buffalo because it's offered in more locations versus just shifting their purchase destination? That's first. Thanks.

Jonathon Nudi -- Group President of North America Retail

Well, I think it's a fair question. And I think we talked a little bit about this at CAGNY. So, if I am repeating myself, I apologize. But the most important thing as you look at is, household penetration and what's going on with household penetration. And as we've expanded Blue Buffalo across channels, our household penetration continues to rise and so now it's north of 35%, I think household penetration, which is up maybe three-fold from where it was a year ago. Jeff can check me on that math and get back to you. But it's up quite significant. And I think that is actually the key, because as we've expanded distribution, we've brought in more households, and more pet parents where they sell it. And so I think the evidence is actually already there that as we've expanded across channels, we have grown household penetration and not just cannibalize our own sales.

The second thing, and this is consistent with what we've seen before, on things like Annie and Larabay any and EPIC. And so, I know that it is maybe a bit of surprising to some, it's actually not surprising to us and following a very familiar pattern of what we've seen in other natural and organic businesses. But the second point you raised is important, and that's about how are we turning where we currently are and that's why I mentioned the first four customers we've been at a year, how are we doing. I mean, our turns are really good. And as evidenced by the fact that our Q3 business is up double digits to where it was in Q2. And because when we bring in Wilderness, it's going to be incremental and the only reason it's going to be incremental is because what we have there right now is turning well.

And so, that's really the key and is behind -- the reason for that is because Blue Buffalo is a really good brand and Billy Bishop and his team have done a nice job with in-store signage and display, but also really good advertising and marketing campaigns. And so, they have built a great brand, which we're capitalizing on. And so, the key is, as we expand it is to make sure that not only we're growing distribution, which we are, but our turns are doing well. And look, even places where our business is down, I mentioned Pet Specialty we are down double-digits, our turns are actually pretty good, is the fact that we've actually lost some distribution.

So our business is still turning at these places, we just have less distribution than we were before. And I think that's encouraging and that's one of the reasons why eventually our plan is to get back in the game, especially because the turns of Blue Buffalo in those places are actually pretty good. It's just our distribution that's down. So that's really the -- we feel confident about. As we roll out the Blue Buffalo, we will continue to gain pet parents, which is just a household penetration and that our sales will be incremental because that's what we've seen to-date.

Robert Dickerson -- Deutsche Bank -- Analyst

Super. Make sense. And then just quickly, as we think about fiscal '20, I know you're not giving guidance, but I'm just curious, obviously, Q3 margin did a lot better than people expected I think on average. Q4 there is a little give back, just given the timing of shipments relative to takeaway and incentive comp, et cetera. But it seems like the core drivers of just better margin or stabilized margin at least into next year, which should be pricing, saving synergies, and then, mix, partially on North America business in Cereal and also partially just given the Buff. Seems like those were still sustainable, right? I mean, if we are thinking into next year, is there anything in each of those three buckets that really would change or do they just stay as the drivers of stabilized or improving margin? Thanks.

Donal Mulligan -- Chief Financial Officer

Sure. Yeah. I think firstly kind of ground on this year, as you alluded to, we came in where we know was well ahead of where the consensus was, but frankly versus our own internal expectations, Q3 was a bit stronger on the margins, but not materially stronger. We had a bit better gross margins because our plant performance was stronger. We had a bit better operating margins because of that and because of good cost controls. And EPS came in a little bit better on top of that because of tax rate was a little bit better. So we had some improvement in the middle of the P&L, and down through tax rate, and that's would flowed through to our new guidance for this year, but it was little bit better than we expected, but not as outsized, as certainly maybe what's compared to the Street.

As you mentioned, in the fourth quarter, we see tougher comps. Our gross margin was at a high point last year, it grew in the quarter last year, so we're lapping that. And as you mentioned incentive, and as I said in the call, we have higher brand investments in the quarter. So for the full year, we expect our margins to be a bit better, our operating margins to be a bit better than where we started the year. And in our most recent guidance, we think they will be flat to slightly down, which is a bit stronger than what we thought a quarter ago.

As we look to next year, our focus is going to be on staying very balanced. We want to make sure we have a mix of top line growth and margin expansion. We are not going to lean strongly in one way to the other. We know we have to deliver a balanced year to have sustainable model and that's where we're going to be focused on as we build the year. The factors you mentioned in terms of pricing, strong HMM, the added benefit of Blue Buffalo stronger margins should all carry through.

Jeff Harmening -- Chairman and Chief Executive Officer

Yeah. I would build on Don's point. I'd say, the quarter was better than what was expected externally. That's fair, and our profit are little bit better. I would broaden the lens, and look at the last year for us. And we had a tough Q3 last year, that's no surprise or secret, but I really like the way the General Mills team has bounced back from that. And I think you see the strength in execution and it's not an accident We are really focused on how well we are going to execute, and whether that's SRM or e-commerce or brand building, how we forecast the business and there is no reason to think our ability to execute well is going to diminish next year. And that's I think what allowed us to deliver on our commitments this year, is that, we have, we've delivered on the core what we said and we've delivered on Blue Buffalo what we've committed and that end is what we looking for as a Company and so there's no reason to think that that won't diminish.

At the same time, I mean, while we feel good that we've executed well and our performance has improved and we feel good about that, there is still more work to be done and we're not yet to a sustainable top line and bottom line model, where our shareholder return has a flywheel that we expect of ourselves over the long term and that hopefully you expect out of us. And so we're not going to give specific guidance for F '20, but I can tell you our goal is going to continue to work toward getting closer to that sustainable model, that's going to continue to build value for shareholders and we've taken one step this year. And we are, I would say, pleased, but not yet satisfied and we're pleased with what we've done, but we've got more work to do, and we're going about the business of doing that.

Robert Dickerson -- Deutsche Bank -- Analyst

Super. Thank you.

Operator

The next question comes from line of Robert Moskow with Credit Suisse. Please proceed.

Robert Moskow -- Credit Suisse -- Analyst

Hi. Thank you for the question. So the inventory has shifted around a lot this year and you're not alone. There are several other packaged food companies that had inventory builds in January. And so I'm asking Jon Nudi, have you had any conversations with big retailers as to whether their inventory strategy has changed at all? It seems like every year they are working hard to try to reduce those levels, but as you plan the business going forward, do you think we're at a sustainably higher level that's appropriate for the business or do you think that it makes sense to continue to expect (Technical Difficulty)? Thanks.

Jonathon Nudi -- Group President of North America Retail

So, hey Rob. You think about our retail partners, just like us, they continue to stay focused on working capital and I think leveraging technology and processes and systems to improve working capital. So we would expect them to continue to get better in terms of being able to operating with less inventory. So that's our going assumption as we move forward. And I think for the year, again, you see that. So our takeaway is about 1 point better than our reported sales and I think that's what we'd expect for Q4 and into '20.

Robert Moskow -- Credit Suisse -- Analyst

So again, so you think you lag retail consumption by about 1 point in fourth quarter, is that right?

Jonathon Nudi -- Group President of North America Retail

We do. Yes.

Robert Moskow -- Credit Suisse -- Analyst

Okay. Thank you.

Jonathon Nudi -- Group President of North America Retail

Thank you.

Operator

The next question comes from line of Jason English with Goldman Sachs. Please proceed.

Jason English -- Goldman Sachs -- Analyst

Hey. Good morning folks. Congratulations on a strong quarter and thanks for the question. I've got two quick questions. First, on the all-in inflation outlook. I know you're beginning to cycle what was an uptick last year. As you cycle over that, are you seeing your all-in rate of inflation subside? And if so, kind of to what levels are we settling in that?

Donal Mulligan -- Chief Financial Officer

Yeah, Jason. We still see inflation coming at around 5%. It may be a couple of basis points lower than when we started the year, but we're still seeing inflation in grains, packaging, other commodities. Logistics from a percentage standpoint is the biggest change. And then we're seeing higher inflation in our European business, which is trending higher than that 5% full year guidance and we really seeing it in dairy and vanilla. So there hasn't been a material change to our outlook in inflation. It might be just a touch lower, but still rounding to 5%.

Jason English -- Goldman Sachs -- Analyst

That's helpful. Thank you. And I wanted to touch on your divestment plans. It's something you've announced and intend to pursue over a year, about a year ago now I guess. Why is it taking so long? And while we're waiting, clearly some M&A multiples have begun to contract in the space, there's a lot of company shopping assets and your cash flow conversion is rock solid as you point out. Are those dynamics giving you pause and causing you to reconsider whether or not you want to go down that path?

Jeff Harmening -- Chairman and Chief Executive Officer

Thanks for the question. I appreciate that, Jason. No, it hasn't -- really hasn't -- it hasn't forced us to reconsider whether we want to go down that path. But I think the point you mentioned, we'll only go down that path if it makes -- to the extent it makes sense for General Mills' shareholders, as it did when we exited Argentina this last quarter. And so, I would reiterate, we are not doing divestitures, which is roughly about -- we think roughly about 5% of our portfolio. We are not doing it, because we need to generate the cash. We are clearly already doing that. We're doing it because we believe that by divesting some businesses that are slower growing, will not only help improve our organic growth rate, but also help our improved focus on some of the businesses that are going to be really important for us to invest in. So it hasn't really changed

What's changed on the timing and I know it can seem slow and -- but for me, I would call it thoughtful and that is that coming into this year, especially after our Q3 last year, we said, we better execute well on our core business and transition Blue Buffalo effectively. And if we do that, we think that shareholders will reward us and that feels to be like is the case. And that, whether we do divestitures or not, people are going to look back on our core and look on to whether we're transitioning Blue Buffalo successfully. And we feel like we're on the path to doing both of those. And so our attention, certainly is still on divestitures and looking at what we would do from that standpoint.

And so, it hasn't been anything other than that. We felt like we had a job to do, and we feel like we're well on our way to doing that. And so we'll continue to evaluate divestitures and we'll do it if we think it makes long-term sense for General Mills shareholders. And if it doesn't, then we'll come back and tell you that it doesn't. But for now, that's still our plan.

Jason English -- Goldman Sachs -- Analyst

Makes sense. Thank you.

Jeff Siemon -- Vice President of Investor Relations

All right. It looks like we've hit the bottom of the hour here. So I think we'll go ahead and cut it off. I know there's a number of people we haven't gotten to and my apologies for that. But I'll be available all day for additional questions. Thanks everyone for your time and attention this morning. And have a wonderful day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

Duration: 61 minutes

Call participants:

Jeff Siemon -- Vice President of Investor Relations

Jeff Harmening -- Chairman and Chief Executive Officer

Donal Mulligan -- Chief Financial Officer

Andrew Lazar -- Barclays -- Analyst

Jonathon Nudi -- Group President of North America Retail

John Baumgartner -- Wells Fargo -- Analyst

Kenneth Goldman -- JPMorgan -- Analyst

David Driscoll -- Citi -- Analyst

Unidentified Speaker --

Steve Strycula -- UBS -- Analyst

Robert Dickerson -- Deutsche Bank -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

Jason English -- Goldman Sachs -- Analyst

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