General Mills, Inc. (GIS) Earnings Call Transcript & Summary

Good afternoon, everybody. I'd like to welcome General Mills back to the Global Staples Conference today. For our afternoon virtual presentation and Q&A session, we are with CFO, Kofi Bruce; and President of North America, Jon Nudi. Thanks very much for both of you, you're spending some time with us here today, and I'm sorry we're not doing this in person, but good to be with you nonetheless. I will turn it over to the both of you and then be back with some questions, time permitting. Thanks again.

Thanks, Andrew, and good afternoon, everybody. Jon and I are happy to be here joining you virtually, and we'll follow this with a virtual fireside chat. But before we get there, I want to share a brief business update, including some messages you may have seen in the press release we issued yesterday in advance of this conference. And I think to head this off, I also would like to just give you a quick reminder that today's discussion will include some forward-looking statements, and this slide lists several factors that could cause our future results to be different from the estimates. So as we've entered our fiscal '21, our most important objectives continue to be the health and safety of our employees and our ongoing ability to serve our consumers around the world. We've kept a very sharp focus on wellness and safety, both for our frontline and our office employees. And as a result, we've continued to execute at a very high level. Our supply chain has operated without any major disruptions during the pandemic, and I could not be more proud of the way our 35,000 employees have remained engaged and energized to fulfill our company purpose of making food the world loves. A couple of months ago, our fiscal '20 year-end earnings call, we outlined 3 priorities for fiscal '21: first, compete effectively everywhere we play; second, drive efficiency to fuel investment in our brands and capabilities; and reduce our leverage to increase our financial flexibility. I'm pleased to report we're off to a good start on all 3 of these priorities. First, we're competing effectively, and we're doing it everywhere we play. At-home food demand continues to remain elevated relative to pre pandemic levels, though it has moderated as we expected from our fourth quarter, and we continue to win in this environment. As you can see on the slide, we are gaining market share in each of our 6 largest markets. And our worldwide shares are up in many large and important categories, including cereal, snack bars, Mexican food, pet food, ice cream and refrigerated dough. And the combination of higher at-home food demand and our best-in-class supply chain, sales and marketing execution has led to notable gains in household penetration from nearly all of our largest brands, including Cheerios, Pillsbury, Old El Paso, Progresso, Yoplait, Betty Crocker and more. Importantly, in the past 6 months, our brands gained more household penetration than the leading branded competitor in 8 of our top 10 U.S. categories. Our second priority of driving efficiency to fuel investment, we continue to expect another strong year of COGS HMM. We anticipate media spending will be up for the full year, and we're planning meaningful investment in enterprise capabilities, including data and analytics, e-commerce and strategic revenue management. We're continuing to take an agile approach to managing the business this year, given the significant volatility driven by the pandemic. We remain focused on our objective of delivering full year adjusted operating profit margins, roughly in line with last year's levels. Strong fixed cost leverage is expected to result in adjusted operating profit margin expansion in the first quarter, while external supply chain costs and the more difficult prior year comp comparison are expected to result in a decline in adjusted operating profit margins in the second quarter. On our third priority of reducing our leverage, we continue to keep a sharp focus on cash and our capital discipline, which has been critical to our ability to take a full point off our leverage ratio over the past 2 years, and we remain on track to reduce our net debt to adjusted EBITDA again in fiscal '21 to below 3.2x where we ended fiscal '20. With that as a summary, Andrew, I'll turn it back to you to get us started on the Q&A and the fireside chat.

Great. Great. Thank you very much. Perhaps we start maybe broadly, just with the state of play in the industry. At this point, for me, having covered the group for some 25 years now, I've been truly impressed by the agility of the industry to pivot where needed, serve consumers while also keeping everybody safe. And I know none of this has been easy or perfect, but it does feel like the industry has responded quite effectively. And we'll get into specifics on General Mills in a moment. But maybe what has stuck out to the both of you on the industry's response thus far?

Yes. So maybe I'll jump in. It really has been a fascinating period for sure, and I'm incredibly proud of General Mills in the way we respond and, frankly, the way the industry responded as well. I think at the end of the day, the country, really the world, was counting at us to feed them. And that was something that became very apparent very quickly. So I know that us, as well as our competitors, really worked very differently. You mentioned agility. That's something that I think was truly demonstrated, and it wasn't waiting days to make decisions; it was hours. I can tell you that all of us were working literally around the clock and it started with making sure we can keep our plants running. And as you can imagine, that was a major challenge. So we put protocols in place, and they kept our 26 facilities in the U.S. and really around the world running. Keeping our employees safe, Kofi talked about how important that was and then, at the same time, making safe food for our consumers who desperately needed it. I would tell you the relationship with the retailers and the way that things played out was most collaborative, obviously, in my almost 30 years in the industry. So again, we were all very focused on keeping the shelves full and making sure that we were feeding people that needed it. And I think that the way we worked with retailers, as well as the way we work with our employees, will lead to some new things in the future. I think transparency and care and the way that we worked across the board are things that are going to stick with us. So it's been a fascinating time. Obviously, we're spending some time really codifying what worked and what didn't and how that can change things in terms of how we operate moving forward. I don't think you'll see the industry work the same way as we have in the past as a result of what we just went through.

I'd like to pivot a little bit to some of the recent consumer behavior and consumption patterns that you mentioned earlier, Kofi. I mean, first of all, many have described this crisis as essentially the greatest CPG trial experiment of our lifetime. And you mentioned a couple of metrics on how this is playing out for General Mills in terms of household penetration and repeat purchase. And it's a bit of an unknown, but I'm trying to get a sense of at least how you guys are thinking about currently the likelihood that some of this is sticky by either new or lapsed users and how you think that plays out over time, even though I know there's no crystal ball on this.

Yes. Yes. So we absolutely think some of this will be sticky over time because we're seeing consumers really change their behavior. And frankly, changing consumer behavior is the hardest thing to do. One of the things we noticed, there's a generation of consumers that didn't know how to cook or cook very well, that are cooking a lot more, and we have direct evidence. We have 2 of the top 5 food websites in bettycrocker.com and pillsbury.com, and we've seen our traffic up 4x since the pandemic started. And the searches are around recipes and how to do simple culinary techniques. And as we dig in and really understand who these consumers are, in many cases, they're younger consumers learning to cook for the first time. So we think that, that's going to stick as we move forward. I think the way the consumers shop will be forever changed as we saw dramatic increases in e-commerce and omnichannel, and we think that big brands are positioned well in those channels and in e-commerce, and that will work for us as well. So we think that, again, we'll get through this and see where things end up at the end of the day. You can't be certain, but we do believe that consumers are changing their behaviors. In addition to that, we know we're obviously in a recession. We're not sure that we've seen consumer behavior really play out that way quite yet as there's been a lot of stimulus in the economy and unemployment programs as that starts pulling out more. We do know that our brands tend to perform well during recessionary times as we look back. So we do believe that we're set up for a nice run here. We're making sure that we really have to pedal down, and that means supporting our brands and also making sure that we're agile. So we're directing more and more of our marketing dollars to digital marketing efforts. We're investing heavily in data and analytics because we know that that's where the game is going to be played as we move forward, really building one-to-one personal relationships with our consumers and leveraging that first-party data from our food websites as well as Box Tops for Education. So we like how we're performing at the end of the day. I think the truest test of how you're performing is share. We're growing aggregate share, grew into Q4. We just closed our Q1 from a Nielsen standpoint. We grew share in aggregate across the U.S. and holding or growing share in some of our top 10 categories as well. So we like how we're competing for the short term, and we think that the way that consumers are changing, the way that we're interacting with them, we can continue this as we move into the future as well.

Yes. We got into this a little bit, but I think at the outset, Kofi, you mentioned that even on some of these metrics around household penetration and repeat, that they were up greater than what you're seeing for either a category or a lot of your key -- sort of key competitors. I'm curious. What do you think is driving that sort of relative outperformance even in the context of some of these metrics?

Sure. Let me take it direct, Kofi?

Yes. Why don't you go ahead?

Yes. So the facts that Kofi touched on, so we are growing faster than our competition in 8 of the top 10 categories, repeat as higher than a year ago in 9 of our top 10, and we're actually seeing repeat rates at elevated levels even for those new consumers. We think several things are driving it. Again, we are investing in marketing. We never pulled back through the pandemic, which -- we really have worked hard over the last few years to make sure that we've got compelling messages on our big brands. We've innovated well. And I think one of the other things, that's a key driver is distribution share. And that's something that we look very, very closely at because, ultimately, you have to be on the shelf to win, and we are growing distribution share in aggregate and growing distribution share across the majority of our major categories. So that's been really helpful. And then Kofi touched on it as well, but our supply chain has performed incredibly well. So we do know for a fact that in some of our categories we were on the shelf, and our competition wasn't. So we are sure that, that helps us as well.

It's a good segue into the next question, which is General Mills, among others, has discussed consumers looking for comfort brands and brands they know and trust as part of the reason that some of the bigger brands are winning in this environment. There are others that think that big brand success is really more tied to simply having advantaged supply chains and, therefore, better availability on the shelf frame now. And I'm curious how you view that dynamic. And I guess, have you seen -- or I assume, would expect a recovery from a supply chain standpoint from competitors? At some point, it may take some time. And as they begin to catch up from a supply chain standpoint, how you look to sort of maintain some of the share gains that you've come by?

Yes, there's probably a little bit of both of those things going on. So obviously, our supply chain is robust, and we've got scale, and that's helped us keep our products on the shelf. I think some of the smaller brands have struggled more as a result. The other thing I would tell you due to some of the trials and tribulations the industry has gone through over the last decade, we spent a lot of time really improving our brands and improving our products. So if you look across our portfolio, we've touched almost every single product. We've made it -- our products taste better. We made the nutritional ingredient deck better. We cleaned up the ingredients that are in there as well. And we do know for a fact as we have consumers come back and experience their products for the first time in many years, we're having a different experience. So I think there is something to comfort and trusting the big brands. I think, obviously, we're on air right now on building our brands, which helps out as well. But I do have a sense that some of this will be sticky and change the game a bit as we move forward. Clearly, consumer trends are changing rapidly. They continue to change, and there will be some smaller brands that do well. But we like how we stand right now. We like how we're building our brands.

And Kofi, it's interesting because we've all focused a lot, as you'd expect, around potential top line opportunities that come as a result of the crisis. Many packaged food companies are also now beginning to talk about maybe taking some of the learnings from the pandemic and thinking about maybe some longer-term structural changes around the cost side of the equation, whether it's more significant SKU rationalization, whether it's cost savings on travel, global real estate, consulting fees, things of that nature. I'm curious if you've got a similar viewpoint. What maybe are some of the things that could position General Mills better from the longer term, maybe the magnitude of the type of opportunity we're talking about. Just to get a sense on how you view some of this potentially playing out over time, even though I know it's a bit early on that front.

Yes. No, I think you're asking a great question. And clearly, the pandemic has created both challenge and opportunity. And one of the places where I do think there's opportunity is to rethink the way that we mobilize some of our dollars. Clearly, some significant portions of our admin costs have been sort of favorably impacted by the fact that we're all traveling a lot less. The nature of how we meet and engage with our customers, in some cases, and certainly with each other and globally have all brought an opportunity to do some rethinking. And so for us, I view HMM and our ability to drive HMM as a core capability and, frankly, a differentiated capability that is now well past 10.5 years of adding to our margin expansion capability. So I expect we will come out of this, looking for opportunities. Everything from -- certainly from T&E to consulting fees, real estate, those are all areas that I think everybody would and should be looking at this environment.

Understanding that the company does not have sort of formal guidance for the fiscal year, perhaps you can just discuss some of the high level assumptions, the sort of the key puts and takes. One piece that you have talked about was on operating margins for the full year. I guess, what are the key drivers to achieving this result? And I guess, what gives you the confidence that you can provide that kind of an outlook, even though the environment remains dynamic, and it is unclear how quickly or not the top line will decelerate as markets reopen and things of that nature?

Yes. Yes. Look, I think that is obviously an area where we've gotten a few questions just along the way in the past 1.5 days. It's important to note, we are not changing and we did not change our annual outlook on margins. We still feel very confident that the right place to draw the line is to ensure that we're operating our business to at least deliver flat margins year-over-year. So that's -- the important note there is that it's an operating principle. So as we think about sort of the progression of the year, what's unnotable is the magnitude of demand. For the near term, we expect elevated at-home demand. We expect that to require additional investment behind capacity, a lot of which is going to come from external supply chain, which will cost us more. So as you think about the Q1 versus Q2 dynamic that we called out, that's a critical difference between our Q1 and our Q2 expectations. It's also important to note that embedded in there and maybe less noticed is the fact that our comparison for Q2 is against our highest margin quarter for last year, which actually had a huge onetime benefit as we built up a fair amount of stock in advance of labor negotiations at some of our North America plants. So as you think about all those factors, our job in this environment is to provide as much transparency as we can with confidence. And what we wanted to flag was just the progression. As we work through the year, I think the first quarter will show strong margin expansion. The second quarter will show some contraction for those factors. But in aggregate, our perspective and our confidence on the full year hasn't changed. Some of the other things that I'd note is critical drivers. We expect HMM to be in line with our historical trend, about 4% inflation at about 3%. And we are, to Jon's point, investing, making targeted and higher levels of investment and continuing to make those higher levels of investment behind critical brands and advancing some of our core capabilities around data and analytics to support e-commerce and SRM in this environment. And then lastly, and really important, while we do not have a vaccine, I would expect we will continue to incur some of the costs just to keep our plants safe and operating safely and open, keep our employees safe and everything from personal protective equipment to some crewing modifications and things like that help us keep employees safe and the plants running.

Great. I know it's hard to complain about, certainly, the elevated levels of ready-to-eat cereal category growth that we've seen since the start of the pandemic. But in the context of, let's say, some other center store consumer staples category, cereal hasn't necessarily been, from a growth standpoint, at the top of the list. Maybe that's a little surprising just given the benefit from the shift to at-home consumption and was most pronounced, I think, or largely pronounced in a lot of the breakfast daypart. Even now in an elevated demand environment, the category is only but growing, call it, low to mid-single digits. So I'm just trying to get a sense of how you think about this dynamic. What do you think is driving it one way or the other, and then as consumers have sort of reassessed this category, maybe younger consumers, how sticky that can be and what General Mills can do to sort of continue to revitalize the category?

Andrew, it's a great question, something we've been digging into over the last few months as well. First of all, I'd like to say, we feel really good about our cereal business. So again, we've worked over the last 3 or 4 years to really change the trajectory of our business. We've been gaining share for multiple years in a row now and are now the clear biggest manufacturer in the category. And we've really done that by innovating well and by marketing our big brands with really good compelling consumer messaging, and that's not going to change as we move forward. Interestingly, we did see the category slow a bit as we moved into summer. And as we dug into it, it actually became pretty clear what was happening, and it was really about the comp. And if you think about kids and where they spend their summers, they spend their summers at home, and they did that last summer as well. So we really didn't see much of a tailwind in terms of in-home consumption year-over-year. Interestingly, as kids last year started to go back to school, this year, many of them are working from a home in a virtual way. Over the last 2 to 3 weeks, we've seen the category actually increase in velocity. And our hypothesis is that we'll see the category continue to perform well and actually accelerate as we move through the fall. And we know, I think upwards of 70% of kids are working virtually this year, this fall. So we believe in the category, and we continue to support it. We'll continue to support our brands and innovate, and we believe that category will accelerate as we move through the fall here.

Yes. Interesting. I hadn't thought about that dynamic as it relates specifically to cereal. I'm a pretty consistent cereal consumer myself. So I'm doing my part.

We like that. Thank you.