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

Good morning and welcome to the 92nd Annual Meeting of General Mills' Shareholders and our first virtual meeting of shareholders. I hope all of you are healthy and safe in these unprecedented times. I'm Jeff Harmening, Chairman and Chief Executive Officer of the company. It's 8:30 a.m. We have a quorum. All official papers are on file, and the inspector of election has been appointed. So I'll call this meeting to order. Here with me today is Richard Allendorf, our General Counsel and Corporate Secretary; Kofi Bruce, our Chief Financial Officer; and other members of our senior leadership team are also attending the meeting virtually. I'd now like to introduce our Board members who are attending the meeting virtually and standing for election: Kerry Clark, retired Chairman and Chief Executive Officer of Cardinal Health; David Cordani, President and Chief Executive Officer of Cigna Corporation; Roger Ferguson, Jr., President and Chief Executive Officer of TIAA; Maria Henry, Chief Financial Officer of Kimberly-Clark Corporation; Jo Ann Jenkins, Chief Executive Officer of AARP; Elizabeth Lempres, retired Senior Partner of McKinsey & Company; Diane Neal, retired Chief Executive Officer of Sur La Table; Steve Odland, President and Chief Executive Officer of The Conference Board; Maria Sastre, retired President and Chief Operating Officer of Signature Flight Corporation (sic) [ Signature Flight Support Corporation; ] Eric Sprunk, retired Chief Operating Officer of NIKE; Jorge Uribe, retired Global Productivity and Transformation Officer of The Procter & Gamble Company. And I am also a member of the Board. We are especially excited to welcome Jo Ann Jenkins to her first General Mills annual meeting. Next, let me introduce Michael Gaynor and [ Matt Lawrence, ] who are attending the meeting virtually and representing our independent auditor, KPMG. Richard, would you now please introduce the 3 proposals being voted on at this meeting?

Yes, Jeff. We are presenting 3 proposals for a vote at this meeting. These proposals are: first, the election of the 12 directors named in the proxy statement; second, an advisory vote on executive compensation; and third, ratification of KPMG as our independent auditor. These 3 proposals are recommended by our Board of Directors for shareholder approval. Full details on each of these items are provided in the proxy statement. All items have now been presented for a shareholder vote. For shareholders, if you have not voted or would like to change your vote on any of the proposals, please make sure to do so now on the virtual meeting portal. Our inspection of election for today's meeting is Broadridge Financial Solutions. I am pleased to announce that preliminary voting results suggest that more than the required number of shares have been voted: first, for the election of all director nominees; second, in support of the company's executive compensation program; and third, to ratify the appointment of KPMG as the company's independent auditor for fiscal 2021. The final vote totals, which will include ballots properly submitted today, will be filed with the SEC on a Form 8-K within the next 4 business days. We will make that Form 8-K available on our company website.

Thank you, Richard. With that, before beginning my prepared remarks on the business, we will now officially close the polls and adjourn the meeting. And now let's turn to our business update. Please note that our remarks this morning will include forward-looking statements that are based on management's current views and assumptions. There are many factors that could cause our future results to be different than our current estimates. See our fiscal '20 annual report on our General Mills Investor Relations website for reconciliation of the non-GAAP measures discussed in today's business update. Today, we find ourselves facing multiple societal challenges. And for each, General Mills is committed to doing its part to make a positive difference. At a time when the COVID-19 pandemic has created significant uncertainty, General Mills is doing what it can to avoid significant disruptions for our consumers. While our company's purpose is to make food the world loves, we understand that in today's environment, we are also making food the world needs. That's why we have taken steps to strengthen our supply chain and instituted new safety measures for the health and well-being of our employees. And I offer my sincerest thank you to each person working tirelessly to support our operations and our communities during this difficult time. This is also an important historical moment for racial and social justice. The horrible killing of George Floyd occurred here in our hometown of Minneapolis in May and the recent shooting of Jacob Blake in our neighboring state of Wisconsin. As a company, we are committed to helping lead the Minnesota corporate and community coalition to create sustainable and meaningful change around racial justice in the twin cities. And we are continuing our work to build a culture of belonging here at General Mills. In the U.S., we committed to doubling the representation of our black managers, increasing our minority representation to 25% and doubling our spend with minority-owned suppliers. And when it comes to the fight against climate change, you know that we have long been a committed player. In fact, 2019 represented our 50th year of General Mills reporting our social and environmental performance to stakeholders. We believe that it's no longer enough to sustain our planet. To truly be a force for good, we must regenerate the natural system upon which we all depend. To that end, last year, we announced a bold commitment to advance regenerative agriculture practices on 1 million acres of farmland by 2030. And for the last 2 years, General Mills has been selected as a member of the Dow Jones Sustainability Index, the most prestigious global recognition for leadership and corporate sustainability. Before I turn to our fiscal '20 results, I'll say that our overall business goal is always to create growth that translates into top-tier shareholder returns over the long term. And we understand that the foundation of long-term returns must be consistent profitable growth. As we look to our fiscal 2020 results, it is clear that General Mills is strongly on the right path. We exceeded our external goals for sales growth, adjusted operating profit, adjusted diluted earnings per share and leverage. Total net sales were up 5%. Organic sales grew 4%. We grew adjusted operating profit 7% while continuing to build our brands. We increased media spending by 15%. Adjusted diluted earnings per share increased 12%, and we used our strong free cash flow to lower our leverage ratio to 3.2x net debt to adjusted EBITDA. I am proud that in fiscal '20, we delivered outstanding performance, and we successfully navigated a challenging operating environment. Now turning to fiscal '21. We have outlined 3 priorities that keep us focused on what we can control and allow us to deliver competitive performance in the short term while continuing to advance our long-term strategies. We will compete effectively everywhere we play. We will drive efficiency to fuel investment, leveraging our HMM initiatives and volume leverage to fund increased spending in our brands and capabilities. And third, we will reduce our leverage to increase our financial flexibility. I'm pleased to say that as we've started the year, we're off to a good start on all 3 priorities. First, we're competing effectively, and we're doing it everywhere we play. At-home food demand remains elevated relative to prepandemic levels, though it has moderated as we expected from the fourth quarter. And we continue to win in this environment. We are gaining market share in our 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. Our second priority for driving efficiency to fuel investment, we continue to expect another strong year of COGS Holistic Margin Management savings. We anticipate media spending will be up for the full year. And we're planning on meaningful investment in enterprise capabilities, including data and analytics and e-commerce. 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 a full year adjusted operating profit margin roughly in line with last year's level. Our third priority of reducing our leverage, we continue to keep a sharp focus on our cash and capital discipline, which have 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 leverage ratio again this year. In closing, I'm proud of what we accomplished in fiscal '20, and we are on track for another successful year in fiscal '21 while managing the significant uncertainty that the COVID-19 pandemic brings. Tune in tomorrow, September 23, for our first quarter earnings release. The live Q&A webcast and materials will become available on our General Mills Investor Relations website. And with that, we will now begin our Q&A session. To give as many people as possible the opportunity to participate, we opened up the virtual meeting portal for questions after we filed our proxy statement in August. [Operator Instructions] We will start with responding to the questions we received prior to the meeting.

Now for the first question. We received a number of questions on how the company is addressing racial equality, so we wanted to provide an update on what the company has been doing on this very important matter. As discussed in my prepared remarks, we were heartbroken by the killing of George Floyd. And we realize that this killing in our hometown is only one piece of the much broader and complex picture of systematic inequality that black people face in America, and it's time for real and lasting change. We will lead differently, vocally, tirelessly, focusing our efforts where our expertise is most impactful: equitable food access, equity in education and equity in representation. So first, equitable food access. We will direct our philanthropy to work locally and nationally with food banks and anti-hunger organizations to address food and security that disproportionately impacts communities of color. As far as equity in education, Box Tops will build on its legacy of giving nearly $1 billion to schools, with a renewed focus on creating greater equity and education for kids of color so they can reach their full potential. And in terms of equity in representation, we will address representation and access opportunities in the U.S. at General Mills by doubling the representation of our black managers, increasing our overall minority representation to 25% and doubling our spend with minority-owned suppliers. So for the next question, what is the company doing to fight obesity, diabetes and heart disease? While we recognize diabetes and heart disease as concerns that many consumers have today and as the leading public health concerns, particularly in the U.S., Cheerios is highlighting the role it can play in reducing the risk of heart disease using on-pack messaging and in its advertising. Also, products like Fiber One bars support consumers worried about obesity, diabetes and heart disease, so do offerings, such as low-sodium Progresso soups, Yoplait yogurts and Cascadian Farm and Muir Glen fruits and vegetables. So for the next question, although General Mills stock is performing well, why is it that the market tends to value Kellogg's at a higher price per share than General Mills? In other words, what do they have that we do not? Well, while we respect and have been competing against Kellogg's for nearly 100 years, as it relates to how the market values General Mills, Kellogg's or any competitor, we believe the more comprehensive metric to look at is the company's enterprise value, of which stock price per share is just one component. When looking at enterprise value, you'll find that General Mills is more highly valued relative to Kellogg's. We think we've been competing quite effectively against Kellogg's and other competitors recently, including expanding our market share leadership in U.S. cereal and gaining share across nearly all of our top countries and categories, as I mentioned in the business update. Now our job is to continue to drive profitable growth that will further increase the value of General Mills and result in strong returns to you, our shareholders, going forward. The next question, why do retired employees no longer receive matching funds on donations to charitable organizations? We sunset our charitable matching program for retired employees in 2017 in connection with the reduction of the charitable budget for the General Mills Foundation, which is entirely funded by General Mills, Inc. This budget reduction, coupled with declining retiree participation in the matching program, led us to make a very difficult but necessary decision to remove retiree eligibility from the foundation's charitable gift and matching program. Our next question, what is your policy on including women in higher positions of management? I'm pleased to say that General Mills has a strong foundation of women in leadership roles, with 50% of professional positions and 35% of officer positions currently being held by women. We invest in and are committed to cultivating a pipeline of female leaders in a culture where women can thrive and support each other. For the next question, General Mills used to be routinely listed among the best places to work. What happened? Well, I'm extremely proud that General Mills continue to be recognized among the best places to work. We continually -- continue to receive recognitions, which you can view at generalmills.com. A few awards include 50 Best Large Companies to Work For by Comparably, 50 Best Large Companies for Women and Diversity by Comparably, 100 Best Companies by Working Mother, Best Places to Work For LGBTQ Equality by the Human Rights Campaign, Military Friendly Employer by Victory. For the next question, we received a few questions on why our sales, profits and stock price have not been growing faster in recent years. Prior to the COVID-19 pandemic, we were progressing on a path toward restoring consistent top line growth. We and the industry spent a few years with a focus primarily on cost and margins. During that time, we [ took ] some important actions to streamline our structure and improve our efficiency. I launched our global growth strategy when I took over as CEO in fiscal 2018, and we've seen a significant improvement in our end market competitiveness over the last 3 years. During fiscal 2020, prior to the pandemic, we were already on track to deliver a year of good growth on the top and bottom lines. With the acceleration we saw in the fourth quarter, we finished the year with 4% organic sales growth and 12% adjusted diluted earnings per share growth as I mentioned in the business update. As we've entered fiscal 2021, we're continuing to strengthen our business in many ways, including increasing our agility, deepening our relationship with our customers, getting our brands in front of many new consumers, enhancing our competitive position in our categories and investing meaningfully in our people, our brands and our capabilities. These changes shows up to deliver continued strong results in the months and years to come. For the next question, the company sales appear to have benefited from the current pandemic. What is the management's plan to do with the additional profit and cash flow? As I discussed during the business update portion of the meeting, our fiscal '21 priorities include competing effectively everywhere we play, driving efficiency to fuel investment and reducing leverage to increase financial flexibility. This includes investing in our brands and capabilities to drive long-term growth. And elevated demand from COVID-19 has allowed us to repay debt faster than we had anticipated. Once we achieve our deleverage goal, we will begin shifting toward our long-term capital allocation priorities, which include dividend growth, share repurchases and opportunistic acquisitions. So the next question is related, when does the company plan on increasing its dividend? We're thrilled to be ahead of schedule on our deleverage goal. When we announced the Blue Buffalo deal, we said we'd get to 3.5x leverage by the end of fiscal '20. And we ended up at 3.2x. Our ultimate goal is to get to 3.0x leverage. And as we reach our leverage goal, we'll begin shifting toward our long-term capital priorities, including dividend growth, share repurchases and opportunistic acquisition. Rest assure that dividend growth is at the top of the priority list. For the next question, how are climate change and other environmental matters impacting the company? Are you keeping up with your peers? And is your compensation structure accounting for these issues? We leverage our scale by increasing our impact as a force for good in the world. It's no surprise that as a food company, our business depends on the earth and on its resources. Threats to land, the water and climate pose risk to our business and could compromise our ability to feed a growing population. We believe that it's no longer enough to merely sustain our planet. We must regenerate the natural systems on which we all depend. To that end, we announced a bold commitment to advance regenerative agriculture practices on 1 million acres of farmland by 2030. General Mills' leadership team has ultimate accountability for the company's global responsibility and regeneration programs. Responsibility goals are included in many of the performance objectives of our officers and employees, including my own. I'm proud of the leadership we bring and our ability to collaborate with others for bigger impact. It's critical that we connect these efforts to our brands, and we've leveraged purpose-driven consumer messaging on brands like Cheerios, Nature Valley and Annie's. Purpose-driven brands create strong consumer engagement and ultimately deliver faster growth. For the next question, based on the current climate in Minneapolis, has the company considered moving the headquarters? We remain fully committed to Minneapolis, where General Mills was founded more than 150 years ago. We have not considered moving our headquarters. Instead, we are helping to lead the Minnesota corporate and community coalition to create sustainable and meaningful change around racial and social justice here in the twin cities. The next question, is the Board or management being pressured to donate to political organizations? No, the General Mills Board of Directors and management are not pressured to make any political contributions. All transactions by the General Mills Political Acts Committee are completely transparent and available on the Federal Election Commission website. For the next question, please let us know how General Mills is helping food banks and addressing food security issues for children during this unprecedented pandemic. When the novel coronavirus spread across the world, one thing was evident among General Mills employees: they all wanted to do their part to help in some way. Across the company, from our product brand teams and the General Mills Foundation to employees in their free time, plans were made and actions have been taken. Specifically, $5 million in General Mills product was manufactured to immediately donate to Feeding America to provide 4.2 million meals for families in need, and $5 million in charitable grants were given to help those in need from the General Mills Foundation. Next, we received a number of questions on the Board's size and adding more women and ethnically diverse directors to the board. There are currently 12 directors on the General Mills Board, which is typical for a company of our size and complexity. The current size of the Board provides a broad set of valuable skills and experiences and allows us to effectively staff and fulfill the responsibilities of the Board's 5 committees. Diversity has been a core value of our Board and the company for many, many years, and we have a policy encouraging diversity on the Board. Currently, 4 of our 11 independent directors are ethnically diverse, and 5 of our 11 independent directors are women. We are proud to say that we are 1 of a few public companies that has had at least 1 female director and 1 ethnically diverse director on its Board every fiscal year since 1975. Next question, in view of concerns regarding KPMG's involvement in accounting fraud and tax shelters, why do you continue to use KPMG as your accounting firm? The Audit Committee of the Board is responsible for the selection, retention, oversight, evaluation and compensation of our independent auditor, KPMG. The Audit Committee annually reviews KPMG's qualifications, their performance, independence and fees in making its decision whether to engage KPMG. The process -- the focus of the process is to select and retain the most qualified firm to perform the annual audit. During the review and selection process, the Audit Committee considers a number of factors, including: a view of the firm's independence and internal quality controls; and any legal or regulatory proceedings that raise concern about KPMG's qualifications or ability to serve as our independent auditor, including reports, findings and recommendations of the public company accounting oversight Board. Based on its annual review, the Audit Committee is confident that the retention of KPMG as our independent auditor is the best interest of the company and you, our shareholders. I think we have time for one more question. Before closing, I wanted to address a few questions we have received on some of our products not being fully stocked in the stores. I want to remind our shareholders and consumers that now and throughout the pandemic, our terrific supply chain and sales teams have been working around the clock to ensure a reliable food supply as demand for food at home has increased significantly. While each individual product and platform has a unique situation and there are unfortunate occasions when you might find your local retailer is out of Gold Medal flour or Betty Crocker desserts or that a particular variety of Big G cereals is absent, rest assured, we are working tirelessly to keep your favorite General Mills products on the shelves and to keep our employees healthy and safe. With that, we will now formally close the question-and-answer session. I would like to note that we did receive a few additional questions that we did not have time to answer today. Responses to those questions will be posted on our Investor Relations website by the end of the week. I'd like to thank you for participating in today's meeting and for being a shareholder of General Mills. We look forward to our meeting again next year.

That concludes today's conference. Thank you for joining, and have a pleasant day.