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

Good morning. It is an honor to kick off the CAGNY conference once again. If our records are correct, this is the 50th consecutive year that General Mills has opened the conference, though it's the first where attendees are participating from the comforts of their home offices. We look forward to gathering again in sunny Florida in the future. But in the meantime, we hope you and your loved ones are staying safe and healthy. Before we get started, I'd like to remind you that our remarks today include forward-looking statements that reflect our current views and assumptions. The supporting presentation on our Investor Relations website includes a list of factors that could cause our future results to be different than our current estimates. Before the pandemic, we aligned on a new strategic framework to drive the next chapter of growth for General Mills. This plan, which we call Accelerate, sets clear priorities for where we play, how we win and how we'll drive superior returns for our shareholders over the long term. By aligning our 35,000 employees behind our Accelerate strategy, we were able to build positive momentum on our business before the pandemic hit. In fact, at this time last year, we were forecasting 1% to 2% organic sales growth for fiscal '20, which was a notable step-up from the previous year. Weeks later, when the virus turned into a pandemic, General Mills was ready, and we have met the moment. Since then, we've taken care of our people, delivered on our company's purpose of making food the world loves and needs and executed to advance our strategic priorities. Our ability to meet increased global at-home food demand has driven impressive results in the first half of fiscal '21, with organic net sales up 8% and adjusted operating profit and adjusted diluted earnings per share, each up double digits. We're also outperforming our peers in household penetration gains and generating repeat rates that outpace those of our categories. We've continued to execute our Accelerate strategy through the pandemic, taking actions to maintain our momentum. These efforts have included increasing and evolving our brand-building spending, continuing to prioritize innovation and stepping up investments in advantaged capabilities. As a result, we're confident General Mills will come out of this period better positioned to compete and to win in the future as a larger and more profitable business with stronger brands, higher market shares and enhanced capabilities. In short, we remain bullish on our ability to generate sustainable, profitable growth over the long term. As we go through the remainder of today's presentation, I'll share an overview of our strategic framework. Then Ivan Pollard, our Chief Marketing Officer, will discuss how we're boldly building our brands. And finally, Kofi Bruce, our Chief Financial Officer, will explain how our strategy is linked to our shareholder return model. Our Accelerate strategy is centered on strategic choices that we have made about where to prioritize our resources to drive superior shareholder returns. We've made choices about where to play across geographies as well as platforms and brands, and we've aligned on initiatives to create competitive advantages and to win. The output of our Accelerate strategy will be long-term shareholder value creation generated through consistent sales growth, margin expansion, cash conversion and cash returns. Now let's dive a little deeper on the elements of our strategy, starting with where to play. General Mills brands are sold in more than 100 markets around the world, but we are prioritizing our resources and investments in 8 core markets: United States, Canada, France, the U.K., Australia, China, Brazil and India. Our #1 priority is to win and grow profitably in North America, which represents roughly 80% of our worldwide net sales and even higher proportion of our profit. Outside North America, our other 6 core markets represent another 15% of our worldwide net sales, where we have the necessary scale and infrastructure to drive profitable growth going forward. So we are clear in the markets that are going to drive our growth. We're also clear about where we're prioritizing across platforms and brands, starting with 5 global platforms where we're putting differential resources and investments to drive differential results. Those platforms are cereal, pet food, ice cream, snack bars and Mexican food. These 5 platforms offer attractive long-term growth potential and strong margins, and they're areas where General Mills already has advantage capabilities and leading brands. And because these products play similar roles for consumers around the world, we can leverage our capabilities and investments globally. Together, our 5 global platforms represent about 45% of our worldwide net sales, and we expect them to lead our growth and drive favorable profit mix for our portfolio into the future. Next, we prioritize a collection of leading brands with more localized growth potential. We call these brands local gems, and together, they represent about 35% of our global sales. Examples of our local gems include Pillsbury refrigerated and frozen dough, Annie's organic products, Yoplait yogurt and Totino's hot snacks in North America; Wanchai Ferry frozen dumplings in China; and Yoki and Kitano meals and snacks in Brazil. We expect our local gems portfolio to grow roughly in line with our total company growth rate over time. We're allocated outsized resources and investments first to our global platforms and then to our local gems to ensure we're maximizing our highest return on investment opportunities. In the remaining 20% of our portfolio, we have strong brands that can generate consistent cash flows, but their growth has historically lagged our company-wide average. So we'll invest at appropriate levels to remain competitive within those categories. We'll also remain committed to portfolio reshaping through both acquisitions and divestitures to reach our long-term growth goals. General Mills has a strong M&A track record with success in transformative acquisitions like Blue Buffalo and bolt-on deals like Annie's. Looking forward, our primary acquisition focus will be growth accretive, bolt-on deals within our core markets that build on our current platforms and capabilities. We're also continuing to target divestitures, comprising roughly 5% of net sales. Like we did with Green Giant, we'll be focused on finding new homes for growth dilutive platforms, where we see lower-than-average returns on our investment. Our Accelerate strategy also defines how we will win. Our plan focuses on boldly building brands, relentlessly innovating and unleashing our scale and finally, being a force for good. Throughout our 155-year history, bold brand building centered on the consumer has been a hallmark of General Mills from the very first radio ad jingle on Wheaties to the on-the-go energy that nature intended with Nature Valley. We work hard to ensure our brands stay relevant to our consumers' ever-changing needs and demands. Staying relevant requires clear communication about each brand's purpose and meaning. We do this because we know brands with purpose deliver stronger business results. As Ivan will share in more detail, our purpose-driven approach is resonating across our portfolio, and we're continuing to evolve our brand-building playbook and the size and shape of our investments to accelerate growth. Relentless innovation is essential to maintaining vibrant brands, and it's a critical component of our Accelerate strategy. We've revamped our entire innovation process with a focus on getting new products into the hands of consumers faster. Now we can measure the time from an idea to a first consumer transaction in weeks rather than months or years, resulting in more experimentation with greater efficiency. And we're seeing the results, with our sales contribution from new products increasing 30% from just a few years ago. We're enjoying success from innovation across our core platforms, including Cinnamon Cheerios, Old El Paso Tortilla Pockets, Pillsbury Heat & Eat desserts and new decadent flavors of Häagen-Dazs ice cream. We're also taking our brands into new spaces as we did with our Oui by Yoplait platform, which now represents roughly $150 million in retail sales; and with our new Blue tasteful product line, which brings our true Blue promise and a superior taste experience to the $10 billion cat food segment in the United States. To ensure we maintain the pace of innovation, we've structured our organization to foster continued development. For example, we recently created g-works, an internal start-up accelerator that discovers and builds new growth businesses. And because we know that innovation is not exclusively happening within our company, we established an investment arm called 301 Inc. to make minority investments in emerging high-growth, innovative brands that have the potential to accelerate our portfolio's growth. We currently have 11 investments, including Good Catch, a brand of plant-based tuna and other fish alternative products. And our most recent investment, Pots & Co, a U.K.-based company that sells restaurant-quality desserts using only natural ingredients. As a large food company, we're leaning into the advantages of our scale. For example, we're aggressively investing in data and analytics to drive differential growth and efficiency across our enterprise. We're gathering unparalleled insights from the first-party data we collect through our brand websites and our Box Tops for Education mobile app and then responsibly using this data to capitalize on trends for the benefit of our brands. We're also leveraging our scale to enhance our core capabilities, including our holistic margin management productivity program, our strategic revenue management initiative and e-commerce. Through the pandemic, we've increased our investment in these capabilities, which will better enable us to compete and win moving forward. The final aspect of how we will win is by being a force for good. We know our investors care about integrating climate and social impact into their investments, and this mindset has been deeply ingrained in our company culture. In fact, General Mills has been reporting on our corporate responsibility efforts for more than 50 years. And 6 years ago, we became the first company to publish a climate goal approved by the Science Based Target Initiative. Today, our force for good efforts are focused on advancing our 4 critical priorities: regenerating our planet, improving food security, strengthening our communities and advancing inclusion. These are areas where General Mills can have a real impact, and they're inherently tied to the success and sustainability of our business. For example, sustainable sourcing is key to ensuring long-term health in our value chain. However, we believe that sustaining our planet's natural systems will not be enough to feed a growing population. We need to regenerate them. So 2 years ago, we announced a commitment to advance regenerative agriculture practices on 1 million acres of farmland, which represents approximately 25% of our raw material footprint across all of North America. This will help us achieve 2 important goals: reducing greenhouse gas emissions by 30% across our full value chain by 2030, and reaching net zero-emission levels by 2050. But being a force for good is not simply about mitigating risk, it is also increasingly critical aspect of how we connect with consumers and grow our business. A recent Harris Poll indicated that all else equal, nearly 80% of consumers would switch brands if a more sustainable version were available. Our job is to be a force for good work into our brands, so it becomes relevant for our consumers. For example, just today, Nature Valley is announcing the launch of the first plastic snack bar wrapper to be approved as store drop-off recyclable. In addition, our Annie's and EPIC brands feature on-pack messaging, highlighting climate initiatives. We're proud of the work we're doing to be a force for good, and we're proud of the recognition we've received as leaders in this space, including General Mills being named to the Dow Jones Sustainability Index and CDP's A List for climate and water, and we see more opportunities to deliver on our force for good priorities and connect that work to more brands to accelerate growth. The output of our Accelerate strategy is a shareholder return model that prioritizes the investments and activities that will enable General Mills to deliver sustainable top and bottom line growth. We continue to focus on 4 key value-creating levers: sales growth, margin expansion, cash conversion and cash returns. And as Kofi will outline later, we're targeting specific metrics in each of these areas, including 2% to 3% organic net sales growth, mid-single-digit adjusted operating profit growth and mid- to high single digit adjusted diluted earnings per share growth while maintaining our strong capital discipline and paying a healthy dividend. Now I'll hand it over to Ivan to provide more detail about how we're boldly building our brands today and for the future.

Thank you, Jeff, and good morning to everyone. It's a pleasure to participate in the CAGNY conference this year, even if it is from the frozen tundra of Minnesota. Now bold brand building is at the center of our Accelerate strategy, and we're on a journey to ensure that our brands stand out more than ever and that they are infused with purpose and meaning. To do that, we're reinvesting in a reinvented marketing playbook. Our marketing strategy is built on the core beliefs that brands matter, big ideas count and execution is crucial. And whilst we've always known this to be true, the pandemic has only reinforced our view that nurturing vibrant brands with big ideas and outstanding execution really delivers tremendous results. To achieve those tremendous results, we have to begin with a clear understanding of each brand's anatomy and then bring those brands to life with what we call remarkably modern magical marketing, and this is leading us to reinvent our marketing playbook. Now whilst that playbook remains consumer first, we now have data and analytics guiding us so we're able to find precisely when and where to best engage with our consumers. And ultimately, this makes a real difference in driving superior results. Now of course, those superior results cost money. And after a period of declines, we've returned to growing our media investments in recent years. Our media spend was up 15% in fiscal '20, and we expect it will be up mid- to high single digits in fiscal '21, even with one fewer week in our calendar. It's not only the amount that's important, it's also how we are investing in our brands. And this, too, is evolving. We're significantly ramping up our e-commerce media investment and growing the proportion we spend in other digital vehicles whilst maintaining a strong presence on old vehicles like television. Now we don't have a target percentage for digital versus traditional media spend. Instead, we meet our consumer where they are and then choose the best tool to get our particular job done in that moment and in that location. So let me give you 3 examples of how we are investing behind our evolving playbook, including our developing theory of connected commerce, our work to leverage purpose-driven influences and build cultural capital and our back-to-the-future journey on compelling creativity. Now let's start with connected commerce. The great advantage of digital engagement is the immediate impact on shopability and the speed at which we can tailor our message to the moments that matter most to the consumer. Now as you all know, digital activity and accessibility is growing rapidly. And in the last 12 months, this has led to astonishing growth in grocery through e-commerce. Now usually, people think of e-commerce as a digital click leading to some physical collect, but we think it also needs to be considered the other way around because every interaction we have with the consumer can move them closer to commercial transaction with us, and every commercial transaction that they make can create an experience and data that moves us closer to our consumer. Now we call this connected commerce. It's a practice of combining the traditional marketing model and the e-commerce model into one symbiotic system. Now one example of how we're rapidly scaling this system is our Box Tops for Education program. This program has been around for almost 25 years, providing a purpose-driven incentive to purchase General Mills brands and generating hundreds of millions of dollars in benefits to school. Now for consumers, the program used to involve cutting out a cardboard box top and then sending it to a school in an envelope, quite literally old school. So 18 months ago, we digitized this program. Obviously, it makes it easier for the consumer, but it's also more rewarding for the schools and much more useful for us because now the physical action of buying a product in a store is translated into a digital engagement by simply scanning the receipt in an app. So where the consumer saves time and hassle, we get access to receipt level first-party data. And when we use that data protected naturally with privacy safeguards, we can spot patterns and drive more value for the consumer, for the customer and even for the schools and of course, for ourselves. Now to date, we already have 2.7 million app downloads, more than 700 million rows of receipt data and over 80,000 schools have benefited. Now we're able to experiment with that data that we are collecting, scale up some of our winning tests and launch new capabilities in an endless loop of learning that benefits us all. And we fully expect to keep growing and expanding our user base through which we can drive more connected commerce. The second aspect is taking the notion of digital development even further because the year 2020 saw the enormous growth of digital content consumption, especially through social media sites like TikTok and Instagram and YouTube. Now the lifeblood of that ecosystem is influencers, and the heart that pumps that blood around that system is celebrities like sports stars. So for example, LeBron James has almost 50 million followers on Twitter, and some of his individual tweets are seen by more people than see his regular season games on TV. So this is opening up new possibilities for innovating on, for instance, an old playbook or playbox in this case, especially when we combine it with enhancing our brand purpose. We've been featuring athletes on the Wheaties box for nearly 90 years, starting with Lou Gehrig back in 1934. But in recent years, we've been combining the power of the Wheaties box with the power of the athlete to turn that combined force into a force for good through social activation. Now this enhances the brand's purpose, but it also elevates important conversations. For example, last year, we featured Serena Williams and what she stands for both on and off the court. And more recently, we released a box featuring LeBron James and his I PROMISE School. Now when we do this, sales grow on Wheaties. In fact, Wheaties' retail sales are up high single digits this fiscal year. But more importantly, so do the stories that get told, they grow also and the conversations that arise. And that has a positive impact on society when we talk about the right things and on our company's reputation also. For instance, General Mills recently ranked #6 overall and #1 among CPG companies on Newsweek's Most Responsible Companies list for 2021. Now our focus on harnessing the power of cultural capital for good is not limited to just Wheaties. It's happening across all of our brands, including Yoplait and Annie's and Reese's Puffs and Old El Paso and many more. Now you can see how our new playbook is evolving with initiatives like connected commerce and cultural capital, but it's also a critical part of the old playbook, compelling creativity that I believe our industry has been neglecting, now General Mills is working to enhance for our brands today. Research shows across the years that one of the highest correlations to media ROI is the quality of a creative idea. Now with that in mind, we're helping drive a renaissance in the craft of creative brand storytelling that generates differential financial returns inside General Mills. You can see this bought to life, for example, in our Häagen-Dazs ice cream business. Recently, we saw an opportunity to elevate the creativity of our ideas on Häagen-Dazs. So we bought in a new agency partner to take a fresh approach to the brand. They developed a consumer insight around the constraints of the modern millennial and the Gen X and the Gen Z world, where one is constantly visible and therefore, constantly being judged. We developed creative work around this insight designed to inspire people to let go, enjoy the moment and just be themselves. It's great production, powerful music and a message that builds the brand, but also sells the product. So let me play you just a bit of this because you don't often get to hear the Chemical Brothers and see a machete at the CAGNY presentation. [Presentation]

The results are speaking for themselves. In our Europe and Australia segment, for instance, Häagen-Dazs' retail sales have grown double digits across the last 12 months, and we've gained 30 basis points of market share since the launch of this campaign despite being significantly outspent by our competition. So I hope that gives you a taste of where we're evolving, the way we are boldly building our brands. And that as we do so, we'll also beautifully build our business. So now I'll pass it to Kofi to talk about how those investments and the execution in brand building translates to shareholder returns.

Thanks, Ivan, and hello, everyone. I'm incredibly proud of the work we've done to advance our growth agenda while making the food the world loves and meet. Let me close the loop on our Accelerate strategy by outlining our shareholder return model. As Jeff shared earlier, we focus on 4 levers for driving shareholder value: sustainable sales growth, margin expansion to grow profit faster than sales, capital discipline to convert earnings into cash and then returning cash to shareholders through dividends and share repurchases. While many companies can achieve 1 or 2 of these at a time, our goal is to be a top-tier performer, able to pull all levers consistently across a multiyear time frame. Our goal is to consistently deliver 2% to 3% organic net sales growth. With modest margin expansion, we can generate mid-single-digit adjusted operating profit growth. From there, we look to convert at least 95% of adjusted net earnings into free cash flow and then we target returning approximately 80% to 90% of that free cash to shareholders through dividends and share repurchases, resulting in mid- to high single-digit adjusted diluted earnings per share growth and top-tier total shareholder returns. Now let me go into a bit more detail on each of these measures, starting with net sales growth. Sales growth is the foundation of our shareholder return model. To reach our growth aspirations of 2% to 3%, we need to do more than win where we compete today. We need to increase our growth exposure by acquiring businesses that get us into higher growth areas or divesting businesses where we don't see sufficient growth potential. With a base of 2% to 3% organic net sales growth, we can deliver mid-single-digit growth in adjusted operating profit with a modest level of margin expansion, and we have a solid track record on this measure having expanded our adjusted operating profit margin by 70 basis points between fiscal '18 and fiscal '20. Going forward, we are unleashing our scale to support the margin drivers in our arsenal, including holistic margin management, or HMM, our own productivity program that uses continuous improvement principles to reduce waste and optimize our value chain. We still see a pipeline of annual HMM savings of approximately 4% of cost of goods sold going forward, which is in line with our performance over the past 5 years. We've also significantly advanced our capability in strategic revenue management, or SRM. We're now better able to leverage data to achieve positive price/mix through tools, including mix management, trade optimization, price pack architecture and list pricing. In addition to supporting SRM, our data and analytics capability is uncovering new ways to drive efficiency, such as improving our demand and supply forecasting, which will help lower logistics costs and reduce inventory. And of course, as we step up our top line growth, we'll be better able to leverage the scale in our global operations to support margin expansion. Together, these elements are critical to perpetuating the cycle of value creation in our business. In recent years, we freed up more than $1 billion in cash through working capital improvements, and that progress has been a key contributor to our outstanding free cash flow conversion performance. We've generated $7.7 billion in free cash flow at a 127% conversion rate in the last 3 years. Looking forward, we are committed to continuing our cash discipline and generating competitive levels of free cash flow. With strong cash management as the foundation, our long-term capital allocation priorities reflect our thoughtful approach to utilizing cash to drive attractive returns for our shareholders and accelerate growth through portfolio reshaping. We've made tremendous progress in paying down debt over the past 3 years. In fact, we've reduced our trailing 12-month net debt to adjusted EBITDA ratio to 2.9x as of the second quarter of fiscal '21. At this level, we have fully shifted back to our long-term capital allocation priorities, and we see our balance sheet as a strategic asset. Our first call on cash is capital investment at approximately 4% of net sales to fuel our growth initiatives and cost savings for our businesses. Next is dividend growth, in line with earnings over time, continuing our 122-year track record of uninterrupted dividend payments. Last fall, we increased our dividend by 4% to $0.51 per share. At this rate, our yield remains strong at approximately 3.5% and in the top quartile of our CPG peers. After dividends, our next priority is growth accretive acquisitions that support the portfolio shaping component of our Accelerate strategy. And finally, we'll pursue share repurchases with an expectation that over the long term, we'll drive a 1% to 2% average annual reduction in our net share count over a multiyear time frame. Before I wrap up, let me make a couple of brief remarks on our near-term outlook for fiscal '21. As we said on our Q2 earnings call, we're executing well in a dynamic environment. We're competing effectively, fueling investments in our brands and capabilities and reducing our debt leverage, consistent with the priorities we outlined at the beginning of the year. As we move into the back half of our fiscal year, we expect that the pandemic will drive continued elevated demand for food at home relative to pre-pandemic levels. As you saw in our press release this morning, we reaffirmed our guidance for the second half of fiscal '21. Specifically, we expect our third quarter organic net sales growth to be roughly similar to the 7% growth we saw in our second quarter. Third quarter adjusted operating profit margin is expected to be in line with last year's third quarter at approximately 16.1%. And we anticipate our full year fiscal '21 adjusted operating profit margin to be in line or better than fiscal '20's result of 17.3%, even as we continue investing in our brands and capabilities to drive future growth. With that, let me now turn it back to Jeff for some closing remarks.

Thanks, Kofi. To close, let me reiterate that we're bullish about our future. We'll continue to execute on our Accelerate strategy, delivering on our purpose, investing decisively in opportunities to drive growth and winning where we compete to drive long-term value and superior shareholder returns. Thank you all for joining us this morning and for your continued interest in General Mills.