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

Hey, good afternoon, Jeff. Thank you so much for joining us today. Over the years, General Mills has been ahead of the curve on so many food trends, going back to before whole grains and gluten-free were in vogue and most recently, on sustainability. With more than 25 years at General Mills and at least 4 -- and the last 4 as CEO, you've led General Mills through many of these themes, including a shift towards organic, with the acquisition of Annie's and EPIC; the successful integration of Blue Buffalo; General Mills' consistent share gain in cereals; and now leading with your Accelerate strategy and the reshaping of your portfolio. Again, I cannot thank you enough for joining us this afternoon. With that, I'll turn it over to you for opening comments before we begin the Q&A.

Well, thank you, Ken. I really appreciate it, and it's great to be here. I've got about 7 minutes and 15 seconds of comments, and then we'll turn it over for questions. But before we get to Q&A, I'd like to provide a little bit of color on a few recent announcements we've made to continue to advance our Accelerate strategy. As we move to the second slide in our supporting presentation, I'll note that today's discussion will include forward-looking statements based on our current views and assumptions and that our future results could be different than our current estimates. My main message for General Mills today is that everything we're doing as an organization is clearly aligned to our Accelerate strategy. We launched Accelerate internally more than a year ago, and we unveiled it to the investment community in February at CAGNY. You can see the overview outlined here on Slide 3. Accelerate is really all about the choices we're making to drive profitable growth and top-tier shareholder returns, including long-term goals of consistently generating 2% to 3% organic net sales growth, mid-single-digit operating profit growth and mid- to high single-digit EPS growth. As a part of this strategy, we've aligned on initiatives to create competitive advantages and to win. These include boldly building our brands, relentlessly innovating, unleashing our scale and being a force for good. In fact, you can hear more about our force for good work during our first ever ESG investor event, which will be webcast next Tuesday, May 25, starting at 8 a.m. Eastern Time. Achieving our long-term goal so as to driving profitable growth on our core business, and I'm very proud that we've been doing that this past year. We've competed effectively and are gaining share across our core markets and the majority of our brands. That includes fiscal year-to-date share gains in cereal, pet food, ice cream, snack bars and Mexican food, our 5 global platforms. As we said at CAGNY, competing effectively in our current portfolio won't be enough to drive our long-term objectives. We need to continue to reshape our portfolio to enhance our growth exposure. I'm pleased to say that we've announced 2 deals in the past 2 months that represent significant steps towards that objective. Let's move to the next slide. First, on March 23, we announced that we've entered into a memorandum of understanding to sell our interest in our European Yoplait operations to Sodiaal. This proposed transaction will improve our growth profile. It would enhance our margin and allow us to focus on the businesses where we see the greatest potential for profitable growth. We expect this deal to close by the end of the calendar year. Then last Friday, we announced the acquisition of Tyson's pet treat business, a deal that strengthens our position in the fast-growing U.S. pet food segment. A summary of that transaction is on Slide #5. Tyson's pet treat business, which includes the Nudges, True Chews and Top Chews brands, is the leader in natural meat treats and is highly complementary to our existing Blue treats portfolio. Blue already has a solid position in the crunchy biscuit and training bits subsegments within natural treats, while Tyson's business leads in jerky and other meat for pet snacks. As a part of the deal, we're acquiring a factory in Iowa, which gives us the access to manufacturing capability and technology to produce these differentiated product forms. Annual net sales for Tyson pet treats business totaled more than $240 million and have grown at nearly 28% compounded rate over the past 3 years. We see significant opportunities for future growth by expanding awareness and availability of these products, building on what is already a highly loyal base of pet parents. In addition to a strong track record and future growth potential, the Tyson pet treat business has an attractive profile, with an operating profit margin that is accretive to General Mills company average. And we see the opportunity to generate cost synergies as we plug the Tyson business into our existing pet structure. We're paying $1.2 billion in cash for the acquisition, which equals an effective price of $975 million after factoring in net present value of the tax benefits that result from the transaction. Including the tax benefit and cost synergies, the purchase price equals an EBITDA multiple of roughly 18x. As we indicated in the press release last week, we expect this acquisition will be moderately accretive to General Mills' earnings in the first 12 months, excluding transaction and integration expenses and including an estimated purchase accounting impact in the first year. We'll fund the acquisition with cash and with some short-term borrowing. We expect the deal will have only a minor impact on our leverage position and our share repurchase activity in the near term. And we expect the transaction to close in the first quarter of our fiscal 2022. With these 2 transactions, we're taking significant steps towards reshaping our portfolio for faster and more profitable growth. But we think there's still more work to do to achieve our targeted growth exposure, and we remain committed to additional portfolio shaping through acquisitions and/or divestitures to further enhance our growth profile. Now let's move to the final slide. In addition to our reshaping our portfolio for growth, we're also reshaping our organization to be more aligned to our growth. Two weeks ago, we announced the restructuring action to better align our structure and resources with our Accelerate strategy. As the initial step in that process, I announced changes to my leadership team. First, Dana McNabb, who has been leading our European and Australian segment, will step into a newly created role as Chief Strategy and Growth Officer. Dana will be responsible for key growth capabilities and strategic initiatives that advance our Accelerate strategy. Second, Sean Walker, who currently leads our Asia and Latin America segment, will add Europe and Australia to his responsibilities and will lead both segments going forward. And third, John Church, our current Chief Supply Chain Officer, will transition to a new role as Chief Transformation and Enterprise Services Officer. In this role, John will lead enterprise transformation initiatives as well as manage our global shared service function. And finally, Paul Gallagher, who currently leads our North America Supply Chain, will join my leadership team as the Chief Supply Chain Officer. Paul joined General Mills about 2 years ago after spending nearly 20 years in supply chain and leadership roles at Diageo. With those changes already announced, we are now going through the exercise of redesigning our structure through the rest of the organization. We expect to update our 8-K filing within the next month to provide an estimate for the financial impact of these organizational changes. To be clear, this is not simply a cost-cutting exercise. The goal of this initiative is to free up resources from parts of our organization and redeploy them into more growth-facing areas, such as digital and data and technology, e-commerce and strategic revenue management and other capabilities that are critical to our future success. To summarize, we have a clear strategy in Accelerate. We're executing well on our core business. And we're actively reshaping our portfolio and our organization to deliver consistent profitable growth. With that, Ken, why don't you kick off the Q&A?

Great. Thank you so much. Before we get into the pet food and the reorganization, let me just ask a big picture question. You said in your last call, as well as at CAGNY, that General Mills will emerge stronger after the COVID. Can we take it in 2 parts? One is, from a qualitative point of view, what capabilities have you learned and worked with? But also from a quantitative perspective, what financial metrics are best to measure how you're moving forward on this? And how does this relate to your pre-pandemic growth exposure of 1% to 2% and your long-term growth algorithm?

Yes, Kenneth. Thanks for that question. I think we've reached -- we have come out of this pandemic stronger in a number of ways. I'd start with stronger brands. Our household penetration and repeat rates are up across a vast majority of our brands. We're stronger in our capabilities. We have enhanced our e-commerce capability. We've enhanced our data and analytics capability. We've enhanced our strategic revenue management capability, which will certainly come in handy over this next year as we see tremendous inflation. So I'm glad we've enhanced that. But also, we're in a much stronger financial position. Our -- we've significantly reduced our leverage. We've resumed our dividend growth. We've resumed our share buybacks. And so all the levers that add to shareholder value, in addition to reshaping our portfolio. And finally, we have a stronger portfolio. And what exactly our growth exposure will be will remain to be seen. But by -- with the proposed sale of our European yogurt business and the addition of our pet business from Tyson, both those things combined, it really enhanced our growth exposure and our -- the profitability of our business. So in a number of ways, we'll end this pandemic as a stronger company than when we started.

Great. Now just moving to the pet food acquisition. Can you talk about the decision to buy versus build within pet food? And in treat specifically, like what does this acquisition say about Blue's performance? And more importantly, what does it say about their treats portfolio?

Yes. So the first thing I would say, what I think it means about our Blue performance is that we really like what we're seeing in the pet food category, and we've got a great brand and a great ability to win, and as evidenced by the fact that we've been growing our Blue Buffalo business by a compound annual growth rate of double digits. And so we believe in the category. We believe in the Blue brand. You say, "Well, that's great, Jeff, then why acquire this business?" What I would say, in most parts of the natural business, Blue Buffalo is the top player in this segment. That is not true in pet treats and especially in dog treats, where Tyson has the #1 position. And so what -- we've innovated in a lot of areas like wet cat food. We've innovated into the treats area with bones. We'll continue to innovate Blue Buffalo on our own. But this was one subsegment of the category where -- and dog treats, we have some nice businesses in training and in healthy treats, but in this meat snacks area, we really didn't have a business. So what we're acquiring is highly complementary to the Blue Buffalo business and whether from a customer base or from a consumer base.

And you mentioned it, so I have to ask it. Can you update us on the progress of the Tastefuls launch?

We are -- the Tastefuls launch, so far, all I will say is it's been wildly successful. And cats tend to love this. I haven't tried it myself, but I can tell you that a lot of cats have, and they really like it. So we're -- we could not be more pleased with the launch of Tastefuls so far.

Great. And with the reorganization, you kind of alluded to it, but can you share a little bit more on the savings it will drive? And how do you see the opportunities to improve efficiencies and resource allocation?

Yes. So I won't speak much to the savings. And I'm not really the main driver behind the reorganization. I mean we'll talk more about our guidance in maybe a month or so, and we'll incorporate any savings into that. But it really is more to get us aligned and our resources aligned to the things that are most important to us. And creating a strategy and growth organization to continue to reshape our portfolio will be important to make sure that we're putting our resources behind the things that are more important and to kind of elevate the things that we think are going to make the biggest difference ahead of us, specifically as we look at e-commerce and data & analytics and strategic revenue management, those 3. This reorganization will allow us to keep putting increased emphasis on those things, which are a key part of our Accelerate strategy.

Great. As you do this Tyson deal, and I know as you kind of do the Accelerate program, does this change your ability to do other deals? Does this limit the size of your other deals? How do you move from here? Is this just one of a series of deals that you're thinking about? Just kind of thinking about how you're thinking about the acquisition outlook for you guys?

Yes. So this -- so we're really excited about this deal. It's a little bit bigger than our Annie's deal, but it's roughly the same size. And first, I would start off by saying it really doesn't -- it doesn't change our leverage very much and it doesn't really change our capital allocation strategy, which starts with servicing our core business with 3.5% or 4% of capital spending as a percentage of sales, but increasing dividends with our sales, done some M&A and then 1% to 2% share repurchase. So with a deal of this size kind of a bolt-on, it doesn't really have an impact on our capital allocation because, yes, we paid nearly $1 billion -- we're going to pay nearly $1 billion for Tyson, but it's a highly profitable business, and it's growing really fast. And so it doesn't really have an effect on either, in the short term, a negative effect on EPS accretion nor does it have an impact on leverage. So we're still able to do all the other things that we would contemplate doing before, and that includes reshape our portfolio, repurchase shares and grow our dividend with sales.

Great. Just switching topics. General Mills has actually been a pioneer in the sustainability front. And I don't want to steal your thunder ahead of your Analyst Day. Our view on ESG is that successful companies will manage ESG broadly and meet a minimum threshold, then more importantly, differentiate in 1 or 2 areas, have what we call like superpowers. From what we have seen and what we've looked at, we think one of your superpowers is regenerative agriculture. Do you agree with that, that is a superpower? Do you have other superpowers? How do you think about your ESG over time?

Yes. First of all, I read your report, it's a good report. And what I will say is I do think that companies have to pick and choose and prioritize, just as we do with the rest of our business. General Mills has had a public responsibility on a committee on its Board for 50 years. So this is not something -- so when you talk about pioneering, this is not something we just came up with because we think our investors are interested in it recently. We've been doing this for a while. Regenerative agriculture is one of the keys of our success, and this is a superpower. And the reason why it's so important to us is because regenerative agriculture, it really has an impact across our product portfolio. We have a lot of grain-based products. And regenerative agriculture, really, is about improving soil health. And the fact is that to the extent that we can keep improving soil health, that has an impact on a large part of our business, but it also has an impact upon a number of measures. And so just a couple of examples. Regenerative agriculture, when done well, it sequesters carbon in the soil, which helps us reduce greenhouse gas emissions. And we have a commitment to reduce our greenhouse gas emissions by 30% by 2030 and be carbon neutral by 2050. And so regenerative agriculture plays a big role in that. The other thing that regenerative agriculture does is that it helps maintain water in the soil. And so you have a lot less runoff, and it makes the soil healthier and more fertile. And it also keeps pesticides or other things from running off into the streams and rivers and lakes and so forth. So we really are a big believer in regenerative agriculture. We can have a big impact. We were working on other things as well, recyclability and that sort of thing. But the biggest impact we can have is going to be through our regenerative agriculture.

Great. I'd be remiss not to ask about inflation. You alluded to it. A lot of people, over the last 2 days, have really said that the inflation is demand-driven versus supply-driven. And with that, is there a difference in how you look at it on a longevity point of view? And you've also said last quarter you expect inflation in 2021 to round down to about 3%. So a couple of things. How do you think about the sustainability of inflation? And what are your tools to which you can actually offset the inflation, again, not just this year, but we like to look at it a little bit longer term in the next couple of years?

Yes. So let me answer those couple of questions and a couple more. First, I would just go by saying that the inflation pressure we're seeing is significant. And it's higher than we've seen in our last fiscal year. It's probably higher than we've seen in the last decade. So the inflation pressure we're seeing, first of all, is significant. The second would be that it's very broad-based. It's broad-based by geography. It's also broad-based across input. So whether that is transportation or commodity or labor cost, what have you, it's also a very broad based. Those 2 things are -- and the reason I start there is it's important because people always want to know, can you pass through -- can you pass through pricing? Are your customers going to accept that? Through my career, which I've been doing for a long, long time, when you have cost pressures that are broad based and they're significant, everybody feels the pressure. And so it's a lot easier for retail customers and consumers, when they're reading about it every day, to accept that prices are going to be a little bit higher. So that's the first thing I would say. The second thing, the -- you talked about duration. I hear Chairman Powell talk about transitory inflation. I mean I think transitory is what you use when it's not happening to you. And you could say the OPEC was transitory in the 1970s, but it didn't feel very good while it was going on. So how long is the inflationary pressure going to last? I don't know. But it feels to me that, certainly, for the next 12 months, we're going to feel inflationary pressure across a broad part of our portfolio. Then you asked how do we deal with it? The first line of defense is our productivity, and General Mills generates as, I think, one of the, if not the leader, one of the leaders in CPG when it comes to productivity savings, which have averaged about 4% a year for the last decade. And so that's the first line of defense in defending margins. The second is pricing. And I started this by talking about our capabilities we've developed, and we've developed over the last number of years, a strategic revenue management capability that's going to come in really handy over the next 12 months. It's always good, but it's going to be particularly important as we look over the next year.

And then in terms of revenue management outside of cost savings, what are your levers and tools that you can use with that? And more importantly, can you talk about the differences between parts of your portfolio in which it will be easier to take pricing? What we've heard is emerging markets, they're more used to inflationary pressures. So the pricing there is a little bit easier versus can you contrast that with cereal, where maybe promotions weren't as high, and therefore, you're trying to raise prices as you're restoring merchandising? And how does that all play out?

Well, I'll give you -- I'll get down to some specifics without being specific in any one particular category. But I will say, when it comes to pricing, the first thing is that there are 4 basic tools. You have list pricing, you have trade promotion, you have price pack architecture and you have mix. Those are the 4 tools you have. And you just alluded to something that's important because you talked about geographies and you talked about categories. And what you find with pricing is that the way one takes pricing is -- and realizes pricing is going to be different according to categories and geographies, and it's very specific. So how you realize pricing in cereal in the U.S. is going to be different than how you realize Haagen-Dazs pricing in China, is different than how you're going to realize pricing on seasonings in Brazil. And so for that reason, you have to have a set of tools, but you have to deploy those tools and very specifically by geography and by category. And even within categories and geography like the U.S., how pricing is generated in yogurt is probably going to be different than cereal. And so one of the things that we've been able to do very well with our new revenue management capability is to get very granular on how that pricing is supposed to occur. And what I will tell you is that you're kind of getting back over the start of the discussion on inflation, it's so broad based that we're going to see pricing across our categories. I don't envision a single category that we have where we're not going to see pricing.

And -- but each lever will be different as these categories...

Each lever will be different according to the category in which you participate, yes.

So won't all be list price increases?

That's correct.

Okay. You and I have had this discussion probably for close to 5 years or so. Your European margins and your North American margins are disparate. What is the opportunity to close the gap between Europe and North American margins over time? I [indiscernible] all the way there, but I feel like there is some room there to close that gap and make a difference.

There is. I mean we know -- you see -- part of it, you see the first step of that in our selling our proposed sale of our European yogurt business, which was below average growth and below average margin. And so -- and that's why in selling that business, you see that we're going to -- I think we've said already that our growth rate will accelerate, but so are our margins. And that's an enterprise level. And you can imagine, on a European level, or as an outside the U.S. level, what that does. So we think there's a tremendous opportunity for us to both accelerate our sales growth outside the U.S. and accelerate our margin growth outside of the U.S. And part of it is through portfolio shaping, what you saw with Yoplait. But there will be other ways that we're going to be able to do it as well. And we're -- we believe -- I'm not sure that we're ever going to get to the same level of margin outside the U.S. as we do in the U.S. But we can certainly make it a lot more -- a lot higher than it is right now. And we -- that should be a business that generates double-digit return on sales for us over time.

Great. Can you also give us an update on China? What has been the environment looking like as they reopen? And more importantly, are there any key learnings from China that we can look at from either the U.S. or Europe or other emerging markets? What are the key lessons that we can take from this and kind of apply it across the rest of your portfolio, if there are any?

I think there are a couple. The first is that the China market has been open, if you will, for quite some time. I mean they got back to growth pretty quickly because they had a very strict lockdown and then their economy opened back up. One of the things we see is that our retail business, our, let's say, Wanchai Ferry dumplings, our at-home business, responded very quickly, but has also stayed high over time. So we're growing our at-home business by double digits in China even as that economy has been open. And I will also tell you, on Haagen-Dazs, our shops business has come back, but it's taken longer for that shops business to come back than we thought it would originally. But the other thing I will say we've seen in China is we call connected commerce, and that is the connection between the digital and the physical, we see in China has really developed over time. And so we're distributing a lot of ice cream, for example, from our Haagen-Dazs shops to people's homes. And so as we think about the future in the U.S., we're starting to talk quite a bit about connected commerce, and it's the connection of the digital and the digital shopping and with the physical. And we think there's some nice lessons to be learned from what we've done in China, and we're really pleased with how that's progressed.

That's great. Flipping back to the U.S. for a second. General Mills has improved your yogurt shares over the last year, but the category has moderated considerably. How would you position the category -- how do you position General Mills now within the category? Have you changed how you think about it? Is it managing more for cash and less for innovation? Do you still believe there's opportunities where you can find niche -- niches of growth within the category? How are you positioning yourself within the potentially slowing category, though you are gaining share? So it's a contrast there.

Yes. Our goal for both our U.S. business and, hopefully, soon our wholly-owned Canadian business is going to -- on yogurt is going to be to grow in the absolute and to grow share. And as you said, we've become more competitive over the last couple of years, which is to say we've gained -- we're gaining share, which feels great to be competitive. But our -- look, the goal was to grow, which we have been. Our goal is to grow and gain share at the same time. And that's going to require us to continue to be good on our core businesses. So our Original Style yogurt here in the U.S., our Liberté brand in Canada, our Go-Gurt business here in the U.S., so we've done a lot of innovations on those core businesses. So a lot of it's improving product quality, but also distinct new flavors and that sort of thing as well as continuing to innovate. And so Oui by yogurt (sic) [ Yoplait ] is one example. Ratio, and we have a new Ratio yogurt, which has 25 grams of protein, which we just introduced, which we're really excited about and introducing some plant-based yogurts under the Oui line. So it's going to be a combination to get us to grow in the absolute and to continue to grow share, is going to be focusing on our core business and continuing to innovate. And we think we have a -- we've done a lot better than that over the last couple of years, and we feel good about our ability to continue to do that.

Great. Can you talk about -- there's been a lot of constraints within labor and capacity. Can you talk about your current capacity utilization rate? Are you experiencing material constraints in your supply chain? Are you still using some external suppliers and co-packers? And how do you expect that transition to happen?

The short answer to most of those first questions are high and yes. I mean our capacity utilization is high. We really haven't rebuilt all our inventory with our retailers over the past year. We thought we would have by now. But even if you just look through the third quarter of this past year, we depleted inventories by about 9 points in the fourth quarter of last year. We've only gained maybe 4 of them back. And we're really running all out on all of our core platforms. So we don't have a lot of excess capacity internally. We've made the choice last May to go externally for a lot of capacity. And we did this so in meals and in baking categories, in particular, things like soup and Old El Paso and baking mixes and all the rest. And we're really pleased we did that. That's more expensive capacity than our own. And a lot of our growth was supplied through this external capacity. And the important thing is that as we -- if we see demand continue to be high, we'll be able to use that external capacity, but it's -- but it's also very flexible capacity. So to the extent that we see demand start to slow, then we're not obligated for the long term for a lot of that capacity, which gives us -- which will certainly help with our margin structure even over the course of the next 12 months. And the key is to make sure that we're staying in tune with consumer demand and what we see in the marketplace.

Is there any intent to bring some of that external capacity -- internal capacity where you see a permanent change to your demand outlook?

I mean if we see a permanent demand in our outlook, certainly, we will do that. And we have done that on several of our lines. We've brought the capacity and internalized -- I mean we've always had internal capacity for Cheerios and things like Cinnamon Toast Crunch. But we've seen sustained high demand for businesses like Totino's and for Old El Paso. And to the extent -- and fruit snacks. So to the extent that we continue to see high demand and we think we'll have high demand over time, we are certainly not opposed and have been invested -- reinvesting back in our own business for the capacity for those lines.

But nothing yet today to announce?

Nothing yet today to announce. No. Probably not.

I'll leave with one last question. As you think about the impacts of emerging from COVID stronger, when you look at your ability to navigate, your better tools, all that, are there situations -- and also your changing of your portfolio, are there any situations which you can either raise or lower, which I'd be surprised about, but your long-term growth algorithm, how would you revisit that, particularly given as you emerge and you have new customers? You've accelerated your portfolio and you have new capabilities. How do you ever think about that? And is there a time that you'd reassess that? And I'll leave it there.

Yes. So we talked about our long-term growth algorithm of being 2% to 3%. And before the pandemic, we were probably in the 1% range. And so it doesn't sound like a lot, but that's a pretty big change in algorithm of a company our size. The -- what I would say is that we're -- we've gained a lot of confidence during this pandemic. And it's not because our sales were higher. It's because we competed so well. And it's a combination of competing well in every category across the world as well as incorporating Blue Buffalo. And so one of the things we're really pleased with is we think we're one of the few companies that has proven that it can compete on its core business while integrating new businesses successfully. And for us, that's going to be the key, going forward. And the question -- one of the questions maybe behind what you ask is how is demand in some of these categories going to be different post pandemic? And the answer is we will see. But I will tell you, it's very clear to me that we have consumers who -- a generation of consumers, and particularly millennials, who've got newfound confidence in the kitchen. I mean that have made more meals from scratch, Old El Paso being defined as scratch or Betty Crocker being defined as scratch. And so a couple of our meals categories and, really in our baking categories, we have consumers who have been able to lower their -- reduce their food budgets and have more confidence than they had before. And I would be really surprised if all of that went away. And so do I think our growth profile of our core business will be a little higher coming out of the pandemic? I think it will. And we'll see how much that is over time. But if we -- to the extent we can combine that and continue to be successful in driving that core growth and we can continue to incorporate some high-growth businesses that are bolt-ons what we currently do, we're successful and not only are we stronger now, but we can continue to gain strength.

That's great. Thank you very much. Very insightful. And more than anything else, I appreciate your time and taking the time with us.

Yes. Thank you.

Thank you. Be safe.

Thank you.