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

Good morning, everybody. We hope everyone had the chance to recharge over the summer ahead of our 30th Annual Barclays Global Consumer Staples Conference kicking off today. As much as we wanted to celebrate this milestone in person with everyone, we determined a virtual environment would remain the best option until we're confident we can all comfortably gather in person. Of course, we'll again miss seeing so many familiar faces around the venue, not to mention the opportunity to welcome many new ones to our Staples family. When we aren't live moderating, you can find us and our teams on e-mail or Bloomberg all week. And please be in touch so we can try and get back some of that in-person goodness. We are thrilled to welcome General Mills back to our conference today. Speaking with us today are Jon Nudi, President, North America Retail; Bethany Quam, President of the Pet Segment; and Jeff Siemon, Vice President of Investor Relations. I'd like to turn it over to you, Jeff, to kick things off. Jeff, Jon and Bethany will provide some remarks. And afterwards, we'll have some time for some other topics of discussion. Over to you, Jeff.

All right. Thanks, Andrew, and good morning, everyone. I'm going to go ahead and share my screen. I've got a few slides to go through before we get to Q&A. All right. So -- all right. Before we jump into the content of the presentation, let me remind you that our discussion this morning will include forward-looking statements. And this slide lists several factors that could cause our future results to be different than our current estimates. So let me kick off this -- our remarks this morning by summarizing our key messages. As you saw on our press release -- okay. Thank you. My apologies. Get over there. All right. Let's -- I'll jump back in. Okay. Okay. Thank you very much. Let's see. All right. Let's try this again. Here we go. Is that better? Can you see today's General Mills overview? Awesome. All right. Let me try this again. So as you saw in this morning's press release, General Mills is on track to deliver on our fiscal '22 priorities. We remain focused on continuing to compete effectively, successfully navigating the challenging cost environment and executing our portfolio and organizational reshaping actions without disruption. As Jon and Bethany will share in a moment, today's operating environment is highly dynamic, including an evolving consumer demand picture, elevated input cost inflation and labor shortages that are primarily impacting our suppliers and our distribution network. Within that context, General Mills is competing well, leveraging the strength of our brands and our advantaged supply chain and sales capabilities to meet consumer and customer needs as well or better than our competition. Amid these near-term opportunities and challenges, we continue to be guided by our Accelerate strategy, and we remain committed to boldly building our brands, relentlessly innovating, unleashing our scale with advantaged capabilities and being a Force for Good. Finally, in light of the evolving operating environment and the addition of the pet treats acquisition, we are updating our full year financial outlook. Our updated fiscal '22 targets can be seen on this slide. We now expect organic net sales to be toward the higher end of the prior range of down 1% to 3%, primarily reflecting stronger-than-expected sales performance in the first quarter. We now expect constant-currency adjusted operating profit and constant-currency adjusted diluted EPS to be toward the higher end of the prior ranges of down 2% to 4% and flat to down 2%, respectively, largely due to the impact of our recent pet treats acquisition, which we estimate will add approximately $0.02 to our fiscal '22 adjusted EPS. We are addressing the increasing cost environment with incremental strategic revenue management and cost efficiency actions to protect our profit outlook. Finally, we continue to expect free cash flow will be approximately 95% of adjusted after-tax earnings. As a reminder, these targets exclude the impact of our European Yoplait divestiture, which was scheduled to close by the end of the calendar year. And with that, let me turn it over to Jon to provide an update on our North America Retail segment.

All right. Well, thanks, Jeff, and good morning. I'm glad to be with you today. Let me start with a quick business update. As Jeff mentioned, the environment is highly dynamic in North America Retail. Consumer demand remains elevated relative to pre-pandemic levels. Our first quarter U.S. retail sales were down versus last year but up more than 4.5% on a 2-year compound basis, generally in line with the trend in the previous 3 quarters. This includes a bit of a pickup in recent weeks as we've seen increased uncertainty around the Delta variant. We continue to compete well amidst this demand picture. We're holding organic share in more than half of our retail sales base in the U.S., and we continue to post strong share gains in Canada. As you've heard from many of our peers, the supply chain environment remains challenging. In addition to significant input cost inflation, our industry is facing labor shortages that are impacting all aspects of our supply chain, from our suppliers all the way through to our distribution network. While we believe our supply chain organization is competitively advantaged, our service levels today are not where we'd like them to be. As a result, we're focused on remaining agile and leaning on the processes we established at the onset of the pandemic to secure supply and ensure our consumers and customers can get access to the food they need. At the start of the year, we said the combination of our HMM cost savings and our SRM price realization efforts would be critical to offset the input cost inflation we expected for fiscal 2022. We implemented a broad set of pricing actions in the first quarter, leveraging all of our SRM tools, and we're starting to see those actions taking hold in the market. In fact, our average unit price in Nielsen-measured channels in the U.S. was up mid-single digits in Q1 and accelerated throughout the quarter. We expect the full impact of our previously announced pricing actions will be in place as we move into the second quarter of fiscal '22. Our top priority as a company in recent years has been to compete effectively across our core business. I'm tremendously proud of the way that we've improved our competitiveness in North America Retail over the past 3 years, leveraging stronger execution and support behind brand building and innovation. Nowhere is that more evident than in U.S. cereal, where General Mills has posted market share gains for 34 consecutive months in 4 consecutive years, strengthening our position as the #1 player in the category. The keys to our success at cereal have been great marketing and innovation on the best brands in the category. We're continuing that playbook in fiscal '22, including taste-focused messaging and innovative partnerships on Cinnamon Toast Crunch; new product news on our Cheerios and Lucky Charms franchises; and fun seasonal initiatives like our new Monster Mash cereal, launching in time for Halloween. We've also driven excellent results on Pillsbury refrigerated dough, including nearly 5 full points of market share gains in the past 3 years. Consumers are consistently finding that Pillsbury delivers what they need for meal solutions, something comforting, delicious, convenient and affordable. As a result, Pillsbury's household penetration is up almost 4 points since fiscal '19. We're working hard to ensure that we hold on to these new consumers by investing in data-led digital advertising to target repeat purchases, increasing advertising and in-store messaging focusing on everyday dinner ideas and boosting spending behind expanded consumer messaging. We also continue to delight consumers with exciting and relevant innovation, including edible cookie dough snacks and new pull-apart kits, both of which recently launched and are off to a promising early start. The story is largely the same for Old El Paso, strong market share gains over the past 3 years that have continued in the first quarter of fiscal '22, driven by compelling consumer news and innovation. Our latest creative campaign highlights our most differentiated and unique platforms, reminding consumers how Old El Paso can conveniently bring the family together for dinner. And our burrito bowls and street taco kit innovations aim to make restaurant-quality food more accessible and affordable. Now back at CAGNY, we started talking about this concept of connected commerce, which is about building brands across both physical and digital worlds. Connected commerce is powered by data, digital capabilities, measurement and execution to enable General Mills to be part of the consumer journey and create strong one-to-one relationships. One of our first significant initiatives under the connected commerce banner was the digitization of our Box Tops for Education program. By moving Box Tops to a mobile app platform, we've saved schools the time and hassle of collecting and shipping physical clips. We've increased the number of participating schools. We made it easier for consumers to find and support schools in need, and we've created a unique one-to-one relationships with our consumers that provides us with a receipt-level first-party data which we can use, with appropriate consumer privacy safeguards, of course, to spot patterns, experiment, scale-up winning tests and launch new capabilities. For the back-to-school season this year, we've launched a new Box Tops campaign titled Unlocking Brighter Futures, focused on unlocking the door to more opportunities for families and school communities to get what is needed for every child to achieve their full potential. This campaign will help build awareness of the Box Tops mobile app while strengthening our role as a Force for Good in our communities. We're amplifying the impact of our Box Tops campaign this year with exciting retailer partnerships. For example, we partnered with Walmart and the LeBron James Foundation on a content series to raise awareness of the importance of a diverse teaching workforce to improve student outcomes in education. With Kroger, we're combining the power of digital and in-store with breakthrough display plans, leveraging the Box Tops equity. And our partnership with Target leverages their Target Circle membership to strengthen consumer engagement. Overall, I'm incredibly proud of the progress we've made in North America Retail over the past few years, and I'm excited about our opportunity to build on that momentum, execute against our Accelerate strategy and drive profitable growth in the years ahead. So thanks for your time this morning. And I'll hand it over to Bethany to share a few highlights for our Pet segment.

Well, good morning, and thank you, Jon. It's a pleasure to be with you all again to provide an update on our Pet business. When I last spoke to you at our Q3 earnings call, I told you about the significant growth we've delivered on this business since the acquisition, and I'm pleased to say that our growth has continued. Blue Buffalo's household penetration is now above 15%, and we're growing buy rate at the same time we're expanding households, leading to further omnichannel market share growth. Thus far in fiscal '22, Blue Buffalo's Nielsen-measured retail sales have increased at a double-digit rate. And I should mention that our newly acquired dog treat brands are doing really well also with first quarter retail sales nearly up 20%. Now of course, just like Jon's business, we are also dealing with input cost pressures. We're seeing that here in Pets. As with the rest of General Mills, our first line of defense is our strong HMM productivity program. In addition, we took broad pricing across our portfolio early in fiscal '22, and we're starting to see that reflected in the Nielsen data with average prices for Blue Buffalo up mid-single digits in the first quarter. Now as you may recall, I shared Blue Buffalo's accelerated plan for growth with you back in March. This continues to be our long-term growth strategy. We are focused on leading and expanding our presence in high-quality natural feeding and treating for both dogs and cats, and we are winning by boldly building the Blue Buffalo brand, relentlessly innovating, leveraging the advantages of General Mills' scale and being a Force for Good. Let me give you an update on the few exciting things we've done in the last 6 months as we put the Accelerate plan into action. From the very beginning, connecting with pet parents has been an integral part of the Blue Buffalo go-to-market model. Historically, our primary means of making these one-to-one connections have been in-store through our highly effective Pet Detective program. Going forward, we'll continue to invest in our in-store Pet Detectives while adding a new mobile platform to scale these one-to-one relationships with pet parents. This new platform called Buddies by Blue Buffalo will allow us to meet pet parents where they are and strengthen our engagement with them through their pet's life. Let's take a look at this brief clip of how Buddies by Blue Buffalo is coming to life for pet parents.

All right. One second here. [Presentation]

Well, as you can see, Buddies is not just an app. It's a relationship centered on moments that matter to our pet parents, and it's another example of how we're strengthening our connected commerce capability across General Mills, leveraging our investment in digital, data and analytics. Relentless innovation is another key element of our growth plan for Pets. As we've shared in the past, there are still large segments of the U.S. pet food category where natural products are less well developed and where Blue Buffalo's market share significantly under indexes compared to our share in dry dog food. Our opportunity is to innovate and bring the True Blue Promise to these segments with differentiated products. For example, roughly 6 months ago, we launched a new Tastefuls product line in the cat wet food segment of the category, which alone represents approximately $5 billion in retail sales. I'm happy to say that Tastefuls is off to a great start. Our bold move to replace our previous Healthy Gourmet product line has paid off with Tastefuls already turning at a 40% higher rate than the products it replaced and our growth rate in cat wet doubling to more than 25%. And we see tremendous opportunities for growth still ahead. My last example today of how we've moved aggressively to execute our Accelerate growth plan is the dog treat segment. Dog treats is the second largest segment in the pet food category, representing $7 billion in retail sales and growing at high single-digit rates. While we've been successful historically in pockets of this large segment with our Blue Buffalo Health Bars and training bits lines, we saw an opportunity to accelerate our expansion into natural dog treats with the acquisition of Nudges, True Chews and Top Chews brands from Tyson Foods, which we just closed in July. These differentiated natural products are aligned to our True Blue Promise: no corn, wheat or soy, no artificial ingredients and meat as a first ingredient, making them a great fit for our portfolio. The brands we acquired play in jerky and other meat-first snack forms, making them highly complementary to our existing Blue Buffalo portfolio, which is largely focused on other parts of the treat segment. We even see a strong complementary fit from our retailer perspective, adding scale in key channels where Blue Buffalo under indexes. To top it off, the Nudges, True Chews and Top Chews brands are bringing millions of new pet parent households into our portfolio, giving us exciting cross-selling opportunities. With our expanded portfolio, we are now the #1 natural player in the dog treat segment, and we strengthened our position as the #1 overall natural pet food brand in the category. Let me close by saying that we are very bullish about the growth opportunities ahead for Blue Buffalo and our expanded pet food business. U.S. pet food is a $37 billion category growing at mid-single-digit rates. We have the best brand and the leading position in natural pet food, which is the most attractive segment in this category. The Blue Buffalo brand is fueled by our mission to love and feed more pets like family, and that mission has never been more relevant. We're excited about the opportunity to leverage our Accelerate strategy to drive profitable growth for many years to come. With that, Andrew, I'll turn it back to you.

Great. Thank you, Bethany, and thanks for that, everyone. I'll go back and forth between you all with questions, if that's okay. But maybe we'll start off with one that each of you, Jon and Bethany, can comment on. So General Mills highlighted many of the factors that are posing challenges to the overall food group back on your fiscal 4Q investor call. These topics have certainly played out in most companies' calendar 2Q results as well. So maybe you can update us a little bit on the latest trends in your supply chain in terms of inflation, access to labor, where that impacts you the most, service levels and how you're managing within this context.

Yes, absolutely. So maybe I'll start and then turn over to Bethany. So as we said in our Q4 call, input cost inflation is significantly elevated versus last year with notable increases in things like packaging materials, grains, fats and oils, freight and fuel. We expected that, and it's largely playing out the way we expected. What we didn't expect was the labor market that we see and really experienced through our first quarter, and that really had a knock-on impact through the entire supply chain. I can tell you that our plants -- our internal plants are doing pretty well. We're running and generally have our full workforce showing up every day. It's been more acute with some of our external supply chain partners as well as our distribution centers and the transportation network as well, and that's really been a challenge for us. And as a result, our service levels in NAR haven't been where we wanted them to be. So what we've done is really revert back to some of the processes that we had in place at the beginning of the pandemic. We have a daily control tower at the working team level really tackling the issues that are coming and getting after those in real time. We have a senior-level control tower meeting once a week, where we talk about some of the big issues and where senior leaders can help remove hurdles. Just yesterday, I was on the phone with the CEO of a major ingredient company, talking about an ingredient that's really constraining one of our platforms and allowing us not to run. So -- well, it's really all hands on deck. We're focused on this. We're confident that our service levels will get better as we move through Q2 and the back half of the year. But certainly, the labor market has been a challenge over the past few months. But Bethany, I don't know if you have anything to add.

As we compete in North American Retail, we're seeing very similar things. Like Jon, we are competing well and fighting through it and working to improve our service levels and continuing to make sure that we get our food out there for the pets that need them.

Great. And then another one for both of you. How is price realization progressing? Do you feel as though General Mills was anticipatory enough with its pricing actions given where inflation has gone? And how has your enhanced SRM capability played a role in the ability to drive net price realization this year? Also, any context around expected volume elasticity versus previous bouts of pricing and inflation would be helpful.

Yes. Absolutely, Andrew. So as you saw from our presentation, our net price realization has been building throughout Q1. So obviously, we've seen a tremendous amount of inflation over the past 6 months, more inflation than we've seen really in a decade. What I'm really pleased with is the capabilities that we have that we didn't have a decade ago. Our strategic revenue management team has data that we didn't have before. We've got the tools to really interpret that data. We have experts really in pricing, and they've been invaluable as we put together plans to really tackle the inflation coming our way. So we've worked hard to put -- use the entire SRM toolbox. So that's everything from list prices to pack/price architecture, to mix, to promotional optimization. We're leveraging all of those tools. We've put together strong stories. And with good rationale, we were able to get the pricing sold into the majority of our customers. And we're seeing it reflected in the market. Again, you saw a chunk of that flow through in Q1. We expect the rest of our actions to be flowing through market in Q2. So we feel good about our ability to get after it. We'll continue to be vigilant as well. If more inflation comes our way, we'll take more actions as we move forward. In terms of elasticities, what I can tell you is with the healthy demand environment as well as the inflationary environment that we're in, our elasticities are playing out a bit more favorably than they have been historically -- they would have been historically and even versus what we model. So it's early days, but so far, so good from an elasticity standpoint.

Yes. And I would say the same thing, Andrew. We took broad pricing actions here in the first quarter. And I just told you in our presentation that our retail sales growth is very good, in double digits, and that's both units and average price. Again, the pet category, I would say the cats and dogs didn't eat away from home, so they've been eating at home the whole time. But we have seen both growth from units and average price.

Great. And Jon, General Mills recently announced some organizational changes to better align the structure with your Accelerate strategy. I guess what changed within NAR specifically? And how does that impact your capabilities and growth potential going forward?

Yes. Absolutely, Andrew. I'm really excited about the changes we just made. They're probably some of the most major changes I've seen in the way that we operate as a team in my career. And what we really did was move from a matrix functionally based organization to really a business-team-first type of environment. So we rationalized our U.S. operating -- OUs from 5 to 3. We forward deployed as many capabilities we could into those operating units. So things like e-commerce and digital marketing are now sitting with our business teams every day. We forward deployed our sales teams as well. They used to report to a central sales organization. Now each of the operating units have their own sales teams, and that pays off with decision-making speed and being closer to consumers and customers. And supply chain was embedded as well. So we're trying to get closer to our consumers and customers, trying to move more quickly and be more agile. And we think the new organization will allow us to do that as we move forward.

And then, Bethany, pet category growth has been strong. General Mills has grown its pet business at a double-digit compound rate really since the acquisition. I guess what's reasonable to expect for growth for your pet business in the years ahead? And what are the key drivers of growth now that the sort of channel expansion and distribution build is largely behind you?

Well, I mean, I think I showed you we're still growing penetration and we're at a really, really large category. We love our share, but we have a lot of opportunities to continue to do that. And our goal is to be a leader in the pet food category, definitely a leader in the natural. One thing about Blue Buffalo is our whole portfolio is premium, wholesome, natural. And so we're going to keep driving our Accelerate strategy. There's a ton of opportunity to continue to drive penetration, right, to innovate. I talked a little bit about wet cat food today as well as treats. Those are both categories that Blue Buffalo has a lot of opportunity to continue to grow. I was -- 30% of U.S. households have dogs and cats. Pet parents want to feed natural, dogs and cats. And so we're continuing -- they want to feed natural for treating. And so again, continuing to go after dogs and cats in feeding and treating across the whole $37 billion category is our opportunity. Now we're 2 years past lapping the distribution. So we've continued to see growth. We still grow the distribution because of these underrepresented categories, but we know we're continuing to see more pet parents want to feed Blue.

Jon, as we're now more than a year past the most elevated sort of COVID-driven demand levels, how much of the share that General Mills gained in North America Retail has it been able to hold on to? And how much do you expect to retain once the environment normalizes, understanding that things are still quite fluid, of course?

Yes. Absolutely, it's a dynamic time. I mean one of the things I'm really proud of, we've competed well during the pandemic but really competed well for the last 4 years. In fact, for the last 4 years, we've grown share in the majority of our categories in North America Retail. Some of our big ones, like cereal and OEP and refrigerated baked dough -- baked goods, which are large businesses that are highly profitable, we've grown for multiple years in a row. So we're focused on the fundamentals. We're really growing -- focused on building our brands. We're focused on innovation, the blocking and tackling matters as well as distribution shares. So I think what allowed us to be successful during the pandemic was in place prior. It worked prior to the pandemic, and we think it will continue to work post the pandemic as well. One of the things the pandemic did do was to really drive penetration on a lot of our brands. And we're doing everything we can to hold on to those consumers as we move forward. I think e-commerce and digital marketing is a tool that we're really doubling down on because we think that will allow us to keep consumers as we move forward as well. So I really like the way we're competing. And again, it's not a more recent pandemic thing. It's a longer-term trend that we have, and we expect to continue to compete effectively as we move forward.

And Bethany, broadly speaking, what's the current exposure by channel these days of General Mills' pet business? And at this stage, how is each channel performing? And sort of what are the longer-term growth expectations for each?

Well, Andrew, I'm going to answer this a little bit different, and then I'll get there. But Blue Buffalo was an expansion. We talked a lot about channels. Over the last couple of years, we've become omnichannel. And we really start with dogs and cats, right, in feeding and treating. But we're doing well in all channels, and we have growth in all of these channels. I will tell you we've seen a lot of shift in consumer behavior throughout this pandemic. And so we've been having Blue Buffalo in all areas, be it FDM or pet specialty or e-commerce. We've been where the pet parents need us. I would say, this summer, we've seen definitely a little bit more shifting back to the in-store environment, the pet specialty, the food, drug, mass, right? And so being omnichannel has really been incredibly good for this business and for the brand, but growth across all 3 channels.

I maybe have time for one more. Maybe, Jon, with how elevated consumption trends have been in North America Retail, has General Mills yet been able to fully replenish retail inventory? Or would you expect to see shipments ahead of consumption for the next couple of quarters?

Yes, Andrew. So as a reminder, at the end of Q4, we saw customer inventory generally come back into balance after the initial dislocation at the beginning of the pandemic, and we expect that still to be the case. So as we move throughout this year, if there are any changes, we'll let you know. But again, we feel like we're really balanced at this point.

Okay. So I think that's all we have time for. So Jon, Bethany, Jeff, I want to thank you all for being with us today. And looking forward to tracking things and hearing about the results more specifically in late September. Take care.

Thanks, Andrew.

Thanks, Andrew.