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

Good morning. On behalf of the entire General Mills team, we are honored to be kicking off the CAGNY conference once again this year. Before we get started, I'll 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. Last year at this conference we shared Accelerate, our strategic framework that will drive the next chapter of profitable growth for General Mills. In it, we set clear priorities for where we play, how we win and how we'll drive superior returns for our shareholders over the long term. Over the past year, we've executed well while making significant progress advancing our strategy, including making some meaningful changes to our portfolio and our organizational structure. And we've done all of that in the middle of a historically challenging operating environment. With input cost inflation at a multi-decade high and labor shortages causing disruptions and adding costs across the supply chain, we've remained agile to deliver for our customers and consumers and outperform our categories. Our clear strategy and bold actions are delivering results, and I'm confident we are positioned to continue to drive profitable growth and strong returns for our shareholders in the future. During today's presentation, I'll review our Accelerate strategy and highlight the important work we've done to reshape our portfolio and our organization. Dana McNabb, our Chief Strategy and Growth Officer, will provide more details on how we're advancing our other strategic priorities. Kofi Bruce, our CFO, will explain how our strategy is linked up to our shareholder return model and he'll discuss our outlook on fiscal 2022. At General Mills, every decision we make is grounded in our purpose, to make food the world loves. With a firm grounding in our purpose, our Accelerate strategy is centered on strategic choices we've made about where to prioritize our resources to drive superior returns. This includes choices about where we play and how we will compete and win, leading to profitable sales growth and long-term shareholder value creation. From a geographic standpoint, we're prioritizing our resources and investment in 8 core markets. Our #1 priority is to win and grow profitably in North America, which represented nearly 85% of our pro forma fiscal 2021 net sales and an even higher proportion of our operating profit. As we look at our product portfolio, we prioritized 5 global platforms that have attractive growth and where we have strong margin, advantage capabilities and leading brands. These global platforms include cereal, pet food, ice cream, snack bars and Mexican food. Including our recent portfolio shaping transactions, these 5 platforms now represent nearly 50% of our pro forma net sales and we expect them to lead our growth and drive favorable profit mix for our portfolio into the future. In addition to our global platforms, we prioritize a collection of local gem brands that have attractive growth potential and a more limited geographic scope. On a pro forma basis, these local gems together represent about 30% of our global net sales. As you've heard us share in detail over the past year, our Accelerate strategy also defines how we will win by boldly building brands, relentlessly innovating, unleashing our scale and being a force for good. This is translating into stronger end market performance. We're holding or growing market share in more than 60% of our priority businesses in the first half of fiscal 2022, making this the fourth consecutive year where that figure is above 60%. In addition to increasing our competitiveness, we've been working to increase the growth profile of our portfolio. Since fiscal 2018, we've turned over roughly 15% of our net sales base through acquisitions and divestitures and increased our growth exposure by about a full point. We divested or have agreements to divest lower growth, lower margin businesses, including yogurt in Europe and Brazil and dough in Europe and Argentina. We acquired high-growth businesses like Blue Buffalo Pet food and Nudges True Chews and Top Chews dog treats. And we've successfully integrated these acquisitions into the General Mills portfolio and continue to fuel their growth. For example, net sales for Blue Buffalo have grown by roughly $600 million since our acquisition, which represents a 10% compound annual growth rate. In that time, we've introduced the brand to 10 million more households, significantly increased our market share and grew operating profits faster than sales at an 11% compound rate. While we've made great strides to upgrade the growth of our portfolio, we have more work to do to reach our long-term growth goals. In fact, we don't see M&A as an episodic activity but rather an ongoing part of our Accelerate strategy. As a result, Dana's new strategy and growth organization has built an always-on M&A capability focused on sourcing and executing acquisitions and divestitures and capturing best practices that we can leverage in future transactions. With our balance sheet and a healthy position, we're actively looking for growth accretive acquisitions, focused in our core markets that play in current or new growth platforms and where we can leverage our capabilities to create value. In addition, we're open to divestitures of growth dilutive businesses that have lower returns on investment and where General Mills is not uniquely positioned to win. Overall, the portfolio reshaping work we've done to date has put our enterprise growth exposure solidly within our long-term 2% to 3% organic net sales growth target. Additional portfolio changes from here will help us move toward the higher end of that range. Not only have we been hard at work changing our portfolio, we've also made changes to our organization over the past year to better align our structure with our Accelerate strategy and ensure we're set up for success in the post-pandemic world. Within North America Retail, we streamlined our structure and removed functional silos, which has improved our alignment, agility and decision speed. We also recently made the decision to realign our U.S. Convenience Stores business into our North America Retail segment to better leverage our scale and unlock omnichannel snacking growth. Our renamed North America Foodservice segment will now be exclusively focused on the U.S. and Canadian food service channels. With the completion of our Yoplait Europe divestiture, we've decided to simplify our global operations and consolidate our Asia and Latin America and Europe and Australia segments into a single reporting unit. These changes to our segment reporting structure will be reflected in our third quarter results, which we will report next month. Finally, we've established a new strategy and growth organization led by Dana McNabb, who ran our U.S. Cereal business from 2015 to 2019 and most recently, was President of our Europe and Australia segment. Her team's objective is to put our Accelerate strategy into operation, and it includes growth-oriented functions such as M&A, disruptive growth, strategic revenue management and consumer insights. In total, these changes position our business for increased speed, competitiveness and agility and they also strengthen our ability to deliver on our Accelerate strategy. Now I'll hand it over to Dana to provide more detail on the important step we've made in the past year to advance our strategic priorities.

Thank you, Jeff, and Good morning, everyone. It's a pleasure to participate in the CAGNY conference this year. I'm excited to be here on behalf of the entire team to share how we've put our Accelerate strategy into motion over the past year. Our strong execution against our strategic priorities of boldly building brands, relentlessly innovating, unleashing our scale and being a force for good is driving accelerated momentum for our business. Our business momentum had started before the pandemic, driven by the improved execution on the fundamentals. Once the pandemic hit, we were ready to capture the opportunity and deliver even stronger results. For example, we've grown household penetration around the world. As Jeff said, we're holding or gaining share on more than 60% of our business worldwide, and we're fueling these results with stronger support for our brands, including a 28% increase in media investment between fiscal '18 and fiscal '21. And this is translating into strong top line performance, with General Mills organic net sales up 4% in both fiscal '20 and '21 and a forecast for 4% to 5% organic growth in fiscal '22. We have momentum. Now let me walk you through how we've built it and how we'll continue to drive it into the future. For more than 150 years, bold brand building has been a hallmark of General Mills. For every generation, our brand-building playbook has changed to reflect the times. Today, we believe great brand building is achieved when we're connected to consumer culture, when we execute exceptional experiences and when we're driven by data. Let me give you a few examples of how we bring these principles to life. There is no growth without good ideas, and those come from being so connected to our consumers that we understand them beyond the demographic data. This means we not only know who they are, where they live and how they shop, but we also understand and speak to their passions. Just look at what we've done with cereal. We challenged ourselves to highlight the taste, health and convenience benefits of cereal in a culturally connected way that resonates with today's consumers. Take Cheerios heart-shaped O's where this year, we're telling consumers to pour their heart into taking care of their health with the help of an utterly likable coach, celebrity Ice-T. When Lucky Charms became Loki Charms last summer, tied to the hit Disney+ show, the boxes sold out in seconds, reinforcing for us the power of exclusive, limited offerings that reintroduce our brands to consumers. And recently, Cinnamon Toast Crunch collaborated with snowboarder and influencer, Chloe Kim, to talk about her obsession with Cinnamon Toast Crunch's irresistible taste. These are 3 of the biggest brands in the U.S. Cereal category, and they're showing up in culture in a way that has driven significant penetration gains and helped expand Big G's category leadership, with our U.S. market share up more than a full point so far this year. We can have a strong idea grounded in culture, but it won't matter if we don't accomplish job one, executing exceptional experiences better than the competition. To do this, we need to demonstrate superiority across all elements of the brand experience. Superior offerings across the marketing mix drive market growth, prevent commoditization and build sustainable advantage. We use data to assess our superiority relative to our competition across 5 key measures: product, packaging, brand love, omnichannel availability, and value for the consumer and retailer. Excellence across these measures drives an exceptional consumer experience and ultimately stronger sales performance. Take this example on Totino's Pizza Rolls, a product we know is already an appealing anytime snack for consumers. Our data showed that we had a superior product communications and value proposition, but we were not standing out on the physical and digital shelves. So we set about to change that. We partnered with retailers to test new standup, eye-catching packaging and optimize the e-commerce digital shelf and search content, improving our physical and digital shelf breakthrough. These changes drove an immediate impact with retail sales up high single digits on the products we renovated in the first months after the change. We know that digital activity and accessibility is growing rapidly. The last 2 years of the pandemic delivered explosive e-commerce growth with 11% of our net sales now sold online, more than double the level 2 years ago. To remain successful going forward, we must ensure we are driven by data, so that we can increasingly build brands across the physical and digital worlds, a concept we call Connected Commerce. We've invested significantly over the past 3 years to develop proprietary data, technology and analytics capabilities to become a leader in this space. We've developed first-party data and one-to-one relationships with consumers across multiple platforms to deliver better content, reach, engagement and retention. For example, we've digitized our Box Tops for Education program and have now broadened it to include all our brands. We launched Buddies by Blue Buffalo, a mobile app platform that allows us to create personalized connections with pet parents and offer education, advice and rewards across digital and physical commerce. In China, we brought the Häagen-Dazs mobile app to the physical store, contemporizing our Häagen-Dazs shops with the connected in-store and virtual digital buying experience. And we continue to leverage the data and insights generated by bettycrocker.com and pillsbury.com, 2 of the largest food content websites in the United States. In fact, our Pillsbury refrigerated dough business is further along on this data-driven journey than almost all of our brands because of the consumer insights we're able to gather from pillsbury.com and other social media platforms. We can see on our food websites and social media that meal prep fatigue has become a real consumer problem during the pandemic. We're leveraging data to determine the optimal convenient meal solutions, like Pepperoni Pizza Crescent Rolls to feature in our omnichannel marketing campaign. We're dynamically optimizing our creative content in real time, ensuring we target the right consumer at the right time with the right message and in the right language to capture their attention. And we're making our media shoppable, include linking our recipe data with our customers' e-commerce platforms, allowing consumers to put all the ingredients for a recipe into their digital basket with a single click. This data-driven approach is working. Retail sales for Pillsbury refrigerated dough increased more than 25% since the beginning of the pandemic, with household penetration up almost 5 points and buy rate up an impressive 13%. The brand has gained share for more than 3 years in a row, with fiscal year-to-date market share at 72% in measured channels. Innovation is in our DNA at General Mills. We think of innovation on a spectrum from launching close-in new products that provide consumers variety to fostering white space exploration, to investing in or fully acquiring new businesses. Over the past year, we've leveraged each of those tools to help us win today and to set us up for success in the next 5 to 10 years. Does this apply in a pandemic? Absolutely. Even as many of our competitors pulled back on their new product plans, we continued to innovate. In fact, in the U.S. in fiscal '22, our sales from innovation continue to outpace our categories by almost a point. This success has been driven in part by changes we've made to our innovation process. We now use predictive analytics and rapid in-market experimentation to test ideas, learn about emerging consumer behaviors and develop new product pipelines across our categories. Our recent slate of compelling core innovation includes the top-performing product launch in the U.S. Cereal category in fiscal 2022, Cheerios Oat Crunch Almond, which addresses consumers' feedback that they would love more texture in their Cheerios bowl. In K-12 schools, we worked with school nutritionists to develop Honey Cheerios, a gluten-free, nut-free, great tasting cereal that students will love. With Old El Paso Tortilla Pockets, we developed an alternative to the round tortilla that makes it easier to enjoy taco night without the mess. And Häagen-Dazs continues to drive differential taste and texture innovation with products like DUO and Twist & Crunch. Perhaps the launch we are most excited about this year is in pet food. Since our Blue Buffalo acquisition, we've focused on winning with dogs and cats in feeding and treating occasions. Historically, we said we could increase our retail sales by about $1 billion, if we can bring our market share in wet pet food and treats up to the level of our share of dry dog food. On dog treats, we took the opportunity to close that share gap with our treats acquisition last summer. On cat food, we took a different approach and built a new growth platform with the launch of Tastefuls. This high-quality, all-natural line of wet cat food meets the exacting ingredient standards of our True Blue promise, while delivering great taste that even the pickiest cats will love. And the results so far have been outstanding. Retail sales for Blue Buffalo wet cat food have continued to accelerate since its launch last spring, with growth of more than 50% in the latest quarter. To build on that success, we recently launched Tastefuls Spoonless Singles, a new subline that addresses an additional key pain point for pet parents, the mess of canned food. By taking Tastefuls out of the can, we've made it easy for pet parents to peel it, pop it and chop it to provide a tasty, healthy, mess-free meal for their beloved furry friend. We recently created our disruptive growth team to fill the gap between core innovation and acquisition and to ensure we're finding the most ways to partner with, learn from and ultimately grow with the external entrepreneurial marketplace. Sitting in our strategy and growth organization, this team is made up of G-Works, our internal venture studio that is working to solve big consumer problems with new-to-world ideas and 301 INC, our external venture capital arm. Disruptive growth is all about creating the next growth engine for General Mills with a current focus on these 3 disruptive opportunities: the impact of climate change on food, increasing consumer personalization and technology-enabled convenience; and we're already making progress in each of these areas. For example, to get after the theme of climate change's impact on food, G-Works has launched Bold Cultr, a next-generation cheese alternative made with proteins created through precision fermentation, which replicates dairy proteins without the cow. And based on the insight that Black Americans are the largest and fastest-growing vegan demographic in the country at almost 8% today, 301 INC recently invested in Everything Legendary, a taste forward plant-based meat company led by passionate founders and targeted to the black community. The pandemic has reinforced our belief that our scale in food can create distinct competitive advantages for General Mills. We think going big in digital and technology, or D&T, will create value by unlocking insights, growth and efficiency across every aspect of our business. We've increased our investment in this area for a third consecutive year, focusing on implementing digital solutions that will support marketing in a digital world, improve connected commerce and customer relationship management and help us get sharper at predicting demand and improving supply. As we manage through unprecedented levels of inflation, the pandemic has highlighted the strength of our strategic revenue management capabilities. We now have a more sophisticated data-driven revenue management toolkit that has helped us achieve significant net price realization while minimizing elasticities. The work we did in recent years to build out a robust SRM capability allowed us to react faster to the surge in inflation and with greater precision at the category and product level. Already this fiscal year, we've announced multiple rounds of pricing across our portfolio, utilizing all 4 SRM levers: list pricing, promotion optimization, pad price architecture and mix management. We expect these actions will drive a steady increase in our organic price/mix throughout the year. The sophistication and scale of General Mills' supply chain has been a point of pride and a clear advantage during the pandemic. We expect to drive holistic margin management, cost savings of roughly 4% of cost of goods this year. And by prioritizing worker safety, increasing the frequency of our communications and rewarding agility over perfection, we've been able to navigate the current environment better than our competition, resulting in broadly higher customer service and market share performance over the past 2 years. The final aspect of how we will win is by being a force for good because at General Mills, we believe doing good is good for business. We plan to host our second Annual General Mills Force for Good ESG event in May, where we'll spend time sharing our commitments and progress in the areas of planet, food security, communities and people. We're proud to be recognized as a leader in this space, including being named to the Dow Jones Sustainability Index and CDP's A List for climate and water. And most importantly, we're proud of the recognition from our employees, with our engagement scores outpacing our CPG benchmark and increasing for 3 consecutive years despite the strain of the pandemic. Let me close by saying that even amid a difficult operating environment, our clear strategic focus and strong execution is helping ensure that General Mills can compete and win both today and into the future. I am so thankful to all our employees for their dedication and care of one another and our communities during this time. I'll now pass it to Kofi to talk about how our strategy translates into shareholder returns.

Thanks, Dana, and hello, everyone. As we shared with you last year, we focus on 4 levers to drive 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. Our focus remains unchanged. We want to consistently pull all levers across a multiyear time frame to deliver top-tier shareholder returns. More specifically, we aim to consistently deliver 2% to 3% organic net sales growth. With modest margin expansion, we look to achieve mid-single-digit growth in constant currency adjusted operating profit. From there, we target converting at least 95% of adjusted after-tax earnings into free cash flow. Finally, we aim to return approximately 80% to 90% of free cash flow to shareholders through dividends and share repurchases, resulting in mid- to high single-digit constant currency adjusted diluted earnings per share growth and top-tier total shareholder returns. Let me share with you how we're delivering against each of these goals in recent years. Sales growth is the foundation of our shareholder return model. The pandemic has driven elevated at-home demand and our ability to compete effectively has driven strong market share performance and sustained penetration gains for our brands. As a result, in the 3 years through fiscal '21, more than half of which was before the start of the pandemic, we generated 3% compound growth in organic net sales. With our increased growth profile, expectations for further portfolio shaping and a plan to deliver continued strong competitiveness in our categories, I am bullish about our ability to consistently generate organic net sales growth within our 2% to 3% target rate. Over the long term, we believe the combination of consistent sales growth, contributions from HMM, SRM and fixed cost leverage should drive modest margin improvement and mid-single-digit growth in adjusted operating profit. And that's what we saw in the 3 years through fiscal '21 when our adjusted operating profit margin expanded by an aggregate 80 basis points, and we delivered 6% compound annual growth in adjusted operating profit. As Jeff mentioned, the current operating environment is presenting unprecedented cost headwinds on our business in fiscal 2022. Though we're pulling SRM and HMM levers as aggressively as possible, we expect our adjusted operating profit margin to be down this year due to the pace of cost increases in the near term. Even so, we're confident that when the environment stabilizes, our HMM and SRM efforts should help drive a rebound in our margins. We expect the combination of strong growth in adjusted operating profit and regular share repurchase activity will result in mid- to high single-digit growth in adjusted diluted earnings per share, and we delivered on that target over the past 3 years, when our adjusted diluted EPS grew at a 7% compound rate. General Mills has a strong track record of converting earnings into cash flow. In recent years, we've freed up more than $1 billion in cash through core working capital improvements. And in the 3 years through fiscal '21, we generated a cumulative $7.9 billion in free cash flow at 120% conversion rate, which is well above our target of 95%. The final step in our financial model is to return cash to shareholders through dividends and share repurchases. We've made tremendous progress in reducing our leverage since fiscal 2018 and we closed fiscal 2021 with a net debt to adjusted EBITDA ratio a bit better than our target of roughly 3x leverage. We resumed dividend growth and share repurchase activity in fiscal 2021 and we see our balance sheet as a strategic asset. We are committed to a disciplined capital allocation policy with the first call on our cash being investments in the business behind growth initiatives and cost savings projects. We expect capital investment to be approximately 4% of net sales. Our next priority for cash is our dividend, with our current payout ratio in a manageable position. We expect to grow our dividend roughly in line with earnings over time. General Mills' commitment to the dividend is steadfast as evidenced by our 123-year track record of uninterrupted dividend payments. After dividends, our next priority for cash is strategic acquisitions that enhance our portfolio's growth profile. And our final capital allocation priority is share repurchases. We expect to drive a 1% to 2% average annual reduction in our net share count over a multiyear time frame. Our strong operating performance and disciplined capital policies have contributed to General Mills delivering an aggregate 65% total shareholder return over the past 3 full fiscal years, which was well ahead of our CPG peer median, and our outperformance has continued in fiscal 2022 with year-to-date total returns to General Mills shareholders up 11%. Before I close, let me add a few comments on our outlook for fiscal 2022. As we outlined in this morning's press release, we reiterated our full year fiscal 2022 guidance ranges. We expect full year organic net sales to increase 4% to 5%, constant currency adjusted operating profit is expected to be down 1% to 4%. Constant currency adjusted diluted earnings per share is expected to range between down 2% and up 1%. And free cash flow conversion is expected to be at least 95% of adjusted after-tax earnings. Additionally, we anticipate our back half earnings growth will be more heavily weighted to Q4 than previously expected. Recent acute supply constraints on our refrigerated dough, pizza and hot snacks platforms in North America have caused short-term production shutdowns and lower customer service levels during Q3. As a result, we expect our net sales growth will lag our retail sales performance in Q3, and we expect third quarter adjusted operating profit will be down high single digits to low double digits versus last year. We've taken actions to address these supply constraints, and we expect to improve customer service and deliver strong top and bottom line growth in the fourth quarter. With that, let me now turn it back to Jeff for some closing remarks.

Thanks, Kofi. I'm proud of the work we've done in the past year to execute well in a challenging environment, reshape our portfolio and advance our Accelerate strategy. While we know there is still work to do, I have confidence in our team, in our strategy and in our ability to drive profitable growth and attractive long-term returns for our shareholders. Thank you all for joining us this morning and for your continued interest in General Mills.