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

Good afternoon, everyone. My name is Nik Modi, RBC's senior HPC, beverage, packaged food and tobacco analyst. I'm pleased to welcome General Mills to the RBC Global Consumer and Retail Conference. We have Jon Nudi, General Mills' Group President of North America Retail. Jon has been with General Mills for almost 30 years. Prior to leading the North American retail business, Jon was the President of the company's European and Australian segment, overseeing operations in 25 countries. And prior to that, he served as the President of General Mills Snacks. General Mills has announced several actions on portfolio reshaping over the past 12 months and is navigating through significant cost pressure. So clearly, a lot to discuss with Jon, so why don't we get to it?

So I guess the first question, Jon, for you is really around consumer dynamics, right? A lot of us were creating theories during the pandemic on what was going to last, how consumers are changing the behavior, so maybe you could just kind of give us a reflection on what really did stick, and then we can talk a little bit more about consumer dynamics.

Yes. First of all, thanks for having me here. Pleasure. So certainly, it's been an interesting few years. And really, even before the pandemic, we spent a lot of time working on making sure that we strengthen our brands and really focus on our products. So we reformulated many of them. We improved the taste, improved the ingredient decks, the nutritionals on many of our products. And we think we benefited as we went into COVID as a result. So during COVID, obviously, during the early parts of the lockdowns, the lock-ins we saw our brands and our business spike. And we had more people come back to try our brands for the first time in a long time and for many people trying for the first time. And I think they were -- the people that hadn't tried them were a pleasantly surprised with what they found. So we, back at the time, believed that, that would make a difference when we get through COVID. And obviously, we're not quite through it yet, but we're really just getting back a little bit more to normal. And we do believe that, that is playing out. And I know some analysts bought into that, some others didn't at the time. But if you look at our penetration levels, our penetration levels on the majority of our brands are still higher than they were pre-COVID. And something we're proud of is that it's actually outpacing our competition in most of those categories as well. So we think that consumers obviously try things for the first time. Many consumers actually learned to cook for the first time. And we think that, that is benefiting us today. Obviously, the way consumers work has changed as well. So while offices are opening back up, hybrid is certainly the order of the day. And we believe that benefits food at home. So as we look at some of our breakfast items, we think we benefit there as well as lunch-based items as well. In addition to that, obviously, we're experiencing unprecedented inflation right now. And with that inflation, we're starting to see consumers change the way that they eat, probably going out a bit less frequently as they've gotten back to go on to restaurants. Now inflations come into play, we believe that we benefit from that trend as we move forward. And even within our categories, private label and other things like that are the things that we're watching closely as well. So a lot's happening. We do believe the focus on our brands and really building them on our products is something that's going to pay off for the long term. And at the same time, we'll continue to stick-handle the situation from an economy standpoint as we move forward.

And I was looking at some data recently, some Numerator data and looking at at-home versus kind of QSR in terms of the breakfast occasion. And we are seeing a little bit of leakage there. I mean do you think this is temporary, just kind of a change in mobility? Or do you think that this is something General Mills has to really think about in terms of how do we get those consumers come back from QSR back into the home?

Yes, absolutely. So prior to COVID, we saw QSR breakfast occasions increasing pretty significantly over time. So it's something that we were focused on. We saw that reverse out in COVID. So I think some of it is going back to behaviors that were there prior to even the pandemic. But it's something we take seriously, and I think convenience comes into play. I also think having great-tasting products that really delight consumers in the morning is important as well. So if you think about cereal, we believe that it's highly convenient. You obviously pour it into a bowl with some milk, and we think that works for us. And as more consumers are eating at home, we think that works really well for us, too. We are experimenting those. We're looking at things like QSR Breakfast sandwiches in the freezer case. We've got some things that we're excited about there because if we can do that more affordably and more conveniently at home, we think we can make some good inroads there as well.

Excellent. Maybe we could just now kind of pivot to the operating environment. There's a lot to talk about there. It's probably going to take the next 20 minutes of our discussion. But when you think about labor, you think about inflation, you think about just kind of what's going on in the economy, I mean -- let's start the discussion here. I mean how are you kind of thinking about where General Mills stands right now, especially with North America retail as it relates to the operating environment?

Yes. So you mentioned I've been doing this for almost 30 years. I've not seen anything like this operating environment in my career. And on one side, it's pretty daunting. On the other side, it's kind of an exciting time because I think if you've got a team that is really focused on what matters, that's our consumers as well as executing really well, you can differentiate yourselves. And we feel like we've been able to do that over the last few years. So where do you start? So inflation obviously has been a big challenge and inflation levels that we haven't seen in years. And frankly, I think it's been almost 40 years since we've seen that type of inflation that we're seeing now. Over the past year, we've taken actually 5 different rounds of pricing. We have not taken 5 rounds of pricing in many, many years, let alone all in one. Every one of those actions didn't involve all of our products, but we compete in 25 different categories across the store. So we hit all of those categories and some of them multiple times. And that obviously required a different risk. It's something that we're really proud of is our SRM, or strategic revenue management, capability that we built over the last 5 years. we've got much more sophisticated in terms of the way that we look at our pricing. We have tools now that are very technical and models that really help us figure out the best way to take pricing. So in many cases, it was list price increases. We adjusted our promotional frequency and depth as well. And then pack price architecture is another area that we leaned into. So if you look in market, you look at Nielsen, you can see our prices are up significantly versus a year ago. And we believe -- and again, our goal is to keep our products as affordable as possible for consumers. That's something that we strive to do. But at the same time, with the inflation that we've seen, we believe that we've taken pricing in a smart way and work with our retail partners in a way that makes sense for them as well. So pricing has been a big challenge as we look forward. We think we'll have to take more pricing, and we'll continue to do that in a smart way. The other thing that's happening at the same time is the supply chain environment is unlike anything I've ever seen. And really, starting over a year ago, we started seeing -- first of all, labor became an issue, obviously, due to COVID and the impacts of the pandemic. But the knock-on effect of that as well as the global supply chain and then the war in Ukraine was material disruptions unlike anything we've ever seen. So we're seeing 10x the number of disruptions in our supply chain from an ingredient standpoint coming into our plans than we ever experienced before. And this gets really challenging because we can't see them coming in many cases. So a truck is supposed to show up with oil at our refrigerated dough plant in Tennessee doesn't show up, so we have to shut the line down. Obviously, that creates lots of issues in terms of having the right amount of product and supply to our customers. And at the same time, it drives a lot of incremental costs as well. So we have thousands of these material disruptions every single month now, and it's something that we haven't seen before. So we're spending a lot of time focusing on the biggest ones. We have daily control tower meetings on the issues that are popping up. I have a weekly control tower meeting where I meet with our team on the biggest issues that we're facing and really help try to break down barriers and do things differently than we've done before. So trying to build resiliency back in the supply chain will help us from a sales standpoint as well actually being better in stock levels, and at the same time, hopefully take out some costs over time as all these disruptions are very costly as well.

I'm just curious as someone that has been in this game for a while, I mean, the environment we're in is obviously a lot more volatile than what you're used to, than what any of us are used to, but it feels like it's going to be the way it's going to be going forward. And so just philosophically, as a leader, how we do things -- do you do things differently? I mean, how do you say, "Hey, we got to carry more inventory now forever because we have to be just in case now, right?"

We're doing things dramatically different than we did certainly versus 2 years ago and then the pandemic. And the big thing that we're trying to build is an agile organization because inventory might make sense for today and for the foreseeable future, but things keep changing, and things keep changing faster than ever before. It used to be our industry was pretty sleepy. Diets changed every 4 or 5 years. You'd run into supply chain issues every once in a while. And now the cycle of change has sped up. And I do believe the Internet is driving consumer trends faster than ever. Diets come and go in a year now, so the time you launch something, that trend could be gone. So we've been trying to work differently. We used to be a big slow bureaucratic organization with silos and functions. And just last summer, and a lot of people second-guessed or we're wondering at the time did it make sense for us to have a major reorganization last summer in the middle of a pandemic. And I would contend that it's allowed us to be much more successful in dealing with pricing and supply chain ever before. So what we did in North America was take 5 operating units, which all were sizable but yet subscale and move those to 3. So we had more scale. We were able to have our best leadership teams really run those businesses, and we put our capabilities into each of those operating units. And at the same time, we forward deployed all of our functional partners. So instead of having sales set off on the side, we now have sales report into each of our operating units directly. And I can tell you for a fact, we would not have been able to take 5 rounds of pricing this year if we run our old structure because it used to work that our operating units or our business teams had to negotiate with our sales teams before we negotiate with our customers. Now they're one team working together, moving much more quickly. And the supply chain side has really helped us as well as we have our supply chain partners sitting with the business teams in real time getting after the issues that are coming against us. So I do believe that organization matters and then mindset matters. We can't all be experts in everything. We've got to be agile. We've got to read and react, and I think we're doing a better job, but we've got more work to do in that space, too.

And so obviously, getting a lot of pricing putting into the marketplace, we've heard from certain retailers that are coming under some margin pressure. How do you think about your pricing? How comfortable do you feel -- how should we think about potential promotional spend back? And then just maybe touch on private label because I know that's a question investors typically have around these times.

Yes. So if you look at Nielsen, we're tracking a couple of points ahead of our categories in terms of average unit price. And that's by design. That's where we want to be. We don't want to be too far out, but we do want to lead. We believe that we have the capabilities in the right with our brands to lead pricing. And we've done that, as I mentioned, through multiple waves this year. A couple of indicators of whether it's working or not. So if you look from a share standpoint, we are growing share in the U.S. in 69% of our top categories. So we feel great about that, 66% of all of our categories. When you look at elasticities, elasticities are less than half of what they've been historically. We're watching that all the time and is obviously as we take more and more price, there is elasticity out there. It's just not what we've seen historically. And then private label, while in food and beverage, you've seen it start to tick up in our categories, it's only up 5 or 10 basis points more recently. And so we're keeping track of that as well. Overall, we feel like we do a good job, and our best job of competing in as private label and we innovate well and we really build our brands and really market behind them. And when you look at total food and beverage, private label is about 18% share of total food and beverage and only 10% of our categories. So over time, we believe that building brands and innovate can really differentiate us.

And then maybe touch on just ingredient supply, right? Because, obviously, with what's going on in the agricultural markets, I mean wheat is being short in a lot of parts of the world right now. So can you just talk about that and how we should think about it?

Yes. So when you think about grain, the majority of our grain, over 90% comes from North America. So availability is really not the issue for us. We have the ingredients that we need. It's really price, and it's a global grain market. So we've been impacted by that. And that's some of the pricing that we've seen come through. It's really been other things. So starch, frankly, it's something I didn't realize what we use in so many different products. It's really used as a processing aid and starch has been constrained for over a year now, and that's been a real challenge for us. Oil, a little bit of knock-on impact of what's happening in Ukraine has become a challenge from a supply standpoint. Even beyond that, again, I'm learning all kinds of things I didn't know over 30 years, but oil has to ship in specific trucks that are built for shipping oil and have drivers that are specifically trained to drive this truck. There's a shortage of those truckers right now. So even if there is oil available, getting the truck has been some...

And edible oil...

Edible oil, yes, we use it in our ingredients for sure. So it's been just one thing after another. And every time we think we fixed something, in Q3, we're pretty open about challenges in our refrigerated and baked goods and Totino's hot snacks businesses, we feel great about this now. If you look at our on-shelf availability, we're back to where we need to be. But then other things pop up. The oil issue that I talked about is a real challenge for us right now.

Yes. Let's talk a little bit about just portfolio shaping because General Mills has been very active in the last 1.5 years around that. So maybe just kind of give a summary of kind of where we are, what you recently announced last week and kind of what is the philosophy, the strategy as we move forward.

Yes. At the end of the day, and at CAGNY, Jeff Harmening, our CEO, talked about having an always-on M&A capability. And we're really trying to get to that point where we're constantly assessing opportunities to acquire something that makes sense for us, and at the same time, we'll continue to assess our current business to figure out what we might want to divest as well. Historically, over the last few years, we've done bolt-on acquisitions, things like Annie's and Blue Buffalo that have worked out quite well for us from both the top and a bottom line standpoint. And we'll continue to make some acquisitions. We acquired foodservice business recently as well that makes pizza crusts, which we're excited about. And then Blue Buffalo continues to look at things like treats, which we acquired from Tyson more recently as well. We have been active in not only buying things but also divesting as well. So in November, we divested our European yogurt business, which, again, was a great brand, Yoplait yogurt, but at the same time, it wasn't growing the way that we had hoped, really a challenging business model, particularly in Europe as well. And just this last week, we announced that we're divesting our Hamburger Helper and Suddenly Salad businesses as well. And at the end of the day, we -- prior to the pandemic, we're growing at the 2% to 3% range. Our goal is to get to 3% plus. Taking these moves really help us get closer to that and incrementally are making a real difference in our growth rate.

And so when you think about the portfolio as it is today, I mean, do you feel like there's even more opportunity to kind of divest some lower growth brands? And then if you were to think about actual M&A, where do you feel General Mills has the biggest gaps?

Yes. I think -- as it comes to M&A, I do think that we're going to look at our existing categories and adjacent categories. That's our starting point. And again, I won't go into specific targets, obviously. But we continue to really scan that space. I'll tell you to get a lot of surprise. We love pet. I mean it's been a great category for us. We think there's more opportunity there for sure. So we'll continue to look at that space. And then in terms of divestitures, for sure. I mean, we are a big company with many, many brands. And I do think that -- we're using Hamburger Helper and Suddenly Salad as an example. We, prior to the pandemic, had been declining for 10 years in a row at a double-digit rate on each of those businesses. And we haven't been able to hold share either. So for us, we can better focus our resources and efforts behind brands that we think we have better shot at growing, and I do believe that focus by someone else can probably do great things for those brands as well. So we think it's a win-win. We'll continue to look at our portfolio for other opportunities as well.

And then segueing into kind of growth. So obviously, portfolio reshaping helps kind of improve the algorithm. Talk about innovation and kind of what you're doing there, what you've changed in terms of internal process that we were talking about earlier. I think that would be really helpful for the audience.

Yes. So innovation is critically important. It's something that I've been passionate about and our company has been passionate about. And during the pandemic, we never pulled back in innovation, and we think that we've really benefited as a result. In fact, in cereal last year, we had over 50% of all the new product volume in the category just by keeping a healthy lineup of innovation. So core innovation, we think, is really important. We've got a good track record of success there. Increasingly, we're continuing to try to focus on disruptive innovation. So things that can create other new businesses or new categories and really incremental growth for us. So we created a new disruptive growth team within General Mills a year ago. Even prior to that, we were working with a partner to develop a new way to innovate in spaces that we're not currently in. So it's a really different approach. It starts with not a category and innovating a product. It starts with deeply defining a consumer problem. Because if you really understand a problem that a consumer has, you can serve up solutions for that problem in unique and innovative ways. And it's a different way in than we typically do things. It usually starts with the category. It usually starts with the brand, and then you go from there. This starts with the consumer at the front. We think that's really powerful. And then what we do is we take 3 people, and it's usually a technical person, a consumer insight person and a business person. We put them together and we get them a full-time job of working on that consumer problem. And then we give them a budget. And we say go out and figure out, talk to consumers, use Facebook to create products that we can sell online and get learning and really develop a thesis for is there a business here for us or for someone else, and if so, go ahead and build it. So we've got a couple of things that we're public about now, one is...

You're going to get the Phil Donahue mic.

Sorry. I love it. Saved by the bell. So [indiscernible] product that really focuses on the consumer problem is glucose levels in diabetes. So if you look at America alone, there's over 100 million consumers that are either diabetic or prediabetic. And they really have to look to pharmaceutical solutions. There's not good food solutions, and we know food plays a big part in that health issue. So this team is really trying to develop a line of food products that will help diabetics better regulate their glucose levels so they don't have to lean on pharmaceuticals. So we launched a snack bar, it's online [indiscernible] actually in several bricks-and-mortar accounts now getting really good feedback. So the hope is to develop that, bring it to additional categories and then you've got a line of products that will help consumers solve a significant problem for them.

And is this different than the G-Works?

It's part of what we call the G-Works. And we have 10 of these teams now focused on 10 different consumer problems and really excited about what this can do for us over time.

And obviously, innovation requires complexity in the supply chain at a time where the supply chain is already very complex. So how do you think about new product development, getting it into the marketplace in this moment?

Well, I think it's critically important. I mean we know consumers still want variety. They want new things. And particularly, during the lockdown, during COVID, they were searching out new and innovative products. So we think innovation is critically important. We'll continue to stay focused on it as we move forward. And -- I'm sorry, I'm making this static by my microphone here. I'm not sure if it's working or not. I think I'm back to Phil Donahue.

We're going to go old school here. Just a quick wardrobe change in the middle of the fireside chat.

All right. We good? So we’re good. All right. So the supply chain and the technology in the room are not working right now. So what I would say about our core businesses when it comes to innovation, we're being more thoughtful about what ingredients do you put in them. So we used to -- we have great -- we have 1,000 food scientists, most of them in Minneapolis, all over the world, though, and they're brilliant. In the past, we gave them free reins to use whatever ingredients they wanted to create unique new products. Now we're creating a pantry of ingredients and asking them to, as you create new things, use existing things and existing ingredients and wanted to get -- and add additional complexity as we move forward. So [Technical Difficulty] We do believe that free rein -- giving our free reins to our teams to really do what they need to do to create something unique. And when you think about things like trying to solve for glucose levels, do whatever you need to, right, find the right technology, find the right solutions there. And one of the challenges of General Mills is we're complicated, but one of the benefits is we're complicated. We know how to manage complexity as well.

Right, right. Snacking, obviously, pretty volatile in terms of the behaviors, right? People were not going out, not on the go. What's the state of the union on snacking? And how do you feel like the strategy is developing there at General Mills? I mean, is there a lot more that you can do in terms of innovation and M&A in that space?

We love snacking. I mean, obviously, prior to the pandemic, it was on trend. When the pandemic came, you saw categories like granola bars and snack bars really decline due to mobility. So as consumers were at home, they weren't consuming the products they used to eat on the go and granola bars are typically that. We've seen that category come back. In fact, our fiscal year that just wrapped up, if you look at Nielsen, it's grown kind of mid-teens, which is fantastic. So we love our granola bar business, our bars business, we're the #1 player in this space. And we think there's a lot more to be done from an innovation standpoint and building on our existing brands like Nature Valley and Fiber One. Fruit snacks, which has been an amazing success story. We can't service that business. Every time we add more capacity, we go through it. So we're just adding more capacity as we go. And the reframe for us there was, look, I mean it's not fruit, right? Everyone knows it's not fruit. But what it is, is it better for your candy. So reaffirming it that way and really communicating to mom, that if you want to feel a little bit better about the snack that you're giving your child, look at a fruit roll up or look at a gusher, and that's been a real unlock for us. And that category has just been on fire. And even things like Chex Mix and Bugles. Obviously, we're not going to go head-to-head with Frito-Lay. They own that aisle and they do terrific things, but we've got a unique role to play with really good brands and spaces. So we'll continue to innovate. We'll continue to see if there's new spaces that we can go to in snacking as well because we think that, that occasion is going to be on trend for the foreseeable future for sure.

One thing I forgot to ask about when we're talking about the operating environment was just labor, right? Because that seems to be an issue that everyone is dealing within every industry. What's going on with labor? Are you having more success bringing people into the door? And are they staying?

Yes. So labor, obviously, has been a huge focus for us. What I would say in our own manufacturing facilities, we've had really good success really through the entire pandemic. For the early days, our frontline workers were really the heroes of General Mills. When there are so many unknowns, they showed up at work every day and kept cranking out products for our consumers that needed food and our products more than ever before. And we didn't lose many of them throughout the pandemic, obviously, as people had family issues or health issues, they would take care of those, but they would come back. And part of it is we have a long history with these employees, and we treat them well and they treat us well. So that's been great. The bigger knock-on effect has really been at many of our suppliers have had real issues with labor. And I think that drove a lot of these ingredient issues that I talked about as well. And then for a while, our distribution centers had some significant issues with labor, but it seems like that's going to be able to have -- they've been able to work through that more recently as well.

So you're seeing the problem kind of subside as the pandemic is not going to endemic and stimulus is kind of rolling off?

Yes, it's better, but definitely still an issue, but it's better than it was 9 months ago.

And we...

That's exactly, take anything.

So on ESG, you guys have been really focused in that area recently had an Investor Day, just kind of focused on ESG. Talk about how General Mills, broadly speaking, is integrating ESG into their strategy, into their brands?

Yes. So ESG is critically important for our company and for our brands. It's something we've been focused on for decades. It's not something that's new for us. And we're doing several things. One, at the corporate level, so starting -- all we go after the Board, we have something called the GIGC. And basically, it's focused on making sure we add up all the commitments we've made over time in this space, and then we have glide path and real actionable mileposts for our teams to go after. So prior to that, we had a lot of commitments and we knew what they were. We were working on them, but it really wasn't all that coordinated. So now we've got a senior-level group that once a month gets together, looks at all of the commitments, looks at our progress. And if a brand wants to come off of a glide path, it used to be they could do that, and they can make that on that call on their own. They now have to come to this government -- this Governance Board and basically make a case for why they want to come off and no one's ever come to -- back to -- try to come off at this point, which is good because I recognize that this is really important work. So what we're trying to do in addition to meeting the commitments, which are critically important is make sure that we build this into our brands. And, in many cases, this is really good stuff that would actually build our brand as well. We do believe that doing good can be good for business, and that's something that we talk to our teams a lot about. So regenerative agriculture is something that we're really proud of. We were one of the first into this space. And we think that can make an incredible impact when it comes to GHG. And if you look at the impact of our business, agriculture is probably the biggest contributor of greenhouse gases coming out of our space. So we are working with farmers to basically go back to the way that farming used to happen. So it's less tillage, it's covered crops, it's rotating livestock on land. And it's pretty incredible, and we have trials under way right now to quantify the impact it has. But all the early signs, it's really significant. So we're working with farmers to go in that direction. And then we're taking regenerative agriculture and bringing it back to our brands. So at Annie's, we actually have 2 farms that we actually have grown specific ingredients that we then put into a specific box and put a farmer on the cover of the box, and he talks about a farm-specific regenerative agriculture initiative on Annie's, which has been really powerful. And I can tell you when it comes to oats, we're the one of the largest, if not the largest buyer of oats in North America with Cheerios, we're working to do the same thing with farmers regenerative agriculture. So we think we can do the right thing for the environment, the right thing for our consumers and still drive more sales as well, and that's something we continue to work on.

Yes. And it seems like that creates a nice brand narrative as well.

For sure. And it builds purpose into your brands and clearly, brands with purpose are the ones winning in the marketplace.

Excellent. So we're just bumping against time. And Jon, just any closing thoughts you have for investors, new and old.

I'd say, look, we're really proud of the way we're now getting a tough environment. We've been around for over 155 years, and we've built brands that really resonate with consumers. And we continue to work and improve and build those brands and continue to innovate. And one of the things that we're proud of, again, is not only our top line or bottom line, but really our competitiveness. And if you look over the last -- even prior to pandemic over the last 4 years, we've consistently been able to grow share in the majority of our categories over time. And when you stack that up against others and any competitors that consistency is something that is hard to do. And again, it's something that we're going to continue to focus on by operating well, innovating and building our brands.

Excellent. Jon, thank you so much for being here at the RBC Conference.

Thanks, Nik. Appreciate it.