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

Welcome back, everybody, to our next fireside chat with General Mills. So with me today are our CFO, Kofi Bruce, and President of North America Retail segment, John Nudi. Let me hand it over to Kofi just for a little bit of a summary of General Mills Press Release this morning and then we'll get into some of the Q&A that follows. Over to you.

Thanks for having us, and welcome, everybody. I'll take just a few minutes, we have two of the things that were covered in our press release, starting with a reminder that I'll make forward-looking statements, which obviously changes and -- so just as you think about the structure of a supporting takeaway, we're affirming the full year guidance, 3% to 4% organic sales growth 4% to 6% adjusted diluted earnings per share and constant currency operating profit growth along with 95% free cash flow conversion. That's the headline. And then I think as you click below that, a couple of [indiscernible]. We're still over same shifts that you've probably been hearing about in the operating environment remodeling levels of inflation, I think there's [ tingly really ] returning to the space. And consumer that remains resilient, but obviously, a little bit more cautious in this event. So we see all of those things play out in our business as well. And our priorities remain unchanged from what we shared at the end of the year, we reported in competing effectively, driving supply chain efficiency and maintaining discipline in our capital allocation priorities. So let me really through a couple of those. First, as we think about continuing, let me start with retail business [ Jinmestice in that ] unfold. We are seeing consumer value-seeking behavior. We're seeing some, obviously, some pressure that you can see in the movement. But again, in line with we would only have expected. So our Q1 net sales, we would expect to outpace retail sales as we see some of the growth in nonmeasured channels as the leisure channels, in particular and a modest production in our inventory. We saw that move the other way at the end of our fiscal year. We look at our pet business, we're seeing some of the same things, a shift of value and the change in pet parent behaviors. Specifically, we're seeing some of the value brands benefit [ ratio ], continued stabilization of supply chain. But we're also seeing more pet parents away from the household. So a lot less of the mixing and creating behavior that had the driver business as well as a shift in the mix the types of food that are being fed to pets. So we expect our organic net sales on pet to be roughly flat and the margin around 18% as a result. That said, our North America foodservice and international businesses, which comprise about 25% of our portfolio to a good start. So then as we think about the supply chain, we continue to see our service levels improve. We expect them to range from a low 90% to mid-90 percentage point range for the year. And with that stability comes on, I think the environment that's conducive to us producing the normalized levels of HMM COGS productivity that we would historically have delivered 4% or greater. So that becomes an important theme as we think about our expectations for the balance of the year. And then importantly, if we think about our capital allocation and capital priorities, we continue to invest in the business behind key growth platforms as we think about our CapEx. We expect that to range close to 4% of sales. We have also prioritizing returns to shareholders, right, 9% increase in dividends. And with that, also about a 2% reduction in shares as we have share repurchase [ begin ] for this year's expectations. And even with that, ample flexibility in the balance sheet with leverage at its lowest levels just before the Blue Buffalo acquisition should have the forward shaping opportunities. As we think about where we are, the environment is dynamic, we've been saying that. I've been saying that pretty much [indiscernible] year as CFO. But the job for us and the challenge for us remains to the [indiscernible].

First off to start you actually look for pet sales in fiscal 1Q. There was no commentary around any change in expectations or not around profitability, right, for overall General Mills in 1Q as a result. I don't know what you can or can't talk about around margins and sort of EPS growth in 1Q or if there was some flexibility built in the P&L elsewhere that's helping offset some of the sales shortfall impact.

Yes, sure. And I think it's important to note, I referenced our North America foodservice and international businesses, which are -- we're off to a really strong start and we probably stronger than expected results in the quarter. I don't want to get too much further ahead on we're just a couple of weeks out from our earnings release. So we'll say more about Q1 profit at that point. But as we talk about the pet environment, [ comfort ] was important to acknowledge some of the trends you're seeing put them in context. And obviously, it's very clear we're going through an environment where pet households and pet parents are seeking out [ most everything backsides ] to where they shop for pet food. Our job in this environment just gets down to the fundamentals of still focused on what's the unique brand proposition of the Buffalo around clean ingredients for that child in household. And ensuring that we're talking about that value benefit, which we carried with the premium trade. To be sure that we're playing in the channels where consumers want to shop right now. So if they're going to value channels, we need to ensure we're showing up activity being relevant in those channels. And then lastly, to pay attention to the tools of toolkit to ensure that we have the right price points that are relevant to consumers in this environment. As we think about our price pack architecture in particular on this business.

You had enough confidence to reaffirm sort of the full year, right, on both the top line and the bottom line. Is that more that you're now expecting a greater rebound in growth in, let's say, the back half of the fiscal year versus previous? Or maybe is now the full year more anchored we should be towards maybe the lower end of those ranges? Trying to get a sense of what -- I guess, what's driving that confidence in reaffirming the full year?

Yes. So I think it's in part we see puts and takes. I'd also concede that we went into the year giving guidance that we expected was built around the expectation that most things would go right, but not everything would go right. So I think we feel comfortable we are still within the range of the guidance we provided, I'm not prepared to share [ you about land ] within that range on sales. And within the going in sort of an expectation setting exercise.

You mentioned in the release that Pet could be under pressure for a period of time as we go through this fiscal year. I guess, what should our expectations be for how quickly or not we could see a pivot in growth in Pet as we move through this year? Is it that you've got a big inflection coming in the back half? Or is it more a more slow and steady as we go through the year would be a more reasonable expectation?

Well, as best as we can read the present it, we're certainly not -- our guidance isn't built on a huge hockey stick change in the pet operating environment. That said, as I mentioned earlier, we're not accepting that there are things that we can do to improve the trends and the performance on our premium pet food business. So that's specifically around the unique brand proposition on Blue Buffalo, talking about that more to consumers around getting at the right channels. And then in particular, addressing some of the absolute price points through getting the right pack sizes. So the price is relevant for the consumer as they shop our brand.

And maybe just giving a little bit of a better understanding, I know that premium pet food has been discussed often maybe in the past as sort of being one of those more bulletproof for sort of impenetrable sort of categories where when shoppers are feeding their pet premium, better than their families, that kind of thing. That's one of the last things they would shift. And it's harder to shift pet food when it's working for your pet. Has that changed? Or what's leading to that change in what we're seeing versus what we might have thought before?

Well, I think at first, it's important that technology [indiscernible]. We're coming out of a period of supply disruption, which in part sort of forced some conditions for consumers and pet parents unfortunate or were to [indiscernible] and try new brands. So that was a challenge, that's become unstuck. But the unprecedented levels of inflation accumulated over the past couple of years are also a factor. But as I step back and think about the pet segment over the long term, right? The underlying trend has been towards humanization, which has been driving the premiumization of the segment. That is still likely and we believe the dominant driver of growth in the pet segment, even if right now, there is a shift in the short term towards value and maybe a readjustment, the consumer sells into maybe a cautious state.

You have pet segment also obviously not just dog food, [ light ] protection formula, wilderness, vet, treats. And I know they're not all performing similarly. Maybe you can just break it down a little bit more to get a sense of sort of what's working in senses life protection formula, dry dog food. Is it actually responding a little bit better to some of the capacity additions and it's really the other areas maybe where you're seeing more of the weakness. Is that fair?

Yes. I think that's a fair way to characterize it. We've seen and we were focused on improving life protection formula first and that's the core of our brand, and we are seeing improvement in the trends there. We've seen more challenge on wilderness, which is a super premium offering and obviously, treating has been -- and what should have been impacted the consumer behavior at pet parents being out of the household, being less willing to leave out wet food in this [ room ] and certainly not being home to provide treating, which is a arguably more discretionary part of the category. But again, it's a $44 billion category. So on the other side of that supported by long-term pet population growth expectations in the low single digit and a continued trend that we've seen in multiple markets where pet adoption drives a certain set of behaviors around humanization. So I think those things are still there structurally over the long term for the category even if maybe it's a little harder to see them right now.

Would your expectation, therefore, maybe, again, over time, given it sounds like more of this you're seeing is more transitory, still be for Blue Buffalo to generate, call it, that high single-digit type of sales growth on average?

We would expect that our job for sure, is to make sure that we get the marketing right, but that we should be positioned to lead premium growth over the long term and follow that humanization trend that drives the premium and the category, which over the long term, I would expect to be kind of in that range of the high to mid-single digits, the mid-single-digit growth range.

And then capacity has been a big challenge, right? Within Buffalo. With some of the weakness we're seeing more recently in that business, is capacity not becoming less of an issue? And I know it's not necessarily the way you want to solve, right, the capacity constraints by weaker sales versus [ inlet ] capacity. But where are we now on capacity? And more importantly, maybe do current trends change the way you're thinking about how quickly you bring on or your plans to bring on a lot of incremental capacity that's planned in the next year or so?

Well, I think it might be still a little early to read, but I would say, certainly the key pressure on capacity has abated somewhat. I would expect that the capacity we are bringing online we made expansion plans in our internal dry capacity will allow us at a minimum to address the mix of internal versus external manufacturing. We don't expect to see much benefit from that in this fiscal year. But I think over the long term, that also will help us with margin and margin structure improvement on the business as we step into future years.

Maybe last one on Pet for the moment, and then we'll switch gears a little bit. But can you talk about the margin opportunity as some of this incremental in-house capacity comes online? With the growth that petfood category has seen over the last couple of years, I realize the differential in what you're paying in a [ tolling try ] to a co-packer versus producing this in-house. I think has expanded pretty dramatically. Maybe you can give us a sense of whatever -- a magnitude of that differential to give the audience a sense of just how much that helps profitability once that in-house capacity comes online.

Yes. And I would say in this environment, a good portion of our margin pressure that is unrelated to deleverage would be specifically driven by the other costs that we've taken on. A large chunk of that showing up in the gross margin for tolling. So as we think about the potential for what this looks like in the future, there's probably a couple of hundred basis pounds potentially.

So I know we've been talking about sort of the very short term here for a minute. But maybe just to take a step back a bit, maybe talk a little bit about your longer-term goals. You mentioned in the past you be holding share across your current mix of categories and geographies, generate organic net sales growth squarely in the middle of your 2% to 3% long-term target. I guess what gives you the confidence in your ability to grow in line with the top line growth algorithm? And how is that confidence may be different today than where it might have been a few years ago or even short of pre-pandemic?

So why don't I start, and then we'll get [ John ] in here, so we can get some work in that too. So I think a couple of things. As we think about the past couple of years. We've really made some great progress. First, in terms of competing effectively, if we look at the last 4 years, we've grown our [ held ] share in over 50% of our top categories. So we've certainly become a lot more competitive and driven that go through into really profitable bottom line growth as well. I think as we think about the portfolio, we've turned over almost 20% of the portfolio in terms of sales all of which has also helped improve the underlying growth exposure of the portfolio that helps us get comfortable with that 2% to 3%. So I think we're kind of coming out of this period I think, stronger than certainly we went in, and we continue to make investments in the capabilities that will need to drive growth in more stabilized, I hate to use the word normalized just given what we've been through, it's hard to argue. We know what normal looks like, but certainly in a more stabilized environment. So I think those are the things that I would point to at the macro level probably useful for Jon to maybe weigh in some perspective.

So one of the things I think is underappreciated is the reorganization that we undertook a couple of years ago. So for most of my 30 years with General Mills, we were matrix function-based organization led by businesses, but really informed by functions and we operate that way. So 2 years ago, we [ flittinon ] its head and really want to a business-led function-enabled data field model. And it's really been a game changer for us. We have -- went from 5 operating units in the U.S. to 3 at scale. Each was about $4 billion in sales. Each of them was led by [ the President, he was a cross Fortuna team that refers ] directly to them. In the past, sales didn't report to them directly, supply chain to them directly. Today, they work together as one team. We also fully deployed many more resources to operate units. And it's really been invaluable as we've gone through the last couple of years with supply chain disruption and unprecedented inflation. One good example is when it comes to pricing. So a few years ago, we would have never been able to take the number of rounds of pricing that we took over the last 18 months, with the functions set up the way they were. Sales was a separate function, actually reported to me, not to the businesses. So the team have to negotiate internally first and then go [ together ] with our customers that used to take sometimes weeks or months. Today, teams get in the room, they make decisions and they go and selling around the pricing. Supply chain is the same thing over the last few years. Obviously, all the supply chain disruptions have been unprecedented and us working together as one team and enable us to really navigate better than ever before. So again, we don't talk a lot about it. What I can tell you is we are operating much more efficiently, much more agilely than we ever had for and that gives me a lot of confidence that we'll be able to compete effectively like we have over the last 5 years as we move forward.

It's probably always naive to think that as the industry sort of moves towards a more normal operating environment or a more stable operating environment, that the timing would align perfectly, right, between the industry lapping pricing and seeing sort of a commensurate volume recovery so that we stay in sort of positive territory around organic sales growth. And I think we're seeing some of the bumps in the road for the industry that come with this shift in operating environment. But I'm curious, it still seems like a bit of a puzzle. I think to a lot of investors on where sort of the volume is going and how to explain what we're seeing in some of the scanner data. Not just for you, but broadly, we're not seeing mass trade down to private label. We're not seeing mass shift to away from home meeting, doesn't appear that consumers are eating less calories. Yes, there's been some summer travel, and we've heard some companies talking about guarding against waste and hunkering down here and there. But I'm curious what your thesis is on this. If you've got one, maybe it's a mix of things. But -- and I ask because obviously, we're all sort of waiting with bated breath for things to start moving in the right direction on the volume side of the equation. I know it's -- we're probably overly focused on that at the moment, but and sort of get why.

Yes, for sure. I'll take a crack at it, and [indiscernible] can jump in with any color. So Andrew, I remember we were together in Chicago in spring, and you asked the same question as with the linear in terms of the volume recovery. And clearly, it hasn't been and as we look at things, we think there's three macro factors really impacting our business. There's a couple of things impacting [ general those ], particularly in our business in the First Quarter as well, which I'll touch on. From a macro standpoint, again, you mentioned mobility. And clearly, this is the first summer that consumers are back to full mobility since the beginning of pandemic. I read that 110 million Americans traveled last week and that's 1/3 of the country. So obviously, if you're traveling, you're not [ needing ] at home. And obviously, that impacts our business. We have seen noncommercial foodservice channels grow, so things like hospitality, sporting venues, things like that. So that's part of it for [ Seres ] mobility. At the same time, we know that consumers are challenged. And again, they are resilient but certainly are exhibiting some behaviors that we've seen in the past and during economic challenges. So trading across channels, so shopping [ load ] value channels trading down [ to private in some ] cases. Certainly moving to smaller pack sizes as well. We think there's some destocking of pantries going on as well. So we think that's part of it. Then the other things in the U.S. with tracked channels, some of the fastest-growing channels aren't tracked. So in untracked channels, we're seeing quite a bit of growth right now. So as you read our volumes and it's probably not fully capturing all of our sales. In terms of General Mills and particularly in our business, we're essentially [ copy subs where we ] thought we'd be after the First Quarter. [ We ran that Q1 ] will be the most challenging quarter from a comp standpoint, certainly from a share standpoint. We grew share in aggregate Q1 fiscal '23, and we grew share in north of 70% of all of our categories in Q1. And primarily, that was because we priced first in many places across almost every category we compete in. So we got the rate benefit last year. As we look at this year, we're not getting that rate benefit [ as we've lapped ] our pricing faster. Our competition has a rate benefit, which is hurting us from a Q1 standpoint. The other thing that's definitely a factor for us is on shelf availability. On shelf availability was good last year. It continues to improve. What's different is that our competitors are seeing an even better improvement, particularly private label a year ago, some of our private label competitors were 10 points south of where they are today from an on shelf [indiscernible] standpoint. So as they get back healthier and on the shelf, that's had an impact in our Q1. So with all that being said, again, we're generally where we thought would be. Clearly, we see volume accelerate through the back half of the year. We believe that as we lap pricing elasticities will help us win back to that. And as consumers get back to the routines and back-to-school to that will drive volume as well.

In the release this morning, you also mentioned it wasn't the primary reason for sales growth in North America retail being above scanner, but part of it was inventory rebuild. Obviously, you were coming off of a period in the Fourth Quarter where you had that unexpected sort of inventory destock. Did retailers go too far to a point where they were getting paid with out of stocks or -- and they're kind of learning the lesson a little bit, depends on sometimes we know in this case, between [ tile ] manufacturers can swing a little bit too far in one direction versus the other. Is that kind of what happened? Or what's leading to some of the restock that you're seeing?

Yes. We know over the last couple of years, the trend has been for retailers volume down as we focus on working capital and getting their inventories in line. And as supply disruptions have normalized, they don't need to carry as much inventory. So in fact, 6 of the last 8 quarters for NAR we've seen our [indiscernible] trail movement in the market because of the phenomenon. Obviously, Q4 was a bit different. Q1, as we mentioned in the press release, we'll see our RNS a bit ahead of movement. What I would tell you is over the course of the year, we don't think it's going to be material. We think it will relatively be flat. Retailers don't care where a quarter earnings are and again, there's normal order income things that you see. And as a result, there might be a quarter where we see a little bit more or a little bit less. But overall, don't expect inventory to be still for us as we move forward.

Moving back to pet for a minute. We've heard from a number of other CPG companies that are big in the pet space. And they have all talked about around the edges some trading down and they're seeing some of that behavior as well. It just doesn't seem that maybe, respective pet businesses are getting impacted quite as severely as what we're seeing with [indiscernible]. What will be your perspective on [ it is ], obviously, your portfolio is much more skewed towards the premium and you don't have as much of the laddering, if you will, across mainstream and whatnot. But just trying to get a sense of what your thoughts would be on that.

Yes. And I think that's a fair read, right? Our portfolio is most exclusive than the premium end. Therefore, I think the level of exposure to particular value-seeking [ movers like part right now ] during this adjustment period. I think the other trends that we talked about around the shift of how [ the fee repaid ] less wet food that's a place where you've actually seen pounds come out of the category. So thinking on the last question, the treating, which we've talked about as being discretionary, also a place where you're going to see pounds come out. All of that is on the premium income with million dollars. And so the impact on us probably a little bit more acute during this time.

Also Blue did such an amazing job when you bought that business, moving mainstream consumers like up to more premium and maybe a little more [ app ] come up and down depending on sort of economic environment.

Well, perhaps so, I mean, in the 5 years we've owned it, we doubled the sales in the business and doubled the household penetration, quadrupled the distribution. So I think that's a fair observation.

So maybe a lot of the structural changes that you've made, right, with the intention of simplifying the portfolio. And now that we're maybe nearing a more statable operating environment, I guess should we expect the company to pivot a little bit more towards, let's say, a more acquisitive approach, you divested some of the less core businesses? And I guess, if so, are there any specific areas you find maybe more intriguing than others. I noticed in the release this morning, I don't know there was necessarily a difference, but it is pretty prominent, right? The thinking around hey, we're thinking about both organic and inorganic growth opportunities. And I thought that was pretty prominent in the release. I'm just trying to get a sense, if that's a different -- trying to communicate something different there or just saying hey, we're in a different environment now, and this is what we do.

No. I think since we've embarked on our accelerate strategy, which we launched at the [ 2020 KG ]. We have so proceeded with an always-on mindset on portfolio shipping, right? So irrespective of the environment. In fact, we've made progress even in this environment, getting into the pethane treats, TNT acquisition, divesting our European dome and yogurt businesses. So as you think about it, we've actually been acting on this even in this period of disruption. So I don't know anything's changed. We see this as an always-on capability, which means we need to be looking objectively both for what we add to our portfolio and potentially what we exit and finding value and growth accretion as we do so. I think the beauty of this environment is we've been able to keep going and build that flexibility so that we have room to act regardless of what's going in the office.

You've had a phenomenal run in your very large profitable core [ credit cereal ] business many, many years of increasing share in a category that's gone through its spurts of growth and more maturity and what have you. Any reason to think that, that looks different going forward in any way? Just by the nature of the shift in the competitive structure of the category. You've got a competitor that will be more focused on [ and reminded around ready so ] that could be a good thing you've been carrying the load for a bunch of years around growing the category. So maybe that helps. I'm trying to get a sense of -- if you've seen anything. It's a little early but if you've seen anything one way or the other that would change your thinking there.

Yes. So we really like our [ cereal ] business where exists today. So as you mentioned, we've been competitive for many years in a row, 5 years in a row, we've grown share last year, obviously, we did [ as we were ] up against one of our [ or before they were off the shelf to the basis we grew share early than last ] year. And it's really been playing our game, and we'll continue to do that. So it's making sure that we've got strong expense in the category, and we continue to invest and build those brands. And we have 4 of the top 5 brands in the category. We're really proud of that. Innovation is critically important. And for the last 4 years, we've had the bulk of the innovation in the category. North of 50% of all category innovation has come from General Mills. And it's remained sticky, so we really like what we're doing there. And then just executed at a high level as well, making sure we're getting the right merchandise and the right displays, the right shelf placement. We'll continue to play that game. We actually believe that having all the major players in the category, compete and compete well is good for the category. In fact, if you look back through history, when ourselves and the other major competitor are both, supporting the category, supporting the brands, the category tends to grow to differential rates. So we're going to continue to play our game as we look forward, we think perhaps a more focused competitor might not be daunting for us.

Sticking to North America Retail. And just thinking about all things kind of retailer relationships, promotional activity, broadly speaking, as supply chain effectiveness improvements across the board. What do you see right now? Obviously, it's no surprise we're seeing promotional activity year-over-year from a very low base for the industry that we'd expect. Not a bad thing, right? Promoting is very high return. But what are you seeing kind of in your categories? Would you expect it to return to sort of '19 levels? Do you think you could [ sell it as an industry starbelow that and ] have better effectiveness than we did before? I don't know the last ever month or two has changed that thinking at all.

Yes. I don't think it has a short answer. I would say our relationships with retailers are very collaborative today. I'd say, more [ cloud ] than before the pandemic. I think everything that we've done through the last few years have brought us closer together. I think some of the structural changes I mentioned earlier are helping us with retailers as well. So as we look at the promotional environment, yes, frequency is up a bit mid-single digits versus a year ago, but still down 10% versus pre-pandemic. Importantly, price points were up dramatically. If you look at total food and beverage price points are up 35% since pre-pandemic. Our categories are up even more 40%. So I think all of both ourselves and our competition invest in strategic revenue management tools. Frankly, retailers have invested those tools as well. So we're much better at modeling impacts we can make. And certainly, you can drop price and move a little bit of volume. It doesn't necessarily mean it grows the category or grows our profit or the retailer. So I do believe we're in a rational period. Now I think again, it's going to get more competitive for sure, as retailers get back to historical levels of frequency. But I don't see a race of bottoming. Again, I don't see competitors doing that. I don't see retailers pushing us to do that either.

I know there's been a lot of focus, obviously, on the industry volume, but maybe taking a step back for a minute, prior to this sort of inflation super cycle, if you were asked hey, we're going to be taking a collective 35% pricing across North America retail, I'd say, over the next 2 years or so. And our volume is going to be down whatever is a couple of percent. Would you thought it was crazy like positing that? Because I do think we use perspective sometimes. I get the focus on volume recovery, but I would have expected to be much more dramatically, right, than what we've seen across the industry.

No doubt. I think broadly that the [ lags ] have proven, I think, to defy model -- but we -- I think the whole challenge in this environment is that it's been a, historic both in terms of the level of inflation, or challenges put on the consumer challenges put on supply chains, which is, I think, has made some of the tools that we use a little bit harder in terms of predicting what's going to come out on the other side, elasticity being one of those. So I probably would have thought you were crazy for the record for many reason. The only thing I said obviously, I think we all think you're crazy. But at the same time, our business is much larger, much more... [Audio Gap]

Volume is down. We feel like we're competing effectively. And again, we like the way the business [ is like the way the ] P&L sits as well.

Just a way to wrap it up. As we track various metrics as we move through the back part of this calendar year, for you and the industry, maybe they're the same, maybe they're somewhat different. What would the key sort of 1 or 2 metrics be that we really ought to be focusing on that we can determine from the outside?

Yes. I would say we do expect with the pricing comps to change that we will see some improvement in volume trends, right? So as we think about the balance of the year, we are expecting that. We expect continued improvement and stability in the supply chain environment. And I think with that, the ability and [ comments ] to be able to drive in-store merchandising activity, and to execute and get leverage out of our marketing. So that's what we're focused on as we think about the balance of the year.

All right. I think that's a great place to finish it up. Please join out on the breakout, and thank you, Kofi and Jon for being here.