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

Okay. Good morning, everybody. My name is Alexia Howard, and I cover the U.S. food sector for Bernstein. And it's my great pleasure to welcome Jeff Harmening, the CEO of General Mills since 2017. Now as we all know, the U.S. food industry seems to be at something of a crossroads with high hopes for some improvement in volume trends as the headwinds of 2023 are lapped. General Mills has made a good deal of progress in shaping the portfolio over the past several years in a bid to tap into fast growth markets and make the company more defiant in the face of more frequent disruptive change. So very many thanks for joining us today, Jeff.

Yes. Thanks for having me here.

Great. So you became CEO of General Mills back in 2017. And the industry has certainly seen some pretty tumultuous times since then. What has changed across the sector in your view over the last 7 years?

First of all, I want to start by saying I don't take any credit for causing those tumultuous times. I didn't pick the 2017, it kind of picked me. I think back on where we were then, it's been an interesting time for the whole sector. And in 2017, recall, we were just coming out of what I would call the 3G era, which is really focused on cost cutting and limited brand building and really trying to optimize short-term profitability. And we're just coming out of that, kind of getting back to the middle of the boat, which is what I would call it, say, look, we got to get back to growth, but we need to do it profitably. We were kind of in the midst of doing that. We had just bought Blue Buffalo. And then we were hit by a pandemic. And following that, supply chain disruptions and following that inflation, which we hadn't seen in my 30-year career. And so, I guess, there are 2 questions. What do we learn from all that? And then what do we see coming up? The first thing I would say we learned is just the importance of continuing to invest in our business. And we saw that coming out of the prior area. We certainly reinvested during the pandemic and everything that followed both in the terms of our capabilities, our digital and technology capabilities, but also our brand building, which is up 40% over the last few years. And so one of the things we learned is that through a period like we have just seen, you need to keep investing in your brands. And it may seem like a throwaway line, but for us, it's critically important. And as a result, we now have $9 billion brands at General Mills. The other thing, though, we did not predict the pandemic. We didn't predict the depth of the supply chain disruptions and inflation certainly wasn't transitory. So as we think about that period, we also know that our ability to predict exactly what's going to happen is relatively limited, but we can choose to how we're going to adapt to that. And as an organization, we became a lot more adaptable, a lot more change oriented. As a result, our supply chain held up well during the last few years. And our pricing held up well over the last few years. And so as we look ahead, mean the consumer is in kind of a tough place. You look at the geopolitical environment, you look at the pace of change in technology. We're in an interesting period where some things are settling out like inflation, but there are other things that are disruptors. And so as we look ahead, one of the things that gives us confidence, in addition to the strength of our business right now and our balance sheet in addition to our income statement, is just our ability to change and our ability to not predict exactly what's going to happen, but just in the environment around us.

Makes sense. The elephant in the room seems to be all about volume recovery at the moment. We seem to be at a pretty pivotal moment for the sector. Investors have been waiting with bated breath for an improvement in volume trends as we lap the cut back in SNAP spending in March of last year. Yet, so far, we haven't really seen any discernible improvement in trends. Is there something more structural going on? Or could things improve as we lap the step-up in cooking from scratch last summer?

Yes. So as we think about the environment, yes, I know investors have been waiting with bated breath and maybe more than a few members of management teams as well. What I would say is that, broadly speaking, the way that the environment has evolved the last 6 months has been kind of the way we thought it would evolve. And would we wish it to evolve faster in terms of volume improvement? Well, of course. But we never really expected a step change from any one event in volumes recovering. And so as we look at the categories we compete in the first half of last year, our category volumes were down about 3%. If you look at the last 3 months, our category volumes are down about 1%. And while it's not back to growth, it certainly is a pretty significant improvement from where we were. The same could be said of our own business, which was the volumes were down 7% in the back half. We got a little bit more competitive. Our volumes are down about 4% over the last 3 months. And so the business is going in the right direction, not a step change pace. And the question is why is that? And I would say we've lapped SNAP benefits. We have lapped pricing from a year ago. Effective at the end of this month, we have lapped a significant increase in private label and small brands getting on shelf more regularly. And I think the thing to go is really the change in consumer. And the first I would say is the change in mindset. It takes consumers a while to adjust to pricing. And that's true not only in food, that's true of almost any category. And it's probably a 12- to 18-month process before consumers really land on, okay, what is the true price this good going to be? And I think it's particularly difficult for consumers now because they've seen -- we've seen a 30% increase in cost inflation over the past 3 years. And so, combined, the consumer perception, but consumers are stretched financially right now. You see the rise in credit card debts and so forth. And so I think that's why we haven't seen a step change, and that's why I don't think we're going to see a step change in volumes either for our categories or for our business. But I would expect that we would see a gradual improvement over time. All as the consumers get used to pricing and as they feel economically more sound.

Makes sense. If anyone has any questions in the audience, feel free to submit them into the pigeonhole link. I'm more than happy to work those into our conversation here. Now looking forward, I know you're not going to provide guidance for 2025, but could you talk a little bit about the building blocks or, more broadly, how you're thinking about the approach to next year?

Yes. So you're right. I can't provide guidance. But look, I'll try to provide some insights into how we're thinking about next year. And but the first thing I would say, it kind of starts with how our current fiscal year ended, which I think we just ended on Sunday. So I mean, it just ended a couple of days ago. And I would say the first thing our inventory levels with our retail customers are in good shape. I mean we didn't see -- we don't expect to see a rebound in inventory levels. We saw inventories down a year ago this time. I think our volume for the fourth quarter, particularly for North America retail should be pretty consistent with what is seen in Nielsen data. And while that may not have been encouraging for the fourth quarter, what some people may think, as we look at the year ahead, our inventories are in a good place with our retail customers. So as we think about the building blocks to next year. With regard to volumes, as I said, I think we'll see a steady improvement in volumes over the course of the year. In a pricing environment it's going to be challenging, also in an inflation environment that's not going to be particularly high either, I don't think. And so that will put a little bit of pressure on our long-term sales algorithm. So I would love to say that we're going to get back to our long-term sales algorithm of 2% to 3% top line growth next year. But given the gradual improvement I would see in volumes, I think that's going to be a little bit tough to come by. Our goal will be to be competitive within our categories, and I think we can achieve that in this coming year. As we have, by the way, the last 4 years. We've grown in 50% of our categories our market shares. When you look at our profitability, I'm encouraged by a couple of things. Our gross margins are back in line to where they were pre-pandemic, which is better than many of our peers. And as I look at our productivity, our productivity has been really strong. I mean, it's been really good this year. We're at 5% HMM savings. As we've said at the end of the third quarter, we'll be at 4% plus next year. We have a very good line of sight to what it will be next year. We'll give more specific guidance in 4 weeks, but our productivity efforts are very good. We expect inflation not to be so high. And so as we think about the cost side of our business, we are in good shape, particularly at the gross margin level. And what that means is we have some options to how we go about this next year, and it's very clear to us that we need to reinvest back into our business for growth. And we plan to do that and maintaining gross margins at the same time, but reinvesting back, particularly in consumer spending to reestablish and revitalize our brand growth. That's the number one objective going into next year. So to the extent that we feel like our gross margin is going to be in a good place, our plan would be to reinvest that back into growth and to drive growth of our biggest, most profitable brands. The other thing I'll highlight for you is that -- and we've talked about it, but we didn't hit our targets for this year. We didn't grow the way that we wanted to grow after doing so for the prior 4 years. And so we have to reset our -- we have to reset, if you will, our incentive, which is about a 2-point drag to profitability. It doesn't happen at the gross margin, it happens on the SG&A line. And so as we head into next year, we have to face that tide, but we think it's still important that we reinvest in our top line growth and we'll continue to do that even though we have a drag on our SG&A.

Makes sense. A question has come in from the audience here. Have you considered dialing back some of the price moves? And if not, why not?

The -- one of the things that -- look, first of all, it's a very fair question. One of the -- we look at these -- we look at our pricing as well as our consumer spending and our investments category by category. So there's not one answer, and we compete in 25 categories here in the U.S., let alone, what we do in China and Brazil and France and the U.K. So there's not one answer. I wish it were as simple as giving you one answer. There are a certain place -- and what I would also say is our strategic revenue management is now and always on capability. We run millions of models a month talking about looking at our pricing. And our pricing has gotten quite a bit better over time. I mean, significantly better over time. Having said that, no one is perfect. We're not perfect. Models aren't perfect. And so we look at specific categories, specific brands, specific package size to see where we need to do work. And so we're very surgical in how we look at where our pricing is. And I'll give you one example we did recently with Blue Buffalo on our wet pet food business. We found out that the value proposition wasn't right for consumers, and they were telling us this. And so we introduced a lot of multipacks, first of all. And then we got under a certain price threshold with our wet pet food, still it's a very profitable business for us, and we saw a significant uptake in volume. But that was one area where we saw that we got out of line. One very specific area, and it was on dog mostly. And so as we look ahead, there won't be one answer where we say, "Okay, we're going to adjust prices here or there." We'll look category by category, size by size, to see what makes the most sense. But the most important thing we could do really is keep investing behind our brands because consumers in this environment, they really don't want to be able to throw away food that they have gone to purchase. And so they're looking for brands they trust and something that they know their family will eat. So the most important job we have to do, as we think about price and value is on the value side, which is one of the benefits we're bringing to consumers.

Maybe let's delve into some specific business lines here. It seems as though the pet food business is beginning to show some signs of improvement after a rough time over the past year or so. What are you seeing in terms of consumer behavior that might be driving this? Or are there other factors that are working here?

It's a fair observation. I think this is the case sometimes I say 2 things can be true at once. This is a case where 3 things can be true at once. The first is that it has been a rough year, you are right. The second is we are improving. Actually, we made some really nice improvements. And the third is that we still have improvements yet to make. And so I'll give you evidence about the value of consumer, which I talked about earlier and the value of making sure we market, is that with Life Protection Formula, we've seen really good growth in Life Protection Formula, which is our biggest business in Blue Buffalo. And I think we've seen 8% growth or something over the last couple of quarters and back to market share growth in Life Protection Formula. And all we did was change the marketing. We changed the advertising. We made the advertising better. And I say that's all we do, but it's hard to do. And, I mean, again, it goes to show the strength of the Blue Buffalo brand when we get it right. That's not the only area we've seen improvement. We've seen an improvement in our wet pet food, and I just talked a little bit about that pricing with some multipacks and things like that. We've also seen improvement in our Tastefuls [indiscernible] business. We've started to market that. We changed the marketing on that. We started to see improvements in that business. The big one for us still to improve is our Wilderness business. And you'll see new marketing coming out for that this summer as well as an increased focus to some of our retailers where Wilderness is a big player, some pack size changes and things like that, again, going back to the value equation. What I feel great about on Blue Buffalo is that every time over the last year we diagnose what the challenge is and then we put the steps in place to change the trajectory of the business, and now we need to do the same thing on Wilderness. But it's still -- in some ways, it's a tough category. The toughest part of the category really in value-seeking behavior is treating. And it's not to say there haven't been trade-offs in other areas, but treating is still the one where we see the biggest challenge with value. And look, I think value -- I think consumers are still going to be value conscious over the next year. I'm not sure that's going to change dramatically, but I'm pretty sure that we're going to change our game and we're better, as you say, but there's still [indiscernible].

Let's move on to cereal. Now that the WK Kellogg Company has been spun off from Kellanova, it also seems that private label has gained a bit of share over the past several months after being out of the picture for so long. What do you see in terms of the changing dynamics, competitively, in cereal?

Yes. The cereal category is obviously a very important one for us, a very profitable one for us and one we pay a lot of attention to. The first thing I would say is starting out before I get into WK Kellogg and the competitive situation in front of us is that we've competed very well in cereal over the last 4 or 5 years, gaining quite a bit of share and doing a really nice job with product innovation. We have [indiscernible] best product. I think we can still do even better work on our core in cereal, and so we'll continue to market that and continue to dial up our marketing on our core cereal business. With regard to the competition, we haven't really seen anything out of the ordinary. I was -- WK Kellogg they can speak to it better than I can, but I would say their promotional levels are kind of -- they've grown, but they're back to where they were before. I mean they had a lot of supply chain disruptions, which are well documented and they've talked about it. And to the extent that they kind of get back on their game here in the U.S. along with us and [indiscernible] I think it will be beneficial for the entire cereal category, and that's what I'm seeing. So there's nothing really out of the ordinary, I would say, with regard to WK Kellogg. With regard to private label, I would start from the perspective that private label and cereal is only about 7% market share. In food and beverage, in general, market share of private label is about 20% and cereal is about 7%, so it's not a big player. And while it has grown the last year, it's only back to what it was pre-pandemic. And so they say they had their supply chain issues would be an understatement. And so it's really kind of back to where it was. And the most important thing for us to do in cereal is keep playing our game. We've got great brands like Cheerios and [indiscernible] and Lucky Charms. We've had good innovation. I feel good that we're going to step up our marketing game. And so as long as we keep playing our game in cereal, we will be more than fine.

Let's move on to international markets. Could this be a bigger future focus for growth? And if so, how do you do that while maintaining company-wide margins and returns on investment?

Yes, we're encouraged by what we're seeing in parts of our international portfolio. And I would say that it is going to be a vector for growth for us as a company. And if I take a step back and what have we done with our international markets. The first thing we've done, we divested our Yoplait business in Europe, which is big, but was also slow growing and lower margin. We divested our [ dough ] business in Europe, same. And that allowed us -- that's allowed us to put our focus back on our core global brands, both within the markets they compete in, but as well as distributor markets. And when I look at our business outside the U.S., there's a chance for us to not only grow faster, but also increase our margins as we do it. And that's our goal, to do both of those things. We've seen good evidence of this in Europe and Australia so far. And I think it talks about the value of what a divestiture can do. Our European and Australian businesses really grow nicely. And yes, we divested Yoplait, but there was a lot of time, money and attention put to that. And when we refocused that time, money and attention back on our big global brands, we saw growth. We saw the growth on Häagen-Dazs. We saw growth in Nature Valley, where now Nature Valley is the #1 bar in France. We've seen it on Old El Paso. And so we like what we have seen there. Our challenge more recently on international has been with regard to Brazil. We saw a lot of commodity inflation in Brazil, and we had to price for that, which was very challenging for the Brazilian consumer. In the short run, we've seen some challenges in China as the Chinese consumer has come under a little bit of pressure, and we lapped lockdowns from a year ago and our [indiscernible] business. But I would tell you our -- I feel very confident in our business in China. We have a good Häagen-Dazs business. We have a good [indiscernible] business. We just really launched Blue Buffalo into China, which is the second largest market -- food market in the world. And so I feel really good about our prospects in China. So long and the short, in international, what you will see us doing is focusing on our big global brand, which now includes Pet, including Edgard & Cooper in Europe. And with that, driving accelerated growth, which will certainly be above the company average and margins at the same time because those big brands are margin accretive for our business.

Can you talk about what you're seeing in Europe versus the emerging markets, you've already spoken to China specifically?

Yes. So in Europe, we're seeing nice growth out of our European business. And I attribute it mostly to the focus of our teams on our big global brands. I said it's Häagen-Dazs, it's Nature valley and [indiscernible] and those are 3 great brands. We're seeing good growth from them. We've also seen our administrative costs go down, particularly as we've gotten more distributor markets even outside of Europe. So we're more focused in Europe, has led to better results -- new product innovation. And then even outside of Europe and China and Brazil, we moved to distributor markets. So fewer feet on the ground, if you will, from General Mills people, which has improved our cost structure, but also has given us access to more talent. And so we're excited about the prospects of our distributor business, which is largely based on Häagen-Dazs.

Okay. Can we move on to competitive dynamics here more broadly because I know we've touched on that in a couple of the categories. Have there been any changes to the competitive dynamics in the U.S. since the pandemic began. Smaller brands, for example, were more hard hit during the supply chain issues a couple of years ago. it sounds as though they've come back, what else are you seeing in terms of the other competitive environment?

Yes. So the -- it's really been dynamic. But what I -- let me start with, one of the things we've seen is people eating food more. And you touched on that in your very first question, talking about lapping, making stuff at home from last summer. We've seen people eat food at more homes since the pandemic ends now. And I think that speaks to availability, but also that eating at home is 4x less expensive than eating out. And so when consumers get strapped economically, one of the first things they do is eat food at home more than they do away from home. But within our categories, we've seen very rational behavior, I mean -- and part of that is there are supply disruptions, so it's hard to act irrationally when you're just trying to get product to market. But even now as supply disruptions have dissipated, I can't really point to a category where we see somebody doing -- a competitor do something like why are they doing that? I mean promotional frequencies are about what they were before the pandemic, the depth of promotion in terms of percentages is about where it was. The absolute price points are higher because all price points are higher, but the depth of promotion is about what we -- what it was. Private label, although it's grown the last year and most have been written about that, their levels are about what they were before the pandemic. And so we've had a lot of ups and downs over the last several years, but we're kind of back to where we started. And I think what that means, as we look ahead, is that there's going to be a premium put on the basics of [indiscernible] like it has been for most of my career, which is who's got the best brands, who has the best marketing, who is executing the best, both in-store and online and with regard to your consumer marketing. So I think we're entering a period where that's going to be a differentiator and that's a period that General Mills has historically accelerated.

Are you sensing that consumers are becoming more concerned about heavily processed foods in the wake of media coverage of these ultra processed food studies. Obviously, it's not really a concern for you.

Yes, because in the categories we compete in, there's a lot written about nutrition. What I would say is that, in all the categories we compete in, the brands are doing their best and it tastes really good and bring them joy. So no matter what the category is, one of the top turning items and what are the things that are growing is things that taste -- it's not to say that consumers don't care about nutrition as well, but I don't want to get lost in the conversation. People like food -- new flash, people like food that tastes really good. To the extent that consumers are more knowledgeable and care more about what's in their food. I think that's a benefit for us. I mean, we care about that for 158 years. And happy to compete in that environment. And so to the extent that consumers are -- we launched gluten-free [indiscernible] in 2008 with the first mainstream cereal that went gluten-free or that in clinical studies that show that Cheerios lower cholesterol or have added protein to yogurt and bars have fruits and vegetables. For us, one of the things that General Mills does really well is make food that tastes good, all is good for you. And to the extent that consumers are looking at ingredients more closely, I think that's a benefit for us, and I think that's going to be an opportunity for us.

Can I add a question that's coming from the audience on this theme? If the government is exploring adding warning labels to food packaging, and I feel there's a debate over food labeling has been going on for many, many years. How big of a risk is that to General Mills business? And how is the company participating in that debate?

The -- we see labeling schemes all over the world, and we can [indiscernible] all over the world. So competing in an environment where there's some sort of labeling is not new to General Mills. I mean we do it in Europe right now. We've done it in Latin America. We've done it in many, many places. So the idea that would have a significant impact on our business one way or the other, I don't think that it will because we've competed in all -- we've competed with all kinds of regulatory environments. When we get asked our opinion on what we think, we provide our best scientific information. I think the key to having something constructive when labeling products is make sure it's based on science, just not the politics of the day or what's convenient, but really what does the science say about what we should be doing in. And -- so we've been assisting with that everywhere we compete. And so I don't see that as a big -- I don't see that as a huge risk. I don't see that as a huge opportunity. I think it is what it is. It's not the first time we've seen that movie. The key is to make sure it's science-based, but also have one. I mean what would not work in different labeling schemes for different states, for example, that would actually be -- that would not work.

I remember [indiscernible] labeling bill, I think.