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

Perfect. Thanks so much. Good morning, everybody. I'm looking forward to kicking this off. Welcome to the 34th Annual Barclays Global Consumer Staples Conference. Given I just passed my 30-year anniversary at Lehman/Barclays, this conference even predates me, although increasingly, it seems not much else does. That said, it's truly awesome to see so many familiar faces once again, and we also welcome some of the new faces that have joined our Staples family this past year. I'm Andrew Lazar and I cover the U.S. packaged food space here at Barclays. As usual, we've got a full complement of Barclays Global Staples coverage here, including Lauren Lieberman on U.S. Beverages and Household Personal Care; Warren Ackerman, European Food and HPC; Alex Sloane, European Ingredients; Patrick Folan, European Beauty; Ben Toyer, Americas Agribusiness and Fertilizers; Laurence Whyatt, European Beverages; Gaurav Jain, Global Tobacco; and of course, Rupert Trotter, Global Consumer Staples Industry specialist. As I mentioned, this conference is on its 34th year. I won't try to guess the number of inflationary or emerging markets growth or commodity cycles that we've discussed over those years. But surely, it's the enduring nature of the staples industry that has allowed our conference to remain as relevant as it has, keeping its annual placeholder on everyone's calendars, but also to grow as it has. This is a team effort, and we appreciate all the hard work that our management teams have put in to make these on-stage sessions and meetings possible year after year. The same goes for our incredible Barclays events team. So we hope everyone is well rested and well caffeinated as we're pleased to host another year with a great lineup and really look forward to all the listening, questioning and thinking that is to come over the next few days. In keeping with tradition, our entire team will be easy to find over the next 2 nights at the hotel bar -- lobby bar Fellini. Also tomorrow, once the content concludes for the day, we'll be hosting a reception at Matria, private dining room and terrace on the first floor of the hotel. And on Thursday at the close of the conference, Boston Beer will host their annual reception. So plenty of opportunities outside of the more formal conference sessions to catch up, compare notes and engage in the fun and healthy debate that makes what we do so much fun. And as always, we appreciate any feedback about what you like about the conference and what can be improved going forward. And with that, I'd like to introduce our first fireside chat with the management of General Mills. With us today are CFO, Kofi Bruce; and Dana McNabb, President of both the North America Retail and Pet segments. Welcome to you both, and thanks for joining us today. I'm going to hand it over to Kofi first for just a couple of opening remarks, and then we'll jump into sort of the Q&A. Over to you, Kofi.

All right. Thank you, Andrew, and thank you, Barclays team for hosting this event. We're pleased to kick off. It is obviously an interesting time in packaged food despite valuations. As I take note of where we've been, we've seen 5 years of really strong growth through fiscal '23, part of which was punctuated by once-in-50-year inflation. And so where we encounter the consumer now over the past 2 years is a consumer who is feeling more constrained and a lot more value focused. So as we think about our fiscal '26 priorities, we remain laser-focused on organic sales growth. With the overriding belief that in the long term, the most sustainable way to drive value in packaged food and to create value for shareholders is through organic sales growth. It is the most highly correlated driver of long-term value creation in our space. And when aided with modest portfolio shaping, leads to long-term value accretion. So our focus, as we step into '26 is restarting volume-driven organic sales growth in our North America Retail business, driving dollar share growth and dollar growth in our pet business. And creating the resources and flexibility to fund that growth. Now part of that requires us addressing the consumers' needs on value. So we are investing to make sure that our prices are accessible, that we address price gaps to private label and get them more in a sustainable range, address price cliffs places. But that is not the sufficient work necessary to restart growth. We also fundamentally are seeing a step change in investment in innovation. We have product news on all 10 of our major categories in North America retail, significant news coming in our pet business. And we're doing the work underneath our remarkable experience framework on the core execution of demand driving which fundamentally is the terrain, which will differentiate winners and losers in the environment ahead. So where do we find ourselves we are approaching the end of -- we will be reporting earnings here at the end of our Q1 here in a few weeks. While I can't characterize those, I will say, if you look at our Nielsen-measured results, we are seeing pound share growth in 8 of our 10 categories in North America retail. 7 of our 10 key categories have seen improvement since Q4 in pounds. And those signs give us confidence the work we're doing is paying off. In addition, we saw real good progress on some of the price correction and price investment we made as well as investment in marketing ideas and halfway through our last fiscal year. And in combination with the progress we're seeing here in this quarter on our measured results, we reaffirmed our guidance for the year. So with that, I'll turn it back over to you, Andrew.

Perfect. Thanks, Kofi. So I know many in the audience are going to be heavily focused obviously on the current environment, and we'll have plenty of time to talk about that. I want to take a step back a bit first, talk about your long-term goals. You've mentioned in the past you believe holding share across your current mix of categories and geographies. We'll generate organic net scales growth squarely in the middle of your 2% to 3% long-term target. I guess what gives you the confidence in the ability to grow in line with that top line algorithm moving forward and what's still obviously a very dynamic operating environment in the past few years? And I guess, how is that confidence different today than maybe where it was a few years ago. based on what we've added in terms of capabilities, portfolio changes and brand support?

Well, good morning, Andrew, and thanks to your team for hosting us today. I would say our confidence in being able to get to that 2% to 3% growth rate stems from 3 things. First, it's the work that we've done to reshape our portfolio towards more growth orientation. Second, it's the work that we've done to amplify our brand focus through the remarkable experience framework. And third, it's really investing in capabilities to secure our future, and I'll talk a little bit about each one of those. I'd say on portfolio shaping, we have made tremendous progress over the last 8 years. We've turned over 30% of sales through acquisitions and divestitures. You know that we have acquired into the fast-growing Pet segment with Blue Buffalo, Edgard & Cooper, Whitebridge, and we've divested businesses like yogurt and our side meals business that were dilutive to our ability to grow. And the result of all of that work is that we've added a point of growth orientation to our portfolio, which gives us confidence that we can get back to the 2% to 3%. Even though at this time, candidly, our categories aren't where they need to be. And I know we'll talk about that later in this discussion. So reshaping the portfolio towards more growth orientation, that is working for us. Then we're focused on amplifying our brand building through what we call the remarkable experience for remark. We want to drive category growth and capture our fair share of that growth. And I am convinced that we can hold or grow share in our categories by focusing on remarkability. And what we've done is we've benchmarked our peers, P&G being one of them, and develop what we call the remarkable experience framework. And it's really simple. We measure how our brands perform against the competition across 5 key measures: product quality, packaging, omnichannel execution, communications and of course, price value. And what we know in using this framework is brands that consistently beat the competition in 3 or 4 of those measures will deliver sustainable penetration and share growth over time. And so we have work to do. When we measured against the competition, we weren't winning in enough areas, and that's been a place we've been focusing on to get back to organic growth. The last area that we are investing in is strengthening our capabilities. And I am convinced that those companies that invest in a world-class digital capability will be winning in this environment going forward. And that's not investing in digital just to say it is a buzzword for digital sake. It is about really strengthening our digital foundations and using those foundations across the value chain. So supply chain, marketing, strategic revenue management, our business processes. We've invested significantly in digital since about 2019, and we're in a place now where we're really starting to see some return from that investment. So I'll give you a few examples. Where we've been able to deploy AI and digital across our supply chain, we've been able to increase our cost savings from HMM, our holistic margin management program to 5% of cost of goods. That's up from 4% historically. We've invested to have a leading position in e-commerce. And when I look at our North America retail business right now, our e-commerce sales are about 18% of our total sales. That's up from 4% pre-pandemic. And then, of course, AI and digital innovation is critical in terms of how you market, having better insights in order to target consumers, get to personalized experience, have social-first marketing where the consumers are talking about our brands for us. I think the combination of this focus is going to allow us to get at growth -- both growth and efficiencies better than others. And so when I think about portfolio shaping, I think about our iconic brands, our capabilities that we're developing are great team. I think we're poised to be one of the winners going forward and get back to that 2% to 3% growth.

Sticking with the industry environment for a moment. I think it's pretty well understood at this point, right? The industry volume recovery has been both longer and more expensive, I think, than was initially expected. And your fiscal '26 outlook, outlook is consistent with this theme. I guess, first off, I know this is a harder question to answer, but to what do you attribute that weakness from an industry volume perspective? How do you compartmentalize to what extent, if at all, right, some of this has been driven by more structural factors versus things that are maybe either more one-off or cyclical in nature?

Yes. So I think first, let's start with just giving some context on our categories. If I look at our categories, our volume is flat. We have a little bit of dollar growth due to price mix, and that's below expectations for the long term. If I look at volume growth being flat, we expect in our category volume growth to be about 0.5% and keep in line with population growth. So we have work to do to improve them, but we're not far off. When I think about the industry and what's happened to volume, I think we have to acknowledge the fact that we had a hyperinflation period. And when you look at the fact that if we were here talking 2 years ago in 2023, we were talking about the fact that commodities were up 30%. We increased prices 25% and but we're only seeing volumes decline 5%. We kept talking about why. And I think in retrospect, what we've seen is that the consumer is struggling with value, and we're starting to see those volumes unwind, because they're ingesting to that hyperinflation period. Now there are a couple of other things that are impacting our industry. I'd say, whenever the consumer is struggling with value, we do see a shift back to cooking from scratch. So we are seeing some of the perimeter protein and vegetables increase. We're seeing beans and rice increase, broth because you're making meals from home. And we're seeing people make those meals last longer than just one occasion. They're typically stretching it to 3 meals. And then it also would be remiss of me not to mention GLP-1. We know 12% of adult consumers are on GLP-1s. We do think that will have an impact on food. But really, at the end of the day, we think the biggest driver of the volumes slowing down is the fact the consumer is still adjusting to inflation and is in a value-conscious period. Now that doesn't mean that there isn't growth everywhere, though. So I want to really talk about the fact that in almost all of our categories, we see a couple of benefit areas that are driving growth. So we're seeing better for you, focus on protein. That is growing really fast. Bold flavors, if you can bring more flavor intensity to your products, that's growing, and it's tough out there for consumers. So anything that's nostalgic and brings a little bit of comfort, that's growing. So what you'll see us focusing on is every innovation we're bringing to the marketplace will deliver against one of those benefit areas because there is growth to get.

Dunkaroos is my -- go-to. We're talking nostalgia. You stated your main objective this year or this fiscal year is to restore volume-driven organic sales growth. However, taking a complement with your '26 guidance, which looks for an operating profit decline of 10% to 15%. One of my question, whether you're aiming to sort of drive volume at any cost, so to speak, or instead investing responsibly in areas where you feel the consumer is sort of ready to be engaged. I guess can you remind investors of some of the puts and takes that are driving that expected decline in profitability? I mean, which of those drivers you view is more temporary versus maybe somewhat more structural?

Sure, sure. And I appreciate the question and I always have the opportunity to put that in context. I think the first important thing to note is we have some unusual factors weighing on this year's profitability. Investment is a much smaller portion of that on a net basis. Our divestiture of Yoplait, which we just completed the U.S. portion of that divestiture in the end of June. It was about a 5-point drag on operating profit. In addition, we have a 3 percentage point drag from the reset of our incentive compensation off of last year's much lower-than-planned performance. So those 2 factors will be more transitory in nature. Included in that 5% for Yoplait is about half of the stranded costs, which will not come out this year, which I'd expect to work out in the following year. And then kind of as you work through it, that leaves you kind of a low to mid-single-digit decline in profit taking out those factors, which includes a significant amount of cost savings as a partial offset to fund that. $100 million at a minimum of transformation initiatives, in addition to 5% industry-leading cost of goods sold HMM. So we are, to your point, being responsible, measured and targeted. And at the same time, recognizing the environment realistic about the level of reinvestment needed to restart organic sales growth. Over the long term, I would expect that restarting our organic sales growth led by volume with a stable top line, will bring leverage and stability back into the business and also help us put ourselves back in a position to start clawing back margin.

Great. Kofi, sticking with you for a minute, given there are quite a few moving parts that you'd noted on your fiscal fourth quarter call, I think it might be helpful, as a reminder, maybe for the audience. If you could just remind everyone, how you're thinking about the phasing of this fiscal year?

Yes. So on our fourth quarter call, you may recall, we outlined that we expected to see volume improve ahead of dollars largely reflecting the fact that in addition to investments we've made in reducing prices last year, we were making additional investments on sort of up to 2/3 of our North America retail portfolio. There's a phasing impact as we work our way through that the -- lapping the investment from last year, which, as we recognize the trade last year, late at the end of last year, we will see that be a drag on the front part of the year, first half of our year on the top line as well as the bottom line. And then I would expect, as you work your way into the second half of the year and in particular towards year-end, we would see the impact of the 53rd week, lapping that trade phasing impact, which we saw -- the bulk of which we saw in Q4 really boosting the tail end of our second half. So those are kind of the big drivers.

I guess, what do you view some of the more significant risks or opportunities, right, that you see that would allow General Mills to either outperform or on the other hand, underperform where your full year guidance is, which, at the midpoint, calls for flat year-over-year organic sales?

Yes. I appreciate that. I would put at the top of that list volume. That is the single biggest probably determinator between the low end and the top end of our range. Obviously, in this environment, we'd expect the investments we're making to pay off, but we're also measured about the fact that some of those may take a little bit more time to realize or the risk and the consumer response might be a little slower than we projected. So that would be kind of a driver number 1. Second area, I put in a category, we see stability in our overall core inflation. Tariffs, as a reminder, we flagged as an additional kind of 1% to 2% drag on top of the 3% core inflation. And there's been a little bit of volatility at the risk of maybe understating in the tariff picture. So our expectation contained within our guidance is that we have enough net levers to kind of offset a portion of that. But to the extent that we can't offset all of that, that would provide some modest additional risk and volatility that might push us to the lower end of our range. So those are kind of the core drivers. We're feeling really good about our HMM delivery at 5%. We likewise see really good line of sight to the $100 million of transformation-related benefits. So that part of the guidance, we feel very, very confident about. It's those other factors that drove the width a little wider than we might normally give guidance.

For the better part of the past year or so, you've been very open about the fact that you've seen categories pretty close in your key North America retail segment to where you'd want them to be and have stabilized on volume. But your own level of competitiveness in terms of market share has not been up to par. I guess what's been the reason for the more challenging competitiveness this past year outside of -- and outside of simply price investments? What else are you doing to improve the competitiveness and better deliver the value that the consumer is looking for?

Well, you're right, we weren't competitive enough last year. And I think the reason why it really comes back to this remarkable experience framework where we simply weren't good enough relative to the competition in many of our categories. And so we've really focused on that. We're making a meaningful step change in our investment in product quality, in advertising, in everything that we're doing really across the framework. And so yes, price investment was one of those things. What we saw that we had to do was really look at our shelf prices and we had to adjust our gaps relative to competition. And in most cases, we had to look at cliffs, where we exceeded key cliffs, we had to get back under that. We invested in about 1/3 of our portfolio price value in fiscal 2025. And our goal is to have about 2/3 of our portfolio covered. We'll have that by the end of our Q2. So we've made those investments. But as Kofi said multiple times, price just isn't enough. It's not just about price. and we are investing in all the other areas of the remarkable experience framework. So let's talk first about product quality. Every single one of our top 10 categories will have product news this year. We will have Pillsbury biscuits that bake up bigger and provide more value. We have more intense flavors on our top 3 brands per check. We have 35% more chicken in our Old El Paso soups. So news that we know will resonate with consumers. We're making a meaningful step change in our new products. So our new product sales will be up 25% this year. These are products like Cheerios Protein is a runaway hit, Pitmaster soups that are high protein, tastes great barbecue flavored, Mott's fruit filled bars, we're launching a Totino's Ultimate pizza that's fantastic. So really stepping up investment there. Price pack architecture is very important in our environment right now. We're going to have double the price pack architecture we had in the plan last year. And our seasonals are up 50%. Because what we know is parents just won't give up on fun and nostalgia for their kids during the holidays. So 50% more seasonal. We've increased our advertising across all of our biggest businesses and refreshed our campaigns. We have stronger in-store events, and we keep investing to maintain our lead in e-commerce. So what I hope you're hearing from us is that we really believe that focusing on being better than the competition is the way to get back to organic sales growth. Where we did this in the back half of our last fiscal year, we saw a strong return on investment. And the early part of our F '26 in Nielsen is proving out the way we thought, and so we'll continue this focus.

The big news on the last earnings call was certainly about your planned entry into the Fresh pet food category. We got a number of questions here, hopefully you'll indulge us since that was a hot topic. But obviously, preceding this launch, you dipped your feet into the Fresh category with some testing about 2 years ago. I guess, what were some of the key learnings from those tests that you're sort of addressing or that have helped inform how you address this launch this time around?

You are right. There is a lot of excitement about our Fresh launch. I do feel obligated to mention that returning our core $2.5 billion business back to growth is also a priority in addition to launching Fresh. So I hope we will talk about that later on in this discussion. But you're right, we did do a test in Fresh 2 years ago, and we learned a lot. What we learned is that the Blue Buffalo brand has a right to win in Fresh and can succeed there. And we learned that pet parents really like our products. We had great quality products. And we also had some challenges that we learned from. You need to be able to build trial and awareness and it's hard to do that when you don't have scale. And then when you don't have that awareness, you don't have scale, it's hard to get efficiencies in your supply chain. So we did the test to get real-world learnings and we did get that, and we've used it in order to strengthen our proposition that we are launching now coming in Q2.

Great. In the past, I know General Mills have been somewhat hesitant to jump into the Fresh arena in any sort of meaningful way. And I think the company has been uncertain about what it would take to compete in the space profitably. What level of investment might be required in terms of capital and marketing to achieve the proper scale, all in light of other uses of capital in categories in which the company could likely generate a greater level of profit dollars, much more quickly. I guess what's changed such that now is the right time to make this leap?

Well, I think first and foremost, the Fresh segment has continued to grow double digits. It's a $3 billion category right now. We project that to be $10 billion within the next 10 years. And so obviously, we want to participate in that growth. We think Blue Buffalo has a right to win and capture our fair share of that growth. So it's an exciting segment. As we've talked about, we really believe the Blue Buffalo brand has a right to win in this category. It is the most loved and trusted natural pet food brand in the U.S. We know humanization and premiumization of pet is going to continue, and we know Blue Buffalo has a right to win in this segment. And then we also think it's going to really help our kibble business. What we know about consumers who use Fresh today is they also use it with kibble, 80% use it with kibble. They either mix it or they use it in a topper. And then half of those consumers are looking -- they'd like to buy both the Fresh and the kibble from the same brand. So when we put all those factors together, we think the time is now for us to launch into this segment.

I think the big difference between some of the testing you've done in the past, as you mentioned, and the launch this time around is the scale that you're coming to market with. Can you elaborate a bit about what that's going to look like in terms of product variety, retailer and geographic breadth and the level of investment that you'll be putting behind in support of the launch?