Q3 2021 General Mills Inc Earnings Call - Question & Answer Session

Environment.

And I I will tell you that part of the cost and our logistics network costs have gone up in relation to responding to the high demand environment spin.

Specifically as we're operating.

In an environment, where we need to open new lanes of freight to reach our external supply capacity capacity.

But also to reposition within a network, which is where we've seen some incremental costs as it related to the weather in the quarter and as we get to Q4, while we're not giving guidance on on Q4 inflation I think it's important to note for the full year.

We are still expecting about 3% inflation and the way I'd characterize it is on.

Our expectations at the beginning of the year with 3% than we are.

Rounding up to about 3% and were in a position now where we will be rounding on two to about 3% inflation and I think the critical thing for US is we're where we are.

Taking the opportunity to to act with all of our SRM and our H M M levers.

To set ourselves up to in anticipation of higher inflation as we step into F. 'twenty two.

Okay. Thank you for that and then I had a separate question if I could on pet food, perhaps for both enable just in relation to you had some incremental promotional costs around tasteful. The launch of that does that continue do you see a step up in some increase.

In promotional spending for that business.

And then that's also a division where there has been higher cost is that one where we could see some pricing coming through has that come through at all on the industry that looking for forward commentary there, but have you seen that yet in the industry.

Well third England.

Support.

We're launching a new app isn't until you have cost on to do that and to tell them.

We see ourselves spending.

On a range that's right for the category and again, we can Brooklyn, and the entire portfolio.

On that launch cost that were talking right now in terms of premium and based on that is absolutely continuing and every part of the category. So the premium cost per pound on wet pet food.

Definitely higher.

And then what you see in dry but every part of the category continues at a penny of innovation on a cost per pound Nathan.

Chris This is Jeff Siemon I'll, just add to the original question about cost in the quarter or just no debt on a year to date basis the pet.

Segments at about a little over 24% margin versus 2002, and a half last year. So while while the quarter was maybe there was a little bit of incremental hospitals still feel very good about where we are year to date for that for that business from a margin and a growth standpoint.

Okay.

For that I appreciate it.

Our next question comes from the line of Michael <unk> with fond of hyper. Please proceed with your question.

Mhm.

Good morning.

On a morning following.

Just following up on the pet segment.

Had some accelerating volume growth over the course of the year can you give a sense of how much of that is driven from pipeline fill behind new launches versus just.

On a more run rate type of momentum.

Yeah. Thanks for the question. So we continue to expand on the movement of the business accelerate and Intel in Q2, we had talked a little bit about on move, namely on reported 18% sales.

Being a little bit ahead of our inventory.

And that accelerated as we went into Q3.

So we feel pretty debt above the levels of inventory at this point.

Okay, Great and then just following up on the inflation question looking ahead, a little bit can you give us a sense of how much you're positioning yourself for 'twenty two.

Just trying to get a sense of how much you think the current.

Kind of run in prices might be sticky versus waiting to take some positions. If it may come back what's your thinking on that at a high level.

Well certainly at a high level, we are preparing for higher inflation and I don't want to get too far ahead, we'll come back and talk to you in Q4 about F. 'twenty two inflation expectations, but I will just reiterate we are taking actions on the on the basis of that preparation.

Specifically around our H M M <unk> or.

Strategic revenue management plans and using all of the levers of our strategic revenue management.

Okay, great. Thanks, so much.

You bet.

Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.

Hi, coffee on Jeff.

I think I'm going to get the same answer as.

Yes, Michael just got but.

Inflation is.

Accelerating higher than you thought and and.

And I know you have multiple levers to offset it.

But within SRM I think list price increases are one of those levers. So is it fair to say that debt that will have to be.

Utilized more.

Than originally contemplated.

You know look a lot of retailers are talking about inflation right now a lot of your competitors are talking about inflation is it fair to say that.

That there's more willingness to pass that through I know it is never easy, but it's not just you who is facing the inflation.

So Jeff.

Hi, Jeff and Jeff Let me, let me take that question because if you get the same answer then at least you'll get it from a different person.

Yes.

So.

I will start by saying that in places is very broad based on it's actually global so we're seeing it across the globe. We're seeing in place on it is broad based across commodities across logistics across things like aluminum and steel and so whenever you see this kind of broad based on plays that that's global that's an environment, where you're gonna realized net pricing and.

We certainly going on <unk> first but in this kind of environment just like a few years ago. When we saw the same thing on <unk>.

Retailers are saying and our competitors are seeing it we're seeing it and so we will realized pricing will also we will use all the tools and that includes loan pricing, but is list pricing. It is price pack architecture is how we how we managed trade and then finally price on mix, we'll need to use all of those levers when it comes to pricing you go from the Mac.

<unk> on the micro pretty fast so the levers we pull it certainly depends on category and then certain depend on geography, and so we'll use all of those would use all the levers on our disposal will.

We will begin I mean, we're getting that process here on the fourth quarter.

And let me just just add for additional context, It reminder, that.

Our first lever is holistic margin management right.

Cost of goods sold productivity, which has been averaging about 4% annually. So so we're not relying just on SRM to address the issue.

The first four points are so we would expect to get through to gross margin productivity.

Jeff.

Okay I'll leave it there thank you.

Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your question.

Hey, good morning folks thank you for spot warning.

I guess, I guess I'm going to keep coming back on sort of the same question. That's just really just trying to understand the margins here.

Yeah I think.

Margins this quarter and I think your guidance for profit or margin actually be below fiscal 19 levels on the fourth quarter. So.

So below pre COVID-19.

And I'm trying to wrap my head around day, Youre talking about H M M savings exceeding inflation. So for the year you actually net deflation on those two you've got phenomenal volume leverage.

Huge pricing rolling through the <unk>.

Pricing of years.

What is the other offset you can stack those up right. There on I would expect meaningful margin expansion for the year nonprofit actually falling below pre COVID-19.

What are the other offsets can you help us quantify them and.

Which of those offsets maybe transitory and related to Covid.

With cost falling out as we look over the next 12 to 24 months.

Sure sure. So let me, let me speak to some of the key drivers here.

Foundation really after those you need to look at the higher operating costs in this environment related to to us securing additional capacity from external supply chain.

And with that the logistics costs associated with operating in that environment.

Puts us in a position where we are securing more lanes for freight to support that external capacity.

At higher spot market rates, which we would note that we're seeing about mid single digit inflation in freight in this environment.

So as we're exposed to the spot markets on those external supply chain lanes.

Cost of delivering to customers and distribution centers is higher so those two factors I would expect to be largely linked to the demand environment and as such.

Supply and demand come more into balance as our inventory levels in the system come more into balance I would expect those costs to two to abate.

And obviously, we're lapping a tremendously strong Q4, where we're a fair amount of leverage.

And was driven just in part because of the the inventory in the system debt, both us and the retailers used to draw down to service.

The demand.

That's really helpful is there any way to quantify some of those things like these transitory logistics costs.

That can fall away just so as we look to attack on model. We've got some of the right puts and takes that we're contemplating.

Yeah, I don't want to get too specific on <unk>.

Q4, but I think it's fair to say that those two as you think about the offsets too.

Some of the key drivers and specifically leverage those are more than sufficient to offset the some of the leverage benefits, we expect to see this year.

Okay. Thank you.

You bet.

Our next question comes from the line of <unk> with Deutsche Bank. Please proceed with your question.

Yes, hi, good morning.

So I guess I wanted to follow up on Andrew's question and that was what I wanted to see if you could talk about how you think consumption patterns blue trend from here.

And within that specifically, how you think about the snack bar category, which is one of your global platforms.

But Jeff you talked about how you don't expect consumer habits change.

I'm curious you know how how are you.

Thinking about the recovery in that category. The overall category is fragmented and there are many different segments.

So just wondering if you could share your aspirations there on how you would like to play on the overall category.

Yes, So let me thanks for the question, let me, let me make a clarifying point, what we see happening on that.

Demand will be higher in the near future than it was pre pandemic.

Certainly as people return to eating out and people return to school well, we'll see.

The reversion of some of that volume back to where it was before and just not all the way back so I would envision an environment, where demand is not as high as it is today.

And at home eating, but it's higher than it was pre pandemic and I think some some investors. Some analysts feel Jeff volume is just going to snap back to the way it was before the pandemic and what we've seen outside the U S where we're currently sitting on our current channels and lead us to believe that any return to normal will be would be more elongated.

And that return on a normal eventually be different.

So as we as we said we see that the same would hold true.

Our bars category on I'll give a little highlight high level commentary on the John John Doody, who may want to weigh in and bars, because it really is energy on the go.

On the category has been down recently, just because people have not been on a go as much as people start on starting to get out a little bit more we have seen the category improve a little bit in fact, I'm really pleased with our progress in terms of share.

<unk> effectively all over the world on the bars category that would be the U S as well as Europe as well on Australia. So we're starting to see the category return a little bit and we've been competing quite effectively on a John do you have any other.

And anything you want to add to that.

On the go.

Each of the categories.

On the train.

Good day.

The current environment.

On the toughest to play.

John mentioned, even though.

On the problem.

We're actually growing share in total bars as many of you remember we've been struggling as established in the last few years kind of on.

I'm joined on the initial dollar basis, perhaps because most of our marketing on their usage.

Thanks, Robert that's a small amount.

On launches on Orange.

This past year, so we feel good about our performance Jeff.

She was getting back to more normal times.

There is a bounce back to growth.

Great and then just I wanted to also take advantage of Bethany being on the call and Bethany I was hoping you could give us a little bit more color on the treat side of the business.

Any on those of you that.

As blue Buffalo moves into F. D. M. Dot is the channel, where Oh treats are more prevalent and I think it's been a bit disappointing relative to everything else that blue has done. So I'm curious if you have any thoughts on the law.

Long term potential of the pizza business and you know what.

There's sort of more innovation more marketing any anymore.

You can do or that.

Do you think needs to be done around that side of the business.

Based on your absolutely correct frame as you can get it into the free.

John Mass channel there is more tweets that are sold in that channel.

Hello.

Definitely resonating with pet parents and in terms of training and you'll see here in the fourth quarter, we are launching a new innovation.

Behind bones, and so that is the opportunity for pet parents to clean seed.

On the on alternative crunching debt, it's about the change in product.

I'll be on containing the tinting, while interest rates category, but we know we can do better until we have on the innovation launching as well as bridge I mean on some price pack architecture work as well and so we're able to general merchandise. If you look at on a pet category.

Segment is obviously more responsive can merchandising than Europe food segment, and so I'm thinking about in our remarks today you know we have a picture of how the whole portfolio was Shawn now and so when we merchandise on me.

Sellers are able to offer them.

The new power Inc.

Fixed February then we really cover.

All different types that we're continuing on compressed merchandise also.

Starting doing some different types of marketing behind Trimble moment and so.

Pushing on all areas and Ian.

Can you drive that bad debt.

Each category.

Got growth, we'd like to have a higher share of debt.

Great. Thank you so much.

Our next question comes from the line of Nik Modi with RBC capital markets. Please proceed with your question.

Good morning, everyone.

Good morning Ann.

So I just wanted to ask about new items my understanding.

General Mills is can be pretty active in this area.

In 2021, and just within the cost dropped in the backdrop of.

SKU rationalization happening at retail I, just wanted to kind of understand how that.

It's going to work as you look to really get on these new products onto the shelf and then on just have a quick follow up.

But John you want to take that.

Yes sure.

Obviously, there are some SKU rationalization going on on really driven by click and collect and retail is really optimizing the shelf space at the same consumers are always looking for new products and new innovation in food retailers are very pleased by that as well. So is this a 'twenty one on revised performed quite loans zero, we got three launches in the category.

We've got three of the top four launches. So we've got a great track record on that track record really helps us selling new products. So the bar is higher and youre going to have good items.

We really had a chocolate without doing that trial in the coming year.

That's important as a share of distributions of overall.

Key categories as well as new products really help us with that on.

Moving to approach it really centered on plans with somebody for fiscal 'twenty, two as well, which for sure as we get closer to two months of the year.

And John Jeff.

We think about that key rationalization and how retail is prioritize which brands that have on itself.

Would you expect additional space kind of over the next 12 months as a result of some of those changes.

Well I think obviously, the highest skus getting more shelf space.

Really the shelves for bricks and mortar shopping as well is there on the operations so our top skus.

Shelf space and that's a really good thing for us and then.

Simple.

Resellers are looking for a track record of success.

As we've proven we can do that if you're looking for on this first I think in some cases on this.

Smaller.

Shawn and I think John food products.

I'll say resource sooner as both of those items and the ability to track records and deliberate.

Yeah.

Excellent. Thank you I'll pass it on.

Our next question comes from the line of Jonathon Feeney with consumer edge. Please proceed with your question.

Good morning, and thanks.

Yes.

Do you have any clearly I touched on this a little bit before but given the clear ryzen visible cost here I'm, a little surprised there's not more.

Dedicated.

Effort to raise pricing is this something that is really just tactical inside your organization just kind of let it ride here or is this a is this a response to discounting and private label growth or fear about that in the marketplace. Because you would look at the what.

But you would look at your input costs on everything Thats on the headlines on.

It feels like 10000 fixed type environment.

We're not seeing that at least on at least on the pricing front.

Hey, John.

Go ahead go on our company.

Hey, John.

I think.

Just just.

To answer your question, we certainly are responding right now on the expectation that debt debt than inflation is it's going to be higher as Jeff referenced earlier.

We're seeing a broad based we're seeing a global.

And we're frankly in all of our businesses working hard at debt and using the SRM levers. So I think you'll see us acting.

And in fact in some of our businesses we already have.

Actions in market on this are on front so I.

I would just sort of respectfully note debt, we're moving right now.

Okay I recognize it's a sensitive topic, thanks very much.

Our next question comes from the line of Lawrence <unk> with Guggenheim. Please proceed with your question.

Hey, good morning, everyone.

Hello.

Okay.

I'd like to come back on on the Pet segment.

I'd like to understand better.

This makes it work make it even a quarter.

Quarter, Youre launching premium wet and treats but also where I'm not sure you per Mark you said on Youku in the pet specialty and not for the first time, which perea ask for a premium price so I'd like to turn us on better.

That's.

What's driving this and they get EBIT.

Price mix in the quarter on how we should think about price mix. He pet segment going forward. Thank you.

Yeah.

Well again, thank you for that question so yes.

For the nine months into the ear right on sales are up 13% on our profits up 22%. So we feel really good about it.

We're able to drive the business in the quarter I mean, our mix can vary depending on channel.

And so as they continue to build on this isn't really young business in some channels.

Now.

We can have a variance on the channel mix, but also the product mix and so we invested behind the different parts of the business I feel good about the long term.

On price mix again, what's driving the pet category is premium innovation in food.

Vessel is.

Slowly in that part and we will continue to Ann.

And share that we have the right price mix and it can vary by quarter by channel by product mix.

This is Jeff Siemon I'd just add.

As a reminder to everyone, especially on the first half of the year, we're comparing against the first half last year, where we were still expanding our wilderness line more broadly into food drug and mass and so that.

That's a very high price.

Business and so the comparison was probably a headwind through the first half maybe a little bit into the into the back half as we go forward. We're now fully comped all that expansion and as Bethany said a lot of innovation.

On news Youre seeing is on the web and the treat segments, which are which are certainly mixed positive. So we feel good about where we go from here.

Thanks.

Second question I mean in a completely different topic itself, it's about Yoplait in Canada.

Visibility on on the business there on could.

Could you could you maybe give us on some cutters.

Should we see about the same type of profitability in Canada about you've got you know in the U S.

So Tim on pools.

Bruce.

Is it growing faster knights rounds out a bit more color on the on yogurt I cannot attribute.

Rob we haven't we have a good market and in Canada, what I'll have John Doody provided some of the some of the commentary on that business.

Yes.

We really later on.

Total business in Canada.

And it's actually the bigger business.

Liberty day, so it's about 60% of Rx on yogurt business versus 40% retail clinic and one of the things we love the deliberate immediate Greek yogurt in Canada. So while we a few years back and do some loans that Shawn U S variable on Canada.

And on the strong margin share this view of the market. So.

Excluding the margin.

I'd, probably highlight the new products and other things would be accounting related businesses on the long candidate as we speak.

Thank you and pass it on thank.

Thank you.

Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.

Thanks.

As you know in the U S. There are some markets that are reopening faster than others, Texas and Florida I'm wondering as you look at some of those micro examples.

What sort of two year trends are you seeing and maybe <unk>.

Even within that some insights that you're garnering about the reopen and the impact on individual categories retail pet and within retail and.

And I have a follow up.

This is David let me this is Jeff let me provide a little background on the last year and I'll tell you I'll tell you a little bit what we're seeing on the last month or so but as we look at the past year, we've really seen the at home trends across our markets on some have been relatively more open than others. As you know we've seen at home trends have accelerated across those markets even.

The markets that are more open and then maybe a couple of points less growth at home than those that have been relatively mark loans, but we're seeing pretty consistent performance across markets over the past year, whether it's at home or away from home consumption.

There's been a lot of talk on reopening the last month, but the data is really challenging because especially because of the weather situation. So for example, Texas has opened up.

David home eating, but they had a huge winter snowstorm on last month, which elevated demand quite a bit on sort of trying to pick apart the pieces and the variables over the recent short term is really difficult to do and I don't say that to try to hide anything but if you look at it you would see that at home consumption in Texas will be up which would be counterintuitive, but that's because of the huge storm. So I think we'll know a lot more.

At the end of this quarter once we've seen more so right now what I can tell you is over the long term over the last year, we've seen elevated demand across markets over the short term. There are so many brown variables at play it really is hard to pick them apart.

Yeah, right I sympathize with that it feels like we're going to be looking week by week from now on but.

When we look at this last year this fiscal 'twenty one.

And we look backwards what are some COVID-19 related costs, both direct and indirect and if for example, you cited the supply chain demand and that the elevated trucking costs.

That just basically freight and logistics being under such pressure that debt is essentially an indirect COVID-19 related costs, but is there could you maybe sum that up in terms of gross margin headwinds that you will be lapping in fiscal 'twenty two.

I'll pass it on.

Yeah, sure and I'll add to that list some of the other COVID-19 related costs such as some of the policy leave policy dispensation, we've given to our employees obviously some of the security protocols and adjustments we've made.

And I expect a good portion of those costs as we work into a more normal environment.

Two two.

Sort of get back in line with normal trends, so I wouldn't build off of a base of this cost on a.

We will go forward basis, as you think about F 22, and demand potentially for at home consumption being lower than this year, but even still elevated above pre COVID-19 levels.

Not going to quantify at this point, but we'll we'll.

We'll talk more about debt as we work our way into F. 'twenty two.

Okay. Thanks.

Jennifer I think that's all the time, we have so I think we'll go ahead and close out now thanks, everyone for taking the time out in the interest of their follow up questions. Please reach out over the course of the next couple of days.

We hope everybody is staying safe and healthy and we'll talk again next quarter.

Thank you.

This does conclude today's conference call. We thank you for your participation and ask that you.

You may disconnect your lines have a good day everyone.

Okay.

[music].