Q2 2022 General Mills Inc Earnings Call - Pre-Recorded Management Remarks
And execution supported with strong levels of investment.
And as the continuation of an ongoing multiyear story of improved competitiveness that started before the pandemic and continues through the pandemic.
The current operating environment is as dynamic and challenging as I've seen in my 27 plus years in the industry.
At home food demand remains elevated input cost inflation is at a 10 year high and labor shortages and other issues are causing disruptions across our supply chain from our suppliers to manufacturing to distribution.
These disruptions are driving down service levels, and driving up costs above and beyond inflation throughout the industry.
In the face of these challenges we've stepped up our agility and responsiveness to ensure our customers and consumers can access the food they need.
We've also taken actions to manage costs and support our profitability, including leveraging our strategic revenue management capability to execute significant pricing actions across our portfolio, resulting in organic price mix stepping up from Q1 to Q2.
And we expect a further increase in price mix in the back half of the year.
Later in the presentation, John Doody will share examples of how we're addressing these challenges in North America, where inflation and supply chain disruptions have been particularly acute.
Shifting gears to portfolio reshaping, we executed several strategic moves in the first half of the year.
In July we completed the acquisition of Nudges crew choose and top choose dog treat brands from Tyson foods strengthening our position in the fast growing U S pet food category.
The increase is the second largest segment in pet food at an estimated $7 billion in retail sales and growing at a high single digit rate.
Combining our newly acquired brands with our Blue Buffalo treat business gives us a powerful <unk> portfolio that is prime to deliver on pet parents, increasing interest in wholesome natural treating.
As we continue to integrate these brands into our pet segment, we are confident in the growth and the value creation opportunities ahead.
In fact retail sales for nudges crew choose and top shoes were up 22% in measured channels in the first half of the year, adding to the 16% growth for our legacy Blue Buffalo treats business.
Our second significant portfolio reshaping actions. This year was the completion of our European Yoplait divestiture, which closed at the end of November.
This transaction improves our enterprise growth profile enhances our margin and allows us to focus our resources on our faster growing priority businesses.
Yoplait will remain one of our local gym brands in the U S and in Canada, We will now operate on a wholly owned basis.
Kofi will share additional detail on the financial impact of this transaction later in the presentation.
Also at the end of November we announced the sale of our Dow business in Germany, The UK and Ireland to cereal alia, these businesses, which represent less than 5% of our Europe and Australia segments. Net sales include the napkin back and just roll brands, we expect to close these transactions by the end of fiscal 2022.
Two subject to competition approvals.
Overall these three transactions that represent further progress on our accelerate strategy, which include clear priorities on where to play across geographies as well as platforms and brands to drive long term superior shareholder returns.
Made significant progress here and there is still more work to do we.
We continue to look for opportunities to further reshape our portfolio through acquisitions and divestitures.
Another critical element of our accelerated strategy is our focus on being a force for good in the world as a company and through our brands as I mentioned.
Last quarter, we plan to regularly highlight different aspects of our force for good work on our earnings calls this year touching on four priority areas regenerating, our planet improving food security protecting our people and strengthening our communities.
As we enter an important season of giving for many around the world. We thought it would be a good opportunity to highlight general most impact on our communities and in particular, our commitment to charitable giving.
In fiscal 2021 General Mills donated approximately $100 million in charitable causes across our key global markets.
Roughly 60% of that was in the form of food donations to the world's leading food bank networks <unk>.
<unk> feeding America, and the global food banking network translating into a 41 million meals for families and individuals.
During the last school year more than 80000 schools in the U S benefited from our box tops for education program.
<unk> has provided more than $940 million schools since the program began in 1996 and.
In addition, we recently increased our focus and funding on closing ratio disparity gaps and household food security and improving equitable food access.
And even as the pandemic has continued to disrupt communities and organizations everywhere General Mills employees continue to give back to COVID-19 friendly volunteerism events as well as through our workplace, giving program.
I am proud of our company's long standing commitment to supporting communities and using our charitable giving to advance key social and environmental outcomes not only are these actions good for people and the planet. They are also good for our business with that I'll pass it to John Doody, who will cover our North America retail segment.
Thanks, Jeff and Hello, everyone I appreciate the opportunity to provide an update on our North America retail business today, Let me begin with a quick overview of our segment, which generated $11 billion of net sales last year.
We operate a broad portfolio of trusted leading brands across more than 25 categories in the U S and Canada.
Millions of consumers every day.
Products are enjoyed by around 95% of households, each year.
North America retail driven strong growth in net sales and operating profit over the past two years.
The rise of at home demand from the pandemic has been a key contributor we've also outperformed our competition during this time.
The improved execution stronger support behind brand building and innovation and greater alignment of our people and structure with our strategy.
Now priority as a company in recent years has been to compete effectively.
I'm tremendously proud of the way that we've improved our competitiveness in North America retail over the past four years.
Leveraging stronger brand building and innovation that meets consumers' needs consumer demand remains elevated relative to pre pandemic levels.
Our second quarter U S retail sales were up 4% versus last year and up 6% on a two year compound basis and acceleration from the trend in the previous four quarters.
We continue to compete well amid this demand picture as we have for the past several years before the pandemic started we are holding or growing share and 55% of our U S retail business.
<unk> started that metric improved to 65% and our strong performance has continued in fiscal 'twenty, two with more than 60% of our U S retail sales base holding or growing share year to date. These.
These results have been led by long term share gains in key categories, including cereal refrigerated dough food snacks and Mexican foods.
Strong focus on the fundamentals has fueled our multi year success story in U S. Cereal for General Mills has posted market share gains for 37 consecutive months 12 consecutive quarters and four consecutive years strengthening our position as the number one player in the category to be clear our performance is not driven by short term competitive supply chain dislocations.
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<unk> consistently bringing compelling consumer ideas relevant innovation strong levels of investment and excellent execution to the best brands in the category.
On product innovation that exemplifies this is cheerios oat crunch, we first launched the sub line a similar variety of two years ago.
Bringing in more complex taste and texture to the largest franchise in the category appealing to older children and adults.
Oh Crunch has proven to be highly incremental to the cheerios franchise and the category and now represents a 1% market share in the U S cereal category across three great tasting varieties.
Our track record on Pillsbury refrigerated dough is equally compelling retail sales for this business have grown 30% in the last four years, we are working on a fourth consecutive year of expanding our category leadership.
Our market share is now at 72% and household penetration has reached 58%, which is up almost five points versus pre pandemic levels.
Consumers are consistently finding that pillsbury delivers what they need for meal and holiday solutions, something comforting delicious convenient affordable and our.
Imagine the numbers, you'll make messaging is resonating with consumers during this key baking season.
One critical wave, where continued future growth on pillsbury and increase our relevance with Hispanic consumers.
We're shifting reactivation plans and doing a better job of intentionally reaching out to this growing cohort we've seen an increase of almost four points from pillsbury's. Hispanic household penetration over the past two years.
We're excited about continuing to provide products and solutions to these new consumers and solidifying our growth for years to come.
The fruit snacks with expenditure U S share leadership in recent years, driven by our breadth and depth of products that serve the needs of all ages from task to teens.
This includes remarks real fruit and veggie juice shapes, winning kid equities like space Jam shapes, and new varieties on Randy's line differentiated brands like Froot roll ups fruit by the foot and gushers.
For the pandemic, our food snacks business was driving growth by expanding into new formats into the seasonal out capture new usage occasions.
When the pandemic hit we responded quickly and continued our momentum by delivering our consumers' desires for frictionless all family Snacking.
These efforts have helped unlocked terrific results, including year to date retail sales growth of 18%.
Significantly increased your capacity in recent years to keep pace nearly 40% increase in retail sales since fiscal 2018 as.
As we look ahead, we expect to invest further in capacity to support what we see the long runway of continued growth for this attractive business.
Finally, <unk> was loving Mexican food category with three plus years of share gains through compelling consumer news and innovation.
We've introduced exciting product innovations like bold flavored spin on Taco shells Street, Taco kits and squeeze sauces.
So, bringing taco pockets to North America retail in 2022 after a hugely successful launch in Europe in Australia last year.
Total pass what's been leveraging our connected commerce capability.
Utilizing data driven personalized messaging Shaffer will media to drive improved rois.
It's not only driven share gains helped drive nearly four points of increased household penetration and 39% growth in retail sales over the past four years.
Shifting gears to consumer landscape continues to evolve as we face new variance and see ongoing fluctuations COVID-19 case rates, while the magnitude varies by market and by month. What has remained constant is that at home food demand remains elevated relative to pre pandemic levels as Jeff mentioned earlier, the supply chain environment is as challenging as we.
Seen in decades.
We like the rest of the industry are facing rising input cost inflation in fact, our north American market Basket has reached its highest point in recent history.
To add to the challenged industry wide shortages in the labor market are impacting every part of the supply chain.
Significant costs that are above and beyond inflation.
We're seeing record levels of disruptions across our raw material suppliers internal and external production facilities, our own distribution centers, our customers' warehouses and logistics networks required to connect each of these elements of the supply chain. These disruptions and resulting service challenges elevated cross across the industry.
For example, when our suppliers' labor shortages limit their ability to deliver a key ingredient to one of our factories, we either need to shut down our lines a reposition that increase from another manufacturer location, both of which increased cost.
Another example, we may be able to procure ingredients manufacture the product and have it ready to ship, but for a carrier can't make the scheduled pickup because of the driver shortage, we run the risk of missing our customers on time and full delivery window, thus leading to fines and fees. These examples are just a few of the many challenges we and the rest of the <unk>.
Industry are facing daily.
In the face of labor shortages and disruptions across the supply chain. Our teams are focused on remaining agile to secure supply and ensure our customers and consumers can get access to the food. They need for example, so far this year, we've reinstituted control tower teams that we set up at the outset of the pandemic helping to facilitate.
Take quicker decision, making.
We've secured alternative sources of supply and increased internal inventory levels on some constrained raw materials.
Develop new risk metrics and alerts to proactively identify challenges we've increased the frequency of our communication with our vendors and our customers to ensure that we're working one supply chain.
I am pleased to say these actions are making a difference and are enabling us to service their customers better than our competition, which we can see in Nielsen measured data and the.
Second quarter, our on shelf availability in the U S outpaced our categories are.
Service was better than our leading competitor in seven of our top 10 categories. We under indexed on lost sales from out of stocks by almost 20%.
We've also seen our share of distribution growth every month since the onset of the pandemic.
Our service levels remain in the mid 80% range compared to the high Ninety's that we typically deliver in a normal environment, we hear from our customers that our performance during the pandemic has been consistently leading among food manufacturers.
At the same time, we are leveraging our enhanced SRM capabilities to address the significant inflation and costs related to supply chain disruptions.
Already this fiscal year, we have announced multiple rounds of pricing across our portfolio utilizing offshore SRM levers list pricing.
Promotion optimization pack price architecture and mix management, we're seeing the impact of these actions flowing through in the market with our average unit prices rising steadily over the course of the year.
As I look at the business today I am struck by the advancements we've made in North America retail in recent years and I am confident will be a stronger business today, we were before the pandemic.
Our brands are more relevant with consumers. Our household penetration is up strength in critical capabilities like connected commerce and Thats wrong and our team is more agile today that has ever been before as.
As we enter the holiday season, and a reminder of the importance of our work families across the U S and Canada, we're able to enjoy holiday staples, such as Pillsbury Crescent Rolls, Betty Crocker cookies and checks party mix because of what we do every day I'm proud of the progress we've made in North America retail over the past few years.
Excited about our opportunity to build on that momentum and drive profitable growth in the years ahead with that I'll pass it over to coffee to review our financial performance in the quarter.
Thanks, John and Hello, everyone.
Let's start with our second quarter financial results on slide 24.
Net sales of $5 billion were up 6%.
Organic net sales grew 5% in the quarter, reflecting our strong execution broad based SRM actions and continued elevated demand versus the pre pandemic period.
Adjusted operating profit of $821 million was down 6% in constant currency.
Driven primarily by input cost inflation and higher other cost of goods sold including costs related to supply chain disruptions, partially offset by favorable price mix holistic margin management cost savings and lower SG&A expenses.
Adjusted diluted earnings per share totaled <unk> 99 in the quarter.
Down 7% in constant currency.
On a two year compound growth basis second quarter organic net sales were up 6%.
Adjusted operating profit was flat in constant currency and adjusted diluted EPS grew 1% in constant currency.
Slide 25 summarizes the components of net sales growth in the quarter.
Organic net sales were up 5% driven by positive organic price mix foreign.
Foreign exchange was a one point benefit in the quarter and our acquisition and divestiture activity added one point to reported net sales growth.
Now, let's turn to segment results, beginning with North America retail on slide 26.
Second quarter organic net sales were up 1% driven primarily by favorable price mix, partially offset by lower volume.
Because of the service challenges caused by the current supply chain environment, our net sales lag retail sales growth by roughly two points in the quarter.
Net sales growth in U S snacks and U S. Cereal were partially offset by a decline in U S meals and baking.
On a two year compound growth basis second quarter organic net sales were up 5%.
As John mentioned, we continue to compete effectively in our fios.
Fiscal year to date, we grew or held market share in 62% of our U S retail sales and we posted solid share gains in Canada.
Second quarter constant currency segment operating profit decreased 8%, driven primarily by higher input costs and lower volume, partially offset by positive price mix and lower SG&A expenses.
On a two year compound growth basis constant currency segment operating profit was flat.
Second quarter net sales for our pet segment increased 29%, including 15 points of benefit from the pet treat acquisition.
Organic net sales were up 14% in the quarter, including double digit growth in both dog food and cat food.
On a two year compound growth basis second quarter organic net sales were up 16%.
In the first half of the fiscal year, the Blue Buffalo brand continued to drive strong retail sales growth and market share gains in measured channels and as Jeff mentioned, the nudges true choose and top choose brands generated year to date retail sales growth of 22%.
On the bottom line segment operating profit increased 10% to $132 million.
Driven primarily by higher volume and favorable net price realization and mix, partially offset by higher input costs and higher SG&A expenses.
Profit results in the quarter included a one time inventory adjustment and other acquisition related expenses totaling $11 million.
On a two year compound growth basis constant currency segment operating profit increased 28%.
Turning to convenience stores and foodservice segment results on slide 28, organic net sales grew 23% in the quarter, reflecting increased away from home food demand in the U S, including higher year over year consumer traffic in schools restaurants, lodging and C stores.
As well as market index pricing on bakery flour.
On a two year compound growth basis second quarter organic net sales were up 3%.
Segment operating profit increased 20% in the quarter, driven primarily by positive price mix and higher volume, partially offset by higher input costs.
On a two year compound growth basis constant currency segment operating profit decreased 10%.
In Europe, and Australia second quarter organic net sales were down 2% due to declines in yogurt and Doe.
On a two year compound growth basis organic net sales were flat.
We continue to compete effectively growing year to date market share in Mexican food and snack bars.
Second quarter segment operating profit totaled $16 million compared to $36 million, a year ago, driven primarily by higher input costs and lower volume.
On a two year compound growth basis constant currency segment operating profit was down 35%.
In Asia, and Latin America second quarter organic net sales increased 5% driven by Yoki meals and snacks in Brazil.
On a two year compound basis net sales were up 7% second quarter segment operating profit increased 40% in constant currency, driven primarily by positive price mix and lower SG&A expenses on a two year compound growth basis constant currency segment operating profit increased 23%.
Slide 31 summarizes our joint venture results in the second quarter.
Oreo partners worldwide net sales were down 2% in constant currency, reflecting a difficult comparison against elevated at home demand a year ago.
Hagen Dazs, Japan, net sales were up 8% in constant currency, including strong contributions from innovation.
Second quarter after tax earnings from joint ventures of $33 million were down 9% driven by lower profit at CPW.
On a two year compound growth basis combined after tax earnings were up 15%.
Now, let's turn to total company margin results on slide 32.
While significant benefits from positive price mix and HSM cost savings were sufficient to offset high single digit input cost inflation in the quarter.
The large step up in costs due to supply chain disruptions combined with volume deleverage drove adjusted gross margin down by three points.
Adjusted operating profit margin in the quarter was down 200 basis points driven by lower adjusted gross margin, partially offset by lower SG&A expenses.
As Jeff and John mentioned, we're moving quickly to address the increasing cost environment, including announcing incremental SRM actions that will take effect in January providing a partial benefit in Q3 and a full benefit in Q4.
Slide 33 summarizes other noteworthy Q2 income statement items.
Adjusted unallocated corporate expenses increased by $12 million in the quarter net interest expense decreased $8 million driven primarily by lower average debt balances. The adjusted effective tax rate for the quarter was in line with last year at 22, 3%.
And average diluted shares outstanding were down, 1%, reflecting our share repurchase activity.
Our fiscal 2022 first half results are summarized on slide 34.
Net sales of $9 $6 billion were up 5% organic net sales increased 4% driven by positive organic price mix.
Year to date adjusted operating profit of $1 6 billion decreased 4% in constant currency adjusted diluted earnings per share of $1 98 were also down 4% in constant currency and on a two year compound growth basis organic net sales were up 6%.
Constant currency adjusted operating profit was up 4% in constant currency adjusted diluted EPS was up 6%.
Turning to the balance sheet and cash flow.
First half operating cash flow increased 5% to one $5 billion driven.
Primarily by changes in inventory, partially offset by changes in accounts payable.
Year to date capital investments totaled $224 million.
And we returned nearly $1 billion in cash to shareholders in the first half of the year through dividends and net share repurchases.
Slide 36 provides a brief summary of the financial impact of the Yoplait Europe divestiture, which closed on November 30.
We expect the transaction will reduce reported net sales by approximately $700 million on a 12 month basis.
Taking into consideration the associated reduction in operating profit, partially offset by lower interest expense and Noncontrolling interest, we expect the divestiture to reduce adjusted diluted EPS by roughly 1% in the first 12 months after the close.
From a portfolio standpoint, this transaction significantly increases, our Europe, and Australia segments focus on our faster growing higher margin platforms, including Mexican food ice cream and snack bars.
On slide 37, we provided an update on some key financial assumptions for the second half of fiscal 'twenty two.
First we expect price mix to step up further in the second half, reflecting additional SRM actions that will take effect in January.
On the cost side, we expect double digit input cost inflation in the back half I should note that at this point in the year, we are more than 80% covered on our raw and packaging material spend for fiscal 2022.
On a full year basis, we are now estimating cost of goods sold headwinds the approximately $500 million higher than what was assumed in our initial fiscal 2022 outlook. This includes full year input cost inflation, we now estimate to be 8% to 9% as well as elevated.
Costs related to supply chain disruptions.
While it's difficult to forecast, we expect the operating environment will continue to be challenged by labor shortages and other disruptions in the back half and we expect our second half customer service level will be generally in line with first half.
Finally from a phasing standpoint, we expect these assumptions to result in back half adjusted diluted EPS growth to be weighted more heavily to Q4.
With these assumptions in mind, our updated fiscal 2022 financial outlook can be seen on slide 38.
Organic net sales are now expected to increase 4% to 5% compared to the previous guidance that was towards the higher end of the range of down 1% to 3%.
Constant currency adjusted operating profit is expected to be down 1% to 4%, which now includes a one point drag from the Yoplait Europe divestiture.
This compares to the previous guidance that was towards the higher end of the range of down 2% to 4%.
We expect constant currency adjusted diluted EPS to range between down, 2% and up 1%, including a one point headwind from the Yoplait Europe divestiture. This.
This compares to the previous guidance that was towards the higher end of the range of flat to down 2%. We expect free cash flow conversion will be at least 95% of adjusted after tax earnings.
Finally, the net impact of divestitures acquisitions and foreign currency exchange is expected to reduce full year reported net sales growth by approximately 1%.
And foreign currency is not expected to have an immaterial impact on adjusted operating profit or adjusted diluted EPS.
We now turn it back to Jeff for some closing remarks.
Thanks, Koby before we close.
Not to take a moment to thank the entire 30000 strong general Mills' team for their passion perseverance and performance in these unprecedented times I am proud of the way, we're growing our core and reshaping our portfolio for the future.
More confident than ever that general mills, where emerge from the pandemic with stronger brands and capabilities and a portfolio better geared to generate profitable growth over the longer term.
Thank you for your time. This morning. This concludes our prepared remarks I invite you to listen to a live question and answer webcast, which will begin at eight a M. Central time. This morning and will be available for replay at general Mills Dot com.
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