Q3 2022 General Mills Inc Earnings Call - Question And Answer Session
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Yeah.
Greetings and welcome to the General Mills third quarter fiscal 2022 earnings Q&A webcast. During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session.
At that time, if you have a question. Please press the one followed by the four on your telephone.
At any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded on Wednesday March 23rd 2022, I would now like to turn the conference over to Mr. Jeff Siemon. Please go ahead.
Thank you Frank and good morning, everyone.
Thanks for joining us today for our Q&A session on third quarter results I Hope everyone had time to review our press release listened to our prepared remarks and view our presentation materials, which were made available. This morning on our Investor Relations website.
As a reminder, beginning this quarter, we are reporting results under our new segment structure, you can find supplementary information on our website that shows our historical net sales and segment operating profit results recast for this new segment structure.
I'll also remind you that in our Q&A session. We may make forward looking statements that are based on management's current views and assumptions. Please.
Please refer to this mornings press release for factors that could impact forward looking statements and for a reconciliation of non-GAAP information, which may be discussed on today's call.
Joining me this morning are Jeff Harmening, our chairman and CEO Kofi Bruce our CFO and John <unk> Group President of our North America retail segment.
But go ahead and get to the first question Frank could you get us started please.
Thank you.
Ladies and gentlemen, if you would like to register a question. Please press the one four on your telephone.
You will hear it called pump technology, a request to answer your question has been answered and you would like to withdraw your registration. Please press the one followed by the three.
One moment please for the first question.
Yes.
Our first question comes from Andrew Lazar with Barclays. Please proceed.
Good morning, everybody.
Alright, good morning, Andrew.
Great. Thank you.
So Jeff maybe if we put aside general mills is comments from Cagny.
<unk> sort of <unk> expectations, and such I guess the bottom line is the company is still raised its full year outlook above.
Above where that initial sort of set of company forecast, where prior to the startup III Q, despite a very tough environment.
I guess two fold question on that first what do you think enabled that because I think there is.
It has been still ample industry skepticism around.
The industry's ability to sort of deal with the current environment as it is.
And then more importantly.
I know you're not going to give detailed guidance for next year until next quarter, but do you think this dynamic of managing through this kind of hold as you move through fiscal 'twenty three because the concern I hear from many investors really is that the industry is just sort of kicking the can down the road so to speak about when the impact of certain things like costs, particularly in light of recent.
Global events will ultimately catch up to the group.
That would be my my question. Thank you.
So Andrew as I think about this year.
Fortunately, we ended Q3 with momentum and the reason we ended with momentum is because our service levels improve and as a result of our volume improved more than we thought even before we wait till going into going into Cagny and as we look at the fourth quarter of this year.
It is important to realize we're still going to have inflation in fact inflation in the fourth quarter will be will be higher.
Pricing will also be higher in the fourth quarter and in line Q3, our inflation our pricing was in line with what we expected and so we feel as if we have a good handle on both those items Amendment. So then what's really driving the improvement.
Fourth quarter is just a little bit better volume than what we had anticipated given the given the service levels a little bit higher we're also saying.
That's been made at Elasticities I mean, it's a pretty benign last 15 environment right now which is not to say there is no elasticity certainly as prices go up there'll be some level of that.
Plasticity, but it's also important to note that it is not in line with historical.
Elasticity given this current environment and so our raise on the fourth quarter really is confidence in our underlying assumptions around inflation and pricing, where we are as we said mostly hedged on commodities through the calendar year, which obviously includes the fourth quarter and inflation has been in pricing we saw them.
Pricing, we thought we would get through and so it really is increased confidence in our ability to service the business in the fourth quarter now our service levels won't be as they have historically been some way, we're not anticipating to get all the way back getting all the way back to that.
So as you look at 'twenty, three I mean, it's a pretty volatile environment and so usually as you well know Andrew we don't comment even on even on hedging. We don't we don't comment on past past the current fiscal year, but these are unusual times and so we thought we'd get a little bit of time, and we will have inflation.
In fiscal our fiscal 'twenty three we will have a significant inflation in fiscal 'twenty three it just won't be at the level of the spot prices at least through the calendar year that you see now in the market.
Our next question comes from Ken Goldman with Jpmorgan. Please proceed.
Typically on pet.
The margin.
Yes, I think dropped to its lowest level since you since you bought blue Buffalo.
Could you talk a little bit about what caused the pressure in terms of input costs I assume that those are here to stay for a while I think you also mentioned the higher SG&A. So I'm just curious how do you think about the potential for pricing to start offsetting some of these for ahead of you that progression.
Ken I'll I'll take that this is coffee thanks for the question.
So one of the important things to also think about here is the impact of pet brands on.
On pet market is so.
That is dilutive this year theres some specifics.
One time.
Charges related to purchase accounting flowing through it.
We both bring that more fully into <unk>.
Our.
Into our production system.
And get it online for HMS that we'll see those margins.
Since improve on the pet pet brands business acquired in the prior brands excuse me and then as we as between inflation and pricing to close so pet will be a meaningful pace.
Great.
You bet.
Okay.
Okay.
Our next question comes from Michael Lavery with Piper Sandler.
Please proceed.
Thank you.
Hey, good morning.
Good morning.
Yes.
I appreciate it just even a little peek under the tent for fiscal 'twenty three.
Maybe I am pushing our luck here, but would love just know when you say you've got some coverage in.
Inflation would that would that be.
Yes.
Where are they now if that holds would that be an acceleration in and place an order.
Or does the coverage give any moderation, maybe just order of magnitude.
Youre seeing as far as a little bit of a barbell look ahead.
Michael Thanks for the question and yes, you might be pushing your luck a little bit.
<unk> be significant.
Wouldn't want to go much further than that and.
I think our expectation at this point in the year would be a normal policy would be to be about 50% hedged which is the perspective I'd give on why we.
We got it to calendar 2022 so.
Here is to buy ourselves the time frankly to give ourselves time to read.
They are not we see the inflation has been structural.
Okay. Thanks, that's really helpful. Maybe just a follow up on the service levels for Pizza dough and snack you said, you're kind of really push.
Get more out the door in the last couple of weeks of the quarter.
In short period of time, but your margin performance was still quite good in North America retail relatively speaking with.
Fairly modest sequential and year over year decline.
It was significant or.
Is there some other things going on that are just good to keep in mind for how we think about.
Youre moment.
Momentum in margin outlook in that segment.
Yeah, I'll start and then I'll ask John to provide any color.
Sure.
Miss anything so I think you've got it.
Right. So we saw pricing actions come in in the quarter.
<unk> towards the middle to tail end of the quarter. So as we as we go forward, we would expect that to be a meaningful step up in this segment as well as well as a meaningful contributor therefore to the step up for that.
The total company on top of that as Jeff referenced in his.
His comments on the first question, we expect service levels.
Two two.
Performing closer to in line with what they had been trending prior to the quarter. So I think it's a combination of those two things is what gives us a good portion of that confidence.
That drove our guidance range.
I think that's exactly right. So again pricing and service are the two big things that we're focused on across our end, maybe I'll spend just a minute ago, a little bit deeper on service. Obviously, that's been a big challenge this year and it's really evolved as well at the beginning of the year truly modern distribution centers logistics.
Okay.
Right now the biggest issue, we're seeing it's really raw material disruptions ingredients coming into our plants to run our products in Q3 is particularly challenging for treatment RPG pizza hut snacks, and things like fats and oils and.
Starz and packaged with malls are still quite a bit of historical levels, we target 90%.
99% were in the seventies overall for Q3, we expect to get better but not year historical levels are expected to ease as we go into Q4. So we've taken lots of actions really proud of the team <unk> work in Australia.
On business to market sooner and we pulled the levers we can turn it up control towers.
D Argentine level at a senior level, we're meeting once a week.
<unk>.
Our other constrained platforms to make sure that removes hurdles.
The senior loan booking on the phone with suppliers at senior levels to make sure that we prioritize for ingredients, we've adjusted formulations and some of our products, we've reformulated over 20 times.
Every time, we can create change you have to choose a formulation, which is obviously a lot of work there ICT teams.
Adjusted freight lanes as well pretty significantly to make sure that we can use for customer lifetime, we've added capacity in things like <unk> cereal to T cells.
We're adding the ESC. So we're spending a good chunk of our title insurance and.
It's a business we can better.
As we enter the next corner.
We've got a lot more work to do and we will see.
Very focused on that.
Okay really helpful. Thanks, so much.
Our next question comes from Robert Moskow with.
With credit Suisse. Please proceed.
Alright, thank you.
A couple of quick ones.
Jeff can you talk a little bit about your plans for capacity expansion in this calendar year I believe you were adding more in refrigerated dough.
I wanted some more specifics there and see if there's any other categories that you have been expanded and then secondly, I wanted to know.
Flour milling grain merchandising business do you expect any kind of benefits from dislocation in the grain markets.
So Rob on the two on the two questions in terms of capacity expansion.
Probably won't go product line by product line. However, I do appreciate the question and what I will say is that we are certainly willing and will be spending capital to expand and expand capacity.
On a few of our lives in the coming year and really the businesses are that we will spend money on are the ones that perform well pre pandemic and continue to have momentum during the pandemic and there are actually a number of those and so what youll see from that in the coming year is that we will expand capacity on several of our major businesses.
Let me give you an update at the end of the year on where we then intend to do that but your question is a fair one and just know that we do our first call on capital is investing in our current business. We have momentum on a number of businesses that we had pre pandemic and we have during the pandemic.
In terms of in terms of the question about flour milling and dislocations I mean I.
I don't know that were going to see any benefits, having said that I think we will have full supply on our on our grain milling businesses were world class in that we've been selling flower since 18 to 66, so we have a pretty long history of.
Being able to do that effectively.
Our next question comes from Steve Powers from Deutsche Bank. Please proceed.
Hey, Thanks, and good morning, everybody.
I guess, he performed well on <unk> cost savings despite the supply constraints that we've been talking about and I guess I'm curious.
Just to what degree.
You'd think that HMO cost savings momentum.
Can continue but may actually be able to accelerate to some degree is the supply constraints and youre able to focus.
More on so called business as usual conditions hopefully into the new year, just some commentary around HMO it'd be great.
Yes.
I appreciate that question and I'd love for our business as usual conditions tomorrow, if the bad debt.
Powers.
I think our expectation is <unk> is a core capability for us.
We've been at it as a discipline really since since the start of close to the start of this.
The century.
We've been pretty consistent delivering mid single digit cost productivity off of it.
I don't have any concerns about our ability to keep doing that.
What I would expect is that if we if and when or when I should say, we get to and it's hard to say when that is when we get to more stable conditions that won't be in a position to each of them will be the lever that allows us to shed a lot of the operating costs that we put on in this environment given the disruption.
And so what that will do is allow us to bring our margins our gross margins back up as a result of the SRM actions that we've taken in this environment to deal with the extraordinary inflation.
Yes, great okay. Thanks.
If I could just deploy different tact.
On pulp.
I Love your perspective.
On how you expect the category broadly and then Youre brands, specifically, but the category broadly high end pre.
Premium pet care pet food too.
Holdup, if we enter a more adverse consumer environment.
Just how you think that category has evolved and solidified itself could.
To be able to persevere through a cycle.
Yes, Steve this is.
We anticipate the category will continue to perform well and we think that RSA, but well continue to perform quite well.
Even through the last recession, which was a long time ago, one of the day and before he meant Bob Blue Buffalo, We will look at how the category performed during a recession and it turns out our performance very well. The last thing you want to do in tough times is.
And to sort of optimize what are you going to give your Pat and I would tell you that on top of that the predominant trend in pet food now and I think we will be going forward as the humanization of pet food and where it clearly very well positioned.
In that area given that we're the number one natural pet food.
Pet category by a long way and so we believe we have the best brand and the best part of a really good segment really good category.
Holds up well during recessions and by the way and as a result of all of those things is very level.
Closure of private label.
Alright, very good. Thank you so much take care.
Yeah.
Yes.
Our next question comes from Bryan Spillane with Bank of America. Please proceed.
Thanks, operator, good morning, everybody.
My question's around <unk>.
Elasticity in I guess.
Wanted to just get two perspectives on it yes, I think in the prepared remarks.
Mention there's a mention about the sort of expectation that the elevated level of <unk>.
Demand.
You expect that to stick.
So.
As part of that just a function of Dow.
Now given where inflation is just an expectation that.
Consumers eating more at home, so we've kind of shifted from being at home because of Covid to now eating more at home because.
It's too expensive to go out.
And then maybe the second point, ladies and diabetes.
Anything that Youre seeing now in terms of.
Like cross elasticity between channels, so our consumers, making different choices in terms of may be avoiding.
Food stores or convenience stores or just anything that goes out between channels. As we are just watching the pricing said it although there's a lot there but.
Appreciate it.
Thanks, Brian its a chance maybe I'll tackle pricing.
Sure and I'll get to elasticity.
So obviously.
I talked about supply chain pricing.
So I think we're spending a lot of time on.
We believe that we're pricing effectively with this market and for each brand amongst different motives.
I'm really proud of is that surround capability of strategic revenue management capability.
Five or six years under John's.
Leadership, and our interim look different for every brand and leave it on the SKU level. Its an always on capability. We're looking at what's coming at us from an inflation standpoint, we're looking at what's happening in market and then leveraging the full that shrunk Toolkits left Carlos This is trade optimization pack price architecture mix and in the.
U S measured data our average unit prices are up a bit more than our categories and thats really where we want to be in many cases with the leaders in the category and we feel like it's on us to make sure that we have clear pricing strategies at the end of the day our thoughts passes.
As needed that certainly with the tweaks, we need to take pricing at this 0.2% margins. So we weren't closing from retailers from that pricing is never an easy discussion.
Everyone is facing installation. So again, we can walk in and provided good rationale for why we are taking the pricing and more importantly, according to plan for what pricing will look like as market, we've been able to find good acceptance and more importantly, good reflection of the market. So.
It's been a big focus area for us and feel great about what we've done to date and we've got a roadmap for each of our brands and down to the SKU level for the future as well pricing as needed in terms of elasticity as you just touched on this earlier, but we are seeing elasticity. So again, it's not like we're not this is not a historical levels. We've seen elasticity has remained pretty consistent for the quarters.
What we saw in Q3 was consistent with Q2, we expect that to be the case in Q4, not brand and we're going to have more price mix in Q4, So expect to see elasticity as a result, but again not back to historical levels.
In terms of.
In terms of what's happening.
<unk> segments and categories and channels, there's obviously a lot of noise in the data.
Product availability attack consumer mobility to government support levels.
Significant inflation in away from home channel, that's really hard.
But we'll continue to try to do that again elasticities remain constant thats important cleaner number and not a historical levels as well.
Okay. Thank you.
Our next.
She comes from Alexia Howard with Bernstein. Please proceed.
Good morning, everyone.
Alright.
Sure.
Morning could I can I ask about <unk>.
Marketing and innovation obviously.
So much disruption going on in the industry, you've talked about supply chain.
<unk>.
Starting to be resolved I can imagine there's a lot of fires to put out right now, but on the underlying marketing it sounded as though SG&A was down this quarter is that a marketing firm went down is that likely to remain that way until things get easier on the supply chain and then also on the innovation classes that have to be ratcheted back.
Jeff.
The current state of play a bar in the world. Thank you and I'll pass it on.
Alexia.
Really do appreciate that question this is Jeff.
I think the heater a member.
We've gained market share and more than 60% of our categories for four years in a row and there's a reason why we've done that and that's because we really haven't cut back on marketing spending or our levels of innovation in fact, our levels of new product innovation have led most of our categories.
All over the world and we've actually increased our marketing spending over time.
You can't just turn on and off marketing spending on brands that have those brands be effective and the same will be true of innovation. So this whole pandemic. We wanted to break things. We see is that companies that come out of periods like we have been through the ones who invest in their brands, whether that's new product innovation or whether that's marketing are the ones that are successful with regard to the latest quarter then.
Our SG&A is down the number one reason is that our admin costs are down.
Our marketing spending is down just a touch but but that really is a reflection of a very short period of time, but broader picture. We've continued to innovate and we continued our marketing and that's the reason why we are growing share pretty much everywhere around the world.
Our next question comes from Laura.
Hey, good morning, everyone I'd.
I'd like to come back a bit.
Okay.
Pricing.
That's a question I've gotten from some menu versus so firstly.
What is the price what is the mix.
In pet food in the third quarter.
Hi.
If you can do with the convertible notes.
Are you seeing pet parents trading down to smaller bite size as we have seen from some of the brands in Asia.
Sure on price with ICT.
And again as it's one of the major concern procedural products.
That business about from investors and finally could.
Could you please update us on the split between mass and E Commerce.
Specialty.
In Fed fund.
Within the next year. Thank you.
Sure. This is <unk> I'll start with the front part of the question on price mix.
Just to give you a sense here.
We saw about seven points.
Price mix on.
In the quarter.
And then.
Our expectation is that we'll still.
We'll see that step up.
We go forward into Q4.
<unk>.
The rest of your question was about the channel split, which we may have to get back to you just to verify I don't have a stated since you haven't yes, yes, I think flaw.
Okay.
Broadly the channels points, we're at about a third a third a third across food drug and mass is probably a little bit higher in food drug and mass down maybe closer to 40%.
E Commerce and specialty maybe about 30 percentage so in kind of broad terms, that's roughly that's roughly where we are from a channel, but I just wanted to say Craig Cocchi comment on who is looking at maybe on a reported number on an organic basis price mix. It was plus 13 in the quarter.
And that's a.
<unk> got a combination of pricing, which was we did have some pricing go into the market in the quarter. So we only have a partial benefit of that in the quarter and then some mix benefit as well.
You heard us talk about at Cagny, our tasteful launch for instance on on webcast food.
On a price per pound basis, as you know both treats and wet food are advantaged relative to dry and those are growing faster for us.
Both firms take hold as well as from the acquired brands that we've had here recently.
You asked a couple of other questions more detailed questions in terms of elasticity to the pet category is relatively an elastic even in even in recessionary periods is relatively inelastic.
You asked about pack size as one of the things. We've seen is that demand has been so strong in the pet category and we anticipate it going forward and your consumers really are buying what they can find on the shelves and whether thats wet fluid or whether that's dry food.
The availability really is driving consumer acquisition at this point Theres, nothing really not a trade down in pack sizes fair tradeoff and pack sizes really availability is the key because the category is so strong and we believe it's going to remain strong as we saw.
Then I'll cover our opening remarks that we look at the fourth quarter, our pricing will catch up to inflation, which will have a positive impact on our pet margins in the fourth quarter.
Our next question comes with specific.
Thank you and good morning.
Good morning, Chris.
Hi, just had two quick questions. The first would just be maybe one for kofi.
As we think about this pricing cost dynamic in inflation picks up there's going to be double digits I should say in the fourth quarter.
The pricing is accelerating as well obviously, that's implicit in the guidance.
Should we expect the same kind of gross rate of change in gross margin year over year.
And therefore, it should it should improve sequentially, but should be down still year over year I'm, just trying to get some order of magnitude there and then I had a second question maybe more for John .
Under shipment in North American retail here that three point GAAP you called out since we can't quantify the sales shortfall in the quarter or from the service issues you had and.
And I guess also I'm curious about rebuild of inventory or are you in that.
Still hoping to do that and and should you be shipping ahead of consumption directly to keep up with the name here. Thank you.
Yes.
Okay. So let me take the first part of your question.
The price mix step up to be meaningful.
Obviously embedded in our range if you do the squeeze on gross margin would be.
Absolutely a sequential improvement.
And the possibility obviously of.
Gross margin increased year over year.
The shipments versus consumption question Chris.
Net sales lagged Nielsen measured retail sales growth by three points in the quarter as you mentioned.
Really driven by the service issues on RBC Pizza hut snacks, we don't expect.
Shipments <unk> sales in Q4, we also don't expect to rebuild inventories in Q4.
Is that guidance stuff, we can do a bit better service levels improve.
Right.
Likely pushed into fiscal 'twenty, three where we hopefully can get back to more historical levels.
Yes.
Our next question comes from Ken Zaslow with Bank of Montreal. Please proceed.
Hey, good morning, guys.
Good morning.
I just wanted to dig a little deeper into the elasticity question, you said that there's been a little bit of elasticity is it the similar level across all your categories or is there a spectrum of elasticity, where certain categories to show year over.
The carriers are showing a greater variability of elasticity and can you talk about either the second or it's flat.
So this is this is John .
For us for now while we completed over 20 categories.
The U S and our global businesses and I can tell you every category is reacting differently. So we are seeing philosophies that very there's not a single category that has zero elasticity. So when you take price and particularly at the levels of pricing that we're seeing some of that inflation. There. Our elasticity is for sure again, our changes beta.
Categories, but at this points out we are seeing elasticity and everything as I mentioned earlier, though those elasticities are generally holding so again they are not.
Creasing theyre not getting towards historical levels are holding at lower levels than what we've seen in the past.
Okay.
Second question is.
Data analytics can you talk about the speed to which or the real time data analytics.
The idea that.
The service levels came back quicker.
Was it positive.
In your understanding how quickly came back would you be able to understand that it came back in real time or was there a lag in the understanding of when it actually occurred.
And just trying to figure that out is there is real time data and data analytics.
Real time data analytics improved changed or stayed the same and I'll leave it there, but I appreciate it.
Yes.
Weighted to data analytics and in this one I think was pretty simple. So at the end of the day, we had particularly on RBC pizza hut snacks more demand than supply and it was really focused on getting as much as we come out of our plants and the big issue again with not so much capacity on those platforms those getting the ingredients to get our lines running literally 24 hours a day.
So as we get towards the end of the quarter. We did put a full court press. Our teams did a great job and we were able to pump out significantly more volume than what we had originally thought some cases attracted to our region.
Sellers as a result of that.
See some stronger sales team.
<unk> and.
No.
It was more about just sort of $1 billion.
On the product.
Job really significantly improving batch.
Question comes from Nik Modi.
With RBC capital markets. Please proceed.
Yes, Thank you and good morning, everyone.
The consumer you guys talked about at Cagny about so just wanted to see if you had any more evolved thoughts on that and what you have been given what's been happening with inflation.
Would you guys agree with the statement that.
Perhaps the low income you can see it's been a.
Maybe go into August .
A recession sooner rather than later, just given what's going on with all the.
External pressures or is that not.
Not the way you see it.
I guess I would start by saying our I think our success is going to be determined by how fast we can pivot as witnessed by John It is latest comment about supply rather than our ability to predict exactly what's going to happen in the future.
Well pay it on purpose just there are so many moving pieces, we have some people returning back to the office yet demand will be.
Yes, greater than pre pandemic levels for quite a while there is a possibility of our session.
But it's certainly not here yet there is going to be inflation, but how much that inflation is a couple of quarters from now has is yet to be determined.
The state of the consumer and their financial well being of their customers are in a good place now how is that going to look for two quarters now is difficult to say so.
I think our ability to be successful over the last couple of years has really been predicated on another affiliated to determine what's going to happen next part of our ability to react to what's happening and that's what I feel great about and Youll see that impact you see that in North America retail you see it all over the world and so as we think about the future. There are a variety of outcomes that are possible, but I will tell you that.
Been a variety of outcomes over the last three years and we've been successful through all of them and so we're confident that whenever it comes at US next we'll be able to deal with that at least as well as our competitors if not perfectly.
Okay.
Great Frank I think Thats all the time, we have today I appreciate everyone.
Following along and appreciate the good questions. This morning, please feel free to reach out to the IR team. If you have follow ups today, otherwise wish you a good day and we'll talk next quarter.
Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a great day everyone.
Okay.
Yes.
[music].
Great.
Yeah.