Q3 2022 General Mills Inc Earnings Call - Pre-Recorded Management Remarks

First we continue to compete effectively by executing our accelerate strategy.

Second we are successfully navigating the dynamic supply chain environment and.

And third we are executing our portfolio and organizational reshaping actions without disrupting our base business.

Let me share a few examples of our performance across these three priorities.

General Mills brands are winning in the marketplace.

We're competing effectively in fiscal 2022, holding or growing market share and 66% of our priority businesses year to date.

This includes important global platforms, such as cereal pet food ice cream and Mexican food as well as local gen brands like Pillsbury refrigerated dough and our fruit snacks business in the U S. Once I, a ferry frozen dumplings in China, and Yoki, and Kitano snacks, and seasonings and Brazil.

We are winning in an operating environment that remains highly volatile.

All industry continues to face transportation challenges and labor shortages.

Our suppliers are facing these same constraints leading to significant disruptions for our business.

At Cagny, we called out the supply driven challenges on our U S refrigerated dough pizza and our hot snacks platforms that were causing lower customer service and reduced on shelf availability for those businesses.

We responded urgently to address the problems are actions drove a sharper rebound than we expected at the end of the third quarter and we're seeing that improvement continue into Q4.

Not only have supply chain disruption has been a challenge, but we are also facing historic levels of input cost inflation.

Our market basket measured at spot rates has been at a multi decade high in recent months and Russia's invasion of Ukraine has driven further spot market inflation and volatility.

Critically we've seen very limited impact from those movements on our fiscal 'twenty, two inflation outlook, which remains at 8% to 9% across our full cost of goods, including raw and packaging materials manufacturing and logistics.

Our hedging strategy is working reducing input cost volatility and increasing visibility, which gives us more time to take actions and importantly, we are covered on certain key commodities at competitive prices through calendar 2022.

We continue to rely on <unk> cost savings and SRM pricing actions to address rising cost.

As we've shared before we've taken broad based SRM actions across our portfolio. This year in response to elevated inflation.

Our organic price mix has increased each quarter, reaching 7% in Q3, and we expect another step up in Q4 as we get the full impact of the SRM actions, we put in place in recent months looking.

Looking ahead, we remain committed to taking the necessary actions to address rising cost and protect our bottom line.

We've also made progress on our third priority, including streamlining and realigning our operating structure.

This includes shifting our U S convenience store business into our North America retail segment to better leverage our scale and unlock omnichannel snacking growth.

Ah renamed North America Foodservice segment is now exclusively focused on the U S and Canadian foodservice channels.

And with the completion of our European divestitures, we've consolidated our Asia, and Latin America, and Europe , and Australia segments into a single international reporting unit to simplify our global operations.

In total these changes position our businesses for greater competitiveness, and agility and strengthen our ability to deliver long term profitable growth in line with our accelerated strategy.

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 we shared with you earlier this fiscal year each quarter, we intend to highlight in ESG related topics and discuss our progress and future goals.

This quarter, we focus our attention on Russia's invasion of Ukraine, and the growing humanitarian crisis in the region.

We extend our deepest sympathies and condolences to the people of Ukraine, and we've taken action to support those impacted in Ukraine and neighboring countries with a particular focus on food security.

Through General Mills, and our cereal partners worldwide joint venture, we have provided funding to our partners at the European Food Banks Federation.

And the International Federation of Red Cross societies, and we've made direct food donations for people in need our employees are also supporting these initiatives through our charitable gift matching program.

To conclude I like the way, we're competing and managing through this challenging environment better than our competition.

We are growing our core while making important changes to our portfolio to position us for stronger more profitable growth over the long term.

And we're doing what we said we would do.

With fiscal 'twenty, two marking the fourth consecutive year, where we expect to meet or exceed our key financial targets. We have good momentum and we are set up to continue to win as we exit the pandemic and move into that next phase of growth.

With that I will pass it over to coffee to review our financial performance in the quarter.

Thanks, Jeff and Hello, everyone.

Let's start with our third quarter financial results on slide 14.

Net sales of $4 $5 billion were flat in the quarter.

<unk> net sales grew 4% driven by positive price mix from a broad based SRM actions, partially offset by lower pound volume adjusted operating profit of $676 million was down 6% in constant currency, driven primarily by input cost inflation supply chain deleverage in <unk>.

Higher other cost of goods sold and lower volume, partially offset by positive price mix HSM cost savings and lower SG&A expenses.

Adjusted diluted earnings per share of <unk> 84 were up 2% in constant currency due primarily to lower net interest expense and higher after tax JV earnings partially offset by lower adjusted operating profit.

On a two year compound growth basis third quarter organic net sales grew 5% adjusted operating profit decreased 1% in constant currency and adjusted diluted EPS grew 4% in constant currency.

Slide 15 summarizes the components of our reported net sales in the quarter organic net sales grew 4% with seven points of positive organic price mix, partially offset by a four point headwind from lower organic pound volume.

Our net acquisition and divestiture activity reduced net sales growth by three points in the quarter.

Now, let's turn to segment results, beginning with North America retail on slide 16.

Note that in addition to shifting our convenience store business into narrow this quarter. We've also streamline the segment's operating unit structure, most notably by combining U S cereal and U S yogurt into a single U S morning Foods operating unit.

Third quarter organic net sales for <unk> were up 1% driven by positive price mix, partially offset by lower volume.

<unk> had a difficult comparison this quarter with organic net sales up 11% a year ago.

On a two year compound growth basis third quarter organic net sales were up 6%.

Net sales growth lagged Nielsen measured retail sales growth by roughly three points in the quarter driven by the acute supply shortages that Jeff mentioned earlier on refrigerated dough pizza and hot snacks.

As Jeff mentioned, we started to see improved customer service on these platforms in the last few weeks of Q3, and we expect further service improvement in Q4.

From an operating unit standpoint, third quarter net sales growth and U S morning Foods and U S. Snacks was partially offset by a decline in U S meals and baking solutions.

We continue to compete effectively with 56% of our U S retail business holding or growing share year to date.

Third quarter constant currency segment operating profit decreased 3%, driven primarily by higher input costs and lower volume, partially offset by a positive price mix and lower SG&A expenses.

On a two year compound growth basis constant currency segment operating profit was up 5%.

Third quarter net sales for our pet segment increased 30%, including 14 points of benefit from the pet treats acquisition organic net sales were up 16% in the quarter, including double digit growth in cat food and treats and high single digit growth in dog food and treats.

On a two year compound growth basis third quarter organic net sales were up 15%.

Fiscal year to date, the Blue Buffalo brand continued to drive strong retail sales growth and market share gains in measured channels and then just two genes and top choose brands generated year to date retail sales growth of 21%.

On the bottom line constant currency segment operating profit increased 8% driven primarily by a positive price mix and higher volume, including benefits from the <unk> acquisition, partially offset by higher input costs and higher SG&A expenses.

On a two year compound growth basis constant currency segment operating profit also increased 8%.

Turning to slide 18 third quarter organic net sales for North America Foodservice grew 22%, reflecting increased demand in away from home food channels, including schools restaurants and margin as well as benefits from market index pricing on bakery flour.

On a two year compound growth basis third quarter organic net sales were down 3%.

Segment operating profit decreased 13% in the quarter driven by higher input costs, partially offset by positive price mix on a two year compound growth basis constant currency segment operating profit decreased 29%.

Third quarter net sales for our international segment were down 23%, primarily reflecting the divestiture of our European yogurt and build businesses.

Organic net sales were down 1%, reflecting a difficult comparison to year ago results that grew 10%.

On a two year compound growth basis organic net sales increased 4%.

We continue to compete effectively including growing year to date market share in Mexican food and ice cream.

Third quarter segment operating profit was down 16% in constant currency, driven primarily by lower volume, including the impact of the European yogurt and Doe divestiture.

And higher input costs, partially offset by positive price mix and lower SG&A expenses.

On a two year compound growth basis constant currency segment operating profit was up 1%.

Slide 20 summarizes our joint venture results in the third quarter.

Cereal partners worldwide net sales increased 1% in constant currency driven by positive price mix, partially offset by lower volume.

<unk>, Japan net sales were up 9% in constant currency, driven primarily by strong performance on core products and improved distribution.

Third quarter constant currency after tax earnings from joint ventures increased to $30 million versus $12 million, a year ago, driven by higher profit cereal partners worldwide.

Yeah.

Now, let's turn to total company margin results on slide 21.

As we expected we cut our Q2 margin decline roughly in half with Q3, adjusted gross margin down 160 basis points.

Increased benefits from positive price mix and continued <unk> cost savings outweighed a step up in the input cost inflation in the quarter, but were not enough to fully offset headwinds from supply chain disruptions and other cost of goods sold.

Adjusted operating profit margin in the quarter was down 90 basis points driven by lower adjusted gross margin, partially offset by lower SG&A expenses.

Slide 22 summarizes other noteworthy Q3 income statement items.

Adjusted unallocated corporate expenses increased by $19 million in the quarter.

Net interest expense decreased $20 million driven by lower average debt balances.

The adjusted effective tax rate for the quarter was 21% compared to 21, 6% a year ago due primarily to favorable earnings mix by market and.

And average diluted shares outstanding were down, 1%, reflecting our share repurchase activity.

Our fiscal 'twenty two year to date results are summarized on slide 23.

Net sales of $14 billion were up 4%.

Organic net sales also increased 4% driven by positive organic price mix year.

Year to date adjusted operating profit of $2 3 billion decreased 5% in constant currency and adjusted diluted earnings per share of $2 82 were down 2% in constant currency on a two year compound growth basis organic net sales were up 6% constant currency adjusted operating.

<unk> was up 3% and constant currency adjusted diluted EPS was up 6%.

Turning to the balance sheet and cash flow.

Nine month operating cash flow of more than $2 2 billion was up 1% versus last year.

Our core working capital balance decreased $159 million from a year ago.

Due to an increase in accounts payable and timing and inventory.

Year to date capital investments totaled $351 million.

And we've returned nearly $1 4 billion in cash to shareholders in the first nine months of the year through dividends and net share repurchases.

On slide 25, we've provided an update on some key financial assumptions for the fourth quarter of fiscal 2022.

We expect price mix to step up again in the fourth quarter, reflecting a full quarter of benefit from SRM actions that went into effect in recent months on the cost side. We continue to expect double digit input cost inflation in the fourth quarter and 8% to 9% inflation for the full year.

We are close to fully covered on our ingredients and packaging materials requirements in fiscal 2022.

We expect the operating environment will remain challenging and volatile as we close out the year.

We anticipate demand will remain elevated and we expect the improvement in customer service that we saw at the end of the third quarter were carry into Q4, there will still be well below normal service levels.

As Jeff mentioned earlier, we've raised our full year outlook for fiscal 2022, which you can see on slide 26.

We now expect to generate organic net sales growth of approximately 5%, which is at the upper end of our prior range.

We expect constant currency adjusted operating profit to range between down, 2% and flat compared to our previous range of down four to down 1%.

Reflecting the flow through of stronger topline growth.

Constant currency adjusted diluted earnings per share are now expected to range between flat and up 2% compared to our prior guidance between down 2% and up 1% and we continue to expect free cash flow conversion will be at least 95% of the adjusted after tax earnings.

Let me now turn it back to Jeff for some closing remarks.

Thanks, Colby, let me close by saying that I'm proud of the way, we're executing and competing in such a challenging environment.

We moved quickly to address recent supply disruptions and exited Q3 with improved momentum.

We expect to generate strong growth in Q4 and deliver full year results that are ahead of our original guidance.

And we remain focused on executing our accelerate strategy and driving superior shareholder returns over the long term.

Thank you for your time. This morning. This concludes our prepared remarks and <unk>.

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.