Q1 2023 General Mills Inc Earnings Call
Again, it's one four if you would like to register for a question.
And our first question comes from Andrew Lazar with Barclays. You May proceed with your question.
Thank you good morning, everybody.
Good morning, Good morning, Andrew.
Maybe to start off I think the area that diverged from expectations. The most in the quarter was certainly on gross margin, which actually expanded modestly year over year I was hoping you could provide a bit more detail on sort of the drivers of this performance and maybe more importantly, how you see the sustainability and sequential cadence of margin performance through the remainder of the year.
Sure Andrew This is kofi.
I would just note.
We're pleased with.
The start on margins for Q1, the primary driver just as we think about kind of where we are that the H M cost savings plus benefits from price mix.
Offset inflation deleverage in our other sort of operating costs, we've taken out in this environment to show modest expansion in the quarter.
I think as we look forward, we're not going to give guidance largely in recognition of the fact that we are in a highly dynamic environment and still vulnerable to supply chain disruptions. So as we think about the operating environment Theres still a high degree of volatility the biggest variables as you can imagine.
As we think about the gross margin progression for us are going to be volume performance on the level of disruption.
And as we obviously would just take note of the inflationary environment. We just noted that we're expecting modestly higher inflation for the year. So that's kind of a table setting.
Okay, and then I guess second I'm curious some of the volume declines that you're seeing just based on elasticity and let's say North America retail do you have a sense for how much of that is due to let's say the loss of promoted volume versus base or full price volume just given that you and others are not promoting as much in light of current service levels I guess.
I ask this because it can help us get a maybe an even better sense of the health of the underlying business. If you will.
Yes, John do you want to take that.
Yes, good morning, Andrew So as we look at the unit declines the vast majority of that is.
Due to promotional pulling back and thats much frequency, but really adjusting our price points. So in most categories that it's up to about 75% of the unit decline was due to promotional pullback.
Okay very helpful. Thanks, so much.
Our next question comes from David Palmer with Evercore ISI you May proceed with your question.
Hi, I'm, a I'm trying to think of a good follow up on gross gross profit because obviously that was very impressive this quarter I'm wondering how are you viewing your gross profit performance. Your gross margin performance versus your plan. So far maybe you could speak to that.
And I'm.
I'm wondering.
To what degree would you be teasing.
US tease out perhaps some benefits that may not.
Repeat in the future some things that are outside benefits such as.
Some of the market share gains in your higher margin categories or perhaps promotional activity that you don't feel like we'll be its favorable anything that you would do to caution us on gross margin.
Yes, I think sort of broadly beyond the qualitative let me get to the front part of your question.
In the quarter.
Largely what was sort of unexpected and gross margin was.
The level of volume and on the back of the Elasticities that John just alluded to which were lower than we expected going into the quarter and into the beginning of the fiscal year. So that resulted in less less deleverage pressure so that flowed through to gross margin.
I think of as a cautionary note.
Well I would certainly be at the front of the line along with all of our business leaders, including John to want the environment stabilized I think supply chain disruption that they're still very very real.
Categorically well above historical levels and the cost of servicing volume in this business even.
As we think we are doing it competitively in our North America business is just higher and will remain higher until we see that stabilization. So that probably is the first and primary cautionary note and the second is obviously the interaction of pricing and volume and elasticities in this environment remains so hard to read because we are in.
A historical period and it is hard frankly to all those things. So it is sort of a cautionary notes and they all have.
Reasonable.
Isn't really significant impact on gross margins I think the last thing is.
As we noted in the scripted remarks.
We did flag some other headwinds.
Potentially it will flow through to operating margin.
Including.
Increased.
Investment on the business to sustain long term growth.
And the cost of the expected cost of the recall on Hagen Dazs.
If I could just squeeze in just a follow up on your supply chain comment was there improvement through the quarter such that your so called exit rate supply chain friction was less at the end of the quarter than it was at the beginning of the quarter that gives you hope that that will be less.
Going forward.
That's it I think.
Sure.
Fair question.
We entered the year, we expected a very modest improvement.
And the level of supply chain disruption.
The quarter effectively played out in line with those expectations and with the expectations. We set at the beginning of the year, which are.
We're still expecting a categorically higher level of supply chain disruption than our historical experience.
Thanks.
Our next question comes from Chris Growe with Stifel. You May proceed with your question.
Thank you and good morning.
Good morning, Chris.
Hi, I just had a question if I could I think you have an expectation that elasticity will increase from here I think that's a very prudent assumption.
Just curious if youre seeing any signs of that or any indicators that would increase at a level that would indicate that.
Elasticity is increasing or maybe some categories, where youre seeing it perhaps that gives you a bit of a warning sign for the business overall, it seems like it's doing pretty well across the industry. That's when we'll see if there's anything that we're.
We're missing here.
Chris This is Jeff harmening.
I don't think <unk> missed anything so far as Kofi alluded to just a minute ago elasticities have been more favorable to us than we had anticipated.
In the current environment, particularly as consumers have traded to away from home eating to more at home eating consumption is just a matter of as we look through the year.
We would anticipate that elasticities would become a little bit less favorable than they are right now, but still more favorable than they would have been historically and but it's but so far we haven't seen really any change in.
And elasticities.
For US was that it was a positive for the quarter.
That's great. Thank you.
We've had a few gross margin questions. There was quite a great performance. There I just was curious maybe kofi to you and to the facing questions around the gross margin.
Do you still have price increases.
Going into place that needs to take place to offset the inflation and I guess related to that you had this increasingly inflation does that prompt you to take more price in retail overall. Thank you.
No I appreciate that we have most most of the vast majority of our pricing.
In the market to address or announced to address the inflation that we see and including the revised modest provision.
And the inflationary guidance.
And the last from being in our North America Foodservice business, where we've taken some additional steps.
To address costs.
<unk> of goods as we saw more inflation in the quarter.
Then we did price mix so.
<unk>.
We're in a place where we feel comfortable we've got this sort of bounded.
Okay, great. Thank you.
Okay.
Our next question comes from Cody Ross with UBS you May proceed with your question.
Hey, good morning, Thank you for taking our questions I'm, just going to nitpick, a little bit here, you noted supply chain headwinds and Pat can we unpack that a little bit which brands and categories are you seeing the most impact and I'm, just a little bit surprised that given the demand that youre seeing are demanded category you were not able to deliver.
Total sales dollars in line with the fourth quarter of last year.
Yes, So let me, let me take that Kofi and I'll unpack it a little bit in a few of them in our packet even more let me, let me know, but I would say first I would remind everybody on the call that we grew our pet business double digits, yet again in the first quarter and we've increased our pet sales of $1 billion over the last four years and so while it may not have been the runway run rate.
Q4 is still growing in double digits. So I guess that would be my first bit of context.
The second I would always say is that I think it's also important to remember at Q1 last year. Our sales were really really strong and that's not only because we had capacity, but also we're working off some inventory. So we're selling not only everything we can make first quarter of last year, but we are also.
But we're also drawing down inventory levels product, we had made previously and so the comparisons are particularly difficult by the way as they are in the second quarter of this year as well and so the comparisons are really difficult when we look at so when we look at our performance.
I would say our supply chain.
Improved modestly throughout.
Throughout the quarter and Pat our service levels improved modestly in line with our expectations.
And we actually grew share in the wet pet food category, and we lost share in trees, dry and Thats, where we don't have the capacity.
Just to answer your question just a little further.
As a reminder, we anticipate having more capacity for treats coming online in the third quarter and January of this year and then drive is going to take another few quarters to get in line and that's important to note because as we think about our second quarter and Pat will have a lot of costs from increasing service in the business whether through external supply chain.
Or through.
Through adding capacity on treats and warehouse space in all of those things, but we don't yet have the sales associated with it. So you can expect our second quarter and Pat to be.
A little bit challenged but we're highly confident that will rebound in the third and fourth quarters of this year.
And Thats <unk> margin that youre, referring to or not sales I just want to make sure I understand that.
Yes, I would say primarily the margin piece, yes.
Got you that's helpful. And then one more quick question if I may.
You noted in your prepared remarks plans to step up brand building and investments for growth, which categories and brands do you see it amongst opportunity. Thank you.
Well I would say.
Over the long run we see the most opportunity in our global brands and our local gem businesses and so they include businesses like pad in Hagen Dazs and nature Valley, probably the biggest upside potential but also some of our local gen businesses like <unk>, where we highlighted during the quarter and erratic capacity is now a $1 billion brand for us.
<unk>, which is a $1 billion brand Wanchai ferry dumplings in China. So the biggest areas of opportunity for us are going to be probably the ones that you would anticipate which are our big billion dollar brands and global categories as well as some of our local <unk> brand, but I just mentioned.
Okay.
Our next question comes from Steve Powers with Deutsche Bank. You May proceed with your question.
Hey, Thanks, and good morning.
I'm going to.
What I said on gross margin again.
And then a follow up on pet on on the gross margin. So acknowledging the uncertainty around volume progression. The supply questions correctly that you mentioned, we just focus on the phasing of run rate inflation.
<unk> two pricing benefits.
HMS benefits.
Yes.
And as those things get tougher from from <unk> before they get better or it feels like you're you're relatively well caught up between pricing and productivity benefits relative to the rate of inflation as we run through the first quarter. So I'm just trying to get a sense of if that's correct and then.
So if things get worse for some reason before they get better.
Well.
I'd say broadly.
<unk>.
We are modestly higher on an inflation in the front half.
And modestly.
Probably be appropriate, but I think on balance. It is it is still a relatively balanced year in terms of our inflation call between 14 and 15%.
Yes.
Okay.
Yesterday. It doesn't go ahead, just just I would just say from a pricing standpoint.
We will we will start to rollover more meaningful pricing in the back half of this year.
And obviously, we saw strong price mix come through in Q1.
That's likely similar in Q2, and then it decelerates as we start as we start comping more meaningful step ups last year.
Yeah, Okay. That's fair thank you very much.
And then on the pet question.
Yeah.
Given sort of the tightness of supply and it looks like you're obviously, making.
Efforts to bring supply online, but it feels like.
The real relief isn't going to isn't going to come at this point until fiscal 'twenty four we've seen with <unk>.
<unk> in the space.
Start to start to buy up capacity to sort of accelerate that.
Incremental capacity online sooner.
Wanted to kind of play that.
<unk> and just get a sense for is that something you would consider as we think about capital allocation M&A strategies.
Adding capacity through acquisition is something that's on the table or are you more inclined to stick to building it out and we've been working through co Packers.
Yes, Thanks, very very fair question, Let me, let me make sure that there's one point I want to make sure or clarify because you talked about relief coming in fiscal 'twenty four I would say I think about it in two pieces in and Im not trying to nitpick, but I think this is important our tree, we're lacking capacity and treat and dry entrees forget we'll have it we'll bring on external capacity in.
Third quarter of this year, so we don't need to wait until fiscal 'twenty four for a treat capacity and where we're really short on that we bought a great business.
Nudges and true choose and so forth we're branding it blue Buffalo, So really excited what we can do we just need the capacity and we don't need to go out and buy additional capacity for that because we will have a we have come in January on the dry. It. It is true that it is going to take a while for us to get to get dry capacity and if something became available whether it's through external supply chain.
Or buying or another source.
The question would we be willing to look at that absolutely we'd be willing to look at that if it would speed up our rate instead of doing it internally and we haven't had that option yet present itself, but we're going to we would certainly evaluate that and the speed the market of that and the cost relative to doing it ourselves.
Great. Okay. Thank you very much.
Yeah.
Yes.
Yes.
Yeah.
Our next question comes from Jason English with Goldman Sachs. You May proceed with your question.
Hey, folks thanks, Dara Thanks for slipping me in.
And congrats on a strong start to the year.
Im going to come back to Pat.
A different question.
So first the capacity that you are going to be bringing on and drive can you could you give us some context in terms of like quantify how much how much that's going to add for you in fiscal 'twenty four.
Jason We said it was going to be about upwards of $150 million of capital that we're putting in and we've talked about that on the Q4 call, but beyond that we haven't we haven't quantified what percentage of additional capacity, but it will be meaningful it'll be meaningful chunk to add.
Okay. Okay.
And you are not alone in that.
Police, adding Lars it's adding hills is adding as Steve mentioned, both organically and Inorganically Simmons of that he felt that like there's a litany of small manufacturers. There is a lot of capacity and bill it seems like it's coming in.
The wake of Covid as we as we start to anniversary a pull forward of pet adoption in other words. It seems like it's coming at a time when there's not a lot of volume growth in the industry.
How does this play out.
If we think forward like.
What's the risk that Pat gets.
It's pretty darn competitive with an overbuild of capacity becomes becomes a pretty promotional category.
Yes.
I understand the rationale behind the question about promotional activity in pad, usually isn't very productive effort.
Because demand is pretty inelastic and consumers tend to be very loyal I would also add that even in the even pre pandemic as you probably realized J as you probably remember this is that we are growing blue Buffalo double digits already even in a category that was barely growing in terms of pound before that in the most import.
The thing to remember is not the trend of the pandemic, but as the Humanization trend, which I know you will remember and that's been going on for 15 years, or so and blue Buffalo is very well positioned to grow in that in that market. So so even in the face of even the face of a category that sees a low growth and pounds blue Buffalo participate in the fastest.
Part of a very attractive category with the best brand and so we're confident no matter what happens.
The rest of the category that Blue Buffalo is going to be well positioned as we look to the future.
Yes, no doubt I'm not argue that premium position should fade away and to that point.
You've got double digit growth this quarter I think Edwin it's double digit growth because the inflation out there can you unpack maybe that that price mix line been for us like how much of it is just pass through of higher cost and how much of it is the mix the <unk> that youre talking about.
Yeah.
It's really a combination so we did we have seen meaningful.
Meaningful pricing SRM actions on the business.
Obviously, the business itself is high mix, but the larger largest amount is really what we're seeing from an SRM standpoint in the quarter.
Got it alright, thanks, a lot guys I'll pass it on.
Thanks, Ed.
Yeah.
Our next question comes from Bryan Spillane with Bank of America. You May proceed with your question.
Hey, good morning, guys.
Good morning.
Wanted to ask a question about foodservice.
And I guess looking at the margins in the quarter I know you've called out in the press release that maybe pricing has lagged.
Outside of flour milling. So can you just talk about.
A couple of things one.
How much pricing do you think you're going to need to recover margins can margins sort of recover in the course of <unk>.
Fiscal 'twenty three and then.
Maybe separate from that is there any.
I guess like stranded cost or dis synergy related to the.
<unk>.
Thats kind of reflected there. So is it more is it more than just inflation and is there any like stranded cost or.
Anything related to the re segmentation that's affecting it in the near term.
Kofi probably getting into the specifics of this but this is Jeff let me just.
It's a it's a lot to unpack in foodservice this quarter I guess, one of the takeaways topline I would share with you is that we have high confidence in our foodservice business and and certainly in the fact that we can grow into the future and that the margins will improve so I want you to know there's there's nothing fundamentally Mrs.
In our foodservice business, having said that it was there's a lot going on in this particular quarter, so probably like Kobe explain a little bit of that sure and let me. Let me just start with your reference to index flower pricing or index pricing on our bakery flower. So as a reminder that is.
Profit neutral dollar profit neutral so as prices go up to cover costs.
Closer to $1 fixed dollar profit. So as you think about that a good chunk of the price mix you saw in the business, which is about 21 points was actually driven by index pricing on the rest of the business. We did not see enough price mix come through to cover fully cover the inflation in.
In the quarter, we subsequently have additional pricing.
To work with pass through the customers and we would expect in the balance of the year, we will continue to see.
Improvement.
In the margin prospects for the business.
To your question about stranded costs. So as we just as a reminder, we decoupled the convenience.
Business, primarily focused on convenience stores and other smaller convenience channels and put that into into North America retail as part of the snacks business and with that we actually moved administrative structure as well. So there isn't really an overhang from from stranded costs all of that kind of went with the business. So this.
Is it pretty fair representation of the underlying foodservice business margins.
Okay. So it's some of this is just the math of.
Flower prices going up you get the dollar profits, but its profit neutral and the rest is really just going to be catching up to inflation I guess in the non flour milling piece is that good way.
Exactly the way I would put it you got it Brian just really cool.
If you put a finer point on that.
Pricing going up for index pricing with no incremental profit dollars coming whether it is actually margin negative for the for the segment in the quarter to tune of about 200 basis points. So yes, yes.
Which is obviously a big portion of Youre seeing that flow through in this quarter, yes.
Perfect. Thanks, Jeff Thanks, guys I appreciate it.
You bet.
Our next question comes from Jonathan Feeney with consumer Edge. You May proceed with your question.
Hey, good morning, Thanks, very much two questions first.
Wanted to on the 14th to dig in on the 40% to 50% expected Cogs inflation could you comment if he can anymore about how much of that is.
Input costs relative to.
All the other structural inflationary things in Japan, just a flavor for that.
Input cost the vast majority of that will be helpful. My second question would be more broadly in the U S promotional levels merchandising levels are.
If you want to use.
The syndicated data something like 10 points off their pre COVID-19 normal due.
Our retailers expecting they get back to that pre COVID-19 normal at some point. Thanks.
Yeah, well, let me start on the front part of the question and then.
I'll hand, the second part probably to John or Jeff.
As you think about our call on modestly higher inflation, we're seeing a couple of things go on but primarily reflects.
The burden of higher labor energy and transportation costs on our suppliers in particular on.
Items in our Cogs that have high conversion.
So when we think about your value added ingredients, such as not fruit flavors et cetera. So the pass through impact of that second is that we as we've been working our way through the quarter and on the expectation that we will see higher volume flow through.
As a result of lower elasticities unexpected we've outstripped coverage in some areas. So we are actually buying.
Out in the back of the year, Ed and exposed to more spot spot market prices. So those are the primary drivers as we think about it and then just as a reminder, we.
We started taking coverage positions.
At the turn of the calendar year for this year and our coverage position still.
Reasonably strong relative to the spot prices, so we're effectively pretty.
In the money as you think about our.
Coverage. So those are those are some critical things just as you think about the guidance and how we're how we're thinking about the balance of the year on an inflation and then I'll, let John or Jeff handle the <unk>.
Second part of your question, Yes, Let me this is Jeff Let me, let me take that one I think.
As I said at a conference a couple of weeks ago.
Do you think the.
Risk promotions ramping up significantly over the next couple of quarters is quite low and the reason is that you kind of have to believe three things to be true and are referred to see a lot of promotions increased the first you'd have to think that this inflationary cycle, we are different than the ones that you've seen before and I was running a business in the last inflationary cycle here at General Mills.
And what we see is that there isn't really a sharp increase in promotions coming out of an inflationary cycle. So you have to think that the environment would be different. The second thing is that you have to believe the disruption in the supply chain are going to change significantly from where they are now in and the third is that you'd have to see cogs inflation not only decelerated, but also.
Got to absolutely deflation and the fact is that I think you need all three of those things, we don't see any of those things.
As we see right now we just increased our guidance on inflation a little bit. We've told you that supply chain disruptions remain elevated they are about two times, what they were before the pandemic even if they are below where they were a year ago and then there's inflationary cycle as we see playing out so but.
That's what we think that the risk is relatively low given what I just laid out.
Thanks very helpful.
Thank you.
Our next question comes from Ken Zaslow with Bank of Montreal, You May proceed with your question.
Good morning, guys.
Good morning, good evening.
Two questions. One is what are your expectations for your innovation progression this year and next relative to the last two years.
Yeah.
I would say in it.
In aggregate, we would expect our R. R.
Levels of innovation to roughly flow are the same as they have in prior years I would say the one exception to that would probably be our pet business.
Clearly when you're capacity constrained innovating when you're capacity constrained as a little bit difficult and so in pet we would see our innovation weighted to the second half of the year and we'll talk about that more in December were actually quite pleased with some of the innovation that we see coming a lot of it is on our established businesses and some of it some new products, but in pet I would say that we probably have more coming in the.
Half of the year in the first half of the year, but in general the promotion of the innovation timing is roughly similar.
So you don't think that Youll accelerated given your supply constraints being a little bit I would've thought you would've told me.
Your innovation will actually accelerate over the next two years given all the things that have happened between the consumers.
But I hear what you're saying I'm, just curious and then.
My next question is as you go forward a couple of years.
Europe gross profit expand it.
<unk> become what you think it's going to be in volume.
Kind of subside, a little bit or do you truly need the volume.
Operating leverage because that seems to be one of the points you pointed to as a key core reason for gross margin expansion I was just trying to get a little color on that and I. Appreciate your time.
Sure sure I appreciate the question this is Kobe.
So I would just note our gross margins are down still relative to the pre pandemic. So fiscal 19, probably about 100 140 basis points or so.
And I think the goal for us during this inflationary period has really been to drive our <unk> cost savings, which remain roughly 3% to 4% and our price mix benefits from from SRM to be enough to offset inflation and I think actually as we measure it we have done a pretty good job of.
Kind of covering inflation with the combination of those two things. The reason our gross margins are down versus that period because of the cost of dealing with.
Supply chain disruptions and additional cost to operate and serve.
The business in this environment, so those costs when the supply chain environment stabilize or the things that we would expect to be able to take out in relatively short order with targeted H M M and productivity actions as well as changes in our supply footprint.
And that I think gives us confidence that.
As we step out of this environment, we will be able to get our gross margins back to sort of pre pandemic levels and a more stable environment.
Okay I appreciate it thanks guys.
You bet.
Our next question comes from Michael Library with Piper Sandler You May proceed with your question.
Thank you good morning.
Morning, Ryan.
Yes.
You'd mentioned consumers shifting back to more food at home as part of whats probably softening elasticities, but.
Organic growth in foodservice outpace North America retail and even going back a few years I know, there's some moving parts maybe the comparisons are not perfect, but it looks like even against the physical.
<unk> 'twenty.
Growing faster is there is that is that driven by.
Relation and index pricing or is there just that much momentum in foodservice maybe.
Maybe help us reconcile this.
How strong the numbers look versus some of those.
It's a very logical color about consumer shifting back to more at home.
Michael you're you're you're right in the sense that it is logical to assume that foodservice would move in a different direction.
Then with our retail business given the trend at home consumption, but there are two things playing into this.
For the quarter and one thing flying over to more generally in the quarter remember we have a lot of index pricing.
On bakery flour, which is.
Which really.
Inflates the sales number on R. R.
In our foodservice business I mean, the accounting is right, but it just it makes it look higher than it would be otherwise and so that really all of our growth this quarter and foodservice as a result of that index pricing. That's the first thing I would tell you. The second is that even given that though our foodservice business doesn't move in perfect correlation inverse correlation with.
Our retail business, because we have a really big school business and so we're not only servicing our restaurants, because a significant part that we sell a cereal and yogurt and other baked goods through our education, and we're really really good at that and so that demand tends to be a little bit more and elastic and so.
Even though it may seem logical in the face of it to have foodservice move inversely with retail and point of fact, our it doesn't move perfectly that way for that reason, even even even if.
We take out of consideration.
Index pricing.
Okay. That's helpful. And then can I just follow up on.
You called out higher SG&A.
Pet is one of the margin drivers are having an impact on margin.
Okay.
Maybe just behind that I guess I'm just curious because.
If there's capacity constraints.
Two of the biggest pieces of that business it wouldn't seem like its higher marketing.
Is it just sort of a.
Step up in the G&A or what's behind the SG&A growth there.
Yes, no we've had.
Along with most of our retail businesses modest increases in our spending behind data and analytics. So that would be a big chunk as you think about what's driving SG&A growth in the comp.
That would be more of it obviously.
Obviously, we've maintained modest levels of.
Increases in media as we step through and we're trying to manage through it.
The supply pressure on this business and Michael one other thing is you've got now a full quarter of the types of business that we acquired last year. So there's a bit of a step up in SG&A, just just by the math of adding an incremental business there.
Okay, great. Thanks for all that.
You bet.
Okay. I think we're gonna go ahead and wrap up there I appreciate everyone's time and good questions and.
Please feel free to follow up over the course of the day with the IR team and we look forward to being in touch next quarter.
That does conclude the conference call for today, we thank you for your participation and we ask that you. Please disconnect your lines.
Sure.
Yes.
Okay.
Okay.