Q1 2024 General Mills Inc Earnings Call

Greetings and welcome to the General Mills Q1 fiscal 'twenty four earnings call.

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 September 28, 2023, I would now like to turn the conference over to Mr. Jeff Siemon VP of Investor Relations. Please go ahead.

Thank you Frank and good morning, everyone. Thanks for joining us today for our Q&A session on our first quarter fiscal 2024 results.

I hope everyone had time to preview our press release listened to our prepared remarks and view our presentation materials, which we made available. This morning on our Investor Relations website.

And to note that in our Q&A session. We may make forward looking statements that are based on our current views and assumptions. Please.

Please refer to this mornings press release for factors that could impact forward looking statements and for reconciliations of non-GAAP information, which may be discussed on today's call.

I'm here this morning, with Jeff Harmening, our chairman and CEO Kofi Bruce our CFO and John Doody Group President for our North America retail segment.

So let's go ahead and get to the first question. Frank can you. Please get us started.

Thank you.

If you would like to register a question. Please press the one followed by the four on your telephone.

Our first question comes from Ken Goldman with Jpmorgan. Please proceed.

Hi, Thank you.

You mentioned, the consumers have been shifting purchases to customers and channels not necessarily tracked by Nielsen.

Just curious is this trend has taken place have you seen any of your more traditional attract customers I guess those FTM.

Kind of leaning more into price to try and retain traffic and tonnage and if theyre not yet is this something maybe we might expect to see just given past history.

So in Canada, So Jeff arm and again, you're right. We did see we did see increased traction in non measured channels in the first quarter and we'd expect that to continue throughout the year, but John do you want to give all the color commentary on that.

Yeah, absolutely. So we did see non measured channels grow at a double digit rate in the quarter, which.

Obviously drove.

Rns ahead of movement, a bit <unk> as you look at traditional grocery we see frequency up a bit above 5%, but price points up dramatically versus pre pandemic.

We continue to invest in our SRM tools and as a result of that we don't expect to see deep discounting as we model our retailers model. It just doesn't add up at the end of the day. So we're seeing a bit more frequency, but price points up versus pre pandemic for short.

Got it and then thank you for that I guess.

Quickly even the street's modeling just looking at <unk> low single digit organic sales growth is this kind of a reasonable range within the context of youre not providing quarterly guidance just trying to get a little bit of color. There is especially in light of scanner data, maybe suggesting that.

Performance in our is heading downward a little bit in recent weeks I just didn't know if that's what you were looking for.

Yes.

Go ahead John .

Yes, so I think that first of all Youre right were not going to give guidance on a quarter either for the segment for the company, but I'll give you a little bit of color commentary on the year in the guidance because I think thats, probably as important I mean importantly, as we as we looked at 3% to 4% sales growth I think it is important to remember that to know that we don't really expect a huge rebound in our.

In our pet business for the rest of this year and due to all the factors we've talked about I will say as importantly, our foodservice business is growing nicely and we see continued growth in that in our international business is up really really nicely as well.

Yes, we had the haagen dazs recall that we're lapping in Hagen Dazs responded nicely up 20% that's not the only thing growing our European business was up double digits and growing 70% on our bars business in France in our India business. Our distributor businesses are also growing and so I think it's important to note that even while pet didn't quite meet our expectations for the first quarter is going to be a challenging this.

Here, we have two other big segments that are going to do quite well.

Is it kind of as it comes to <unk>.

We're executing really well and our I mean, our distribution is up the quality of our merchandising are up our new products are doing well.

And you might say, okay, well, then what happened to share performance in the first quarter and I guess I'd just remind you that our first quarter is our toughest from a share perspective, given the pricing that we're lapping and our competitors gains that they've made and getting their supply chains back up in order and ours were already really good ours aren't privy to so as we look at the rest of the year and <unk> for those less.

And we do expect our volumes to improve importantly, they don't have to get the positive but you just have to improve from where they are now and part of that is really going to be gaining share as as pricing gets lapped as competition comparisons getting tougher and as our get easier because of this.

Supply chain challenges and we think and look with all of that happening as we continue to execute well on our business will continue to get better throughout the year.

Yes.

Sorry color on it on shelf availability, so Jeff touched on that in our on shelf availability is better this year than last year and that's great.

Remarkably different as our competitors, particularly private label. So if you look at private private label on shelf availability categories like grain and RPG, It's up 10 points year over year. So while that was a tailwind for us where we are on the shelves from private label wasn't it's a headwind this year that comp gets better as we move throughout the year and that will help us as we can.

Expect to see sequential volume improvement.

Makes sense. Thanks, so much.

Our next question comes from Robert Moscow with TD Cowen. Please proceed.

Hi, everybody. Thanks for the question.

I wanted to know.

I guess two questions you've had some very significant marketing investment in first quarter.

But this is a very tough volume environment and.

I want to know.

What's your plan for marketing investment for the rest of the year and do you have.

Yeah would you.

Keep the same amount of pressure on or would you change tactics mid year, if youre not getting the volume that you expect.

Yes, Rob first of all this is Jeff welcome back good to hear good to hear you again.

<unk> you want to you want to take this yes, so youre correct in noting Rob that we were up double digits in the first quarter on our media spend.

I would expect for the balance of the year based on everything we see right now we would expect our media spend to grow at least in line with sales.

This environment I think it's important for us to put support brand support behind quality IV is still.

And especially so as we see the environment stabilize.

Okay can I ask a follow up.

Youre snacking business has improved in the quarter it had some ups and downs.

And in the press you were mentioned as being interested in a major snacking company.

As you look at your M&A objectives.

Knocking a.

A key area in which you want to expand and possibly through M&A.

Yeah.

Yeah, Rob So this is Jeff.

Clearly, we're not going to comment.

Comment on rumors or what has or hasn't transpired in the marketplace no matter, whose transaction. It is what I would tell you is that for us our objectives with M&A really havent changed I mean, we've been we've been very consistent maybe boring over the last couple of years and then we will look to add about 50 basis points of growth if we can.

Through both acquisitions and divestitures they'll things that'll be bolt on in nature by which I mean, where we can use our current capabilities and our R.

Our knowledge of channels and technology in order to generate both sales growth and some synergies.

And we do have the balance sheet in order to be able to do that well I will also remind you is that we've also said we've been disciplined and we are disciplined and so to the extent, we see something that we like on acquisitions, we will certainly do that but only only at a price that makes sense for our investors and so I'll, let you don't know that no matter, what's transpired over the last.

Little while and M&A.

Our position hasn't really changed that.

That includes that I've also read commentary our food companies looking at M&A now because their volumes are down and the answer is no I mean that we don't play the short term game. When it comes in we go get brands, we like we hold them for a long time, we grow and we've been doing that for 165 years and what can it continue to do that and so.

What isn't going to be the case is that we see volumes going in a certain direction and therefore, we have to make up I guess, that's really not part of our plan.

Got it makes sense thanks, Jeff thank.

Thank you Rob.

Our next question comes from Andrew Lazar with Barclays. Please proceed.

Great. Thanks very much.

I guess with a slower results expected in pet sales for the year versus initial expectations as you've talked about I'm curious if this impacts your sort of capacity expansion plans in any way you've obviously got a lot of a lot of our work underway and just trying to get capacity going in bringing a lot of that in house over the period of course of the next year or two.

<unk>.

Does that get any impact does that get impacted in any way and I guess, it's another way of asking it is do you still see sort of.

<unk> as a sort of high single digit.

Type of sales growth driver over time for the port for the overall portfolio.

Sure I appreciate the question Andrew This is coffee okay.

I think.

I'll start with the back end of your question first I think we're still bullish on the long term prospects for the pet category. As a reminder, it's a $44 billion category. It's supported by at one to one 5% pet population growth and we do think the prevailing trend over the long term, we'll be humanization, which will drive growth.

<unk> in particular will benefit premium brands like like Blue Buffalo I think in the short term, we're making dramatic changes to our capacity expansion plans plans on dry dog food.

I think it's important as we think about.

That capacity coming online late this year, we wont we wont see the benefits. This year, we would expect that it will it'll give us longer term benefits at a minimum for being able to steer more production to internal capacity, which will also help with margin reconstruction on this business over there.

Intermediate term so we still feel good we're still bullish in that investor.

On this business and on capacity and certainly for the long term strategically got.

Got it and then Jeff I know you.

You and others are certainly talking about the expectation to see improving.

Sequentially volume trends as we go forward just as you know the.

The industry.

It gets back to maybe a more normal cadence of sort of marketing and merchandising spending now that service levels are back in a better place and such which it seems logical certainly but.

I still don't.

Just have a lot of clarity on and maybe because it's just a lot of little things that add up is why do you think that broadly industry volumes are still sort of where they are.

Even as pricing is starting to to lap.

And maybe it's just a matter of timing and these things don't always line up perfectly linear way, but.

I know there's been lots of different reasons people were traveling now they're back back at home or back to school or people hunkering down a little bit I'm, just curious if what youre most sort of up to date thinking on that might be alright. Thank you, yes, yes sure Andrew we spent quite a bit of time on this end.

It's very clear to us that there are three broad reasons, and so theres not theres not one theres not one thing I mean, there are they are kind of three broad reasons for what we see in the marketplace right now, especially as one looks at Nielsen trends. The first one will be touched upon this a little bit earlier, but we do see quite a bit of growth in non measured channels were up double digits in <unk>.

The first quarter and non measured channel for example, and so.

That is certainly a piece of why you're seeing Nielsen data as it has it is the second would be that.

<unk> away from home not necessarily in restaurant restaurant traffic has been pretty flat in fact quick service restaurant traffic has gone up so there's a move towards value added restaurants, but that traffic as it remained relatively flat.

What has changed is that we have seen a reversion back to people being mobile and more.

Education, and health care, and hotels, and lodging and that sort of thing, which I think is logical in fact, if you look at the.

<unk>.

The movement data through airports, it's up year over year and that was the only back to pre pandemic levels, but it's up quite a bit year over year. So that would kind of corroborate that thinking. So that's the second reason and the third is there is there is probably as we've seen in other kind of recession, where the consumer recessionary periods, even though technically.

Technically we're not in a recession consumer behavior.

Trying to economize, and so that may be going into smaller sizes and things like that and.

In the very short term talks of pantry, but people aren't eating less.

And we don't anticipate that they will be less in fact, what I would say as consumers start to get squeezed what generally happens as people move more at home.

And now the cost of eating out is roughly four times what it is eating at home so as consumers get more squeeze and as people get their normal routines in the fall we would think that at home eating we're probably pick up a little bit we will find out but that's what that's what we think and those are the three factors that is very clear to us are driving the current environment great. Thanks, So much.

Thank you.

Our next question comes from Jason English with Goldman Sachs. Please proceed.

Hey, good morning folks thanks for sneaking me in.

I have another question on Pat but not top line.

Looking at margins input costs have been stubbornly onerous for you impact not just Q it seems like the industry at large.

The rate of inflation, that's been a lot higher and for a lot longer.

What's driving that and what's the forward like at what point do we start to get some relief there and get to a point, where maybe you can give some margin recovery and second part of my margin question.

I know you expanded treat capacity coming into this year with a third party vendor, obviously, you need it with what's happening with treats.

A take or pay agreement and is that also a contributing factor to your margins and if so how big and how long will that headwind persist. Thank you.

Sure sure. Thanks for the question Jason.

Just a couple of thoughts I think on.

On the first as you as you sort of take the frame on the year given.

Given all of the challenges the mix of business. We don't expect the operating profit margins to improve this year as you think about the structure of inflation. Some of the same trends that are driving stickiness.

In human food inputs are there and present and probably more so on some of the pet input in particular, the conversion costs, which are heavily factored.

Labor in particular in the <unk>.

Put in pet food, so that until we start to see that trend come off I wouldn't expect to see.

Any near term relief on the inflationary pressures on our input basket for pet food.

I think.

On supply chain, our external suppliers, we generally have a pretty flexible structure. So the benefit of.

The way we structured those contracts is as we as we need the capacity, we can get access to it.

We don't have.

A hard floor fixed cost structure, where would it be paying if they arent using it.

Jason This is Jeff Siemon, I would just add on that second point.

We were able to close down an internal.

Factory, so we werent, adding capacity to the system. We were just reshuffling where that capacity on <unk>. Specifically was was located and the supplier is we have a strategic partnership we have our <unk> cost.

Cost savings program built into the contracts so we like the.

And what that can do for us from a profitability standpoint on that business and it's actually a lower cost alternative to internal production. In this case got it that's really helpful. I appreciate that and one more question on margins foodservice.

Sequentially.

Historically looking back there is not a lot of seasonality there, but we've seen margins slip for two consecutive quarters and we're now at 11%.

Whats driving the sequential dip is there anything unique about this quarter or is this like an 11% rate something we should take to the bank for the rest of the year. Thank you.

No.

Would expect.

That we will see margins improve on this business I do think one of the big factors has been the volatility.

And flower pricing as we've worked through this environment, which is a significant it has been a significant headwind in the deconstruction of March and so that's been a put and take as we've moved through through the past several quarters, including the last couple.

I think long term the challenge and the opportunity on this business will come from Steve.

Stabilization of the supply chain, giving us access to a more stable H M. M delivery, we are seeing that come through.

Oser to our historical levels.

The mid single digit range on this business.

And we'd expect that.

The pricing benefits from last year's significant pricing will also help buoy margins as we move through the back of the year.

Thanks, Bob I'll pass it on.

Yes.

Thanks Arne.

Next question comes from Chris Carey with Wells Fargo Securities. Please proceed.

Hey, good morning, everyone.

So just on the pet business you noted SRM.

And pack size would be one of the methods that youre using.

To kind of stimulate sales how long does it take to get the right pack sizes in market.

And.

SRM your current thinking kind of exclusively or are you starting to think about any pricing adjustments beyond just.

Pack size and just overall SRM.

Yeah, Chris on the on the good questions.

<unk> business, where we're doing a couple of things first and someone asked this question earlier about about the amount of marketing spend but also what we're spending it on.

What we are spending it on the first thing I would say is that we are.

We're going back to some more hard hitting advertising that really gives pet parents are very rational reason to believe why blue Buffalo feeds them like family. The equity is held up well.

And we think in this environment direct comparative advertising on why exactly pet parents.

Pay for Blue is really important so we're going back to that that's the first thing I would say on the on the pricing itself and price pack architecture, we're doing at a launch several lines of all our products I'll give you just a couple of examples and and.

And our dry pet food line, we didn't have a medium size, we have a lot of large sizes, but not some medium sizes. So we're introducing those those start rolling out now and but again. It takes the time it takes a while for them to kind of get going the same will be.

Treating we didn't we are introducing some size has some more entry level price points, so that doesn't mean.

Lower margin for us it just means lower price points. So it was good for pet parents and then in wet food. We're looking at some variety packs and things like that which would probably be more weighted towards the back half of the year. So theres just a few examples of things we're doing to make sure that consumers understand the value, but we're not going to do is disrupt the value proposition of blue Buffalo, which is a premium brand.

Consumers know us as a premium brand, we've spent lots of money and lots of years.

Making it the best brand in the premium part of the category and what I can assure you will do is not just about that.

Yes.

Okay very helpful. Just one quick follow up.

In the press release.

You noted that gross margin.

<unk> from favorable mark to market.

Can you just remind us of the typical hedging strategy, where you hit for the year basically trying to understand.

We're where there might be some variability if we see any moves there, but thanks so much.

Sure. So as a reminder, our adjusted gross margin obviously it does not include debt mark to market benefit. So that has an effect of our GAAP reporting where we do not get the.

The hedge accounting treatment on our commodity hedging program as a reminder, we're generally trying to hedge out at the beginning of the year about 50%. So given where we are in the year, we're at about 65% hedged.

Across all of our four businesses and across all the inputs.

Okay.

Our next question comes from Rob Dickerson with.

Jefferies. Please proceed.

Great. Thanks, so much.

Maybe just a.

Cereal for a minute.

It.

It sounds like just from various sources I believe yourselves included.

Not necessarily a tremendous amount of growth is expected to be category over the next few years.

So Jeff.

It's probably easier to kind of comment.

Category, maybe reverting back to kind of pre Covid dynamics for the same time I felt like.

During that period of time, either acceleration or for general Mills specifically.

Looking to the quality of the power of the brands like Cheerios cinnamon toast Crunch has done really well. So I'm just curious because you think forward.

So next year next three years.

Kind of like.

Why are you doing.

I think that category might not grow kind of relative to overall food just as a reminder.

And then secondly, just given the power of your portfolio.

Right.

In that within that dynamic.

Like.

I guess, what's the conviction level and your ability to continue to gain share.

You've done for let's say the prior seven years or so.

Okay.

Yes, Thanks, Rob let me provide some commentary and then John follow up as necessary as the first reminder.

Let you know as that cereal is still the number one.

In the morning for breakfast and almost 20% of breakfast eating so I guess 19. So so that's here in the U S. So it's still a.

Highly consumed item in the morning, we've been doing very well in cereal as you noted we've grown more than 20% over the last five years. We've gained share I think five years in a row, we have the two biggest brands in the category and Cheerios cinnamon toast Crunch, we have almost 50% of the.

Categories, New product volume and I think it's 47% and for the last five big items are from from General Mills. So we're innovating well for developing your equity as well we continue to grow and so my expectation for our cereal business is that we grow a little bit every year and hopefully take a little bit of share every year, but keeping in gorilla.

But everybody else is youll have to ask the rest of the competitors in the category, but we like cereal, we like our brands I Love, how we've been competing so John anything you want to add to that.

And I think you hit it well I mean at the end of the day, we believe in cereal and we think it's a great category as Jeff said, it's the most widely eaten breakfast in America today.

And as Jeff mentioned, we have been really performing well across the board and we can play to continue to do that as Jeff said, we don't need to grow a lot we can grow a little bit and really like the way the business runs for us.

The P&L looks as well so we're going to keep investing.

More excited today about cereal than we were even a decade ago as Jeff mentioned grew share six was last seven years.

Clear share leader today, and again never had been in the history of the category into the last five years or so and we'll keep investing we keep growing the category. The other question, we get a lot is.

What happens if one of our major competitors gets more focused in what we would tell you is that's actually a good thing if you go back through history. When the two major competitors in the category are supporting the category with marketing as well as innovation. The category does better. So we hope that everyone comes to play and we can continue to grow this category as we move.

Forward.

Alright Super.

And then just a quick clarification question had a lot of that.

Commentary.

Really around had not really improving that much.

To get through the year, given the drivers relative to Q1.

I believe last year, though Q2, you did have a fairly pronounced inventory deload.

So should we be thinking.

That kind of starts to revert out some to provide some tailwind to your volume dynamic in Q2 specific to pet or is it basically maybe there was some de load and then maybe a little bit of a reload in Q3, but maybe some of that inventory. It's just kind of now being sold through kind of as normal with al maybe.

The more traditional.

On a year over year rebound.

From a deal that makes sense.

But.

The.

So I guess, what I would say is that.

One of the things I've learned about pet in the short five years that we owned at that first of all it's a great category and brand we've doubled the business, but also trying to go quarter by quarter on it on a business with this much e-commerce and everything else is a.

It is a tough way to go so I'm not going to try to prognosticate what happens.

You do bring up the point, we had an inventory de load last second quarter that is true we're going up against that but it's also true that inventory is very quite a bit and as the business has slowed down a little bit inventory tends to come out of the system and so we'll see what happens in the second quarter, but we're not we're not anticipating a big rebound in the second quarter from what we see.

So on the first quarter in order for us to hit our guidance.

Got it alright, thanks, so much.

Thanks.

Our next question comes from Max gum.

BNP Paribas.

Please proceed.

Hey, Thanks for the question.

Industry starts to return to quality merchandising and with your own display support up mid single digits.

We're hearing that the less associated with some of these events, especially end cap displays.

Proving to be as incremental it might have been anticipated.

Im wondering if youre seeing this dynamic and also what you think is driving it thanks very much.

John do you want to comment on that.

Yeah, absolutely so as we look at merchandising writ large as I mentioned earlier, we see frequency up a bit of mid single digits, but still down about 10% versus pre pandemic levels. One of the things as I mentioned before we've invested in his room capabilities. Our competition has as well and our retailers have also so as all of us are more.

Modeling the various pricing actions, we can take.

Some of the tactics are different than maybe what we're doing pre pandemic I think we all know that driving deep discounts actually drives dollars out of the category of tries profit out of the category as well. So what you are seeing is maybe more frequency at higher price points and as a result of that and maybe the lift on each deal is it higher but at the end of the day when you add up all of your <unk>.

Merchandising across the year, a little bit more frequency with higher price points actually drives more dollars for the category and our retailers more and more for us as well. So you are right. We are seeing slightly smaller list off a higher price points, but at the end of the day. We believe it's a good thing for a category.

And again, the big difference I think versus maybe the past or the downstream capabilities and all of US have delivered are developed.

And pretty sophisticated models now that we all can have a really good conversation with retailers on what to expect from a merchandising performance.

Makes sense, thanks, very much I'll leave it there.

Frank I think we're going to wrap it up there I appreciate everyone's time on the call. This morning, I know, we didn't get to everyone. So please feel free to follow up with any questions throughout the day or the coming days.

Look forward to continuing to connect with you.

We'll look forward to speaking again next quarter. Thanks, so much.

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.

Okay.

Yes.

[music].

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