General Mills Q3 2024 Prepared Remarks Earnings Call Transcript

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March 20, 2024

There are 3 speakers on the call.

Operator

Good morning. This is Jeff Seaman, Vice President of Investor Relations and Treasurer. Thank you for listening to General Mills' prepared remarks for our fiscal 2024 Q3 earnings. Later this morning, we will hold a separate live question and answer session on today's results, which you can hear via webcast on our Investor Relations website. Joining me for this morning's presentation are Jeff Harmening, our Chairman and CEO and Kofi Bruce, our CFO.

Operator

Before I hand things over to them, let me first touch on a few items. On our website, you'll find our press release that posted this morning, along with a copy of the presentation and a transcript of these remarks. Please note that today's remarks include forward looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists several factors that could cause our future results to be different than our current estimates. And with that, I'll turn it over to Jeff.

Speaker 1

Thank you, Jeff, and good morning, everyone. Let me start by summarizing today's key messages. We continue to navigate an evolving operating environment including moderating but still positive inflation, changing consumer channel preferences and stabilizing competitive supply chains. At the same time, we continue to deliver industry leading levels of holistic margin management cost savings, helping us restore our pre pandemic gross margin. Within this context, we are remaining focused on our accelerate strategy and driving long term growth through brand building, innovation and strong execution, we contributed to improve volume and market share trends for our business in the Q3.

Speaker 1

We know that we have more work to do and we remain committed to investing further in our brands and capabilities to drive profitable growth over the long term. Based on our Q3 results and our outlook for Q4, we are reaffirming our full year guidance for fiscal 2024. Later in the presentation, Kobi will share more details on our Q4 expectations including a prior year trade timing comparison that will be a headwind to this year's Q4 results. Slide 5 summarizes our Q3 and year to date results. Organic net sales for the Q3 were down 1% reflecting lower organic pound volume partially offset by positive price mix.

Speaker 1

Our volume trends improved in the 3rd quarter compared to the first half and to fiscal 2023. 3rd quarter adjusted operating profit increased 14% and adjusted diluted earnings per share were up 22% each in constant currency. Our fiscal year to date 2024 results include growth on the top and bottom lines with organic net sales up 1%, constant currency adjusted operating profit up 9% and constant currency adjusted diluted EPS up 11%. As we recently discussed at the CAGNY conference, the operating environment has continued to be dynamic and we're closely monitoring impacts to consumer demand and the supply chain environment with these factors creating headwinds and tailwinds for our business. For the headwinds, first, we see an increase in value seeking behaviors from consumers affecting both the channels they shop and the size of their basket.

Speaker 1

2nd, while the geopolitical dynamics both here in the U. S. And internationally have had limited effect on our business to date, we are continuing to carefully monitor. And third, we've seen a near term example of the impact from increased climate volatility as cold temperatures across much of the U. S.

Speaker 1

In January boosted sales of at home food in our North America retail segment while suppressing sales in our away from home North America food service segment. We are also seeing some emerging tailwinds including moderating inflation, reduction in supply chain disruptions and increased U. S. Consumer confidence bolstered by wage growth and a strong labor market. In the next few months, we expect to lap 2 dynamics that have led to increased volatility over the past year.

Speaker 1

First, SNAP reduction headwinds in the U. S. And second, the normalization in on shelf availability of our competitors driven by stabilized supply chains. The next few months will be important in helping us better understand the dynamics of the consumer demand environment as we enter fiscal 20 25. While the environment continues to evolve, we remain focused on executing our accelerated strategy and our 3 fiscal 2024 priorities, which are to compete effectively by leveraging remarkable brand building, innovation and advantage capabilities to win with a change in consumer, to improve our supply chain efficiency with a focus on increasing holistic margin management cost savings and reducing costs related to supply chain disruptions and to maintain our disciplined approach to capital allocation by investing in the business, delivering strong cash return to shareholders and maintaining our balance sheet flexibility for portfolio reshaping.

Speaker 1

Let me take a few minutes to share how we are advancing work against each of these key priorities starting with competing effectively. In North America retail, we are remaining focused on the factors within our control and accelerating our drivers of long term growth. We are continuing to invest in our brands to keep them moderate, relevant and top of mind for consumers. In Q3, we continue to invest behind core seasonal brands including Pillsbury, Betty Crocker and Progreso. Pillsbury's media investment was up double digits behind its 2 ingredient campaign focused on easy meal solutions for busy families.

Speaker 1

On select creative within this campaign, we saw Pillsbury sales lift by almost 10% and Google search activity increased by almost 50%. We've also increased our innovation pressure and prioritize our resources against several impactful launches. Of these big bet innovations, we've seen our net sales increase double digits versus last year, including contributions from our loaded cereals platform, which lost in January with both Cinnamon Toast Crunch Loaded and Trix Loaded turning in the top third of the category. And finally, we're ensuring that our brands are available wherever consumer shop. We are pleased with the continued progress we've made on distribution in Q3 with more than 90% of our priority brands growing their share of distribution contributing to a 30 basis point increase in our overall distribution share for our U.

Speaker 1

S. Retail business. By focusing on brand building, innovation and in store execution, we're beginning to see improvements in our North America retail end market competitiveness. In January February, more than 40% of our priority businesses held or grew market share and we are seeing improved share trends in several key businesses including cereal, snacks and desserts. Though not all of these businesses are back to share growth, we expect our competitiveness to continue improving as we lap the normalization of category on shelf availability dynamics in April May.

Speaker 1

In our pet segment, we saw a modest improvement in Blue Buffalo's U. S. Retail sales trends in the Q3 compared to the Q2 of the fiscal year. Much of this improvement was attributable to the performance of our life protection formula dry dog food line. We saw Nielsen measured pound volume increase 8%.

Speaker 1

LPF returned to dollar share growth in the quarter driven by the effectiveness of our ingredient superiority advertising. On wet pet food, we saw improved retail sales trends as we delivered better value to pet parents through multi packs and hitting key price points on our core can offerings. We still have more work to do on our wilderness line in the pet retail channel including plans to increase our marketing investment and refresh our brand communication. Turning to our foodservice segment, we continue to see the away from home environment stabilize with a modest increase in overall traffic. Growth in quick service restaurants and non commercial channels including education, travel and leisure was partially offset by declines in full service restaurant channels.

Speaker 1

Enabled by improvements made in our supply chain during Q3, we delivered strong volume growth on key platforms including cereal, frozen biscuits and yogurt. In our international segment, China net sales declined due to continued macroeconomic pressure as well as lapping elevated at home demand December January of our last fiscal year. These dynamics in addition to headwinds in Brazil were partially offset by continued net sales momentum in Europe and Australia. We continued to see retail growth on key global platforms including Old El Paso Mexican Food, Haagen Dazs Retail Ice Cream and Snack Bars. In our 2nd enterprise priority improving supply chain efficiency, we continue to see input cost inflation in fiscal 2024.

Speaker 1

While current inflation levels are lower than what we saw over the past 2 years, they are still higher than the average annual inflation rate we experienced in the decade leading up to the pandemic. To offset inflation, our first line of defense is always our cost savings program. We have continued to make progress in removing disruption related costs and accelerating our delivery in fiscal 2024. We remain on track to deliver 5% cost savings this year, which is above both last year and our historical levels. At the same time, we're delivering a strong level of cost savings.

Speaker 1

We are also working to optimize our working capital and reduce inventories. We made nice progress on this front in Q3 with our inventory balances at their lowest levels since the Q2 of fiscal 2022. For our 3rd priority, we are on track to deliver against our capital allocation priorities, which include investing back into our core operations for growth and cost savings. We expect full year capital investments to be roughly 4% of net sales. Next, we increased our dividend by 9% in August 2023 and we'll look to continue to grow our dividend over time roughly in line with earnings.

Speaker 1

After dividends, we are retaining flexibility for strategic acquisitions that create value and improve our growth exposure. And finally, we are returning excess cash to shareholders in the form of share repurchases. In the Q3, we repurchased nearly $300,000,000 worth of shares and we expect to reduce our average diluted share count by approximately 3% in fiscal 2024. With that, let me turn it over to Kofi to go into more details on our Q3 results.

Speaker 2

Thanks, Jeff, and hello, everyone. Our Q3 financial results are summarized on Slide 15. Reported net sales of $5,100,000,000 were down 1% and organic net sales also declined 1% in the quarter, reflecting lower pound volume partially offset by positive price mix. Adjusted operating profit of $914,000,000 was up 14% in constant currency, driven by lower compensation and benefits expenses. Adjusted diluted earnings per share totaled $1.17 in the quarter and were up 22% in constant currency, driven by higher adjusted operating profit, a lower share count and a lower adjusted effective tax rate, partially offset by higher net interest expense.

Speaker 2

Slide 16 summarizes the components of our net sales growth in the quarter. Organic pound volume was a 2 point headwind in net sales and we generated 2 points of positive organic price mix in Q3 as we continue to lap prior year strategic revenue management actions. Foreign exchange and net impact of acquisitions and divestitures were not material to net sales in Q3. Shifting to segment results. 3rd quarter organic net sales for North America retail essentially matched year ago results that grew double digits with positive price mix offset by lower pound volume.

Speaker 2

Organic net sales growth outpaced Nielsen measured U. S. Retail sales by about 2 points in the quarter, driven by a modest increase in retailer inventory, high single digit growth in Canada and mid single digit growth in non measured channels. At the operating unit level, net sales were up 2% for U. S.

Speaker 2

Morning Foods and up 8% for Canada. Net sales were down 1% for U. S. Meals and Banking Solutions and down 2% for U. S.

Speaker 2

Snacks. On the bottom line, constant currency segment operating profit was down 4% in the quarter, driven by higher other supply chain costs, including the unfavorable impact of inventory reductions on fixed cost absorption, as well as input cost inflation, lower volume and supply chain deleverage, partially offset by cost savings and positive price mix. Moving on to our Pet segment results on Slide 18. 3rd quarter organic net sales were 3% below year ago results that grew double digits. Lower organic pound volume in the 3rd quarter was partially offset by positive price mix.

Speaker 2

Net sales results reflected declines on treats and dry food driven by Wilderness, partially offset by growth on wet food. On the bottom line, 3rd quarter segment operating profit was up 25% in constant currency, driven by cost savings and positive price mix, partially offset by lower volume, higher SG and A expenses and input cost inflation. North America Foodservice organic net sales were up 1 in the 3rd quarter despite a 4 point headwind from market index pricing on bakery flower. Q3 results included positive price mix and a modest increase in pound volume. On the bottom line, North America Foodservice segment operating profit was down 1% in Q3, driven by higher other supply chain costs and higher SG and A expenses, partially offset by positive price mix and cost savings.

Speaker 2

For our International segment, 3rd quarter organic net sales were down 3%, driven by lower volume. Net sales declines in China and Brazil were partially offset by continued growth in Europe and Australia. 3rd quarter segment operating profit totaled $18,000,000 compared to $42,000,000 a year ago, driven by higher input costs and lower volume. Slide 21 summarizes our joint venture results. Cereal Partners Worldwide net sales were up 11% in constant currency in Q3, driven by positive price mix, partially offset by lower pound volume.

Speaker 2

Haagen Dazs Japan net sales were down 2% in constant currency, driven by the timing of new product launches. 3rd quarter combined after tax earnings from joint ventures increased 64% in constant currency to $18,000,000 driven primarily by higher after tax net earnings at Cereal Partners Worldwide. Our margin results are highlighted on Slide 22. Our Q3 adjusted gross margin increased 20 basis points to 34% of net sales, driven by cost savings and positive price mix, partially offset by higher other supply chain costs, including the impact of reduced inventory balances as well as input cost inflation and supply chain deleverage. With continued strong contributions from cost savings, including the removal of disruption related costs in our supply chain, we've now restored our adjusted gross margin to pre pandemic levels.

Speaker 2

Our 3rd quarter adjusted operating profit margin was up 220 basis points to 17.9%, driven by lower SG and A expenses as a percent of net sales and higher adjusted gross margin. Moving on to other Q3 noteworthy income statement items. Adjusted unallocated corporate expenses decreased 100 and $40,000,000 in the quarter, primarily driven by lower compensation and benefits related expenses. 3rd quarter net interest expense increased $23,000,000 driven primarily by higher rates and higher average long term debt balances. The adjusted effective tax rate was 18.4 percent a year ago, driven primarily by certain non recurring discrete tax benefits in the Q3 of fiscal 2024.

Speaker 2

We continue to expect our full year adjusted effective tax rate will be roughly in line with last year. Finally, average diluted shares outstanding in the quarter were down 4% to 573,000,000. Our 9 month fiscal 2024 results are summarized on Slide 24. Net sales of $15,100,000,000 were up 1% versus last year. Organic net sales also increased 1%, driven by positive organic price mix, partially offset by lower organic pound volume.

Speaker 2

Year to date, adjusted operating profit of $2,800,000,000 increased 9% in constant currency, and adjusted diluted earnings per share of $3.51 were up 11% in constant currency. Turning to the balance sheet and cash flow on Slide 25. 9 month operating cash flow increased 20 percent to $2,400,000,000 driven by an increase in net earnings, excluding net gains on divestitures in fiscal 2023. Year to date capital investments totaled $486,000,000 We remain on track for capital investment to equal roughly 4% of net sales for the full year. And we returned $2,600,000,000 in cash to shareholders in the 1st 9 months of the year through dividends and net share repurchases, representing a 34% increase versus a year ago.

Speaker 2

Slide 26 includes our reaffirmed fiscal 2024 financial outlook. We expect organic net sales to range between down 1% and flat. Adjusted operating profit and adjusted diluted earnings per share are each expected to increase 4% to 5% in constant currency. And free cash flow conversion is expected to be at least 95% of adjusted after tax earnings. Looking to our Q4, there are a couple of key This dynamic will represent a roughly 3 point headwind to net sales growth and a double digit headwind to adjusted operating profit growth in this year's Q4.

Speaker 2

2nd, we expect continued input cost inflation on our cost of goods sold in the 4th quarter, and we'll address that with continued strong cost savings delivery. With that, let me turn it back to Jeff for some closing remarks.

Speaker 1

Thanks, Kofi. Let me wrap up with a few thoughts. General Mills continues to adapt to change in the environment we face today as seen in the work of our teams to improve end market performance and deliver cost savings above historical levels. As we have said many times before, we continue to remain responsive and agile as our operating landscape changes while remaining keenly focused on driving growth through brand building, innovation and in store execution. I'm confident in our plans to deliver our fiscal 2024 guidance as well as our ability to deliver strong return for our shareholders over the long term.

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General Mills Q3 2024 Prepared Remarks
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