General Mills Q3 2024 Prepared Remarks Earnings Report

General Mills EPS Results

• Actual EPS: $1.17
• Consensus EPS: $1.05
• Beat/Miss: Beat by +$0.12
• One Year Ago EPS: $0.97

General Mills Revenue Results

• Actual Revenue: $5.10 billion
• Expected Revenue: $4.97 billion
• Beat/Miss: Beat by +$131.13 million
• YoY Revenue Growth: -0.50%

General Mills Announcement Details

• Quarter: Q3 2024 Prepared Remarks
• Date: 3/20/2024
• Time: Before Market Opens
• Conference Call Date: Wednesday, March 20, 2024
• Conference Call Time: 7:00AM ET

General Mills (NYSE:GIS) (NYSE: GIS) is a multinational consumer foods company that develops, manufactures and markets a broad portfolio of branded food products. Its product categories include ready-to-eat and hot cereals, baking mixes and ingredients, snacks and bars, refrigerated and frozen doughs, yogurt and other dairy products, and a variety of shelf-stable meals and meal components. The company’s portfolio features widely recognized consumer brands across grocery store, mass channel and foodservice outlets.

Founded in the early 20th century and incorporated under its current name in 1928, General Mills has grown through both internal brand development and strategic expansion to become a global food company. Its brands — including household names in cereals, baking, snacks and refrigerated foods — are distributed broadly in the United States and sold in numerous countries around the world. The company operates manufacturing facilities, distribution networks and marketing operations to serve retail, e-commerce and foodservice customers internationally, with a particularly strong presence in North America.

General Mills’ business combines product innovation, marketing and supply-chain management to maintain and grow its brands. The company is managed by an executive leadership team and board of directors that direct corporate strategy, brand stewardship and operational execution; Jeffrey L. Harmening has served as chief executive in recent years. General Mills remains focused on meeting changing consumer preferences through new product development, channel diversification and ongoing investment in manufacturing and sustainability practices.

General Mills Q3 2024 Prepared Remarks Earnings Call Transcript

Key Takeaways

• Q3 financial performance: Organic net sales declined 1%, but adjusted operating profit rose 14% and adjusted EPS increased 22%, leading management to reaffirm full-year fiscal 2024 guidance.
• Margin restoration: Through 5% cost savings and positive price/mix actions, adjusted gross margin improved 20 basis points to 34% and operating margin expanded 220 basis points to 17.9%, returning to pre-pandemic levels.
• Brand building and innovation: Double-digit investment behind campaigns like Pillsbury’s 2-ingredient initiative drove a 10% sales lift and 50% increase in Google searches, while “big bet” product launches delivered double-digit year-over-year net sales growth.
• Challenging operating environment: Management cited headwinds from value-seeking consumer behaviors, geopolitical uncertainty and climate volatility, partially offset by moderating inflation, supply-chain stabilization and a strong U.S. labor market.
• Q4 outlook and headwinds: While reaffirming guidance for flat to down 1% organic net sales and 4–5% profit/EPS growth, the company expects a ~3-point trade-timing headwind and ongoing input cost inflation, to be mitigated by continued cost savings.

Presentation

[Jeff Siemon, VP of Investor Relations and Treasurer at General Mills]

Good morning. This is Jeff Siemon, Vice President of Investor Relations and Treasurer. Thank you for listening to General Mills' prepared remarks for our fiscal 2024 3Q 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. Before I hand things over to them, let me first touch on a few items. On our website, you'll find a 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.

[Jeff Siemon, VP of Investor Relations and Treasurer at General Mills]

The second slide in today's presentation lists several factors that could cause our future results to be different than our current estimates. With that, I'll turn it over to Jeff.

[Jeff Harmening, Chairman and CEO at General Mills]

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, which contributed to improved volume and market share trends for our business in the 3Q. 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 3Q results and our outlook for Q4, we are reaffirming our full-year guidance for fiscal 2024.

[Jeff Harmening, Chairman and CEO at General Mills]

Later in the presentation, Kofi will share more details on our 4Q expectations, including a prior-year trade timing comparison that will be a headwind to this year's Q4 results. Slide 5 summarizes our 3Q and year-to-date results. Organic net sales for the 3Q were down 1%, reflecting lower organic pound volume, partially offset by positive price mix. Our volume trends improved in the 3Q compared to the first half and to fiscal 2023. 3Q 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%.

[Jeff Harmening, Chairman and CEO at General Mills]

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. Second, 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. 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.

[Jeff Harmening, Chairman and CEO at General Mills]

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 two dynamics that have led to increased volatility over the past year: 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 2025.

[Jeff Harmening, Chairman and CEO at General Mills]

While the environment continues to evolve, we remain focused on executing our Accelerate Strategy and our three fiscal 2024 priorities, which are: to compete effectively by leveraging remarkable brand building, innovation, and advantaged capabilities to win with a changing 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 returns to shareholders, and maintaining our balance sheet flexibility for portfolio reshaping. 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.

[Jeff Harmening, Chairman and CEO at General Mills]

We are continuing to invest in our brands to keep them modern, relevant, and top of mind for consumers. In Q3, we continued to invest behind core seasonal brands, including Pillsbury, Betty Crocker, and Progresso. Pillsbury's media investment was up double digits behind its two-ingredient campaign, focused on easy meal solutions for busy families. On select creative within this campaign, we saw Pillsbury's sales lift by almost 10% and Google search activity increase by almost 50%. We've also increased our innovation pressure and prioritized 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 launched in January with both Cinnamon Toast Crunch Loaded and Trix Loaded turning in the top third of the category. Finally, we're ensuring that our brands are available wherever consumers shop.

[Jeff Harmening, Chairman and CEO at General Mills]

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.S. retail business. By focusing on brand building, innovation, and in-store execution, we're beginning to see improvements in our North America retail and market competitiveness. In January and 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 cereals, 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 and May.

[Jeff Harmening, Chairman and CEO at General Mills]

In our Pet segment, we saw a modest improvement in Blue Buffalo's U.S. retail sales trends in the 3Q compared to the 2Q of the fiscal year. Much of this improvement was attributable to the performance of our Life Protection Formula dry dog food line, with Nielsen-measured pound volume increase 8%. 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 multipacks 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.

[Jeff Harmening, Chairman and CEO at General Mills]

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. 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 in December and 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, Häagen-Dazs retail ice cream, and snack bars.

[Jeff Harmening, Chairman and CEO at General Mills]

In our second enterprise priority, improving supply chain efficiency, we continue to see input cost inflation in fiscal 2024. While current inflation levels are lower than what we saw over the past two 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. We are also working to optimize our working capital and reduce inventories.

[Jeff Harmening, Chairman and CEO at General Mills]

We made nice progress on this front in Q3, with our inventory balances at their lowest levels since the 2Q of fiscal 2022. For our third 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 will look to continue to grow our dividend over time, roughly in line with earnings. 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 3Q, we repurchased nearly $300 million worth of shares, and we expect to reduce our average diluted share count by approximately 3% in fiscal 2024.

[Jeff Harmening, Chairman and CEO at General Mills]

With that, let me turn it over to Kofi to go into more details on our 3Q results.

[Kofi Bruce, CFO at General Mills]

Thanks, Jeff, and hello, everyone. Our 3Q financial results are summarized on slide 15. Reported net sales of $5.1 billion 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 million 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. Slide 16 summarizes the components of our net sales growth in the quarter. Organic pound volume was a 2-point headwind to 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.

[Kofi Bruce, CFO at General Mills]

Foreign exchange and net impact of acquisitions and divestitures were not material to net sales in Q3. Shifting to segment results, 3Q 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. Organic net sales growth outpaced Nielsen-measured U.S. retail sales by about two 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. Morning Foods and up 8% for Canada. Net sales were down 1% for U.S. Meals and Baking Solutions and down 2% for U.S. Snacks.

[Kofi Bruce, CFO at General Mills]

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 de-leverage, partially offset by cost savings and positive price mix. Moving on to our Pet segment results on slide 18, 3Q organic net sales were 3% below year-ago results that grew double digits. Lower organic pound volume in the 3Q was partially offset by positive price mix. Net sales results reflected declines on treats and dry food, driven by Wilderness, partially offset by growth on wet food. On the bottom line, 3Q segment operating profit was up 25% in constant currency, driven by cost savings and positive price mix, partially offset by lower volume, higher SG&A expenses, and input cost inflation.

[Kofi Bruce, CFO at General Mills]

North America Foodservice organic net sales were up 1% in the 3Q, despite a 4-point headwind from market index pricing on bakery flour. 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&A expenses, partially offset by positive price mix and cost savings. For our International segment, 3Q 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. 3Q segment operating profit totaled $18 million compared to $42 million a year ago, driven by higher input costs and lower volume. Slide 21 summarizes our joint venture results.

[Kofi Bruce, CFO at General Mills]

Cereal Partners Worldwide net sales were up 11% in constant currency in Q3, driven by positive price mix, partially offset by lower pound volume. Häagen-Dazs Japan net sales were down 2% in constant currency, driven by the timing of new product launches. 3Q combined after-tax earnings from joint ventures increased 64% in constant currency to $18 million, driven primarily by higher after-tax net earnings at Cereal Partners Worldwide. Our margin results are highlighted on slide 22. Our 3Q 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 de-leverage.

[Kofi Bruce, CFO at General Mills]

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. Our 3Q adjusted operating profit margin was up 220 basis points to 17.9%, driven by lower SG&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 $140 million in the quarter, primarily driven by lower compensation and benefits-related expenses. 3Q net interest expense increased $23 million, driven primarily by higher rates and higher average long-term debt balances. The adjusted effective tax rate was 18.4% compared to 21.6% a year ago, driven primarily by certain non-recurring discrete tax benefits in the 3Q of fiscal 2024. We continue to expect our full-year adjusted effective tax rate will be roughly in line with last year.

[Kofi Bruce, CFO at General Mills]

Finally, average diluted shares outstanding in the quarter were down 4% to 573 million. Our nine-month fiscal 2024 results are summarized on slide 24. Net sales of $15.1 billion 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. Year-to-date, adjusted operating profit of $2.8 billion 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. Nine-month operating cash flow increased 20% to $2.4 billion, driven by an increase in net earnings excluding net gains on divestitures in fiscal 2023. Year-to-date, capital investments totaled $486 million. We remain on track for capital investment to equal roughly 4% of net sales for the full year.

[Kofi Bruce, CFO at General Mills]

We returned $2.6 billion in cash to shareholders in the first nine months of the year through dividends and net share repurchases, representing a 34% increase versus a year ago. 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%-5% in constant currency. Free cash flow conversion is expected to be at least 95% of adjusted after-tax earnings. Looking to our 4Q, there are a couple of key assumptions that factor into our outlook. First, we expect a meaningful headwind from the comparison against favorable trade expense timing in last year's 4Q. This dynamic will represent a roughly three-point headwind to net sales growth and a double-digit headwind to adjusted operating profit growth in this year's 4Q.

[Kofi Bruce, CFO at General Mills]

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

[Jeff Harmening, Chairman and CEO at General Mills]

Thanks, Kofi. Let me wrap up with a few thoughts. General Mills continues to adapt to changes 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 returns for our shareholders over the long term.

Participants

Executives

• Jeff Harmening, Chairman and CEO
• Jeff Siemon, VP of Investor Relations and Treasurer
• Kofi Bruce, CFO