General Mills Q3 2023 Prepared Remarks Earnings Report

General Mills EPS Results

• Actual EPS: $0.97
• Consensus EPS: $0.91
• Beat/Miss: Beat by +$0.06
• One Year Ago EPS: $0.84

General Mills Revenue Results

• Actual Revenue: $5.13 billion
• Expected Revenue: $4.97 billion
• Beat/Miss: Beat by +$157.73 million
• YoY Revenue Growth: +13.00%

General Mills Announcement Details

• Quarter: Q3 2023 Prepared Remarks
• Date: 3/23/2023
• Time: Before Market Opens
• Conference Call Date: Thursday, March 23, 2023
• Conference Call Time: 8:15AM 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 2023 Prepared Remarks Earnings Call Transcript

Key Takeaways

• General Mills raised its full-year guidance for organic net sales, adjusted operating profit and adjusted EPS growth, citing stronger and more broad-based business momentum.
• In Q3, the company delivered 16% organic net sales growth and 17% adjusted EPS growth, driven by strong price realization amid significant input cost inflation.
• Total input cost inflation remains high at approximately 14–15% for fiscal 2023, with expectations to decelerate but stay above historical averages into fiscal 2024.
• The Pet segment’s operating profit declined 7% year-on-year due to significant input cost inflation, capacity expansion and service improvement expenses.
• General Mills continued to hold or gain market share in the majority of its priority businesses, including North America retail and key international platforms such as cereal and snacks.

Presentation

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

Good morning. This is Jeff Siemon, Vice President of Investor Relations. Thank you for listening to General Mills' prepared remarks for our fiscal 2023 third quarter 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.

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

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. 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 will turn it over to Jeff.

[Jeff Harmening, Chairman and CEO at General Mills]

Thank you, Jeff Siemon, and good morning, everyone. Let me start by summarizing today's key messages. We delivered broad-based top-line growth and strong bottom-line results in our third quarter, including continued positive momentum in North America Retail and encouraging improvement in each of our other three segments. Our team continues to execute well, and we remain focused on advancing our Accelerate strategy and delivering on our fiscal 2023 priorities by competing effectively, investing for the future, and reshaping our portfolio.

[Jeff Harmening, Chairman and CEO at General Mills]

With stronger and more broad-based business momentum, we are once again raising our full year guidance for organic net sales, adjusted operating profit, and adjusted diluted earnings per share growth. Slide five summarizes our third quarter and year-to-date financial performance. We drove 16% organic net sales growth in the quarter, once again fueled by strong net price realization in response to significant levels of input cost inflation.

[Jeff Harmening, Chairman and CEO at General Mills]

Adjusted operating profit was up 20% and adjusted diluted earnings per share was up 17%, each in constant currency. On a year-to-date basis, we've generated double-digit growth in organic net sales, adjusted operating profit, and adjusted diluted earnings per share. Our growth in third quarter was broad-based across our segments, including organic net sales up high single digits in international and up mid to high teens in North America Foodservice, North America Retail, and Pet.

[Jeff Harmening, Chairman and CEO at General Mills]

On the bottom line, three of our four segments posted strong double-digit or even triple-digit operating profit growth, while Pet profit was down year-on-year, as we expected, driven by significant input cost inflation and increased costs related to capacity and service improvements. The state of the operating environment remains a critical factor for our business.

[Jeff Harmening, Chairman and CEO at General Mills]

We are pleased with the improvements we have seen in recent months, and yet the environment remains challenging and dynamic. We continue to forecast total input cost inflation of approximately 14% to 15% for the full year in fiscal 2023, including double-digit inflation in the second half. Looking beyond this fiscal year, we expect inflation to decelerate but remain above historical averages.

[Jeff Harmening, Chairman and CEO at General Mills]

Based on our current projections, we are forecasting mid-single digit total input cost inflation in fiscal 2024, with labor and conversion costs at our suppliers being key sources of ongoing cost pressure. We will provide an updated inflation forecast along with the rest of our typical guidance commentary during our fourth quarter earnings call in late June.

[Jeff Harmening, Chairman and CEO at General Mills]

Volume elasticities remain below historical levels through the first three quarters of fiscal 2023, particularly in North America Retail, and we do not expect a material change in elasticities for the remainder of fiscal 2023. The supply chain environment continues to improve. Our customer service level reached 90% in US retail by the end of the quarter. Despite these improvements, supply disruptions remain well above historic averages and customer service is still notably below our normal range of 98% to 99%.

[Jeff Harmening, Chairman and CEO at General Mills]

In addition to these factors, we continue to track consumer mobility as we move beyond the period of acute pandemic impact. The most recent change has been in China, where we continue to see a broad trend toward reopening and where consumer traffic in our Häagen-Dazs shops is steadily increasing.

[Jeff Harmening, Chairman and CEO at General Mills]

We anticipate shops traffic will be at or near pre-pandemic levels as we move into the summer. Stepping back, while we are seeing definite improvements, the operating environment remains dynamic. Led by our Accelerate strategy, we are confident in our ability to adapt to continued change and deliver winning results in the months and years ahead, regardless of the environment.

[Jeff Harmening, Chairman and CEO at General Mills]

We are continuing to drive our Accelerate strategy this year by executing on the three priorities outlined on slide eight. We are competing effectively by boldly building our brands, relentlessly innovating, and servicing the business with excellence. We are investing for the future by delivering HMM and SRM to offset inflation, making strategic investments in the business and advancing our ESG commitments. We are reshaping our portfolio, including closing three transactions so far in fiscal 2023 and assessing the landscape for additional growth and value enhancing acquisitions or divestitures.

[Jeff Harmening, Chairman and CEO at General Mills]

Let me share a few highlights of the progress we've made against our priorities so far in fiscal 2023. We're continuing to compete effectively this year, including holding or gaining share in 56% of our priority businesses year to date. When adjusted for unusual competitive dynamic in cereal last year and looking at the platform on a two-year basis. This is on top of our holding or gaining share in roughly 2/3 of our priority businesses worldwide in each of the past four fiscal years.

[Jeff Harmening, Chairman and CEO at General Mills]

Our share gains this year span a broad array of platforms in the US and internationally, including cereal, refrigerated dough, fruit snacks, soup, and seasonings. In addition to executing for today, we continue to make strategic investments to strengthen our brands and our competitive advantages for the future. We believe healthy investments in brands is critical for long-term growth.

[Jeff Harmening, Chairman and CEO at General Mills]

We have grown our media investment at a 4% compound rate over the past three years. We're on track for a strong double-digit increase in fiscal 2023. We're putting that investment behind compelling, digitally enabled, high ROI campaigns, such as Cheerios Heart Health, 20% more meat news on Blue Buffalo's Wilderness line, and our latest global Häagen-Dazs campaign. We also continue to invest behind innovation. Over the past three years, we've kept up our innovation pressure. Our new product retail sales have been 30% higher than the category average.

[Jeff Harmening, Chairman and CEO at General Mills]

We are continuing that focus with our fiscal 2023 innovation. In North America Retail, we continue to lead innovation in the cereal category with our latest launch, new minis versions of Cinnamon Toast Crunch, Reese's Puffs, and Trix. In international, we are launching a delicious new Häagen-Dazs macaron ice cream line in collaboration with celebrity pastry chef Pierre Hermé. In food service, we continue to expand distribution and drive growth on our two equivalent grain cup cereal line, including new Honey Nut Cheerios and reduced sugar Trix varieties.

[Jeff Harmening, Chairman and CEO at General Mills]

In pet, we're launching innovation across the Blue Buffalo platform, including Wilderness Premier Blend, a new super premium dry dog food, our new Blue Buffalo fresh dog food offering we are currently testing in 200 stores in the FDM channel, and human-inspired treats products, including BLUE BeneBars and Nudges On-The-Go. In addition to investments in brand building and innovation, we're also investing for the future in capabilities that allow us to leverage our scale and create meaningful competitive advantage for General Mills.

[Jeff Harmening, Chairman and CEO at General Mills]

As we shared at CAGNY last month, we're making good progress in building differentiated capabilities such as connected commerce, strategic revenue management, and supply chain digitization that will help us accelerate profitable growth. To enable this, we've been investing heavily in recent years to build a world-class digital and technology capability that provides the foundation for these enterprise initiatives. We're significantly stepping up this investment again in fiscal 2023 to better capture insights and unlock new growth and efficiency opportunities throughout our business.

[Jeff Harmening, Chairman and CEO at General Mills]

Another way we are investing for the future is through our commitment to standing for good. We continue to make progress against our 10 key ESG commitments, and because yesterday was World Water Day, I'd like to provide a brief update on our commitment to championing the regeneration of water resources in our priority watersheds.

[Jeff Harmening, Chairman and CEO at General Mills]

With 99% of General Mills' water impact outside of our owned operations, we focus our efforts on protecting our ingredient sourcing locations from water risk. We believe advancing regenerative agriculture is our primary lever to protect the most important and at-risk watersheds in our global value chain. In fact, the same activities that improve soil health also improve water outcomes.

[Jeff Harmening, Chairman and CEO at General Mills]

In addition to our regenerative agriculture efforts, we support water stewardship projects in 14 priority watersheds, partnering with a variety of nonprofits, governments, and businesses to improve the management of this essential resource. One example of work underway is in California's San Joaquin Valley Watershed. We source 100% of our almonds from California, a state facing extreme water stress. Over the last decade, we proudly supported Sustainable Conservation, a nonprofit solving water challenges in California.

[Jeff Harmening, Chairman and CEO at General Mills]

Sustainable Conservation educates farmers and coordinates with government water regulators to release water upstream and temporarily flood farms during wet years to refill depleted groundwater. Since December, our partnership has enabled Central Valley farmers to take advantage of recent precipitation to store more than 16 billion gallons of water for use in dry seasons.

[Jeff Harmening, Chairman and CEO at General Mills]

In total, I continue to be pleased with how we're executing our Accelerate strategy, strengthening momentum, and delivering results in fiscal 2023. Let me now turn it over to Kofi to provide more details on our third quarter results and updated outlook.

[Kofi Bruce, CFO at General Mills]

Thanks, Jeff, and hello, everyone. Our third quarter financial results are summarized on slide 15. Reported net sales of $5.1 billion were up 13%, and organic net sales grew 16% in the quarter, reflecting continued positive price mix in response to significant input cost inflation. Adjusted operating profit of $807 million was up 20% in constant currency, with benefits from price mix partially offset by higher input costs and higher SG&A expenses, including a strong double-digit increase in media investment.

[Kofi Bruce, CFO at General Mills]

Adjusted diluted earnings per share totaled $0.97 in the quarter and were up 17% in constant currency. Slide 16 summarizes the components of our net sales growth in the quarter. Organic net sales were up 16%, primarily driven by positive organic price mix.

[Kofi Bruce, CFO at General Mills]

Organic volume was flat in the quarter, reflecting continued low elasticities, as well as the comparison against mid-single-digit organic volume declines a year ago that included acute service issues on our US refrigerated dough and hot snacks platforms. Foreign exchange reduced net sales by one point, and the net impact of acquisitions and divestitures was a two-point headwind to third quarter net sales. Now let's turn to our segment results, beginning with North America Retail on slide 17.

[Kofi Bruce, CFO at General Mills]

NAR continues to perform exceptionally well with our brands delivering for consumers and the businesses executing successfully amid ongoing volatility in the operating environment. Organic net sales grew 18% in the quarter, driven by positive price mix. This growth was broad-based with double-digit net sales growth in US Meals & Baking Solutions and US Snacks and high single-digit growth in US Morning Foods and Canada in constant currency.

[Kofi Bruce, CFO at General Mills]

We continue to compete effectively with 70% of our North America Retail priority businesses holding or growing share year-to-date when adjusting for cereal on a two-year basis. Third quarter constant currency segment operating profit increased 29%, primarily driven by positive price mix, partially offset by higher input costs and higher SG&A expenses, including a strong double-digit increase in media investment.

[Kofi Bruce, CFO at General Mills]

Third quarter input cost inflation was up double digits for NAR, we saw some easing in the cost of supply chain disruptions, and we exited the quarter with our customer service level in the US at nearly 90%. Slide 18 summarizes our pet segment results. As expected, we saw a nice rebound in top-line trends for pet in third quarter, with organic net sales up 14% in the quarter. This included double-digit growth in dry dog and cat food and high single-digit growth in dog treats.

[Kofi Bruce, CFO at General Mills]

Third quarter organic net sales accelerated from our second quarter trend, driven by improved customer service, increased brand building and other commercial activities, and a rebuild of retailer inventory levels. While we've seen significant volatility in retailer inventory for pet over the past two quarters, it was roughly stable on a fiscal year-to-date basis, with organic net sales and all channel retail sales both up high single digits through nine months.

[Kofi Bruce, CFO at General Mills]

On the bottom line, third quarter segment operating profit declined 7%, driven primarily by double-digit input cost inflation, increased costs related to capacity expansion and service improvement, and higher SG&A expenses, including a double-digit increase in media investment. These headwinds were partially offset by positive price mix, HMM cost savings, and higher volume.

[Kofi Bruce, CFO at General Mills]

We remain on track to deliver double-digit organic net sales growth for the pet segment in the second half of fiscal 2023, with a back half segment operating profit margin ahead of our second quarter result. Moving on to our North America Foodservice segment results on slide 19, organic net sales grew 19% in the quarter, driven primarily by positive price mix. Market index pricing on bakery flour was only a one-point benefit in the quarter.

[Kofi Bruce, CFO at General Mills]

On the bottom line, third quarter segment operating profit more than doubled to $82 million, driven by benefits from pricing and improved product mix, partially offset by higher input costs. Third quarter international segment results are summarized on slide 20. Organic net sales were up 8% this quarter, driven by broad-based growth across Europe and Australia, our distributor markets, Brazil, and China.

[Kofi Bruce, CFO at General Mills]

With the yogurt divestiture and ice cream recall now behind us, third quarter segment operating profit for International was up 27%, which represented a sharp improvement from the profit declines we reported in the first half. third quarter profit growth was driven primarily by positive price mix and lower SG&A expenses, partially offset by higher input costs and lower volume, including the continued impact of the dough divestitures, which we will lap by the end of this fiscal year.

[Kofi Bruce, CFO at General Mills]

Slide 21 summarizes our joint venture results in the third quarter. Cereal Partners Worldwide net sales were up 2% in constant currency, and Häagen-Dazs Japan net sales were up 1%, with both results reflecting favorable price mix, partially offset by lower volume.

[Kofi Bruce, CFO at General Mills]

Third quarter combined after-tax earnings from joint ventures totaled $13 million compared to $30 million a year ago, driven primarily by higher input costs and unfavorable non-recurring discrete tax items at CPW, partially offset by favorable CPW price mix. Turning to total company margin results on slide 22, our third quarter adjusted gross margin increased 240 basis points versus last year to 33.8%, driven by positive price mix and HMM cost savings, partially offset by mid-teens input cost inflation and higher other costs of goods sold.

[Kofi Bruce, CFO at General Mills]

We've been pleased with our ongoing margin recovery as our pricing and productivity continue to catch up to the cumulative inflation we've seen over the past two years. However, we still have more work to do as our adjusted gross margin over the past four quarters is still roughly 50 basis points below fiscal 2019 levels.

[Kofi Bruce, CFO at General Mills]

Adjusted operating profit margin increased 80 basis points in the quarter to 15.7%, driven by higher adjusted gross margin, partially offset by higher SG&A expenses. Slide 23 summarizes other noteworthy third quarter income statement items. Adjusted unallocated corporate expenses increased $89 million in the quarter, primarily reflecting higher compensation and benefits expenses, corporate charitable contributions, and capability investments this year. Net interest expense increased $12 million, driven by higher interest rates, partially offset by lower average long-term debt balances.

[Kofi Bruce, CFO at General Mills]

The adjusted effective tax rate for the quarter was 21.6% compared to 21% a year ago, and average diluted shares outstanding in the quarter were down 2% to 599 million shares, reflecting our net share repurchase activity. Our nine-month fiscal 2023 results are summarized on slide 24.

[Kofi Bruce, CFO at General Mills]

Net sales of $15.1 billion were up 7%, including a four-point headwind from net divestiture and acquisition activity and a one-point unfavorable foreign currency exchange. Organic net sales increased 12%, driven by positive organic price mix, partially offset by lower organic pound volume. Year-to-date adjusted operating profit of $2.6 billion increased 11% in constant currency and adjusted diluted earnings per share of $3.18 were up 14% in constant currency. Turning to the balance sheet and cash flow on slide 25.

[Kofi Bruce, CFO at General Mills]

While we drove strong growth in adjusted net earnings in the first nine months of fiscal 2023, our operating cash flow was down from $2.2 billion a year ago to $2 billion this year, driven primarily by an increase in inventory and higher cash tax payments.

[Kofi Bruce, CFO at General Mills]

Year-to-date capital investments totaled $351 million. We returned nearly $2 billion in cash to shareholders in the first nine months of the year through dividends and net share repurchases. On slide 26, you can see our outlook for fiscal 2023. Relative to our prior update, we continued to post strong performance in North America Retail. We delivered the expected acceleration in our pet top-line results. We saw encouraging improvement in operating profit results from North America Foodservice and International.

[Kofi Bruce, CFO at General Mills]

With stronger and more broad-based business momentum, we have raised our guidance and now expect organic net sales to increase 10% to 11%, adjusted operating profit to grow 7% to 8% in constant currency. Adjusted diluted earnings per share to grow 8% to 9% in constant currency.

[Kofi Bruce, CFO at General Mills]

These profit and EPS ranges include a three-point net headwind from divestitures and acquisitions and an estimated one-point headwind from the ice cream recall. Additionally, we continue to expect free cash flow conversion will be at least 90% of adjusted after-tax earnings. These guidance ranges imply a deceleration in net sales and profit growth in the fourth quarter, driven by a much more challenging comparison in last year's fourth quarter. On a two-year basis, our guidance assumes our growth in fourth quarter is generally consistent with third quarter. Now let me turn it back to Jeff for some closing remarks.

[Jeff Harmening, Chairman and CEO at General Mills]

Thanks, Kofi. Let me close with a few thoughts. We're advancing our Accelerate strategy and executing well on our fiscal 2023 priorities. We built on our positive momentum in third quarter and generated broad-based growth across our segments. Our brands continue to win with consumers, and we plan to sustain this momentum by investing further in brand building, innovation, and capabilities that will drive future growth. We're on track to deliver a strong year, having raised guidance yet again this quarter. Thank you for your time this morning.

[Jeff Harmening, Chairman and CEO at General Mills]

This concludes our prepared remarks. I invite you to listen to our live question and answer webcast, which will begin at 8:00AM Central Time this morning and will be available for replay on our investor relations page at generalmills.com.

Participants

Executives

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