General Mills Inc

NYSE:GIS

Earnings Call Transcript 2023-Q4

[Jeff Siemon, Vice President of Investor Relations]

Good morning. This is Jeff Siemon, Vice President of Investor Relations. Thank you for listening to General Mills' Prepared Remarks for our Fiscal 2023 Fourth Quarter and Full Year 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 will find our press release that posted this morning, along with a copy of the presentation and 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 will turn it over to Jeff.

[Jeff Harmening, Chairman and Chief Executive Officer]

Thank you, Jeff, and good morning, everyone. Let me start by summarizing today's key messages.

Fiscal 2023 was a tremendous year for General Mills, marking the fifth consecutive year that we've delivered results that met or exceeded our targets for top and bottom-line growth. We generated double-digit growth on organic net sales and adjusted EPS and exceeded $20 billion in annual net sales for the first time in our company's history. Led by our Accelerate strategy, our team successfully navigated an extraordinarily dynamic operating environment with agility, focus, and resilience.

As we turn to fiscal '24, we'll lean on those same traits to continue to succeed as the business landscape evolves. We'll focus on continuing to compete effectively, driving efficiency in our operations, and maintaining our disciplined approach to capital allocation. By doing so, we expect to deliver financial performance in fiscal '24 that meets or exceeds each of our long-term growth targets. To underscore our commitment to driving strong returns to General Mills shareholders, our Board approved a 9% dividend increase, effective with the August 2023 payment.

Slide 5 summarizes our fourth quarter and full year financial performance for fiscal 2023. We delivered 5% organic net sales growth in Q4, despite a significant headwind from a reduction in retailer inventory in North America Retail. Adjusted operating profit was flat and adjusted diluted EPS was up 1%, each in constant currency. These quarterly results were up against a challenging comparison from a year ago, when we delivered double-digit organic net sales growth and more than 20% growth in adjusted operating profit and adjusted diluted EPS.

On a two-year compound growth basis, Q4 organic net sales were up 9%, adjusted operating profit was up 10% in constant currency, and adjusted diluted EPS was up 11% in constant currency. For the full year, we generated 10% organic net sales growth, 8% growth in constant currency adjusted operating profit, and 10% growth in constant currency adjusted diluted EPS.

A year ago, we laid out three priorities that would enable us to continue to drive our Accelerate strategy and deliver our financial commitments: continuing to compete effectively; continuing to invest for the future; and continuing to reshape our portfolio. Let me share a few examples of how we delivered on each of these priorities in fiscal 2023.

We continued to compete effectively in fiscal 2023, holding or gaining share in 53% of our priority businesses globally, when adjusting for an unusual competitive dynamic in cereal last year and looking at the platform on a two-year basis. This included share gains across many important platforms such as cereal, refrigerated dough, fruit snacks, hot snacks, soup, and seasonings. This marks five consecutive years of strong market share performance across our portfolio, enabled by our superior brand building, innovation, and execution, and supported with healthy levels of investment.

We continued to invest for the future in fiscal '23 on many fronts. We increased our media investment by 17%, with a particular focus on digital consumer engagement. In fact, our media spend in fiscal '23 was 35% higher than our pre-pandemic level. We increased our total capability investment in fiscal '23, including a double-digit increase in our digital and technology investment. We also increased our investment in growth capital by double-digits, supporting additional capacity on constrained platforms, including fruit snacks, pet food, and hot snacks.

Another important way we invest for the future is by standing for good. We recently released our 53rd Annual Global Responsibility Report. In this report, we shared progress against our ESG commitments, including our commitment to reduce greenhouse gas emissions by 30% by 2030 and achieve net zero emissions by 2050.

We've already made great progress on reducing scope 1 and 2 emissions, with our 2022 emissions down 49% from our 2020 baseline. We achieved this through a comprehensive action plan, including implementing renewable electricity for nearly 90% of our global facilities' needs and driving waste reduction at the plant level.

At the same time, we still have significant work to do to reduce our scope 3 emissions, most of which is either upstream within agriculture or downstream at our consumers. Because these areas are outside of our direct control, we're partnering with suppliers, farmers, NGOs, government agencies, and other manufacturers to make a bigger impact.

To ensure we achieve our 2030 and 2050 targets, we've developed a glide path focused on key levers that will drive scope 3 emissions reductions, including: expansion of regenerative agriculture, dairy management, deforestation mitigation, logistics optimization, and supplier engagement. We are proud of the work we've completed to date, while acknowledging the challenges we face and the significant work ahead of us to achieve these important goals.

We also delivered against our third priority in fiscal '23. We continued to reshape our portfolio, closing on one acquisition and two divestitures that further improved our growth profile. Including these transactions, we have reshaped more than 20% of our portfolio since fiscal 2018 and increased our net sales growth exposure by more than a full point. We believe that holding share across our current mix of categories and geographies will generate organic net sales growth that is squarely in the middle of our 2% to 3% long-term target.

Looking ahead to fiscal 2024, we see a new environment emerging across multiple vectors. We see inflation moderating significantly in the coming year, going from 13% input cost inflation in fiscal '23 to 5% in fiscal '24. While certain commodity spot prices are down from their highs, we continue to see labor as the main source of ongoing inflation, showing up in our suppliers' conversion costs, at our copackers' facilities, in our own plants, and downstream in our warehousing and logistics network.

Our consumers have remained resilient, due in part to average bank account balances, credit card debt, and unemployment levels that are more favorable than they were before the pandemic. Despite that, we know from spending time with consumers that they are increasingly cautious about their financial future. This caution could have an impact on their at-home versus away-from-home food choices, the channels they shop, and the brands they choose, making it even more important for us to continue to invest in remarkable products, innovation, and marketing that keep our brands relevant for consumers.

And in terms of supply chain, we are emerging from a highly disrupted environment into one that is showing signs of stabilization. The current level of supply chain disruptions is generally in line with pre-pandemic levels, and our customer service levels have reached the low 90% range in the U.S., with the main barrier to reaching the upper 90%s being various growth platforms where we have capacity constraints such as fruit snacks, cereal, and hot snacks. A more normalized supply chain environment will allow us to ramp up Holistic Margin Management productivity savings, further reduce the cost of disruptions, and free up resources to focus on demand-driving activities such as distribution, innovation, marketing, and quality merchandising.

Our ability to adapt has been a key differentiator for General Mills in recent years, and we like our chances to continue to respond more quickly and successfully than our competition to whatever changes come our way in the year ahead.

We established three priorities for fiscal 2024, highlighted on Slide 12, with this evolving environment in mind: first, we will continue to compete effectively, by leveraging remarkable brand building, innovation, and advantaged capabilities to win with a changing consumer; second, we will further improve our supply chain efficiency, with a focus on increasing HMM cost savings and reducing costs related to supply chain disruptions; and third, we will 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 share some of the actions we're taking within each of these priorities in fiscal 2024. As we move into a potentially more challenging economic environment, it's critical that we step up our investment in brand-building campaigns that keep our brands relevant for consumers. In fiscal '24, we'll support strong campaigns across our biggest brands that highlight the great taste, convenience, nutrition, and importantly, value of our products.

For example, our Pillsbury brand's "Fill. Roll. Bake." campaign continues to inspire easy everyday dinner solutions for consumers. Blue Buffalo continues to communicate our ingredient superiority through our True Blue promise and reminds pet parents of the joy Blue Buffalo treats bring to their families. And Old El Paso's "Make Some Noise" campaign in Europe drives ritualization by encouraging consumers to turn Friday into Fajita Friday.

We'll also continue to compete effectively by stepping up the impact of our innovation. Over the past three years, we've launched a healthy number of new items, leading our categories. However, the challenging operating environment has meant we've had a more difficult time securing customer acceptance for that innovation. As the supply chain environment stabilizes, we're seeing retailers become more receptive to our new products, and we expect innovation to be a larger contributor to net sales in fiscal '24.

In North America Retail, we're adding Lucky Charms and Cocoa Puffs to our highly successful Minis cereal platform, and we're rolling out a new Kit-Kat cereal. We're launching a new savory line of Nature Valley crunchy bars, with nuts as the first ingredient and only 2 grams of sugar. We're bringing luxury to the yogurt aisle with the debut of Häagen-Dazs cultured crème, a new line of indulgent fresh dairy snacks in six varieties, made with the same high-quality ingredients that we use in the beloved super-premium ice cream. We're leveraging our superior cookie dough technology to provide consumers the most convenient way to bake banana bread at home with our new refrigerated batter. And our new Stacked Queso Crunch Kit brings this great-tasting family favorite to taco night in three easy steps.

In our Pet segment, we've launched Nudges On-The-Go, which leverages more convenient packaging to create a new usage occasion, and Blue Benebars, which offer a familiar snacking form with functional benefits for your furry family member.

In North America Foodservice, we're providing more tasty nutrition including a reduced-sugar version of CocoPuffs in a two-equivalent-grain format that meets K-through-12 school nutrition requirements.

And in International, Häagen-Dazs Macaron ice cream is a unique collaboration with world-renowned pastry chef Pierre Hermé. We're launching this blend of chewy macaron shells in creamy Häagen-Dazs ice cream across pint, minicup, and stick formats.

We'll also continue to compete effectively by executing with excellence both in-store and online. We'll leverage our strong innovation line-up, new price-pack configurations, and improved customer service to strengthen our share of the physical shelf. We'll look to restore our levels of quality merchandising through compelling end-aisle and freestanding displays on highly productive categories like cereal and snack bars, as well as seasonal offerings in soup and desserts. And we plan to continue to leverage our data and analytical capabilities to assess and improve our presence on the digital shelf. These tools and processes enabled us to grow our U.S. E-commerce retail sales by 24% in fiscal '23, and we plan to continue this momentum in fiscal '24.

Our second priority for fiscal 2024 is to improve our supply chain efficiency as the environment normalizes. In fiscal '23, we chose to focus our resources on service and supply chain stability, leading to lower-than-historical HMM cost savings. A more stable supply chain in fiscal '24 will allow us to reorient these resources back to driving HMM, which should help us get our cost savings back to our historical 4% of cost of goods level.

In addition to benefiting from fewer supply chain disruptions, we'll step up our HMM delivery in fiscal '24 by opportunistically internalizing production volume to drive better fixed cost leverage; shifting back to original formulas from more expensive alternatives we used during the pandemic in response to ingredient shortages; optimizing our warehouse and logistics networks that were sub-optimized to service the business; and leveraging our new supply chain digitization capabilities to eliminate waste.

Our final priority for fiscal 2024 is to maintain our disciplined approach to capital allocation. Our first call on cash is investing back into the business to drive organic growth. In fiscal '24, we plan to invest around 4% of net sales in capital expenditures, with a focus on high-ROI cost savings projects and capacity additions on constrained platforms. We are also committed to utilizing capital to fund strong and consistent dividend growth. As we announced today, our Board of Directors approved a 9% dividend increase, effective with our August 1st payment. With our debt leverage at 2.7 times, we have the flexibility for strategic acquisitions that would further advance our portfolio reshaping ambitions. And to the extent, we're generating excess cash beyond those uses, we will return it to shareholders in the form of share repurchases.

By competing effectively, driving efficiency in our operations, and maintaining our disciplined approach to capital allocation, we expect to drive financial results in fiscal 2024 that meet or exceed our long-term growth goals. Our specific targets are outlined on Slide 18. We expect organic net sales to grow 3% to 4%. We expect adjusted operating profit and adjusted diluted EPS to each grow between 4% and 6% in constant currency. And we expect free cash flow conversion to be at least 95% of adjusted after tax earnings.

With that, let me turn it over to Kofi to go into more details on our fiscal 2023 results and fiscal 2024 outlook.

[Kofi Bruce, Chief Financial Officer]

Thanks, Jeff. And hello everyone.

Our fourth quarter financial results are summarized on Slide 20. Reported net sales of $5 billion were up 3%, and organic net sales grew 5% in the quarter, reflecting continued positive price/mix, partially offset by lower pound volume. It's important to note that our shipments significantly lagged Nielsen-measured consumption in our North America Retail segment this quarter, primarily reflecting a reduction in retailer inventory. This gap represented approximately 3 points of headwind to our total company net sales growth in the fourth quarter.

Adjusted operating profit of $889 million essentially matched last year's result in constant currency, driven by higher input costs, higher SG&A expenses, including a double-digit increase in media investment, and lower volume, offset by positive price/mix.

Adjusted diluted earnings per share totaled $1.12 in the quarter and were up 1% in constant currency.

Slide 21 summarizes the components of our net sales growth in the quarter. We generated 11 points of positive organic price/mix in Q4, while organic pound volume was down 6 points, including the retailer inventory headwind I mentioned earlier. Foreign exchange reduced net sales by 1 point, and the net impact of acquisitions and divestitures was also a 1-point headwind to fourth quarter net sales.

A review of our segment results begins on Slide 22. For North America Retail, fourth quarter organic net sales were up 5%, while comparable Nielsen-measured retail sales were up 10%. Constant currency segment operating profit was up 2% in the quarter, driven by positive price/mix, partially offset by higher input costs, lower volume, and higher SG&A expenses, including a double-digit increase in media investment.

For the full year, organic net sales were up 12%, with mid-teens organic price/mix partially offset by a 4-point headwind from lower organic pound volume. Our net sales performance lagged retail sales growth by about 2 points for the year in North America Retail. In fact, retailer inventory reduction was a headwind in NAR for six of the past eight quarters as retailers put a sharp focus on their balance sheets and managed their working capital. Based on our assessment of current retailer inventory levels, we do not expect a further significant reduction in fiscal 2024.

Despite the retailer inventory headwind, we delivered strong and broad-based net sales growth across our NAR operating units in fiscal 2023, with U.S. Snacks up 13%, U.S. Meals & Baking Solutions up 10%, U.S. Morning Foods up 7%, and Canada up 8% in constant currency. We competed effectively in fiscal '23, with 68% of our North America Retail priority businesses holding or growing share, when adjusting for cereal on a two-year basis.

On the bottom line, full year segment operating profit increased 18% in constant currency, driven primarily by positive price/mix, partially offset by higher input costs, lower volume, and higher SG&A expenses, including a double-digit increase in media investment.

Moving on to our Pet segment results on Slide 23, fourth quarter organic net sales increased 7%, resulting in double-digit organic net sales growth in the back half, in line with our guidance. As we communicated over the past two quarters, our key pet food platforms are in different phases of recovery from our earlier capacity and service challenges, with net sales in the quarter up double digits on dry pet food, up high-single digits on pet treats, and down high-single digits on wet pet food.

Constant currency segment operating profit was up 18% in the quarter, driven by positive price/mix, partially offset by higher SG&A expenses, including a double-digit increase in media investment, and higher input costs.

For the full year, Pet segment organic net sales increased 9%. We drove double-digit net sales growth on dry pet food and pet treats, while net sales for wet pet food were flat to last year.

On the bottom line, Pet segment operating profit was down 5% in fiscal ‘23, driven primarily by higher input costs, higher SG&A expenses, including a double-digit increase in media investment, and lower volume, partially offset by positive price/mix.

As we look ahead, we expect to drive Pet operating profit growth a bit faster than organic net sales in fiscal 2024, supported by improved volume performance, lower disruption-related supply chain costs, and benefits from our SRM capability.

North America Foodservice segment results can be found on Slide 24. Organic net sales grew 1% in the quarter, including a 2-point headwind from index pricing on bakery flour. On the bottom line, fourth quarter segment operating profit was down 10%, driven by higher input costs and higher SG&A expenses, partially offset by positive price/mix and higher volume.

For the full year, reported net sales grew 19%, including a 6-point tailwind from the TNT Crust acquisition. Organic net sales increased 13%, driven by positive price/mix, including a 5-point benefit from index pricing on bakery flour. Segment operating profit increased 14%, driven by positive price/mix and higher volume, partially offset by higher input costs and higher SG&A expenses.

Turning to our International segment on Slide 25. Fourth quarter organic net sales were up 6%, driven by growth in ice cream, Mexican food, and snack bars, partially offset by a decline in Wanchai Ferry frozen meals in China as that market shifted back toward more away-from-home dining.

Fourth quarter segment operating profit declined 9% in constant currency, driven by higher input costs, lower volume, and higher SG&A expenses, partially offset by positive price/mix.

Full year International organic net sales were up 4%, led by growth in Europe & Australia, Brazil, and our distributor markets, partially offset by a decline in China due to the ice cream recall and lower consumer mobility in the first half of the year. Full year segment operating profit was down 25% in constant currency, driven by higher input costs and lower volume, including the impacts of yogurt and dough divestures and the ice cream recall, partially offset by positive price/mix and lower SG&A expenses.

Slide 26 summarizes our joint venture results. Cereal Partners Worldwide net sales were up 8% in the fourth quarter and 4% for the year in constant currency, driven by positive price/mix, partially offset by lower pound volume. Häagen-Dazs Japan net sales were flat in the fourth quarter and declined 5% for the full year, reflecting a comparison against strong new product performance a year ago.

Full year combined after-tax earnings from joint ventures totaled $81 million compared to $112 million a year ago, driven primarily by higher input costs at CPW and Häagen-Dazs Japan and lower net sales at Häagen-Dazs Japan, partially offset by favorable CPW price/mix. Despite the year-on-year decline, fiscal 2023 after-tax JV earnings were still up 13% versus pre-pandemic fiscal 2019 levels.

Slide 27 summarizes other noteworthy Q4 income statement items. Adjusted unallocated corporate expenses increased $25 million in the quarter, primarily reflecting higher compensation and benefit expenses and capability investments this year. Net interest expense essentially matched year-ago levels. The adjusted effective tax rate was also essentially flat in the quarter at 19.1%. And average diluted shares outstanding in the quarter were down 2% to 598 million, reflecting our net share repurchase activity.

Our full year financial results are summarized on Slide 28. Net sales of $20.1 billion were up 6%, including a 4-point headwind from net divestiture and acquisition activity and 1 point of unfavorable foreign exchange. Organic net sales increased 10%, driven by positive organic price/mix, partially offset by lower organic pound volume. Adjusted operating profit of $3.5 billion increased 8% in constant currency. And adjusted diluted earnings per share of $4.30 were up 10% in constant currency.

Now let's turn to our margin results on Slide 29. We expanded our adjusted gross margin by 120 basis points in Q4 and for the full year, driven by positive price/mix, partially offset by higher input costs and volume deleverage. Our full year adjusted gross margin of 34.2% is only 20 basis points below fiscal 2019 levels, thanks to our significant work to implement timely SRM actions, generate HMM cost savings, and begin to eliminate costs related to supply chain disruptions. And we see room for further improvement as we look ahead.

On the bottom line, fourth quarter adjusted operating profit margin was down 60 basis points to 17.7%. Full year adjusted operating profit margin increased 30 basis points to 17.2%, driven by higher adjusted gross margin, partially offset by higher SG&A expenses as a percent of net sales.

Turning to the balance sheet and cash flow on Slide 30. While we drove strong growth in adjusted net earnings in fiscal 2023, our operating cash flow was down from $3.3 billion a year ago to $2.8 billion this year, driven primarily by changes in inventory and accounts payable. Capital investments totaled $690 million, or 3.4% of net sales, which was up from 3% of net sales a year ago, driven by increased investment in growth capital. We delivered free cash flow conversion of 80% adjusted after-tax earnings in fiscal 2023. And we reduced our leverage to 2.7 times net debt to adjusted EBITDA, even after stepping up our cash returns to shareholders this year.

You can see on Slide 31 that we increased our total cash returned to shareholders by 25% in fiscal 2023 to $2.5 billion. Our 6% annual dividend rate increase in fiscal 2023 was partially offset by a lower net share count, resulting in a 3% increase in total dividends paid to $1.3 billion. And we stepped up our full year net share repurchase activity by more than 50% to roughly $1.2 billion.

With strong net earnings growth in fiscal 2023 and plans for continued growth in fiscal 2024, our Board of Directors today announced a 9% increase in our quarterly dividend rate to $0.59 per share rate, effective with our August payment. General Mills has paid a dividend without interruption or reduction for each of the 95 years we have been a public company.

On Slide 32, we've provided some key financial assumptions for fiscal 2024. On the top-line, we expect contributions from organic price/mix to decelerate, but remain positive in fiscal '24, following a similar trend as the deceleration in input cost inflation that Jeff mentioned earlier. The majority of our fiscal '24 price/mix will be carried over from SRM actions taken in the back half of fiscal 2023.

We see three key drivers of improved organic pound volume performance in fiscal 2024 relative to the decline we posted in fiscal 2023. First, we expect less of a headwind from pricing as our price/mix steps down significantly from fiscal '23 to fiscal '24. Second, a more stable supply chain should allow for much stronger commercial activity, including increased distribution, innovation, brand-building investment, and quality merchandising. Third, we have added capacity on many constrained platforms including fruit snacks, pet food, and hot snacks.

Moving down the P&L, we're forecasting 5% input cost inflation on our cost of goods sold, driven primarily by labor inflation that continues to impact all aspects of our supply chain, including our raw material suppliers and co-packers, our manufacturing facilities, and our warehouse and logistics providers. As Jeff mentioned, we expect to step up our HMM cost savings to 4% of cost of goods sold. And we'll continue to invest in the future, primarily in the form of increased brand-building and capability investments.

And below operating profit, we expect net interest expense to increase by 30% to approximately $490 million, driven by two main factors. First, we have roughly $4 billion of debt that will be refinanced between the end of fiscal 2023 and fiscal 2024, with interest rates on the new debt generally 200 basis points higher than the debt that it's replacing. And second, we'll be impacted by higher rates on our floating-rate debt, which makes up about 20% of our overall debt portfolio.

Our adjusted effective tax rate is expected to be roughly in line with last year at a little more than 20%. And we anticipate reducing our average diluted shares outstanding by roughly 2%. Based on those assumptions, Slide 33 reiterates the fiscal 2024 outlook that Jeff shared earlier, with each of our targets at or ahead of our long-term algorithm.

With that, let me now turn it back to Jeff for some closing remarks.

[Jeff Harmening, Chairman and Chief Executive Officer]

Thanks, Kofi. Let me close with a few thoughts. We delivered a highly successful year in fiscal 2023 by executing our Accelerate strategy amid a volatile and inflationary environment. Looking to the year ahead, we will continue to build on our momentum by competing effectively, improving the efficiency of our supply chain, and maintaining our capital discipline.

Thank you for your time this morning. This concludes our prepared remarks. I invite you to listen to our live question-and-answer webcast, which will begin at 8:00 a.m. central time this morning and will be available for replay on our Investor Relations page at generalmills.com.