General Mills : Third Quarter 2024 Transcript - Prepared Remarks

GENERAL MILLS FISCAL 2024 Q3 EARNINGS CALL

March 20, 2024

Pre-Recorded, Available by 6:30 a.m. Central Time

CORPORATE PARTICIPANTS

Jeff Siemon, Vice President, Investor Relations & Treasurer

Jeff Harmening, Chairman and Chief Executive Officer

Kofi Bruce, Chief Financial Officer

PRESENTATION

Jeff Siemon

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 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. Before I hand things over to them, let me first touch on a few items.

On our website, you will 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. And with that, I will turn it over to Jeff.

Jeff Harmening

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've continued 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 third quarter. We know 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.

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General Mills - Third Quarter Fiscal 2024 Earnings Webcast, March 20, 2024

Based on our third-quarter results and our outlook for Q4, we are reaffirming our full-year guidance for fiscal 2024. Later in the presentation, Kofi will share more details on our fourth-quarter expectations, including a prior-year trade timing comparison that will be a headwind to this year's Q4 results.

Slide 5 summarizes our third-quarter and year-to-date results. Organic net sales for the third quarter were down 1 percent, reflecting lower organic pound volume partially offset by positive price/mix. Our volume trends improved in the third quarter compared to the first half and to fiscal 2023. Third-quarter adjusted operating profit increased 14 percent and adjusted diluted earnings per share were up 22 percent, each in constant currency.

Our year-to-date fiscal 2024 results include growth on the top and bottom lines, with organic net sales up 1 percent, constant-currency adjusted operating profit up 9 percent, and constant-currency adjusted diluted EPS up 11 percent.

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 headwinds, first, we've seen 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 increasing 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 Foodservice 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 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.

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."

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General Mills - Third Quarter Fiscal 2024 Earnings Webcast, March 20, 2024

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 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 percent, and Google search activity increase by almost 50 percent.

We've also increased our innovation pressure and prioritized our resources against several impactful launches. On 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.

And finally, we're ensuring that our brands are available wherever consumers shop. We are pleased with the continued progress we've made on distribution in Q3, with more than 90 percent 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 in-market competitiveness. In January and February, more than 40 percent of our priority businesses held or grew market share, and we are seeing improving 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 and May.

In our Pet segment, we saw a modest improvement in Blue Buffalo's U.S. retail sales trends in the third quarter, compared to the second quarter of the fiscal year.

Much of this improvement was attributable to the performance of our Life Protection Formula dry dog food line, which saw Nielsen-measured pound volume increase 8 percent. 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.

Turning to our Foodservice segment, we continued 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.

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General Mills - Third Quarter Fiscal 2024 Earnings Webcast, March 20, 2024

In our International segment, China net sales declined due to continued macro-economic 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 & Australia. We continued to see retail sales growth on key global platforms, including Old El Paso Mexican food, Haagen-Dazs retail ice cream, and Snack Bars.

On 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 HMM cost savings program. We have continued to make progress in removing disruption-related costs and accelerating our HMM delivery in fiscal '24. We remain on track to deliver 5 percent HMM 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 our inventories. We made nice progress on this front in Q3, with our inventory balances at their lowest levels since the second quarter of fiscal 2022.

For our third priority, we are on track to deliver against our capital allocation priorities, which include investing back into our operations for growth and cost savings. We expect full-year capital investments to be roughly 4 percent of net sales. Next, we increased our dividend by 9 percent 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 third quarter we repurchased nearly $300 million dollars worth of shares and we expect to reduce our average diluted share count by approximately 3 percent in fiscal 2024.

With that, let me turn it over to Kofi to go into more details on our third-quarter results.

Kofi Bruce

Thanks, Jeff. And hello everyone.

Our third-quarter financial results are summarized on slide 15. Reported net sales of $5.1 billion dollars were down 1 percent, and organic net sales also declined 1 percent in the quarter, reflecting lower pound volume, partially offset by positive price/mix.

Adjusted operating profit of $914 million dollars was up 14 percent 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 percent 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.

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General Mills - Third Quarter Fiscal 2024 Earnings Webcast, March 20, 2024

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. Foreign exchange and the net impact of acquisitions and divestitures were not material to net sales in Q3.

Shifting to segment results, third-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. 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 percent for U.S. Morning Foods and up 8 percent for Canada. Net sales were down 1 percent for U.S. Meals & Baking Solutions and down 2 percent for U.S. Snacks.

On the bottom line, constant-currency segment operating profit was down 4 percent 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 HMM cost savings and positive price/mix.

Moving on to our Pet segment results on slide 18, third-quarter organic net sales were 3 percent below year- ago results that grew double digits. Lower organic pound volume in the third quarter 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, third-quarter Pet segment operating profit was up 25 percent in constant currency, driven by HMM cost savings and positive price/mix, partially offset by lower volume, higher SG&A expenses, and input cost inflation.

North America Foodservice organic net sales were up 1 percent in the third quarter, 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 percent in Q3, driven by higher other supply chain costs and higher SG&A expenses, partially offset by positive price/mix and HMM cost savings.

For our International segment, third-quarter organic net sales were down 3 percent, driven by lower volume. Net sales declines in China and Brazil were partially offset by continued growth in Europe & Australia.

Third-quarter segment operating profit totaled $18 million dollars compared to $42 million a year ago, driven by higher input costs and lower volume.

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General Mills - Third Quarter Fiscal 2024 Earnings Webcast, March 20, 2024

Slide 21 summarizes our joint venture results. Cereal Partners Worldwide net sales were up 11 percent in constant currency in Q3, driven by positive price/mix, partially offset by lower pound volume. Häagen-Dazs Japan net sales were down 2 percent in constant currency, driven by the timing of new product launches.

Third-quarter combined after-tax earnings from joint ventures increased 64 percent in constant currency to $18 million dollars, driven primarily by higher after-tax net earnings at Cereal Partners Worldwide.

Our margin results are highlighted on slide 22. Our third-quarter adjusted gross margin increased 20 basis points to 34 percent of net sales, driven by HMM 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 HMM 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 third-quarter adjusted operating profit margin was up 220 basis points to 17.9 percent, driven by lower SG&A expenses as a percent of net sales and higher adjusted gross margin.

Moving to other noteworthy Q3 income-statement items. Adjusted unallocated corporate expenses decreased $140 million dollars in the quarter, primarily driven by lower compensation and benefits-related expenses. Third-quarter net interest expense increased $23 million dollars, driven primarily by higher rates and higher average long-term debt balances. The adjusted effective tax rate was 18.4 percent compared to 21.6 percent a year ago, driven primarily by certain nonrecurring discrete tax benefits in the third quarter of fiscal 2024. 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 percent to 573 million.

Our nine-month fiscal 2024 results are summarized on slide 24. Net sales of $15.1 billion dollars were up 1 percent versus last year. Organic net sales also increased 1 percent, driven by positive organic price/mix, partially offset by lower organic pound volume. Year-to-date adjusted operating profit of $2.8 billion dollars increased 9 percent in constant currency. And adjusted diluted earnings per share of $3.51 were up 11 percent in constant currency.

Turning to the balance sheet and cash flow on slide 25. Nine-month operating cash flow increased 20 percent to $2.4 billion dollars, driven by an increase in net earnings, excluding net gains on divestitures in fiscal 2023. Year-to-date capital investments totaled $486 million dollars. We remain on track for capital investment to equal roughly 4 percent of net sales for the full year. And we've returned $2.6 billion dollars in cash to shareholders in the first nine months of the year through dividends and net share repurchases, representing a 34 percent increase versus a year ago.  

Slide 26 includes our reaffirmed fiscal 2024 financial outlook. We expect organic net sales to range between down 1 percent and flat. Adjusted operating profit and adjusted diluted EPS are each expected to increase 4 to 5 percent in constant currency. And free cash flow conversion is expected to be at least 95 percent of adjusted after-tax earnings.

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General Mills - Third Quarter Fiscal 2024 Earnings Webcast, March 20, 2024

Looking to our fourth quarter, there are a couple 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 fourth quarter. This dynamic will present roughly a 3-point headwind to net sales growth and a double- digit headwind to adjusted operating profit growth in this year's fourth quarter.

Second, we expect continued input cost inflation on our cost of goods sold in the fourth quarter, and we'll address that with continued strong HMM cost savings delivery.

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

Jeff Harmening

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 in-market performance and deliver cost savings above historical levels. As we have many times before, we'll 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 on our fiscal 2024 guidance, as well as our ability to deliver strong returns for our shareholders over the long term.

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