Greetings, and welcome to the Fiscal 2021 Q3 Earnings Call. During the presentation, all participant lines will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded Wednesday, March 24, 2021. I would now like to turn the conference over to Justin, VP of Investor Relations.
Please go ahead.
Thanks, Jennifer, and good morning to everyone. On behalf of my colleagues at General Mills, thanks for joining us. We are looking forward to have our live Q and A session on our Q3 results. I hope everyone had a chance to review our press release, Listen to our prepared remarks and view our presentation materials, which are made available this morning on our Investor Relations site. Also refer to the press release we issued yesterday announcing our proposed sale of our European deal play operations to Sotial.
I'll just note that in regard to that transaction, we have a memorandum of understanding, and that is still subject to appropriate labor And we expect to Close that proposed transaction by the end of the calendar year. Furthermore, it's important to note that in our Q and A session today, we may make forward looking statements That are based on management's current views and assumptions, including facts and assumptions related to the potential impact of the COVID-nineteen pandemic on our results in fiscal 'twenty one. Please refer to this morning's press release for factors that could impact our forward looking statements and for reconciliations of non GAAP information, which may be discussed on today's call. I'm here virtually with Jeff Harmening, our Chairman and CEO Kofi Bruce, our CFO Stephanie Quam, Group President for our Pet Segments And John Yuchty, President from North America Retail. We're holding this call from different locations, so hopefully technology cooperates and everything goes smoothly.
And with that, we can get into First question, Jennifer, you can get us started.
Thank
I think I'd like to stick with the 2 year growth CAGR methodology that you kind of laid out and discussed in the prepared remarks. Thinking about it that way would imply fiscal 4Q organic sales growth that would look to be roughly in line with what you reported in fiscal 3Q, again on a 2 year basis. And I realize some of this is likely a bit of a shift of inventory refill from that you expected in 3Q into 4Q, But it would seem to suggest you believe sales growth the sales growth deceleration as reopening occurs is likely to be maybe slower
So I'm just trying to get
a sense if that's a fair characterization of your thinking at this juncture? And if it is, sort of what's informing that viewpoint? Thank you.
Yes. Thank you, Andrew. This is Jeff Harmening. You have that exactly right. I mean, as we look at the Q3 of this year, demand was high all over the world, including the Fueled by the pandemic as well as stimulus spending and in addition to that some weather related events.
So as we look at Q4, We really believe that our sales both in terms of pounds and pricing is going to be higher than it was Pre pandemic and we're seeing that in the 1st couple of weeks of the month and we're confident that consumer behaviors aren't changing as quickly as some would think. And what fuels that, Andrew, is really as you look at the last year,
if you look
at 2020, our foodservice business in general in the U. S, Industry declined about 25%. And of that, about 25% was quick service restaurants, schools and healthcare. And we've seen quick service restaurants bounce back Schools are gradually getting online as is health care. So that bounces back relatively quickly.
Another 25% of that decline was related to casual dining, and that's going to take longer And then finally, about half of the decline we've seen over the last year in away from home heating is really driven by travel, leisure, business and industry. Thank you know, canteens at places of work. And clearly, that's going to take a longer term to cut back if it ever does at all because we're not going to work the We're going to be working at home a little more than we were before. People want flexible schedules. While consumers may be making vacation plans now more than they have, business people are not going to be It's much because technology has cut up and we realized we can do a lot of things remotely.
And so we know what fuels our belief in the Q4 and we're confident is not only inventory buildup, Moving will be better than what some expected based on what we've seen over the past year and kind of what we see in the 1st few weeks of this
month, this quarter.
Great. Thanks very much. I'll leave it
there. Thanks.
Our next question comes from the line of Ken Goldman with JPMorgan. Please proceed with your question.
Hi, thank you. 2 for me. First, how should we think about your appetite for being aggressive on share repo? Just looking back prior to the BUC deal, there were some years the company spent upwards of $1,700,000,000 on buybacks. So Should we think this level is at least within the realm of possibilities or do you want to keep a little more dry powder around?
That's my first one.
Sure. Ken, this is Kofi. Good morning. Thanks for the question. Look, I think we are absolutely in a position where We ended the quarter with a really strong balance sheet, a leverage ratio at 2.8 times net debt to EBITDA, Which means that we've continued to make great progress against our capital goals.
I expect we will restore our full capacity To use all of our levers of cash return. And I think with the signal that I think was important is that we've already started. So while I can't commit to anything beyond what we've done, We continue to have the flexibility to act and use the balance sheet to the extent that to the full extent of our capital allocation policy. And I think as a reminder, share repurchase is the last of those. So that is where we would look
And then, Daphne, Within broader Pepsi, the refrigerated, temperature state, it's small, but it's growing quickly, not really showing a lot of signs Slowing down except for some supply chain issues. Has Blue Buffalo's appetite to break into this subcategory changed at all? Or is it still sort of a wait and see attitude, which is not necessarily what you've said, but what some of your predecessors may have kind of implied in talking about it?
Well, hi, thanks for the question. What we really have seen is that pet parents throughout this pandemic have really Wanted to continue to offer their pets different forms. So you're talking about different forms here. So we've seen mixing between kibble and then Wet food from cans, our wet business is performing incredibly well, as well as fresh. It's still a very All part of the category, but the trend is pet parents continue to mix different kinds of food.
So we'll continue to look at all those different areas and continue to take the Blue Buffalo Master Brand where we think pet parents want to see it.
Thank you.
Our Next question comes from the line of Chris Growe with Stifel. Please proceed with your question.
Hi, good morning.
Hi, Chris.
I just
had a question for you. Hi, Chris. On to start first with cost inflation and to better understand the Yes, kind of some of the moving pieces in the gross margin, I think it's very clear about the inflation and there were some costs to secure incremental capacity. So just to understand a couple of simple things, was weather a factor at all on the gross margin for you this quarter? And then I also just want to understand like the rate of inflation and then How 4th quarter inflation might look in relation to the 3rd quarter?
Sure. Chris, I'll be happy to address your question. Thanks for asking. So as you think about the other factors, certainly as we flag, there are higher costs to operate in this higher demand environment. And I will tell you that part of the cost in our logistics network costs have gone up in relation to responding to the high demand environment.
Specifically, as we're operating in an environment where we need to open new lanes of freight to reach our external supply Capacity, but also to reposition within the network, which is where we've seen some incremental costs as related to the weather in the quarter. And as we get to Q4, while we're not giving guidance on Q4 inflation, I think it's important to note for the full year, We are still expecting about 3% inflation. And the way I'd characterize it is, our expectations at the beginning of the year were 3% and we were Rounding up to about 3%. And we are in a position now where we will be rounding down to about 3% inflation. And I think the critical thing for us is we're taking the opportunity to act with all of our SRM and our levers to set ourselves up in anticipation of higher inflation as we step into F 'twenty two.
Okay. Thank you for that. And then I had a separate question, if I could, on pets or perhaps for Bethany. But just in relation to You had some incremental promotional costs around Tastes Bowls, the launch of that. Does that continue?
Do you see a step up sort of increase in promotional spending for that business? And then that's also a division where there has been higher costs. Is that one where we could see some pricing coming through? Has that come through at all in the industry, Not looking for forward commentary there, but have you seen that yet in the industry?
Well, starting with the support, We're launching a new business and so you have costs to do that. And so we see ourselves spending At a rate that's right for the category and again we can work within the entire portfolio. So look at launch cost that we're talking right now. In terms of premiumization, that is absolutely continuing in every part of the category. So the premium cost per pound wet cat food is definitely higher than what you see in dry, but every part of category continue to see premiumization on a cost per pound basis.
And Chris, this is Jeff Siemon. I'd just add to the original question about Cost in the quarter, I'd just note that on a year to date basis, the Pet segment said about a little over 24% margin versus 22.5% last year. While the quarter was maybe there was a little bit of incremental cost, we still feel very good about where we are year to date for that business from a margin and a growth standpoint.
Okay. Thank you for that, Ben. I appreciate it.
Our next question comes from the line of Michael Lavery with Sandler Piper. Please proceed with your question.
Thank you. Good morning.
Good morning. Just following up on the Pet segment, you've had some accelerating volume growth over the course of the year. Can you give a sense of how much of that is driven from pipeline fill behind new launches versus just kind of a more Run rate type momentum?
Yes. Thanks for the question. So we've continued to see the movement of the business accelerate. And so in Q2, we had talked a little bit about MVMT when we had reported 18% sales Being a little bit ahead of our inventory, but our movement accelerated as we went into Q3. And so we feel
Okay, great. And then just following up on the inflation question, looking ahead a little bit, can you give a sense of how much You're positioning yourself for 'twenty two and just trying to get a sense of how much you think the Current kind of run-in prices might be sticky versus waiting to take some positions if it may come What's your thinking on that at a high level?
Well, certainly at a high level, we are preparing for Higher inflation. And I don't want to get too far ahead. We'll come back and talk to you in Q4 about F 'twenty two inflation expectations. But I will Just to reiterate, we are taking actions on the basis of that preparation, specifically around our and our
You bet.
Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Kofi and Jeff. I think I'm going to get the same answer as Michael just got. But Yes, inflation is accelerating higher than you thought. And I know you have multiple levers to offset it. But within SRM, I think list price increases are one of those levers.
So is it fair to say that that will have to be Utilized more than originally contemplated. And Look, a lot of retailers are talking about inflation right now. A lot of your competitors are talking about inflation. Is it fair to say That there's more willingness to pass that through. I know it's never easy, but it's not just you who's facing the
inflation. So,
let me take that question because if you get the same answer then at least you get it from a different person.
So, I would start by
saying that inflation is very broad based and it's actually global. So we're seeing it across the globe, we're seeing inflation and it's broad based across Commodities across logistics, across things like aluminum and steel. And so whenever you see this kind of broad based in place and it's global, That's an environment where you're going to realize net pricing. And we certainly go to first, but in this kind of environment, just like a few years ago when we saw the same thing, Our retailers are saying it, our competitors are saying it, we're saying it. And so we will realize pricing.
We'll also just so you know, we will use all of the tools and that includes less pricing. It's list pricing, it is price back architecture, it's how we manage trade and then finally price and mix. We'll need to use all those And when it comes to pricing, you go from the macro to the micro pretty fast. And so the levers we pull certainly depend on category And they certainly depend on geography. And so I want you to know we'll use all those levers at our disposal and we'll begin that process here in
the Q4.
And let me just add for additional context, a reminder that our first lever is holistic margin management, right, so our Cost of goods sold productivity, which has been averaging about 4% annually. So we're not relying just on SRM to address the issue. The first four points or so we would expect to get through gross margin productivity. Okay. I'll leave it there.
Thank you.
Our next question comes from the line of Jason English with Goldman Sachs.
I guess I'm going to keep coming back at sort of the same point of question. That's just really just trying to understand the margins here. Kofi, I think you clearly reached margins this quarter and I think you're guiding for profit or margins to actually be below 'nineteen levels in the Q4, so below pre COVID. And I'm trying to wrap my head around it. You're talking about savings Exceeding inflation.
So for the year, you're actually net deflation on those 2. You've got phenomenal volume leverage, Huge pricing rolling through, the best pricing in years. What is the other offset? You can stack Those are right there and I would expect meaningful margin expansion for the year, not profit actually falling below pre COVID. What are the other offsets?
Can you
help us quantify them? And which
of those offsets may be transitory and related to COVID with costs falling
As we look over the next, say, 12, 24 months.
Sure. Sure. So let me speak to some of the key drivers here. Yes, foundationally, after those, you need to look at the higher operating costs in this environment related to us securing additional Capacity from external supply chain. And with that, the logistics costs associated with operating in that environment It puts us in a position where we are securing more lanes for freight to support that external capacity At higher spot market rates, which we would note that we're seeing about mid single digit inflation in freight in this environment.
So as we're exposed to the spot markets on those external supply chain lanes, the cost of delivering To customers and distribution centers is higher. So those two factors, I would expect to be largely linked to the demand environment and as Supply and demand come more into balance. As our inventory levels in the system come more into balance, I would expect those costs to abate. And obviously, we're lapping a tremendously strong Q4, where a fair amount of leverage It was driven just in part because of the inventory in the system that both us and the retailers used to draw down
That's really helpful. Is there any
way to quantify some of those things, like
Yes. I don't want to get too specific on Q4, but I think it's fair to say that As you think about the offsets to some of the key drivers and specifically leverage, those are more than Sufficient to offset some of the leverage benefits we expect to see this year.
Okay. Thank you.
You bet.
Our next question comes from the line of Faiza Alwy with Deutsche Bank. Please proceed with your question.
Yes. Hi, good morning. So I guess I wanted to follow-up on Andrew's question and that was what I wanted to see If you could talk about how you think consumption patterns will trend from here? And within that, Specifically, how you think about the snack bar category, which is one of your global platforms. But Jeff, you talked About how you don't expect consumer habits to change.
So I'm curious how you're thinking About the recovery in that category, the overall category is fragmented and there are many different segments. So just wondering if you could share your aspiration
What we see happening is that demand will be higher in the near future than it was pre pandemic. Certainly, as people return to eating out and people return to schools, we'll see a reversion of some of that volume back to where it was Just not all the way back. So I would envision an environment where demand is not as high as it is today, and at home eating, but it's higher than it was pre pandemic. And I think some investors and some analysts feel as if volume is just going to snap back to the way it was before the pandemic. And what we've seen Outside the U.
S, what we're currently seeing in our current channels would lead us to believe that any return to normal will be more elongated and And that return to normal will eventually be different. So as we see that, the same will hold true of our bars category. And I'll give a little high A level commentary and then John Nudi may want to weigh in. In bars, because it really is energy on the go. The fact that the category has
been down recently is because people have not been on the go
as much. As people start to It's because people have not been on the go as much. As people start to get out a little bit more, we've seen the category improve a little bit. In fact, I'm really pleased with our progress in terms of share. We're competing effectively all over the world in our category.
That would be the U. S. As well as Europe as well as Australia. And so we're starting to see that category return a little bit and we've been competing quite John, do you have any other anything you want to add to that?
I mean, you really hit it, Jeff. I'm going to go make sure the categories, I mean, in a tough category, the grain Hi, this is Pat on high single digits here to date. Performance bars is down double digits. So again, that's been a tough place to play. And John mentioned, we've been really focused.
I'm proud of it that we're actually growing share in total bars. As many of you remember, we've been struggling with this category for the last few years. And And our turnaround is really one of our major value, our biggest brands. We've got some most strong marketing on there, some great news around recyclable wrapper that just rolled out As well as the number one launching of the category which we've passed this past year. So we feel good about how we're performing.
As Jeff mentioned, when we get back to a more normal time, we believe the
Great. And then just I wanted to also take advantage of Bethany being on call. And Bethany, I was hoping you could give us a little bit more color on the Treat side of the business. Early on, there was a view that as Blue Buffalo So, moves into FDM. That is the channel where treats are more prevalent.
And I think it's been a bit disappointing Relative to everything else that Lou has done, so I'm curious if you have any thoughts on the long term potential of the treats Business and whether there's sort of more innovation, more marketing, any more work you can do or that you think needs to be done around that side of the business.
Yes. Thanks. You're absolutely correct, right? As you get exposed into the food drug mass channel, there is more treats That are sold in that channel. Blue Buffalo definitely resonates with pet parents in terms of You'll see here in the Q4, we are launching a new innovation behind bones.
And so that is the Opportunity for pet parents to clean to feed a bone alternative crunchy biscuit that needs the treatment product. And so we are continuing to do well in the treats category, but we know we can do better. And so we have both innovation launching as well as we're Doing some price pack architect work as well. And so we're able to merchandise. If you look in the pet category, The Treat segment is obviously more responsive to merchandising than your Food segment.
And so If you look in our remarks today, we have a picture of how the whole portfolio will show up now. And so when we merchandise, Retailers are able to offer the new bone, our sticks, our sizzlers and we really cover All different treat types. So we're continuing to process merchandise. We also are starting to do some different types of marketing behind treatable moments. And so we are pushing on all areas to continue to drive that business.
It's a huge category. We've got growth. We'd like to have a higher share of it.
Great. Thank you so much.
Our next question comes from the line of Nik Modi with RBC Capital Markets. Please proceed with your question.
Good morning, everyone.
Good morning,
Mike. So I just wanted to ask about new items. My understanding is General Mills is And be pretty active in this area in 2021. And just within the construct and the backdrop of SKU rationalization happening at retail. I just wanted to kind of understand how that kind of is going to work as you look to really get all these new products onto the And then I just have a quick follow-up.
John, you want to take that?
Yes, sure. So obviously there's some SKU rationalization going on really driven by Click and collect and retailers really optimizing the shelf space. The savings on consumers are always looking for new products and new innovation. I'll tell you retailers are very engaged by that Well, so in fiscal 2021, our new products performed quite well. In cereal, we've got 3 of the top 3 launches in the category.
In yogurt, we've got 3 of the top We've got a great track record and that track record really helps us selling new products. So the bar is higher. We've got
to have good items.
We've got
to We really have a track record of doing that, which will help us as we place new items in the coming year. The other thing that I'd suggest we look at is our share of distribution of overall And our key categories as well. Again, new products really help us with that. So that's how we're going to approach it. We're really excited about the plans we have coming for fiscal 'twenty two as well, which we'll share
as we get closer to
And John, just as we think about FQ rationalization and how retailers prioritize which brands they have on the shelf. I mean, would you expect additional space kind of over the next 12 months as a result of some of those changes?
Well, I think, obviously, the highest turning SKUs getting those shelf space right now as they really are using the shelf For bricks and mortar, shopping as well as their equipment collect operations. So our top SKUs continue to grow shelf space and that's a really good thing for us. And then from an innovation standpoint, again, I think that retailers are looking for a track record of success. So as we prove that we can do that, I think we look into our eyes first. I think in some cases, the smaller companies that are coming in were a few years ago, retailers were jumping all over those items.
It's a tougher environment for them right now. So I do believe for manufacturers that have big brands that turn well, it's a good time to show. And I think new products are Really all about how excited you can get retail consumers about those items and building a track record to deliver it and we've been able to do that more recently.
Excellent. Thank you. I'll pass it on.
Our Next question comes from the line of Jonathan Feeney with Consumer Edge. Please proceed with your question.
Good morning and thanks. I'd love to Given a clearly I touched on this a little bit before, but given a clear rise in visible costs here, I'm a little surprised there's not more Dedicated effort to raise pricing, is this something that's like just tactical inside your organization, just going to let it ride here? Or Is this a response to discounting and private label growth or fear about that in the marketplace? Because You would look at your input costs and everything that's in the headlines and this would this feels like a 2,006 Type environment and yet we're not seeing that at least yet on the pricing front.
Go ahead, Kopi. No. Hey, John, I think just to answer your question, we certainly are responding Right now on the expectation that inflation is going to be higher, as Jeff referenced earlier, we're seeing it broad based,
We are seeing it
global and we are frankly in all of our businesses working hard at using the SRM levers. So I think you will see us Acting. And in fact, in some of our businesses, we already have actions in market on the SRM front. So I would just sort of respectfully note that we're moving right now.
Okay. I recognize it's a sensitive topic. Thanks very much.
Our next question comes from the line of Laurent Dredet with Guggenheim. Please proceed with your question.
Hey, good morning, everyone.
Hello.
Hey. I'd like to come back on the Pet segment. I'd like to understand better the dynamics in price mix as it was negative in the quarter. In the quarter, you launched in premium weight and pantries, but also where I'm not new product you said, and you grew in the pet specialty and for the first time, which probably asked for premium price. So I'd like to understand better what's driving this negative price mix in the quarter And how we should think about price mix effect segment going forward?
Thank you.
Well, again, thanks for the question. So for the 9 months of the year, right, our sales are up 13% Our profit is up 22%. So we feel really good about how we're able to drive the business. In the quarter, right, our mix can Vary depending on channel. And so as we continue to build out, this is a really young business in some channels.
And so as we're building out the base, We can have a vary from the channel mix, but also the product mix. And so we invested behind the different parts of the business. I feel good about the long term Price mix, again, what's driving the pet category is premiumization. Boo Buffalo is solely in that part and we will continue to ensure that we have the right price mix and it can vary by quarter, by channel, by product mix.
Yes, Laurent, this is Jeff Steeman. I'd just add that as a reminder to everyone, especially in the first half of the year, We are comparing against the first half last year where we were still expanding our Wilderness line more broadly into Food, Drug and Mass. And so that It's a very high price mix business, and so the comparison was probably a headwind through the first half, maybe a little bit into the back half. As we go forward, we've now fully compiled that expansion. And as Bethany said, a lot of the innovation and news you're seeing is in the Web and the Treat segments, which Certainly makes positive, so we feel good about where we go from here.
Thanks. My second question, I mean, a completely different It's about your play in Canada. Not much visibility on the business there. Could you maybe give us some colors as Should we think about the same type of profitability in Canada that you've got in the U. S?
And also in terms Of growth, is it growing faster? I'd like to have a bit more color on your play Canada, please. Thanks.
Laurent, we have a good market position in Canada. Why don't I have John Dutty provide some of the commentary on that business?
Yes. Hi, Laurent. We really like our business in Canada, our yogurt business. It's about a third of our total business in Canada. And actually, the bigger business for us Libertate, so it's about 60% of our total yogurt business in Canada versus 40% for Yoplait.
And one of the things we love is the Libertate, the leading Greek yogurt in Canada. So while we, a few years back, didn't do so well with that trend in the U. S, we did very well in Canada. And as a result, we have a strong market share position in the market. So We'll expose you more as we move forward and we'll probably highlight some of the new products and other things we have coming, but really like our business is performing well in Canada as we speak.
Our next question comes from the line of David Palmer with Evercore ISI. Please proceed with your question.
Thanks. As you know, in the U. S, There are some markets that are reopening faster than others, Texas and Florida. I'm wondering, as you look at some of those micro examples, What sort of 2 year trends are you seeing? And maybe even within that, some insights that you're garnering about The reopen and the impact on individual categories, retail, pet and within retail.
And I have a follow-up.
Yes. So David, let me this is Jeff. Let me provide a little background on the last year and I'll tell you a little bit what we're seeing in the last month or so. But As we look at the past year, we've really seen the at home trends across our markets and some have been relatively more open than others as you know. We've seen at home trends have We've been relatively more closed, but we're seeing pretty consistent performance across markets over the past year, whether it's at home or away from home consumption.
There's been a lot of talk on reopening the last month, but the data gets really challenging because especially because of the weather situation. So for example, Texas has opened up its away from home heating, but they had a huge winter snowstorm over the last month, which elevated demand quite a bit. And so trying to pick The pieces and the variables over the recent short term is really difficult to do. I don't say that to try to hide anything, but if you would look at it, you would see that home consumption in Texas would be up, which would I'm intuitive, but that's because of this huge storm. And so I think we'll know a lot more at the end of this quarter once we've seen more.
So right now, what I can tell you is over the long term, over the last year, We have seen elevated demand across markets. Over the shorter term, there are so many variables at play, it really is hard to pick them apart.
Yes, I sympathize with that. It feels like we're going to be looking week by week from now on. But when we look at At this last year, this fiscal 2021, and we look backward, what are some COVID related costs, both direct and indirect? And for example, you cited The supply chain demand and the elevated trucking costs and that just basically freight and logistics being under such pressure that That it's essentially an indirect COVID related cost, but could you maybe sum that up in terms of gross margin headwinds that you will be lapping in fiscal And I'll pass it on. Yes, sure.
And I'll add to that list some of the other COVID related costs Such as some of the policy, lead policy, dispensation we've given to our employees, obviously some of the security protocols and Adjustments we've made in the early days, and I expect a good portion of those costs as We work into a more normal environment to sort of get back in line with normal trends. So I wouldn't Build off of a base of this cost on a full go forward basis as you think about F 'twenty two And demand potentially for at home consumption being lower than this year, but even still elevated above pre COVID levels. Not going to quantify at this point, but we will talk more about that as we work our way into
Jennifer, I think that's all the time we have. So I think we'll go ahead and I'll close-up now. Thanks, everyone, for taking the time out and the interest. If there are follow-up questions, please reach out over the course of the next couple of days. And we hope everybody is staying safe and healthy, and we'll talk again next quarter.
Thank you.
This does conclude today's conference call. We thank you for your participation and ask that you kindly disconnect your lines. Have a good day everyone.