Greetings, and welcome to the General Mills Second Quarter Fiscal 2022 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Tuesday, December 21, 2022. I would now like to turn the conference over to Jeff Siemon, VP of Investor Relations. Please go ahead.
Thank you, Silvana, and good morning, everyone. Thanks for joining us today for our Q&A session on second quarter results. I hope everyone had time to review our press release, listen to our prepared remarks, and view our presentation materials, which were made available this morning on our investor relations website. It's important to note that in our Q&A session, 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-19 pandemic on our results in fiscal 2022. Please refer to this morning's press release for factors that could impact forward-looking statements and for reconciliations of non-GAAP information, which may be discussed on today's call. I'm here with Jeff Harmening, our Chairman and CEO, Kofi Bruce, our CFO, and Jon Nudi, Group President of our North America Retail segment.
Let's go ahead and get to the first question. Silvana, can you please get us started?
Our first question is from Ken Goldman with J.P. Morgan. Please proceed with your question.
Close enough. Good morning, everybody.
Morning.
You highlighted that your actions to offset supply disruptions and logistics issues, they're starting to bear fruit. Great to hear, obviously, but we've sort of been seeing, you know, similar pattern from the whole sector for a while now, right? Where these, I guess, quote-unquote, "hidden costs" are rising. Management teams think the worst is over, and then the next quarter, you know, unfortunately, the pattern repeats. I guess my question is, you know, in the wake of these exogenous issues continuing to crop up, you know, does your guidance have any sort of bigger cushion in it, bigger than usual, to kind of account for the potential that some of these, you know, logistics and supply shortages worsen once again in the back half of the year?
Sure, Ken. This is Kofi. I appreciate the question. As you can obviously see, we gave a little bit wider guidance on operating profit than we did on the top line, and EPS as a result of the operating profit guidance. It reflects, I think, what you're alluding to, which is the underlying volatility in this environment, right? At the root cause of this, we see, you know, about an 8- to 10-fold increase in the amount of disruptions in our supply chain. The predictability has been at the core, but what we provision and expect in the back half is not as much of an improvement to be candid.
As you think about it in relation to last year, we saw a ramp up in external supply chain costs in the back half of the year. We don't expect these costs that we're seeing for disruptions to really materially change in the balance of our year, just to replace the ramp up in those external supply chain costs. The wider guidance reflects the volatility in the call.
Okay, thank you for that. Quick follow-up. You know, in your cereal business, obviously, you've taken a great deal of share from your larger competitor that's having some unfortunate issues of its own right now. Can you just walk us through a little bit, where your plants are in terms of utilization in case that the demand for your products continues to grow over the next few months?
Yeah. Hi, Ken. It's Jon Nudi. I would tell you, we feel really good about our cereal business. While certainly there's been some short-term dislocation from one of our major competitors, our performance has really been over a longer time. In fact, over the last four years, we've had really strong performance. As we look at short-term, we feel like we have the capacity we need to continue that, continue to invest in our brands and continue to innovate. Again, we expect to continue to grow share and get the category to grow as well. Short-term, we feel good about our ability to service the business, and we'll continue to do what we've done over the last four years, and that's continue to lead the category.
Okay, Silvana. Maybe go to the next question.
Certainly. Our next question is from Andrew Lazar with Barclays. Please proceed.
Good morning. Happy holidays, everybody.
Happy Holidays, Andrew.
Thank you. Jeff, I'm curious, you know, how General Mills thinks about sort of the balance, you know, between, let's say, shorter term profitability, given the, you know, dramatically higher cost to serve currently, versus, you know, the potential for, you know, longer term benefits from sort of, you know, sort of stepping up and servicing the customer and consumer in this difficult environment. So I guess what gives you the confidence that fulfilling this excess demand at this higher cost is sort of worthwhile? Like, where's that cutoff on where you would decide to, like, forego a sale? Not suggesting we're kind of at that point yet.
Yeah, Andrew, I mean, you know, one of the things we spend quite a bit of time looking at the trade-offs between things like customer service and margin and sales growth and that sort of thing. You know, we always try to make sure we play the long game in looking at these things. You know, we've been around for 155 years because we played the long game. You know what I would say in this environment, there isn't a huge trade-off. In fact, I'm not sure there is a trade-off between higher service levels and costs.
That's because, you know, if we were to take our foot off the gas on service, what we would find is that, you know, we create more deleverage and, you know, we would incur fines because it would be more inefficient. We get fines from a retail customer because we're more inefficient, and then we'd be shipping truckloads of stuff, you know, that were probably less efficient. There really isn't a cost trade-off. We would not be making more money if we would lessen their service. We feel like our responsibility at the end of the day is to the end consumer and making sure they have the products they want and to our retail customers. By fulfilling that, you know, we're doing our job.
The only thing we would gain by lessening service on margins would look a little bit better, but our sales would be down, but we wouldn't make any more money for General Mills shareholders, and we certainly wouldn't generate more cash than we're generating now either.
Got it. Thanks. Kofi, just a quick follow-up. In the outlook, I think you say General Mills expects back half EPS growth to be more weighted to fiscal 4Q. Does this mean you see some, even if modest, EPS growth in 3Q and just far more in 4Q, or do I not have that right? Thanks so much.
Yeah. I appreciate the question. What it really reflects is our expectation that we will see an improvement off of the margin decline that we just posted in Q2, and sequential improvement on that as we work our way into from Q3 to Q4.
Thank you.
Our next question is from Nik Modi with RBC Capital Markets. Please proceed with your question.
Thank you. Good morning, everyone, and happy holidays. I guess the question, Kofi, is if you can just give us some context on the inflation delta in terms of the guidance, you know, where were things worse than you expected? And then the other question I have just around price elasticity is, I mean, we've heard a lot of companies talking about things are better than expected, but it just seems like the retailers aren't passing all the pricing on. I wanted to get your thoughts around that as we kind of roll forward over the next few months and quarters.
Sure. Yeah. Let me start with your first question. Just as a reminder on the framing here, about 55% of our input costs are sitting in raw and packaging materials, 30% in manufacturing and the remainder in logistics. Where we really saw that kind of acceleration was in particular our raw and packaging materials moving up to double digits, logistics, which was already in the double digits, continue to rise a little off of that base. Manufacturing remaining in the low single digits.
In particular, as we look at the sourcing and packaging, you know, aluminum, resin, fiber, raw materials, grains, fats, and oils and meats, are particular pressure points as well as freight and fuel as we look at the logistics cost structure. On your second question, in relation to elasticities.
Sure, Nik, it's Jon. One of the things we're really pleased with is our SRM capabilities that we've built over the last five or six years, and we've got a lot more data and analytics that we leverage and a lot more talent frankly in the organization. We've been closely monitoring obviously the pricing that we take in and the reaction that we're seeing in the market, and it's really meeting our expectations at this point. We have seen elasticities that are certainly better than what we would have modeled historically to date. As we move to the back half, we expect to see a bit more elasticity, and we'll continue to monitor that. With our capabilities today, it's really an always-on type of system where we're literally looking at pricing on a daily basis.
We can monitor and adjust as needed.
Great. Thanks a lot, guys.
Go ahead.
Our next question comes from Robert Moskow with Credit Suisse. Please proceed.
Hi. Thanks. Hope everyone's well. I wanted to know if when you're raising your prices, Jon , and you're showing customers your inflation in your ingredients, like, you know, 8%-9%, do you also show them the supply chain disruption costs that you're incurring? Is it possible to justify the pricing based on this? 'Cause, like, a customer could argue that maybe some of that's transitory. I wanted to know how that conversation goes.
Absolutely. I'll wrap. I've been in this for a long time. I can tell you know, today the conversations are no easier than they have been in the past. I think everyone recognizes its level of inflation. Obviously, our job is about justification, so we spend a lot of time building the case. Most of that case is built around inflation-related market baskets. I think, you know, with that, we believe that will stick over a longer period of time. Certainly, retailers are very aware of some of the short-term supply chain costs that we're incurring because they're incurring the same costs. At this point, we really don't bring this into the conversation. Again, really focusing on some of the more macro factors from inflation to justify the pricing.
Yeah. That's kind of my question, Jon. Is it more difficult than to factor in supply chain disruption as justification? Like, the pricing that you're taking, is that designed to offset 8%-9% inflation longer term, or is it also designed to offset some of this disruption as well?
As you look at our pricing as well as [audio distortion] inflation. It's really the short-term supply chain costs that we're seeing from oil that are really the bogey for us. That is a harder conversation to have with retailers. Again, I mean, we wanna make sure that we price in a way that is right for our consumers as well. We're balancing how much pricing we can take, how much is warranted, and then really leveraging these restaurant capabilities that we've built out. We're trying to take a long view from a pricing standpoint, and then clearly there's some short-term things that are challenging today as we speak now with the supply chain costs.
You know, Rob, I think you bring up a good point. Jon answered it well. You know, some of these supply chain disruptions, I mean, they will be transitory, and we don't expect them to improve for the rest of our fiscal year, as noted by Kofi earlier. Over the longer term, I mean, the supply chain will get more efficient. We've got terrific Asia now productivity capabilities. We are highly confident that these costs over time are costs that the business will not bear. So even if it's a tougher conversation to have with retailers now, we are confident over time, once the market stabilizes, these are costs that we can recoup in our P&L.
Got it. Okay.
Maybe, Jeff, Rob, I'd add. This is Jeff Siemon. I'd add one more point to that to maybe, you know, hit the nail on the head. You know, while we don't expect the disruption environment necessarily to improve meaningfully in the back half, as Kofi said, we do expect our margin performance year-over-year to improve, which is really all about the comparisons, which get quite a bit easier as we had more other supply chain costs in the back half of last year. The costs that we're seeing this year on a year-over-year basis will be less of a headwind, which really drives gross and operating margin improvement in the back half.
Okay. I actually have more questions, but it's Christmas, so this is my gift to you, is to not ask any more than that. Small gift, but something.
Our next question is from Jason English with Goldman Sachs. Please proceed.
Hey, good morning, folks. Happy holidays. Jeff-
Happy New Year.
Jeff Siemon, guys. Jeff Siemon, you just clarified one of my questions with Kofi, but I'm gonna still ask the question with a finer point. Year-on-year, obviously, the gross margin pressure is gonna be some size. It's gonna be the comps you have. But you've got price mounting or climbing through the rest of the year. I also know you have inflation coming. As we think about sequentially, your gross margins dip down in the second quarter. Is this a floor level based on what you know today? Like, could we should we expect sequential growth in gross margins?
I think what you can expect is we will see an improvement off of the decline and sequential improvement as we move through from Q3 to Q4. That's about as far as we've implied in the guidance we've given you.
Implicitly, the 3Q margins could be weaker than 2Q. Next question. The U.S. consumer is still obviously very flush with cash, but one of your competitors has already noted that trade down activity beginning to resume in categories like cereal. Are you seeing something similar across any of your categories? And what are you planning for in regards to trade down behavior, price elasticity, et cetera, as we begin to cycle the pretty big stimulus checks early next year?
Jason, it's Jon. We have not seen that dynamic play out. In fact, we look at our business, most of our categories, our business is strengthening. As we look at share versus private label, private label lost share during the pandemic and continuing to lose share. We'll continue to monitor that. We believe that building your brands and innovating and doing what we know best will drive our business. If you look back historically, when you know, during the time of the recession, again, our brands tended to perform well. At this point, we haven't seen any change in dynamics.
I would add on that, Jason, we haven't seen it in food service either. We haven't seen it in ad, we haven't seen it in Europe, we haven't seen it in China or Brazil. We simply haven't seen that behavior.
Yeah. I haven't seen it either. I was surprised by the competitor noting it, which is why I asked the question. But thanks a lot for the clarification, guys. Happy holidays, hopefully.
All right. Thanks, Jason.
Our next question is from Steve Powers with Deutsche Bank. Please proceed.
Yes. Hey, thanks, and good morning from me as well. You know, on the supply chain disruptions that you're seeing and labor shortages, et cetera, taking all your prior comments in context, I guess, is there a cadence that you're expecting or places where you're a little bit more optimistic, whether categories of bottlenecks or geographic overlays? Are there places in what you're facing now where you're relatively more optimistic versus not in terms of finding that relief? I'm just curious.
Yeah. Thank you, Steve. It's Jon. One of the challenges right now is the disruption, you know, really across the entire supply chain. In some cases, it's material inflation really impacting a category. In other cases where capacity constrained, obviously freight and logistics remains a challenge for all of our businesses. I'd say probably the one area that you know, we do believe will get better as we move to the back half is material inflation, and then due to the actions that we're taking, we're bringing on alternative suppliers, where in the past we might have been single sourced on a particular ingredient, we'll now have options as we move to the back half.
Our sourcing team has been doing a great job really identifying solutions, and we'll see some of those things come online for some key ingredients that really hurt us through Q2. I'd say that's the one area that we do expect to get a bit better. We'd expect our service levels to remain challenged through the back half of the year. We think Q3 will look a lot like Q2. We think Q4 will get a bit better and it'll look more like Q1. On average, we think our service will look similar in the back half as it did in the first half.
Okay, great. Just to clarify that, so you're expecting that relief to come in the ingredient sourcing, but more because you're diversifying less and less because the conditions get better. Is that fair?
That's fair. You know, today, we've not seen a significant improvement and availability across materials. Every time you see something get better, something else goes the other way on. It can just be very challenging.
Okay, great. The other question I had was just on Europe and Australia, where the margin pressure is, you know, obviously exceptionally acute. Just as you go into, you know, annual price negotiations there, just your relative confidence based on what you're talking about so far that will be a source of relief or further relief in the fourth quarter as those negotiations take effect.
Well, I think you've outlined the clear constraints on pricing in that environment. You know, there is a pretty firm negotiation window for pricing. I can't comment on anything forward-looking obviously, but what I will confirm is that that's why you've seen our margins on EU, AU be under a little bit more pressure than the rest of the segments. In particular, as you look at pricing as a contribution to sales growth, you'll see that reflected there. We'll leave it there. It's a very-
You're-
I'd just add it's also, you know, it's a small business, so it's about 10% of our-
Yeah.
our total sales.
Yeah. Understood.
Our next question is from Wendy Nicholson with Citigroup. Please proceed.
Hi. Good morning. My first question has to do just in terms of the magnitude of the pricing that we should expect to see on shelf. I think the last two months you said it was 9% average increase, at retail in North America. Can you give us a sense for how high you think that will be maybe over the next six months?
No, I think, you know, we generally don't comment on forward-looking pricing. Just know that we have pricing already in the marketplace that we've already announced to our customers, and so we're confident that it will be higher in the second half of the year. As a rule, we don't comment on the specifics of forward-looking pricing.
Okay. Fair enough. I guess my question is, you know, with regard to the competitive activity, I know you said private label really isn't a threat and they're not gaining share. But sort of over a longer term basis, your share trends have been terrific, but I assume at some point, you know, competition is gonna start to fight back harder. Maybe in terms of cereal, your major competitor has their hands tied behind their back a little bit from a supply perspective. Can you talk about what you're seeing maybe from some of the other branded guys in North America in your other categories? Are they being as equally aggressive on pricing? Do you expect them to step up promotion in an effort to gain share? Just maybe what you're seeing kind of in the store right now.
You know, I think it's probably best to let our competitors talk about what their pricing is gonna be and what their outlook for their business is. One of the things I am most proud of, Wendy, that you didn't notice and I'm glad you noted, is that, you know, we've gained share over a long period of time and we've been doing it in North American retail. We've been doing it in our pet business. We've been doing it in Europe and in China and Brazil. One of the things I'm most proud of, even in this tough environment, we continue to compete very effectively. I think that's a sign of the quality of our execution and our customer service levels.
No matter what. That was happening before the pandemic, it's happened through the pandemic, it's happening now. I think that is the most important thing. You know, a lot of that time our competitors were not constrained by supply and they did not have material disruption. You know, those things come and go and we take them as they come and go. One of the things I am most pleased with is our performance is that we've been able to do all of that while reshaping our portfolio. We've added Blue Buffalo, and it's worked really well. We've divested our yogurt business in Europe and now, you know, announced the dough business and we've restructured our organization.
We've been able to have all this competitive, you know, quality while navigating a lot of change internally as well as externally.
Just, you know, in terms of the North America business, I assume one of the big contributing factors to your market share gains has been the innovation we've seen, which has been terrific, seemingly across the portfolio in North America Retail. I assume innovation kinda comes in waves. You know, some quarters are stronger than others. And I'm not looking for specifics or things you haven't announced yet, but just generally, you know, can you comment kind of thinking maybe about calendar 2022, if you think the innovation pipeline things to come are as strong as you've launched over the last 6 to 12 months? Just sort of conceptually, is innovation, you know, still set to be a good strong driver of hopefully more even more market share gains? Thanks.
Yes, sure. Hi, Wendy. As Jeff noted, we've been performing well over a long period of time, and to his point, it's really about focusing on the fundamentals, and one of those fundamentals is innovation. Brand building and innovation are key to our brands over time. One of the things that we didn't do during the pandemic was pull back on innovation. In fact, we kept innovating, and our customers really appreciated that. We've kept the pedal down. As we move into calendar year 2022, we expect to see similar levels of innovation versus what we saw in the past year. In some cases, we've got some bigger ideas that we're quite excited about. At the end of the day, whether there's inflation or not, the fundamentals matter, and that's about building our brands, and it's about innovating.
We'll continue to do that as we move forward.
Terrific. Thank you.
Our next question is from Pamela Kaufman with Morgan Stanley. Please proceed with your question.
Good morning. Happy holidays.
Happy holidays.
During the quarter in North America, you mentioned that your shipments lagged consumption by about 2% because of the service challenges you experienced. Can you just elaborate on what some of the dynamics were that contributed to that? Would you expect this to continue into the back half of the year? I guess as a follow-up, is it related to inventory levels, and do you feel like you have adequate inventory levels to meet elevated demand into the back half?
Yeah. Hi, Pam. You know, clearly, as we've talked about, lots of challenges in the supply chain, and those have impacted our ability to service our customers. Our service levels, you know, during the quarter were in the low- to mid-80s% versus high 90s% is what we target. As a result, you know, we couldn't ship to all the demand that we saw. As a result, retailers drew down a bit of inventory in the quarter, and that led to the gap that you talked about. As we look to the back half, we do expect our service levels to be similar to the front half. We wouldn't expect to necessarily close that gap as we move through the back half of our fiscal year.
Clearly, our goal is to, you know, continue to strengthen our supply chain as we get into, you know, fiscal 2023 and beyond. We do believe that we'll be in better shape and be able to service all of the demand that's there. One of the things that we've pivoted to is a new metric on shelf availability. We think that's really important. While it's certainly not where we want it to be, it is better than our competition. Our share of sales that we're losing due to not being on the shelf is lower than our competition as well. That's really a testament to our supply chain and the great job that they're doing and the communication that we have with our customers.
Great. Thanks. Can you talk about what short-term initiatives you have on the operational side to manage the disruption that you're experiencing in the supply chain? I guess over the longer term, are there any changes that you're making to operations or increasing investments in capabilities or automation in response to the current operating environment?
Yeah, for sure. We went back to a lot of the practices that we put in place at the beginning of the pandemic. One of the things we have are daily control tower meetings at the working level. For North America Retail, I chair a weekly supply chain huddle, which we get together with all of our senior leaders across the business to talk about biggest issues and try to help our team work through some of the challenges that are out there. We're leveraging data and analytics. One of the things Jeff's been committed to for a long period of time is really increasing our investments and our capabilities there. That's starting to bear some fruit.
If you think about the number of trucks we have running across North America, if we can ensure that they're more full than they are currently, that's good for us. It's good for our business, good for our customers, good for our margins. We're starting to leverage some of that technology. We have a host of other initiatives from a data standpoint, analytics standpoint on the supply chain that will help us over time. We're also taking a look at you know, our distribution centers, and there's probably some opportunities to automate some of those facilities where we're challenged right now from a labor standpoint. We have a host of things happening.
At the end of the day, communication is probably one of the most important things, communication with our vendors to make sure that we get ingredients when we need them, so we can keep our plants running. Then we spend a lot of time meeting with our customers. We're probably holding them tighter from a supply chain standpoint, really, wanting to know real time where we are and, working with them to make sure that we can service them the best we can and also service our consumers.
Thank you.
Our next question is from David Palmer with Evercore ISI. Please proceed.
Thanks. Good morning. Happy holidays. Just looking back at your presentation, slide number 32, which is that gross margin waterfall chart, thanks for that. There's no numbers on some of those steps in the chart, but it looks like the supply chain disruptions, deleverage and other is a large part of or the majority of the decline if you net out everything else. In other words, about 300 basis points. Maybe you can confirm if that's at least ballpark correct. But also, obviously, these effects are not new to the quarter. I mean, how would you think about that same line item, supply chain disruptions, deleverage and other, you know, through the year and what's implied in the guidance for the second half?
Yeah. Let me thank you for the question, David. Let me start with Q2, and then I'll talk about what to expect going forward. I think your read is about exactly right. Just to be very direct, I think you got it about 300 basis points or so related to the combination of those disruption factors, and the HMM and price mix, in the quarter, offset the impact of the inflation. I think going forward, what you can expect as you move into the back half.
It's a step up starting in Q3 and the contribution from price mix. I'd expect an inflation to be roughly equal front half, back half, so this is pretty evenly spread across the quarter, so it's nothing material there. Then you know, an easing in the drag or the headwind from the other supply chain disruption costs, not because the costs themselves are easing, but because as you think about the comparison to last year, we saw a ramp up in other costs, primarily driven by our step into greater external supply chain costs. We don't expect these costs to ease. We expect them to replace a lot of those costs we saw last year.
Factually, that's kind of how to think about the back half of the year and what drives the margin improvement as we step from Q3 to Q4.
Great. That's helpful. Thank you. You mentioned in one of your remarks that you thought the price elasticity would perhaps get a little less good, you know, per like and less favorable later in the year. What is your thinking there? I think it was Jon that made that comment. I mean, with something we've been thinking a lot about, is it the lapping of stimulus or greater availability of private label or value brands that have perhaps been more supply chain constrained? What's your thinking about price elasticity as you get further into, say, calendar 2022? Thanks.
Yeah. Yeah. Well, let me start first. I think I might have misspoke. I said inflation will balance. Inflation actually steps up in the back half. HMM is balanced. To your question on elasticity, we are assuming a moderate increase in price elasticity, although still below our historical model levels in the back half. That's what's contained in our sales and profit guidance.
I think we're just trying to be pragmatic, right? All of the things you mentioned, David, are real. At the same time, you know, SNAP benefits are decreasing a bit, although it's still elevated versus, you know, 2019 levels. From a planning standpoint, we're just trying to be pragmatic from an elasticity standpoint. We'll see how things play out.
Got it. Thank you.
Our next question is from Chris Growe with Stifel. Please proceed.
Hi. Good morning.
Morning, Chris. Morning.
I'll add my happy holidays as well. I had just two questions. The first one would just be in relation to this incremental $500 million in inflation from your initial expectations. I'm just curious, you know, if you could frame how much of that's cost inflation and how much of that is supply chain disruption, because I think you said that's incorporated into that figure. Just to get a sense of, like, what's ongoing, what you're going to solve for, if I can say it that way, then what, you know, hopefully will be transitory.
Yeah. Great question, Chris. Let me take a crack at it. As you think about the half a billion dollars of increased costs that came in since the start of the year, in our expectations, about half of that, a little less than half of it is sitting in inflation. Which we're now estimating to be 8%-9% for the full year. That implies that, obviously, double digits in the back half. The other half is really relating to those factors in the disruption in the supply chain.
Most of which is driven by direct costs, the things that Jon alluded to, inefficiency and freight, you know, alternative supply, all of the things that we're doing in this environment to ensure that we keep customer service levels high.
Okay. Thank you for that color there. Just a follow-up question. I think a bit to Dave's question. This quarter had a stronger pricing performance than I expected, but the gross margin was weaker. I'm just trying to understand the incremental inflation you're feeling. Did more of that, as you think about for the year, come through in 2Q causing that weaker gross margin? I'm trying to flip that with your comments about second half inflation stepping up a bit versus first half. In the quarter, was that a heavier drag on the gross margin?
The drag came from a combination of inflation and really we saw a step up in the cost of disruption in Q2 as we moved from Q1 to Q2. That was actually a bit more of the driver as we looked at the quarter. I think as we go forward, as I alluded to, we expect our price mix contribution from actions that we've already announced and negotiated with customers to start probably mid-quarter and then ramp fully into Q4.
Okay. Thank you for your time.
Yep. Thanks, Chris.
Our final question will be from Michael Lavery with Piper Sandler. Please proceed with your question.
Thank you. Good morning.
Morning, Michael.
You've obviously talked a lot about the disruptions in the various stages of supply chain. Can you just give us a sense in your guidance, what you're assuming relative to a vaccine mandate and what that might do to impact the labor market or testing costs or both?
We actually don't have a specific provision for the vaccine mandate. You know, obviously it's still both working its way through the courts, but we aren't expecting it to have a material impact on our guidance beyond what we've already baked in.
If it did stick, you feel like the incremental costs would be pretty modest or just captured in what you already allowed for?
Yeah, I think it's probably more of the second, Michael. The range that we give, it gives us coverage.
Okay, great. On the North America Retail components, your snacks business is pretty significantly outperforming, but it had been for a while one of the laggards. Can you just maybe give a sense of some of what's really given that a boost? Is it related to a better ability to supply products or is it more innovation than some other factors?
Yeah. Hi, Michael. We see the granola bar category really accelerate after the lockdown and people got back to being more mobile. The category is up nicely. Our business actually on bars was up 16% in Q2, just not up quite as much as the category. We'll continue to stay focused on building our brands. We're still the number one brand in the category with Nature Valley. We did some good innovation with Nature Valley [audio distortion] this past first half. We're seeing a lot of growth in the kids segment. That's probably the one area that we're not keeping up. I mean, we're growing nicely with the products that we have.
When you see some competitor products like Rice Krispies Treats that are growing really nicely off a big base. That's probably the one area that we're losing a bit of share. Overall, we like the way we're competing in bars, and we'll continue to focus on innovation and brand building. The other, you know, or category that we really like is fruit snacks. It's been an amazing category for us over the last four or five years. Our biggest challenge has been keeping up from a capacity standpoint. We continue to be challenged from a capacity standpoint. We've got more coming online in the back half. We'll continue to grow that business nicely in double digits, which is really exciting. We like our snacks business and how it's performing.
Okay, great. Thanks so much.
Thanks, Michael.
Okay. I think that is all the time we have this morning. Appreciate everyone's interest and good questions and discussion. Thanks for sticking with us during the holiday week. We wish everybody a restful holiday season and look forward to catching up in the new year. Thanks so much.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.