General Mills Inc
NYSE:GIS
Earnings Call Analysis
Q1-2024 Analysis
General Mills Inc
The company meticulously manages its commodity hedging programs, with around 65% of necessary hedging positions already secured, surpassing the initial target of 50% for the year. While these strategies are vital for financial stability, they have an impact on reported gross margins due to gaps in hedge accounting treatment, unrelated to the company's adjusted gross margins which exclude mark-to-market benefits.
Cereal remains America's top breakfast choice, with the company's cornerstone brands Cheerios and Cinnamon Toast Crunch driving more than 20% growth over the past five years. With nearly half of the new product volume in the category, their strategy is to innovate and expand market share steadily, securing their leadership position and contributing to sustainable growth in the segment.
While the company experienced a de-loading of inventory in the pet segment during the last second quarter, they are not banking on a significant rebound in the subsequent quarter. The company remains cautious, suggesting that the inventory adjustments and business slowdown will not lead to substantial volume changes, thus aligning with their existing guidance.
Post-pandemic merchandising sees a shift toward higher frequency events at elevated price points rather than deep discounts that can erode both category value and profit. Through Strategic Revenue Management (SRM) capabilities, the company collaborates with retailers on sophisticated modeling of pricing actions to enhance overall category profitability, despite seeing smaller lifts from individual merchandising events.
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Good morning, this is Jeff Siemon, Vice President of Investor Relations and Interim Treasurer. Thank you for listening to General Mills prepared remarks for our fiscal 2024 first 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 and Kofi Bruce, our CFO.
Before I hand things over to them, let me first touch on a few items. On our website, you'll find a press release that posted this morning, along with a copy of the presentation and a transcript of these remarks. Please note that today's remarks include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists several factors that could cause our future results to be different than our current estimates.
And with that, I'll turn it over to Jeff.
Thank you, Jeff, and good morning, everyone. Let me start by summarizing today's key messages. We entered fiscal 2024 with a sharp focus on the evolving external environment, highlighted by moderating inflation, stabilizing supply chains and a resilient but increasingly cautious consumer. . As we continue to navigate this dynamic landscape, we remain focused on executing against our fiscal 2024 priorities and driving strong growth for our brands. With first quarter results that were broadly in line with our plan and confidence in our ability to adapt to continued change, we are reaffirming our full year fiscal 2024 guidance.
Turning to our results. We delivered 4% organic net sales growth in Q1, fueled by strong carryover net pricing realization from strategic revenue management actions we took in fiscal 2023 in response to significant input cost inflation. This was partially offset by a lower pound volume as elasticities have increased from historically low levels a year ago.
Our adjusted operating profit increased 2% and adjusted diluted earnings per share declined 1%, each in constant currency. At the start of the year, we outlined 3 priorities for fiscal 2024 as we continue to execute on our Accelerate strategy and drive shareholder value: first, we'll continue to compete effectively by leveraging remarkable brand building, innovation and advantaged capabilities to win with a changing consumer; second, we'll improve our supply chain efficiency with a focus on increasing holistic margin management cost savings and reducing costs related to supply chain disruptions; and third, we'll 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.
As we started the year, we also outlined 3 factors: moderating inflation, a resilient, get increasingly cautious consumer and the stabilizing supply chain. It will have a significant impact on our business in fiscal 2024. And through 1 quarter, these continue to be the most important external factors impacting our performance.
Let me share what we're seeing across each of our segments and how we're leveraging our advantaged capabilities to compete effectively in response to these dynamic environmental factors. In our North America Retail segment, we continue to see elevated retail sales growth for at-home food in the first quarter versus the pre-pandemic period.
Though, the pace moderated from the double-digit growth rates we saw in fiscal 2023, reflecting less impact from inflation-driven pricing and a shift toward value for some consumers. As we expected, North America Retail's market share was down in Q1, driven by 2 challenging comparisons from a year ago. First, we were quicker to leverage our SRM toolkit in response to accelerating inflation last year, resulting in significant pricing driven market share gains across more than 70% of our NAR portfolio in Q1 of fiscal 2023.
Second, our advantaged supply chain performance provided us with superior on-self availability a year ago. While these factors created a challenging market share comparison in this year's Q1 with more normalized competitive dynamics, we expect this headwind will lessen as we move through the year, allowing us to get back to stronger share performance. And beyond our Nielsen Measure Performance, we saw stronger growth in nonmeasured channels in Q1, including club, discount and dollar stores.
Despite these challenging category dynamics, we are pleased with the way our business is executing on key fundamentals that tend to be leading indicators of stronger retail sales and market share growth. For example, we grew share of distribution on more than 70% of our NAR business in Q1, including cereal, snack bars, refrigerated dough, yogurt and desserts.
We improved the effectiveness of our merchandising with display support up mid-single digits versus the prior year. And as supply chains improve, we are able to refocus our efforts on General Mills' proven strengths, building brands and delivering remarkable innovation. We continue to invest in our brands in Q1 with media investment up double digits, and we received great feedback on our new product launches including extending our successful Mini Cereals platform on 2 of the top brands in the category, Lucky Charms and Cocoa Puffs as well as bringing luxury to the yogurt aisle with the launch of Haagen Dazs culture cream.
Looking ahead to the rest of fiscal '24, we expect our volume trends to improve as pricing moderates as we get more traction from stronger distribution, brand building, innovation and merchandising activity, and as we unlock additional capacity on growth-constrained platforms. In the pet category, retail sales for U.S. pet food moderated in Q1 for some of the same reasons as human food, less of an impact from pricing and increased value-seeking behaviors from consumers or in this case, pet parents.
With pet parents feeling increasingly uncertain about their economic outlook, we saw some shifting to more value-oriented products and channels as well as smaller pack sizes. In addition, with pet parents spending more time in the office or otherwise away from home, we're seeing incremental headwinds for the Treats and Wet Foods segments of the category. These short-term headwinds and premium pet food put pressure on our Pet segment performance in Q1 due to Blue Buffalo's premium positioning.
While our flagship Life Protection Formula product line continued to drive double-digit retail sales growth, it was offset by declines in our Wilderness product line and portions of our wet food and treats portfolio all of which are meaningfully more premium relative to LPF dry dog food. As we see category dynamics continue to change, we're adapting our plans on Pet to ensure we are meeting pet parents' needs today, while remaining true to the purpose and the positioning of the Blue Buffalo brand.
This includes shifting our advertising to emphasize the brand's simple and clear message of ingredient superiority. We'll invite pet parents to compare Blue Buffalo to their current Pet foods ingredient list and highlight our true Blue promise that Real Meat is the first ingredient with no byproduct meals, corn, wheat or soy and no artificial flavors or preservatives.
In addition, we will use our strategic revenue management capability to ensure that we have the right pack sizes and formats in the right channels at the right absolute price point to meet pet parents where they are shopping. We are confident these actions will resonate with pet parents and further support Blue Buffalo's position as the most loved and trusted natural brand in the category. At the same time, we are not expecting a sharp change in the economic outlook for pet parents in the near term.
And therefore, we expect a more challenging category dynamics we've recently seen will remain a headwind to our pet segment performance through fiscal '24. Stepping back, while we'll manage through these short-term headwinds, we remain confident in the long-term growth opportunity for Blue Buffalo as a multi-decade category trend toward humanization continues. Both our North America Foodservice and international businesses are off to a strong start in fiscal 2024.
These 2 segments represent 25% of total General Mills worldwide net sales, and we expect them to be nicely additive to our growth this year. In North America Foodservice, while restaurant traffic was generally in line with year ago levels in Q1, we saw an increase in consumer traffic in hospitality, travel, education and other nonrestaurant away-from-home food channels.
We continue to compete effectively in foodservice by leveraging our advantaged sales, supply chain and innovation capabilities to drive mid-single-digit top line growth despite a headwind from index pricing on bakery flour. In our International segment, we built on our positive momentum in the first quarter, generating strong retail sales growth on ice cream, Mexican food and snack bars, our 3 largest global platforms within international.
In fact, Nature Valley recently became the bars market share leader in France, having grown retail sales by more than 70% over the last 13 weeks. On our second priority for fiscal 2024, improving supply chain efficiency, we've made progress on delivering both improved service levels and greater contribution from our HMM productivity program. Building on the steady supply chain environment improvement we've seen in recent months, we've stepped up our customer service levels to mid-90s in North America, and we've seen supply disruptions reduced to pre-pandemic levels.
This improvement is allowing us to put more resources toward our productivity efforts, and we remain on track to generate HMM cost savings of roughly 4% of cost of goods sold in fiscal '24, in line with our long-term goal. Our third priority for fiscal 2024 is to maintain a disciplined approach to capital allocation. We will first prioritize capital investment back into the business at roughly 4% of net sales in this fiscal year.
Our second capital priority is dividend growth. And we announced a 9% increase to our quarterly dividend rate effective with our August 2023 payment. With our net debt leverage comfortably below our 3x target, we have ample capacity to further reshape our portfolio with growth and value-accretive acquisitions. And after M&A, we target returning remaining cash to shareholders via share repurchases, which are expected to reduce our average net shares outstanding by roughly 2% in fiscal 2024. Stepping back, amid a continued volatile environment and with various puts and takes across our business, our first quarter results at the enterprise level were broadly in line with our targets.
As we look to the rest of fiscal 2024, we have strong growth plans supported by healthy levels of investment, increased HMM productivity and efficient capital deployment, with confidence in our plans and our ability to adapt to continued change in the consumer landscape, we are reaffirming our full year financial guidance.
With that, let me turn it over to Kofi to go into more details on our first quarter fiscal 2024 results.
Thanks, Jeff, and hello, everyone. Our first quarter financial results are summarized on Slide 15. Reported net sales of $4.9 billion, were up 4%, and organic net sales also grew 4% in the quarter, reflecting continued positive price mix, partially offset by lower pound volume. Adjusted operating profit of $899 million, was up 2% in constant currency, driven by positive price/mix, offset by higher input costs, higher SG&A expenses, including a double-digit increase in media and lower volume.
Adjusted diluted earnings per share totaled $1.09 in the quarter and were down 1% in constant currency, driven by higher net interest expense and a higher adjusted effective tax rate, partially offset by higher adjusted operating profit and lower share count. Slide 16 summarizes the components of our net sales growth in the quarter.
We generated 7 points of positive organic price/mix in Q1, while lower organic pound volume was a 2-point headwind to net sales. Foreign exchange and the net impact of acquisitions and divestitures were not material to net sales in Q1. Shifting to segment results. First quarter organic net sales for North America Retail were up 4%, driven by positive price/mix, partially offset by lower pound volume.
Our organic net sales growth outpaced retail sales growth in Q1 by about 2 points due to faster growth in nonmeasured channels and a modest rebuild of retailer inventory. At the operating unit level, net sales for U.S. Snacks were up 8%. U.S. Morning Foods was up 3% and Canada was up 4% in constant currency. Net sales for U.S. Meals and Baking Solutions were down 1%, driven by the helper and suddenly sale of divestiture. As Jeff noted, our market share in the U.S. was down in Q1, reflecting a challenging comparison to our strong share gains a year ago when we benefited from the significant inflation-driven pricing and advantage on-shelf availability.
We expect our market share to improve as we move through the year and get beyond the more challenging comparisons. On the bottom line, constant currency segment operating profit was up 3% 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.
North America Foodservice organic net sales grew 4% in the quarter, driven by higher pound volume and despite a 6-point headwind from market index pricing on bakery flour. We saw an increase in consumer traffic and hospitality, travel, education and other nonrestaurant away-from-home channels in Q1, while restaurant traffic was generally in line with year ago levels.
On the bottom line, North America Foodservice segment operating profit was up 10% in Q1, driven by positive price mix, partially offset by higher input costs. Moving on to our Pet segment results on Slide 19. First quarter organic net sales essentially matched year ago levels. Net sales were up mid-single digits for dry food, roughly flat for wet food and down double digits for treats. As Jeff mentioned, we're seeing short-term consumer challenges in the Premium Pet Food segment that we expect will remain a headwind to our pet performance this fiscal year.
Even so, we continue to see strong long-term growth opportunities for Blue Buffalo as the trend towards humanization continues. Turning to the bottom line. First quarter Pet segment operating profit was down 10% in constant currency, driven by higher input costs, lower volume and higher SG&A expenses, partially offset by positive price mix. For our International segment, first quarter organic net sales were up 9%, driven by growth in our distributor markets, Europe and Australia and China, partially offset by a decline in Brazil.
We drove strong retail sales performance in Q1 on the segment's 3 key global platforms: ice cream, Mexican food and snack bars. First quarter constant currency segment operating profit was up 52% from year ago results that included the impact of the Haagen Dazs ice cream recall. International operating profit results this year were driven by a positive price/mix partially offset by higher input costs.
Slide 21 summarizes our joint venture results. Cereal Partners Worldwide net sales were up 8% in constant currency in Q1, driven by positive price/mix, partially offset by lower pound volume. Haagen Dazs Japan net sales were up 4% in constant currency, reflecting positive price/mix and strong contributions from innovation. First quarter combined after-tax earnings from joint ventures increased 19% to $24 million, driven by positive price/mix at CPW and Haagen Dazs Japan, partially offset by higher input costs at both joint ventures.
Our margin results are highlighted on Slide 22. We expanded our adjusted gross margin by 50 basis points in Q1 to 35.4% of net sales, driven by benefits from positive price/mix, partially offset by the continued impact of inflation on our input costs. Our first quarter adjusted operating profit margin was down 40 basis points to 18.3%, driven by higher SG&A expenses as a percent of net sales, including a double-digit increase in media investment partially offset by higher adjusted gross margins.
Moving to other noteworthy Q1 income statement items. Adjusted unallocated corporate expenses increased $12 million in the quarter, due in part to the comparison against certain favorable items a year ago. We expect corporate unallocated expenses to be down for the full year as we reset incentive compensation to normalized levels versus results that significantly exceeded plan a year ago. First quarter net interest expense was up $29 million, driven by higher interest rates. The adjusted effective tax rate was 21.1% compared to 19.7% a year ago, driven by certain nonrecurring discrete tax benefits last year and unfavorable earnings mix this year. Finally,
average diluted shares outstanding in the quarter were down 2% to $591 million, reflecting our continued net share repurchase activity, partially offset by options exercises.
Turning to the balance sheet and cash flow on Slide 24. First quarter operating cash flow decreased 3% to $378 million, primarily driven by a change in the timing of accounts payable, partially offset by an increase in net earnings, excluding the net divestiture gains in fiscal 2023. Capital investments in the quarter totaled $142 million. We remain on track for capital investment to equal roughly 4% of net sales for the full year. And we returned $844 million in cash to shareholders in Q1 through dividends and net share repurchases.
I'll wrap my comments by reiterating the fiscal 2024 outlook, including organic net sales growth of 3% to 4%, 4% to 6% constant currency growth in both adjusted operating profit and adjusted diluted earnings per share and free cash flow conversion of at least 95% of adjusted after-tax earnings.
With that, let me turn it back to Jeff for some closing remarks.
Thanks, Kofi. Let me close with a few thoughts. General Bill's ability to adapt to ongoing change in the operating environment is what has separated us from our competition over time and particularly in recent years.
I remain confident that we will continue to respond with agility to the needs of the short term while keeping our focus on our long-term strategic priorities. We successfully managed that balance in the first quarter, generating growth on both the top and bottom lines. By remaining focused on our accelerated strategy and executing against our priorities, we are confident in our ability to deliver on our goals for fiscal 2024 and beyond.
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.