General Mills' CFO Presents at Citi 2013 Global Consumer Conference (Transcript)

May.30.13 | About: General Mills, (GIS)

General Mills, Inc. (NYSE:GIS)

Citi 2013 Global Consumer Conference

May 30, 2013 08:00 am ET


Don Mulligan – Executive Vice President & Chief Financial Officer

Kris Wenker – Vice President, Investor Relations


David Driscoll – Citigroup

David Driscoll – Citigroup

Good morning. We’re right at the beginning of the hour. My name is David Driscoll. For those of you who don’t know me I am Citigroup’s Food Manufacturing Analyst and I’d like to welcome you all to the second day of our Citigroup Global Consumer Conference.

We have 26 presentations today spanning global consumer. Please be sure to join us for our lunch and end-of-day sessions. At lunch we will have a panel discussion with two senior Citibank Investment Bankers who will discuss their views on both the staples and retail sectors. At 4:00 PM today our final presentation is a keynote presentation with Carlos Gutierrez, the Vice Chair of the Albright Stonebridge Group and US Former Secretary of Commerce, and the former CEO of Kellogg.

So with that let’s get started with our first presentation, and I am delighted to introduce General Mills. From General Mills we have Don Mulligan who is the Executive Vice President and Chief Financial Officer; and we’re pleased to have Kris Wenker, Vice President of Investor Relations.

Don has been with General Mills for over 15 years, with the last six years as the Chief Financial Officer. Prior to joining General Mills he spent 11 years with Pepsi and YUM! Brands where he held various international finance positions. With that I’ll turn it over to Don to get started with the presentation, and then we’re going to move to a hybrid fireside chat and then finally we will have time for your questions.

Good morning, everyone, and let me turn it to Don.

Don Mulligan

Thank you, David, and good morning everyone. I’m very pleased to be here. This is the first of 26 presentations so I appreciate the marathon session you’ll all be going through. I’m glad I’m kicking you off. It is a pleasure to be here in New York and I do appreciate the opportunity to update you on General Mills.

Let me quickly remind you that my comments today will include forward-looking statements that are based on our current views and assumptions, and as this slide points out numerous factors could cause actual results to differ from our estimates.

I’ll start by saying a few words about General Mills’ F2013 which ended just this past Sunday. We won’t have final results for you until June 26th but I can give you a general outline today, which is consistent with the guidance that we provided with our F3Q earnings call.

We expect to report mid-single digit growth in net sales. This includes low-single digit growth from our established businesses and contributions from recent acquisitions. We expect operating profit to grow at mid-single digit rates as well, and we expect to deliver earnings per share of $2.66 to $2.68 before items affecting comparability.

Our expected F2013 results build on a track record of solid performance. Since F2007 our net sales and segment operating profit have been growing at a mid-single digit rate and our adjusted diluted earnings per share increased at a double-digit rate over those five years.

We’ll also share the specifics of our F2014 plan with you in June but let me recap the framework of those plans which we outlined at Cagney. For F2014 we’re targeting high-single digit growth in adjusted diluted earnings per share.

The new businesses that we’ve added in the last two years led by Yoplait International and Yoki in Brazil will make a meaningful contribution to our sales and profits. Operating profit from these new businesses is expected to represent $0.15 of earnings per share in F2014.

We expect to generate strong operating cash flow, a higher return on invested capital, and increase cash returns to shareholders. This includes a 15% increase in dividends and plans for a 2% net reduction in shares outstanding.

Our growth plans for F2014 and beyond are focused on five key global businesses: ready-to-eat cereal, super premium ice cream, convenient meals, wholesome snack bars, and yogurt. These are big global categories and Euromonitor projects they will increase at mid- to high-single digit rates in the years ahead. We believe our focus on these five growing categories is a strategic advantage for General Mills.

These categories are on trend with consumer demand for great-tasting foods that are nutritious, affordable and easy to prepare. In our core US market these products are found in 60% or more of households nationwide.

Outside the US, these categories are still developing. For example, household penetration in Europe for snack bars, super premium ice cream and Mexican foods are well below levels of other developed markets. This represents a strong opportunity for future growth.

Our categories also benefit from the significant technology and marketing expertise of the branded food players in them. As a result of consistent product news and innovation, private label market share in each of these categories is well below the average for US packaged food and beverage in total.

For General Mills, these five global product platforms account for nearly two thirds of our worldwide sales. We see excellent growth prospects in each of these platforms moving forward. Here’s what gives us confidence, leading with our largest global business – cereal.

This food choice is very on-trend with consumers. Cereal is convenient, it’s affordable and it tastes great. And cereal is inherently healthy. It’s low in calories and packed with whole grains and other key nutrients. In fact, breakfast cereal is one of the best, perhaps the best option you can choose for breakfast.

The US is the single largest cereal market. Over the last three decades category volume and sales have grown at low single-digit rates. This 30-year history includes periods like oat bran mania when cereal was hot, and moments like the Atkins Diet fad when it was not. So the category doesn’t grow each and every year, but over the long term the trend in cereal is steady growth.

After all, breakfast is a growth market. The number of breakfast occasions increases as the US population expands, and today, fewer people are skipping breakfast. Breakfast at home is thriving, representing over 80% of all breakfast occasions last year. And cereal remains the most popular at-home breakfast by far.

The strength of our cereal business is rooted in the breadth of our portfolio. Our cereal brands deliver on a number of attributes important to consumers, from the cholesterol-lowering benefits of whole grain oat Cheerios to the all-family appeal of Cinnamon Toast Crunch and Lucky Charms, to the great taste of gluten free Chex. These brands shown here represent over 20% of cereal category sales.

Recent trends in our US cereal business are encouraging. Our new advertising campaign reminds consumers about the simple goodness of our iconic original Cheerios. Baseline volume trends have improved 250 basis points since January. Adults account for nearly half of Lucky Charms cereal consumption, so in December we launched adult-targeted advertising, driving a 21 point increase in baseline unit sales.

We launched a strong slate of new products in F2013, including new varieties of Cheerios, Cascadian Farm Granola, and Fiber One. Our F2014 new product lineup has just started to hit store shelves, including two varieties of new Nature Valley Granola cereal with 10 grams of protein per serving.

We believe demographic trends bode well for the US cereal category in the years ahead. Over the balance of the current decade, children 12 and under and adults 55 and over are projected to account for over 80% of total US population growth and these groups have the highest rates of per-capita cereal consumption. So we expect these trends to provide a tailwind to category growth in the years ahead.

Cereal category dynamics are even stronger in international markets. Today the majority of cereal sales occur outside of North America, and while category growth slowed recently in Southwest Europe we’re seeing good performance in markets like France and the UK where category sales increased low-single digits this year. The category is expanding at stronger levels in emerging markets, with Central Europe, Asia and Latin America markets generating mid- to high-single digit growth.

Cereal Partners Worldwide, our joint venture with Nestle is capturing a growing share of this growing market. CPW is the clear number two cereal company outside North America with a 23% value share. Developed markets still represent the largest portion of CPW sales but CPW holds leading market positions in many emerging markets including Central and Eastern Europe and Asia. In fact, CPW is the number one cereal company in key markets like Russia, Turkey, and countries in Southeast Asia.

We believe the global cereal category is poised for strong future growth. That’s because more than half of today’s cereal consumption happens in just four countries – the US and Canada, and the UK and Australia. But these markets represent only 6% of the world’s population. For the remaining 94% of consumers, cereal eating occasions per capita are still quite low so we see great opportunity ahead for our cereal business.

Let me turn next to our convenient meals business. Consumers everywhere face the daily dilemma of what’s for dinner and that makes convenient meals a terrific growth category. In the US consumers devote less than 30 minutes to prepare and cook the evening meal so convenience is very important, right after taste, in deciding what to make for dinner. In emerging markets, increasing household incomes are creating a rapidly-growing middle class. Consumers in these markets are shifting to urban living and the percent of working women is growing. These trends drive demand for more convenient meal options and branded food denotes product quality and safety for these new middle class consumers.

In the US we have a great lineup of convenient meal solutions for consumers. Progresso Soup is a fast and easy option for lunch or dinner. Led by our great tasting Rich & Hearty and Light varieties year-to-date retail sales for Progresso are up 8% through April. Every night over 1 million US households serve our lineup of Hamburger, Chicken, or Tuna Helper for dinner.

In F2013 our dry dinners performance did not meet our expectations. A comprehensive plan to improve this business is just entering the market. Juliana Chugg, President of our Meals Division, will share the details with you in July.

Old El Paso Mexican products make taco night a fun and easy at-home dinner. We’ve got some great innovations planned for F2014, including a soft shell version of our popular stand and stuff taco that will hit store shelves this summer. Our Old El Paso business is global. This product line is sold in over 60 markets and sales for the brand are greater outside the US than here. We expect to keep the momentum going in this business with another strong year of product lineup.

In greater China we bring convenience to consumers with the Wanchai Ferry frozen foods. Our frozen dumplings are available in more than 130 cities today with more to come and we’ve just started to expand our product lineup beyond frozen dumplings to frozen noodles, [ton yung], and wonton varieties. So we see tremendous opportunities ahead in that market.

In other emerging markets like Brazil and India, our convenient meal offerings start with seasonings and other basic foods that reduce the prep times of traditional meals. Our year-to-date sales in both of these markets are increasing at a double-digit rate, and we think the Yoki, [Kitano and Parampra] brands will drive significant growth in emerging markets in the years ahead.

Healthy snacking is another terrific category for global growth. Today consumers are eating between meals more than ever. In the US more than half of all eating occasions are now a snack, and [better view] snacks is the fastest-growing segment of the US snack category, projected to grow at a 5% compound rate over the current decade.

We launched the original Nature Valley crunchy granola bar nearly four decades ago. Since then we’ve expanded to new Nature Valley varieties and added new brands like Fiber One, a great tasting source of fiber, and Cascadian Farm, an organic snack bar. Since 2008 we’ve added over 9 points of market share on our grains snack business and with strong recent innovation, like protein offerings for both Nature Valley and Fiber One we expect to deliver great growth in this business moving forward.

Grain snacks are popular with international consumers, too. Our Nature Valley brand is now available in nearly 80 markets worldwide. Sales are growing at a double-digit rate led by Nature Valley in the UK and both Fiber One and Nature Valley in Canada. And we’re still in the very early stages of marketing our core product offerings in these international markets. We’ve only just begun to tap into the product pipeline that we’ve built here in the US.

In recent years we’ve added some great natural and organic items to our [better view] snacks portfolio. Sales for Larabar all natural fruit and nut bars have grown at a robust double-digit rate. Our latest addition to the lineup, Larabar Alt, gets its high protein content from peas. We’re also quickly expanding availability of our Food Should Taste Good savory snacks. This line is still only in a small percentage of traditional retail customers today, so we see tremendous growth ahead for this business.

We’re delivering strong snacks growth in away-from-home channels too. In convenience stores we’ve increased distribution for our snacks products in each of the last four years, driving double-digit net sales growth. Our Nature Valley Oats & Honey Bar is a top-turning grain snack bar in this channel. We’re quickly expanding distribution of Food Should Taste Good snacks and our Nature Valley Oatmeal Squares are hitting c-store shelves just this week.

Ice cream is another strong platform for global growth. This category generates over $70 billion in annual sales and is projected to grow at a mid-single digit rate in the years ahead led by the super-premium segment of this category. Haagen-Dazs is the world’s number one brand of ice cream, super-premium or otherwise. The brand is marketed in more than 80 countries today, and sales in constant currency have been growing at a 9% compound rate.

China is our single largest Haagen-Dazs market. Our growth strategy there starts with entering new cities with our upscale Haagen-Dazs shops, and today, shops make up the largest piece of our Haagen-Dazs business in this market. We have over 260 shops in operation across greater China. Our shops build brand equity and this increases demand for Haagen-Dazs products in food retail outlets.

This distribution is just getting started in China. Year-to-date sales in retail outlets have increased at a double-digit rate. So with geographic expansion of our stand-alone shops and continued rapid growth of our food retail business we see great opportunities for Haagen-Dazs in China in the years ahead.

We’re bringing strong Haagen-Dazs innovation to markets throughout the world and we’re supporting our entire Haagen-Dazs lineup with global advertising campaigns. Fiscal year-to-date sales are up high-single digits as a result.

Finally, the acquisition of Yoplait International added a fifth global platform to our portfolio. Yogurt is a terrific category. As I showed earlier, global retail sales are $76 billion worldwide and are expected to grow at a high-single digit pace in the years ahead.

The US is our largest yogurt market with annual retail sales of over $6.5 billion. Recently category sales growth has been led by the Greek segment. When you look at units instead of dollars, light, regular and kid varieties are equally popular. In the Greek segment, we’ve added nearly 3 points of market share led by the launch of Yoplait Greek 100, 100 calorie yogurt. Year one retail sales for this product line are expected to surpass $140 million and we have more Greek innovation coming in F2014.

With an improved product offering and competitive merchandise price points we’ve stabilized our Yoplait original and Yoplait light product lines. Year-to-date unit turns are up 8%. GoGurt Twisted Yogurt is the latest addition to the leading yogurt brand in the kids’ segment. We’re adding two new flavors to the line this summer, and in away-from-home channels Yoplait Parfait Pro gives food service operators an easy way to prepare layered yogurt parfaits.

For our US yogurt business in total we did fall short of our goal of renewed sales growth this year. However, we are very encouraged by the progress we’re making. We achieved a number of key objectives we set for F2013, including share growth in Greek, stabilizing the core, and working with our retail partners in expanding the yogurt shelf set. We’re exiting the year with momentum in yogurt including another quarter of sequential volume improvement, and we have another terrific innovation lineup and increased marketing support planned for F2014.

Yogurt is now our largest product category in Europe and France is the largest yogurt market. Here we concentrate on segments where we can offer value-added innovation. We’re the market leader in the kid, fruit, and indulgent segments. Our yogurt retail sales in France are up 3% in the latest 52 weeks and we’ve gained over half a point of market share. In the UK we’ve launched new varieties of [Colon], a functional yogurt high in calcium and Vitamin D; and introduced a Greek style line extension. And in March we added Liberte Greek to the UK lineup. Our retail sales are up 4% and we continue to gain share in the UK market.

In Canada, our Liberte brand is the top selling organic and natural yogurt and is a leading player in the fast-emerging Greek segment. Liberte sales are up 29% and we’ve added nearly two points of market share in the last twelve-month period. Our Yoplait brand is the leader in the light and diet segment and we’re driving growth in the kid segment with innovation in the Yoplait yogurt tubes and beverages. Combined, Yoplait and Liberte account for nearly a third of category sales.

Yogurt consumption is still concentrated in a fairly small number of developed markets today. In Canada, per capita consumption is concentrated in the Quebec market. The US is still a developing market for yogurt, and people in China, India and Indonesia consume less than 4 kg per person per year. So we see great opportunities to expand yogurt consumption levels moving forward.

At General Mills, our brands hold leading positions in large, growing, global categories. We believe our categories are a source of competitive advantage for our company. We really like the prospects for increasing our sales, earnings, and market share positions in the years ahead and delivering strong returns to our shareholders as a result.

We’ll give you two important updates on our progress and plans in the coming weeks. As I stated earlier, our FQ4 2013 earnings conference call will be on Wednesday, June 26, and we’ll hold our Investor Meeting in New York on Tuesday, July 9th, where we will discuss our plans for F2014 in much more detail. That concludes my prepared remarks, so we’ll shift to Q&A and I’ll join David and Kris up here at the fireside chat. Thank you.

Question-and-Answer Session

David Driscoll – Citigroup

Thank you. Kris will make her way up here as well. Don, that was a great overview of the five platforms. I’d like to maybe just start off with a question. We’ve seen some split-ups within the food space where companies have maybe acknowledged the difficulty of running multiple platforms. When you think about the five platforms you outlined in your presentation, maybe can you provide us with some thoughts on why you believe that General Mills has been successful with these platforms where others have maybe struggled doing more than one thing?

Don Mulligan

Sure, I’d be happy to. I’d point to a couple things. First off, as I pointed out, these are large global and rapidly-growing platforms. We see the participation in a pretty well-diversified portfolio around the world. We’re not centered and we don’t see the growth necessarily being centered in one geography over another, so it does give you a nice global footprint. Importantly the commonality behind them is they’re driven by branded player innovation which we know we can bring with our technology and our ability to innovate and market.

Now importantly I think underpinning that is we have some capabilities that play across all of the categories as well. One is our holistic margin management and our ability to drive margins, which we’ve seen apply in all of these categories in the markets that we’re in; which gives us more fuel to reinvest back behind that innovation, behind that product development. And then we have a tremendously strong sales organization. We’ve had it for years in the US so we’re seeing that same capability internationalize with our businesses outside the US which again gives us a platform for growth beyond maybe what some others can bring to the table when they’re looking at different categories.

David Driscoll – Citigroup

I’d like to move over to the topic of US food volumes. Over the past few years we have seen food equalized volumes decline about 2% in our Nielsen AOC classes of trade – that covers just more than 100 food categories, so no beverage, no household and personal care. This is strictly a food measure. First, can you give us the big picture factors that have driven the food volumes down? And then second and more importantly, can you look forward and talk to us about how you see it from General Mills’ perspective, this volume picture going forward?

Don Mulligan

Sure. Well two factors impacted the volume over the past couple of years. One is pricing that was taken across the space. There was specifically an inflation that came in at our F2012, calendar 2011-2012, and in our case it was fairly representative. We had double-digit inflation which was historically high levels and as a result there was mid-single digit pricing across our categories.

Now that happened at the same time that the consumers were very stretched coming out of the recession, and the combination of those two things – the consumer found ways to economize, whether it was pantry de-loading or originally more efficient use of leftovers as the recession wore on, especially with the pricing. The good news is two things: one, the economy kind of knock on wood looks like it’s stabilizing.

Probably more important and more directly impacting our volumes is the industry, we in the industry are lapping the pricing that we took a year ago. So if you look over the last several months pricing has been fairly neutral in our space. And we’ve seen volume start to pick up for the last quarter plus. We’ve seen positive volume growth and also a little bit of pricing mix positive across our aggregate categories.

So our expectation as we entered this fiscal year, so sitting here a year ago, was that we would start seeing that happen. And it has happened. It probably took a couple months longer than we possibly expected it to happen but we are starting to see it, and that’s why this confidence as we enter our new fiscal year that we specifically – but the industry more broadly – is on much firmer footing today entering our new fiscal year than we were a year ago.

David Driscoll – Citigroup

You continue to see that volume growth critical.

Don Mulligan


David Driscoll – Citigroup

HMM is the topic of the next question and this will relate to some of the things you just mentioned. There’s been a significant amount of inflation that’s impacted the business over by my count the last eight years, and I feel like this topic has just not gone away. And it’s created clearly an otherwise difficult environment. Can you describe General Mill’s holistic margin management program? This is the HMM acronym – the strategy and its targets – first off just lay it out for everybody once again and then a couple of follow-ups that I’d like to do on it.

Don Mulligan

Well HMM really started with us probably six or seven years ago now at the start of that inflation wave that you mentioned. With the growth of emerging markets being the primary driver, more consumers coming into the middle class, consumption patterns changing increasing the demand on agriculture and even energy commodities we felt we were going to move into an era of rising inflation. And as we thought about our business model we knew we had to do some things differently as a result of that, and quite honestly that’s how it’s played out.

We’ve seen in our own business an average inflation of about 5% over that roughly eight-year period whereas if you go to the fifteen years before that it was less than half of that or it was mute or very benign. So we had to change how we operated and that was really the birth of holistic margin management, and what it is is it’s using all the tools at our discretion. And I appreciate you describing it as a strategy because it’s not a traditional cost-cutting program where you’re closing plants or combining lines.

It’s an innovation process and the reason we call it holistic is a number of aspects. One, it’s holistic in terms of it’s not just driven by our supply chain group which is the historical way I think most companies have operated on productivity or margins. It really starts with our marketing organization and determining with various associated tools where is there waste in our product, either in how we produce it or what we offer in the ingredients. And waste is defined by what the customer or consumer is not willing to pay for and so it involves marketing, R&D, finance, supply chain of course.

So it’s holistic from a business functional standpoint. It’s also holistic in terms of the tools we use that it’s not just productivity. That’s certainly a major component of it, but it’s not just COGS productivity I should say – it’s also trade efficiency, advertising efficiency, admin efficiency. It’s looking at our mix and looking at pricing. So it’s a whole spectrum of tools that we bring to bear, and each business as its situation evolves, both its competitive and inflationary situation evolves, use those tools differently at different times.

And we’ve had some larger items that have driven multi-million dollar savings but quite honestly the bulk of it is a thousand points of light where you have different businesses, different plants, different departments around the company applying continuous improvement tools to really think about our processes, whether it’s a manufacturing process, a process to make an ad or a process to pay our bills; and defining how do you do that most efficiently and take that “waste” out of the system.

Key things about it are that we have to make sure that we maintain or enhance the product quality, whether that’s the product itself or a service that we’re offering customers, and that’s true of our administrative processes as well. So that’s the ultimate measure of it. And I think what we’ve seen is two things. First of all, if you look backwards our performance over the last five to six years from a gross margin standpoint would put us in very good stead versus any of the large competitors that we compete against in the marketplace.

And then looking forward, because it is an innovation process we treat it very much like we do our new product development process – that is just like with new products as you can imagine, we meet with the businesses on a regular basis and we look at a pipeline, a multi-year pipeline of ideas. We do the same with HMM. We meet with the businesses and they take us through what their multi-year plan is from a margin standpoint, and again, that includes productivity, that includes mix management. And because of that we have a good line of sight of what is coming both in terms of the activities so we can plan and pace those but also the benefits.

We made a commitment in 2012 for this current decade that we would see $1 billion in COGS cost savings in the first three years, F2012, F2011, F2012, and we successfully did that with the close of our fiscal year last year; and $4 billion in savings over the course of the decade and we’re very much on track to deliver that as well.

David Driscoll – Citigroup

That explicit target is just a component of the HMM – it’s not the entirety of HMM.

Don Mulligan

Correct. The way to think about HMM, and the reason… We’re asked also “Give us the number, the percent of COGS,” and the reason we don’t do that is because again the tools differ year to year and where the savings will come from. But what we do commit to and when we talk about our long-term model is that we’re going to consistently deliver low-single digit sales growth and mid-single digit operating profit growth. So implicit in that is a 20 basis point to 40 basis point per year margin expansion, operating margins expansion. That’s where HMM comes into play for us and that’s what we see as we move forward.

And again, because we have these great categories that we’re in they give us confidence on the top line, and then we have a very robust pipeline of HMM activities it gives us confidence in the margin expansion side of the equation as well.

David Driscoll – Citigroup

It sounds like I think I know the answer to my first question here on the follow-up, it’s simply that given the experience how strong is your confidence in the ability to continue to maintain the annual progress?

Don Mulligan

Yeah, it’s very strong because of the oversight and because of the deeply embedded nature of it. Again, it doesn’t depend on one bright idea to take us – it’s a thousand great ideas that take us. And so as a result of that it’s very robust, very deeply embedded and through oversight practices we have a very good line of sight on how the next couple of years are going to unfold.

David Driscoll – Citigroup

And then maybe perhaps the most exciting part of this is what happens to margins inclusive of HMM in a deflationary commodity environment?

Don Mulligan

Well maybe we’re getting ahead of ourselves there because we don’t see deflation on the horizon. The year we’ve just exited we’ve shared that our expectation will be 3% inflation. We think as we look forward our F2014 will also be a year of manageable inflation, and to put it in perspective those long-term targets I talked about of low-single digit sales converting to mid-single digit operating profits, embedded in there in our long-term assumption is that we’ll see 4% to 5% annual inflation – again, very much in line with what we’ve seen historically.

So we think as we look at F2014 that inflation will be manageable in that frame, but it’ll be inflation, not deflation. And we think that’s one of the reasons also that gives us more confidence in that volume growth for our categories because we don’t foresee a need for pricing, significant pricing across our space in the next year. We don’t see deflation so we don’t see prices coming down, we don’t see inflation. We think price stability for consumers will allow us to get back to a more normalized growth profile which in the US would be a little bit of volume, a little bit of mix and low-single digit sales growth.

David Driscoll – Citigroup

At the risk of being contradictory my next question is about the idea of deflation and it is about what we’re seeing on the grain markets. Of course your fiscal year ends in May; you would then see a significant portion of your next fiscal year still representing the prior crops, still representing the drought-affected crops. In October as the United States and the Northern Hemisphere harvest its next crop, Chicago Board of Trade is clearly giving very strong signs that there is a fairly massive percentage reduction in the major field crops. So then would you agree in as much as your full F2014 is not deflationary that as we look forward, and if in fact these Northern Hemisphere crops grow in accordance with the USDA projections – a lot of if’s right there, certainly what we have to do – then it looks like there is very strong price reductions in these basic ingredients that go into your cost of goods sold.

Don Mulligan

Well, I’d like to make a couple of points. There are a lot of if’s in there and we’d have to see the crops come in. Second is that if you look at the spot market today versus the spot market a year ago you’re still seeing inflation in the [chop market spaces].

David Driscoll – Citigroup

Sure, drought-affected crop, sure.

Don Mulligan

And the third is obviously we’re not giving guidance on F2014 today. But again, all that wrapped up, I guess the last point is your comments focus on grains and that’s an important piece of our input. But it’s 5% to 10% of our total input costs, total COGS. So it is a factor but it is not the overriding factor as we see our total inflation bucket.

David Driscoll – Citigroup

Maybe just one final point on the deflation issue. If we were to come to a point where you were to see deflation, how will your organization handle it? I guess the question is would you generally categorize this as a desirable event given this long, long run of inflation? Or is deflation something you just flat out do not want to see?

Don Mulligan

Yeah, I think as I said, we plan our business based on long-term inflation expectations of that 4%, 5%. What we’ve seen is when it’s significantly higher than that there’s a lot of margin compression even to get price through. If it’s deflationary, the experience two years ago was that there was some discounting and that helped volumes but didn’t necessarily move the needle in total for the industry. And the sweet spot really is that kind of low-single digit inflation, kind of like where we had last year in our F2013 and hopefully where F2014 will play out to be.

So I don’t want to try to hypothesize on what would happen if we see deflation. I would hope that the industry learned its lesson, and this is both the manufacturers and the retailers from two years ago when there was heavy discounting which again, it didn’t create a more robust top line growth; it passed a lot of value to consumers but didn’t necessarily accrue a lot of value to the manufacturers or the retailers.

David Driscoll – Citigroup

I want to move on to use of cash. When we think about General Mills certainly it’s a very, very strong cash flow generation company, something on the magnitude of $2 billion of free cash flow annually. Can you talk about the priorities going forward? There’s been a number of M&A pieces that have gone into it but what do you do in the coming years?

Don Mulligan

Yeah, sure. Just to back up on that, within that free cash flow, embedded in that is our capital spending which will average about 4% of sales per year. It can be lumpy year to year but we think that’s the right level to make sure that we can drive that top line and mid-single digit operating profit growth that we target. So with the free cash flow really three priorities and really in this order: one is dividends. We’ve been a dividend-paying company for thirty years longer than a public company, so 114 consecutive years without interruption or reduction.

We’re at about a 3% yield today and we think that in today’s market it’s important to keep your eye on that, and payout is about 50%. So we think that’s right, and our expectations there would be to grow our dividends with earnings – obviously bump it up a little bit more than that as we look into next year with a 15% increase.

Then share repurchase, and we look at our cash returned to shareholders as being the first call on that. We’re not trying to accumulate cash so we return our cash to shareholders, and it is kind of over the longer term roughly half in dividends and half in share repurchase. That half in share repurchase will equate to reducing our shares outstanding, our net shares outstanding by 2% per year.

And there is going to be some M&A. You referenced in the past few years they’ve been historically heavy outside of maybe the Pillsbury acquisition twelve years ago because we had our eyes on expanding our portfolio both from a category and a geographic standpoint, and you can’t always time exactly when deals happen and we had two great properties that came available and were right for us within a 14-month to 15-month time period. And so it was important to get them.

And because of that we did scale back on our share repurchases. We had signaled we would if acquisitions like that came up. As we look forward we’ve already signaled for our F2014 that we’re starting this week that we don’t see any large acquisitions on the horizon. We’re going to increase our return to shareholders versus what we’ve seen the last two years which includes that very healthy 15% dividend increase and a net 2% reduction in our shares, kind of what I’d call on the share side a more normalized cash return.

So as you go forward I think that’s what you can expect – dividend increasing with earnings, share reduction at about 2% per year on average over a multiyear period and some funds going to strategic M&A as it comes available but again, not as heavy as you’ve seen the last two years.

David Driscoll – Citigroup

That feels extremely consistent with where you’ve been in many prior years.

Don Mulligan

Yes it is.

David Driscoll – Citigroup

Moving on to US cereal, you did make a mention of this in your presentation but it is a question that I get tremendously. I just would like you to expand on your thoughts about the cereal category itself. The category seems to have remained sluggish here in early 2013 and I would note for the audience that our latest AOC Nielsen data has the US cereal category declining by about 2.5% over the last twelve weeks driven by lower volumes. General Mills I think is doing better than the category but maybe we all generally think that we want and need to see a healthy category, so can you give us some thoughts about how this might unfold?

Don Mulligan

Sure. Well, as I mentioned in my presentation, cereal over the longer term has been a consistent grower over a multiyear period but it’s had times when it’s grown faster and times when it’s grown slower. Sometimes that’s external factors – as I mentioned the Atkins Diet for example; sometimes it’s internal to the category. But in our view the category participants have to drive that category growth, and there hasn’t been enough innovation. And this year the merchandising from a category standpoint wasn’t as well balanced by player as it could have been and that’s hurt the growth.

If you look at our performance, we had five consecutive years of sales and share growth coming into this year. We will not see share growth for the year; we are seeing it more recently. I think the April Nielsens are up about a point if I remember the numbers correctly, and that gets back to my point: the reason why we’ve done that is because A.) we have evened out the merchandising calendar. I mentioned at the beginning of the year there were some merchandising windows that went to some of the smaller players in the category that would typically accrue to us. We evened up that as the year’s unfolded so we’ve seen stronger back half merchandising.

But more importantly it’s driven by innovation and strong marketing ideas. And in our case we have a couple of great examples – our Chex business which is a gluten-free product so it has a very unique health attribute has been growing double-digit rates for the last number of years behind that and we’ve expanded a number of offering – the flavor profile, the flavor varieties. So that goes back to the strong growth you can see if you offer the right health benefit for a category that again has a lot of inherent strength to it in terms of convenience, price, and nutrition.

Second, if you target the right audience – we see with our “kid” cereals, Lucky Charms for example, Cinnamon Toast Crunch that we would maybe think more globally as a kid’s cereal, 40% plus of the consumption is adults and half of that consumption is in households without kids. So it’s not like they’re sneaking a bowl of cereal they buy for their kids. So what we started doing is advertising on late night TV to adults, and as I mentioned we’ve seen Lucky Charms jump 21% in its growth rate – and this is a fifty-year-old brand. So it’s about the right idea and advertising to the right consumers.

And then Cheerios has seen a nice strengthening in the baseline of our yellow box, our original Cheerios. It has great health benefits, cholesterol-lowering health benefits, but we went back to advertising what I’d say is more of the emotional content and how it brings generations together. And it’s advertising that’s been tried and true and we went back to it and we’ve seen some really strong results over the past quarter or so.

And that, combined with some strong new products that we have hitting the shelves now – I mentioned Nature Valley Protein variety. Protein clearly is a health benefit that consumers are looking for today so if you can offer it in a great tasting convenient cereal I think that’s a winner. So you combine some of the marketing ideas, some of the product innovation ideas and a really solid new product lineup coming into next year and a more even merchandising calendar. I think that not only bodes well for our business but it bodes well for the category as well.

David Driscoll – Citigroup

A very good, comprehensive answer. Let’s open it up to questions from the audience. We still have good time. Please raise your hands and we have microphones that will come around for anybody that has a question for Don. Question in the front here, please.


Yeah, I was curious regarding the presentation portion where you highlighted breakfast consumption has been on the rise the last several years. I’m trying to dovetail that with what has been from what I can tell flat at best volume per capita in cereal consumption. So clearly breakfast, share of breakfast is moving away from cereal. Now my impression is that you’re trying to move the protein side of the equation into cereal more – what is the marketing message? How do you convince people that their source of protein should come from cereal? It’s sort of non-intuitive. And maybe what else do you think you can do to shift what looks like a secular trend?

Don Mulligan

Thank you. We have seen, as I mentioned, the cereal category has gone through growth periods where it’s higher or lower than its long-term low-single digit average. Clearly the last year or so has been below that. Cereal is the third of at-home breakfast occasion in the US so anytime there’s another alternative it’s almost inherently going to eat a little bit from cereal. More recently we’ve seen that with yogurt and snack bars – fortunately we also have great businesses in those two areas so we see the positive impact of that in other parts of our portfolio.

But back to the question on cereal in particular, it does come back to what I mentioned earlier in terms of innovation and the right marketing, and the underlying both convenience and health benefits of the category. Protein is very analogous to me with what we did with fiber, with Fiber One a couple years ago, five years ago now. Fiber One was a decades’ old brand that we had. Through some technology advancements we were actually able to make fiber taste good and at the end of the day a health benefit is important, but if it doesn’t taste good consumers aren’t going to come back to it. And by having the health benefit of fiber and actually the taste profile that people have come to expect from General Mills cereal that created a huge tailwind in growth trajectory for our Fiber One business.

We see the same opportunity in protein. It’s a matter of making it taste good. With our Nature Valley product that we’re rolling out we believe we have an offering that will do that. We believe that consumers if they’re looking for protein, cereal consumption again being a high-consumption category, very kind of routinized within people’s repertoire, they’ll gravitate to cereal as well to find their protein as long as it tastes good. They won’t come back if it doesn’t taste good but if you make it taste good they’ll try it and they’ll come back.

So we think that’s what’s going to drive the cereal category. It’s great new products with the right health benefits that are on trend with the consumers and the right marketing messages behind them. And as I said I think we’re starting to hit that on a number of fronts in our business.


Yeah, my question is around HMM. So you’ve done a lot of work as I take it and had a lot of success with applying HMM domestically, and I know you’ve talked about looking for more opportunities internationally. Can you talk a little bit more about how much is there? And then to the extent you have the success there that you’ve had domestically is it a comparable impact on let’s say EBIT margin or would we expect it to be greater or less?

Don Mulligan

Great question. It did start in our US business absolutely, but it’s well-embedded in our international business now as well and with the same types of tools. It starts with what I’ll call inside our four plant walls in particular, started with our product, both the formulation and the processing; but it quickly expands to the other aspects of our business as well, whether it’s trade efficiency, advertising efficiency, administrative processes.

I’d say right now that our international business is very much approaching the US business in terms of the impact of HMM. Where I think we have opportunity outside the US, the differential from the US, a higher opportunity is in the US we have kind of taken the next steps and gone outside of our four walls, partnering with customers and with suppliers to drive productivity in those mutual supply chains. Because where costs are incurred is where supply chains or within companies functions or processes come together – that’s where inefficiencies are so they don’t necessarily all line up precisely.

So with our continuous improvement tools as we’ve worked with our suppliers, even back to their plants, or our customers all the way back to their store shelves we’ve been able to drive efficiencies and then share that with our suppliers and with our customers with a good portion of that accruing to our benefit as well. We haven’t done that yet internationally so I think that’s a difference we can see as we go forward internationally. It will allow us to increase the impact of HMM.

But as I step back more broadly to international, as I think about our margin expansion opportunities one of the big ones is mix. We look at the global categories that I talked about and about 70% of our sales, they generally have higher operating margins than our company average and certainly higher than our international average. So as we grow those businesses at a faster rate we’re going to have a mix plus in our international margins.

International also, inherently as you’re building businesses in different markets there’s an infrastructure cost. We’re not to scale in most if any of our markets internationally like you would have in the US, so as we build scales in those markets – I’ll use Brazil as a great example. We bought a business, Yoki, it’s about a $500 million to $600 million annual sales business. We had about a $30 million to $50 million General Mills heritage business in that market but it was very geographically confined because we didn’t have the national marketing, sales, distribution and manufacturing infrastructure that we now have with Yoki.

So we can expand our business and the two major ones we have today are Haagen-Dazs and Nature Valley. We now have the capacity to expand those more effectively, more economically with the infrastructure that we have through Yoki and we can bring other businesses. And we have a pipeline of other ideas and other brands that we can bring into Brazil which won’t require a disproportionate amount of sales or administrative overhead support. So you’ll see a leverage from a scale standpoint.

So I think the combination of some differential HMM opportunities, the mix benefit of our global platforms and the scale benefit of growing in the markets is we have footprints largely in the markets we want to be.

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