Greetings and welcome to the General Mills First Quarter Fiscal 2022 Earnings Conference Call. As a reminder, this conference is being recorded today, Wednesday, September 22, 2021.

Thank you, Franz, and good morning, everyone. I appreciate you joining us today for our Q&A session on first quarter results. I hope everyone had time to review the press release, listen to our prepared remarks, and view our presentation materials, which were made available this morning on our Investor Relations website. Please note that in our Q&A session, we may make forward-looking statements that are based on our current views and assumptions, including facts and assumptions related to the potential impact of the pandemic on our results in fiscal '22. 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. And on the call with me this morning are Jeff Harmening, our Chairman and CEO; Kofi Bruce, our CFO; and Jon Nudi, Group President of our North America Retail segment. So let's go ahead and get to the first question. Franz, can you please get us started?

And our first question will be from Andrew Lazar with Barclays.

Jeff, I wanted to start off maybe to get a better sense of how you are thinking about guidance for the rest of the year and how you're managing the business in obviously what's still a very volatile environment. I guess, specifically, it sounds like the company has not made meaningful adjustments to its original net sales outlook for the remainder of the year. But it seems like consumption still remains elevated even into your fiscal 2Q. Volume elasticity in response to pricing, while admittedly early, is almost nonexistent so far. And the company obviously has taken additional pricing actions as well. So I guess at a high level, I'm trying to get a sense of how much of guidance sort of builds in a sales deceleration and cost increases that you're already seeing versus just trying to be prudent in what's clearly still a very fluid sort of environment.

Yes. Thanks, Andrew. And let me start by just kind of reiterating what's in our guidance and what's not. And then I'll provide some clarity on what lies ahead. Even in an uncertain market, I find that clarity beats certainty in terms of how we think about these things. Our updated guidance for the year reflects the beat we had in sales in the first quarter, which we just announced, but really didn't have any change in our sales performance for the balance of the year. If our sales remain elevated as it has for the first quarter, would that indicate that there's a possibility that our sales could be higher? And the answer is yes, there is that possibility. Our second quarter has certainly started out well, particularly in North America. As you look at the retail sales and as you look in the past or second quarter, we're off to a nice start. But there's a lot of uncertainty. Our revised guidance does not contemplate yet revised demand guidance, but I think we'll have a much better view as Q2 unfolds. As we announce earnings in Q2, we'll have a better sense of not only the quarter, but how demand looks for the rest of the year. Our guidance includes elevated inflation that we expect to see for the balance of the year. We said it was 7% at the beginning of the year. It's clearly going to be between 7% and 8% now as we go on. It also contemplates some pricing actions we've taken to address that rising inflation. How our profit comes in will depend on how much inflation goes up and exactly when pricing is implemented. Inflation will continue through the balance of our fiscal year, particularly in the first half of calendar '22. That's clear, and it's broad. We've done a nice job with pricing so far, and our prices will go up for the remainder of the year as we see inflation increase. We will continue to strike a balance between driving sales growth and profitability. This balance has served us well over the last few years and, I would argue, especially during the pandemic.

Yes. Very helpful. And then just a very quick follow-up. With some of the incremental pricing, retailers always say the same thing, which is they're open to pricing when things are structural as they see structural versus, let's say, purely transitory and things of that nature. So I guess as you've kind of gone back to the well, so to speak, as a lot of others have as well, are those conversations changing at all, broadly speaking, in terms of what is sort of acceptable or thought of as transitory versus structural things that one would need to price for? Just curious for your perspective on that.

Let me give you an overview, and then Jon Nudi, if you have anything to add, I'd welcome your commentary as well. Ideally, you wouldn't like to go back to retailers multiple times or consumers with price increases, but we're clearly not in an ideal market. Everyone understands that not only is there inflation, but also a dynamic environment. People are aware of the need to revise plans and stay current. We're all seeing the same costs, whether it's transportation, labor, or ingredient costs. It's never easy, but there's an understanding that we're in a market that is continuing to change. Jon Nudi, any color you'd like to add to that?

Yes. I think that's exactly right. Retailers are seeing increased costs and inflation as well. One of the things we're really proud of is the Strategic Revenue Management capability that we've built over the last 5 years or so. When you come to retailers with a rationale that makes sense, they tend to listen. We've taken some list price increases, but we continue to look at promotional optimization and leveraging all of our different tools. We're working well with retailers, and we've gotten the majority of our pricing accepted and reflected in the market. We'll continue to take the inflation and deal with it as we move throughout the year.

Our next question is from the line of Ken Goldman with JPMorgan.

With the understanding that you don't provide specific quarterly guidance, are there any items, Kofi, that we should be particularly aware of as we model the current quarter, especially with unusual comparisons from last year or the timing of pricing by segment? I want to make sure we're sort of minimizing potential surprises there.

Sure, Ken. Thanks for the question. As you think about the year with Q1 coming in stronger than we expect on both the top and the bottom line, we anticipate a more balanced year in terms of the flow of margins, with more cost increases expected in the back half, offset by stronger performance in the first half. We do expect our pricing realization to come in strong in Q2 against the inflation expectations. Just to give you a little more color, we don't want to get any deeper on a quarter-by-quarter basis.

I appreciate that. And then as a follow-up, you showed in your chart how difficult the labor market is. Your inflation outlook is being raised today largely because of that. We're hearing anecdotally that perhaps the worst is over for the labor situation, given some benefits rolling off and back-to-school. Obviously, labor is still incredibly difficult to secure. Is it worsening any more? Are you seeing a peak in those challenges? Just curious how to think about that going forward.

No, it's a fair question, Ken. I foresee labor challenges persisting for a while, especially if you look at logistics. There's a shortage of truck drivers in the U.S., and that's not going away for a while. There's a shortage of shipping containers as we look at global transportation. While we have seen a little loosening in labor markets, that won't solve the entire dilemma. The challenges we have with labor and labor inflation are going to persist for some time. We have not seen them abate significantly at this point.

Our next question is from David Palmer with Evercore ISI.

In your transcript, you mentioned that your service levels weren't quite where you wanted them to be. What is the average out there in service levels in the industry? Where do you think General Mills is versus normal for today for the industry, but also normal versus itself? Are you below where you'd like to be in terms of ship sales? Or are there penalties happening?

Fair question. Jon Nudi, do you want to take that one on?

Yes, absolutely. Our service levels are certainly better than they were at the beginning of the pandemic, but still quite a bit off where we'd like them to be, which is in the high 90s. We're seeing a widespread impact from raw material vendors, internal manufacturing, co-packer manufacturing, and our distribution network. We have hundreds of disruptions in our supply chains, changing daily and weekly. We've gone back to practices that served us well at the beginning of the pandemic by standing up control towers to work with teams and address these issues. We expect these issues to persist throughout the year. While we're competing well against many of our competitors, we are at probably somewhere in the high 80s in terms of total service levels, with the majority of our categories actually performing well.

Just a follow-up on pet food. Now that you closed on the treats acquisition, what is the big picture strategy and opportunity? Where are your market shares across major pet segments, and where do you see that opportunity? Where do you see that market share going to moving forward?

On Blue Buffalo, our organic business performed quite well in the first quarter, with a 20% increase and gaining market share across all segments. However, I wouldn't model 20% growth for us moving forward due to tougher comparisons as the year progresses. We over-index in dry dog food but under-index in other subsegments, presenting broad opportunity. The Tyson acquisition has exceeded our initial expectations and offers significant growth potential. The acquisition cements our leadership in the treats category, something we wouldn't have achieved alone. We're pleased with both Blue Buffalo's performance and the recent Tyson pet food business acquisition.

Our next question is from the line of Michael Lavery with Piper Sandler.

You've got broad pricing across every category and segment. Can you touch on just what you're seeing regarding elasticities? Your sales are holding up, but any surprises? Any variation? Particularly looking ahead, are there areas we should watch for more volume pressure?

Michael, you're right; the pricing has been broad. It reflects our Strategic Revenue Management capability. Demand is holding up better than we thought. Broad-based inflation is observed not just at-home but away-from-home eating as well. Given the significant inflation in both segments and challenges facing restaurants, elasticity seems lower than anticipated. However, the sample size is small, and we’ll continue to monitor it.

That's great. One follow-up on your comments about the digital programming and the data you gather from receipts for Box Tops. How can you leverage that data effectively?

We can meet consumer demands better, offering tailored options. For Box Tops for Education, we can combine our data with retailers' first-party data to customize offers for consumers while adhering to privacy laws. This approach is essential in creating connected commerce, which we actively pursue.

Our next question is from the line of Chris Growe with Stifel.

In the environment you're seeing stronger revenue growth translating into stronger profit growth, can you provide insights on investment opportunities? Would continued stronger revenue growth lead you to reinvest more heavily?

We're confident in strong support behind our priority brands. Even amid additional cost pressures, we believe we have strong ideas and will continue to support them. We will also maintain investments regarding data and analytics capabilities.

On incremental cost inflation, you discussed SRM actions and HMM savings. Do you believe you can offset inflation with these initiatives during the year?

The environment remains dynamic on costs, and we are seeing significant changes. Our initial inflation call moving up from 7% to 8% reflects our plans to address visible cost increases. We’re prepared to act if conditions change further.

How is the incremental inflation likely to impact the distribution throughout the remaining quarters?

Inflation will impact the second half of the year more heavily than the first half due to the combination of our hedge positions and expected exposure.

Our next question is from the line of Alexia Howard with Bernstein.

Can you hear me okay?

Yes.

Yes.

The first question I had was around the categories or businesses that are holding or gaining share. I think you said that of your priority businesses, you are holding or gaining share in over 2/3 of those. I'm just wondering which businesses are not prioritized and is there an overall number for the company overall?

I'm not going to give it down to the decimal point on what's priority and not, but our priority businesses are the overwhelming majority and represent the top 10 categories for us in the U.S. and our categories in Europe, Asia, and Brazil. This includes almost all our categories.

Can you give more color on where the ingredient issues are happening? Is it due to bringing in from emerging markets? And domestically, are capacity issues mainly because of labor or parts?

We have supply constraints in some categories due to high demand. An example is fruit snacks, where we grew significant share. We've added capacity, but it takes time to come to market. About ingredient issues, we see a combination of shortages across the board, not limited to one ingredient or region. Most competitors are experiencing similar challenges.

Our next question is from Steve Powers with Deutsche Bank.

Kofi, could you talk about cost inflation in the first quarter versus your earlier call for 7%, 8% for the year?

Our HMM was roughly in line with our full year forecast. Cost inflation was a bit lower, still elevated, but not precise.

Jeff, with the Tyson brands off to a strong start, can you expand on your expectations for those businesses?

It's off to a strong start, and I'm pleased with how the Tyson team integrates with Blue Buffalo. We haven't fully plugged them into our distribution system yet, but teams are collaborating well. We're confident in the growth potential amid this integration process.

Our next question is from Nik Modi with RBC Capital Markets.

Given the current volatility, do you think the industry needs a mini CapEx surge to strengthen supply chains for consistent results moving forward?

It’s a volatile environment, but General Mills tends to perform well during challenges. Execution is critical. The coordination among our supply chain and marketing is as important as capital expenditures. The challenges we face now are likely the new normal, and we believe we're well-positioned to continue to execute effectively.

Our next question is from Robert Moskow with Credit Suisse.

Congrats on the results, certainly much better than I expected. I wanted to know about the hedges, Kofi. Can I assume that you're generally like 0% hedged in the back half?

We're at about 66%, roughly two-thirds covered for the year at our present demand and volume expectations. We cover ingredients and commodities where markets exist and long-term contracts help. Logistics costs pressures are partly covered by our long-haul and short-haul trucking contracts. We're experiencing upward price pressure due to labor shortages.

What happens when a supplier is late or has to charge premiums due to logistics challenges? Is that hedged?

Generally, no. The entire network faces similar pressures, leading to incremental operating costs in this environment.

Our next question is from Jonathan Feeney with Consumer Edge.

Is it correct that retailers are unhappy with case fill rates, and it feels like the pendulum has swung to less importance on data? What are your thoughts on that?

Data is important, but relationships matter too. While demand for data increases, trust based on relationships is crucial. Retailers recognize the benefits of strong partnerships with manufacturers, which streamlines their operations.

Prior to the pandemic, there was a narrative indicating that big brands were challenged. Consumers like our brands, and we continue to build and innovate them. Our scale helps retailers with respect to supply chain and provides us opportunities to focus on capabilities.

Speakers, our final question for today will be from the line of Rob Dickerson with Jefferies.

I'm curious if meals, baking, and cereal territories will still face pressure relative to more fluid COVID rates, while snacks may continue to perform despite shifts in mobility.

Broadly speaking, all our categories are up compared to a couple of years ago. As consumers return to being more mobile, on-the-go categories have improved, while cereal and baking trends remain positive. We're focusing on competing effectively across all categories and driving growth in snacking, which has rebound significantly.

We are growing share in more than 50% of our business, which has been the case for four consecutive years. We remain committed to competing effectively across all categories.

You've stated it's an ongoing process looking for potential acquisitions and divestments. Now that we have a timeline on yogurt divestment, are you largely done with divestment, or are you always looking for pockets up for divestment potential?

We're looking to close the yogurt transaction at the end of this year and recently completed the Tyson acquisition. Our portfolio reshaping is an ongoing process. I'm proud of our strong performance and continue to seek growth through both acquisitions and divestments while competing effectively in all categories.

Great. Thanks so much. We are going to wrap up there. Thank you, everyone, for the time and good questions this morning. If you have follow-ups, please feel free to reach out to me throughout the day. Otherwise, we look forward to speaking with you again next quarter. Thanks so much.

And that does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.