General Mills leader sees no dimming of long-term picture

by Josh Sosland
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Ken Powell, chairman and chief executive officer of General Mills, urged industry observers to avoid focusing excessively on near-term swings.

BOCA RATON, FLA. – Challenging analysts who question whether growth prospects for packaged food companies have been fundamentally and perhaps permanently diminished, Kendall J. Powell, chairman and chief executive officer of General Mills, Inc. urged industry observers to avoid focusing excessively on near-term industry swings.

Mr. Powell was the leadoff speaker Feb. 17 at the 2015 Consumer Analyst Group of New York conference at the Boca Raton Resort and Club. He particularly defended the continued validity of General Mills’ long-term financial goals of low-single digit annual sales growth, mid-single-digit annual operating profit growth and high single-digit earnings per share growth.

“I’ve read sell-side research in recent months that questioned the appropriateness of this growth model for General Mills and for our peer competitors, and I understand this skepticism,” he said. “Recent peer group results have generally fallen short of these targets. But this is a long-term model, so let’s take a longer term view.”

Looking back over the last seven years, beginning in the fall of 2006, Mr. Powell showed General Mills earnings per share rising an average of 8% per year, including double-digit gains in the early years and low single-digit gains more recently.

“There was growth in each and every year, and taking the average over this extremely challenging period, when the operating environment was marked by global political unrest and high levels of unemployment and consumer uncertainty, average growth is right on our long-term model,” he said. “The resilience of the consumer food business and the strength of our brands and the breadth of opportunity we see to provide foods that consumers demand, these factors solidify our confidence in this growth model going forward.”

Similarly, he noted General Mills share price performance 1995 to 2015 and 2005 to 2015 each averaged an 11% annual return, versus 9% and 8% for the S.&P.500 during the same periods, respectively.

Much of Mr. Powell’s presentation was devoted to putting the current picture at General Mills into the broader context of the company’s history. That history is a lengthy one, he said, noting that the business was established with the opening a single mill in 1866, just after the Civil War.

After incorporating in the late 1920s, General Mills branched out into 13 different industries before refocusing on its core foods business in 1995.

That refocus has paid off well, Mr. Powell said. While Yoplait sales were only $300 million in 1995, they were $1.8 billion over the most recent 52 weeks. Similarly, the company’s Nature Valley brand has grown even faster over this period, jumping to $1.3 billion in sales over the past year from $115 million in 1995.

In more recent years, the company has streamlined and restructured certain parts of its business to better position them for elevated profitability and future growth, Mr. Powell said. For instance, sales of the Convenience and Foodservice Segment over the past year totaled $1.9 billion, not much higher than $1.7 billion in annual sales in fiscal 2005. Operating profit, though, was $332 million in the past year, up from $134 million in fiscal 2005.

To grow going forward, General Mills and other food companies will need to adapt to significant changes in consumer demand, both in the United States and beyond, Mr. Powell said.

“Around the world we see and understand that food preferences are changing,” he said. “People want natural foods with simpler ingredients. They are avoiding things like gluten, simple carbohydrates, artificial ingredients. They want more protein, more fiber, more whole grain. More natural and organic products. And consumers everywhere are snacking more than ever. All of these changes create tremendous opportunity for General Mills.

“This is what we have always done. This is what we do, from revolutionizing baking with Betty Crocker and Pillsbury products to transforming breakfast with ready-to-eat cereals, to simplifying Dim Sum for busy Chinese consumers our business is about innovating to meet consumer needs.”

Other General Mills presenters offering examples of how the company is successfully adapting to these changes included Jeff L. Harmening, executive vice-president, chief operating officer, U.S. Retail.

For example, he noted the company has successfully put the Yoplait brand back on a path to growth following a period of weakness. By renovating the Greek yogurt line, sales in the first half of fiscal 2015 jumped about 37%, versus 8% for the category overall. Similarly, by reformulating original style Yoplait without HFCS or artificial colors or flavors, sales grew 12% in the first half of the year.

While acknowledging broad trends in ready-to-eat cereal “have been challenging recently,” Mr. Harmening blamed the problems on a failure of manufacturers to renovate/innovate, shifts in how consumers define wellness and inadequate advertising spending.

The company’s decision to designate most of its Cheerios products gluten-free is emblematic of the opportunity changing consumer preferences offers, Mr. Harmening said.

“Starting this summer, we are taking the biggest franchise in the cereal category, cereal varieties that represent 11% of category sales, gluten-free,” he said. “We shared this news with our customers last month, and they are very excited. It will drive interest in the Cheerios brand and to the entire category. This is a first step in broad investment plan designed to renovate our basic portfolio for today’s wellness oriented consumer.”

Pressed by an analyst during questions and answers over whether the shift in consumer preferences will require costlier ingredients and reduced gross margins, the General Mills executives said the changes do not undermine the company’s great opportunities.

Mr. Powell said the company’s past experience doesn’t suggest the changes will hurt profitability. He called the move to gluten-free “an investment, part of a continuous process.”

“Ten years ago we reformulated all of our cereals so they had whole grains as the No. 1 ingredient,” he said. “That was generally a margin neutral for the company and very meaningful for consumers. These are the kinds of things you do, particularly when you do them in the context of our goal of maintaining or increasing margins.”

Similarly, Mr. Harmening noted a move to gluten-free for certain Chex brand products arrested a long-term downward trend in sales for the brand and launched an extended period of double digit growth.

Donal L. Mulligan, executive vice-president and chief financial officer, said gross margins comparisons may not be apt between better-for-you foods and conventional products.

He noted that while gross margins “are leaner” for some natural products, advertising spending tends to be lower and net margins are competitive.
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