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General Mills CEO talks growth outlook tied to cereals, dry pet food

General Mills (GIS) reported better-than-expected first-quarter earnings, narrowly outpacing adjusted earnings per share and revenue while seeing net sales trend higher. General Mills Chairman and CEO Jeff Harmening joins Yahoo Finance Executive Editor Brian Sozzi to discuss value trends hitting the sales of Blue Buffalo pet products and its cereal brands.

"In the short-term, it is clear that... pet parents are more mobile than they have been and going back to the office more. So they're treating less, little bit less wet pet food," Harmening says. "So, that was a drag on our sales. However, our dry pet food sales were up, so that's positive."

Harmening goes on to talk about its innovation and prominence in its snacking and cereal categories.

"We're always focused on market share because it's one of the things that we can control, and we've grown our market share in more than 50% of our categories for five years in a row. It's because we're focused on advertising," Harmening explains.

Lastly, Harmening comments on acquisitions in the food space and how the Cheerios-maker is addressing inflation.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video transcript

BRIAN SOZZI: Welcome back. General Mills out with better than expected earnings. The company sold a lot of Cheerios, a lot of Cinnamon Toast Crunch, but maybe had a little bit of a challenging quarter in pet food. Let's get right to General Mills chairman and CEO Jeff Harmening. Jeff, always great to see you. It's been a while. Thanks for hopping on right after your earnings call here.

Good quarter for you guys. Beat on earnings. Guidance looked intact. But let's start on that pet business. You called out some weakness in wet pet food and pet treats. Now, those things, stuff's not exactly cheap, it's a little expensive for some households. What do you think those trends there say about the US economy?

JEFF HARMENING: Well, Brian, first, it's good to be back with you again. And you're right, we had a good first quarter. In fact, we've had a good run over the last few years. We're a $20 billion business with $9 billion brands. As it relates to pet food, it was a tough quarter. But a couple pieces of context.

The first is that we've doubled the size of our pet food business since we bought Blue Buffalo five years ago. And we think this trend toward humanization is gonna continue. In the short term, it is clear that mobility, pet parents are more mobile than they have been and going back to the office more. And so they're treating less, a little bit less wet pet food. So that was a drag on our sales.

However, our dry pet food sales were up, so that's positive. And in the short term, consumers are seeking a little bit more value. And so we're taking actions like improving our advertising and doing what we call price pack architecture to make sure we hit certain price points. So even though our sales were flat we were thrilled with what Blue Buffalo has done for us. And we see a bright future ahead for it.

BRIAN SOZZI: Jeff, wow. Gosh, I remember when you guys made that Blue Buffalo acquisition, it seems like yesterday, but it's been a couple of years now already. What is that-- why is the consumer opting for dry dog food-- is there just-- and even cat food? Is there just more value in that bigger bag than buying wet food?

JEFF HARMENING: Yeah, there are really two reasons, Brian. The first is that there is more value in dry dog food. The price per pound is lower than it is for a wet pet food. The other thing is a lot more convenient. So you can leave out dry dog food or dry cat food and have your pet eat it throughout the day if you're not gonna be there, which is something you probably don't want to do with wet pet food. And so for those two reasons, we're seeing nice growth in our dry dog food business.

BRIAN SOZZI: You talked on the earnings call a lot about standing up some bold advertising for Blue Buffalo in the coming quarters. Talk to us about that.

JEFF HARMENING: Well, your Blue Buffalo was founded on the premise that we feed our pets like family. And we want to make sure that pet parents know what's in Blue Buffalo and compare that to what's in other dog food because if you're gonna pay a premium, which consumers do for things like for Blue Buffalo, you wanna make sure you know that what you're getting is better than what you could have gotten otherwise.

And so especially as consumers are looking for value, we think it's important that consumer's pet parents know exactly what's in Blue Buffalo and why that's different than other pet foods. And so we call that the true blue promise. It's the way the brand was founded. We've stayed true to that. And we're kind of really going back to our roots.

BRIAN SOZZI: That focus on value by the consumer, Jeff, is that being reflected in those namesake businesses like a Cheerios, like a Cinnamon Toast Crunch, and also in your snack business.

JEFF HARMENING: You know, it is being. When consumers get pressed, the first thing they go back to the supermarket, they go to at-home eating. And so we are a value player when it comes to at-home eating versus eating at restaurants. In fact, eating at restaurants is about four times more expensive.

BRIAN SOZZI: I can't afford to go out, Jeff. I can't afford to go out. Dan's gonna report earnings this week, Olive Garden. I mean, I can't afford this stuff anymore. It's crazy.

JEFF HARMENING: But as you say, you know, our cereal sales are good. And that's because cereal offers a great value. It's convenient. It tastes good. It's good for you. All of our cereals are whole grain. Yes, Cheerios is whole grain but so is Cinnamon Toast Crunch. They also taste good. And so those are the three things that make cereal so attractive. And cereal tends to perform well in these kinda markets.

BRIAN SOZZI: You made a very important point on the earnings call, Jeff, you and your team. You said consumers might be focusing on value. But they're not eating less. Is that correct?

JEFF HARMENING: Well, that is correct, you know, consumers just finding value-- trying to find value in places where they shop. And so they're looking for places where they can get a better deal. And that might be a club store, or a mass merchandiser, or dollar store.

But they're also looking at things like the package size itself. And if I was getting a large size, now maybe I wanna get a medium size because I wanna make sure that things don't go to waste. Importantly, they're still looking to our brands as they always have because it's also important when you don't wanna waste food that your family's gonna eat it.

And when you have products like General Mills with our $9 billion brands, they got there for a reason. And that's because consumers love them. And so even though consumers are looking for value, that only doesn't only mean price. It means convenience. It means great taste. It means nutrition. It really means something your family's gonna eat.

BRIAN SOZZI: It sounds like you and team are very focused over the next couple of quarters at taking market share, whether it's more market share cereal, more market share in snacks. Talk to us about the innovation, some new products that you have coming down the pipeline.

JEFF HARMENING: You know, we're always focused on market share because it's one of the things that we can control. And we've grown our market share in more than 50% of our categories for five years in a row. And it's because we're focused on advertising. Our advertising was up double digits in the first quarter.

As you mentioned, our new product innovation is really good. We have Haagen-Dazs in the yogurt aisle now, which is off to a good start. We have many varieties of things like Lucky Charms and Cocoa Puffs. I mean, it's hard to resist those kind of things.

And we have Haagen-Dazs ice cream outside the US, Macaron, which is off to a phenomenal start outside the US. And so we're really pleased with our new products efforts. In fact, in cereal, we have four of the top five new products over the last year and almost a 50% share of all new products in cereal.

And so whether it's getting back to our good marketing which we're doing, or innovating, or getting good distribution, or distribution is up this year, those are the kind of things that we're really focused on, is executing the things that we can control.

BRIAN SOZZI: Another thing that stood out to me, Jeff, is as it pertains to guidance, you noted it looked like you're still factoring in moderate inflation. Now, it's not lost on me and the people watching this all over the world that today is Fed Day. And the Fed is likely to come out and say, well, inflation has moderated. But now it's starting to pick up with oil back over $100 a barrel. How concerned are you about the inflation outlook?

JEFF HARMENING: Well, we've been dealing with inflation for the last few years. If you look at the last three years, including this one, inflation for our business is up 30%. Now, importantly, as we look at the year ahead, inflation is only 5%. So it's moderated from 13% last year to 5% this year. So it's gone down, but it hasn't gone away.

And it's hard for me to see a scenario where inflation is gonna go away completely. It's at 5% for us this year. For us, the good news is we have productivity gains. And that's our first line of defense. We have about-- generate about 4% of savings in productivity every year. We have a little bit of pricing.

And so we should be able to manage this OK. But for the viewers who think that inflation is going to zero, that's not the way we see it. And we believe that labor will probably be the main driving force of inflation, even if it's gonna be less than what it was a year ago.

BRIAN SOZZI: Fair enough. And the last few minutes that we have with you here, Jeff, look, we showed your bio. You are not afraid of making big deals for this company. Now, you were rumored to have some interest in Hostess. And I know you can't talk too much about that. Of course, Smucker looks to have gotten that one. But you have acknowledged that you've maybe been a little bit boring with acquisitions on that earnings call. Talk to us about the priority to make that big deal at General Mills over the next 12 months.

JEFF HARMENING: Yeah, we're really pleased-- you're right, we don't talk about any specific deals and rumors and things like that. But we've been very consistent over time on what we think. I mean, the most important thing we can do is grow our core and grow our core business. And then we add on top of that. And we've been successful at growing both our core business but also successful at M&A. And that's true if you look at Blue Buffalo, if you look at Annie's, if you look at the Patrick business we bought from Tyson, TNT pizza crust.

So we have-- we have made really good gains in acquisitions. And we'll look to make some acquisitions into the future. We think our growth rate now is roughly 2 and 1/2%. We'd like to add 50 basis points of growth through acquisitions and divestitures.

But we're also disciplined as to how we do it. And we've always been disciplined. We've got a good balance sheet. We like our core business. But we will still be on the lookout for assets that we think can accelerate our growth and things that we will be particularly capable of doing well. But we'll be disciplined as we do that.

BRIAN SOZZI: So I've seen this battle for Hostess. But we've also seen Campbell's food, of course, spend a lot of money to buy Rao's pasta sauce. Does big food-- is your industry at a moment where you need these type of really transformational acquisitions again like they were done in the past to jumpstart sales growth?

JEFF HARMENING: No, we don't. I mean, before the pandemic, before we bought Blue Buffalo, we were growing at a trajectory of 0% to 1%. Now we think we're at 2 and 1/2. And so whether it's being more competitive on our core, or through the acquisitions, or divestitures-- we've done like Yoplait in Europe-- we've added to our growth rate already.

And so we don't need to add more in order to be able to grow. And the idea of replacing what's happening now with growth is not something that we really consider. We look at long term and what's the long-term potential of our business.

And so while we would like to do deals, we like the businesses, we like the fact that our dividend is growing and we're returning money to shareholders, and if we don't find something that we can grow, we will be happy to repurchase shares.

BRIAN SOZZI: Jeff, you almost got me yesterday in my local supermarket, almost picked up some pumpkin spice Cheerios. I think I saw that on the shelves, right?

JEFF HARMENING: I would recommend it.

BRIAN SOZZI: I'm sure you would. Jeff Harmening, General Mills chairman and CEO, always nice to get some time with you don't be a stranger we'll talk to you soon. Thanks Brian.