GIS - General Mills Inc. (GIS) Presents at 2023 CAGNY Virtual Conference (Transcript)

General Mills, Inc. (GIS)

2023 CAGNY Virtual Conference

February 21, 2023 08:00 AM ET

Company Participants

Jeff Harmening - Chairman and CEO

Kofi Bruce - CFO

Conference Call Participants

Steve Powers - Deutsche Bank

Rob Moskow - Credit Suisse

Ken Goldman - JP Morgan

Cody Ross - UBS

Andrew Lazar - Barclays

Dave Palmer - Evercore ISI

Presentation

Jeff Harmening

All right. Thanks for the introduction, Steve, and greetings to everybody here and listening on the webcast. It is a real pleasure to be back in-person this year and on behalf of the entire General Mills organization, we are honored to kick off the CAGNY conference once again. I'm joined on stage today by our Chief Financial Officer, Kofi Bruce; and our Vice President of Investor Relations, Jeff Siemon.

I'd also like to thank Monica Baik, Jane Geiwitz, Chelcy Walker and [Sue Rhodes], who did a terrific job supporting our presentation and pulling together this morning's breakfast.

Before we get started, I'll remind you that our remarks today include forward-looking statements that reflect our current views and assumptions. This slide and the supporting presentation on our Investor Relations website list factors that could cause our future results to be different than our current estimates.

I'll begin by sharing 3 messages, I hope you will take away from today's presentation. First, our Accelerate Strategy is working and executing the strategy is making us a stronger company. Second, we've delivered outstanding results since launching the Accelerate Strategy. And as you saw in this morning's press release, we've raised our guidance again for fiscal 2023. And third, we're well positioned to continue delivering top-tier shareholder returns in the years ahead.

During our remarks this morning, I will review our Accelerate Strategy and highlight how our strong results have been driven not solely by the pandemic and volatile operating environment, but by strategic choices that we've made, that have improved where we play and how we compete. We'll then take a deeper dive into the compelling growth opportunities we see for our largest business and our largest market, North America Retail and our fastest-growing global platform, pet food. Then Kofi will explain how executing our strategy is driving strong shareholder returns and he'll provide more details on our updated fiscal 2023 guidance.

Grounded in our purpose to make food the world loves our Accelerate Strategy is centered on choices we have made about where to prioritize our resources to drive top tier shareholder returns. We expect these choices, including where we play and how we create competitive advantages and win to result in long-term value creation through consistent sales growth, margin expansion, cash conversion and cash return to our shareholders.

Our choices on where to play center on geographies and product platforms, where we have unique advantages and a right to win. From a geographic standpoint, we're focused on 8 core markets with our #1 priority being North America, which represents nearly 85% of our fiscal 2022 net sales and an even higher proportion of our operating profit. Beyond North America, we prioritize China, Brazil, the U.K., France, Australia and India, where we have the scale and infrastructure to drive profitable growth.

From a product standpoint, our global platforms of cereal, pet food, snack bars, Mexican food and ice cream make up roughly 50% of our net sales base. These 5 platforms offer attractive global growth potential and strong margins and are areas where General Mills has advantaged capabilities and leading brands.

Our local gem brands like Pillsbury, Totino's, Wanchai Ferry and others make up another 30% of our net sales and have attractive growth potential in a more limited geographic scope.

Our Accelerate Strategy also defines how we will win with a focus on 4 pillars of boldly building brands, relentlessly innovating, unleashing our scale and standing for good. Of course, we believe in the power of brands. And we're proud to have a portfolio of 9 iconic brands, each with more than $1 billion in retail sales, including the latest across the $1 billion threshold, Totino's.

We've been boldly building brands throughout our company's long history, whether it's heart health on Cheerios; the very best super-premium ice cream at Haagen-Dazs; or the highest-quality natural pet feeding in Blue Buffalo, we invest in our brands to meet our consumers' ever-changing needs with clear, relevant and modern messaging.

Relentless innovation is essential to maintaining vibrant brands and is the lifeblood of a consumer product's company. We think of innovation on a spectrum from launching close-end new products that provide consumers variety to fostering white space exploration through G-Works, our internal start-up accelerator, to investing in emerging brands through our 301 Inc. investment arm to fully acquiring new businesses. We continue to leverage each of these innovation tools to help us win today and to set us up for success tomorrow.

We believe that our scale and food creates distinct competitive advantages for General Mills. We're focused on building differentiated capabilities like connected commerce, strategic revenue management, supply chain digitization and holistic margin management that will help us accelerate our profitable growth.

To enable this, we've been investing to build a world-class digital and technology capability that allows us to capture insights and unlock new growth and efficiency opportunities across every aspect of our business.

The final aspect of how we will win is by standing for good. This work is focused on 4 areas: regenerating our planet; improving food security; protecting our people; and strengthening our communities. Standing for good is central to our culture. And we've consistently been leaders in this space, including being the first company in any industry to publish a climate goal, approved by the science-based targets initiative as well as being an early leader in advancing regenerative agriculture practices.

We prioritize our efforts and report on our progress against 10 bold ESG commitments from greenhouse gas reduction to recyclable packaging to human rights.

Since we launched the Accelerate Strategy 3 years ago, we delivered outstanding financial performance, with compound annual growth rates of 5% in organic net sales, 4% on adjusted operating profit and 7% on adjusted diluted earnings per share. It goes without saying that these results were impacted by the environment including elevated demand early in the pandemic and historic levels of inflation more recently. And yet, our ability to consistently win at the shelf and drive peer-leading shareholder returns during this time is a testament to the actions we've taken to improve our competitiveness, reshape our portfolio and organization and increase investments in our brands and capabilities. Importantly these actions were not tied to the pandemic or inflation, and we're confident they will continue to generate -- continue to benefit General Mills in any future operating environment.

We made great strides in improving our competitiveness before the onset of the pandemic, fueled by stronger brand building, more relevant innovation and increased investments in growth initiatives. Over each of the past 4 fiscal years, we've held or gained share in roughly 2/3 of our priority businesses worldwide.

Our significant actions to reshape our portfolio in recent years have been a key contributor to our improved growth performance and outlook. We've turned over almost 20% of our portfolio since fiscal '18, including the acquisitions of Blue Buffalo, pet treats and TNT Crust, and the divestitures of European yogurt and dough and the North American Helper and Suddenly Salad businesses. This portfolio reshaping work has increased our enterprise growth exposure by more than a full point. We now believe that holding share across our mix of categories and geographies would generate organic net sales growth that is squarely in the middle of our 2% to 3% long-term target.

In addition to reshaping our portfolio, we've reshaped our organization to be better able to capture the growth opportunities ahead. This includes structural changes within our segments and the establishment of a new strategy and growth team to help activate our Accelerate strategy. These actions have improved our competitiveness, our agility and our ability to drive profitable growth.

The output of our Accelerate strategy is a shareholder return model that generates sustainable, top and bottom line growth. To drive returns, we focus on 4 value-creating levers, sales growth, margin expansion, cash conversion and cash returns. While all levers continue -- contribute to our model, we know sales growth is the one with the highest correlation to shareholder returns over the long term.

With that in mind, I'd like to spend the next few minutes showing you why we're bullish on our ability to drive consistent and profitable sales growth going forward. First, I'll share how we've been winning in North America Retail, our largest business and our largest core market, and why we believe we're set up to continue to drive growth for this segment in the years ahead. Then I'll share about executing exciting growth opportunities we continue to see for our fastest-growing global platform, pet food.

North America Retail has built a strong track record of competitive performance, having grown or held share of the majority of its priority businesses each in the last 5 years. These results have been driven by exceptional brand building, innovation and execution. We believe healthy investments in brands, even in periods of volatility, is critical for long-term growth. North America Retail has grown its media investment at a 5% compound rate over the last 3 years and we're targeting a double-digit increase in this current year fiscal '23.

Importantly, we're putting that investment behind compelling and high ROI campaigns such as our Ovens Off campaign for Pillsbury refrigerated dough and Cinnamoji for Cinnamon Toast Crunch.

Let me show you some of our recent brand building examples across our North America Retail brands.

Could we please go ahead, and roll the video?

[Audio/Video Presentation]

Jeff Harmening

We also continue to drive exceptional innovation even within a highly challenging operating environment. Over the past 3 years, we've kept up our innovation pressure and our new product retail sales have been 30% higher than the category average. We know that winning innovation depends on a remarkable offering. So we rigorously assessed the remarkability of our new products. And our established products across 5 key vectors: product, packaging, brand love, omnichannel availability, and value for the consumer and retailer.

Excellence across these measures results in a differential consumer experience and ultimately, stronger sales performance for our new products.

One of the innovations we're most excited about in the back half of fiscal '23 is our mini cereal platform, which brings consumers miniature versions of their favorite cereal brands. We've seen a strong retail acceptance for these new products, and they're already among the top turning items in their first months on the shelf. For those of you here in the audience, I hope you had a chance to try them during this morning's breakfast.

Exceptional execution has been another key driver of NAR's performance over the last several years. We've been fast and flexible in dealing with supply disruptions in volatile demand, helping ensure that our products are on shelf when our consumers and customers needed them. Over the past 18 months, our superior customer service has resulted in on-shelf availability that was better than our competition in 8 of our top 10 U.S. categories.

North America Retail's tremendous performance in recent years has been broad-based across most of our top categories. In U.S. Cereal, our category-leading innovation and strong brand-building investments have helped us increase our #1 share position and grow our retail sales at a 4% compounded rate over the last 5 years.

Within Refrigerated Dough, strong execution in the key baking season and increased investment focused on growing year-round usage have driven 10% compounded annual retail sales growth and added nearly 8 points to Pillsbury's leading share position, which has reached an all-time high of 74% this year.

In U.S. Fruit Snacks, we've generated 11% compound annual retail sales growth and other 4 points of share since fiscal '18. Our growth has accelerated recently, driven by significant incremental capacity we added on Gushers and Fruit by the Foot.

In Mexican food, superior innovation and compelling advertising have helped drive share gains and 9% compound annual growth in retail sales for Old El Paso. Capacity constraints have led to a step back in our share performance in fiscal '23, but we recently brought new capacity online that should unlock additional growth.

In U.S. Hot Snacks, on-trend innovation and modern advertising have contributed to 8% compound annual retail sales growth for Totino's in the past 5 years despite being limited by capacity constraints. Here, too, we have new capacity coming online this summer to enable the next phase of growth for this $1 billion brand.

While we've been leading performance across most of our top categories in North America Retail, we have more work to do on some businesses to improve our competitiveness and step up our growth. In U.S. Snack Bars, our retail sales were up 9% in the last 52 weeks, but they trailed the category, which was up 11%. We're focused on expanding our leadership in the all family segment by improving our brand messaging and innovation performance on Nature Valley, the #1 brand in the category. We're going after differential growth opportunities in the kids segment, with our great lineup of treat bars that leverage our leading cereal brands.

And we're working to increase our presence in the fast-growing weight management and nutrition segments by innovating on core brands like Fiber One, lÄRABAR and EPIC and by launching new platforms like our new :ratio KETO* Friendly snack bar line.

In U.S. Yogurt, our retail sales were up 7% the past year, while the category grew 13%. We're working to strengthen our core original styled GO-GURT and [we buy] Yoplait lines with flavor news, product improvements and increased brand investment. We're focused on increasing our presence in the low sugar weight management space, which is leading the growth in the category, by expanding distribution on our highly successful :ratio product line that delivers high protein with lower sugar and lower net carbs. We're also significantly stepping up our innovation pressure, including exciting new offerings, launching in early fiscal '24.

And with yogurt being one of the few categories where on-shelf availability has lagged our competition, we're working to reduce supply chain disruptions and improve our customer service.

As we shift from where we've been to where we're headed in North America Retail, we know that exceptional brand-building, innovation and execution will remain critical to our success going forward. At the same time, we know the world around us is changing with technology having an ever larger impact on consumer behaviors and the operating environment. To meet this changing environment, we've been building new capabilities that will create meaningful competitive advantage for us in the future. These new tools, including Connected Commerce, strategic revenue management and supply chain digitization, are enabled by our enterprise-wide digital and technology investments and will be critical to our continued growth as we look ahead.

Consumers are increasingly wanting to shop for food, both in-store and online, and they expect personalized interactions with our brands. Our connected commerce capability utilizes data and insights to meet consumers across the physical and digital space. With the rise of e-commerce food sales in recent years, we've invested in capabilities and measurement tools to ensure our leadership at the physical shelf translate to an even stronger position at the digital shelf.

For example, we've developed and optimized digital tools that have significantly improved organic visibility for our brands online. This has helped drive a 51% increase in e-commerce retail sales for our fruit snack business thus far in fiscal '23. By leveraging these and other learnings, our U.S. Retail business has seen its proportion of retail sales and e-commerce channels tripled to more than 10% over the last 3 years, and our e-commerce market share continues to exceed our share in brick-and-mortar outlets.

Today's consumers are increasingly looking for more personalized interactions with brands. Building on that insight, our connected commerce capability focuses on creating one-on-one relationships across digital and physical touch points that engage consumers along the path to purchase. In recently years, General Mills has expanded or launched a broad and enviable collection of digital platforms that we are building one-on-one relationships. We have 14 million monthly active users on these platforms, including our leading food recipe websites in pillsbury.com, bettycrocker.com, our digital Box Tops for Education platform, our Buddies by Blue Buffalo mobile app and our most recent addition, the Good Rewards loyalty program on the Fetch mobile app.

Fetch has a highly engaged user base with more than 6 million active users snapping 7 million receipts every day. Since launching, Good Rewards 6 months ago, we've signed up 2 million consumers to the program and are now taking in 60 million lines of first-party data per day. While we're still in the early innings in this space, we're encouraged by the opportunities that we see for connected commerce drive stronger engagement with our consumers and stronger growth for our brands.

Strategic revenue management is another capability who's impact has grown dramatically in recent years as we've enhanced our use of data and analytics. We've developed a full suite of strategic revenue management levers, including list pricing, promotion optimization, mix management and price pack architecture as we've built 3-year pipelines of actions across our brands, enabling us to adapt our approach and continue to achieve net price realization in a rapidly evolving cost environment. We've demonstrated this adaptability over the past 2 years and we stepped up our strategic revenue management activity to help offset the unprecedented level of cost inflation that we faced.

With robust data sets and granular analytics, we varied our SRM approach at the category and even item level to address relative price points and cliffs while maintaining our overall competitiveness. This has played out successfully over the last year with Nielsen-measured elasticities for General Mills products averaging 27% better than our key branded competitors in our top 10 U.S. categories.

As the supply chain becomes increasingly complex, we see digitization as a growing source of competitive advantage for General Mills. We expect to move our supply chain digitization, will drive increased efficiency and resiliency, leading to better service at a lower cost and in many cases, with reduced carbon footprint.

We see digitization unlocking significant opportunities across our supply chain. In sourcing, we're using enhanced data to develop models that identify the gap between what we are currently paying and what the ingredient or packaging materials should cost, helping drive significant productivity savings.

In manufacturing, we're testing the use of real-time analytics to eliminate waste in our production lines. We've seen a 30% waste reduction in initial tests, and we're planning to expand this program across our manufacturing network as we look ahead.

And in logistics, we're working to digitize the end-to-end flow from our suppliers through our network and into our customers' networks. This will allow us to identify constraints and implement solutions that eliminate waste while optimizing inventory. We're still early in our supply chain digitization journey, and we see significant opportunities ahead to strengthen this competitive advantage, increase our efficiency and fuel profitable growth.

Overall, I am bullish about our prospects for North America Retail. Our categories are growing even on a pre-pandemic basis, and our job is to continue to compete effectively and grow at or ahead of our categories as we've done in recent years. We'll do this by investing in bold brand building, delighting consumers with remarkable innovation and leveraging a full suite of differentiated modern capabilities. We'll also continue to assess opportunities for portfolio shaping within North America Retail via acquisitions and/or divestitures. With a great team, a clear strategy and best-in-class execution, we expect North America Retail to generate consistent, profitable organic sales growth in the years ahead.

So now let's turn to talk about the continued growth we see ahead for our fastest-growing, global platform, which is pet food. The global pet food category is highly attractive, representing nearly $120 billion in worldwide retail sales and has grown at a 7% compound rate over the last 5 years. The United States alone makes up more than 1/3 of the global pet food category at $44 billion in retail sales and our remaining 7 core markets at more than $30 billion in aggregate make up another 25%.

More than 95% of General Mills pet food business today is in the U.S. market, which has grown at 4.5% compound rate over the past 5 years. Category growth in the U.S. has been driven over the long term by steady growth in the pet population and the continued humanization of pets, which has contributed to ongoing premiumization in the category.

Within this attractive market, Blue Buffalo is very well positioned. We are focused on leading and expanding our presence in high-quality natural feeding and treating for dogs and for cats. We are led by our purpose to love them like family, feed them like family, which is the reason Blue Buffalo ranks as the #1 brand pet parents are likely to recommend, the top brand pet parents are willing to pay more for and the most loved and trusted natural brand in the category.

Since our acquisition of Blue Buffalo nearly 5 years ago, we have driven strong growth on our pet food business. We've increased our distribution in the U.S. by 4x, and we more than doubled our household penetration, helping contribute to compound annual net sales growth of 15%. Building on this strong foundation, we believe that Blue Buffalo is very well positioned for continued growth. In fact, as the humanization trend continues to drive increased share of premium pet food, within the broader category, we see an opportunity for an additional $2 billion in Blue Buffalo retail sales over time, if we can continue to grow our household penetration and increase our share within the premium segment.

To begin to capture that opportunity, we need to do 3 things: continue to lead the humanization of dog feeding, capitalize on our #1 position in natural treating and drive the naturalization of cat feeding. Since Blue Buffalo's beginning, the brand has been the leader in the humanization of dog feeding. We're building on this leadership position with renovation and innovation news including significant news launching in the second half of this fiscal year. We're adding 20% more meat to our core Wilderness dry dog food products. We know that high protein is a top attribute sought by pet parents, and we're ramping up spending behind this news.

We're launching Wilderness Premium Blend in this pet specialty channel. This new super premium offering includes kibble plus a proprietary tender meaty piece that dogs love in a convenient, all-in-one solution that pet parents will love as well.

And in the coming weeks, we'll be testing a new fresh offering under the Blue Buffalo brand as a potential next step in our humanization journey. These vegetable products deliver remarkable experience with great tasting, home-style chicken and beef stew recipes, packaged in a convenient, deli-style, resealable tubs. With this 200-store test in the food, drug and mass channel, we're hoping to learn more about how pet parents respond to the product, packaging, convenience and value of this differentiated fresh offering from the leading natural pet brand in the category.

Pet treating is another exciting growth opportunity for Blue Buffalo. We are now the category leader in natural treating, including our heritage Blue Buffalo treats as well as Nudges, True Chews and Top Chews, the leading portfolio of natural meat treats that we acquired in 2021. These acquired brands have tremendous loyalty and repeat purchase rates but low brand awareness.

So we've recently brought the portfolio together under the Blue Buffalo master brand with a packaging refresh that elevates attributes like natural, premium and trust. We're just now turning on new master brand advertising, including these treat products and we see plenty of opportunity to expand their distribution, both of which should drive increased awareness and sales.

In addition, we're continuing to innovate in treating with inspiration from human food, including new Blue Benebars, which offer a familiar snacking form with functional benefits and Nudges on the go, which leverages more convenient packaging to create a new usage occasion. A third key vector for Blue Buffalo is a naturalization of cat feeding. This segment has lacked dog feeding and the journey towards naturalization with only 23% of cat food retail sales containing a natural claim compared to 51% in dog food. Cat parents tell us they're highly interested in natural products, but the lack of natural offerings that deliver on taste has been the key limiter in their development. So last year, we launched Tastefuls by Blue Buffalo, a new line of wet cat food that delivers the great taste cat's love with the natural ingredients that meet our true Blue promise.

This product line has enjoyed nearly 30% retail sales growth in the past year despite running into significant capacity constraints.

More recently, we repositioned our delicious core cat food line under the Tasteful banner, meaning that Blue Buffalo now has a full lineup of tasty and natural cat food products that deliver for cats and for their pet parents. To bring this work to life, let me share a video of some of our latest brand-building campaigns across pet feeding and treating, highlighting how Blue Buffalo continues to lead the humanization and naturalization of the U.S. pet food category.

[Audio/Video Presentation]

Jeff Harmening

Okay. Microphone on? Okay. Good. Thank you.

While I focus so far on exciting long-term growth opportunities for our U.S. pet food business. We know that many of you are also interested in the short-term outlook for our pet segment given the capacity challenges and retailer inventory headwinds we experienced in the second quarter. I'm pleased to say that customer orders have accelerated nicely so far in Q3, and we remain on track to deliver double-digit organic net sales growth in the third quarter and for the second half of fiscal '23 with a back half segment operating profit margin ahead of our Q2 results. Beyond the U.S., there are sizable and fast-growing pet food categories in many of the core markets within our international segment.

These markets account for more than $30 billion in retail sales, and they're growing at an 8% compound rate. And we're seeing the same trends towards humanization drive growth across these global markets, including in China, where pet food retail sales totaled roughly $8 billion and have been growing at a 20% rate in the last 5 years.

Research has told us that the natural credentials of Blue Buffalo and the True Blue Promise resonate well with consumers around the world. Earlier this fiscal year, we began testing Blue Buffalo in China by importing from the U.S. and selling exclusively online. We've learned a great deal about how the brand position fits within the Chinese pet food category and have been encouraged by the results so far. Building on that positive test, we're planning to expand our offering in China and to begin testing in other international markets in fiscal '24.

While there's still much to learn, we're optimistic that international can become an exciting new source of growth for our global pet food platform.

Overall, we like the prospects for driving continued differentiated growth in pet food. The global category is attractive and growing, driven by rising pet populations and the elevated role of pets in the family. Blue Buffalo is well positioned for growth in the U.S. as we lead the humanization and naturalization of feeding and treating. And we're encouraged by the opportunity to develop international into a new growth vector.

Now I'll hand it over to Kofi to share about how our commitment to our strategy is translating into shareholder returns.

Kofi Bruce

Thanks, Jeff, and good morning, everyone. I'm incredibly proud of the progress we've made in recent years to advance our growth agenda. Let's now turn to shareholder return model and how we're creating a sustainable value for long -- the long term.

As you heard earlier, we focus on 4 levers to drive shareholder returns: sustainable sales growth, margin expansion to grow profit faster than sales, capital discipline to convert earnings into cash and then returning cash to shareholders through dividends and share repurchases. Even in a volatile environment, the best companies can pull all 4 levers consistently across a multiyear time frame to deliver top-tier returns. Our goal is to consistently deliver 2% to 3% organic net sales growth. With modest margin expansion, we can generate mid-single-digit adjusted operating profit growth.

From there, we look to convert at least 95% of adjusted net earnings into free cash flow. And then target returning probably 80% to 90% of that free cash flow to shareholders through dividends and share repurchases, resulting in mid- to high single-digit adjusted diluted EPS growth and top-tier shareholder returns.

While all 4 levers are important, we know that over the long run, net sales growth and specifically organic net sales growth is the single biggest contributor to value creation for food companies. I'm pleased to share that over the past 3 full fiscal years, we've exceeded our long-term target and generated 5% compound growth in organic net sales. And as Jeff said, while the results occurred during the pandemic and inflationary periods, it is the actions we've taken to improve our competitiveness, and reshape our portfolio, actions that were not driven by the pandemic or inflation that give us increased confidence we can consistently drive 2% to 3% organic net sales growth going forward.

From a portfolio shaping standpoint, we turned over nearly 20% of our net sales space and added more than a full point to our growth exposure. From here, our goal is to continue our portfolio reshaping work and increase our growth exposure to roughly 3% to further acquisitions and/or divestitures. Building from our long-term sales growth target, we need modest margin expansion to generate mid-single-digit adjusted operating profit growth. We've met this goal over the past 3 years, generating 4% compound annual growth in adjusted operating profit on a constant currency basis, even after incorporating a net headwind from our portfolio reshaping activities.

While we delivered on our profit goal -- growth goal over the past 3 years, absolute margin expansion has been more difficult to achieve due to the unprecedented level of inflation and supply chain disruptions that we've experienced. Our disciplined investment and cost management efforts have helped us maintain strong operating margins during this time, even while our gross margin has declined in response to significant supply chain cost headwinds.

We've begun to build back our adjusted gross margin in fiscal '23, posting year-over-year gains in the first and second quarters as our productivity and pricing have begun to catch up with the cumulative inflation we've experienced in the past 2 years. We still have more work to do with our adjusted gross margin over the past 4 quarters still roughly 100 basis points behind fiscal 2019 levels.

We see a few specific areas of margin opportunity in the near term. First, as the supply chain environment stabilizes, we will work aggressively to eliminate the inefficiencies that have come into our cost structure from significant disruption over the past 3 years.

Second, in addition to reducing disruption-related costs, we see an opportunity to further accelerate HMM cost savings through more resource focus and greater purchasing leverage. In our International segment, our recent efforts to divest low-margin businesses, restructure our organization and reduce complexity are starting to bear fruit.

With the Haagen-Dazs recall now behind us, we expect to start improving our international operating profit margin towards our double-digit long-term goal. And in our Pet segment, we expect to improve our profit margin by internalizing volume as we bring new capacity online, fully leveraging our HMM and SRM capabilities on our acquired brands and realizing fixed leverage as we drive volume growth.

With mid-single-digit profit growth, strong below-the-line management and regular share repurchase activity, we generated 7% compound annual growth and adjusted diluted earnings per share over the past 3 years, in line with our long-term goal of mid- to high single digits. And we've continued our strong record -- track record of converting earnings into cash flow. In the 3 years through fiscal 2022, we generated a cumulative $8.4 billion in free cash flow at a 119% conversion rate, which was well above our target of 95% and was above the median of our U.S. food peers.

With strong cash generation as a foundation, our capital allocation priorities reflect our thoughtful approach to utilizing cash to drive attractive returns for shareholders. We've significantly reduced our leverage since the Blue Buffalo acquisition nearly 5 years ago and we closed fiscal 2022 with a net debt to adjusted EBITDA ratio of 2.8x. We see our balance sheet as a strategic asset, and we're deploying capital in shareholder-friendly ways.

Our first priority for cash is investing back in the business for organic growth with capital expenditures expected to be approximately 4% of net sales over the long term.

The next priority for cash is our dividend. General Mills has paid a dividend without interruption for 124 years, and we expect to grow our dividend in line roughly with earnings over time.

After dividends, we'll look to deploy cash for strategic acquisitions to enhance our growth profile. And finally, capital allocation priority is share repurchases, where we expect to drive 1% to 2% average annual reduction in our net share count in a multiyear time frame.

Our strong operating performance and disciplined capital allocation policies have driven attractive returns for General Mills shareholders, including 18% compounded TSR over the past 3 years and double-digit returns over the long term with our performance beating our CPG peer benchmark across 1-, 3-, 5-, 10- and 20-year time frames.

Before we close, let me provide a quick update on our outlook. Due to our continued strong in-market performance, we are once again raising our full year guidance for fiscal 2023. We now expect organic net sales growth of approximately 10%. Constant currency adjusted operating profit growth of 6% to 7% and constant currency adjusted diluted EPS growth of 7% to 8%. And we continue to expect free cash flow conversion will be at least 90% of adjusted after-tax earnings.

Let me close by thanking the entire 30,000-person-strong General Mills team for their effort and their engagement in executing our Accelerate strategy and delivering outstanding results during what has been a volatile and challenging time. I'm confident we are a stronger company today than when we launched the Accelerate strategy over 3 years ago, and we positioned ourselves well to continue driving profitable growth and top-tier returns for General Mills shareholders in the years to come.

With that, I think we have a few minutes for some questions. Jeff, will you get us started?

Question-and-Answer Session

Q - Steve Powers

Okay. Rob Moskow.

Rob Moskow

On the last conference call, I thought I heard management say that over the next 6 months, you think that there's going to be more inflation and probably more pricing by the industry. And I want to know if you still have those views, retailers sound like they're getting frustrated with the amount of pricing that's coming through and the signals on spot inflation are kind of mixed. So I want to know what you think is going to happen next? Do you think another round is still coming?

Jeff Harmening

Yes. So I mean, the guidance for inflation for us for this year is about 14% with double-digit inflation in the back half of the year. So the first half of '23, we're still going to see double-digit inflation. There's been a talk of spot prices and what's going to happen with inflation. And of course, nobody knows.

But if you look at inflation more broadly, you'll see that inflation is a lot stickier than what people had anticipated. Just look at the recent CPI data that came out just a week ago. It was like almost 6.4%, I think.

So our inflation is going to continue in the back half of this year. And while we don't know exactly what's ahead, it's certainly not a deflationary environment, I would suggest it will still be an inflationary environment.

And as for pricing, I mean, we announced prices during our third quarter because we see the inflation coming in the double digits. We're not going to talk about pricing ahead, but we'll continue to monitor -- kind of look at the environment and see what it holds. I mean, look, I'm frustrated by pricing. I'm sure our customers are too. I'm sure consumers are too, but that's the environment that we're living in.

Steve Powers

All right. Can we go to Ken Goldman at the back.

Ken Goldman

You mentioned and reiterated the 2%, 3% long-term organic sales growth number. I think it's now based on an assumption that you're -- or to get to the midpoint, you're not going to gain any share, correct me if I'm wrong on that? So why would you not gain share? I guess, is my first question. And my second question is, assuming you will gain share, why not at some point, raise this to 3%? Jeff, you've been hinting at this for a long time getting there. I know it requires some portfolio transformation, but it seems a little bit conservative, I guess, just assume that you won't be gaining any market share over time in your categories.

Jeff Harmening

I'm thrilled that you asked the question. I remember when we started talking about this a few years ago, frankly, a very few people believed us that we get to 3%. So the fact that you're wondering whether we're sandbagging getting there or not is actually a very welcome question, legitimately. What I would say is that, if you look at consumer products companies over the arc of time, over the arc of time, if you can grow in 50% plus of your categories, you're doing pretty well and we've been doing better than that the last few years. And probably, we'll try to continue to do that.

And if we can get to 3%, we will. We're not going to stop to get to 2.5%. But I think in terms of what can shareholders expect of us, what can you all expect of us is somewhere right between 2% and 3% growth with a healthy margin and really good cash flow.

If we can do better than that, I think we've shown over the past few years, we will certainly not stop, but we're trying to look at what do consumer products generate. And we think we think that our categories with all the portfolio shaping, we've redone and our competitiveness will generate between 2% and 3% growth. But look, we'll see. I thought the pandemic would be over in 2 weeks. So I mean, and it lasted a couple of years. So...

Steve Powers

Great. Can we go to Cody Ross over on that side, please? Sorry -- opposite side, then we'll come back. Yes, right there.

Cody Ross

Just curious, you raised your guidance for this year today. Can you talk about how the context of your pet segment, just specifically around the supply chain improvements that you're seeing or not seeing? And when do you think you can expect to return to a more normalized environment from a supply chain standpoint?

Jeff Harmening

And so let me take this about pet and then I'll expand it more broadly. Because on the pet business, obviously, our second quarter was kind of rough to understate the case. And -- but we've seen a nice rebound in the third quarter. And I remind those of you who watch Nielsen data, that only captures about 60% of our business. So there's another 40% that's captured by channels that are not Nielsen track, which are growing quite nicely, which allows us to kind of reiterate our guidance for the back half of sales.

And part of the reason we've been able to do that is our supply chain is rebounding nicely. We're probably up in the high 80s in terms of service. And 3 months ago, we were if we looked hard, we were at 75% to 80%. And so we've actually improved quite nicely over the last quarter with -- in line with our expectations. And we -- what we thought would happen is, it turned out to be true in that -- our dry pet food business has come online the most quickly, and you see that in Life Protection Formula, which has grown 19% in dollars and 6% in pounds over the last quarter. And then we'll start to see a catch-up on treats because we've added capacity on that in the last month or so, and then wet pet food will be the last one to see.

And so we're really encouraged by what we see on Life Protection Formula. Because as we look at these things, you need the capacity and then you need to gain the distribution, then you need to turn on your marketing, and we've done all those things on Life Protection Formula has responded. Everything else, we've been in the getting the capacity online and are starting to build distribution. And so kind of from this point forward, we'll start our marketing on treats and on Wilderness and then later on wet pet food.

More broadly, on service, I would say I'm really proud of our North America supply chain Jon Nudi's team here in North America Retail. We're up to about 90% service, which is 10 points probably ahead of where we were 6 months ago. So supply chain continues to improve. 90% is not 98%, which is where we've been historically. And so while the supply chain has improved, that's not to say it's not still hard work and they're not still more disruptions than usual. There are just fewer than there were, and we'll see what the next 6 months brings. Hopefully, there are fewer yet.

Steve Powers

All right. Can we come across the aisle to Andrew Lazar right here on the...

Andrew Lazar

Maybe just quickly Kofi, just what's come in better than you had anticipated such that you're raising guidance for the year? It sounds like it's pricing flowing through still reasonably well, maybe less volume elasticity still than you had anticipated? And and some of the gradual supply chain work, but I just want to make sure I have that right?

Kofi Bruce

You do. So just structurally, I think the core of this is, we do not see our elasticities changing from the first half of the year. So we expect that to play out favorably. We have announced some modest pricing actions on our pet business that are in-market. So we'll see, on average, better, a little bit better price mix as we work through the year.

And then to your point, service continues to improve. So we're seeing all of that kind of flow through, and we would expect modest gross margin expansion now on the basis of the guidance we've given.

Jeff Harmening

And what I will say on that, that guidance also reflect to build on Kofi's point. We haven't cut marketing spending, our capabilities paying to achieve the growth. The growth in our operating profit, we think it's really important that at this point in time, we continue to -- we have got great advertising and really good marketing and some capabilities that I talked about earlier, and we're investing in those capabilities as we go ahead.

Steve Powers

Could we go to Dave Palmer here in the middle of the mid section, microphone over there.

Dave Palmer

Just looking at some of this -- the IRI data, you can see the capacity coming on stream for some of your categories in that data. And you can see also some turbulence from other people's capacity coming on. I'm wondering, are there any other unlocks or noise, so to speak, when it comes to capacity? You expect in some of your major categories. We've seen it with dough and Totino's and now cereal in the opposite way. But any help there?

Kofi Bruce

I'll take that. Yes. I think beyond what Jeff outlined on pet, where we expect continued improvement in treats followed by wet. Those are probably the big things structurally for the balance of the year that we're expecting. Obviously, we're continuing to make capacity investments on a couple of key platforms cereal, Old El Paso in this environment, fruit snacks.

And obviously, pet for the next fiscal year, we would expect a significant amount of online additional capacity. So we're certainly on the platforms where we see the growth in volume and addressing, I think, situationally with external supply chain as we're working through the capacity challenges in the short term.

Steve Powers

Yes. I think with that, we're going to head to the breakout. Let's thank General Mills and Jeff -- Kofi and Jeff for a great presentation. And thanks for getting the conference off to a happy start.

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General Mills, Inc. (GIS) Presents at 2023 CAGNY Virtual Conference (Transcript)