General Mills, Inc. (GIS) Q1 2022 Earnings Call Transcript

General Mills, Inc. (NYSE: GIS) Q1 2022 earnings call dated Sep. 22, 2021

Corporate Participants:

Jeff Siemon — Vice President, Investor Relations

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Kofi Bruce — Chief Financial Officer

Jonathon J. Nudi — Group President, North America Retail

Analysts:

Ken Goldman — J.P. Morgan — Analyst

David Palmer — Evercore ISI — Analyst

Michael Lavery — Piper Sandler — Analyst

Chris Growe — Stifel — Analyst

Alexia Howard — Bernstein — Analyst

Steve Powers — Deutsche Bank — Analyst

Nik Modi — RBC Capital Markets — Analyst

Robert Moskow — Credit Suisse — Analyst

Andrew Lazar — Barclays — Analyst

Jonathan Feeney — Consumer Edge — Analyst

Rob Dickerson — Jefferies — Analyst

Presentation:

Operator

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

It is now my pleasure to turn the conference over to Jeff Siemon, Vice President of Investor Relations. Please go ahead, sir.

Jeff Siemon — Vice President, Investor Relations

Thank you, Frances and good morning, everyone. I appreciate you joining us today for our Q&A session on the 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 invest 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. Frances, can you please get us started.

Questions and Answers:

Operator

Absolutely. [Operator Instructions] And our first question will be from the line of Andrew Lazar with Barclays. Please go ahead.

Andrew Lazar — Barclays — Analyst

Great, thanks very much. Good morning, everybody. Jeff wanted to start off, maybe to get a better sense of how you were thinking about guidance for the rest of the year and kind of how you’re managing the business? And 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 and volume elasticity in response to pricing or admittedly early is almost non existent so far, and the company obviously has taking 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 bills 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? Thanks so much.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Yeah, thanks, Andrew. And let me — let me start by just kind of reiterating what’s kind of in our guidance and what’s not and then I’ll provide some clarity on kind of what lies ahead even even in uncertain market, and I find that clarity beat certainty in terms of how we think about these things and the guidance, important — you kind of hit on it that our updated guidance for the year would reflect 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. And I mean, that probably raises the question then if our sales [Technical Issues] remains elevated as for the first quarter, would that indicate that there is a possibility that our sales could be higher and the answer is yes. There is that possibility.

And our second quarter has certainly started out well, particularly in North America, as you look at the retail sales and is looking past, so our second quarter is off to a nice start. But there certainly — there is a lot of uncertainty in our — the revised guidance we have did not contemplate yet, revised demand guidance. But I think we have a much better view as Q2 unfolds. And as we announced earnings in Q2, we’ll have a better view not only in the quarter, but then how does demand look for the rest of the year.

The other piece of it is really on the bottom line in our guidance with — our guidance not only contemplates what happened in the first quarter, but also the elevated inflation that we’re going to see for the balance of the year. We said it was 7% beginning, that’s clearly going to be between 7% and 8% now as we go on the year. It also contemplates some pricing actions that we have taken in order to help address that rising inflation and how our profit comes in will be determined, I think about how much exactly does inflation go up and exactly when does — what pricing had.

In terms of as we look forward, I think the important things that — there are a couple of things that are really clear to ask. One is that inflation is going to continue through the balance of our fiscal year, which is to say the first half of calendar ’22, that much is clear. It’s going to be broad. The second thing is clear is that we’ve done a really nice job with pricing so far and we — our prices are going to go up for the remainder of the year as we see inflation going up and so you start to see that at the end of Q1 and by hitting Q2 you’ll see more pricing. And our job is to, as we’ve done for the last three or four years, just kind of stay in the middle of boat, which is to say, we’re not going to chase sales growth at the expense of profitability nor are we going to be slave as to profit margin at the expense of things like driving our brands, and this balance of driving sales growth and profitability has served us well over the last few years, and I would argue during the pandemic has served us especially well and we’re still in the midst of it. So I think I’ll stop there, otherwise it will probably be a filibuster. But I appreciate the starting question.

Andrew Lazar — Barclays — Analyst

Yeah, I know very, very helpful. And then just a very quick follow-up. With some of the incremental pricing, retailors obviously always say the same thing, which is they’re open to pricing when things are structural as they see structural versus let’s say, surely transitory and things of that nature. So I guess if you’ve kind of going 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 part of is transitory versus structural things that one would need to price for, just curious perspective on that? Thanks so much.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Let me give you an overview and then Jon Nudi if you have anything to add, I would welcome your commentary as well. I mean, ideally you’d not like to go to back to retailers multiple times or consumers with price increases, but we’re clearly not an ideal market and in a market, and everyone understands that not only is our inflation but everyone understands is also dynamic and it really is, and I probably used that word 15 time this morning about dynamic market and so people understand the need to revise plans and make sure that we’re staying current, and we all see we’re all seeing the same cost for those transportation costs or labor costs, or ingredient cost. I mean, we’re all seeing the same kind of costs, whether it’s CPG companies or retailers. So it’s not never easy. But I think there is an understanding that we’re not — we’re in a market that is continuing to change. Jon Nudi, any color you’d like to add that.

Jonathon J. Nudi — Group President, North America Retail

Yeah, I think that’s exactly right, and obviously retailers are seeing increased cost inflation as well. And one of the things we’re really proud of is the strategic revenue management capability that we’ve built over the last five years or so, and it’s differential in terms of the information we have, the data, the talent in the stores that we can put together. When you come to retailers with a rationale that makes sense and facts, they tend to listen and we’re really leveraging the entire restaurant toolkit as well. So obviously, we’re are taking some less price increases. But we continue to look at promotional optimization mix of PPA and really leveraging all this different tool. So, so far so good. We like the way that competitions have gone. We’ve gotten majority of our pricing accepted and more importantly, reflected in the market. So that’s the trick as well. So we’re really working wealth retailers and we’ll continue to take the inflation and deal with this as we move throughout the year. Thanks very much.

Operator

Our next question is from the line of Ken Goldman with J.P. Morgan. Please go ahead.

Ken Goldman — J.P. Morgan — Analyst

Hi, good morning, thank you. 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? I guess, especially as we think about unusual comparisons with last year with the timing of pricing by segment? I want to make sure we’re sort of minimizing potential surprises there.

Kofi Bruce — Chief Financial Officer

Sure, Ken, and thanks for the question. But obviously, as you think about the — in particular in the first half, second half perspective on the year, with Q1 coming in stronger than we expected on both the top and the bottom line, we would expect a little bit more balanced year in terms of the flow of margins, in that we’re seeing more on the cost, obviously the cost increase coming in, in the back half, offset by a little bit stronger performance in the first half. And we do still expect our pricing realization to come in sort of full force in Q2 and against the inflation expectations. So just to give you a little bit more color. We don’t want to get any deeper on a quarter-by-quarter basis.

Ken Goldman — J.P. Morgan — Analyst

I appreciate that. Thank you for that. And then as a follow-up, you showed in your chart — sorry, you showed a chart in your slides on how difficult the labor market is, obviously your inflation outlook is being raised today largely because of that. We are anecdotally and it’s very early, but hearing that perhaps the worst is over now for the labor situation given some benefits rolling off, giving back to school, obviously labor is still incredibly difficult to secure. I guess I’m just asking is it worsening anymore? Are you seeing a peak in that — in those challenges? Just curious how to think about that going forward from here?

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Ken, I would think the — it’s a very fair question, Ken. I guess, we foresee split labor challenges persisting for quite a while. I mean, especially if you look at logistic. So there is a shortage of truck drivers here in the U.S. and that’s not going to abate for a while. There is a shortage in shipping containers. As we look at global transportation, you can see them on pictures you know, and the LA port. So that’s not going to — that’s not going to be — go away for a while. And while we have seen a little bit of loosening in the labor markets once the government spending has kind of decreased, does not get us to solve the whole, that’s not going to solve the whole have dilemma. So I would suggest that the challenges we have with labor and labor inflation are going to persist for quite some time. We have not really see them abate significantly to this point.

Ken Goldman — J.P. Morgan — Analyst

Makes sense. Thanks so much.

Operator

Our next question is from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Evercore ISI — Analyst

Thanks. Good morning. In your transcript, you mentioned that your service levels weren’t quite where you wanted them to be. I’m wondering what is the average out there in service levels in the industry and where do you think General Mills is versus normal for today for the industry, but also normal versus itself? And is there any sort of outcome from this? Is it, is it — are you below where you’d like to be in terms of ship sales or are there penalties happening?

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

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

Jonathon J. Nudi — Group President, North America Retail

Yeah, absolutely. So I would say is that our service levels are certainly better than they were at the beginning of the pandemic, but still quite a bit off of where we’d like it to be, which is in the high ’90s. And really we’re seeing a wide widespread impact emerging from raw material vendors, challenges that are internal manufacturing, co-packer manufacturing, in our distribution network. And it’s almost maximum right now. So we have literally hundreds of disruptions in our supply chain that really changes on daily and weekly basis. So we come back from the practice and that served us well in the beginning of the pandemic, we’ve stood up — the control towers at the working level on a daily basis, on a weekly basis that I think more senior level to really dig in and work with our teams to solve these issues, and we do expect these issues to persist throughout the year.

What I like is the way that we’re performing and I think we’re outperforming versus many of our competitors in the space. So we are probably somewhere in the ’80s in terms of total service levels. And what I would tell you that it varies widely across categories and majority of our categories were actually in the ’90s and then performing well. We a few that — we have capacity issues and have ingredient issues that are really dragging us down. So we continue to work closely with retailers. In fact, the bulk of our discussions right now with retailers are really around service and making sure that we can ship the product that our consumers are ultimately looking for still. I like the way that we’re performing and at the same time I think it’s going to be a challenge as we continue to move throughout the rest of the year.

David Palmer — Evercore ISI — Analyst

And then just a follow-up on Pet food, maybe a good time to go over where you think the big picture strategy and opportunity is now that you closed on the treats acquisition. Where are your market shares, maybe by major Pet segment and and where do you see that opportunity? Where do you see that market shares going to from your major segments? And I’ll pass it on. Thank you.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Sure. On Blue Buffalo, the first thing I would say is that our organic business on Blue Buffalo performed quite well in the first quarter. I mean, we were up 20% in gaining market share, really across all the different segments. Having said that, I think it’s important also to reflect that for Pet, we probably had our easiest comp of the year in this past quarter. We kind of grew about 6% in the first quarter last year and 18% in the second quarter. And so as good as I feel about Blue Buffalo, I feel great about it. I would model 20% growth for us from here on out because the comparisons get quite a bit steeper as the year goes on. But Blue Buffalo in itself is performing quite well. We really have opportunities across the segment. We over index in dry dog food and we basically under index in every other sub-segment of the category. So there is broad opportunity.

And I would say with the Tyson acquisition, you know when we first looked at several months ago we liked it. Once we had bought it, we got a closer look. We really liked it. Now that we have it, we like it even more. And what I can tell you is that the growth of 20% is — kind of exceeded our initial expectations and it’s a good management team and we not only bought some nice brand, a good portfolio, but a good team. And what that acquisition really helps us to do is cement our leadership and treat part of the dog category and something we wouldn’t have able to get to by ourselves. And so, it’s very complementary, both in product form and customers where Blue Buffalo sits. So the more we got to see it [Technical Issues] good after spending that kind of money to make an acquisition, but we feel good both about Blue and about this recent acquisition of the Tyson Pet food business.

David Palmer — Evercore ISI — Analyst

Okay, thank you.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Thanks.

Operator

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

Michael Lavery — Piper Sandler — Analyst

You’ve got broad pricing across — really it looks like every category and segment. Can you touch on just what you’re seeing as far as elasticities and certainly your sales are holding up. But any surprises, any variation? It looks like the consumer demand really remains strong, but especially just looking ahead, anything we should maybe watch out for or where there could be some, a little bit more volume pressure perhaps?

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Michael, what I would say is you made an observation I think was really important, which is that the pricing that we realized in the first quarter is broad, and I think that speaks to what Jon Nudi was talking about earlier on our strategic revenue management capability and the fact that our capability is significantly better across our company than it was four years ago, and you see that in the market. We got out to market fast and we’ve been out there effectively.

As we look at — you talk about elasticity of demand, it is still early. We don’t have a tremendous amount of data points yet. Having said that, it seemed to us as if demand is holding up quite well and is holding up a little bit better than we had thought. And if I think through the logic of that, particular here in the U.S., you see that restaurant — restaurant traffic is still down, the food cost from away from home eating are going up at least as fast as they are an at-home eating because [Technical Issues] a piece of that and they face the same pressures we do from an ingredient [Technical Issues] So when you see broad-based inflation not only in at-home eating but also perhaps even more so in away from home eating where restaurants many of them, not only do they see inflation but they’re having trouble staffing all of their — all the restaurants. It seems to us that this is an environment where as just elasticity is, at least so far it seemed us are a little bit lower than what we have said. Now the sample size of the smaller, we’ll continue to monitor of that, but that’s what we see in the world right now and pretty much true across the world, whether it’s here in the U.K. or in China or Brazil.

Michael Lavery — Piper Sandler — Analyst

Okay, that’s great. And just a follow-up on your comments about the digital programing and just the unique position you have with all the data you get from the receipts for Box Tops. Can you give a little bit more sense of how you can take advantage of that and really put that data to work?

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Well, what we’re able to do, whether it’s the Buddies by Blue Buffalo, whether as Box Tops for Education, or whether as what we’re doing in China with our Haagen-Dazs omnichannel approach to shops is that we can better meet consumer demands and we can give them things that are more specifically interesting to them and the more specific things you can give to consumers, the better off you’re going to be and attracting their sales. And not only that, particular things like Box Tops for Education, we can also partner with our retail customers because a lot of them have first-party data now and we can combine the data that we have with the data that they have in order to customize offers to consumers that are to the benefit of them, realizing of course all the privacy laws and so forth.

So I don’t want to go into much more depth on that, other than to say that it’s the next evolution of marketing and we’ve talked about connected commerce, and I think for some it sounds like a buzzword, but we want to give you a couple of clear example that here — at least here General Mills is none a buzzword, it’s something we’re taking — we’re taking an active approach to.

Michael Lavery — Piper Sandler — Analyst

Okay, great. Thanks so much.

Operator

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

Chris Growe — Stifel — Analyst

Hi, good morning. Thanks for the time.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Hi, Chris.

Chris Growe — Stifel — Analyst

I just, Hi. I just had a quick question, if I could. In an environment where you’re seeing stronger revenue growth and that’s translated into stronger profit growth as we saw in the first quarter. I just want to get a sense around investment, and that can obviously take many forms, marketing or investing back in the business, sort of white space, and you’ve got a lot of investment back in the business for the last few years, but I want to get a sense of as we think about your opportunities for say incremental marketing or something along those lines, would continued stronger revenue growth prompt you to want to reinvest more heavily is the question?

Kofi Bruce — Chief Financial Officer

Chris, thanks for your question. So as we think about structurally where we are in the year, we’re confident that we have strong support behind our priority brands and we would expect to retain that even as we do see additional cost pressure come in and on the basis of everything we know, we still believe that we have strong ideas and we’re going to continue to support those. I think as we roll forward here, we will also continue to support our capabilities, investments around data and analytics. So, at the core of our expectations and our guidance, we’ve preserved our expectations for the year.

Chris Growe — Stifel — Analyst

Okay, thank you. And this is a final question, if I could. In relation to the incremental cost inflation that you expect for the year, you also talked about some more SRM actions, and obviously you still HMM savings. So the inflation that’s coming through, do you believe you can offset that with your SRM initiatives this year, such that costs are roughly offset by the SRM initiatives and plus HMM?

Kofi Bruce — Chief Financial Officer

So I think I’ll start with just the recognition — the environment remains dynamic on the cost side. So we are seeing cost changes moving through the system rapidly. We are at this point we do have a best call on the cost picture for the year moving up from 7% to 8%, and we’ve got plans to address what we can see. And the best thing I can tell you is that we are prepared to act should it change further, which is a very distinct possibility in this environment given how much we’ve seen it move here in the first three months of the year.

Chris Growe — Stifel — Analyst

Just one follow-on Kofi is the incremental inflation, is that across the remaining three quarters as depressed more heavily in say Q2, just understand how the cost — the incremental costs run for the year?

Kofi Bruce — Chief Financial Officer

Yeah, so I’ll give you the perspective that it is going to impact the second half of the year a little bit more heavily than the first half as you can expect given the combination of our hedge positions and where we would expect to see this exposure more heavily hit us. So that that is part of why we would give you the perspective that we see a little bit more balanced in the profit picture between the first half and the second half.

Chris Growe — Stifel — Analyst

Okay, got it. I heard it before and understood. So thank you for that. I appreciate your time this morning.

Kofi Bruce — Chief Financial Officer

Thank you, Chris.

Operator

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

Alexia Howard — Bernstein — Analyst

Good morning. Can you hear me okay.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Yes.

Alexia Howard — Bernstein — Analyst

Perfect. All right. So the first question I had was really around the the categories or the businesses that are holding or gaining share. I think you said that of your priority businesses you are holding or gaining share in over two thirds of those. I’m just wondering which businesses are not priority and is there an overall number for the company overall? And then I have a quick follow-up.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Yeah, I’m not going to get it down to the decimal point, Alexia, was a priority in that, but I would say that our priority businesses are the overwhelming majority of our businesses. So they are the most significant part. They represent the top 10 categories for us in the U.S., our categories in Europe and Asia and Brazil, and they include all of the global categories as well as the local gems that we talk about. So it’s the vast majority of our categories. And so when we say we’re gaining share, you know roughly 65% or so of our categories, you can be confident that is most of our — that is most of our categories throughout the world and we say prioritize though because it doesn’t included some, but it includes all of the biggest most important categories for us.

Alexia Howard — Bernstein — Analyst

Okay, thank you very much. And then I think you said earlier that — and on the question about [Indecipherable] levels that there are certain categories where you got capacity constraints and or ingredients issues. Are you able to just give us a little bit more color on where those ingredients issues are happening? Is it bringing things in from emerging markets? And then domestically is it capacity issues mainly because of labor or its getting parts into the machine? I’m just trying to figure out where the pain points are from a supply chain perspective? Thank you very much, and I’ll pass it on.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Yeah, I would say, Alexia, there are a couple of categories where we have supply constraints only because demand has been has been high for such a long time and I’ll give you a Fruit Snacks an example of that here in the U.S. where we grew share, massive amounts of share two years in a row. Demand was high before the pandemic, has been high during the pandemic, and certainly high right now. And so we’ve had to go out and add more capacity, which we’re going to do — which we signed on a year ago and was we come to market a year, but that takes a long time to get through. So Fruit Snacks will be a great example of one of those places and desserts right now would be another example where the desserts category has been really strong for us and so we have capacity constraints.

When it comes to — when it comes to ingredients, it’s a little bit here and a little bit there. It’s not one particular ingredient all around the world. It’s really a combination of small things, as I think Jon maybe aptly described it as a lack of all. I mean, there is a lot of those ingredient shortage here and a little bit there and labor shortage here and truck there and so it is not geography or category what we said, it’s a little bit of everything. And from what we understand, I think probably most of our competitors and most of our retail customers are experiencing something very similar.

Alexia Howard — Bernstein — Analyst

Great, thank you very much for the color. I’ll pass it on the. I appreciate that. Thank you.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Thank you.

Kofi Bruce — Chief Financial Officer

Thanks.

Operator

Our next question is from the line of Steve Powers with Deutsche Bank. Please go ahead.

Steve Powers — Deutsche Bank — Analyst

Hey, thanks guys. Hey, Kofi, not on the labor but just around the comments made thus far on cost and cadence. Can you just talk about where cost inflation ran in the first quarter relative to your call for 70% of the year? And then if possible the same thing on HMM savings relative to the 4% full year impact expectations? And then I got a follow-up, pet like, to suggest. Thanks.

Kofi Bruce — Chief Financial Officer

Sure. So our HMM brand roughly in line with our sort of full year forecast. And then I think as you look at cost inflation, it was a touch lower and still elevated, so not — I don’t want to get too precise. But I think it’s a touch lower than we expected to be for the remaining three quarters was in the original inflation cause has relatively balanced.

Steve Powers — Deutsche Bank — Analyst

Okay. Okay, that helps. And then, Jeff, going back to the pet treats and he Tyson brands, as you said, after a very solid strong start, can you expand just on your expectations there as you — mainly as you plug those businesses into the Blue Buffalo go-to market model and just any context on timing as to how you see that process unfolding? Thank you.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Yeah, I was. First of all I would say it’s off to a strong start. I mean, you know — what I’m really pleased with is the way that the Tyson team we inherited and the Blue Buffalo team are really working together already even if we hadn’t applied it into our system. And as I indicated earlier, they are certainly a talented team that we brought over from Tyson and we feel good about that, but we haven’t blended into our whole system yet, either our distribution system or how that — or our omnichannel system. And so that’s going to take a little bit of time. I mean, I don’t have an exact date for that. The key for us is that we maintain our execution of that business because it’s executing quite well on its own. While we bring it in piece by piece to some of the Blue Buffalo businesses and some things will integrate and some things we won’t. And, but what I can tell you right now is that the teams are working very well together and it’s only a couple of months, but we like to start we’re off to. And I think once we are able to plug in some of our capabilities to this Tyson business for the strategic revenue management, which we really haven’t quite done yet or Holistic Margin Management, which we haven’t done yet or plug it into the sales team and have for their capabilities, we think that there is — there’s quite a bit of room for growth.

Steve Powers — Deutsche Bank — Analyst

Okay, very good. Thank you very much.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Thanks.

Operator

Our next question is from the line of Nik Modi with RBC Capital Markets. Please go ahead.

Nik Modi — RBC Capital Markets — Analyst

Thanks. Good morning, everyone. Jeff, I wanted to ask a question about — you’ve been talking a lot about whack a mole [Phonetic], which I think is pretty clear given environment. But the whack a mole seems like it’s becoming more normal when you think about disruptions, weather events and labor shortage, labor issues are probably going to persist longer, issues with other countries in the U.S., and trade wars, impacted ingredient costs. So I’m just curious like — do you think the industry in general needs to go through a mini capex surge to really appropriate the supply chains and the capabilities to make sure that they can deliver consistent results through this, that I would characterize this is going to be probably a volatile environment for many years to come?

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Yeah, the — Nik your observation that there is a volatile environment across all of the things you indicated, I think that’s exactly right. What I would say is I think in environment that are difficult, General Mills has its performance best and you saw that during the beginning of the pandemic, I think you see it with our first quarter release and I’m certainly hopeful that you’ll see it in the subsequent quarters. And people talk about strategy all the time, but execution is pretty important. And we’re executing really, really well and is because we’re addressing all of the things that you just talked about.

Now the question is how do address it. Capital may be one area, in some places automation maybe an area in some case, but I would also tell you that the coordination amongst your supply chain and your marketing functions and your sales functions, that’s as important as adding capital expenditures or automation or things like that. And so I do believe that the challenges that we see right now I think they are the new normal for the foreseeable future. And we know what the supply chain we have and with the restructuring that we just did, which kind of addresses the holistic business here in North America, I think our chances of executing well will remain high.

Nik Modi — RBC Capital Markets — Analyst

Excellent. Thank you.

Operator

Our next question is from the line of Robert Moskow with the Credit Suisse. Please go ahead.

Robert Moskow — Credit Suisse — Analyst

Hi, thanks for the question and congrats on the results, certainly much better than I expected. I wanted to know about the hedges, Kofi. I think you said that your are about 50% hedged for the year. In the back half of the year, can I assume that, that means that you’re generally like 0% hedged in the back half? And then what kinds of things do you hedge and what do you not hedge?. Maybe you could remind us because like trucking, logistics costs, are those part of the hedges or is it really like just ingredients that you hedge?

Kofi Bruce — Chief Financial Officer

Sure. So just — I’ll start by just a gentle correction of our hedge levels, we’re at about 66%, so roughly two thirds covered on the year at our present demand and volume expectations. So I think to your question about what we cover, I think generally in ingredients on commodity side, we’ll be able to hedge where there are markets on some of those ingredients that cover the key long-term contracts which gets you effectively the same thing. As we look at the logistics side, obviously we do have long haul and short haul trucking contracts in our network. Obviously, with the labor pressures, there is upward price pressure on that entire complex just as a result of the shortage of drivers to get to drive trucks, and frankly even labor, loan trucks and shipping containers on the other side. So that we are — we have covered partially through the contracts that we have and the key is making sure that we continue to execute most of our routes on contract and we are seeing a little bit of pressure as a result of having do more sort of off contract and off network as a result of the labor shortage in the environment.

Robert Moskow — Credit Suisse — Analyst

Okay that makes sense. And what happens when a supplier like is late or have to charge premiums to you because of logistics challenges. Is that hedged or is that not hedged?

Kofi Bruce — Chief Financial Officer

Generally, no. And that is part of what I think one of the things that Jon had spoken to pretty clearly is the entire network incoming and out is under similar pressure. So that’s a place where we do see some incremental operating costs in this environment.

Robert Moskow — Credit Suisse — Analyst

Okay, makes sense. Thanks for the clarity.

Kofi Bruce — Chief Financial Officer

Sure.

Operator

Our next question is from Jonathan Feeney with Consumer Edge. Please go ahead.

Jonathan Feeney — Consumer Edge — Analyst

Good morning. Thanks very much.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Hi, Jon.

Jonathan Feeney — Consumer Edge — Analyst

In the years before the pandemic, I had the pleasure of covering some of the retailers to as well as the food and the conversation was relentlessly data versus relationships, it was all about the elasticity and private label shares and retailers getting smarter, omnichannel creating more data, and it basically forcing retailers to change their shelf sets more frequently and based on all this, maybe more quantitative factors than qualitative and — but in the past six months it seems like there is this narrative in the industry that it seems that retailers are unhappy with case fill rates, it’s difficult and the industry pricing wise like — that was a very good performance to have a minor relative performance, to have a minor gross margin decrement year-over-year, but some others are much worse. It feels to me like the pendulum has swung and now it’s — well that data is less important. I mean, elasticities to your point earlier excellent, private label shares are in freefall in most of these categories. I mean, supply is short, you would think if this is where you look at the inflation’s of that, I lived through in ’07 and 2011, like these kinds of indicators would have suggested dramatically more pricing protecting it, maybe even expanding gross margin on a two-year basis certainly versus pre-pandemic levels and better utilization, etc. So, guess I wanted your comment about — is that — am I wrong about the analytics first of all? Is that right about that kind of pendulum and the conversation between you and your retail customers. And do you think that in a more normal environment swings back to where, Hey more people buying your products, elasticities are good and I suggest more pricing power over time? Thanks.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

I guess, Jonathan, let me take a crack at that overview and then Jon Nudi to the extent you want to add on. When I think about the data versus relationships when it comes to retail customers, I think about it the same way as I think about brick and mortar retail and e-commerce, which is at the end, and especially in food where — yes, we have e-commerce, 85% of our e-commerce goes through stores. So you need to be good at e-commerce and you need to be good at the physical distribution of our product as well, which is why we talk about connected commerce. The same is true of what we’re going through with retail customers right now. Yes, data is important, it will be coming — it will remain important. Data keeps getting better for our retailers. It keeps getting better for us, that will certainly play a role, but you only trust the data of people you actually trust and so the retail relationships we have are also important because as we go to market and talk about what’s going on in the environment, we need to make sure we have those relationships. So they are both important.

As we think about the elasticity of demand, we’ll see — we’re kind of an uncharted territory, to be honest with you. And that’s why all elasticity models are always based on historical data, which is useful to a point, but only to a point. And that’s why I made the commentary earlier about we’re seeing — we’re seeing inflation broadly not only across our products but also across restaurants as well and that’s why I made the comment about service levels at restaurants and the ability to get labor because it seems like in that environment it feels like elasticity should hold up pretty well and they have so far, but we’ll see what is to come. Jon, anything you want to add on either of those topics?

Jonathon J. Nudi — Group President, North America Retail

Yeah, I mean, I think that’s well said. The only thing I would add is I think prior to the pandemic there was narrative that big brands were challenged and I would say — first of all consumers like our brands and we continue to build them, innovate and build our brands and that’s worked for us. The other thing I would say is for retailers. There’s power in having scale, so they can — retailer ultimately call us and we operate across 25 different categories in the U.S., ad that’s helpful in the supply chain side. We can work in all those categories and really drive scale and make sure that we’re operating well to service their shelves. And the same time, we can focus on capabilities, whether that be connected commerce and digital marketing or e-commerce. So I think retailers are recognizing and have recognized that having powerful partnerships with some big manufacturers is beneficial to them, those three months of work, it’s good for us and it’s good for them as well.

Jonathan Feeney — Consumer Edge — Analyst

Thanks, very helpful answers. I appreciate it.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Thank you.

Operator

And speakers our final question for today will be from the line of Rob Dickerson with Jefferies. Please go ahead.

Rob Dickerson — Jefferies — Analyst

Great, thanks so much. So just a quick question kind of the dissect category dynamics a bit. Obviously, elasticity [Indecipherable] is unknown, but seems as if, maybe there is encouraging light at the end of the total, so to speak. At the same time though you’re seeing feel at home demand is a bit elevated, but then we also see either Cereal Meals and Baking decline a bit, which obviously isn’t shocking relative to the year ago quarter. I’m just curious as you sit down and you think about the guide, any dissected category to category, is it fair to say as we move forward over the next few quarters or so or as mobility increases that it’s rational to think that may be Meals and Baking and Cereal is still a bit more pressured relative to kind of still with COVID rate versus snack to may be the snacking part of the portfolio actually continued to perform despite shifts in mobility? So that’s the first question. Thanks.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Yeah, I would guess, I would say, Rob, that broadly speaking — I mean all of our categories are up — was over where they were a couple of years ago and and at the same time you’re right, as consumers get to be more on the go, categories are more on the go have — we’ve seen an uptick in those and for our, that’s our bars category, for example. And whether that’s in Europe or whether that’s in the U.S., we’ve seen the same kind of trend. But I think importantly, either whether you look at Baking or whether you look at Cereal, I mean the trends versus a couple of years ago are pretty good and the ones for on the go categories are improving as you suggest. Jon Nudi anything you want to add to that commentary?

Jonathon J. Nudi — Group President, North America Retail

No, I think you had it. I mean, obviously it’s dynamic, and when we compete in as many categories as we do and there’s a lot of moving parts and one of the things that [Indecipherable] stressed since some 20 years and we want to compete effectively in all the categories we compete, and so that’s what we’re really focused on. And obviously, just that snacking has really rebound and we’re seeing good growth there. And this big important categories like Cereal, where again over a two-year basis we are growing, which is great. And we think there’s some dynamics of kids getting back to school and focus on convenience. We’ll see that category continue to accelerate, which we sell in August. So we like how we’re decreasing probably in the U.S., we’ve grown share and grew to 50% of our business in Q1 and we’ve done it for four years in a row. So, again this wasn’t just a pandemic-driven performance. We like the way that we’re competing and we’ll continue to focus on as we move forward.

Rob Dickerson — Jefferies — Analyst

Okay, perfect. Thank you. And then just quickly, I think in the prepared remarks you stated that it’s an ongoing process in your search for potential go forward acquisitions, but then also potential divestment. So I guess just very broadly speaking now that we have sort of timeline on yogurt divestment, would you say you’re kind of like largely done with that, that’s the piece of the portfolio optimization efforts or are you always looking, let’s say, and specifically looking at certain pockets that could still be up for divestment potential? Thanks so much.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Yeah, well I guess, I mean, what I would say is that we’re looking to close the transaction at the end of this year and we just closed an acquisition with Tyson, so we feel good about those things. I would view our portfolio shaping is kind of an always-on capability. I mean, similar we view strategic revenue management, used to be episodic until we made it always on and the same will be true with our portfolio shaping. I’m really proud of what we’ve done in our base business, not only this quarter, but the last few years. But it’s also clear to me that we need to do that and continue to reshape our portfolio and some of that will be through acquisition and I think this Tyson acquisition is a great, a great example of that.

And to the extent that we think that the investments are better spent in priority category versus those that aren’t prioritized, we’ll look at additional divestment opportunities as well, and so we’ll continue to compete effectively in the categories we’re in and we’ll continue to look for M&A opportunities. I think one of the things that I have been most pleased about over the last couple of years is that we’ve been able to do both effectively, and whether it’s the start of Tyson or the way we’ve done with Blue Buffalo, we’re keeping our eye on the ball as we’ve divested Yoplait, we’ve done all of that. And so there are some companies you can see that, but I feel good about that combination for us and we’ll continue to look at that into the future.

Rob Dickerson — Jefferies — Analyst

All right. Super. Thanks so much, guys.

Jeffrey L. Harmening — Chairman of the Board and Chief Executive Officer

Thank you.

Operator

And speakers, I’ll return the call back to you, you may continue with your presentation or closing remarks.

Jeff Siemon — Vice President, Investor Relations

Great, thanks so much. We are going to wrap up there. Thank you, everyone, for the time and good questions this morning. If you do have follows-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.

Operator

[Operator Closing Remarks]