Matt Smith

Matt Smith with Stifel inquired about the drivers behind the implied Q4 earnings deceleration, beyond the share repurchase and MSA legal fee expiration, and the long-term strategy for growing smokeable OCI. He also asked about the factors contributing to the sequential moderation in the underlying cigarette industry's rate of decline.

Answer

CFO Sal Mancuso highlighted the continued monitoring of consumer spending and the dynamic marketplace, expressing satisfaction with the first nine months' financial performance and smokeable profitability, particularly Marlboro's strength. CEO Billy Gifford attributed the moderation in cigarette decline to consumers needing consistency in macroeconomic factors like gas prices and inflation, alongside increased e-vapor enforcement shifting consumers to other nicotine categories.

Matt Smith from Stifel asked for clarification on the U.S. ZYN business's expected 'best-in-class margin structure' in light of Q3's performance, specifically whether the $100 million investment was a sustained or normalized level. He also requested more detail on the drivers behind the anticipated single-digit operating profit growth in Q4, including inventory timing for IQOS and ZYN, and ongoing investment levels.

Answer

Emmanuel Babeau, Chief Financial Officer, clarified that the $100 million investment in Q3 for ZYN was a one-off, non-repeatable cost. He reiterated that ZYN is expected to maintain best-in-class margins within the group, even with a 'normal' higher level of promotional activity compared to H1. For Q4 operating profit, Babeau explained that lower growth is due to inventory adjustments for IQOS and ZYN, less favorable combustible pricing, continued high investment pace, and a significantly higher tax rate in Q4.

Matt Smith from Stifel asked for clarification on the U.S. ZYN business's expected 'best-in-class' margin structure, specifically whether the $100 million Q3 investment was a sustained or normalized level. He also inquired about the specific drivers behind the anticipated single-digit operating profit growth in Q4, including inventory timing, U.S. investment levels, and other factors.

Answer

Emmanuel Babeau, CFO, clarified that the $100 million investment in Q3 for ZYN was a one-off, non-repeatable expense. He affirmed that ZYN is expected to maintain best-in-class margins within the group, even with a new, higher 'normal' level of promotional activity compared to H1. Regarding Q4 operating income growth, he explained that while underlying business momentum remains strong, the slower growth is due to inventory adjustments for IQOS and ZYN, less favorable combustible price increases due to phasing, continued significant investment, and a substantially higher tax rate expected in Q4 to reach 22% for the full year.

Matt Smith inquired about the impact of restarting a curtailed line in 2Q, asking if it entails higher fixed cost absorption or a cleaner startup, and if production is expected to be maintained or if lines can be efficiently turned off and on. He also asked for clarification on the phasing of fiscal 2026 cost savings, specifically if the Q1 outperformance means the full-year target is being raised or if it's a timing shift.

Answer

CEO Mike Smith explained that restarting a curtailed line is easier and less costly than a new facility, and they anticipate continuous running due to demand signals, with other curtailed lines available for future growth. CFO Bernadette Madarieta added that North America's fixed factory burden will moderate in late 2Q. Regarding cost savings, Bernadette Madarieta confirmed they drove savings faster, with two-thirds of the benefit expected in the back half, and they remain on track for the $100 million fiscal 2026 target, with two-thirds impacting gross profit and one-third SG&A.

Matt Smith asked about the impact of restarting a curtailed line in Q2, specifically if it would lead to higher fixed cost absorption or a cleaner startup process compared to a new plant. He also questioned if production on this line is expected to be maintained or if it indicates a strategy of turning lines off and on based on efficiency. Additionally, he inquired about the phasing of cost savings in fiscal 2026, asking if the better-than-expected Q1 savings imply a raised full-year expectation or just an earlier flow-through, potentially from carry-in benefits.

Answer

CEO Mike Smith explained that the company had curtailed multiple lines, and this is one being brought back. He noted that restarting an existing line is easier and less costly than starting a new facility, and the company fully expects to maintain production on this line due to demand signals. He also mentioned other curtailed lines are available for future growth. CFO Bernadette Madarieta added that North America's fixed factory burden would moderate with the line startup, while international would see a larger impact from the Argentina plant startup and planned maintenance downtime. Ms. Madarieta confirmed that cost savings were realized faster, with about two-thirds of the $100 million fiscal 2026 target expected in the back half, and the company remains on track for the full-year target.

Matt Smith inquired about the gross margin composition in the quarter, which exceeded expectations, specifically asking for details on the international timing benefit and the phasing of inflation investment through the year. He also followed up on the North America Retail trade expense phasing.

Answer

Kofi Bruce, CFO of General Mills, attributed the better-than-expected profit to lighter inflation phasing (closer to 2% vs. 3% annual guidance) and a $20 million international trade expense timing benefit, both expected to unwind in Q2. He projected Q2 operating profit to be down more than Q1 due to higher inflation, inventory absorption headwinds, no yogurt contributions, and normalization of comp and incentive benefits. He confirmed that North America Retail trade expense would be a significant drag in Q1 and Q2, normalizing in Q3, and becoming a tailwind in Q4.

Matt Smith inquired about the gross margin performance in the quarter, including the international timing benefit and the phasing of inflation investment, and followed up on the trade expense phasing in North America Retail.

Answer

Kofi Bruce, CFO, attributed the better-than-expected profit to lighter inflation phasing (closer to 2% vs. 3% annual guidance) and a $20 million international trade expense timing benefit, both expected to unwind in Q2. He anticipated Q2 operating profit to be down more than Q1 due to higher inflation, inventory absorption headwinds, and the absence of yogurt contributions. He confirmed that North America Retail trade expense was a significant drag in Q1 and Q2, normalizing in Q3, and becoming a tailwind in Q4.

Matt Smith questioned the progress of the strategic review, specifically asking about areas showing accretive potential and the drivers of expected second-half improvement. He also inquired about the level of SKU rationalization and its sales impact.

Answer

Interim President and CEO Alison Lewis stated that progress is being made on the strategic review, with decisive actions like exiting the Yves product line and implementing continuous portfolio management reviews for SKU reduction. CFO Lee Boyce clarified that second-half improvement is driven by a combination of streamlining the portfolio, brand renovation, productivity, and revenue growth management, with SKU rationalization primarily aimed at margin improvement rather than significant sales drag.

Matt Smith asked for insights into the strategic review, specifically identifying areas of incremental confidence for value or accretive potential, and whether the expected second-half improvement relies on category trend changes or Hain's initiatives, along with quantification of sales drag from SKU rationalization.

Answer

Interim President and CEO Alison Lewis reiterated progress on the strategic review, highlighting decisive actions like exiting the EVES business and ongoing SKU reduction for portfolio simplification, alongside implementing continuous portfolio management reviews. CFO Lee Boyce stated that the expected second-half improvement is driven by Hain's initiatives, including portfolio streamlining, brand renovation, productivity, and strategic revenue growth management. He noted SKU rationalization targets a 'long tail' of small, complex SKUs for margin improvement, without providing specific sales drag quantification.

Matt Smith from Bank of America sought clarification on the Borouge Group International (BGI) floor dividend, asking if it was a fixed amount or a percentage of net income. He also asked about the drivers behind recent improvements in chemical spreads and their potential sustainability.

Answer

CFO Reinhard Florey clarified that the BGI floor dividend is a fixed amount of approximately $2.2 billion for the group, translating to about $1 billion net cash inflow for OMV. On chemical margins, Florey noted that opportunities arise from shifting the product mix towards higher-grade specialties. An executive added that OMV's integrated business model provides resilience, as weaker refining margins can lead to expanded margins for its European crackers.

Matt Smith inquired about Lemonade's long-term strategy for its homeowners insurance line, asking if it will remain a shrinking part of the business or if there are plans to reaccelerate growth once market dynamics improve.

Answer

President Shai Wininger explained that while home is an important customer need, Lemonade will be selective, using a flexible model of its own paper, reinsurance, or third-party paper to manage volatility. He noted that the company's competitive advantage is more pronounced in other products like car and pet. However, he also pointed out that Lemonade is expanding its homeowners product on its own paper in European markets like France and the U.K., where catastrophe exposure is significantly lower.