General Mills, Inc.

Greetings and welcome to the General Mills third quarter fiscal 23 earnings Q&A webcast. During the presentation, all participants will be in the listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach the operator, please press star 0. As a reminder, this conference is being recorded. Thursday, March 23, 2023. It is now my pleasure to turn the conference over to Jeff Seaman. Please go ahead.

Thank you, Tina, and good morning to everyone. Thank you for joining us today for this Q&A session on our third quarter fiscal 2023 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 investor relations websites. It's important to note that in our Q&A session, we may make forward-looking statements that are based on our current views and assumptions. 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. I'm here with Jeff Harmoning, our Chairman and CEO, Kofi Bruce, our CFO, and John Newdy, Group President of our North America Retail segment. Let's go ahead and get to the first question. Tina, can you please get us started?

Thank you. As a reminder, you may press the 1 followed by the 4 if you would like to register a question or comment. The first question comes from David Palmer of Evercore. One moment, please. The first question comes from Andrew Lazar of Barclays. Please go ahead.

Great. Thanks so much. In PET, you called out high single-digit takeaway through nine months. And I'm curious what you have as takeaway in fiscal 3.2 specifically. And regarding 4Q, you know, I believe you've previously spoken to your expectation for double digit sales growth in pet in both the third and fourth quarters. So I guess given where we can see consumption trends currently, trying to get a sense of what gives you confidence in that outcome, given, you know, is it more inventory rebuild to go or a step up in consumption along with better service or more of a benefit from pricing or some combination of these? Thanks so much.

Yeah. Hi, Andrew. This is, uh, this is Jeff. And thanks for the question about pet. You know, I would say first, I would say our third quarter sales was roughly in line with, with what we thought it would, we thought it would be at 15%. And it is true that we rebuilt some retail inventory. I think importantly, when you look at it, you know, we built about as much inventory back in the third quarter as we lost in the second quarter. And for the year, our inventory and our, our, our, I mean, our, our sales out and our, um, reported net sales are about the same. So just so you know, as we end the third quarter, we don't have a big retail inventory build. They really are about the same. I would also say, and this may sound like a little bit of spin, but I'm actually glad that we could build some inventory in the third quarter. We didn't think we're going to be able to, but because our supply chain got better pretty quickly in the third quarter, our services almost got to 90% or so especially in dry dog food as well into the 90s. Because that happened, we were able to rebuild our inventory. Our retail customers are glad we're back in business, and so we shipped some inventory for promotions and so forth. We're pretty pleased with the pet business, and there's more work to do. For sure, there's more work to do, but it was a good quarter in terms of the ability to rebuild some inventory. The other thing I would say, a couple more points, I think when you look deeper into our third quarter and retail movement, what you'll see is that our dry dog food business really performed quite well. And, you know, life protection formula continued to accelerate and was up 23% in dollar terms, but also 9% in pounds. And so we're feeling really good about our dry dog food business, which is good because that's one we thought would recover the fastest, followed by treats and then wet. And that seems to be the case. The other thing I'd point out about retail movement is that our third quarter last year in pet was very, very strong. And so as you look at the comparisons, we actually sold more dog food and pet food in Q3 than we did in Q2, both in terms of pounds and RNS. So it sequentially got better, even if the comparisons don't look that great to Q3 in retail movement. And so, as we said before, we'll grow double digits in the back half of the year, and we certainly did that in the third quarter, and we'll see what the fourth quarter brings.

Okay. Thanks for that. And then just a quick follow-up. You mentioned mid-single-digit inflation expected for fiscal 24. I'm curious if you think the carryover benefit from pricing already implemented and in place would be enough, along with productivity, to handle this, or perhaps would other actions maybe be necessary, at least based on what we can see today? Admittedly, it's dynamic.

Yeah, no, appreciate the question. We don't want to get too far ahead here of our expectations. I will tell you, as we always do, we'll approach the fiscal year with an eye towards leveraging first the productivity we get through our HMM cost savings programs. And to the extent that there, you know, is additional You know, margin that we need to protect, we'll use the other levers we have up to and including SRM. But I think we're not going to say much more at this point about fiscal 24.

Understood. Thank you.

Yep.

Thank you. The next question comes from Steve Powers of Deutsche Bank.

Great. Thanks. And good morning as well. Maybe a follow-up on Andrew's pet question. It sounds like from a retail perspective, you think any of the sort of deceleration we've seen is more a product of year-over-year comparisons. But I guess when we cut in the data, it looks as though there is a deceleration and maybe a deceleration in General Mills' market share performance as well as just year-over-year growth. How are you thinking about that? And to the extent that you are seeing some slowdown in takeaway relative to the overall category, is that a byproduct more of ongoing supply constraints that should improve with time? Or is it maybe more of a byproduct of category dynamics and some degree of demand softening and then trade down in the category?

Yeah, no, I appreciate the follow-up question about PET. You know, I would say, first, it's not about dynamics in the category. I mean, the trend toward humanization is quite strong and remains quite strong, and so we really don't see a lot of trade down to private label, for example, or lower-priced brands. I mean, it really is a function. If there's a change in the category dynamics, more people are going back to the office, and so mobility is a little bit higher, and so there's a little bit less feeding of wet dog food, for example, and more dry dog food, and maybe a little bit less treating because people, again, are at their place of work more. So we see a little bit of that in the dynamic. So as we look at the category, I mean, our pounds were down 2% or so in what we can read in the category, and the pounds in the category are down flat. So we're still trailing the category, so we still have some more work to do. But it certainly is not as big a delta as it had been before. And so as we look ahead, one of the things we said is that we were pleased to see Life Protection Formula do so well, which tells us that the blue brand is really good. And so we're pleased with that. And so the first key is to get service levels up, and we've done that on dry dog food. The next is to turn our advertising and marketing back on. Again, we've done that on dry dog food, and we've seen the results. Now that our service level is getting better on treats, now it's really time to activate our marketing on treats. And we would think that that would get better over time. And then probably the last to come along would be wet pet food, which is a combination of our service level still only being in the 80s, as well as pet parent behavior and mobility. So that's kind of the order of things. And I guess I would characterize our pet business as We feel good that we have improved, and yet we know that we have more work to do in several of our areas.

Okay, great. And maybe shifting gears a bit, I want to ask around how you're thinking about elasticity. I know in what you put out this morning, you talked about expectations for little change in elasticity through the end of fiscal 23. I guess just maybe a little bit more on the puts and takes you're seeing there. And what I'm really curious about is how you think all of the different accelerate strategy points of focus may help your portfolio hold up to the extent that we see more broad-based consumer slowing over the course of the calendar year. Just how you're thinking about you know, those dynamics and your specific positioning should the consumer weaken as we progress forward.

Let me take that at a top level, and then I'll probably pass it to John Newdy to maybe give a couple of examples about NAR. Yeah, I would say for the rest of our fiscal year, I mean, we're seeing little change in elasticities, and, you know, we have seen consumption of food at home remain stable over this past year. Despite all the volatility and puts and takes and theories, I mean, the consumer seems to be reasonably robust. And at the same time, they're eating at home more than they were during pre-pandemic. And so we see a continuation of that. I will say there are a couple of things. One, private label exposure in our categories around the world is lower than what you see in the average. And I think that's a benefit to us. The other thing is that we've been investing we've been investing in marketing and so you see over the last four years our compound annual rate of growth and marketing spending is up I think about four or five percent and if you look at this year our marketing spending is double digits and so it's not an accident that our brands that we have strong brands begin with but we also know that brands are kind of organic in nature if you will and that you need to keep them growing and so we've invested in marketing spending as well as capabilities and we continue to do that through the third quarter of this year and so It's not really an accident that private label is lower in our categories, and I think it portends well for our future because even during the last recession, what we found is that even though private label gained a little share back in 2008 to 2010, we were able to hold market share due to our brand staying centered.

Yeah, so just building on what Jeff talked about. So as part of accelerating, and Jeff touched on this, capabilities is something that we're very focused on. And one of those capabilities is strategic revenue management. So we've probably been at that one the longest, five or six years now, and feel really good about the capabilities that we've built. So we leverage the entire toolbox. So obviously with the inflation we've seen this past year, we've taken list price increases, focused a lot on promotional optimization. So if you look at what's happening in the market, Frequency is coming back from a trade standpoint as we get healthier from a service standpoint. But price points are up double digits across our categories. And again, we're getting smart about how we look at pricing, not only at list price, but also from a promotional standpoint as well. We look at pack price architecture and mix as well. So we are much more sophisticated today than we were even a few years ago. And I think that's helping us to make the right moves in market, which is helping with our elasticities as well. So it's something we'll stay focused on. As Jeff mentioned, if we do run into a recessionary period historically, we've held out pretty well. Obviously, private label does well during that period, but we've held our own and held share relatively flat. It's really the third and fourth tier players and categories that seem to hit the hardest from a share standpoint. Great.

Thanks for all that. Appreciate it.

Thank you. The next question comes from Ken Goldman, J.P. Morgan. Please go ahead.

Hi, thanks. One quick follow up on pet and then I had one on North American retail if I could. Is there any way to roughly quantify how much maybe the gap between shipments and consumption or maybe the trade load, whoever you want to put it kind of helped company margins or segment margins during the quarter and pet I realized there's back and back and forth and things have gone around quarter to quarter. So I just am curious if we get a little bit of quantification around that if possible.

It's really difficult to quantify. Ken, this is Jeff. It's really difficult to quantify the contribution of inventory rebuild with margin for pet in the third quarter. I would say, but there are a couple of things. First of all, I would say our margin in pet was roughly in line with what we thought it would be. And the fact that our profitability declined in pet was not a surprise to us. It's really based on a couple of factors. One is, and by the way, even though our margin actually did improve slightly from the second quarter, you know, the factors really contributing to the fact that our profit declined in the third quarter and pet was that we did see significant inflation. And we did see a lot of costs coming in due to capacity expansion, as well as some external sourcing. And so these are things we expected. The other thing I would point to is that when we saw live protection formula really doing well behind our marketing efforts in the second quarter, we decided to spend more against it in the third quarter. And that's paying dividends as our live protection formula has continued to accelerate, but it does mean our marketing spending had a negative impact on the P&L in the third quarter, although it's clear over the long run. that this is such a good idea. So I want you to know that when it comes to PET, you know, the margins we saw in the third quarter are very much in line with what we thought, even if it's difficult to quantify the impact of margin rebuild. It's just our service is getting better, which I think is a positive.

Got it. But if I'm reading between the lines, it doesn't sound like it was a major impact if the margin came in somewhere close to what you thought. Is that correct?

That is correct. It's not a major impact, Ken. And I would also say, I mean, you didn't ask this, but I guess a bonus answer would be that in our fourth quarter, we actually expect that our profitability will be up in our fourth quarter as we see our pricing that took place at the end of the quarter come into effect, as we see a little bit easing on inflation, we see the service getting better. And so the drags that we see lessen, we see a little bit more pricing increase. And so we would anticipate that in Q4, our profitability will be up in PET.

And just to clarify, is that dollars, margin, both?

Both. Both. Perfect.

Yes. I'll let it go there. All right. Perfect. Thanks, Jeff. Yep. Good. Thank you. Do you have a question about NAR?

I'm sorry.

The next question comes from Alexia Howard of Bernstein. Please go ahead.

Good morning, everyone. Hi there. Two questions. Can I ask about marketing spending to begin with? I know that you said it was up mid-single digits, I think 4% to 5% over the last few years, and up double digits, I believe, this year. Do you anticipate that this sort of strong level of marketing reinvestment or increase as a percent of sales is going to continue? And then linked to that, promotional activity. Are you seeing any changes there? Is it sort of steady eddy? Because obviously that's come in or down quite a bit since the pandemic began. Do you anticipate, you know, not a big resurgence, as I think you've said before, on the promotional side? Thank you, and I'll pass it on.

Yeah, I would say, Alexia, this is Jeff. I'll answer the first part of that question, and maybe John Doody can give any insights on the second part. You know, I would say in general, what we would expect is that marketing spending growth would be roughly in line with sales growth. And, you know, we've seen over the last year, we've seen so much inflation on the food, you know, the cost of ingredients side. You know, our marketing spending has grown, you know, 4% or so, but, you know, it hasn't kept up with the sales growth. That's because we've saw so much food inflation. But it actually has kept up, more than kept up with pound growth. And the same is true this year where we're seeing double digits increase in marketing spend, but over time. Our goal would be to increase our marketing spend roughly in line with our sales growth. So John, do you want to take the second part of the question?

Yeah, absolutely, Alexia. From a merge standpoint, so if you look at versus pre-pandemic levels, merge in our categories is still down double digits. I will say you're seeing frequency this past year increase high single digits, and that's really driven by the fact that we're getting back into merchandising in some categories that we couldn't support from a service standpoint over the last few years. At the same time, you're seeing merch price points up double digits across our categories as well. So again, as all of us are dealing with inflation and leveraging our SRM capabilities, we're raising the floor of many of our merch promotions. So as we move forward, service is still not back to historical levels, so we don't expect there to be significant inventory to be getting aggressive from a pricing standpoint. Obviously, everyone in the industry is dealing with increased costs and inflation as well. So we expect to continue to make sure that we're rational from a merchandising standpoint as we move forward.

Great. Thank you very much. I'll pause it on.

Thank you. The next question comes from John Baumgartner of Mizuho. Please go ahead.

Good morning. Thanks for the question. I wanted to come back to Steve's question, I think, on U.S. retail. The elasticity is still favorable, but that elasticity alone sort of masks the underlying percentage volume declines from this pricing. And that's an industry issue, not just mills. But since food at home is not losing share to away from home, and you'd also think, I guess, once consumers normalize to these new prices, volume declines should also moderate independent of recession. So I'm curious, Jeff or John, you know, absent a bounce from recession, how you're thinking about that path to volume normalization. And then just given your brand building innovation, do you think the portfolio's volume plus mix can grow reliably with population over time? Do you aspire to go ahead of population growth? Just what's the expectation for that normalized performance at the portfolio level where you sit right now? Thank you.

Let me start. This is Jeff. Let me start with the end in mind. And the end is that you know, we think absent the current inflation environment we see, which, by the way, we don't think is going away anytime soon, as we talked about mid-single-digit inflation our next fiscal year, but absent a heightened inflationary environment, we would expect our portfolio, you know, our exposure to growth to be in the 2% to 3% range, so call it 2.5% range. And, you know, that's what we talked a little bit about at Cagney. And, And that would, that would imply, you know, some level of volume growth, as well as some level of pricing, birth growth, a mix of those two, which would of course fluctuate based on, you know, what happens in a particular year. But we would think once we get back to a normal environment, which, which we don't see coming actually in the next, uh, in the next 12 months, but a normal environment, we would see the, you know, some level of pound growth and some level, a little bit of pricing as dictated by the growth in our categories. And then you have another deeper question about recession versus non-recession. I'm not really sure how to go about all that other than to say that what we do see is single-digit inflation coming in the next 12 months.

I guess just thinking about the depth of the volume decline, you feel like you're not seeing a shift into the out-of-home channel. So it feels like it's more maybe just more leftover consumption at home. Do you sense that consumers are getting close to normalizing to the new prices on shelf and that should just over the next couple of months sort of roll off with less deep volume declines going forward at this point in terms of that adjustment process for the consumer?

Yeah, John, so obviously volumes are down for NAR. And as we look at that, we expect, frankly, with the amount of pricing that we've taken, historical elasticity is what suggests much bigger declines. So again, we feel comfortable with where we are. That being said, as we pivot into fiscal 24, We want to get back to growing not only dollars, but growing pound volume as well. And it's going to be really all about the fundamentals. And as Jeff mentioned, we're investing in marketing. We feel really good about our marketing on our major brands. Innovation is something that we haven't pulled back on through the pandemic and we'll continue to press the advantage there. And we think that we've got some great items coming in the coming year. And the capabilities that we're investing in from an Accelerate standpoint are really helping as well. I mentioned that's around. In addition to that, digital marketing is something that's very exciting right now in terms of the ability to really have one-to-one relationships and target consumers. And over 50% of our marketing now across NAR is digital, and that will continue to increase. So that will be back to the fundamentals, and we feel really good about our ability to compete in that role as we move forward.

Thanks, John.

Thanks, Jeff.

Thank you. The next question comes from Chris Carey, Wells Fargo. Please go ahead.

hi good morning uh so just a couple quick questions around inflation just on the mid single digit inflation you noted in prepared marks that that is split between labor and conversion costs primarily i wonder if you could disaggregate that and then what are you seeing from a commodity standpoint within that mid-single-digit inflation

Yeah, appreciate the question. So I won't decomp it very deeply other than to tell you that what we're tracking is some of the headline commodity numbers have been obviously coming off of their peaks. Part of the reason we're giving this expectation is because embedded within the inflation expectations for our total input costs, or a fair amount of conversion costs behind some of it. We're not taking in just raw commodities. So as we think about the impact of continued labor pressure, energy costs, and other conversion costs that go into taking raw materials, creating value-added inputs that go into our products, that's what's driving the inflation. So I think the key here is, it probably is an overread to look just at the commodity softening on some of the key commodities and assume that there's going to be a more benign inflationary environment. So we'll give you a decomp and a little bit deeper dive when we come back in Q4 and provide guidance for the next year.

Okay, that's helpful. One quick follow-up. On the last earnings call, I believe, there was a question just around whether the non-commodity pieces of the equation were appropriate buckets to come to retailers with an inflation story. And so this mid-single-digit inflation, are these the types of atypical inflation drivers that typically you would be able to come to a retailer with a pricing story? I appreciate HMM and other offsets are going to be important, including revenue growth there via SRM. But, you know, just in the context of this total inflation idea that we're hearing across the space right now, is that really sticking with the retailer? I just wonder if you could provide any context on that. Thanks.

Yeah, I'll talk broadly for the enterprise. And John, if you want to jump in and provide some specific perspective from NARA, you can do that. You know, broadly, we look at the entire basket of our input costs. So that includes manufacturing, sourcing, and freight. So as we think about the combination of those three things, that's generally what we go and we talk to retailers about the total input cost basket. What's probably not included in that we have talked about in past earnings calls is the other costs to serve in this environment, some of the added pressures that come from supply chain disruptions, some of the short-term decisions we've had to make around product changes and external supply chain that have allowed us to service in a disrupted environment. Those things probably a little bit harder to include in the conversation.

Yeah, I would just say as we talk to retailers, we're focused on multiple things. service level. So, well, certainly better than where we were a year ago. That continues to be a focus and something we spend a lot of time talking about. And then it's about growth. And again, obviously, dollars have grown strongly. I think all of us want to get back to not only growing dollars, but also growing units as well. And that's something that we stay very focused on. In terms of SRM and what levers we pull into the coming year, we pull SRM levers every year, regardless of inflation. Next year, we'll continue to leverage SRM, and obviously our retailers are being impacted by inflation as well. So we'll see how the year unfolds. At this time last year, we certainly didn't envision the number of moves that we've taken this year. One of the things we're really proud of is the way that we've reorganized over the last few years as an enterprise. We're much more agile, so we feel really good about being able to deal with what comes our way, and we'll have any appropriate conversations with retailers if we get to that point.

Perfect. Thank you for the perspective.

Thank you. The next question comes from Brian Spillane of Bank of America. Please go ahead.

Hey, thanks, Operator. Good morning, everyone. Just two for me. One is just SG&A in the quarter was up pretty meaningfully, just in absolute dollars, and I understand there's a pretty strong marketing component. Can you just maybe, Kofi, give us a little more insight in terms of outside of marketing or advertising, just what else is driving SG&A and I don't know, it's just sort of the level we should be looking at as we model the fourth quarter. So just some perspective there, and then I have a follow-up.

Yeah, so let me – you're absolutely right. In the third quarter, media was a big driver. It was up strong, double digits. We expected to actually be a driver in SG&A as we head into the fourth quarter as we've been turning – marketing back on, on PAT, putting additional spending on key platforms. And as a reminder, I think it's important as we were coming out of a period where five years, six years earlier, we had pretty much depleted pretty significantly the amount of marketing spending. So we've been sort of investing through this cycle to ensure that we have appropriate support behind strong marketing ideas. I think the rest of it, outside of marketing spending, we have seen some increase in admin, primarily related to comp and benefits. As we've seen our performance improve, obviously, that increases our incentive accrual. We've seen some increase related to charitable contributions. Those have been kind of the big non-marketing spend drivers as we look at the quarter.

Okay. And those seem like they're more – meaning we shouldn't see an absolute dollar level. It's probably not the same level of SG&A in the fourth quarter that we saw in the third quarter? I think that is generally fair. Okay. All right. Cool. And then second question just on food service. And maybe, Jeff, if you could just kind of give us a perspective on kind of where that business stands now. You took the convenience piece out of it. You know, it looks like, you know, food sales are coming back, even when you strip out the benefit of flour milling. So can you kind of give us a perspective on kind of where you see that business today in terms of where you kind of envision it going forward now that it's really focused on food service? And also just a comment on profitability, the margins, again, kind of back into the mid-teens level. It used to be kind of a higher margin business pre-COVID. So just trying to get a sense of, you know, like, You know, is this early innings in terms of kind of what you envision for what this business could be like, both from a revenue and a profitability standpoint?

Yeah, so on food service, you're right. We took convenience stores out of our food service business and put them in North America retail, and that's been going very well. Really pleased to see that combination of businesses in North America retail. At the same time, we also expanded our food service business to not only be just U.S.-focused but North America-focused. And we're really pleased with that, too, because we have a lot of customers that operate across North America. So we're really pleased how we're executing the convenience piece in NAR, but also adding food service and making North America food service was also meaningful for us. You know, I'm really thrilled to see the momentum that we have in this business, as you can imagine, with fewer people eating in restaurants. It was a little bit tougher for our food service for a number of months, but we've got a strong K-12 school business that has served us very well. We continue to gain share in many of our categories across food service. And as we look, as you can see, it's back to pretty strong growth now. Last year was a tough third quarter, so the comparison is the third quarter easy. And yet, in aggregate, we have really good momentum in our food service business. And so, You know, what I believe is that our food service business can continue to be an accelerator of both top line growth, but also continuing to expand margins. When you talk about the profitability, they were hit particularly hard on the profit side. And I think it's fair to say that we're still in the early innings on driving back margin growth into our food service business. And we're confident that we can. And we're also confident that we need to. And so we'll continue to drive margin growth As we still grow, our top-line sales grow. So we think we can do both of those at the same time in food service and are pleased with the momentum that we've regained in there. All right, great. Thanks, Jeff. Thanks, Kofi.

Thank you. At this time, I'd like to turn the call back over to our speakers for any closing remarks.

Okay, thanks, everyone. I think that's all the time we have this morning, but really appreciate the good engagement. And we will obviously be available throughout the day for follow-ups. Otherwise, we'll look forward to seeing you over the spring. Thanks again.

Thank you. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.