Greetings, and welcome to the General Mills Third Quarter Fiscal '23 Earnings Q&A Webcast. During the presentation, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded on Thursday, March 23, 2023. It is now my pleasure to turn the conference over to Jeff Siemon. 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 website. 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 Harmening, our Chairman and CEO; Kofi Bruce, our CFO; and Jon Nudi, 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?

First question comes from Andrew Lazar of Barclays. Please go ahead.

In Pet, you called out high single-digit takeaway through nine months. And I'm curious what you have as takeaway in fiscal 3Q specifically. And regarding 4Q, I believe you've previously spoken to your expectation for double-digit sales growth, given where we can see consumption trends currently, trying to get a sense of what gives you confidence in that outcome, given 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?

Andrew, this is Jeff. Thanks for the question about Pet. I would say, first, our third quarter sales were roughly in line with what we thought it would be at 15%. It is true that we rebuilt some retail inventory. I think importantly, when you look at it, 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 sales out are about the same. As we end the third quarter, we don’t have a big retail inventory build; they are really about the same. I would also say, and this may sound a bit like a spin, but I'm actually glad that we could rebuild some inventory in the third quarter. We didn't think we were going to be able to, but because our supply chain improved quickly during the third quarter, our service levels got to around 90%, especially in dry dog food. Because of that, we were able to rebuild our inventory. Our retail customers are glad we’re back in business, and so we shipped some inventory from promotions and so forth. We're quite pleased with the pet business, and there's certainly more work to do, but it was a good quarter in terms of our ability to rebuild some inventory. I think when you look deeper into our third quarter and retail movement, our dry dog food business performed quite well, and Life Protection Formula continued to accelerate, being up 23% in dollar terms, but also 9% in pounds. We're feeling really good about our dry dog food business, which is encouraging because that's one we thought we'd recover the fastest, followed by treats and then wet food. The other thing I’d point out about retail movement is that our third quarter last year in Pet was very strong. So, as you look at the comparisons, we actually sold more dog food and pet food in Q3 than we did in Q2. So, it sequentially got better even if the comparisons don't look that great in Q3 retail movement. We are on track to 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. 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 be necessary, at least based on what we can see today? Admittedly, it's dynamic.

Yes. No, I appreciate the question. We don't want to get too far ahead here with 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. To the extent that there is additional 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.

The next question comes from Steve Powers of Deutsche Bank.

Great. 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 of a product of year-over-year comparisons. But I guess when we look into 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. So 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?

Yes. No, I appreciate the follow-up question about Pet. I would say first, it's not about dynamics in the category. The trend towards humanization remains strong. So, we really don't see a lot of trade down to private label, for example, or lower-priced brands. It’s more a function that there's a change in the category dynamics; more people are going back to the office, so mobility is a little bit higher. There's less feeding of wet dog food, for example, and more dry dog food, and maybe a little bit less treating because people are back at their places of work more. So we see a bit of that dynamic. Our pounds were down about 2%, but it’s clear we still have more work to do. We were pleased to see Life Protection Formula do well, which tells us the Blue brand is solid. So the first key is to get service levels up, which we’ve done on dry dog food. Then we need to turn our advertising and marketing back on for treats, and we see results from that. The last to recover will be wet pet food due to service levels still being in the 80s and a combination of consumer behavior and mobility.

Okay, great. And maybe shifting gears a bit. Just 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 your different accelerate strategy points of focus may help your portfolio hold up in the event of a broader consumer slowdown over the course of the calendar year.

Let me take that at a top level, and then I'll pass it to Jon for a couple of examples about NAR. For the rest of our fiscal year, we're seeing little change in elasticities. Consumption of food at home remains stable despite all the volatility. The consumer seems reasonably robust and is eating at home more than they were pre-pandemic. I will say our private label exposure in our categories around the world is lower than average, which I think benefits us. We're investing in marketing, and our compound annual rate of growth in marketing spending is up about 4% or 5%. So we believe our brands are strong, and we need to keep growing them. Jon, would you like to address NAR?

Yes. Just building on what Jeff said. As part of Accelerate, capabilities are a key focus. One of those is strategic revenue management, which we've been developing for five or six years. With the inflation we've seen this past year, we've taken list price increases and focused on promotional optimization. Frequencies are returning from a trading standpoint as we improve service. Price points were up double digits across our categories. We are more sophisticated today than we were a few years ago, and that helps with the elasticities. So, we'll continue to stay focused on that. Historically, we've held up pretty well in recessionary periods, and our market share tends to stay flat while third and fourth tier players in categories seem to get hit the hardest.

The next question comes from Ken Goldman of JPMorgan. Please go ahead.

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 the gap between shipments and consumption helped company margins or segment margins during the quarter? In Pet, I realize there’s back and forth, so I’m curious if we could quantify that a bit.

It's difficult to quantify, Ken, but our margin in Pet was roughly in line with what we expected. Even though our margin actually improved slightly from the second quarter, our profit decline in the third quarter in Pet was expected, based on significant inflation and increased costs from capacity expansion and external sourcing. We expected some pressure. When Life Protection Formula performed well in the second quarter, we decided to invest more in it in the third quarter. While it impacted our P&L negatively, it's clear we're making the right investment for the long term. To summarize, the margins we saw in Pet this quarter are in line with our expectations, and while it's difficult to quantify margin impact, our service getting better is 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 somewhat close to what you thought. Is that correct?

That is correct, Ken. Additionally, in our fourth quarter, we expect our profitability will be up in Pet as we see our pricing take effect and inflation ease. We anticipate our profitability will improve.

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

Two questions. Can I ask about marketing spending to begin with? I know you mentioned it was up mid-single digits over the last few years and up double digits this year. Do you anticipate that strong level of marketing reinvestment or increase as a percentage of sales will continue? And then linked to that, promotional activity, are you seeing any changes there? Is it steady as she goes, considering that it's come down quite a bit since the pandemic?

Yes, Alexia, I'll answer the first part, and maybe Jon can provide insights on the second part. In general, we expect marketing spending growth to be in line with sales growth. While we've seen inflation on the ingredient side, our marketing spending has grown moderately. We're aiming to increase our marketing spend in line with sales growth over time. Jon, would you like to address the second question?

From a merchandising standpoint, compared to pre-pandemic levels, merchant activities in our categories are still down double digits. Frequency has increased high single digits this past year, driven by a return to merchandising in categories we struggled to support due to service issues. However, we don’t expect aggressive pricing given the increased costs and inflation.

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

I wanted to come back to Steve's question on U.S. retail. The elasticity is still favorable, but that elasticity masks the underlying percentage volume declines from this pricing. This is an industry issue, not just for General Mills. Given the stability of food at home, do you think consumers are normalizing to new prices on shelf? How do you envision that path to volume normalization? And do you believe the portfolio's volume and mix can grow reliably with population over time?

Let me start at the end. Absent the current inflation environment, which we expect mid-single-digit inflation in the next fiscal year, we would anticipate our portfolio exposure to growth to be in the 2% to 3% range. This implies some level of volume growth and some pricing growth. This may vary by year. Regarding consumer adjustment to pricing, we think mid-single-digit inflation will continue for at least the next 12 months.

I guess just thinking about the depth of the volume decline, and it feels like you're not seeing a shift to the out-of-home channel. So it seems to be more about consumption at home. Are you sensing that consumers are getting close to normalizing to the new prices, which may stabilize volume declines?

Yes, John. Volumes are down for NAR. However, we expect that, given our pricing history, elasticities would suggest more significant declines. With fiscal '24 approaching, we want to return to not only growing dollars but also growing pound volume. This will depend on good fundamentals. We’re investing in marketing and feel positive about it. Innovation is key, which we've continued to support throughout the pandemic. We expect to compete effectively moving forward with a focus on digital marketing too, as over 50% of our marketing now is digital.

The next question comes from Chris Carey of Wells Fargo. Please go ahead.

Just a couple of quick questions around inflation. Regarding the mid-single-digit inflation you mentioned, could you clarify how much is attributed to labor and conversion costs? And what are you observing from a commodity standpoint within that mid-single-digit equation?

So I won’t go in-depth here, but I’ll mention that headline commodity numbers have declined from their peaks. Part of the reason for our expectation is that embedded within inflation expectations for our total input cost is a fair amount of conversion cost. Continued labor pressure and energy costs contribute to this. It’s an overread to look solely at commodity softening and assume a benign inflationary environment. We’ll provide a more in-depth breakdown when we return in Q4 with guidance for next year.

Okay, that's helpful. As a follow-up, on the last earnings call, there was some discussion around whether the non-commodity pieces of inflation were appropriate for conversations with retailers about pricing. Is this mid-single-digit inflation the kind of drivers typically presented to retailers? What can you share about that?

We look at our total input costs, including manufacturing, sourcing, and freight. We discuss this combination when talking to retailers about input costs. Some pressures from supply chain disruptions and external supply changes may be harder to include in conversations.

As we talk to retailers, we're focused on multiple things. We're still short on service, but it's improved significantly over the past year. Additionally, we want to grow not only dollars but also units, which is something we consistently emphasize. Regardless of inflation, we'll leverage SRM and our retailers are affected by inflation as well. So we'll adapt our conversations as necessary. We're much more agile as an enterprise, which we're proud of.

The next question comes from Bryan Spillane of Bank of America.

Just two for me. First, SG&A in the quarter was up significantly, and I understand a strong marketing component drove that. Could you provide more insight into what else is driving SG&A outside of marketing or advertising, and what level should we look at for modeling the fourth quarter? Just some perspective there.

You're correct that media was a substantial driver of SG&A in the third quarter, with strong double-digit increases. We expect this to continue into the fourth quarter due to the marketing focus on Pet and key platforms. It’s important to note that several years ago, we depleted our marketing budget, and now we’re investing appropriately behind strong ideas. We've also seen administrative increases tied to personnel and performance-related incentive accruals. Charitable contributions have also increased. These factors have driven SG&A in the quarter.

Got it. So those seem transitory, and we shouldn’t expect the same level of SG&A in Q4 as in Q3?

That’s generally fair.

Okay. And on food service, could you provide perspective on where that business stands today? It looks like food sales are recovering even after taking the convenience piece out of it. What do you envision for this business going forward, particularly around revenue and profitability?

On Food service, you're right; we took convenience stores out and integrated them into North America retail, which has been successful. We also expanded our food service business to be North America-focused. We're pleased to see how we're executing in this business. Although our food service faced challenges during times of reduced restaurant dining, we gained share across many categories. Our food service is on a solid growth path now. This year presented easy comparisons in the third quarter, so we have strong overall momentum. I believe our food service business can be a driver of top-line growth while also improving margins. Profitability was hit hard, and we're still in the early innings of restoring margin growth, but we are confident in our ability to do so alongside growing top-line sales.

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

Thanks, everyone. I think that's all the time we have this morning, but I appreciate the engagement. We'll be available throughout the day for follow-ups. Otherwise, we look forward to seeing you in the spring. Thanks again.

Thank you. This concludes 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.