Greetings, and welcome to the General Mills Q1 Fiscal '24 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded on Wednesday, September 20, 2023. I would now like to turn the conference over to Mr. Jeff Siemon, VP of Investor Relations. Please go ahead.

Thank you, Frank, and good morning, everyone. Thanks for joining us today for our Q&A session on our first quarter fiscal 2024 results. I hope everyone had time to preview our press release, listen to our prepared remarks, and view our presentation materials, which we 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 this morning with Jeff Harmening, our Chairman and CEO; Kofi Bruce, our CFO; and Jon Nudi, Group President for our North America Retail segment. So, let's go ahead and get to the first question. Frank, can you please get us started?

Thank you. Our first question comes from Ken Goldman with JPMorgan. Please proceed.

Hi. Thank you. You mentioned that consumers have been shifting purchases to customers and channels, not necessarily tracked by Nielsen. I'm just curious, as this trend has taken place, have you seen any of your more traditional tracked customers, I guess, those FDM kind of leaning more into price to try and retain traffic and tonnage? And if they're not yet, is this something maybe we might expect to see just given past history?

So, Ken, this is Jeff Harmening. You're right, we did see increased traction in non-measured channels in the first quarter, and we'd expect that to continue throughout the year. But Jon Nudi, why don't you give a little color commentary on that?

Yeah, absolutely, Ken. So, we did see non-measured channels grow at a double-digit rate in the quarter, which obviously drove some ahead of movement a bit for NAR. As you look at traditional grocery, we've seen frequency up a bit, about 5%, but price points up dramatically versus pre-pandemic and we continue to invest in our SRM tools and, as a result of that, we don't expect to see deep discounting. As we model, our retailers model, it just doesn't add up at the end of the day. So, we are seeing a bit more frequency, but price points up versus pre-pandemic for sure.

Got it. And then, thank you for that. I guess, quickly the Street's modeling, just looking at 2Q, low-single-digit organic sales growth. Is this kind of a reasonable range within the context if you're not providing quarterly guidance? Just trying to get a little bit of color there, especially in light of scanner data, maybe suggesting that performance in NAR is heading downward a little bit in recent weeks. I just didn't know if that's what you were looking for.

Yeah, so...

Yeah, Ken, please continue, Jon.

Go ahead, Jeff.

I appreciate your question. First, we won't be providing guidance for the quarter regarding either the segment or the company. However, I can offer some insights for the year ahead. We are projecting sales growth of 3% to 4%, but it's important to understand that we do not foresee a significant recovery in our Pet business for the remainder of this year due to various factors we've previously discussed. On a positive note, our Foodservice business is performing well and continues to grow. Our International businesses are also seeing significant growth, including the Häagen-Dazs brand, which has rebounded nicely with a 20% increase. Additionally, our European business is up by double digits, with our Bars business in France growing by 70%, along with positive performance in our Indian and Distributor markets. While the Pet segment underperformed expectations in the first quarter and is expected to face challenges this year, we have two other major segments showing strong performance. Regarding North America Retail (NAR), our execution has been solid, with improved distribution, merchandising quality, and successful new products. It's worth noting that our first quarter is usually our most difficult for market share due to the pricing challenges we're experiencing and competitors regaining their supply chain efficiencies. Despite these hurdles, our NAR results are good and improving. Looking ahead, we anticipate improvements in volumes for NAR. While they don't need to reach positive figures immediately, we expect enhancements from current levels, primarily through gaining share as we lap previous pricing and face tougher competitive comparisons while overcoming supply chain issues. Overall, we believe our NAR business will continue to improve as we execute our strategies effectively throughout the year.

Yeah. And the only thing I might add some color on is on-shelf availability, so Jeff touched on that, and our on-shelf availability is better this year than last year, and that's great. What's remarkably different is, our competitors, and particularly private-label. So, if you look at private-label on-shelf availability in categories like grain and RBG, it's up 10 points year-over-year. So, while that was a tailwind for us where we are on the shelf and private-label wasn't, it's a headwind this year. That comp gets better as we move throughout the year and that will help us as we expect to see sequential volume improvement.

Makes sense. Thanks so much.

Our next question comes from Robert Moskow with TD Cowen. Please proceed.

Hi, everyone. Thank you for the question. I have two inquiries. You made a substantial marketing investment in the first quarter, but the volume environment is quite challenging. What is your marketing investment plan for the remainder of the year? Will you maintain the same level of pressure, or are you considering changing your tactics mid-year if the volume does not meet your expectations?

Yeah, Rob, first of all, this is Jeff. Welcome back. Good to hear you again. And Kofi, you want to take this?

Yes, you are right to point out that we experienced a double-digit increase in our media spending during the first quarter. Looking ahead for the rest of the year, based on current insights, we anticipate that our media spend will at least keep pace with sales growth. In this market environment, it's crucial for us to continue supporting high-quality ideas with our brand, particularly as we notice signs of stabilization.

Okay. Can I ask a follow-up? Your snacking business has improved in the quarter. It had some ups and downs. And in the press, you have mentioned as being interested in a major snacking company. As you look at your M&A objectives, is snacking a key area in which you want to expand and possibly through M&A?

Yeah, Rob, this is Jeff. We won't be commenting on rumors or marketplace transactions today. What I can share is that our objectives regarding mergers and acquisitions haven't changed. We’ve been consistent and somewhat predictable over the last couple of years, aiming to achieve about 50 basis points of growth through acquisitions and divestitures. We are looking at opportunities that are bolt-on, meaning we can leverage our existing capabilities and knowledge to drive additional sales growth and synergies. Our balance sheet supports this strategy. I also want to emphasize that we remain disciplined in our approach. If we find attractive acquisition opportunities that make financial sense for our investors, we will pursue them. However, our stance has not shifted despite recent M&A activities in the market. Additionally, despite rumors about our food company considering M&A due to volume declines, that is not the case. We do not engage in short-term M&A strategies. We are focused on acquiring brands we believe in, nurturing them for the long haul, and that’s how we’ve operated for 165 years. Our plans are not dictated by temporary fluctuations in volume.

Got it. Makes sense. Thanks, Jeff.

Yeah, thank you, Rob.

Our next question comes from Andrew Lazar with Barclays. Please proceed.

Thank you very much. With the anticipated slower results in Pet sales for the year compared to initial expectations, I'm interested to know if this affects your plans for expanding Pet capacity in any way. You have significant efforts underway to increase capacity and bring many operations in-house over the next year or two. Will this be impacted in any way? Additionally, do you still view Pet as a high-single-digit sales growth driver for the overall portfolio in the long run?

Sure, thanks for the question, Andrew. This is Kofi. I'll begin by addressing the latter part of your question first. We remain optimistic about the long-term outlook for the Pet category, which is valued at $44 billion and supported by a 1% to 1.5% growth in pet population. We believe that the trend of humanization will continue to foster growth, particularly benefiting premium brands like Blue Buffalo. In the short term, we aren't making significant changes to our plans for expanding capacity in dry dog food. It's essential to note that while we're expecting capacity to come online late this year, we won't see immediate benefits this year. However, we anticipate that it will provide long-term advantages and enable us to direct more production to our internal capacity, which will help improve margins in this business over the medium term. Thus, we remain positive, continuing to invest in this business and capacity, and we have a strong long-term strategic focus.

Got it. Jeff, I understand that you and others are discussing the expectation of improving sequential volume trends as we move forward, especially as the industry returns to a more typical rhythm of marketing and merchandising with service levels in a better state, which makes sense. However, I'm still unclear about why industry volumes remain where they are even as pricing starts to stabilize. It could just be a timing issue since these events don't always align perfectly. There have been many factors at play, such as people traveling, returning home, or going back to school, and some may be staying in a bit more. I'm interested in your most current thoughts on this. Thank you.

Certainly, Andrew. We've spent a good amount of time analyzing this, and we see three main reasons for the current marketplace situation, particularly when we consider Nielsen trends. First, there is significant growth in non-measured channels; for instance, we've experienced double-digit growth in NAR in the first quarter within non-measured channels. This is a key factor affecting Nielsen data. The second reason involves the food away-from-home segment, which has generally been flat. While quick-service restaurant traffic has increased, indicating a preference for value dining, overall traffic remains steady. However, people are returning to being mobile, with more activity in sectors like education, healthcare, and lodging, aligning with our expectations. If you look at airport movement data, it shows year-over-year increases, returning to pre-pandemic levels. Lastly, we observe that we are in a consumer recessionary period, even if it doesn't meet the technical definitions of a recession. Consumers are looking to economize, leading them to choose smaller product sizes. However, they are not eating less overall, and we expect that as consumers face financial pressures, they will tend to eat more at home. Currently, dining out costs significantly more than eating at home, so we anticipate an increase in at-home dining as routines stabilize in the fall. Those are the three clear factors influencing the current environment.

All right. Thanks so much.

Thank you.

Our next question comes from Jason English with Goldman Sachs. Please proceed.

Hey, good morning, folks. Thanks for slotting me in. I have another question on Pet, but not top-line, instead looking at margins. Input costs have been stubbornly onerous for you in Pet, not just you, it seems like the industry at large. The rate of inflation has been a lot higher and for a lot longer. What's driving them? And what's the forward? Like at what point do we start to get some relief there and get to a point where maybe you can get some margin recovery? And the second part of my margin question, I know you expanded treat capacity coming into this year with a third-party vendor. Obviously, you don't need it, and with what's happening with treats, is that a take or pay agreement? And is that also a contributing factor to your margins? And if so, how big and how long will that headwind persist? Thank you.

Thank you for the question, Jason. I have a few points to share. Regarding the outlook for the year, considering the various challenges and the mix of our business, we do not anticipate an improvement in operating profit margins this year. With respect to inflation, the trends affecting food inputs are also evident in pet inputs, particularly in conversion costs that are significantly influenced by labor and in pet food specifically. Until we see a shift in that trend, I don't foresee any immediate relief from the inflationary pressures impacting our pet food input costs. On the supply chain front, our external suppliers have a generally flexible setup. The way we've structured those contracts provides us with access to capacity as needed, without being tied to a rigid fixed-cost structure that would incur costs even when not utilized.

Jason, this is Jeff Siemon. I want to add to that second point. We closed an internal manufacturing factory, so we weren’t increasing capacity in the system; we just redistributed where that capacity specifically for treats was situated. We have a strategic partnership with this supplier and have incorporated our HMM cost savings program into that contract. We believe this will positively impact our profitability in that business.

And that's actually a lower-cost alternative to the internal production in this case.

Got it. That's really helpful. I appreciate that. And one more question on margins. Foodservice, it dipped sequentially. So, historically, looking back, there's not a lot of seasonality there, but we've seen margin slip for two consecutive quarters and we're now at 11%. What's driving the sequential dip? Is there anything unique about this quarter? Or is this like 11% rate, something we should take to the bank for the rest of the year? Thank you.

I expect to see margins improve in this business. One major factor has been the volatility in flour pricing, which has significantly impacted our margins. This has been a challenge as we navigated the past several quarters, including the last two. Looking ahead, the main challenge and opportunity for this business will arise from stabilizing the supply chain, which will allow us to achieve a more consistent delivery. We are starting to see improvements that align more closely with our historical mid-single-digit range, and we anticipate that the pricing advantages gained from last year's significant pricing will also support margins as we move toward the end of the year.

Thanks a lot. I'll pass it on.

You bet.

Our next question comes from Chris Carey with Wells Fargo Securities. Please proceed.

Hey, good morning, everyone. So just on the Pet business, you noted SRM and pack size would be one of the methods that you're using to kind of like stimulate sales. How long does it take to get those right pack sizes in market? And is SRM your current thinking kind of exclusively or are you starting to think about any pricing adjustments beyond just pack size and just overall SRM?

On the Pet business, we're doing several things. First, we're returning to more impactful advertising that provides pet parents with clear reasons to choose Blue Buffalo, emphasizing that we treat their pets like family. Our brand equity is strong, and in this climate, it's crucial to communicate why pet parents should opt for Blue. That’s our primary focus. Regarding pricing and pack architecture, we are making adjustments across various product lines. For instance, in our dry pet food range, we are introducing medium sizes, which are now rolling out but will take some time to gain traction. We're also adding different sizes and entry-level price points in our treat offerings; this won't lower our margins but will offer better pricing for pet parents. In wet food, we are exploring variety packs, which will likely launch in the latter half of the year. These are just a few examples of our efforts to ensure consumers recognize the value of our products. We will not compromise the value proposition of Blue Buffalo as a premium brand, which consumers recognize. We’ve invested significantly in establishing it as the leader in the premium segment, and we intend to maintain that.

Okay, very helpful. Just one quick follow-up. In the press release, you noted that gross margin had benefited from favorable mark-to-market. Can you just remind us of the typical hedging strategy for the year? Basically trying to understand where there might be some variability if we see any moves in. Thanks a lot.

Sure. So, as a reminder, our adjusted gross margin, obviously, does not include that mark-to-market benefit, so that is an effect of our gap reporting where we do not get the hedge accounting treatment on our commodity hedging programs. As a reminder, we're generally trying to hedge out at the beginning of the year about 50%. So, given where we are in the year, we're about 65% hedged across all of our four businesses and across all the inputs.

Our next question comes from Rob Dickerson with Jefferies. Please proceed.

Great. Thanks so much. Maybe we just move to cereal for a minute. It sounds like just from various sources, I believe yourselves included, there's not necessarily a tremendous amount of growth expected in the category over the next few years. So, Jeff, it's probably easier to kind of comment on the category, maybe reverting, right, back to kind of pre-COVID dynamics, but at the same time, I felt like during that period of time, there was some acceleration for General Mills specifically, just speaking to the quality and the power of the brands. So, you own Cheerios, Cinnamon Toast Crunch has done really well. So, I'm just curious, because you think forward, next year, next three years, kind of like why even state that you would think that category might not grow kind of relative to overall food, just as a reminder. And then, just secondly, just given the power of your portfolio, like within that dynamic, like I guess what's the conviction level and your ability to continue to gain share like you've done for, let's say, the prior seven years or so? Thanks.

Thank you, Rob. I'll share some thoughts and then Jon can add more if needed. First, it's important to remember that cereal remains the top choice for breakfast in the morning, accounting for nearly 20% of breakfast consumption in the U.S. We've performed strongly in the cereal space, achieving over 20% growth in the past five years and gaining market share for five consecutive years. Our brands, Cheerios and Cinnamon Toast Crunch, lead the category. We hold nearly 50% of the category's new product volume, specifically around 47%, and four of the last five major new products have come from General Mills. Our innovation continues to be effective, and our brand remains strong. I anticipate our cereal business will see steady growth each year and some incremental share gain, while we remain focused on growth overall. For insights about other competitors in this category, you'd need to ask them. We are confident in cereal and our brands, and I am pleased with our competitive performance. Jon, do you have anything to add?

You expressed it well. Ultimately, we have confidence in cereal and consider it a strong category. As Jeff mentioned, it remains the most popular breakfast choice in America today. We've been performing well across all segments and intend to maintain that momentum. We don’t need to achieve significant growth; even modest increases suit us, and we appreciate how the business operates and how the profit and loss statement looks. Therefore, we will continue to invest. Our enthusiasm for cereal today surpasses what we felt a decade ago. According to Jeff, we have grown our market share in six of the last seven years, and we are currently the clear market leader. This is unprecedented in the history of the category for the last five years, and we will keep investing to foster growth in the category. Another question we frequently receive is about the potential impact if a major competitor intensifies their focus. We view that situation positively. Historically, when the two primary competitors in this category actively support it through marketing and innovation, the category overall performs better. We hope all players will engage actively so we can continue to expand these categories moving forward.

All right, super. And then just a quick clarification question on Pet. A lot of the commentary is really around like Pet not really improving that much, as we get through the year, given the drivers relative to Q1. I believe last year, that in Q2, you did have a fairly pronounced inventory de-load. So, should we be thinking that kind of starts to revert out some to provide some tailwind to your volume dynamic in Q2 specific to Pet? Or is it basically maybe there was some de-load and then maybe a little bit of reload in Q3, but maybe some of that inventory is just kind of now being sold through as normal without maybe the more traditional kind of year-over-year rebound from the dealer, if that makes sense? Thanks.

It makes sense. What I would say is that in the five years we've owned Pet, I've learned that it's a great category and brand, and we've doubled the business. However, trying to analyze this business on a quarter-by-quarter basis, especially with significant e-commerce involvement, is challenging. I'm not going to predict what will happen. You mentioned that we had an inventory de-load last second quarter, which is true, and we are facing that now. It's also important to note that inventory levels can fluctuate significantly. As the business has slowed down a bit, inventory typically comes out of the system. We'll see how things unfold in the second quarter, but we are not expecting a substantial rebound in the second quarter compared to the first quarter for us to meet our guidance.

Got it. All right. Thanks so much.

Thanks.

Our next question comes from Max Gumport with BNP Paribas. Please proceed.

Hey, thanks for the question. As the industry starts to return to quality merchandising and with your own display support up mid-single digits, we're hearing that the lists associated with some of these events, especially end cap displays, aren't proving to be as incremental as it might have been anticipated. We're wondering if you're seeing this dynamic and also what you think is driving it. Thanks very much.

Jon, do you want to comment on that?

Yes, definitely. When we examine merchandising as a whole, I noted earlier that frequency has increased slightly in the mid-single digits, yet it remains about 10% lower compared to pre-pandemic levels. As I previously mentioned, we have invested in SRM capabilities, and so have our competitors and retailers. Therefore, as we all assess the different pricing strategies, I believe some tactics differ from those used before the pandemic. We understand that offering deep discounts can deplete category dollars and profits. Consequently, we are witnessing slightly more frequency at elevated price points, which means the increase from each deal may not be as significant. However, when you evaluate all merchandising throughout the year, this slight boost in frequency alongside higher price points is likely to generate more revenue for both the category and our retailers, as well as for us. So, while we are observing somewhat smaller increases at higher price points, we believe this is beneficial for the category overall. Moreover, a significant change compared to the past is the advanced SRM capabilities we've developed, allowing us to have meaningful discussions with retailers about expected merchandising performance.

Makes sense. Thanks very much. I'll leave it there.

Okay, Frank, I think we're going to wrap it up there. Appreciate everyone's time on the call this morning. I know we didn't get to everyone, so please feel free to follow up with any questions throughout the day or the coming days. Look forward to continue to connect with you, and we'll look forward to speaking again next quarter. Thanks so much.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone.