Greetings and welcome to the General Mills Q3 Fiscal 2023 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. At that time, if you have a question, please press one followed by four on your telephone. If at any time during the conference you need to reach the operator, please press star zero. As a reminder, this conference is being recorded Thursday, 23 March 2023. It is now my pleasure to turn the conference over to Jeff Siemon. Please go ahead.
Thank you, Tina. Good morning to everyone. Thank you for joining us today for this Q&A session on our Q3 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?
Thank you. As a reminder, you may press the one followed by the four 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, I'm curious what you have as takeaway in fiscal Q3 specifically. Regarding Q4, you know, I believe you've previously spoken to your expectation for double-digit sales growth in Pet in both the Q3 and Q4 . 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 Jeff, thanks for the question about Pet. You know, first, I would say our Q3 sales was 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, you know, we built about as much inventory back in the Q3 as we lost in the Q2 . For the year, our inventory and our, I mean, our sales out and our reported net sales are about the same. Just so you know, as we end the Q3 , 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 rebuild some inventory in the Q3 . We didn't think we were going to be able to. Because our supply chain, you know, got better, you know, pretty quickly in the Q3 and our service levels 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 customers are glad. Our retail customers are glad we're back in business, and so we shipped some inventory for our 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 Q3 and retail movement, what you'll see is that our dry dog food business really performed quite well. you know, Life Protection Formula continued to accelerate and was up 23% in dollar terms, but also, 9% in pounds. 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. That seems to be the case.
The other thing I'd point out about retail movement is that our Q3 last year in Pet was very, 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, 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. So as we said before, we'll grow double digits in the back half of the year, and we certainly did that in the Q3 , and we'll see what the Q4 brings.
Okay, thanks for that. Just a quick follow-up. You mentioned mid-single-digit inflation expected for fiscal 2024. 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? You know, 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. To the extent that there, you know, is additional margin that we need to protect, we'll use the other levers we have up to and including SRM. I think we're not gonna say much more at this point about fiscal 2024.
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 the deceleration we've seen is more a product of year-over-year comparisons. I guess when we cut in the data, it looks as though, you know, Yeah, there is a deceleration and maybe a deceleration in General Mills' market share performance as well as, you know, 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, you know, a by-product more of ongoing supply constraints that should improve with time? Is it a maybe a more of a by-product 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. 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 is that more people are going back to the office, mobility is a little bit higher. There's a little bit 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.
We see a little bit of that in the dynamic. As we look at the category, I mean, our pounds were down 2% or so, and, you know, what we can read in the category and the pounds in the category are down flat. We're still trailing the category, so we still have some more work to do, but it certainly is not as big as a delta as it had been before. As we look ahead, you know, one of the things we said is that we were pleased to see Life Protection Formula, you know, do so well, which tells us that the Blue brand is really good. We're pleased with that. 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. We would think that that would get better over time. Probably the last to come along will be wet pet food, which is a combination of our service levels still only being in the 80s as well as pet parent behavior and mobility. That's kind of the order of things. I guess I would characterize our Pet business as we feel good that we have improved, and yet, and yet we know that we have more work to do in several of our areas.
Okay, great. Maybe shifting gears a bit, you know, I wanna ask around how you're thinking about elasticity. I know in the, you know, in what you put out this morning, you talked about expectations for little change in elasticity through the end of fiscal 2023. I guess just maybe a little bit more on the puts and takes you're seeing there. You know, what I'm really curious about is how you think, you know, all the different Accelerate strategy, you know, points of focus, you know, may help your portfolio hold up to the extent that we see, you know, more broad-based consumer slowing, you know, 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, then I'll probably pass it to Jon Nudi to maybe give a couple examples about NAR. I would say for the rest of our fiscal year, I mean, we're seeing little change in elasticities. 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. We see a continuation of that. You know, I will say there are a couple things.
One, private label exposure in our categories around the world is lower than what you see on 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. You see, you know, over the last four years, our compound annual rate of growth and marketing spending is up, I think about 4% or 5%. If you look at this year, our marketing spending is double digits. It's not an accident that our brands are. We had strong brands to 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.
We've invested in marketing spending as well as capabilities, and we continue to do that through the Q3 of this year. It's not really an accident that private label is lower in our categories. 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, you know, to 2010, you know, we were able to hold market share due to our brand strengths and our investments in and consumer spending. Jon Nudi, you want to talk a little bit about NAR?
Yeah. Just building on what Jeff talked about. As part of Accelerate, and Jeff touched on this, capabilities is something that we're very focused on, and one of those capabilities is Strategic Revenue Management. 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. We leverage the entire toolbox. Obviously with the inflation we've seen this past year, we've taken list price increases. Focused a lot on promotional optimization. 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.
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. We are much more sophisticated today than we were even a few years ago, and I think that's helping us make the right moves in market, which is helping with our elasticities as well. It's something we'll stay focused on. As Jeff mentioned, you know, if we do run into a recessionary period, historically, we've held up 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 get hit the hardest from a share standpoint.
Thanks for all that. Appreciate it.
Mm-hmm.
Thank you. The next question comes from Ken Goldman, JPMorgan. Please go ahead.
Hi. Thanks. One quick follow-up on Pet, and then I had one on North America 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, however you wanna put it, kind of helped company margins or segment margins during the quarter in Pet? I realize there's 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, you know, what's going, you know, the contribution of inventory rebuild with margin for Pet in the Q3 . There are a couple things. First of all, I would say our margin in Pet, you know, was roughly in line with what we thought it would be. The fact that our profitability declined in Pet was not a surprise to us. It's really based on a couple factors. One is...
By the way, even though our margin actually did improve slightly from the Q2 , you know, the factors really contributing to the fact that our profit declined in the Q3 in 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. So these are things we expected. The other thing I would point to is that when we saw Life Protection Formula really doing well behind our marketing efforts in the Q2 , we decided to spend more against it in the Q3 . That's paying dividends as our Life Protection Formula has continued to accelerate.
It does mean our marketing spending, you know, had a negative impact on the P&L in the Q3 , although it's clear over the long run that this is such a good idea. I want you to know that when it comes to Pet, you know, the margins we saw in the Q3 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. 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. It's not a major impact, Ken. I would also say, I mean, you didn't ask this, but I guess, you know, a bonus answer would be that in our Q4 , we actually expect that our profitability will be up in our Q4 , 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. The drags that we see lessen, we see a little bit more pricing. We would anticipate that in Q4, our profitability will be up in Pet.
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.
Good morning.
Can I ask. 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 gonna continue? Linked to that, promotional activity, are you seeing any changes there? Is it sort of steady Eddie? 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. I'll pass it on.
Yeah, I would say, Alexia, this is Jeff. I'll answer the first part of that question, maybe Jon Nudi can give any insights on the second. You know, I would say in general, what we would expect is that marketing spending growth be roughly in line with sales growth. 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. It actually has kept up, more than kept up with pound growth. The same is true this year, where we're seeing double-digit increase in marketing spend. Over time, our goal would be to increase our marketing spend roughly in line with our sales growth. Jon, do you wanna take the second part of that question?
Yeah, absolutely, Alexia. From a merch standpoint, if you look at versus pre-pandemic levels, merch 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.
Again, as all of us are dealing with inflation and leveraging our SRM capabilities, we're raising the floor at many of our merch promotions. As we move forward, you know, 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. 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 pass it on.
Thank you. The next question comes from John Baumgartner of Mizuho. Please go ahead.
Good morning. Thanks for the question.
Good morning.
I wanted to come back to Steve's question, I think on US retail. The elasticity is still favorable, but that elasticity alone sort of masks the underlying percentage volume declines from this pricing. That's an industry issue, not just Mills. You know, since food at home is not losing share to away from home, you'd also think, I guess, once consumers normalize to these new prices, volume declines should also moderate independent of recession. I'm curious, Jeff or John, you know, absent a bounce from recession, how you're thinking about that path to volume normalization. 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 grow 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. 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. Absent a heightened inflationary environment, we would expect our portfolio, our, you know, our exposure to growth to be in the 2% to 3% range, so call it 2.5% range. That's what we talked a little bit about at CAGNY. That would imply, you know, some level of volume growth as well as some level of pricing growth, a mix of those two, which would of course fluctuate based on, you know, what happens in any particular year.
We would think once we get back to a normal environment, which we don't see coming actually in the next 12 months, but a normal environment, we would see, you know, some level of pound growth and some level, a little bit of pricing as dictated by the growth in our categories. You, you mean your, you had another deeper question about recession versus non-recession. I'm not really sure how to go about all that other than to say that, you know, what we do see is mid-single digit inflation coming in the next 12 months.
You know what, I guess just thinking about the depth of a volume decline, it feels like you're not seeing a shift into the out-of-home channel, it feels like it's more maybe just, you know, more leftover consumption at home. I mean, do you sense that consumers are getting close to normalizing to the new prices on shelf and actually just, you know, 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. Obviously volumes are down for NAR. As we look at that, we expected it, frankly, with the amount of pricing that we've taken, I mean, historical elasticity would suggest much bigger declines. We feel comfortable with where we are. That being said, as we pivot into fiscal 2024, 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. 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.
The capabilities that we're investing in from an Accelerate standpoint are really helping as well. I mentioned SRM. 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. Over 50% of our marketing now across NAR is digital, and that'll continue to increase. It'll be back to the fundamentals, and we feel really good about our ability to compete in that role as we move forward.
Great. Thanks, Jon. Thanks, Jeff.
Uh-huh.
Thank you. The next question comes from Chris Carey, Wells Fargo. Please go ahead.
Hi, good morning. Just a couple quick questions around inflation. Just on the mid-single digit inflation, you noted in prepared remarks that that is split between labor and conversion costs primarily. I wonder if you could disaggregate that, what are you seeing from a commodity standpoint within that mid-single digit inflation?
Yeah. Appreciate the question. I won't decomp it very deeply other than, 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 expectation for our total input costs are a fair amount of conversion costs behind some of it. We're not taking in just raw commodities.
As we think about the impact of continued labor pressure, energy costs, those that 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. 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 gonna be a more benign inflationary environment. 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. you know, on the last earnings call, I believe, there was a question just around whether the non-commodity pieces of the equation were, you know, appropriate buckets to come to retailers with an inflation story, right? You know, 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, you know, HMM and other offsets are gonna be important, including revenue growth there, you know, SRM. 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. John, if you wanna jump in and provide some specific perspective from NAR, you can do that. You know, broadly, we look at the entire basket of our input costs. That includes manufacturing, sourcing, and freight. 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 and 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 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. I mean, still focused on supply chain, so, you know, we're still sure to order. We've been historically in the 98%-99% service level. While 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. 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 whether, you know, what levers we pull into the coming year, we pull SRM levers every year, regardless of inflation.
As we see inflation next year, we'll continue to leverage SRM. 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 Bryan 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? I don't know, is this just sort of the level we should be looking at as we model the Q4 ? Just some perspective there, and then I have a follow-up.
Yeah. You're absolutely right. In the Q3 , media was a big driver. It was up strong double digits. We expect it to actually be a driver in SG&A as we head into Q4 as we've been turning marketing back on Pet, putting additional spending behind key platforms. As a reminder, I think, you know, it's important as we're coming out of a period where, you know, five years, six years earlier, we had pretty much depleted pretty significantly the amount of marketing spending. 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 outside of marketing spending, we have seen some increase on 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. Those seem like they're more transitory, meaning, you know, we shouldn't see an absolute dollar levels, probably not the same level of SG&A in the Q4 that we saw in the Q3 ?
I think that is generally fair.
Okay. All right, cool. Second question just on Food service and maybe, you know, Jeff, if you can just kinda give us a perspective on kinda where that business stands now? You know, 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. Can you kinda give us a perspective on kinda 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?
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. 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?
On Food service, you're right. We took convenience stores out of our Food service business and put them in North America Retail. 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 US focused, but North America focused. We're really pleased with that too, because we have a lot of customers that operate across North America. We're really pleased how we're executing the convenience piece in NAR, but also adding Food service and to make it North America Foodservice 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 Foodservice for a number of months. 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 Foodservice. As we look, as you can see, it's back to, you know, pretty strong growth now. Last year was a tough Q3 , the comparison to the Q3 are easy. In aggregate, we have really good momentum in our Foodservice business. You know, what I believe is that our Foodservice 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. 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. We're also confident that we need to. We'll continue to drive margin growth as we still grow our top line sales growth. We think we can do both of those at the same time in Food service, and I'm pleased with the momentum that we've regained 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, 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.