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. [Operator Instructions] 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. [Operator Instructions] 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] (ph), 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 [RNS] (ph) 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 -- go ahead, Jon.

Go ahead, Jeff.

Yeah. So I think -- first of all, you're right, we're not going to give guidance on a quarter either for the segment or for the company, but I will give you some -- a little bit of color commentary on the year and the guidance, because I think that's probably is important. I mean, importantly, as we look to 3% to 4% sales growth, I think it's important to remember that -- to know that we don't really expect a huge rebound in our Pet business for the rest of this year and due to all the factors we've talked about. Yeah, I will say, as importantly our Foodservice business is growing nicely, and we see continued growth in that. And our International businesses is up really nicely as well. Yes, we had Häagen-Dazs recall that we were lapping and Häagen-Dazs responded nicely, up 20%. That's not the only thing growing. Our European business was up double-digits and growing 70% on our Bars business in France and our India business, our Distributor businesses are also growing. And so, I think it's important to note that even while Pet didn't quite meet our expectations for the first quarter, it's going to be challenging this year. We have two other big segments that are going to do quite well. As it comes to NAR, we're executing really well on NAR. I mean, our distribution is up, the quality of our merchandising are up, our new products are doing well. And you might say, "Okay, well, then what happened to share performance in the first quarter?" And I guess I just remind you that, our first quarter is our toughest from a share perspective given the pricing that we're lapping and our competitors gains that they've made in getting their supply chains back up in order. NARs were already really good, NARs are improving too. So, as we look at the rest of the year, in NAR, for those listening, we do expect our volumes to improve. Importantly, they don't have to get to positive, they just have to improve from where they are now, and part of that is really going to be gaining share as pricing gets lapped, as the competition, comparisons get tougher and [indiscernible] get easier because of this supply chain challenges. And we think -- look with all of that happening, as we continue to execute well, our NAR business will continue to get better 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, everybody. Thanks for the question. I wanted to know -- I guess two questions. You had some very significant marketing investment in first quarter, but this is a very tough volume environment. And I wanted to know what's your plan for marketing investment for the rest of the year? And do you have -- would you keep the same amount of pressure on, or would you change tactics mid-year if you're not getting the volume that you expected?

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

Yeah. So, you're correct in noting, Rob, that we were up double-digits in the first quarter on our media spend. I would expect for the balance of the year, based on everything we see right now, we would expect our media spend to grow at least in-line with sales. In this environment, I think it's important for us to put support -- brand support behind quality ideas still, and especially so as we see the environment stabilize.

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, so this Jeff. Clearly, we're not going to comment today on rumors or what has or hasn't transpired in the marketplace, no matter whose transaction it is. What I will tell you is that, for us, our objectives with M&A really haven't changed. I mean, we've been very consistent, maybe boring over the last couple of years. And then, we will look to add about 50 basis points of growth if we can through both acquisitions and divestitures. There are things that will be bolt-on in nature, by which I mean, we can use our current capabilities and our knowledge of channels and technology in order to generate more sales growth and some synergies. And we do have the balance sheet in order to be able to do that. What I will also remind you is that, we've also said we've been disciplined, and we are discipline. And so, to the extent we see something that we like on acquisitions, we will certainly do that, but only if pricing that makes sense for our investors. And so, I want you to know that no matter what's transpired over the last little while in M&A, our position hasn't really changed. And that includes -- I've also read a commentary, our food company is looking at M&A now because their volumes are down, the answer is no. I mean, we don't play the short-term game when it comes to M&A. We go get brands we like. We hold them for a long time. We grow them. We've been doing that for 165 years, and we'll continue to do that. And so, what isn't going to be the case is that we see volumes going in a certain direction, therefore we have to make up that gap, that's really not part of our plan.

Got it. Makes sense. Thanks, Jeff.

Yeah, thank you, Rob.

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

Great, thanks very much. I guess with a slower result expected in Pet sales for the year versus initial expectations as you've talked about, I'm curious if this impacts your sort of Pet capacity expansion plans in any way. You, obviously, got a lot of work underway in trying to get capacity going and bringing a lot of that in-house over the period -- or the course of the next year or two. Does that get any impact -- does that get impacted in any way? And I guess, another way of asking it is, do you still see sort of Pet as a sort of high-single-digit type of sales growth driver over time for the overall portfolio?

Sure. Appreciate the question, Andrew. This is Kofi. Look, I think -- I'll start with the back end of your question first. I think we're still bullish on the long-term prospects for the Pet category. As a reminder, it's a $44 billion category. It's supported by 1% to 1.5% pet population growth. And we do think the prevailing trend over the long term will be humanization, which will drive growth, and in particular, benefit premium brands like Blue Buffalo. I think in the short term, we aren't making dramatic changes to our capacity expansion plans on dry dog food. I think it's important as we think about that capacity coming online late this year, we won't -- like, we won't see the benefits this year. We would expect that it will give us longer-term benefits and at a minimum being able to steer more production to internal capacity, which will also help with margin reconstruction on this business over the near -- intermediate term. So, we still feel good. We're still bullish and a net investor on this business and on capacity, and certainly for the long-term strategically.

Got it. And then, Jeff, I know you and others are certainly talking about the expectation to see improving sequentially volume trends as we go forward just as the industry gets back to maybe a more normal cadence of sort of marketing and merchandising expanding now that service levels are back in a better place and such, which -- it seems logical certainly. But what I still don't, I guess, have a lot of clarity on and maybe because it's the lot of little things that add up, why do you think that broadly industry volumes are still sort of where they are even as pricing is starting to lap? And maybe it's just a matter of timing and these things don't always line-up perfectly in a linear way. But I know there's been lots of different reasons, people were traveling, now they are back at home or back to school, or people hunkering down a little bit. I'm just curious if what you're most sort of up-to-date thinking on that might be. Thank you.

Yeah, sure, Andrew. We spent quite a bit of time on this and it's very clear to us that there are three broad reasons. And so, there's not one thing. I mean, there are kind of three broad reasons for what we see in the marketplace now, especially as one looks at Nielsen trend. The first, we touched upon this a little bit earlier, but we do see quite a bit of growth in non-measured channels. We're up double-digits in NAR in the first quarter in non-measured channel, for example. And so that is certainly a piece of why you see Nielsen data as it is. The second would be that food away-from-home, not necessarily in restaurant, restaurant traffic has been pretty flat, in fact, quick-service restaurant traffic has been up, so there is a move toward value in restaurants, but that traffic has remained relatively flat. What has changed is that we've seen a reversion back to people being mobile and more education and healthcare and hotels and lodging and that sort of thing, which I think is logical. In fact, if you look at the movement data through airports, it's up year-over-year. Now it's only back to pre-pandemic levels, but it's quite a bit year-over-year. So that would kind of corroborate that thinking. So that's the second reason. And the third is, there's probably as we've seen another kind of recession -- we're at a consumer recessionary period, even though technically we're not in a recession, consumer behavior trying to economize, and so that may be going into smaller sizes and things like that, which in the very short-term, [detox] (ph) a pantry, but people aren't eating less, and we don't anticipate that they will eat less. In fact, what I would say is, as consumers start to get squeezed, what generally happens is people move more at home. And now the cost of eating out is roughly four times what it is eating at home and so as consumers get more squeezed and as people get into their normal routines in the fall, we would think that at-home eating would probably pick up a little bit. We'll find out. But that's what we think and those are the three factors that is very clear to us are driving 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.

Sure. Thanks for the question, Jason. Just a couple of thoughts. So, I think on the first, as you sort of take the frame on the year, given all of the challenges, the mix of business, we don't expect the operating profit margins to improve this year. As you think about the structure of inflation, some of the same trends that are driving stickiness in human food inputs are there and present, and probably more so on some of the pet inputs, in particular, the conversion costs, which are heavily factored labor, and in particular in the inputs in pet food. So that -- until we start to see that trend come off, I wouldn't expect to see any near-term relief on the inflationary pressures on our input basket for pet food. I think on supply chain, our external suppliers, we generally have a pretty flexible structure. So I mean the benefit of the way we structured those contracts as we need the capacity, we can get access to it. We don't have a hard floor fixed-cost structure, where we would be paying if they weren't using it.

Jason, this is Jeff Siemon, I would just add on that second point, we were able to close down an internal [manufacturing] (ph) factory, so we weren't adding capacity to the system, we were just reshuffling where that capacity on treats specifically was located, and this supplier is -- we have a strategic partnership. We have our HMM cost savings program built into that contract. So we like what that can do for us from a profitability standpoint on 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.

No, I would expect that we will see margins improve on this business. I do think one of the big factors has been the volatility in flour pricing as we've worked through this environment, which is a significant -- has been a significant headwind in the deconstruction of margins. So that's been a put and a take as we've moved through the past several quarters, including the last couple. I think long-term, the challenge and the opportunity on this business will come from stabilization of the supply chain, giving us access to a more stable HMM delivery. We are seeing that come through closer to our historical levels in the mid-single-digit range on this business, and we'd expect that it had -- the pricing benefits from last year's significant pricing will also help buoy margins as we move through the back 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?

Yeah, Chris, on the -- good questions. On the Pet business, we're doing a couple of things. First -- and someone asked this question earlier about the amount of marketing spend, but also what we're spending it on. What we're spending it on, the first thing I would say is that we're going back to some more hard-hitting advertising that really gives pet parents a very rational reason to believe why Blue Buffalo feeds them like family. The equity is held up well, and we think in this environment, direct comparative advertising on why exactly pet parents should pay for Blue is really important. So, we're going back to that. That's the first thing I would say. On the pricing itself and price pack architecture, we're doing it along several lines of our products. I'll give you just a couple of examples. In our dry pet food line, we didn't have a medium size. We had a lot of large sizes, but not some medium sizes. So, we're introducing those. And those start rolling out now, but it takes a while for them to get going. The same would be in treating. We are introducing some sizes, hit some more entry-level price points. That doesn't mean lower margin for us. It just means lower price points so it's good for pet parents. And then, in wet food, we're looking at some variety packs and things like that, which would probably be more weighted toward the back half of the year. So those are just a few examples of things we are doing to make sure that consumers understand the value. What we're not going to do is disrupt the value proposition of Blue Buffalo, which is a premium brand. And consumers know it as a premium brand. We spent lots of money and lots of years making it the best brand in the premium part of the category. And what I can assure you we'll do is not disrupt 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 [and where you sit] (ph) 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.

Yeah, thanks, Rob. Let me provide some commentary and then, Jon, follow up as necessary. The first reminder I would let you know is that cereal is still the number one item to eat in the morning for breakfast. And it's almost 20% of breakfast eatings, I think it's 19%, so that's here in the U.S. So, it's still a highly consumed item in the morning. We've been doing very well in cereal. As you noted, we've grown more than 20% over the last five years. We've gained share, I think, five years in a row. We have the two biggest brands in the category in Cheerios and Cinnamon Toast Crunch. We have almost 50% of the category's new product volume and -- I think it's 47%, and four of the last five big items are from General Mills. So, we're innovating well. We're developing, our equity is well. We continue to grow. And so, my expectation for our cereal business is that we'd grow a little bit every year and hopefully take a little bit of share every year, but keeping in growth. What everybody else does, you'll have to ask the rest of the competitors in the category. But we like cereal. We like our brands. I love how we've been competing. So Jon, anything you want to add to that?

I think you hit it well. I mean, at the end of the day, we believe in cereal, and we think it's a great category. As Jeff said, it's the most widely eaten breakfast in America today. As Jeff mentioned, we've been really performing well across the board, and we -- plan to continue to do that. As Jeff said, we don't need to grow a lot, we can grow a little bit and really like the way that the business runs for us and the P&L looks as well. So, we're going to keep investing. We're more excited today about cereal than we were even a decade ago. As Jeff mentioned, grew shares six of the last seven years. We're the clear share leader today. And again, never have been in the history of the category into the last five years or so, and we'll keep investing and keep growing the category. The other question we get a lot is, what happens if one of our major competitors gets more focused? And what we would tell you is that's actually a good thing. If you go back through history when the two major competitors in the category are supporting the category with marketing as well as innovation, the category does better. So, we hope that everyone comes to play and we can continue to grow those categories we move 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 kind of as normal without maybe the more traditional kind of year-over-year rebound from the dealer, if that makes sense? Thanks.

It makes sense. I guess what I would say is that one of the things I've learned about Pet in the short five years that we've owned it, first of all, it's a great category and brand, we've doubled the business, but also trying to go quarter-by-quarter on a business with this much e-commerce and everything else is a tough way to go. So, I'm not going to try to prognosticate what happens. But you do bring up the point. We had an inventory de-load last second quarter, that is true. We're going up against that. But it's also true that inventory is very quite a bit. And as the business has slowed down a little bit, inventory tends to come out of the system. And so, we'll see what happens in the second quarter. But we're not anticipating a big rebound in the second quarter from what we saw in the first quarter for -- in order for us to hit 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?

Yeah, absolutely. So, as we look at merchandising [at large] (ph), I mentioned earlier, we see frequency up a bit, mid-single digits, but still down about 10% versus pre-pandemic levels. One of the things, as I mentioned before, we've invested in SRM capabilities. Our competition has as well and our retailers have also. So, as all of us are modeling the various pricing actions we can take, I think some of the tactics are different than maybe what we were doing pre-pandemic. I think we all know that driving deep discounts actually drives dollars out of the category and drives profit out of the category as well. So, what you're seeing is maybe more frequency at higher price points and as a result of that, maybe the lift on each deal isn't higher. But at the end of the day, when you add up all of your merchandising across the year, a little bit more frequency with higher price points actually drives more dollars for the category and our retailers and more for us as well. So, you are right, we're seeing slightly smaller lifts off of higher price points. But at the end of the day, we believe it's a good thing for a category. And again, the big difference, I think, versus maybe in the past are the SRM capabilities that all of us have delivered -- or developed and pretty sophisticated models now that we all can have a real good conversation with retailers on what to expect from a 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.