Jeff Siemon:

Thank you, Julianne, and good morning, everyone. Thank you for joining us today for our Q&A session on our Fourth Quarter and Full Year Fiscal '24 Results. I hope everyone had time to review 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 management's current views and assumptions. So please refer to this morning's press release for factors that could impact forward-looking statements and for reconciliations of non-GAAP information, which we may be discussing on today's call. I'm here this morning with Jeff Harmening, our Chairman and CEO; and Kofi Bruce, our CFO. So I think we can go ahead and get to the first question. Julianne, can you please get us started?

Kenneth Goldman:

Hi. Thank you very much. I appreciate it. I wanted to under -- make sure rather that I understood the dynamics in International, it's a bit of a specific question to start, but the commentary in the prepared remarks, about consumer challenges might indicate that volume would have been more pressured than price-mix, but it was the latter that was down by a greater degree. So I'm just curious if you can walk us through the dynamic there and if there were any unusual puts and takes this past quarter. And then I have a broader follow-up.

Kenneth Goldman:

I'm sorry, Kofi.

Kenneth Goldman:

Thank you. I'm stepping on your words, I apologize, but I appreciate that. The follow-up is, and thank you for all the detailed guidance you always provide from top-to-bottom in the P&L every year. I'm curious if you could break out for us a little bit of the cadence of the top-line and EPS growth this year and in particular if there's any considerations as we think about modeling the first quarter.

Operator:

Our next question comes from Andrew Lazar from Barclays. Please go ahead. Your line is open.

Jeffrey Harmening:

Good morning.

Andrew Lazar:

Maybe, Jeff, to start off, I know in the prepared remarks you discussed sort of a clear mission to drive better volume results through reinvestment, which I know is contemplated in your outlook for '25. And you mentioned prominently the need to improve sort of the value equation for consumers, even mentioning optimizing price points in certain areas, a 20% increase in coupon spending sort of as examples. And I know the consumer measures value in lots of different ways, not just price, so I was hoping to get maybe a better sense of how the mix of incremental spending for '25 is sort of broken out across what would you consider higher-quality sort of brand equity building versus, let's say, more trade or price-oriented spend, particularly as this is such a sort of a hot button topic among investors right now.

Andrew Lazar:

Okay. Thank you for that. And then just a quick one, Kofi, the commentary around HMM for fiscal '25 versus cost of goods inflation suggests, as Jeff highlighted, some gross margin flexibility to reinvest. Given the amount of reinvestment you're planning, not just at SG&A, but that reinvestment that goes against gross margin, can -- does your plan, I guess, anticipate that you can at least protect, if not expand, gross margins a little bit for the full year? Or could there still be some gross margin pressure for the full year, given kind of what you need to do across both sort of trade and consumer? Thank you.

Andrew Lazar:

Okay. Thank you.

Operator:

Our next question comes from Bryan Spillane from Bank of America. Please go ahead. Your line is open.

Jeffrey Harmening:

Yeah. So, Bryan, thanks for the question. The -- you talk about more volatility and uncertainty. I've said that for like you said the last five years, so I'm waiting for the year where we don't have volatility, and the market does continue to evolve, so there's no question about that. Obviously, we think we've given ourselves enough cushion here without being unduly conservative. And the market -- you're right, the market is -- it does continue to evolve. But as I said, we've got really good marketing support. New products are up. We've got really good news on our core brands. And so my expectation is that we would improve our volume performance this coming year, which was down 3% this current year. We would improve our volume performance across our different segments this year. So I know that each of our operating segments, whether it's North America, retail or foodservice or international or pet, are committed to improving our volume performance and our competitiveness. And I'm confident with the level of activity that we have and the news that we have that we can actually do that supported by gross margins that are already good, that are back to pre-pandemic levels already. And as you say, our productivity outstrips what we see as inflation. And so reinvesting some of that to make sure that we have the fuel we need to drive the growth. And we're not counting on a change in the environment necessarily to drive our growth. It really is a change in our competitiveness, and that's within our control. And so we feel good about our ability to do that.

Jeffrey Harmening:

Yeah. The -- well, I certainly can't speak for my competitors, but we're all looking for more growth. And what's been interesting is that the environment has been exceptionally rational, and it's not -- it's hard for me to see that changing. And the reason I say that is because, I mean, we still have some level of inflation. I mean, we have 3% to 4% inflation. And so in that kind of environment, absent leading levels of productivity like we have, it really begs for an environment that continues to be rational. If you look at the last 12 months, promotional spending is up, frequency is up a little bit, depth of discount is up a little bit relative to the year before. But if you look before pandemic, it's kind of back to that level of promotional intensity. And as I started out, I think it was Andrew asked a question about value, there are a lot of ways to create value for consumers, and we see that I'm sure our competitors do, too. And so we'll be pulling all the levers we can to make sure that consumers know the value of our big brands. A lot of that gets back to the marketing and the product news and everything else.

Operator:

Our next question comes from Steve Powers from Deutsche Bank. Please go ahead. Your line is open.

Jeffrey Harmening:

Yeah. The -- as we look at it -- by the way, I can't hear the drilling in the background, Steve. But as we look at it, first of all, we talk about price and volume relatively the same as price mix. And I think that mix piece is really important as we look at it. I wouldn't expect undue differential performance from any one of our segments. So it's not as to say we're looking for lots of one thing in one segment, lots of something in another segment. Really, the job to do is really volume growth across the different segments. And I think we have opportunities to improve even in foodservice, which did really well. We have opportunities to improve across the board. In terms of the sequencing. I guess my only comment would be, as you look at the first quarter of last fiscal year, which was the -- which, in terms of sales growth, was our highest sales growth quarter. You see a lot of pricing in that quarter. We're going up against that as we go into the year ahead. And so that probably has an impact on what we see on price mix in the first quarter, which, as Kofi said, along with some reinvestment, makes the comp in our first quarter the toughest of the four quarters in the year. I would expect gradual improvement as we look at our sales and profitability over the course of the year. And gradual doesn't mean it happens even every quarter, but gradually over the course of the year with Q1 being the toughest. I would say that's especially true in North America retail, where the comp from a year ago was quite good. We had a really nice Q1 in North America retail last year.

Kofi Bruce:

Yeah. We are -- to just pick up on kind of Jeff's last point, we are expecting volume improvement in all of our segments, but as we look at international, I think the critical thing for us is Brazil, we certainly see improvement off of this year's performance and are expecting that similarly so with China and then continued strength off of performance in EU, AU and our GEMS markets, which performed really well this past year.

Jeffrey Harmening:

You bet.

Connor Cerniglia:

Hello. Good morning. This is Connor Cerniglia stepping in for Alexia Howard. Jeff, I'd like to ask about your ready-to-eat cereal segment. Measured channel data suggests you've experienced a bit more challenged market share dynamics at a time when promotional spend has increased at one of your competitors. Can you talk about how you think about this segment in 2025? And do you continue to see rational pricing behavior or is there a concern on this front? Thanks. And I'll pass it on.

Operator:

Our next question comes from Tom Palmer from Citi. Please go ahead. Your line is open.

Kofi Bruce:

Yeah, I appreciate the question. So let me see if I can step back and just, if you will, give me a point of privilege here, I'll try to give you a little bit broader perspective starting at the enterprise and then drilling down to pet and North America Retail. So while we saw the slowdown in organic net sales, I think the critical thing here is we look at our measured retail sales, they're pretty consistent as we move from Q3 to Q4. So as you rightly noted, the big point on the front is three points of headwind from the comparison on the trade expense phasing from Q3 or Q4 of fiscal '23. At the enterprise level, we also saw a modest decline in retailer inventory in NAR and Pet in Q4 versus Q3, where we had a net tailwind. And then I think third and important, I'd reference again the point I made on International that, in Brazil, we had an adjustment to net sales that moved to COGS, which was worth about a point of drag on its own. So in aggregate, about five points of drag from those three factors as you peel it back. And then as you look at it on a segment basis at NAR, that trade expense comparison is about four points of drag. We also had -- we saw the retailer inventory adjustment impact NAR at about a point of tailwind flipping to or a point of tailwind in the quarter of Q4 versus a point of headwind in Q4. And then we also benefited in Q3 from some weather patterns in NAR. Then as we look at Pet, we had about two points of headwind from the trade expense comparison. We also saw retailer inventory reductions in Q4 versus Q3. And then we did have a modest amount of headwind as well from SKU losses in a few key places. So, in aggregate, that kind of gets you the picture. I think the critical thing here is the read through for you as you're thinking about how to look at the quarter. Nielsen's Q3 to Q4, roughly in line.

Kofi Bruce:

Sure, sure. So I think I'd first start by acknowledging that our capital allocation priorities have been pretty evergreen. So I think the first is, clearly, we want to make sure we have and allocate investment for capital spending internally for growth, that's roughly 4% is kind of the top number, and we average around 3.5% if you look at the last handful of years. Second, that we are allocating capital for increasing our dividend, roughly in line with our after tax earnings, and again we paid a dividend uninterrupted for 125-plus years. And then third, as you rightly pointed out, M&A. And again, M&A is both episodic and it's not something we built into the plan. But generally, as you look at our M&A patterns, unless we've done something big, which is pretty rare, last big acquisition was Blue Buffalo, most of the acquisitions we do are kind of in that $1 billion to $1.5 billion price range, which we can easily accommodate with a modest adjustment in our share repurchase patterns. So share repurchase remains the most discretionary element, and obviously, we will make changes to our share repurchase expectations as we identify and act on M&A opportunities. To your second point around criteria for M&A, obviously, the critical filter for us that we start first with our strategic priorities, which leads us to look at critical occasions, which would get us to priorities around breakfast and convenience -- convenient meals and snacking, as well as obviously pet food. And I think the criteria for us anchor around places where we can add value. Leverage points around our capabilities that will allow us to unlock faster growth, but also improve margins as we execute transactions. So we've been candidly working with our always on M&A capability throughout the cycle. We continue to look aggressively at opportunities. At the same time, we've remained very disciplined and have very strong filters in terms of both returns and value creation.

Operator:

Our next question comes from Matt Smith from Stifel. Please go ahead. Your line is open.

Kofi Bruce:

Sure. Yeah, let me start, I think we benefited this from both a more stable supply chain environment and our ability to drive higher-than-expected levels of HMM even in the face of the volume declines we saw. We continue to have and capitalize on opportunities both to internalize production that was previously external, but also to drive HMM that was frankly less available when we were struggling to supply in the supply chain disruption period. So we feel good about sort of the exit point, what I would, what I think is critical as we look at the business right now is we're very focused on driving improved volume trends. So I think profitability, very competitive, at the 20% plus level. I wouldn't expect that 24% is the level we would necessarily target. We continue to expect to be able to drive strong HMM and much like we're doing at the enterprise, I would say, our focus is going to be on reinvesting gross margin improvement back into the business to drive growth.

Matthew Smith:

Thank you. And just a quick follow-up. You talked about some distribution losses in the Pet division, any more detail to add to that? Is that something that remains a drag as we look at fiscal '25 that perhaps keeps volume growth a little less -- a little tougher to achieve as we look into next year?

Matthew Smith:

Thank you. I'll pass it on.

David Palmer:

Thanks. I'll just follow-up on Pet for a second. I know one of the big areas of focus was the Specialty Pet segment. Clearly, it was a drag into the fourth quarter. Do you -- you talked about in the prepared remarks about revenue growth for Pet in fiscal '25, do you also see that, that Pet Specialty segment also stabilizing and growing in fiscal '25?

David Palmer:

And just a question on the Baking segment, that seemed to be an area that did very well during COVID. You cited it as one of the areas that was most declining in this quarter. Are you seeing -- I just wanted to get your pulse on that segment and be consumer behaviors around that and make sure that it's not going to be an on-going drag for you in fiscal '25. How are you feeling about that segment and the consumer behaviors around baking and the At-Home occasions that would drive that? I know it's a high-margin segment for you, and I'll pass it on. Thanks.

David Palmer:

Thanks for that.

Robert Moskow:

Hey, thanks for the question. Good morning, Jeff.

Robert Moskow:

I wanted to know, you and a lot of your peers have shifted the emphasis more to volume, and I'm not denying the importance of it right now. But it is -- it just sounds different than the strategy that a lot of CPG companies have used over the years to create value through premiumization, convenience that's been a way to improve margins and improve mix historically. Can you do both of these things at the same time? It seems like there's a lot of discussion on volume today. And I'm wondering if there's still -- if the consumer can still absorb or accept more premium offerings in this environment?

Robert Moskow:

Great. Thank you.

Christopher Carey:

Hey, thank you. I'll just wrap it up with a couple of follow-ups. So number one, Kofi, on gross margins, you said expansion for the full year. In the prepared remarks, you did highlight, however, that gross margin compares harder in Q1, you'll be doing more couponing in Q1, should we expect gross margins to be down year-over-year to start the fiscal year, then improve as couponing becomes more balanced and comps get easier. Apologies if I missed that, but that would be number one. And then second, just the recurring debate throughout the Q&A this morning has been the sales reaccelerate -- or acceleration implied in the outlook. If you just think about SRM, couponing, and perhaps other items, how would you frame the relative contribution of these items to the acceleration that you're expecting in your outlook for the year? So thanks so much on those two.

Christopher Carey:

Okay. Thank you.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Jeff Siemon:

Thank you, Audra, and good morning to everyone. Thank you for joining us this morning for our Q&A session on our third quarter fiscal 2024 results. I hope everyone had time to review the 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 management's 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 Jeffrey Harmening, our Chairman and CEO; and Kofi Bruce, our CFO. Let's go ahead and get right to the first question. So, Audra, if you can get us started, please.

Andrew Lazar:

Great, thanks very much. Good morning, everybody.

Andrew Lazar:

Hi there. Jeff, in the prepared remarks you mentioned the expected impact in the fourth quarter in terms of reported results from the lapping of the trade expense benefit last year. If we put that aside, which sort of seems like more mechanical. How do we think about momentum for the company in the fourth quarter in terms of what you'd expect in terms of in-market performance and consumption right as the company looks to really build momentum going into fiscal ‘25? Would you expect sort of an acceleration from what we saw in fiscal 3Q or something similar to 4Q?

Andrew Lazar:

Got it. Got it. And then obviously Pet was a significance source of upside to organic sales versus at least sort of street expectations. What really drove the outperformance and I guess more importantly do you see this as sustainable? I didn't know if you had like an all channel consumption number for Pet this quarter and whether you see that sort of continuing to improve sequentially from here? Or should we not get ahead of ourselves based on what we saw on 3Q. Thanks so much.

Andrew Lazar:

Great. Thank you so much.

Operator:

We'll move next to Ken Goldman at JPMorgan.

Jeffrey Harmening:

Well, Ken you reeled off a lot of things we said at CAGNY, so please to hear that. And you're right, the -- you know, when I say, you know, the benign environment, what we hope to be, I guess it would, with regard to a couple of things, you know, hopefully with regard to inflation, we still see an inflationary environment. It's 4% now. It was, you know, double-digits last year, and long-term, it's been kind of 2% to 3% and so hopefully we're headed in the long-term direction as we look at next year we'll certainly give guidance in June on what that exactly looks like. But to the extent we can have a more benign inflationary environment and a supply chain environment we don't see the disruptions we've seen, combined with good productivity, that's a good start. And I think then the question for us, we still really haven't answered yet, even a month after CAGNY, is how exactly are some of these external factors going to play out in the fourth quarter, as we lap SNAP and as we lap on-shelf availability and private label and some of our smaller competitors. Those things are a little bit, I would say too early to call, but I will say the third quarter played out largely as we expected and the benefits of lapping pricing played out as we expected. And so it may be completely unsatisfactory. But I'm not going to comment on F ‘25 at this time other than to reiterate our productivity is good. We've seen inflation is slowing, although there still is inflation, and we'll know a lot more about what to expect out of the top line performance in a couple of months.

Jeffrey Harmening:

Yes, the answer to your answer -- the short answer is yes and yes. And I'll explain, I mean, the first yes is that, yes, we have seen a small benefit in the states where we've lapped the SNAP benefits. And so we have seen that. But I think it's important to remember a couple of things, one, that'll take a while to play out. It's not as if there's one event and it just kind of happens and there's a cliff change. The other is that that benefit is not huge. I mean, there is some benefit, but it's just not a -- it's not a huge benefit. The other yes is you said there's some complicating factors. And the answer is of course, I mean, because we're lapping pricing and pretty soon we'll have on-shelf availability changes. So there's just a lot of factors in the environment that make it a little bit noisier than a perfect correlation. But the short answer is we're seeing a little bit of benefit in the places where we've lapped the SNAP so far.

Jeffrey Harmening:

Yes.

Max Gumport:

Hey, thanks for the question. So first on Pet, it looks like the action plans you discussed for the Pet segment last quarter are starting to bear fruit. So on wet pet food specifically, I think you inflected from a minus double-digit decline in 2Q to growth in 3Q. I was hoping you could talk about any early signs of success you might be seeing with these more value-oriented multipacks? And how they may or may not inform your view of what the '24 pound bag could be doing for Wilderness over the coming quarters in pet retail? Thanks.

Jeff Siemon:

Max, this is Jeff Siemon. I just add a point on the -- you mentioned you know net sales on wet food were up and that we didn't include that in our prepared remarks. That was true. They're up modestly. There's some inventory differences as you look at the individual sublines. So retail sales on wet food are still down. They're moving. They're better, but we still have some work to do to get them all the way to bright. But you were right that from a net sales standpoint, they were up slightly in the quarter.

Jeffrey Harmening:

No, sure, thanks for -- I appreciate the question. Yes, on portfolio shaping, we really haven't changed our approach to portfolio shaping. We were pleased with what we have done and the 20% change we've made so far. We also know there's more to do both in terms of acquisitions and divestiture to get back to the growth levels that we're looking for. But we've been looking for a while, and you know, it's important to note that we have been and will be very disciplined when it comes to looking at acquisitions. And you know, we're only going to do things that make sense for the shareholders, not just to chase a growth goal. And we remain disciplined over that over the years. And the place that we're looking at things that will be growth-accretive. And certainly, you know, Pet is a place that we like, you mentioned snacks. There are some meal categories we like as well. And so there are a number of places where we could go that would be either in categories we're in or tangential to categories and geographies where we feel like we've got some competitive advantages. I'm not going to talk about the recent announcements in Ice Cream specifically, I'll leave that to our competitors. I don't talk about M&A and particular deals. We like our Ice Cream business. I mean, Haagen-Dazs is a great brand and that's a super-premium brand and it's growing nicely. It's good in Europe, it's really good in Asia, and so we, you know, it's one of our five global platforms, so we obviously like the category, but particularly we like Haagen-Dazs. And that is a super-premium brand that's playing in growth spaces and we feel very good about that brand.

Chris Carey:

Hey, good morning. So, just one follow-up and another question. Jeff, you mentioned in response to Andrew's question that fiscal Q4 revenue should look similar to Q3. Were you referring to the consumption or actual organic sales growth in the quarter?

Chris Carey:

Yes, perfect. Okay. That's what I thought. And Kofi, just on, you know, clearly sales were better-than-expected. Gross margins, I think were a bit light relative to street expectations, namely given positive pricing, easing inflation, strong productivity. Can you just expand a bit on maybe some of the key factors in the quarter that offset some of those positives? I think, you know, inventory work down, the volume deleverage relative to the year ago growth? Just any context on those items and how durable they might be into your Q4 and potentially a bit more medium term? Thanks.

Chris Carey:

Okay, perfect. I'll leave it there. Thank you.

Operator:

Next is Rob Dickerson with Jefferies.

Jeffrey Harmening:

Yes, I'll start with. Let me start in a little bit different place and I'll work my way back maybe to your question. I would say one of the shifts we've seen since the beginning of the pandemic is more food consumption at home. And so food consumption at home is a couple points higher than it was going into the pandemic. So roughly about 86% of food is served at home. And the reason for that is because food served at home is such a great value. And it's about 4 times less expensive to eat at home than it is to eat out at a restaurant on average. And so as Americans have felt the challenges with inflation, part of the way they deal with value is that they eat food at home rather than out. And obviously, we were a great source of value when it comes to that. That's actually probably one of the biggest shifts. Interestingly, private label shares are about the same now as where they were before the pandemic. In the categories that we're in, private label is about 10% of the category. In fact, they're down 10 basis points from when the pandemic began. And overall, food and beverage is about 19 points. And so we haven't actually seen a big shift when it comes to value there. When it comes to specific categories, one of the things I'm most pleased with our performance over the last few years is our ability to hold our growth share in half our categories over that time. And so that's so it's broad-based. And, you know, we've seen some big gains in our business, like Pillsbury, refrigerated dough, which has done quite well and, and meals and baking over time. The same with fruit snacks. Both of those businesses are up 60% over the last few years. And we've consistently gained market share in those businesses. Obviously we haven't in Pillsbury this year, because private labels getting back on shelf, but over the course of time. So we feel really good about that. We've had some struggles in bars as you well know. But I can say one of the things I'm pleased with as we look at our business now, Nature Valley is back to growing share. And it was even before one of our competitors had a big recall. So it's not a recall induced kind of activity. We've had some good new product innovation in Nature Valley. Our marketing is working in Nature Valley. I think we shared some of that at CAGNY. And so that's one category where we had struggled where we feel like we're getting a little bit of momentum. And then, you know, on yogurt too, it's an area where we have struggled as well, but we, you know, we have done well. We've got yogurt protein out there right now, which is off to a nice start. And so, but broadly speaking, I would say we haven't seen huge changes category by category in consumption.

Jeffrey Harmening:

Yes, sure. In -- you know, in China, the biggest factor in our -- we did say that the biggest factor in our China business, I think it's important to note, is in our Wanchai Ferry frozen dumplings where a year ago, Chinese consumers were kind of on lockdown. And so there was a lot of at-home consumption. So we're lapping that. And so the comparisons are very, very difficult. And that's the biggest driver of our challenges in China, if you will. The other driver, though, is that we have had the store traffic in China is down a little bit from where it had been before. And I think that's probably a function of the Chinese consumer feeling the pinch of an economy that has slowed down over the past year. And so, but the bigger driver is actually the Wanchai Ferry dumplings. And in Brazil, it's kind of similar to the U.S. for the point now we're lapping pricing from a year ago and our hope is we start to see the Brazilian -- our Brazilian business start to stabilize here over the coming quarter or two. That's been the big challenge. They've seen huge commodity price increases in Brazil. And so our input costs have gone up quite a bit in Brazil. And we're lapping those now in Brazil, kins of, as we are here in the U.S. And my hope is that as we head into our fourth quarter that we start to see our comparisons, kind of, ease a little bit.

Operator:

We'll move next to Robert Moskow at TD Cowen.

Jeffrey Harmening:

Yes, in the -- let me answer that to the best of my ability. But if I didn't get the question exactly right, ask it again and that I'm not trying to avoid it. I would say in the third quarter, we had built inventory a year ago. And this year was pretty benign, I would say. Our -- if you look at our Nielsen data in North America retail, you see a 2 point difference. Some of that is due to the fact of unmeasured channels, we're growing faster than measured channels and only the balance of it is inventory growth. So our inventory is in a good position as we head out of the third quarter. And as we look at the fourth quarter, it's tough to say what's going to happen. You're right, last year, we blood inventory, several points worth of inventory in the fourth quarter last year. And so you may ask, well, does that mean you're going to build it this year or not? The answer is I'm not really sure. It's really difficult to predict inventory changes. What I would say is that we feel like we're in a good place as we end the third quarter with our retail customers, whether that's in North America retail or whether that's in Pet. We don't have too much inventory, but I think we have enough. And so what to -- we're not expecting any change in the fourth quarter. And to the extent there is a change, we think it would be modest, but we'll let that play itself out.

Kofi Bruce:

No, I think -- I appreciate the question. I would say one of the things that worked really well, and I want to make sure it didn't get lost in the strong profit performance in the quarter is that we have continued to invest behind our brands at a mid-single-digit rate. I wouldn't expect that to change as we go into Q4 even as we're driving better-than-expected profitability in a year in which we've seen obviously some top line pressure. So -- from where I sit, I think what you're hearing is we'll continue to keep our foot on the pedal. I don't expect a material change. So I'd expect around the year out somewhere in the mid-single-digit range of increase on our media, which will put us comfortably ahead of our top line expectations.

Jeffrey Harmening:

You bet.

David Palmer:

Hi. A question on North America retail and what you're looking to see from that segment as you think about fiscal 2025. Obviously, that's a key high-margin segment, and there's some big categories that make a lot of money for you in that segment. And I'm wondering, for those of us that are watching the scanner data and thinking about how you'll be thinking about the business and whether you can be sort of on Algo for fiscal '25? What should we be looking for that will give you that confidence? For example, do you need to see volume approach flat year-over-year? Are there a couple of categories that you're reviewing a little bit more closely than others.

David Palmer:

And then you were talking about early signs of a SNAP -- lack of SNAP subsidy headwind, I should say. What are you seeing? Is there -- is that something you're seeing in the last week or two? Is it specific to certain categories that you think are a little bit more family oriented or meal oriented? I mean what are you seeing there? And thank you.

David Palmer:

Thank you.

Pamela Kaufman:

Hi, good morning.

Kofi Bruce:

Hi, Pam.

Jeffrey Harmening:

Yes. I think, Pam, I'm not going to -- this would be unsatisfactory, so I apologize, but I'm not going to try to quantify either one of those two things only because there are so many there are so many moving pieces. We've got -- we are lapping pricing as well in the external environment. But I would say the SNAP benefits are pretty modest. They're there, but they're pretty modest. But look, I'll take a modest benefit at this point. The on-shelf availability should also provide a modest benefit to us. But again, that will be over time and it won't be a one-time event. And that will really start kind of the end of April, beginning of May, we would start to see the benefits of that into our first quarter. And so I think as we talk to you in June, hopefully, we'll give a little bit more satisfactory answer about kind of what we're seeing because we will -- we have seen both of these things play out for a period of time.

Kofi Bruce:

I appreciate the question. The primary driver in the quarter was a reduction in our incentive-based comp accrual as we obviously are tracking a lower top line performance and comping last year. where we had to increase it pretty sizably on outstripping our top and bottom line performance last year. So I expect this to be a benefit that we'll see specific to the quarter. The other item is related to our recall insurance recovery, which we booked in the quarter. So those are specific to the quarter, and I wouldn't expect that to be part of the base expectation going forward.

Jeffrey Harmening:

You bet.

John Baumgartner:

Good morning. Thanks for the question. Jeff, I wanted to come back to the value-seeking consumer. And in North America retail, the areas where volumes have still been lagging. You look at cereal, go, frozen snacks where category pricing is up one-third to 50% in 2019. What can we do at this point? Any levers left to maybe enhance the volumes that are a bit more independent of the macro. I mean can you go to the pack change as you're doing in pet, can you innovate or market consumers into higher prices? Or is it just that some categories overshot on pricing, relative to what consumers can bear and now it's down either taking prices the other way or just waiting for consumers to grow into these levels financially?

John Baumgartner:

Alright. Thanks, Jeff.

Jeffrey Harmening:

Yes. So well, thanks, everyone, for the time this morning. I guess I would start by saying we're encouraged by our third quarter results, particularly improvement in competitiveness in our categories. We're competing effectively and we thought that we would. And a lot of this is driven by lapping some pricing from a year ago and our ability to continue to execute well. We have innovated well. We have grown distribution. We have done -- we're executing our plan well. As we look to the fourth quarter, I mean, there are some timing issues as we talked about with expense -- the timing of expenses. But broadly speaking, we would expect our third quarter sales to kind of play out in the same magnitude that we saw in the third quarter. And our goal really now is to gain some -- regains some top line momentum as we continue to be very disciplined in the middle of our P&L. And we think that combination of factors will serve us well. We'll see how it plays out. There are a number of factors in the coming months, including this lapping of the SNAP benefit as well as on shelf availability and we'll be able to come to you in June with certainly a clear picture of what we expect in fiscal '25 and what some of those benefits are that will lap over the coming couple of months.

Operator:

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Jeff Siemon:

Thank you, Dina, and good morning to everyone. Thank you for joining us this morning for our Q&A session on our second quarter fiscal 2024 results. I hope everyone had time to review our press release, listen to the prepared remarks and view our presentation materials, which were made available this morning on our Investor Relations website. Please note that in our Q&A session this morning, 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, and Kofi Bruce, our CFO. So let's go ahead and get to the first question. Dina, can you please get us started?

David Palmer:

Thank you. A question on North America Retail margins. They've been impressive in spite of the volume declines we've been seeing. Do you think that the segment margin can hold near these levels given what's going on with volume trends? And, I guess, a couple of factors I'm thinking about is, some of your high margin categories, like dough, might be a negative mix effect, but then again, you're talking about accelerating productivity gains. So, curious about the margins for that segment?

David Palmer:

And then with regard to the pet business, maybe, is there a comment you want to make there about what the biggest fix will be from here? Wilderness, for example, has been relatively weak, but what do you think the best earliest fixes will be for that business? And what are some of the long-term things you're looking to do to improve the trajectory? Thanks.

David Palmer:

Thank you.

Andrew Lazar:

Great. Thanks so much. Good morning, everybody.

Andrew Lazar:

And, Jeff, I wanted to maybe chat a bit about -- I realize as you've talked about in the prepared remarks, the company has some EPS flexibility despite the weaker sales in the form of lower sort of compensation expense versus last year. The HMM, that's been stepped up, some more share repurchase versus your sort of initial expectations. So, I guess, my question is, is 2024 a year where maybe the company perhaps should lean in even more and maybe be a little less concerned about sort of a specific EPS range, if you will, in order to set it up -- set the company up for more sustainable sort of growth in 2025 and beyond? That's a question I'm sort of getting a lot this morning, so I just wanted to get your thoughts on that if I could.

Andrew Lazar:

Great. Thanks for that. And then just on -- a bit more on the faster competitor normalization of shelf availability comments that you made in the prepared remarks. Is it an issue in a specific category or is it more broad based? And is it General Mills actually losing shelf space, or really just others now having better availability in the slots that they have? And what have you seen that mean for promotional intensity or not? Thanks so much.

Andrew Lazar:

Will do.

Andrew Lazar:

Will do.

Andrew Lazar:

Great. Thank you so much, and have a great holiday.

Operator:

Our next question is coming from the line of Ken Goldman with JPMorgan. Please go ahead.

Jeff Harmening:

Yeah, Ken. This is Jeff. Let me start with that question, and Kofi, if you want to add any color or commentary, that would probably be helpful, too. But the fact that we've repurchased more shares in the quarter than originally anticipated, the beginning of the year, is not a reflection of a change in how we view capital allocation. We're investing quite a bit in the business and then increasing our dividend. And then, if we see M&A, we'll certainly do more M&A. And if not, we said we repurchase shares, which is what we're doing. And, importantly, our net debt to EBITDA levels are in a good place. And so, to the extent that we see something that we think can create shareholder value in terms of portfolio reshaping, we're more than capable of doing that. So, what you've seen is really a reflection of our executing against the capital allocation priorities we already stated.

Ken Goldman:

And then changing subjects. One of the more appealing elements of pet food as a category has been the high level of switching costs, especially in premium, where there's less price sensitivity, too. Just curious, though, given some of the challenges facing Blue, is it fair to wonder if maybe the cost to switch isn't quite as high as we all thought, and that premium isn't quite as protected? Or do you think maybe, hey, we're just in a unique time when the specialty channel is kind of lagging at the same exact time that the consumer is suddenly worse off?

Operator:

Our next question is coming from the line of Nik Modi with RBC Capital Markets. Please go ahead.

Jeff Harmening:

So, when we talk about historical, it kind of depends, Nik, on what we mean by historical. I don't mean to be cute with this, but if we look relative to where we were a year ago, what we see is our lifts have actually improved vis-a-vis where they were a year ago. If we look to see where the lifts are versus where they were four years ago, they're not quite at the levels of where they were four years ago. And I don't have a fact that I can point to as why exactly that is the case, but I would tell you that neither we nor consumers have seen inflation the way we've seen it over the last few years, and consumers are still getting used to new prices in the marketplace. And I suspect whether that's food or gas or rent or any number of things, that is absolutely the case. And it will take a little while for consumers to settle into what new price points are to the extent we continue to see inflation, which we do, even if at more modest levels. So, Nik, I would say that relative to a year ago, we're pleased with the progress of our lifts, but relative to historic pre-pandemic, they're a little bit lower. And I wouldn't surmise that it's the consumer catching up to a new reality.

Operator:

Our next question is coming from the line of Pamela Kaufman with Morgan Stanley. Please go ahead.

Jeff Harmening:

Good morning.

Jeff Harmening:

So, Pam, Kofi and I are going to tag team this. Let me talk about that. Let me talk about the revenue, and then Kofi is going to take the rest of the P&L side. On the revenue side, the way I think about our guidance is that, in order to hit the lower end of our guidance, so let's call it minus 1%, that would indicate that we'd see a continuation of the top line performance we saw in Q2, and -- which would indicate a little bit better volume and a little bit less price/mix than we saw in the second quarter, but in absolute terms, about the same as we saw in the second quarter. The higher end of our guidance, which suggests that the categories get a little bit better, which we think they certainly could, due to lapping the SNAP emergency reductions from a year ago in January through March, and from our lapping pricing activity from March and April of last year. So, those two things combined with a little bit better share performance based on the out-of-stock situation changing near the end of the year. We could hit the top end of the guidance we suggested, but that kind of brackets the top line. I'll let Kofi talk a little bit more about the profitability.

Pamela Kaufman:

Thanks. That's very helpful. And just a follow up question on gross margins. They're now back to pre-pandemic levels. So, how are you thinking about the potential for gross margin expansion from here? On one hand, you have the benefit from HMM, but I'm assuming there will be some volume deleverage. So, how should we expect gross margins to progress? And do you kind of see them at the right levels here?

Pamela Kaufman:

Thank you.

Matthew Smith:

Hi. Good morning. I wanted to follow up on the elevated level of HMM savings here in the year. You mentioned, it's a step-up relative to the prior two years where it was a bit lower because of inflation and supply chain issues. But how much of the elevated rate here this year is a pull forward from savings that you would expect next year? Or, I guess, that's another way of saying just how sustainable is this elevated rate of HMM savings as you exit fiscal 2024?

Matthew Smith:

Thank you, Kofi. And Jeff, maybe a follow up about your share performance as you begin to lap the rebuild of competitive distribution, which I believe you said that begins to move into the base as you exit fiscal 2024. You're holding and gaining share in the majority of the distribution of your category. So, would you expect your dollar market share performance to improve as you lap that competitive rebuild? Or are there other concerns like consumer value seeking behavior or list price gaps that may need to be addressed as the share of shelf normalizes?

Matthew Smith:

Thanks, Jeff. I'll leave it there and pass it on.

Operator:

Our next question is coming from the line of Michael Lavery with Piper Sandler. Please go ahead.

Jeff Harmening:

Good morning.

Jeff Harmening:

On the on-shelf availability, I mean, the competitors have kind of caught up to our levels, and that's been pretty stable for the past few months, and I wouldn't expect that to accelerate. So, I think we've seen a stabilization in that. Now, we'll see that their on-shelf availability kind of -- which is equal to ours, I'll remind you, so, actually, we're doing quite well. So, it's equal to ours. We’ll see -- they will see that benefit for the next three or four months until they start to lap it a year from now. And so, while it is stabilized, we'll see some of our competitors see a benefit for that for the next few months, and then they won't. In terms of the pricing environment itself, I'm not really going to get into specifics of future pricing. What we do see is that, I think, importantly, we see an inflationary environment ahead of us. I know there's been talk of deflation in some cases, and that may be true for things like commodities like milk and eggs, but it's certainly not true for restaurants. Their inflation is actually outpacing ours, and we see inflation in the low single digits. You look at the category pricing and it's somewhere in the 2% to 3% range. So, we see continued inflation even at a lower level. And, usually, pricing tends to follow inflation, because that's the basis on which we increase prices if we see an inflationary environment. And so, the -- as we look at trade-offs, I mean, our job is to create long term value for shareholders, and we do that by serving consumers, and we'll do that by making sure that our brands are strong and by innovating and making sure the products are available when and where people want them.

Jeff Harmening:

I do not expect it to reverse. I think, there's only so low that it can go. And we may see a reduction again in the third quarter, because I suspect that our sale -- our reported net sales are going to lack our sales out to consumers. And so, we may have not have seen the bottom of that as we look at our third quarter. But it really is more of -- I don't see a rebound in inventory levels, especially as some of our retailers specifically look to manage their working capital.

Operator:

Our next question is coming from the line of Chris Carey with Wells Fargo Securities. Please go ahead.

Jeff Harmening:

Good morning.

Kofi Bruce:

I'll take the first part of that question, and then I'll let Jeff get you on the second. So, look, our expectations on price/mix are really built around the fact that we'll be sequentially stepping down as we lap pricing actions that we took throughout last year. We should fully lap those by the time we get to the end of the fiscal year. We're not expecting any of the quarters to deliver a negative price/mix, but merely just a step down in the contribution from price/mix to total RNS.

Jeff Harmening:

And when you ask a question about growth at the category level, I mean, there are a couple of headwinds. One is just a little bit of consumer behavior and feeling the economic pressure and a little bit less discretionary spending. And I don't frankly know when that will turn around. Consumers are certainly still stressed right now. They feel the impact of inflation over the past few years, and we certainly understand that. The thing that we -- that's more discreet really is the lapping of the SNAP emergency allotments benefits from last year. And those kind of go state by state, but they took place last year between January and March. And that may be a one-point benefit to the categories that we're in. And so, it's not a heroic increase, but certainly a stabilization of the categories. And we'll start to -- as I said, we'll start to lap that here in the next month or so throughout our fiscal third quarter.

Jeff Siemon:

Okay. Unfortunately, I think that's all the time we're going to have this morning. Thank you for all the good questions and discussion. Appreciate your time and attention. And we will look forward to catching up in the new year. In the meantime, happy holidays to everyone. And please reach out if you have any follow ups to the IR team. Thanks.

Jeff Siemon:

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?

Ken Goldman:

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?

Jon Nudi:

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.

Jon Nudi:

Yeah, so...

Jon Nudi:

Go ahead, Jeff.

Jon Nudi:

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.

Operator:

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

Jeff Harmening:

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

Robert Moskow:

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?

Robert Moskow:

Got it. Makes sense. Thanks, Jeff.

Operator:

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

Kofi Bruce:

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.

Jeff Harmening:

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.

Jeff Harmening:

Thank you.

Jason English:

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.

Jeff Siemon:

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.

Jason English:

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.

Jason English:

Thanks a lot. I'll pass it on.

Operator:

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

Jeff Harmening:

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.

Kofi Bruce:

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.

Rob Dickerson:

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.

Jon Nudi:

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.

Jeff Harmening:

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.

Jeff Harmening:

Thanks.

Max Gumport:

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 Nudi:

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.

Jeff Siemon:

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.

Jeff Siemon:

Thank you, Malika, and good morning, everyone. Thank you so much for joining us today for our Q&A session on our fourth quarter and full year fiscal '23 results. I hope everyone had time this morning to review our press release, listen to our prepared remarks and view our presentation materials, which were made available on our Investor Relations site. It's important to note that in our Q&A session, we may make forward-looking statements that are based on management's current views and assumptions. Please refer to this morning's press release for factors that could impact forward-looking statements and for reconciliation of non-GAAP information which may be discussed on today's call. I'm here with Jeff Harmening, 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. Malika, can you please get us started?

John Baumgartner:

Good morning, thanks for the question.

John Baumgartner:

Maybe just to start off, just big picture Jeff. I wanted to come back to this transition you're speaking about in the environment in this new fiscal year. Last year, you made some pretty material investments back into the business. And with those now in the base and conditions getting back to normalizing, how are you sort of adapting and evolving those resources? I know there's a lot there. There's innovation, quality, promo, productivity. But how do we think about the next steps for growth and what a more offensive strategy looks like for mills going forward?

John Baumgartner:

Great. Thanks Jeff.

Ken Goldman:

Thank you. Good morning. I just wanted to ask a little bit about the decline in retail inventory. I'm just curious we get a little bit of color on which of the categories that maybe felt the biggest impact this particular quarter. And I guess also, it's certainly encouraging to hear that the worst is over, as you see it when it comes to this particular temporary headwind. But I think for some of us on the outside or at least me, it does feel like a little bit of a red flag, right, that maybe end user demand isn't quite as strong as what you had hoped. So I appreciate that your customers are trying to get their inventories into a better place. And we're just not necessarily hearing that from many of your packaged food peers. So I'm just curious what gives you the confidence that it's not necessarily a General Mills specific dynamic that's happening there? Thank you.

Jon Nudi:

Yes, absolutely, Ken. So as I mentioned, we did see a five point gap between the Nielsen movement and quarter. For the year, that was a two point gap. And it's not something that's new. We've seen this phenomenon for six of the last eight quarters. So as Jeff mentioned, retailers are focused on inventory. One of the things that we feel more confident about is being able to supply the business after all the supply disruptions in the last few years, then feel like they don't have to carry as much safety stock. In addition to that, obviously, the inventory is more expensive. So working capital is a focus as well. As we look at the absolute levels of inventory, there are some of the lowest levels we've seen on record. So again, we don't believe that we can go much lower. What we can focus on are the controllables. So that's making sure that we have good marketing and driver baselines and our merchandising, and we feel great about that. We feel really good about the movement of 10% in Q4. So again, we feel like this was a onetime headwind. We're not expecting to rebuild those inventories. But at the same time, we don't expect another leg down in fiscal '24.

Jeff Harmening:

Yes. The -- we did have -- we had a rough start to the first half of the year. There's no question about that. And the primary driver of that was lack of capacity. What I feel very good about in our Pet business is that we've rebounded and our service levels are back in the 90s. The Pet team worked very hard to get there. It's more expensive than we would like because we have to go outside for external supply chain, but we've rebuilt our capacity. So that's not a concern going forward. What I also feel good about is we did what we said we're going to do. We said we're going to grow at double digits in the back half of the year, and we have done that. I would also say that our dry pet food business is getting better, and we thought that would be the first recovery and it has. It's responded very well to advertising. Life Protection Formula, I think, was up more than 20% in the fourth quarter. Our treats business, we said would improve, but would follow that and it has, and it actually grew in the fourth quarter and there is much more to do on treats. We can now market that business, and we have full capacity. And then we set our wet test food business with lag and unfortunately, we were right up that too, and it did lag. And so I think for our pet food business, I would characterize it, I feel good that we have improved and there is more work yet to do. And so as we look at this coming year, our supply should not be an issue for us. It will come at a higher cost. So I still expect us to grow our sales and maybe our profit has ahead of sales, but a big improvement in profitability would come until fiscal '25 when we can internalize all of our capacity.

Operator:

Thank you. Our next question is from the line of Andrew Lazar with Barclays. Please go ahead. Your line is now open.

Jeff Harmening:

Yes, Andrew, I'll take it and then Kofi jump in if there's anything you want to add. Our expectation -- again, we don't give specific volume guideline growth. But having said that, we said our top line to grow 3% to 4%, and we'll have mid-single-digit inflation, roughly 5%. And so we do see pricing this year. I'm confident that our pounds will be better in fiscal 2024 than they were in fiscal 2023, which is to say they'll certainly decline less. Whether they get to positive or not? We'll see. That's a really difficult thing to call, especially because of the mix factor involved. I'll give you this last quarter in China, our sales grew really nicely, but our pounds were down is because we sold more expensive Häagen-Dazs ice cream and less one and the Wanchai Ferry dumplings. The same could be true set of our foodservice business where we sold less flower and more of other things. So our pounds were down. So how is a little bit tricky because of mix, but in all I would expect that our – our sales certainly won't -- our pounds certainly won't be as negative as they were in, they may be positive. We'll wait and see. But I think it will be much more competitive on that front. But for sure, we'll see some pricing because we still see inflation in the marketplace.

Andrew Lazar:

Got it. And then just a super quick follow-up just to the inventory piece, just to put a sort of point on that. With supply chain constraints easing, and obviously, is looking to get back to much more active merchandising and display activity and all of that. I guess I would have thought that retailer inventory reductions would be sort of counter to that dynamic, right, wanting to get out there collectively and collaboratively and get going on merchandising and really driving volume and whatnot. I guess what am I missing on that thought process? Is it just that retailers are so much more confident now that they can get what they need when they need it from you and others that the safety stock that was more aggressive, just isn't needed? Or because I would think if it's the first time in a couple of years that you can get out and really drive the business, everyone would be, I don't know, maybe it's naive, but okay with a little more inventory just to make sure you have it on hand?

Andrew Lazar:

Great. Thanks so much.

Unidentified Analyst:

Hi, this is [Brandon Cohen] filling in for Cody Ross. Thank you for taking the question. So you mentioned in the prepared remarks that with your current debt levels, you have more flexibility for M&A going forward. What categories are you targeting? And what are the main characteristics that you're looking for in an acquisition target? Thank you.

Unidentified Analyst:

Great. Thank you very much.

Pamela Kaufman:

Hi, good morning.

Pamela Kaufman:

Your gross margin was a highlight in the quarter. I just wanted to get a sense for how you're thinking about gross margins in fiscal 2024. And then for the 5% input cost inflation outlook, I guess, could you just give us a sense for how you're thinking about the cadence and how that influences the cadence of your gross margin for the year?

Kofi Bruce:

And I would just add, I think we've made some really good progress in moving back towards our pre-pandemic gross margin. We still have a little bit of work to do. And obviously, if you read our guidance, you can expect that we expect to make further progress towards recovering our gross margin levels. I think the important thing to note in our guidance around inflation is that we see it moderating, but there will still be inflation above sort of the historic levels we would expect to see in our category. And as we work through the year, I wouldn't necessarily call out anything notable as you expect the quarterly flow to play out, other than the comments I made about sales and the expectation of the price mix and SRM actions and the interaction of those on the top line. I think the key thing for us though, is that we do see a step up in our HMM levels at 4%, a one point step up from the past couple of years where we've been kind of under-delivered at 3%. With the moderation of supply chain that in -- that we certainly have higher confidence in being able to pull that off, as well as our confidence in our ability to take out some of the significant levels of cost and continue to take out some of the significant levels of operating costs that we put into our model to manage through service disruptions. So, all those things give us the confidence that we should be able to continue to drive back towards pre-pandemic level gross margin.

JeffHarmening:

Yes, I would say on the -- as we look ahead to our marketing and our -- the promotion environment, the first thing I would say is really important to remember that we still have inflation. I mean, there have been a lot of -- a lot of commentary about disinflation or going negative, but we don't actually see that. And it's driven by labor cost inflating. So I think that's the first and most important thing to remember as it relates to the promotion environment. We would expect that promotional frequency would increase a little bit and importantly, the quality of our merchandising, especially display merchandising, will improve. And the reason we think that will improve is that retailers have more confidence that we'll be able to supply the business because our service levels are back in the 1990s. And when that happens, they're more confident in displaying, display merchandising for us has very high rates. And so -- and it does for a retailer as well. So we're kind of aligned and wanting to do that. And now we feel as if we can. And so as I look ahead, I'm not sure the promotion intensity is really going to increase that much. I think it's going to be maybe a little bit of frequency and actually more quality, if you will, merchandising levels. As it relates to marketing, we really like our marketing across our biggest categories, and that's why we've been investing in it. And we'll continue to invest in it. I'm not going to lay out a number of our marketing will improve x-percent, but what we have said is long-term, our marketing spend will grow in line with our -- in line with our sales growth. And over the past few years, our marketing is actually up 35% versus pre-pandemic levels. So we've actually done that benefit us in this year ahead because, what I can tell you is that consumers in this environment and customers, they're all looking for new ideas and ways and our customers are looking for ways to grow. And so we feel good about our marketing spend in the year ahead.

Operator:

Thank you. Our next question is from the line of David Palmer of Evercore ISI. Please go ahead. Your line is open now.

Kofi Bruce:

Yes. That's certainly the state of the consumer, the interaction of frankly all of the, interest rate environment and the expectation of potential economic slowdown on consumer behavior is certainly variable that's a very front and center for us as we set the guidance. Obviously, inflation remains at least sticky and above expectations. And I think the challenge of setting expectations is an environment that any one of those and visibility any one of those factors is hard not the interaction gives us sort of the challenge of setting the frame for the year. But we're confident that kind of whatever operating environment actually shows up, that we will be able to respond and pivot as needed.

Jeff Harmening:

No, I think that's very fair, David. And I can understand your angst on this point. I guess I would do a couple of things. We talked about three-year -- three-week data. Last time I remember talking about three-week data was back in December when there was a panic about what was going to happen due to timing of Christmas and New Year and Nielsen data and then it turned out that it wasn't as bad as people thought. So I think that's a cautionary tale about three-week data. The other thing I would say is that if you look at two-year comparisons over the last few weeks, what you'll see is that the last couple of years, the trends haven't changed all that much. Having said that, I mean, as you look at the last two weeks, it's pretty clear that elasticity -- volume elasticities have increased. And it's something that we expected, and we baked into our guidance for the year. And so, elasticities have not been zero, but they've been quite low. We would anticipate as the year goes on, that elasticities will increase, and that's what we have seen. And so I want you to know, we're not too surprised by the last quarter's trend and it's anticipated in our guidance. And so that's what -- but look, it's a hard period to model from that perspective, but that's what we think is going to happen is that we elasticities will increase, but that's accounted for in our guidance already. In the last three week trends, I wouldn't follow those all the way out the window.

Operator:

Thank you. Our next question is from the line of Max Gumport with BNP Paribas. Please go ahead, your line is now open.

Jeff Harmening:

Yes, Max, I think you just set you summarized it nicely. What we see here, there are a couple of different trends. And remember, the pet category is almost a $50 billion category. So, there can be lots of trends going on at the same time. Importantly, there's still a trend toward humanization, which is why I think you see our dry pet food recovering so nicely and why you see our treats business recovering. At the same time, there is -- people are more mobile. And so they're not -- in aggregate, the treat segment is down a little bit, and the wet segment is down a little bit because consumers are not home as much. And so they can't do it on their pets as much as when they are at home all the time. On top of that, as consumers are feeling the pinch from inflation, there is some downward pressure in several other places on sales. And I think you see that most pronounced in wet foods a little bit a treat. It's a tailwind for our dry pet food business. And so that's one of the reasons why we see that improving. And so -- but I think in general, you have the plot, which is that our wet pet food business has not recovered as fast as we thought. Part of it is due to mobility, part of it is due to service, and part of it is due to behavior in the current environment.

Kofi Bruce:

Yes. So, you're right, Max. Those four platforms, we do have significant capital investment coming online. The first three, excluding exclusive of pet, you would expect to see some of that capacity impact this fiscal year. The pet capacity comes online really pretty late in the year, so we would have a very modest impact on our ability to internalize some of the supply for dry dog food.

Jeff Siemon:

Max, maybe -- this is Jeff Siemon. I'd add one on pet, Kofi is exactly right that our internal capacity comes online in about a year. But we did have some external capacity in the last couple of quarters. So, that will give us an opportunity to, and it has already given us an opportunity to improve service both on our Treats business as well as on our Dry business.

Operator:

Thank you. Our next question is from the line of Matthew Smith with Stifel. Please go ahead. Your line is now open.

Jeff Harmening:

I would say on the benefits to margin expansion, we have some pricing that we have already taken that kind of wraps around in the current year, and you see that in the current results. You certainly saw that in the fourth quarter. You'll also see our productivity levels in Pet are good. And the fact that our supply chain has not disrupted also helps bring down the cost. And so all of those things go to the gross margin level. Kind of what partially offsets that is the fact that we have external manufacturing and not our own internal manufacturing. And so the benefits of some of that will not be as great as they would have been otherwise. I would also say that we're really -- we -- as much as we are on a focused profit recovery on Pet we really want to drive growth. And so we will invest in marketing and capabilities to make sure that we accelerate our top line growth on that. And so we may see a little bit more gross margin expansion than we do operating margin expansion. And that's simply because as we get healthier on supply chain, we'll reinvest some of those savings back into driving top line growth on Pet.

Matthew Smith:

Thank you. I can leave it there and pass it on.

Bryan Spillane:

Hi, thanks operator. Good morning everyone.

Bryan Spillane:

Kofi, I just had two questions related to the cash flow outlook for 2024. The first one is just free cash conversion back to 95% versus 80%. Is that mostly just working capital that will drive that improvement?

Bryan Spillane:

Okay. So the bulk of it is inventory, right? Is that kind of the way to look at it the majority of the improvement?

Bryan Spillane:

Okay. And then the second one is just -- I know you've given the interest rate guide – the interest expense guidance, I'm sorry. And you called out having refinanced some debt at a higher rate. Kofi, is there any opportunity with like some of the shorter term whether it's commercial paper or just shorter term debt? Is there any possibility to just apply some free cash flow to take some of that short-term debt in order to relieve a little bit more of the interest expense pressure?

Bryan Spillane:

Okay. But – so it doesn't sound like there's a lot that you can do to chip away at that guide?

Bryan Spillane:

Okay, all right. Thanks Kofi. Thanks guys.

Operator:

Thank you. Our next question is from the line of Chris Carey with Wells Fargo. Please go ahead. Your line is open.

Jon Nudi:

Yes. So on the first question, on-shelf availability is significantly higher today than it was a year ago across most of our categories. So again, everyone has gotten better. I think the supply situation become more stable. So as a result, retailers feel like they don't have to hold as much inventory to service the demand. The other thing I would tell you is we've invested in digital capabilities to have retailers. I can tell you their inventory systems are much more sophisticated today than they were a few years ago. So, obviously, their goal is to keep the shelf full, but at the same time, hold as little inventory as possible. At this point, we don't see inventory as a hindrance to us being on the shelf or getting the displays when we find them. Again, I think they're just focusing on the working capital and trying to manage it as efficiently as they can.

Chris Carey:

Okay. Thanks. One question just and then I'll be done. But Jeff, you've been talking for a number of quarters now about promotional levels and how promotions would remain rational. And you listed kind of a number of reasons why? I just wonder with supply chains coming back and you've already commented it on the call today, but how do you think about the tools that you would have to reignite volume growth? So obviously, there's a concern about some normalizing of volume. Like what's in your -- what's in kind of -- what are the kind of errors in the quiver, I guess, right? Could you -- is it more promotion? Is it more advertising? Is it more merchandising? Can you just talk to maybe how you think about potentially lifting volumes over the next 12 months, if we see any shifts in the consumer environment? Thanks, so much.

Chris Carey:

Okay. Thanks so much for the perspective. Appreciate it.

Jeff Harmening:

So I'll end this call where we started, which is to say, as we take a quick step back, we're really pleased with the year that that's just happened and 10% sales growth, 8% operating profit growth. That's included -- that excludes a 3% headwind from divestitures as well as earnings per share growth that are double digits. As we look forward, our guidance is to be in line or exceeding our long-term growth algorithm on sales, operating profit, EPS and certainly on dividend increases. And so, we are confident about the year ahead and that confidence is driven by our ability to navigate a number of environments these past three years. And will this next year look different from the last? Of course, it will. But we know that already, and we're confident that we have a team and brands and capabilities that will thrive in the year ahead. And so we look forward to keeping the conversation going.

Operator:

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation and ask that you please disconnect your lines. Have a good day.

Jeff Siemon:

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?

Andrew Lazar:

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

Andrew Lazar:

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 maybe be necessary, at least based on what we can see today. Admittedly, it's dynamic.

Operator:

The next question comes from Steve Powers of Deutsche Bank.

Jeff Harmening:

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

Jeff Harmening:

Let me take that at a top level, and then I'll probably pass it to Jon -- maybe give a couple of examples about NAR. Yes, I would say for the rest of our fiscal year, I mean, we're seeing little change in elasticities. And we have seen consumption of food at home remains stable over this past year despite all the volatility and puts and takes and theories. I mean the consumer seems to be reasonably robust. And at the same time, they're eating at home more than they were during pre-pandemic. And so, we see a continuation of that. I will say there are a couple of things. One private label exposure in our categories around the world is lower than what you see 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. And so you see, over the last four years, our compound annual rate of growth and marketing spending is up, I think, about 4% or 5%. And if you look at this year, our marketing spending is double digits. And so, it's not an accident that our brands -- 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. And so, we've invested in marketing spending as well as capabilities. And we continue to do that through the third quarter of this year. And so is not really an accident that private label is lower in our categories, and I think it pretends well for our future because even during the last recession, what we found is that even though private label gained a little share back in 2008 to 2010, we were able to hold -- we were able to hold market share due to our brands, thanks and our investments in consumer spending. But Jon, do you want to talk a little bit about NAR.

Operator:

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

Jeff Harmening:

It's really difficult to quantify, Ken, this is Jeff. It's really difficult to quantify what's going -- the contribution of inventory rebuild with margin for Pet in the third quarter. I would say, but there are a couple of things. First of all, I would say our margin in Pet was roughly in line with what we thought it would be. And the fact that our profitability decline in Pet was not a surprise to us and is really based on a couple of factors. One is -- and by the way, even though our margin actually did improve slightly from the second quarter. The factor is really contributing to the fact that our profit decline in the third quarter 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. And 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 second quarter, we decided to spend more against it in the third quarter. And that's paying dividends as our Life Protection Formula has continued to accelerate, but it does mean our marketing spending had a negative impact on the P&L in the third quarter over the although it's clear over the long run -- that this is such a good idea. So, I want you to know that when it comes to Pet, the margins that we saw in the third quarter are very much in line with what we thought even if it's difficult to quantify the impact of margin rebuild. It's just our service is getting better, which I think is a positive.

Jeff Harmening:

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

Jeff Harmening:

Both.

Jeff Harmening:

You have a question about NAR? I'm sorry.

Alexia Howard:

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 the sort of strong level of marketing reinvestment or increase as a percent of sales is going to continue? And then linked to that, promotional activity, are you seeing any changes there? Is it sort of steady Eddie because obviously, that's come in or down quite a bit since the pandemic began. Do you anticipate not a big resurgence, as I think you've said before on the promotional side?

Jon Nudi:

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

John Baumgartner:

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

John Baumgartner:

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

Operator:

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

Kofi Bruce:

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

Kofi Bruce:

Yes. I'll talk broadly for the enterprise. And Jon, if you want to jump in and provide some specific perspective from NAR, and we can do that. Broadly, we look at the entire basket of our input cost. So that includes manufacturing, sourcing and freight. So as we think about the combination of those three things, that's generally or we go and we talk to retailers about the total input cost basket. What's probably not included in that we have talked about in past earnings calls is the other costs to serve in this environment. Some of the added pressures that come from supply chain disruptions, some of the short-term decisions we've had to make wrong 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.

Chris Carey:

Perfect. Thank you for the perspective.

Bryan Spillane:

Just two for me. One, what 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 copy, give us a little more insight in terms of outside of marketing or advertising, just what else is driving SG&A and I don't know, it's just sort of the level we should be looking at as we model the fourth quarter? So just some perspective there and then I have a follow-up.

Bryan Spillane:

Okay. And those seem like they're more transitory, meaning we shouldn't see an absolute dollar levels, probably not the same level of SG&A in the fourth quarter that we saw in the third quarter?

Bryan Spillane:

Okay. All right. Cool. And then second question just on food service. And maybe, Jeff, if you can just kind of give us a perspective on kind of where that business stands now? You took the convenience piece out of it. It looks like food sales are coming back even if you strip out the benefit of Flower milling. So can you kind of give us a perspective on kind of where you see that business today in terms of where you kind of envision it going forward now that it's really focused on food service? And also just a comment on profitability, the margins, again, kind of back into the mid-teens level, it used to be kind of a higher-margin business pre-COVID just trying to get a sense of like -- 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?

Operator:

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

Operator:

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.

Jeff Harmening:

Thank you, Jeff, and good morning, everyone. Let me start by summarizing today's key messages. Building on a good start to the year in Q1, we delivered strong results in our second quarter, including double-digit growth in organic net sales and adjusted diluted earnings per share. We also delivered a second consecutive quarter of gross margin expansion, representing continued progress toward restoring our pre-pandemic margin profile. The operating environment remains volatile. While we've seen some modest improvement in recent months, it is still far from pre-pandemic conditions, particularly at our up-stream suppliers. In this context, our team continues to execute well and we remain focused on advancing our Accelerate strategy and delivering on our fiscal 2023 priorities. Given our strong first-half results and positive momentum on our business, we are once again raising our full-year guidance for organic net sales, adjusted operating profit, and adjusted diluted EPS growth. Slide 5 summarizes our financial performance for the second quarter and the first half of fiscal '23. We drove 11% organic net sales growth in the quarter, fueled by strong net price realization in response to significant levels of input cost inflation. Adjusted operating profit was up 7% and adjusted diluted EPS was up 12%, each in constant currency. Our first-half results were also strong, with double-digit growth in organic net sales and adjusted diluted EPS. The operating environment in fiscal 2023 remains challenging and dynamic. On the cost side, we continue to forecast total input cost inflation of approximately 14% to 15% for the full year, including double-digit inflation in the second half. Volume elasticities continued to remain below historical levels in the first half, particularly in North America Retail. We are watching these trends closely, but we do not expect a return to pre-pandemic elasticity levels during fiscal 2023. We've seen some modest improvement in the supply chain environment in recent months, with logistics challenges continuing to ease and a slight reduction in the level of upstream supply disruptions. As a result, our customer service levels reached the high 80% range in U.S. retail by the end of the quarter, up from the mid-80s last quarter, though still well below our normal range of 98% to 99%. Despite these improvements, supply disruptions remain well above historical averages, and we aren't forecasting a return to pre-pandemic levels of supply disruptions or customer service during this fiscal year. Finally, we continue to see the pandemic impacting consumers' health and mobility around the globe. This has been most acute in China during the first half of this year. Overall, while it's encouraging to see some signs of supply chain improvement recently, we expect the pace of change in the operating environment to remain high for the foreseeable future. As we've said in the past, our job is not to predict the future better than our competition, but instead to be better able to adapt to change and deliver winning results regardless of the environment. That has been our recipe for success in recent years, and we're focusing on continuing that success in fiscal 2023 and beyond. We are continuing to drive our Accelerate strategy this year by executing on the three priorities outlined on Slide 7. We will continue to compete effectively by boldly building our brands, relentlessly innovating, and servicing the business with excellence. We will continue to invest for the future by delivering HMM and SRM to offset inflation, making strategic investments in the business, and continuing to progress against our ESG commitments. And we will continue to reshape our portfolio by ensuring smooth transitions for our announced transactions and assessing the landscape for additional growth- and value-enhancing acquisitions or divestitures. I'm pleased to say that we are making progress against each of these priorities through the first half. We're competing effectively once again in fiscal 2023, building on four consecutive years of strong market share performance. We are holding or gaining share in 37% of our priority businesses through the first half, but that includes a share decline in Cereal, where we're comparing against our unusually strong share gains in the U.S. a year ago when a key competitor was dealing with significant service challenges. On a two-year basis, our market share in Cereal is still up, and after adjusting for that change, we are holding or gaining share in 54% of our priority businesses, including a broad array of platforms in the U.S. and internationally. In addition to executing for today, we continue to make strategic investments to strengthen our brands and our competitive advantages for the future. Our Media investment was up double digits in Q2, and we expect it to be up double digits for the full year behind compelling campaigns that are increasingly leveraging our digital capabilities to reach consumers everywhere they interact with our brands. We've invested significantly in recent years to strengthen our capabilities that are critical to our future success, including Digital & Technology, Strategic Revenue Management, E-commerce, Global Impact, and others. Our total capability investments will be up again in Fiscal 2023, led by Digital & Technology. In fact, we've increased our investment in this area by more than $100 million dollars over the past few years, and we expect to grow in this area by double digits again this year. Additionally, we plan to increase our investment in growth capital by more than 50% in Fiscal '23. This includes investments to increase internal manufacturing capacity on key platforms where we see sustained growth into the future, such as pet food, Mexican food, hot snacks, fruit snacks, and cereal. Another important way we are investing for the future is through our commitment to Standing for Good. For decades, General Mills has taken action to reduce hunger and food insecurity in our communities through grants, corporate contributions, and food product donations. We work with food banks in more than 40 countries to expand food security and build long-term resilience for the future. One example is Feeding America. General Mills was a founding member of this U.S. hunger-relief organization more than 40 years ago. More recently, we supported the creation of Feeding America's MealConnect, a solution for the nation's charitable food system that allows member food banks to coordinate and receive donations from their local food businesses and grocers. As the only food-rescue technology available nationwide, MealConnect serves more than 12,000 nonprofits and has enabled the recovery of more than 3.5 billion nourishing meals since its launch in 2014. In addition to providing monetary support, General Mills helped co-create MealConnect's Logistics function, which works to reroute rejected or damaged but perfectly safe food products for donation at food banks. Standing for good is a critical pillar of our Accelerate strategy and is an important way we are investing for our future for our company, our planet, and for our communities. Switching gears, I'd like to spend a few minutes highlighting several businesses where we are consistently competing effectively and investing for the future, led by North America Retail. As we've shared in the past, we've built a multi-year success story in cereal behind strong innovation, renovation, and investment in what we believe are the best brands in the category. In fact, annual Nielsen-measured retail sales for our U.S. cereal business are up 20% since fiscal 2018 to more than $3 billion dollars. We've gained two-and-a-half share points over that time and solidified our number one position in the category. We're bringing more compelling news and innovation to the cereal category in fiscal 2023. Cheerios, which is by far the largest brand in the category, continues to keep its heart-health messaging fresh for consumers, while Cinnamon Toast Crunch, the second-largest brand in the category, is engaging new consumers with its crazy squares. In addition, we've launched three of the top five new products in the category so far in fiscal '23, and we are particularly excited about our second-half innovation plans. Our new Minis platform brings consumers miniature versions of their favorite cereal brands, providing a fun, new way to enjoy the big flavors they love. We've seen exceptional retail acceptance for these new products and they're already among the top turning items in their first few weeks on shelf. We've grown retail sales for our Pillsbury U.S. Refrigerated Dough business by nearly 50% over the past five years, to nearly $2 billion dollars, and we're working on our fifth consecutive year of market share gains after having added five points of share in the past four years. Pillsbury provides convenience and joy to families for special occasion and everyday meals. We're having another strong key baking season this year, and we're bringing the brand more regularly into consumers' everyday meal routines. Our most recent messaging with consumers highlights the many ways to conveniently make homemade using Pillsbury dough products outside the oven. And we are leveraging our data and connected commerce capabilities to personalize our messages. For example, by targeting our make homemade messaging to consumers who recently purchased an air fryer, we were able to drive lower cost-per-click and convert a higher share of our new Pillsbury consumers, further building confidence in the value of our first-party data. Our Fruit Snacks platform is an underappreciated local gem in our portfolio like Pillsbury dough, but on a smaller scale. Here, too, we've generated tremendous growth in recent years, with our retail sales in U.S. fruit snacks up nearly 70% since fiscal 2018 to more than $800 million dollars, and our market share up almost four-and-a-half points to 54% of the category. We accomplished these results despite being capacity constrained for much of that time, but we completed a $100-million-dollar capacity expansion on fruit snacks in Q1, which has allowed us to execute new channel expansion plans for e-commerce and convenience stores. Year-to-date, we've driven a 44% increase in our e-commerce retail sales on fruit snacks by optimizing our online shelf and consumer experience, leveraging our connected commerce capability. We've also expanded our fruit snacks presence in impulse channels, launching new peggable packaging that has helped us drive a 12-point increase in fruit snacks market share in convenience stores. With strong momentum, growing consumer demand, and plans for further capacity expansion ahead, we are excited about the continued runway for growth on fruit snacks. Another business that has a long runway of growth is Blue Buffalo pet food. The trends toward humanization and premiumization in the pet food category are strong and will continue to grow -- in the U.S. and around the world. We are focused on leading and expanding our presence in high-quality, natural feeding and treating for dogs and cats. We are led by our purpose to Love them Like Family, Feed them Like Family, which is the reason Blue Buffalo ranks as the number one brand pet parents are likely to recommend, the top brand pet parents will pay more for, and the most Loved and Trusted Natural Brand in the category. This has helped us drive terrific growth since we acquired the business in 2018, with our Pet net sales up by $1 billion through fiscal 2022. While we continue to believe in the long-run growth opportunity for our Pet business, we experienced an unexpected headwind in Q2 in the form of inventory reductions at some key retailers. As a result, while our all-channel retail sales grew at a high-single-digit rate in the quarter, our net sales were essentially flat. Beyond the unexpected retail inventory decline, our Pet results in Q2 largely reflected the continued impact of the capacity limitations and resulting customer service challenges that we called out on our first-quarter earnings call. Because of these service challenges, we pulled back on media and in-store support so as not to amplify our issues with on-shelf availability. While these headwinds have been felt across our Pet business, they've been particularly acute on our Dry Dog Food and Treats sub-segments. As we move into the second half of fiscal 2023, we expect to get back to double-digit net sales growth on Pet, supported by better customer service, stronger product news, increased brand support, and stable retail inventory levels. We expect our customer service will improve because of the external manufacturing capacity we've added on dry dog food and treats. To further improve service, we recently added a new distribution center and expanded capacity at our existing warehouses. We initially prioritized customer service improvement on Life Protection Formula, which makes up more than half of our dry dog food retail sales, and we've seen encouraging volume growth on that business in Nielsen-measured channels in the past six weeks. We're now expanding our service improvement focus to the rest of our Dry Dog portfolio and to Treats, leveraging our increased capacity. Improved customer service will also allow us to step up our media and in-store support, including a strong double-digit increase in media investment on Pet in the back half. And we have an exciting lineup of innovation and renovation launching across dog food, cat food, and treats. Our back-half news on Pet starts with significant renovation and innovation on our Wilderness dry dog food line. We're adding 20% more meat to our core Wilderness dry dog food products, and we're ramping up spending behind this news. We're also launching Wilderness Premier Blend, a new, super-premium offering that includes kibble, plus a new, proprietary tender meaty piece that dogs love in a convenient all-in-one solution pet parents will love too. On cat food, we're renovating our core dry portfolio and re-launching it under the Tastefuls equity. This launch builds on the success of the Tastefuls wet cat food line we introduced in 2021. Blue Tastefuls now offers a complete portfolio of feeding options for cats that provides the perfect combination of great taste and healthy ingredients. The new packaging is just starting to hit shelves now, and we'll support the news with media and in-store activations in the coming months. And on Treats, our added capacity will help us drive improved customer service on our Nudges, True Chews, and Top Chews products, which now carry the Blue Buffalo shield. With better on-shelf availability, we'll be able to turn on national media support and in-store merchandising, leveraging the Blue Buffalo master brand, which will help amplify awareness of these highly differentiated products. We remain bullish about the growth prospects for our Pet business. With a retailer inventory reduction and the worst of our capacity and service challenges behind us, and with exciting innovation and brand-building investment behind the strongest natural brand in the category, we're poised to continue Pet's track record of outstanding growth in fiscal 2023, and over the long term. Taking a step back, I continue to be pleased with how we're executing our Accelerate strategy to drive profitable growth on our core while continuing to reshape our portfolio. Now let me turn it over to Kofi to provide more details on our second-quarter results and our increased guidance.

Jeff Harmening:

Thanks, Kofi. Let me close with a few thoughts. I continue to be pleased with how we're executing our Accelerate strategy and driving profitable growth, including delivering strong results again in Q2. We're competing effectively, building on four consecutive years of positive market share performance, and we continue to invest for the future. While we have work to do to overcome some short-term headwinds in Pet and International, we've taken actions to drive stronger results in those segments in the second half of this year. I'm also pleased that we are once again raising our guidance for the full year, building on our strong first-half results and compelling plans for the back half. Thank you for your time this morning. This concludes our prepared remarks. I invite you to listen to our live question-and-answer webcast, which will begin at 8:00 a.m. Central time this morning and will be available for replay on our Investor Relations page at GeneralMills.com.

Jeff Siemon:

Thank you, Kelly, and good morning, everyone. Thanks for joining us today for the Q&A session on our Q2 fiscal '23 results. I hope you all had the time to review the press release, listen to our prepared remarks and view the presentation materials, which are made available this morning on our IR website. Please do 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 will 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 get to the first question, Kelly. So please get us started. Thanks.

Andrew Lazar:

I think just to kick it off, I guess, I appreciate that capacity constraints can often lead to a gap between shipments and retail takeaway, but obviously, the differential in Pet was far greater than anticipated. So, I'm trying to get a sense of why would retailers pull back on orders when capacity is constrained and demand remains so strong and does this pose any risk ultimately to the demand side of the equation? And then I've just got a quick follow-up.

Andrew Lazar:

And then, I think you were looking for flattish gross margins or so for the full year, if we were thinking about last quarter's conference call, obviously, with the upside to gross margins in this quarter despite the pet constraints on profitability. Could we see gross margins likely up year-over-year for the full year at this stage?

Operator:

Our next question comes from Ken Goldman with JPMorgan. You may proceed.

Jeff Harmening:

Yes. I think a couple of points, Ken. Yes, we are early in the quarter. Having said that, there are a couple of things that give us confidence in our forecast for the third quarter, the first I would start with Life Protection Formula, which is our biggest dry business. And we've seen over the last six weeks, we've seen demand really rebound quickly. And that's important because that's the first business that we could bring back up to appropriate service levels. And so that gives us confidence. In addition to that, we -- I did tell you we were going to grow double digits in the third quarter. And I can report that we're only about three weeks into December. So it's -- but three weeks is not nothing, and I can tell you, we're on track to deliver what we said we're going to do in the third quarter, which again gives us more confidence that we're going to be able to do what we say we're going to do and that we've seen the pipeline of inventory start to refill itself because we're able to service the business better, and it's especially true on treats.

Ken Goldman:

And then a quick follow-up. Just how do we think about the impact of adding more production from co-manufacturers and maybe re-stepping on the marketing pedal, for your pet food business in the third and fourth quarters, obviously, hopefully, there will be a better volume turnaround, and that will help as well. I'm just trying to get a general sense of, I guess, how to model those margins given all the puts and takes.

Kofi Bruce:

Yes. And that said, we do expect profit growth on our pet business in the back half of fiscal '23. Some of the key things you'll see is we'll expect price/mix to catch up with inflation. We've got another effectively round of pricing coming through at the beginning of calendar year '23. We don't expect the pressure on supply chain to be as acute. So, we won't see as much sort of drag from other cost of goods sold. And of course, we're not expecting the inventory depletion and the pressure that and deleverage that comes with that headwind. So as a result, we would expect our second half top line growth should give us still a solid profit growth even if it's slightly behind the top line growth.

Max Gumport:

Thanks for the question, and happy holidays. And going -- sticking with pet, you just mentioned another round of pricing you expect to come online in CY '23, I believe, and there's a narrative that the pet food industry in the U.S. could be on the horizon of getting more competitive due to potential supply/demand imbalances. I'm wondering, if you can provide any color on what you're seeing on that front?

Max Gumport:

Great. And one follow-up. So you mentioned that you expect the price elasticities to remain below historical levels during the remainder of FY '23 and also that there particularly benign in North America retail. I'm wondering what you're seeing on this front in your international businesses, particularly European Cereal as we've heard some commentary of a return to normal levels of elasticities in those markets from other industry participants.

Operator:

Our next question comes from Robert Moskow with Credit Suisse. You may proceed.

Jeff Harmening:

So Rob, I would say as it relates to pricing, I mean, we've announced some pricing on pet. We've announced that to our retail customers already to take effect, I think, February 1. So we've announced that already. In terms of -- but I will also remind you that when we started the year, we said that for most of this fiscal year, we've taken most of the pricing that we need to take in the market already for this fiscal year. So that also remains true. But I will also say in the back half of the year, we're expecting double-digit inflation. So it's not as -- it may decelerate from where it is now, but then decelerating to double digits is not exactly zero. And even as we look across a longer horizon, I don't want to play Nostradamus with inflation rates. What I will say, though, is even looking out past six months, it's pretty clear to us that we'll still see an inflationary environment. It may or may not be as robust as it is now, but it will still be an inflationary environment, driven quite a bit by wage increases. So it's hard for us to see an environment where we don't see inflation. Even if that inflation -- those inflationary levels may not be exactly what we've experienced over the last six months. And so as we look at our business, we'll continue to look at pricing. But the key is that the pricing has to be justified. And this has always been the case. But it has to be justified based on the cost that we're seeing. And we find with our retail customers if we can justify the cost that we're seeing and that they know that we're investing in the growth of our categories, which we are through double-digit consumer spending increases, launches like minis and cereal and like the innovation we have in Pillsbury and Blue Buffalo, then the conversations are a lot more productive than otherwise. So that's, I guess, what it was a long-winded answer to a fairly straightforward question on pricing. With regard to retailer inventories, I would say we have seen a little bit less retail inventory because of this inflationary environment. But I would say as we look forward, we've probably seen -- I wouldn't -- I don't think that's a risk to our go forward either on Blue Buffalo or our business in general. So that's kind of some generalities. Jon Nudi, anything you want to add to that?

Robert Moskow:

Can I ask a follow-up? In the past, have you been able to go to retailers and show labor inflation internally and use that as a rationale for raising price. It seems like that's something new.

Jeff Siemon:

Rob, or where we see that impacting us is not so much our own labor, but it's the labor at our suppliers, which translates through their pricing to us. So yes, there's labor inflation in our own facilities, et cetera, but the much bigger aspect of labor is upstream at the supplier base.

Michael Lavery:

I just wanted to come back to the elasticities and maybe understand a couple of things better. You say you don't expect to sort of revert to more normal levels over the second half. I guess -- or at least over the year? And is that just because half the year is done? Or what are you seeing something different maybe structurally what -- what's driving that expectation? And what would you consider a more normal level to be?

Michael Lavery:

Okay. Great. That's helpful. And I know China is fairly small, but just would love to get an update on maybe what you're seeing there. Obviously, in the second quarter, there were some of the lockdown, I guess, pressure or the -- certainly, food service challenges from those restrictions. As kind of evolving there, any update on the latest of what you're seeing in China and how we should think about that?

Michael Lavery:

Since they pivoted on policy, they've conveniently stopped giving information on case counts. But so I guess, yes, it -- is it pretty chaotic there? I mean, I guess we're just in for a few months of some uncertainty, but it sounds like you're positioned while neither stated that pretty well.

Operator:

Our next question comes from Pamela Kaufman with Morgan Stanley. You may proceed.

Jeff Harmening:

So the -- so Pam, what gives me confidence are a combination of factors. And I think the key -- the first key factor is the restoration of our supply chain and of our capacity. And this particularly important in our treats area, and -- but it's also important for dry dog food and cat food as well. But I would start with treats and then go to dry dog and cat food. So the first piece of confidence is that we've -- we have gained enough capacity to actually to be able to grow volumes in the second half of the year on both of those platforms. And so that's the first piece. The second, though, then it has to be backed up by good marketing. I feel really good about our innovation, really good about what we're doing on the Wilderness brand, I feel good about our change to Tastefuls and cat dry food. I feel very good about our partnerships with our retail customers to get our treats business take started again. We have great products on treats. We've rebranded a lot of what we had bought from Tyson to Blue Buffalo. And so the branding is really good. We've got good programs with our retail customers. So I feel good about our ability to drive our treats business. And then we're going to increase our brand building by double digits. And we've actually already seen a return to volume growth on Life Protection Formula, and we didn't have innovation on that. We didn't have advertising increases on that. All we had a supply. So I feel like the key is supply and then building on top of that really good innovation, strong in-store execution on treats and good advertising at good levels on top of that, that gives me quite a bit of confidence that we'll be able to turn around the Blue Buffalo business in short order. And as we've seen through this whole time, even though our second quarter was not what we wanted and not what you all expected, the brand remains really good. And we've done a lot of brand -- a lot of brand testing. The brand remains really good. The trends towards humanization are really good. So the tailwinds in the category are still there for us behind a good brand and increased supply and marketing.

Jeff Harmening:

Well, I would say on the innovation front, we've been we've had innovation that we've been willing to put in the marketplace for some time. But obviously, we haven't been able to supply the base business where one or two. So adding innovation on top of that is probably not a good idea. In fact, I think the people listening should take a sign of confidence that we can supply our business better because we're bringing this innovation to the market -- marketplace. And we certainly wouldn't do that if we didn't think we could supply it. That would be my fit point of innovation. So we've had this plan for a while. When it comes to the product renovations themselves, I mean, Wilderness is a high-priced, high-margin business. And so, to the extent that the pet parents want more meat in the product, which they do, and we're giving that to them, that's to do wonders for our margin profile. In fact, I would tell you the most important thing that we can do to enhance our margins in pet is to grow pounds. And so, to the extent that we have the supply and the news on a high price, high-margin brand, that should be just what the doctor ordered for the margins for the pet business.

Chris Growe:

Good morning. I want to start first, if I could, with a question on the gross margin, perhaps for Kofi, but just to understand, the sequential change in the gross margin from 1Q. And again, your gross margin was up nicely year-over-year, and that's been quite unique in the industry. I just want to get a sense of any factors that are worth considering that occurred sequentially. And obviously, the one that stands out, I think, would be around Pet. Was that one of the sequential drivers of the softer gross margin absolute performance or any other factors that are worth noting there, if you could, please?

Chris Growe:

Okay. And I just had one more follow-up on the Pet profit. And you had indicated that the second quarter would be a little softer. You had some costs related to getting third parties and co-manufacturing ready, some inventory and warehousing costs. I guess I just want to get a sense of this second quarter Pet profit performance was unique. You plan on some of that occurring. So are a lot of those costs then sort of embedded in the business? Do you have any ongoing costs related to the co-manufacturing outside just that's a lower margin way to supply your business?

Operator:

Our next question comes from David Palmer with Evercore ISI. You may proceed.

Kofi Bruce:

Sure, sure. I'll try to do justice to your question. So as you think about the path forward, obviously, you hit on the first thing and sort of one of the precedent conditions will be a return to something that is a much more stable and closer to historical level of supply chain disruptions. We're still probably running about 2x our historic levels well off of the peak of 6x to 7x where we were last year, but still enough to be meaningful and significant. And we would also expect that once we get out of a short supply environment, it will be easier to get at HMM and more fully utilize that lever. And that we would expect some of the pandemic era costs related to servicing the business in a more stable environment will become easier and lower. So structurally, we view our job to kind of claw back about 150 basis points of margin versus our sort of pre-pandemic level. I think the stable environment from a supply chain standpoint will be one of the first and the most important things. And then second, it will be probably a return to more historic levels of inflation, moderation of inflation, which -- who knows when that's coming. But we're certainly positioning our business to make sure that we're taking the cost out as we as we have the opportunity to do so.

Kofi Bruce:

Sure. So a lot of the focus of our investments in digital and technology to enable our marketing activity and as well our supply chain efficiency. So, we'll see benefits both in gross margins, and we would expect to see that deliver on growth. And then, I'll ask Jon if he wants to weigh in since we're seeing a lot of investment in our North America retail business.

Operator:

Our next question comes from Cody Ross with UBS. You may proceed.

Jeff Harmening:

I'll answer the first part of that question for you. The second one, I'll take a polite pass. But the -- on the first part, our retail sales, Cody, were about -- up about 8% during the quarter, and our reported net sales were flat. And so the difference between that 8% points was a reduction in retailer inventory for the variety of reasons that I stated earlier. In terms of which customers and retail, I'm not going to get into a customer-by-customer kind of dissection of that.

Jeff Harmening:

Yes. From a high level, I mean the what I would tell you, the best returns that we can generate as a company are adding capacity on platforms that we already know and that are already growing. And the litmus test for me is that if they're growing before the pandemic and they're growing during the pandemic make the chances they grow after a pandemic are quite a bit higher. And you see that in our Pet food business. You see that in Fruit Snacks. You see that in Totino's, you see that in Old El Paso. And so, we have a variety of businesses. You've seen that in our Cereal business. And so, we have a variety of businesses that we've seen continued growth, and we've run out of capacity. And frankly, as soon as we've generated capacity, I think Fruit Snacks is a good example. We've added capacity and you will probably need more given the high level of demand. So that's kind of how we look at it. We make sure that all of these growth investments are value enhancing for our shareholders. But to the extent there are growth businesses and they are good margin businesses and all of the above or meet that criteria then we're more than happy to invest in our own internal capacity.

Jeff Siemon:

Thank you, Kelly and good morning everyone. We appreciate you joining us today for a Q&A session on our first quarter fiscal ‘23 results. I hope everyone had a time to review our press release and listen to our prepared remarks and view the presentation materials, which were made available this morning on our IR 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 maybe discussed on today’s call. I am 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 right to the first question. Kelly, can you please get us started?

Andrew Lazar:

Thank you. Good morning, everybody.

Jeff Harmening:

Good morning, Andrew.

Kofi Bruce:

Sure, Andrew. This is Kofi. I would just note we are pleased with the start on margins for Q1. The primary driver, just as we think about kind of where we are, the HMM cost savings plus benefits from price/mix, offset inflation, deleverage and our other sort of operating costs we have taken on in this environment to show modest expansion in the quarter. I think as we look forward, we are not going to give guidance largely in recognition still of the fact that we are in a highly dynamic environment and still vulnerable to supply chain disruption. So as we think about the operating environment, there is still a high degree of volatility. The biggest variables, as you can imagine, as we think about the gross margin progression for us are going to be volume performance on the level of disruption and as we obviously would just take note of the inflationary environment, where we just noted that we are expecting modestly higher inflation for the year. So that’s kind of the table setting.

Jeff Harmening:

Yes. Jon Nudi, do you want to take that?

Andrew Lazar:

Okay, very helpful. Thanks so much.

David Palmer:

Hi. I am trying to think of a good follow up on gross profit, because obviously that was very impressive this quarter. I am wondering how are you viewing your gross profit performance, your gross margin performance versus your plan so far, maybe you could speak to that? And I am wondering to what degree would you be teasing or have us tease out perhaps some benefits that might not repeat in the future, some things that are outsized benefits such as some of the market share gains in your higher margin categories or perhaps promotional activity that you don’t feel like will be as favorable anything that you would do to caution us on gross margins?

David Palmer:

And if I could just squeeze in just a follow-up on your – the supply chain comment, was there improvement through the quarter such that your so-called exit rate, supply chain friction was less at the end of the quarter than it was at the beginning of the quarter that gives you hope that, that will be less going forward? And I will pass it on. Thanks.

David Palmer:

Thanks.

Chris Growe:

Thank you. Good morning.

Chris Growe:

I just had a question if I could. And I think you have an expectation that elasticity will increase from here. I think that’s a very prudent assumption. I am just curious if you are seeing any signs of that or any indicators that would increase that – that would indicate that elasticity is increasing or maybe some categories where you are seeing it perhaps that give you a bit of a warning sign for the business overall. It seems like it’s going pretty well across the industry. I just want to see if there is anything that we are missing here?

Chris Growe:

That’s great. Thank you. And I know we have had a few gross margin questions. It was quite a great performance there. I just was curious maybe Kofi to you and to the phasing questions around the gross margins, do you still have price increases that are going into place that need to take place to offset the inflation? And I guess related to that, you had this increase in inflation, does that prompt you to take more pricing at retail overall? Thank you.

Chris Growe:

Okay, great. Thank you.

Cody Ross:

Hey, good morning. Thank you for taking our questions. I am just going to nitpick a little bit here. You noted supply chain headwinds in pet. Can we unpack that a little bit, which brands and categories are you seeing the most impact? And I am just a little bit surprised that given the pet demand that you are seeing or demand in the pet category, you were not able to deliver total sales dollars in line with the fourth quarter of last year?

Cody Ross:

And that’s 2Q Pet margin that you’re referring to, not sales? I just want to make sure I understand that.

Cody Ross:

Got it. That’s helpful. And then one more quick question, if I may. You noted in your prepared remarks plans to step up brand building and investments for growth. Which categories and brands do you see the most opportunity? Thank you.

Operator:

Our next question comes from Steve Powers with Deutsche Bank. You may proceed with your question.

Jeff Harmening:

Good morning.

Kofi Bruce:

Well, I would say, broadly, we are modestly higher on inflation in the front half and modestly is probably appropriate. But I think on balance, it is still a relatively balanced year in terms of our inflation call it between 14% and 15%.

Steve Powers:

Yes, okay. That’s fair. Thank you very much. And then on the Pet question, given sort of the tightness of supply, and it looks like you’re obviously making efforts to bring supply online. But it feels like the real relief isn’t going to come at this point until fiscal ‘24. We’ve seen competitors in the space start to buy up capacity to sort of accelerate that and get incremental capacity online sooner. And I just wanted to kind of play that off to you and just get a sense for – is that something you would consider as you think about capital allocation and M&A strategies is adding capacity through acquisition, something that’s on the table? Or are you more inclined to just stick to building it out and working through co-packers.

Steve Powers:

Great. Okay, thank you very much.

Jason English:

Hey, folks. Thanks for slotting me in, and congrats on a strong start to the year. I’m going to come back to pet, but with really a different question. So first, the capacity that you’re going to be bringing on in dry, can you give us some context in terms of like quantify how much is this is going to add for you in fiscal ‘24.

Jason English:

Okay, okay. And you are not alone, right, Nestle is adding, Mars is adding, Hills is adding, as Steve mentioned, both organically and inorganically, Simmons is adding, Phelps is adding, like [Indiscernible] in small manufacturers, there is a lot of capacity being built. It seems like it’s coming in like the wake of COVID as we start to anniversary a pull-forward of pet adoption. In other words, it seems like it’s coming at a time when there is not a lot of volume growth in the industry. How does this play out? And as we think forward, what’s the risk that gets pretty darn competitive with an overbuild of capacity and becomes a pretty promotional category.

Jason English:

Yes. No doubt. I’m not arguing that premiumization should fade away. And to that point, you’ve got double-digit growth this quarter. I think everyone has double-digit growth because the inflation out there. Can you unpack maybe that that price/mix line then for us? Like how much of it just pass-through of higher cost? And how much of it is the mix, the premiumization that you’re talking about?

Jason English:

Got it. Alright. Thanks a lot, guys. I will pass it on.

Operator:

Our next question comes from Bryan Spillane with Bank of America. You may proceed with your question.

Jeff Harmening:

So I’ll have Kofi probably get into the specifics of this, but this is Jeff. Let me just – it was – it’s a lot to unpack in food service this quarter. I guess one of the takeaways top line I would share with you is that we have high confidence in our food service business and certainly and the fact that we can grow it into the future and that the margins will improve. So I want you to know there is nothing fundamentally mass in our food service business. Having said that, it was – there is a lot going on in this particular quarter. So probably let Kofi explain a little bit of that.

Bryan Spillane:

Okay. So, some of this is just the math of flour prices going up, you get the dollar profits, but it’s profit neutral. And the rest is really just going to be catching up to inflation, I guess in the non-flour milling piece? Is that a good way to say that?

Jeff Harmening:

And Bryan, just to maybe put a finer point on that pricing going up for index pricing with no incremental profit dollars coming with it is actually margin negative for the segment in the quarter to the tune of about 200 basis points. So, margin which is obviously a big portion of – you are seeing that flow through in this quarter.

Jeff Harmening:

You bet.

Jonathan Feeney:

Hey. Good morning. Thanks very much. Two questions. First, I wanted to on the 14 – dig-in on the 14% to 15% expected COGS inflation. Could you comment, if you can, any more about kind of how much of that is input costs relative to all the other structural inflationary things in Japan? Just a flavor for that or is input cost the vast majority of that would be helpful. My second question would be more broadly in the U.S. promotional levels, merchandising levels or if you want to use the syndicated data, something like 10 points off their pre-COVID normal. Do – are retailers expecting they get back to that pre-COVID normal at some point? Thanks.

Jeff Harmening:

Yes. Let me – this is Jeff. Let me take that one. I think as I said at a conference a couple of weeks ago, we think the risk of promotions ramping up significantly over the next couple of quarters is quite low. And the reason is that you kind of have to believe three things to be true in order for – to see a lot of promotions increase. The first, you would have to think that this inflationary cycle were different than the ones we have seen before. And I was running a business in the last inflationary cycle here at General Mills. And what we see is that there isn’t really a sharp increase in promotions coming out of an inflationary cycle. So, you have to think that the environment would be different. The second thing is you have to believe the disruption in the supply chain are going to change significantly from where they are now. And the third is that you would have to see COGS inflation not only decelerate, but also get to absolute deflation. And the fact is that I think you need all three of those things, we don’t see any of those things as we see right now. We just increased our guidance on inflation a little bit. We have told you that supply chain disruptions remain high, elevated, they are about 2x what they were before the pandemic, even if they are below what they were a year ago. And then there is inflationary cycle as we see keep playing out, so – but that’s what we think. I mean that the risk is relatively low given what I just laid out.

Jeff Harmening:

Thank you.

Ken Zaslow:

Good morning guys.

Ken Zaslow:

Two questions. One is, what are your expectations for your innovation progression this year and next relative to the last 2 years?

Ken Zaslow:

But you don’t think that you will accelerate given your supply constraints being a little bit ease. I would have thought you would have told me your innovation will actually accelerate over the next 2 years, given all the things that have happened between the consumer and the – but I hear what you are saying. I am just curious. And then my next question is as you go forward in a couple of years, can your gross profits expand if elasticity becomes what you think it’s going to be and volumes don’t kind of subside a little bit, or do you truly need the volume operating leverage because that seems to be one of the points you pointed to as a key core reason for gross margin expansion. So, I was just trying to get a little color on that, and I appreciate your time.

Ken Zaslow:

Okay. Appreciate it. Thanks guys.

Operator:

Our next question comes from Michael Lavery with Piper Sandler. You may proceed with your question.

Jeff Harmening:

Good morning.

Jeff Harmening:

Michael, you are right in the sense that it is logical to assume that the food service will move in a different direction than with our retail business, given the trend at at-home consumption. But there are two things playing into this for the quarter and one thing playing over this more generally. In the quarter, remember, we have a lot of index pricing on bakery flour, which is – which really inflates the sales number on our food service business. I mean the accounting is right, but it just – it makes it look higher than it would be otherwise. And so that really all of our growth this quarter in food service is a result of that index pricing. That’s the first thing I would tell you. The second is that even given that, though, our food service business doesn’t move in perfect correlation, inverse correlation with our retail business because we have a really big school business. And so we are not only servicing restaurants, we have a significant part that we sell cereal and yogurt and other baked goods through our education, and we are really, really good at that. And so that demand tends to be a little bit more inelastic. And so even though it may seem logical in the face of it, they have food service inversely with retail, and point of fact, ours doesn’t move perfectly that way for that reason, even if we take out of consideration the index pricing.

Kofi Bruce:

Yes. No, we have had, along with most of our retail businesses, modest increases in our spending behind data and analytics. So, that would be a big chunk of, as you think about what’s driving SG&A growth in the comp. That would be more of it. As you know, obviously, we have maintained modest levels of increases in media as we step through, and we are trying to manage through the supply pressure on this business.

Michael Lavery:

Okay. Thanks for all of that.

Operator:

That does conclude the conference call for today. We thank you for your participation, and we ask that you please disconnect your lines.

Jeff Siemon:

Thank you, Kelly, and good morning to everyone. We appreciate you joining us today for a Q&A session on our fourth quarter and full year fiscal '22 results. I hope everyone had a time to review our press release, listen to our prepared remarks, and view our presentation materials, which were made available this morning on our Investor Relations website. Please note that in our Q&A session, we will make forward-looking statements that are based on management's 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 right to the first question. So Kelly, can you please get us started?

Andrew Lazar:

I think you've talked about over the course of this year how the combination of HMM and pricing and other levers have actually been pretty effective. It's sort of protecting a lot of the -- at least the dollar cost of actual sort of inflation, but that supply chain costs and some other things, of course, have weighed on margins and profitability as well, like it has for the Group as a whole. I guess as you look forward to '23, I think you mentioned that you anticipate another sort of call it low double-digit benefit from pricing, that's you've taken already or is already in place. But of course, you still see another very significant 14% jump in inflation, and slowly but surely, hopefully will continue to improve on the supply chain side. So I guess the question is, do you think that the combination of the pricing and the HMM, and the other levers that you've got would be enough in fiscal '23 to sort of better protect dollar profits, even including some of the supply chain issues and other things as opposed to just cost inflation? And then I just got a quick follow-up. Thank you.

Kofi Bruce:

Absolutely. Thank you, Andrew. So as we think about our approach to the next fiscal year, we're thinking about it much the same way. We're expecting only a modest decline in the level of supply chain disruption. We expect, as you mentioned, our price realization, and the combination of HMM to largely offset the dollar cost of the 14% inflation that we've called. And our expectation is that the remainder costs from disruption, we would work out over time to the extent that we see the environment stabilize. So the only big question remains, when that happens, we’re -- I think we're expecting another year of uncertainty candidly similar to the table that was set this year.

Jeff Harmening:

Jon, you want to take that question?

Operator:

Our next question comes from Bryan Spillane with Bank of America.

Kofi Bruce:

Appreciate the questions. And think back to my earlier comments about sort of the backdrop for the operating environment. It still remains volatile with a high degree of uncertainty. I think we're expecting as a backdrop that the supply chain disruptions to the extent they are foreseeable will, in the near-term, not abate that much. So that is a factor that even as we worked through this past year, was a headwind to margins and even as we moved from quarter-to-quarter, provided some volatility to our expectations. So the guidance range primarily reflects that. And then obviously inflation is, our best call based on the information we have in front of us is 14%. But I would note that our expectations moved up, even as we worked through the early part of this last fiscal year we just closed. So those are the two primary sources of volatility driving our expectations on the range.

Bryan Spillane:

And anything in terms of I guess you might -- you must know more about the first half of the year than the second half of the year, just anything we should think about that in terms of phasing, just in terms of the inflationary pressures is a little bit more front or back half loaded?

Operator:

Our next question comes from Robert Moskow with Credit Suisse.

Kofi Bruce:

Yes. So we did provide a number, it's -- I think, is in the range of 200, previously 250, is about where we halved the mark here at the end of the year. And then think back to my earlier comments, as we look at the full year, our adjusted gross margins are down. And if you kind of deconstruct that the elements would drive you to inflation being about 500 basis points, roughly drag, offset, almost completely by price mix and HMM. And that leaves the cost of the operating environment, the disruptions to deleverage other intermodal transports, all the things that we're doing to accommodate supply in this environment as the driver of the margin decline.

Kofi Bruce:

You are close.

Kofi Bruce:

15.5 is the number, our organic price mix.

Kofi Bruce:

Are you talking this fiscal year or next fiscal year?

Kofi Bruce:

Rob, I think you've got -- you have to remember that we'll be starting to roll over some pricing as we come into fiscal '22 and certainly much more so as we get into the back half of the year as we have significant pricing come through in the back half of -- sorry, of fiscal '22, we'll be rolling over that in fiscal '23. My apologies. And then the other piece that would be included in that would be the offset from volume and deleverage that comes through. We mentioned that we are expecting elasticities to be below historical levels, but to increase somewhat as we go through '23.

Kofi Bruce:

Yes, roughly. I think that's a fair assumption.

Michael Lavery:

Just looking at the SNAP benefits that Federal COVID Emergency Authorization is now set to run at least into October and that of course supports the state emergency elevated levels of SNAP benefits that have been pretty significant, contemplate your top line guidance. What assumptions do you make around how that might unfold?

Jon Nudi:

Yes, so thanks, Jeff, and I think you hit it exactly right. So SNAP is obviously one of the elements that will drive top-line. And while SNAP is down versus pandemic highs, it's still above pre-pandemic period. So we continue to monitor SNAP and it plays into things. But as Jeff mentioned, some bigger factors in play, as well, including the shift to more at-home eating, and then even what's playing on their categories. We've obviously watched very closely as well in terms of how branded players are performing, how private label is performing. And if you look back through history, during economic downturns, we tend to perform pretty well to see our categories increase by 1 point or 2 point in terms of volume performance. We've actually held our own from a share standpoint during those periods. We've seen the second and third tier brands lose share to private label. So it's a dynamic time. We're very close to our business and watching all the factors, SNAP is just one of those.

Jeff Harmening:

I would say until this point we haven't really seen any change in elasticities. And I think the reason for that -- there's a couple reasons for that. One is that consumers are switched to more at-home eating because it's more expensive. So the reason I started talking about, I would say would be a big contributor to elasticities not having changed much even over the last month and what they were two or three or four months ago. And the consumer is actually still in -- they're still in a decent place. They're getting nervous. But when it comes to savings rates or the employment rate and consumers are still spending quite a bit of money. Now as they look ahead, they get nervous because they see inflation and so forth. But right now the consumer is in a decent place and any -- we haven't really seen any elasticity change. I think that's because of the shift from away from home to at-home eating.

Cody Ross :

I just want to dig a little into pet here, because the pet margin continues to slide further driven by inflation and supply chain disruptions that you called out. Did this catch you by surprise during the quarter? And when do you anticipate the rate of margin declines to moderate? And then I have a follow-up.

Cody Ross :

And I just want to follow up a little bit about gross margin and some of the stranded costs you expect. So if you combine the low double-digit price mix with the HMM savings, it looks like you should fully cover the inflation you're going to endure next year. You'll also be lapping the supply chain challenges in the second half next year. Is it fair to say right now that gross margin could actually increase next year? And if not, is that because of stranded costs? And if so, can you just kind of give us any color as how much stranded cost you expect?

Operator:

Our next question comes from Pamela Kaufman with Morgan Stanley.

Jeff Harmening:

Yes. Thanks for that question. You know what I love is that our strategy is working, and it has been working, regardless of what competitors are doing. Our strategy has been working for the last 4 years, as that inspire continue growth above our long-term algorithm and the fact regaining share in the majority of our categories. And so I think actually, the worst thing that we could do is look at what somebody else is doing and try to emulate that when the strategy we have is working. And I say that because we're executing well on our core business as evidenced by the share gains over the last 4 years. But we've also integrated M&A quite well and whether that's seamlessly divesting the yogurt business or aggressively growing Blue Buffalo and the pet treat business, we feel great about that. The other thing I would say is it kind of goes -- people get lost and we talked -- there are a lot of dis-synergies or splitting things up and not only financial dis-synergies, but also capability of dis-synergies. And let me get me give you a couple of examples. When we bought the Blue Buffalo business, one of the things we said was that the capabilities we have at General Mills are very similar to what is needed at Blue Buffalo. And one of those is extrusion technology, which is the technology we use in cereal. And we're 1 of the world leaders, if not the world's best at extrusion technology. The same would be true for things like thermal processing, where the same technology that's used for wet pet food is used things like soup and yogurt and other things. And so for a whole host of reasons, but ending with our strategy is working. Whatever our competitors do, their strategy may be best for them, but we really like our strategy. We like the way it's working. And at the end of the day, it's creating quite a bit of value for shareholders.

Jeff Harmening:

I'll let Jon Nudi answer the details. I would note that our pricing, it has been higher in the last few months, but at the same time, we're still growing share, which I think speaks to the strength of our brands. But Jon, you want to follow up?

Operator:

Our next question comes from Chris Growe with Stifel.

Jeff Harmening:

Yes. Sorry, I jumped in again. So, Chris, roughly it’s right. I think that's a fair expectation given the inflation assumption for the year and the expected phasing.

Jeff Harmening :

I think it's fair to say in the near term, this will continue to be a headwind. We expect modest improvement to come in the near term primarily from bottlenecking and enrollment, continued enrollment of additional external supply chain capacity. But I would expect it to be probably enough to satisfy the demand we're seeing in the business in the near term.

Tom Palmer:

It's Tom Palmer on for Ken. I wanted to ask on elasticity. So guidance assumes elasticity increases but remains below historic levels. I just want to make sure I understand this. Are you assuming elasticity returns to more normal levels at some point of the year? Or that some degree of below-average elasticity persists throughout the year? And why you have that view and what do you consider to be normal elasticity?

Kofi Bruce :

Yes. This is Kofi. So I think the fair assumption is, for the full year, our guidance is predicated on elasticities being higher than this past year, where, as a reminder, they were significantly below what our historical modeling would tell us. We are not expecting for the balance of the year a return to the full levels of elasticity that the historical models would indicate. Structurally, there are a number of reasons for this, I think Jeff referenced a lot of them around the at-home dynamics, the consumption patterns that we expect to see from consumers being a primary driver as a backdrop. And then I think it's hard to drive by the continued challenge around supply chain disruption as you think about that as a backdrop for choice and selection for consumers. And then lastly, when you think about the broader inflationary pressures and the value trade-offs that the consumers make, it's important to note that inflation is hitting away-from-home through more heavily than even at-home food. So I think all of those things are good for our assumption.

Jeff Harmening :

Jon, do you want to take that?

Operator:

Our next question comes from Steve Powers with Deutsche Bank.

Jeff Harmening :

Yes. Well, let me frame it primary into the lens of what we saw for service. And as we look at the fourth quarter on this business, our service levels came in at the high end of 60%, low end of 70%. So I think the opportunity as we go forward is to be running probably closer to 80%. But we see strong demand across all the channels as we look forward. So this is not a demand issue. It is ultimately going to be even modest improvements in supply will allow us to unlock additional growth and the other factors be listed around retailer inventories are less a challenge and a consideration as we look ahead.

Operator:

And our final question comes from David Palmer with Evercore ISI.

Jeff Harmening:

Yes. I think I can give it to you in the perspective of the friction from other supply chain costs being the primary driver of the drag as you look from beginning of that period to through the most recent quarter. And I think I would note that some of the biggest divestitures we've made over that period also had probably some margin dilution already embedded in our P&L. So to the extent that we are -- the most recent divestiture obviously had attractive margins, but the net of all of those is probably a small for us to neutral from a margin mix perspective.

David Palmer :

Yes, that makes sense. Any thought on the ability to reclaim that margin? Is there anything aside from the timing of pricing actions versus inflation that makes you think you can't get back to a business adjusted pre-COVID gross margin level?

David Palmer:

And I just had 1 last one. Your media advertising, you said in the presentation, it's going to go up by more than the 5% CAGR that you've had over the COVID era. And so that would be -- I guess, would get you 20% above pre-COVID levels in media spend. This is sort of a fundamental change that you started from before -- just before pre-COVID where you're, I guess, getting bigger in digital. And I think it's worth sort of addressing how different this has been for you, how you're spending on this. But also why you feel confident that this is getting an ROI in a way that would make you different than you were in the 3 years before COVID?

Jon Nudi:

Yes, I would just say we feel great about our media and the granularity we have and understanding the return, our ability to optimize. So north of 50% of all our media spend is digital now and amongst that digital spend more than 50% is performance marketing. And our first part of that which we've invested to acquire probably with the retailers and their data which is really powerful and becoming really targeted, building one-to-one personalized relationships. And then testing and iterating at scale. We can take 200 different ads online and optimize and really have been focused on the one that have the best return. And that's seeing significant increases in return for us. So we believe we're getting more than -- more return from our advertising than ever before. We're able to optimize, the days of shooting an ad and hoping it works for a year or over. We're literally optimizing ads on a daily basis. That's really good for our brands because it helps build them and helps you find the messages and it builds more loyalty for us as well. So we feel great about media, and we're continuing to invest heavily to make sure we have the digital capabilities in the future.

Operator:

Pardon me, it seems Mr. Harmening's line did disconnect, unfortunately. So Mr. Siemon, you're good to close the call, if you'd like.

Operator:

That does conclude the conference call for today. We thank you for your participation, and we ask that you please disconnect your lines.

Jeff Siemon:

Thank you, Frank, and good morning, everyone. Thanks for joining us today for our Q&A session on third quarter results. I hope everyone had time to review our press release, listen to our prepared remarks, and view our presentation materials, which were made available this morning on our Investor Relations website. As a reminder, beginning this quarter, we are reporting results under a new segment structure. You can find supplementary information on our website that shows our historical net sales and segment operating profit results recast for this new segment structure. I'll also remind you that in our Q&A session, we may make forward-looking statements that are based on management's 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. Joining me this morning are 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. Frank, could you get us started, please?