Jeff Siemon, Vice President of Investor Relations, welcomed everyone to the General Mills Fourth Quarter and Full Year Fiscal '23 Earnings Q&A Webcast. He noted that there may be forward-looking statements made during the Q&A session, and encouraged everyone to review the press release for more information. Jeff Harmening, Chairman and CEO, Kofi Bruce, CFO, and Jon Nudi, Group President for the North America Retail Segment, were also present for the Q&A. The first question was asked by John Baumgartner with Mizuho Securities, who asked how General Mills is adapting and evolving their investments in innovation, quality, promo, and productivity now that conditions are normalizing.

Jeff Harmening discussed how the company has been successful in investing in growth and driving higher levels of productivity, which has resulted in double-digit growth in sales, operating profit, and EPS. He also spoke to the confidence in the year ahead due to the freeing up of supply chain and normalization of supply chain which will allow for the elimination of pandemic era costs and more investment in innovation and distribution.

Jeff Harmening explains that the factory inventory decline was a surprise given the strong deals and trends, but General Mills was still able to hit their guidance on profitability and exceed margins and EPS despite the headwind. He does not believe this is a General Mills-specific trend and does not expect it to continue in the future.

General Mills saw a five point gap between Nielsen movement and quarter, which is something that has been seen for six of the last eight quarters. This is due to customers trying to get their inventories back to a good place and facing higher carrying costs and interest rates. Jeff and Jon mentioned that they feel confident about being able to supply the business and that inventory levels are at the lowest they have seen. They do not expect to rebuild inventories or have another leg down in fiscal '24. Additionally, the Pet business had a slight decrease during the past year.

Jeff Harmening feels good about the Pet business rebounding and service levels returning to the 90s, despite the cost of external supply chain. He also notes that the dry pet food business has responded well to advertising, and the treats business has improved and grown in the fourth quarter. However, the wet test food business lagged, but with the supply should not be an issue this year, he expects sales and profits to grow, with a bigger improvement in profitability coming in fiscal '25 when they can internalize all of their capacity.

Jeff Harmening answered Andrew Lazar's question about the potential for volume in fiscal 2024, stating that while they do not give specific volume growth guidelines, their expectation is for top line growth of 3-4%, with mid-single-digit inflation of roughly 5%. He also noted that it is difficult to predict whether or not volumes will be positive due to the mix factor involved, as demonstrated by the last quarter in China where sales grew, but pounds were down due to the sale of more expensive products.

Kofi Bruce and Andrew Lazar are discussing inventory management and the potential for retailers to increase their inventory levels due to improved supply chain constraints. Jon Nudi has spoken with some major retailers and they are all trying to figure out the best way to move forward. He suggests that retailers may be more confident in their ability to get what they need when they need it, and thus may not need to maintain as much safety stock.

Jeff Harmening states that the company's balance sheet is in great shape due to their profitability and debt management, giving them a lot of flexibility for M&A, though they will remain disciplined in their approach. He does not mention any specific categories they are targeting, but does emphasize the need for discipline.

Jeff Harmening and Kofi Bruce both discussed the company's gross margin, which has been a highlight over the past couple of years. They are expecting it to remain a highlight in the coming year, despite the 5% input cost inflation outlook. They are confident that they can maintain their pre-pandemic gross margin.

Jeff Harmening states that they expect to make further progress towards recovering gross margin levels, and they have higher confidence in being able to achieve a 4% HMM level, which is a one point step up from the past couple of years. He also mentions that there is still inflation, and they are looking to reinvest in marketing and promotions, with a mix of price promotions and marketing and advertising.

Retailers are more confident in displaying products due to improved service levels, leading to an increase in promotional frequency and quality of display merchandising. Marketing spend has been increased 35% from pre-pandemic levels, and is expected to grow in line with sales growth. Consumers and customers are looking for new ideas and ways to grow.

Kofi Bruce and Jeff Harmening discuss the challenges of setting guidance for fiscal 2024, noting the importance of the consumer behavior, interest rate environment, inflation, and potential economic slowdown. They acknowledge the difficulty in predicting consumer demand in light of the industry's multi-year slowdown, but express confidence that they will be able to respond to whatever environment emerges.

Jeff Harmening explains that there are multiple trends happening in the pet food industry, which is a $50 billion category. He notes that there has been a recovery in dry pet food and treats, but wet pet food has been challenged due to changes in consumer economic environment and behavior. He believes that elasticities will increase, but that is accounted for in their guidance already. He warns against following the trends of the last three weeks too closely.

Kofi Bruce explains that the wet pet food business has not recovered as quickly as they thought due to mobility, service, and behavior in the current environment. He also mentions that the dry pet food business is improving due to inflation and that there will be a modest impact on the ability to internalize some of the supply for dry dog food due to the investment in four platforms, with the pet capacity coming online late in the year.

Jeff Harmening and Jeff Siemon discussed the capacity issues and supply disruptions that the company faced last year, and how they are feeling much better about the situation this year. They also discussed the coming online of external capacity in the next year, which has already improved service in their Treats and Dry businesses. Harmening mentioned that pricing has already been taken to benefit margin expansion, and that this can be seen in the current results.

Kofi Bruce explains that the primary driver of the improvement in free cash conversion from 80% to 95% in 2024 is due to working capital, which was also the primary driver of the miss in the target for this year. He also mentions that the unexpected inventory build in the last two weeks of the year was a challenge.

Kofi Bruce and Bryan Spillane discuss how the supply chain environment is more stable, allowing for better visibility and lower inventory levels, which will result in more cash from working capital. They also discuss how the majority of the improvement will be from inventory. Kofi Bruce explains that while they can reduce their commercial paper balances, the higher interest rates mean there is only a modest headwind from term debt rolling off.

Inventory availability has improved significantly since last year and retailers have invested in digital capabilities to manage their inventory more efficiently. This has enabled them to keep shelves full while holding less inventory. As a result, inventory does not seem to be a hindrance to getting products on shelves or getting displays.

Jeff Harmening commented on pricing and the inflationary environment, noting that they have most of what they need in the marketplace already, but there may be some categories or geographies where they need more. He then commented on the promotional environment, noting that it has been rational and he does not expect that to change. Lastly, he discussed the tools they have to reignite volume growth, such as promotions, advertising, and merchandising.

The author believes that new product innovation, better distribution, and improved promotional spending will drive growth in the upcoming year. He believes that the quality of merchandising should be increased, which will result in increased consumption and be beneficial for both the company and their customers.

Jeff Harmening concluded the call by expressing his confidence in the company's ability to achieve their long-term growth goals, including sales, operating profit, EPS, and dividend increases. He mentioned that the year ahead may look different, but the company is confident that their team, brands, and capabilities will thrive regardless. Jeff Siemon thanked everyone for their time and attention and said the company is available for follow-ups throughout the day.

This summary was generated with AI and may contain some inaccuracies.