Q2 2024 General Mills Inc Earnings Call
Greetings and welcome to the General Mills Second Quarter F-24 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Wednesday, December 20th, 2023.
Greetings and welcome to the General Mills second quarter F. 'twenty four earnings call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one.
All of it by the four on your telephone if at any time during the conference you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded Wednesday December 20th 2023, I would now like to turn the conference over to Jeff Siemon, Vice President for Investor Relations and Treasurer. Please go ahead.
I would now like to turn the conference over to Jeff Seaman, Vice President for Investor Relations and Treasurer. Please go ahead.
Jeff Siemon: Thank you Dana and good morning to everyone.
Thank you for joining us this morning for our Q&A session on our second quarter fiscal 2024 results.
Jeff Siemon: 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 preparative marks, and view our presentation materials, which were made available this morning on our Investor Relations website.
Jeff Siemon: 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.
Jeff Siemon: 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 mornings 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 Harmaning, 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?
Jeff Siemon: 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 do you think can you. Please get us started.
Of course, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. Once again, to register for a question, you can press the 1 followed by the 4. Our first question is coming from the line of David Palmer with Evercore ISI. Please go ahead.
Speaker Change: Of course, if you would like to register a question. Please press the one followed by the foreign or telephone you'll hear three Tom prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press. The one followed by three once again to register for a question you can press the one followed by.
Speaker Change: For our first question is coming from the line of David Palmer with Evercore ISI. Please go ahead.
Thank you. The question on North America retail margins, they've been impressive in spite of the volume declines we've been seeing.
David Palmer: Thank you.
David Palmer: A question on North America retail margins they've been impressive in spite of the volume declines we have been seeing.
Do you think that the segment margin can hold near these levels, given what's
David Palmer: Do you think that this segment margin can can hold near these levels.
David Palmer: Given what's.
going on with volume trends and I guess what a couple factors I'm thinking about is some of your high margin categories like DOE.
David Palmer: Going on with with volume trends and I guess, what we don't.
David Palmer: 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. And I'm so curious about the margins.
David Palmer: A negative mix effect, but then again, you're talking about accelerating productivity gains.
David Palmer: So curious about the margins for that segment.
Speaker Change: Yes, David Thanks for the question.
Yeah, David, thanks for the question. Just to rewind a bit, we've seen the margin improvement to your point largely on the backs of a really strong HMM delivery. So one of the features of this environment has been sort of the stabilization of the supply chain environment, which has allowed us to step up HMM more acutely on this business than our other segments. And also to get at some of those disruption-related costs.
Speaker Change: Just to rewind a bit we've seen the margin improvement to your point.
Speaker Change: Today on the backs of really strong HMA owned delivery. So one of the features of this environment has been sort of a stabilization of the supply chain environment, which has allowed us to step up HSM more acutely on this business than our other segments and also to get at some of those disruption related cost.
We've made really strong margin progression gains on this business on the backs of those two things. I expect that to abate a bit here as we move forward just as a result of having already gotten out of good a chunk of those disruption-related costs. So, on balance, I see this business poised for more stability and aggregate.
Speaker Change: We've made really strong margin progression gains out of this business.
Speaker Change: On the backs of those two things I expect that to abate a bit here as we move forward just as a result of having have already gotten a good chunk of those disruption related cost.
Speaker Change: On balance I see this business poised for more stability.
Speaker Change: In aggregate.
Speaker Change: Okay.
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.
Speaker Change: And then with regard to the pet business maybe is there a.
Speaker Change: You wanted to make there about.
Speaker Change: What the biggest fix will be from here Wilderness for example.
Speaker Change: It has been relatively weak but.
Speaker Change: What do you think that the best earliest fixes will be for that business and what are some of the long term things youre looking to do to improve the trajectory. Thanks.
Yeah, thanks, David. This is, this is Jeff, you know, I would say that, you know, in the, in the presentation, we shared four things we're working on.
Speaker Change: Yes. Thanks, David. This is this is Jeff I would say.
Jeff: In the presentation, we shared four things we're working on it.
You know, a couple of the things we know that we can improve upon to improve the profile of the business and, you know, two of them were we feel good about and that's important because, you know, it shows the blue brand is still strong. And so, as we look at life protection formula, we've changed our advertising on that and the business has responded nicely and we've seen steady improvements there.
Couple of things, we know that we can improve upon to improve the profile of the business and two of them, where we feel good about and that's important.
Jeff: Because it shows the Blue brand is still strong and so as we look at life protection Formula We've changed our advertising on that the business has responded nicely and we've seen steady improvements there we have changed the merchandising on our <unk> business and while it's not all the way to bright and we've seen significant improvement throughout the second quarter on that.
We have changed the merchandising on our, on our treats business and while it's not all the way to bright, we've seen, you know, significant improvement throughout the second quarter on that business.
And yet the results are still not what we want to be. And so, you know, that leads to, you know, what, what needs to come next. And I think there are really a couple of businesses that.
Jeff: And yet the results are still not where we wanted to be and so that leads to.
Jeff: What needs to come next because I think there are really a couple of businesses that.
that we need to improve. One is our is our wet business and our wet pet food. And so you'll see us introduce some value and variety packs in the back half of the year starting in January . And that, you know, we'd like to see improvements in that. And then the biggest fix is which will take a little bit longer. And they're kind of interlinked, but they're not the same. One is wilderness.
Jeff: That we need to improve one as our as our web business and our wet pet food and so youll see us introduce some value and variety packs in the back half of the year starting in January and that we'd like to see improvements in that and then the biggest fixtures, which will take a little bit longer and they are kind of interlinked, but not the same one as wilderness and really new.
and you know we really need to reposition the wilderness brand and do some work on that and that'll take a little while to get back to full health. The other is that you know we haven't the pet specialty channel in itself has not done particularly well we over indexed in that channel.
Jeff: To reposition the wilderness brand and do some work on that and that will take a little while to get back to full health. The other is that we haven't that the pet specialty channel.
Jeff: <unk> itself has not done, particularly well we over index in that channel.
and there's some things we can probably do to perform better in that channel. Even while we keep investing to grow our food drug and mass channel, which we're quite pleased with the results and online with the results.
Jeff: And there are some things we can probably do to perform better in that channel, even while we keep investing to grow our food drug and mass channel, which we're quite pleased with the results and online with the results.
Jeff: The other thing I guess I would add.
is, you know, we did have, as we look at the back half of the year, you know, the reason we're not saying, you know, recovery or stabilization is that in the back half we had shipments ahead of sales.
Jeff: As we did have as we look at the back half of the year. The reason, we're not saying recovery or stabilization is that in the back half we had shipments ahead of sales.
Last year and so we're laughing that's particularly true in the third in the third quarter And so even you know, even to the extent we see some stabilization in the sales trends in pet The reported net sales are going to lag that because some inventory build in the back after the year So those are the things that we need to do some of them are Underway and we like what we see so far and there are a couple more that we really need to work on it It'll take a little bit longer
Jeff: Last year and so we're lapping that is particularly true in the third in the third quarter and so even even to the extent, we see some stabilization in the sales trends and Pat the reported net sales are going to lag that because of some inventory build in the back half of the year. So those are the things that we need to do some of them are underway.
Jeff: We like what we see so far and there are a couple more that we really need to work on it will take a little bit longer.
Thank you.
Speaker Change: Our next question is coming from the line of Andrew Lazar with Barclays. Please go ahead.
Andrew Lazar: Great. Thanks, so much good morning, everybody.
Andrew Lazar: Good morning morning.
Jeff, I wanted to maybe chat a bit about, you know, I realized, as you've talked about in the preparatory marks, the company has some EPS flexibility despite the weaker sales, you know, in the form of lower sort of compensation expense versus last year, the HMM that's been stepped up, some more share or purchase versus your sort of initial expectations. So I guess my question is, how do you make sure that you don't have to do that?
Speaker Change: Jeff I wanted to chat a bit about you know I realize as you've talked about in the prepared remarks. The company has some some EPS flexibility. Despite despite the weaker sales in the form of lower compensation expense versus last year. The H M. M. That's been stepped up some more share repurchase versus your sort of initial expectations. So I guess my.
Speaker Change: <unk> is.
You know, it's 24 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 25 and beyond. That's a question I'm sort of getting a lot this morning, so just wanted to get your thoughts on that if I could.
Is 24, a year, where maybe the company, perhaps should lean in even more.
Speaker Change: And maybe a little less concerned about sort of a specific EPS range. If you will in order to set it up you set the company up for more sustainable sort of growth in 'twenty five and beyond that's a question I am sort of getting a lot. This morning. So just wanted to get your thoughts on that if I could.
Yeah, Andrew, I'm glad you asked and I appreciate the fact you're getting a lot. I think it's a really important question because, you know, our job is to maximize long term shareholder return, not any particular quarter, frankly, even any particular year. And so one of the things that we, as we look back over time,
Speaker Change: Yes, Andrew.
Speaker Change: Glad you ask and I appreciate the fact, you're getting a lot I think it's a really important question because our job is to maximize long term shareholder return not in a particular quarter or frankly, even in any particular year and so one of the things that we as we look back over time.
when the consumer is stressed and the results are harder to come by, you know, one of the things we've seen successful companies like ours do is reinvest for the future.
Speaker Change: When the consumer is stressed and the results are harder to come by one of the things we've seen successful companies like ours do is reinvest for the future.
And that comes in the form of consumer investment, but also investment and capability, things like strategic revenue management and performance marketing and automating supply chains and things like that. And so, in coming, it's going to be great.
Speaker Change: And that comes in the form of consumer investment, but also investment in capabilities things like strategic revenue management and performance marketing and automating supply chains and things like that and so incumbent and included in our results as an increase in consumer spending even though we've guided down on our sales for the year will still invest in consumer spend.
included in our results is an increase in consumer spending, even though we've guided down on our sales video. We'll still invest in consumer spending.
And we're still investing all the capabilities that we know will drive our growth, not only for this year, but in years to come.
Speaker Change: And we're still investing all the capabilities that we know will drive our growth not only for this year, but in years to come and then that's that's with regard to growing revenues, but also maintaining our discipline on H M M and automation add in.
And then that's with regard to growing revenues, but also maintaining our discipline on HMM and, you know, automation and.
and using AI and our supply chains are going to be important parts of that as well. So one of the things that I want to make sure you can tell your investors is that while our profit guidance is still 4% to 5% growth on EPS.
Using AI in our supply chains are going to be important parts of that as well. So one of the things that I want to make sure you can tell your investors is that.
All our profit guidance is still 4% to 5% growth on EPS, that's inclusive of making sure we maintain our reinvestment in the business and we're all up and we're able to do that because our <unk> levels are very high right now were taken out costs from our supply chain and as you mentioned, our admin costs are declining.
That's inclusive of making sure we maintain our reinvestment in the business. And we're able to do that.
because our HMM levels are very high right now. We're taking out the cost from our supply chain and as you mentioned, our admin costs are declining.
Great. Thanks, Thanks for that and then just on a bit more on the faster competitor normalization of shelf availability comments that he 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.
Speaker Change: And what what have you seen that mean for promotional intensity or not thanks. So much.
Alright, Andrew I'm going to try.
Speaker Change: Try to address all of those questions in if I Miss one come back because I didn't.
You mean to skip on the off shelf availability when we put our guidance together for this year I mean, we grew at 10% last year and the original guidance was 3% to 4% this year and so we knew that unsafe off shelf ability would be a headwind for us because frankly, our supply chain has held up a lot better than.
Yep, on the off self availability, you know, when we put our guidance together for this year, I mean, we grew at 10% last year and original guidance was three to four percent this year. And so we knew that unsafe of shelf ability would be a headwind for us.
because frankly our supply chain held up a lot better than our competition did a year ago. So we calculated, we factored that into our guidance for this year. But the fact of the matter is on-shelf availability for our competition increased a lot faster, particularly private label and small players, faster than we had anticipated.
Speaker Change: Than our than our competition did a year ago. So we calculate we factored that into our guidance for this year, but the fact of the matter is on shelf availability for our competition increased a lot faster, particularly private label on small players faster than we had anticipated importantly.
importantly, they're now catching up to our on shelf availability. And so we've actually improved our on shelf availability this year. So it's not that we have gone backward, we are on our on shelf availability is higher now. And you can see that out because we've
Speaker Change: Importantly, they are now catching up to our on shelf availability and so we've actually improved our on shelf availability. This year. So it's not that we have gone backwards.
Our on shelf availability is higher now and you can see that out because we.
reduced our disruption cost. It's just that our competitors have increased quite a bit and now have you know kind of drawn even with us after trailing for like four years.
Speaker Change: Reduced our disruption costs.
Speaker Change: Our competitors have increased quite a bit now have kind of drawn even with us after trailing for like four years. So.
So, you know, that's the first part of the question. We anticipated it, but not the rate of change.
Speaker Change: So.
Speaker Change: That's the first part of the question, we anticipated, but not the not the rate of change.
In terms of the, and we'll laugh, we'll start lapping that really in kind of late April and May of this year, so that's when we started to see this impact.
Speaker Change: In terms of the and we will lap will start lapping that really in kind of late April and May of this year. So that's when we started to see this this impact.
In terms of distribution, one of the things, you know, our teams across the board, certainly in North America retail are really executing well. Our share of distribution is actually up.
Speaker Change: Terms of in terms of distribution one of the things that our teams are.
Speaker Change: Across the board certainly in North America retail are really executing well our share of distribution is actually up.
And so there's not a problem with our distribution. In fact, the opposite, our distribution looks good. And I will say that I'm really excited about our innovation in the back have of this year, which I'm hoping we'll bolster that further. We've got good innovation in cereal. We've got good innovation in yogurt and soup and Old El Paso.
Speaker Change: So there is not a problem with our distribution in fact, the opposite our distribution looks good and I will say that I'm really excited about our innovation in the back half of this year, which I'm, hoping we will bolster that further we've got good innovation in cereal, we got good innovation in yogurt and soup in old El Paso.
and Haagen-Dazs. And so, you know, as I look across our big, you know, billion dollar businesses, our innovation lineup is really good and frankly better than it was last year. And so, as we look to the, you know, the next half of the year,
Speaker Change: And Hagen Dazs, and so as I look across our big billion dollar businesses. Our innovation lineup is really good and frankly better than it was last year and so as we look to as we look to the next half of the year.
Speaker Change: I think we can see our distribution continuing to build.
I think we can see our distribution continuing to build. As what it means to the promotional environment, it's been a very rational promotional environment against some thoughts to the contrary.
Speaker Change: It means to promotional the promotional environment, it's been a very rational promotional environment against some thoughts to the contrary we are seeing the number of promotions pick up this year as would be expected.
We have seen the number of promotions pick up this year, as we expected, because of on-shelf availability. Importantly, we've also seen the quality of the merchandising, specifically the quality of merchandising that we get.
Speaker Change: Because of on shelf availability importantly, we've also seen the quality of the merchandising specifically the quality of merchandising that we get has also accelerated because of the quality of merchandising has.
has also accelerated and because the quality of merchandising has improved for us.
Speaker Change: <unk> has improved for us we've seen the list we receive but also the rois are we receive have had been better than they were a year ago, but importantly, and this is a really important point, even though the level of merchandising has increased in frequency has not increased and death.
Speaker Change: And even the frequency is still below where it was before the pandemic and the and the depth of the promotion is well below so.
Speaker Change: So yes, we're seeing increased levels of promotion we expected that.
Speaker Change: And frankly, the returns are better because of the quality of merchandising that we're seeing.
Speaker Change: Great. Thank you so much and have a great holiday.
Speaker Change: Thanks, you too.
Speaker Change: Our next question is coming from the line of Ken Goldman with Jpmorgan. Please go ahead.
Ken Goldman: Hi, Thank you good morning.
Ken Goldman: When you visited in New York, a couple months ago. You mentioned that you are you maybe lean in a little bit harder to share repo. So I don't think today's announcement on that line item was a huge surprise, but.
Ken Goldman: I guess I'm curious you've also spoken about your ongoing desire to be flexible for potential strategic acquisitions and I was just wondering is there any read through from your willingness to.
Ken Goldman: To purchase more shares than you initially expected into how you kind of see the ripeness of M&A opportunities I guess in today's market.
Ken Goldman: Yes, Ken This is Jeff let me, let me start with that question and coffee. If you want to add any color commentary there would probably be helpful too but.
Jeff: The fact that we 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.
Jeff: And then increasing our dividend and then if we see M&A, we'll we'll certainly do more M&A and if not we said we repurchase shares wishes, which is what we're doing ad.
Jeff: Importantly, our net debt to EBITDA levels are in a good place and.
Jeff: So to the extent that we see something that we think can create shareholder value in terms of portfolio reshaping, where we're more than capable of doing that so what you've seen is really a reflection of our executing against that.
Jeff: The capital allocation priority areas David.
David Palmer: I think Ken the only other thing I'd add is just to state it.
David Palmer: The obvious sort of underlying points, we're getting additional leverage out of our repurchase activity. So the dollars are going further because of the pressure obviously on the stock as much as the stock has come down since our since the beginning of our fiscal year. So thats also amplifying the impact in terms of what the diluted share count and the acceleration into.
David Palmer: Into the front half of the year, but I think I'd reiterate Jeff's point, we expect to have more than ample flexibility for M&A should we see the right project or set of projects. None of the things we're doing at share repurchase we would expect to take our leverage above three times net debt to EBITDA.
David Palmer: And then changing subject one of them more appealing elements of pet food as a category has been the.
David Palmer: The high level of switching costs, especially in premium where there's less price sensitivity to just curious, though given some of the challenges facing blue.
David Palmer: Is it fair to wonder if maybe the cost to switch isn't quite as high as we all thought in that premium isn't quite as protected or do you think maybe we're just in a unique time when the specialty channels kind of lagging at the same exact time that the consumers suddenly worse off.
Speaker Change: Yes, Ken.
Ken Goldman: That's a fair question I think there are either two things at play here and one of you pointed out but I'll I'll start I'll start on another area as we as we look at the pet food business the feeding business and certainly that was the majority of the business. We bought when we bought Blue Buffalo is feeding is relatively inelastic and when we see that with our dry pet food bulk.
Ken Goldman: Cat and dog food performance.
Ken Goldman: But but treating and we bought into that when we bought the pet food business from from Tyson. A couple years later that is actually more elastic and as more of an impulse purchase and that's why that's why when you see the economy as it is people trading down to less expensive treats if theres still trading and trading a little bit out of trades because.
Ken Goldman: They're trying to economize on that but they stick with the feeding and so the first part of the question. The first part is that the feeding part is actually not more inelastic than we had thought.
Ken Goldman: Yes.
Ken Goldman: But trading is more elastic the second piece is a combination as you say I mean, I I don't remember the last time, we've seen 30% increase in cost.
Ken Goldman: Over three years and while it's relatively an elastic it's not completely inelastic.
Ken Goldman: And so the combination of the.
Ken Goldman: The tremendous increase in input costs combined with the pet specialty channel, where we over index.
Ken Goldman: That is that there is no question that those two things they've had an impact on our business in the short term, but importantly, as we look over the five years, we've owned the business we've doubled the business. The Blue band brand is really strong when we when we execute well against it whether it's on life protection formula advertising or or a holiday treats or things like that we see that business really respond well.
Ken Goldman: And it's very clear to us the Humanization trend is going to continue in that blue is well placed to capture that over the course of time.
Speaker Change: Our next question is coming from the line of Nik Modi with RBC capital markets. Please go ahead.
Nik Modi: Yes, thanks, good morning, everyone.
Nik Modi: Okay.
The promotional yeah I wanted to follow up on the promotional comment one thing. We are hearing from retailers is the lift doesn't seem to be as good as we've seen historically so I. Just I was hoping you can just comment on that and is that something youre seeing in the marketplace.
And does that kind of maybe be it sends a signal that perhaps absolute price points have become too high I would just love your comments on that.
So.
Nik Modi: And we've talked about historical it it kind of depends Nick on what we 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.
We see as our list of actually improved vis vis where they were a year ago.
Nik Modi: If we look to see where the lifts are versus where they were four years ago, they're not quite at the levels, where they were four years ago and I don't have a fact that I can point to is why exactly that is the case, but I would I would tell you that.
Nik Modi: 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 you know, whether thats food or gas or rent or any number of things that that is absolutely the case and it'll take a little while for consumers to settle and to what.
Nik Modi: Price points are to the extent, we continue to see inflation, which we do even if at more modest levels. So I would say that relative to a year ago. We're pleased with the progress of our less but relative to historic pre pandemic, they're a little bit lower than I would surmise that it's the consumer are catching up to a new reality.
Speaker Change: Great. Thanks, I'll pass it on.
Speaker Change: Our next question is coming from the line of Pamela Kaufman with Morgan Stanley. Please go ahead.
Pamela Kaufman: Hi, good morning.
Pamela Kaufman: Good morning.
Pamela Kaufman: I had a follow up question on guidance for this year just wanted to see if you could walk through the puts and takes of the updated outlook.
Our sales outlook implies about $800 million in sales this year at the midpoint versus before.
Narrowed your EBIT growth guidance slightly compared to your prior expectation.
Can you just walk through I know you have that higher savings.
Pamela Kaufman: Savings, but where else are you finding offsets in the P&L because it wouldn't seem to explain the fall.
Pamela Kaufman: Okay.
Pamela Kaufman: On the.
Pamela Kaufman: The lower impact on EBIT changing.
Pamela Kaufman: So Pam Kofi Annan going to tag team that can be talk about that let me talk about the revenue in that Kobe is going to take the.
The rest of the P&L side on the revenue side the way the way I think about our guidance is that in order to hit the low end of our guidance. So let's call. It minus 1% that would indicate that we would see a continuation of the topline performance we saw in Q2.
Pamela Kaufman: And which would 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 you know about the same as we saw in the second quarter.
Pamela Kaufman: The higher end of our guidance would suggest 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 from March and April of last year.
Pamela Kaufman: So those two things combined with.
Pamela Kaufman: A little bit better share performance based on the out of stock situation changing near the end of the year. We can hit the top end of the guidance. We suggested does that kind of brackets of topline I'll, let I'll, let Toby talk a little bit more about the profitability for Pam and thanks for the question.
Toby: Just note the H M M adjustment is pretty significant as a reminder, the past two years, we've delivered on below our historic levels is kind of 4% at 3% for each of the prior two years due to the supply chain disrupted environment.
Toby: We are now on pace to deliver 5% against an early expectation for that is the biggest single contributor, but we are seeing.
Improvement in our inflation, but not significant enough to change the rounding so I would say a modest contributor as well, but the other components in gross margin is.
Toby: Fly chain related disruption costs. So as I mentioned earlier one of the features in this environment is supply chain stability has allowed us to get at some of those embedded costs, we took on to operate in.
Toby: In this environment and we made sequential improvement over the last four quarters on this and most acutely within our North America retail business and then lastly, the adjustment of our incentive off of last year's peak levels. So as you know.
Toby: Last year, a really strong year of performance.
Historically high levels of incentive based comp, which is variable based on the top and bottom line projections and thats both normalized at the start of the year or two.
Toby: Two our base expectation of our planned targets and now as we take the top line down that's almost $100 million and reduction in admin expense. So as you take all of those.
Toby: That gives us the confidence to keep within the range, albeit a little tighter as volume expectations come in from the top of the year.
Speaker Change: Thanks, that's very helpful.
Speaker Change: And just a follow up question on gross margin and they're now back to pre pandemic levels.
Speaker Change: Or are you thinking about the potential for gross margin expansion from here.
Speaker Change: On one hand, you have the benefit from the H M M, but I'm, assuming there'll be some volume deleverage there how should we expect gross margin.
Speaker Change: Goodbye.
And at the right level here, yes, well, okay, I think implied within our guidance would be little bit less growth.
<unk> margin expansion bolstered obviously by gross margins in the back half as we see a step down on a sequential step down in the contribution from price mix as we lap last year's SRM actions fully by Q4 of this year.
Speaker Change: I just note we've made significant progress at the gross margin level.
Speaker Change: And bolstered in part not just by <unk>. These past two quarters, but in part by the disruption cost that I mentioned earlier 170 basis points to 120 basis points in the.
The back half of last year and the first half of this year, respectively. So I would expect we'd see more normalized levels of gross margin expansion going forward kind of offer off of this offer. This space. There is still a little bit more disruption related cost to get out primarily in some of our other businesses outside of <unk>.
Speaker Change: So that will give us a little bit.
Speaker Change: Tailwind, but to your point given the volume environment, that's largely going to go to offset the impacts of deleverage.
Thank you.
Speaker Change: Okay.
Speaker Change: And our next question is coming from the line of Matthew Smith with Stifel. Please go ahead.
Matthew Smith: Hi, Good morning, I wanted to follow up on the elevated level of H M. M savings here in the year, you mentioned it to 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 as a pull forward.
Matthew Smith: Word from.
Matthew Smith: Savings that you would expect next year I guess, that's another way of saying just how sustainable is this elevated rate of H M. M savings as you exit fiscal 'twenty four.
Matthew Smith: Okay.
Matthew Smith: Expect that.
Matthew Smith: If the supply chain environment remains stable and continues to stabilize even a little further we will have the ability to deliver at least in line with our historic levels of about 4% 4% of Cogs.
Matthew Smith: I would expect that the contributions from getting out some of those other disruption related costs that sit in Cogs.
Matthew Smith: To decrease a bit here as we gathered a good chunk of them on the.
Matthew Smith: On the back of our <unk> business and as we see maybe a smaller base of course in the other three segments. So all things equal I think 4% would be a good long term estimate for us to migrate back to provided that the supply chain environment continues to cooperate.
Speaker Change: Thank you, Kevin and Jeff maybe a follow up.
Speaker Change: 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 'twenty, four youre holding and gaining share in the majority of the distribution of your of your categories. 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 shelf normalizes.
Speaker Change: Yes, one of the things.
Speaker Change: I'm most pleased with is that you know over the last five years, particularly in North America retail we've gained share in 60% of our categories and we continue to execute well and you know the key of our success once we start to lap the on shelf availability and once we lap the pricing activities from from March and April will be to the question.
Speaker Change: Andrew put pros, which is making sure we maintain our brand building support and really good brand building.
Speaker Change: Make sure we execute against but I think it really good innovation and continue to execute in store and if we do those things and I wouldn't I would expect us to do those things then our share performance will certainly improve over time and hopefully as we're exiting this fiscal year and beginning of next fiscal year, we will we will see that happen interestingly.
Our dollar share performance has not been what we needed to be in.
Speaker Change: In terms of pound share, we're growing we're growing pound share at about 40% of our categories and that's because even though our pricing trailed inflation. So we responded to inflationary pressures were actually more agile than our competitors and so that provided us a dollar share.
Speaker Change: Benefit last year and this year, it's a it's a.
Speaker Change: A headwind, but we are growing pasture on roughly 40% of our categories.
Speaker Change: Thanks, Jeff I'll leave it there and pass it on.
Speaker Change: Thanks.
Speaker Change: Our next question is coming from the line of Michael very with Piper Sandler. Please go ahead.
Speaker Change: Sure.
Michael Very: Thank you good morning.
Michael Very: I wanted to.
Michael Very: I have a couple of follow ups on the shelf availability you said, it's improving for competitors would you say that.
Michael Very: There's still headwinds to come there or is that sort of all caught up.
One more level and then on the promotional sort of.
Related to that.
You gave some color on how that environment looks but.
Given your guidance update it would seem like strategically you'd rather take a little bit of volume.
Michael Very: Push promo much harder.
Speaker Change: I suppose first is that a fair characterization.
What would make you lean in more on the pricing side.
Speaker Change: On the on the on shelf availability I mean, the the competitors, who have kind of caught up to our levels and that's been pretty stable for you know for the past few months and I wouldn't accept I wouldn't expect that to accelerate so I think we've seen a stabilization in that that we will see it is that they are on shelf availability.
<unk> ability.
Speaker Change: Equaled ours I'll remind you. So we're actually we're doing quite well so it's equal to ours.
Speaker Change: We'll see if they will see that benefit for the next three or four months.
Speaker Change: They start to lap it a year a year from now and so while it has stabilized.
Speaker Change: We'll see some of our competitors see a see a benefit for that for the next few months and then and then they work.
In terms of the pricing environment itself, I'm, not really going to get into the specifics of our future pricing.
Speaker Change: What we do see is that I think importantly, we've seen inflationary environment ahead of US I know theres been talk of deflation in some cases that may be true for things like commodities like like milk and eggs.
Speaker Change: But its certainly not true for restaurants, and their inflation is actually outpacing ours and and we see inflation in the low single digits. So you look at our category.
Speaker Change: Pricing and it's somewhere in the 2% to 3% range. So we see continued inflation even at.
Speaker Change: At a lower level and usually pricing tends to follow inflation, because that's the basis on which we which we increase prices if we see an inflationary environment and so the eye.
As we look at trade offs, you 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 by innovating and making sure the products are available when and where people want them.
Speaker Change: Okay. That's really helpful and just one quick follow up on Pat you had mentioned the <unk>.
Speaker Change: Retailer inventory destocking and characterized it as a temporary headwind is that just because there's only so low they can go or do you expect it to reverse.
I do not I do not expect it to reverse I think that there's only so low that I can go in.
We may see a reduction again in the third quarter, because I suspect that our our sale our reported net sales are going to lag our sales out too.
Speaker Change: To consumers and so we may not have seen the bottom of that as we as we look at our third quarter.
Speaker Change: But it really is a more of a fight I don't see a rebound in inventory levels, especially as some of our retailers specifically look to manage their working capital.
Speaker Change: Okay, great. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Our next question is coming from the line of Chris Terry with Wells Fargo Securities. Please go ahead.
Speaker Change: Yeah.
Chris Terry: Hi, good morning, everyone.
Chris Terry: Good morning, good morning.
Chris Terry: So just just a couple of quick follow up for me.
Chris Terry: I guess number one and I think you've been clear about this but maybe just.
Chris Terry: You can put a bow on this in your prepared remarks, you mentioned that price mix will remain positive in fiscal 'twenty four.
Chris Terry: I'm not sure if I'm reading too much into this but is there an expectation that price mix could turn negative in any given quarter head near or medium term because of mix.
Chris Terry: Mixed dynamics or potentially some step up in promotional activity.
Speaker Change: And then just secondly, Jack.
Jack you mentioned an expectation for some improvement.
Jack: Category growth.
Jack: That just associated with lapping snap benefits as you get deeper into your fiscal Q4.
Speaker Change: I'll take the first part of that question and then I'll, let Jeff get you on the second so our.
Speaker Change: Mutations on price mix are really built around the fact that will be will be sequentially stepping down as we lap pricing actions that we took throughout last year.
Speaker Change: Should fully lap those.
Speaker Change: By the time, we get to the end.
Speaker Change: The fiscal year.
We're not.
Expecting any of the quarters.
Speaker Change: To deliver negative price mix, but nearly just a step down in the contribution from price mix to total.
Speaker Change: Our rns.
Speaker Change: Chris This is Jeff Siemon.
Pointed out there is.
Jeff Siemon: What are you seeing over the last couple of quarters as mix even at the segment level is more of a headwind.
Jeff Siemon: As for example, our pet business is.
Jeff Siemon: Growing slower than the other parts of the business, that's a high price per pound business as our foodservice business, which is low price per pound is outperforming and so there are mixed elements within the segments that do depress the overall enterprise price mix.
Jeff Siemon: And when you ask a question about growth at the at the category level.
Jeff Siemon: There are there are a couple of headwinds one is just a little bit of consumer behavior, and feel any economic pressure and a little bit less discretionary spending and and you know I don't frankly know when that will will turnaround consumers are certainly still stressed right now they feel the impact of inflation over the past few years, and we certainly understand that the <unk>.
Jeff Siemon: Thing that we that's more discrete really is the lapping of the snap emergency allotments benefits from last year and those are those kind of go state by state, but they took place last year between January and March in and that may be that may be a one point benefit to the categories that we that we're in and so it's not it's not.
Jeff Siemon: <unk> increase, but certainly a stabilization of the categories and we will start to like as I said, we will start to lap that here and in the next month or so throughout our fiscal third quarter.
Speaker Change: Okay helpful. I'll pass it on thank you.
Speaker Change: Unfortunately, I think that's all the time, we're going to have this morning.
Speaker Change: For all the good questions and discussion I 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.
Speaker Change: That does conclude the conference call for today, we thank you for your participation ask that you. Please disconnect your lines.
[music].
Speaker Change: Sure.
Speaker Change: Please disconnect your lines.