Noel Wallace: Yes, thanks, Filippo, and good morning. So, again, a great quarter for Hill’s, obviously with strong balanced pricing and volume growth in the quarter. That growth was quite pervasive across the world as we saw a good growth in the US, as well as in some of our emerging markets, and likewise in Canada. Category has slowed a bit, as you’ve heard from others. That’s, as you mentioned, a combination of sustained pricing in the category over the last four or five quarters and agg prices still remaining high. And so, it’s not to be unexpected that the volume would slow a little bit. As you rightfully point out, you’ve seen some conversion from wet into dry. That lowers the volume. You’ve seen, obviously treats, which is more discretionary.
And you’ll recall, as we said in the Q2 call, we don’t have a significant business at all in the treats segment. And likewise, I would say the non-science brands continue to perform quite well, but are not immune to the continued challenges that that you highlighted in the category. But as I mentioned just a moment ago, we continue to grow share, and for us, this is a share gain. We only have 5% to 6% penetration in our largest market in the US. So, we have a lot of upside still, hence the reason why we continue to bring strong innovation in the market. Hence the reason why we continue to advertise very aggressively to drive household penetration. Likewise, we see opportunities continued in the prescription diet. Our studies show that only about 5% of pet owners are using a prescription product, whereas potentially up to 80% could be using it.
So, that affords us an upside. We’ve talked about wet, obviously some conversion from wet into dry, but we have very low shares in the wet segment, which has been one of the historically growing segments. And we have plans, as we’ve ta talked about in the past, to continue to grow that. So, overall, we feel we’re positioned well, but not immune to some of the softness that we’ve seen. But likewise, as I mentioned, we’re very focused on driving share and ultimately expanding this business internationally. We’ll watch the category carefully. We know our retailers are very focused on nutrition, and the science segment continues to perform well, and that’s where we’re putting our strategies in order to continue to drive penetration.
Operator: Our next question will come from Jason English of Goldman Sachs. Please go ahead.
Jason English: Hey, morning folks. Thanks for slotting me in, and let’s stay there. Let’s stay on pet nutrition for a minute, but let’s pivot to maybe the bottom line. Looks like gross margins for that segment down 360 bps this quarter, kind of bringing two-year to down 900, very consistent with what we saw last quarter. And I get the mixed benefits of the acquisitions. I get the plant startup expense. I get the inflation, like these are all, obviously factors that have been contributing to the pressure, but I’m expecting all of them to sort of subside as you start to rotate the product out of the Red Collar assets, as you start to pivot some of your resources from starting up plants to attacking some of the efficiency, and hopefully as some of the input cost pressure subsides and price catches up.
But we haven’t yet seen progress yet. What is a reasonable expectation for us as we try to level set our own expectations? When should we start to see the benefits of all those dynamics come to fruition? And how much recovery should we be expecting?
Noel Wallace: Well, thanks for the question. Again, sequentially, things are moving in the right direction, and that’s exactly what we’ve talked about in previous calls. And obviously, operating profit and EBIT continues to inflect where we want it. We continue to support the business with a disproportionate amount of our total increase in advertising, as we talked about. That is, again, strategic based on the low penetration and the real headroom that we continue to see in the category for us. As we see agg prices have somewhat flattened out, and that’s good news for us, given a lot of the pricing that we’ve taken, we anticipate that that will start to inflect more positive in our gross margins as we move forward. As you rightfully pointed out, we have a significant amount of cost is still moving through the P&L on getting our new facilities ramped up.
The new wet facility will start to ramp up here in the fourth quarter. So, we’ll have some costs associated with that, but ultimately, over the longer term, those costs will subside and we feel good about where we are with the new Red Collar plants, getting those integrated in. So, overall, with pricing continuing to flow through, with agg prices holding and continuing to drive premiumization in the category, we feel good about the long-term trajectory of operating margins in this business.
Operator: Next question will come from Olivia Tong of Raymond James. Please go ahead.
Olivia Tong: Thanks. Good morning. Want to ask you a little bit more about North America, given that – a couple of things. First, the pricing accelerated on a two-year stack. If you could talk about the drivers of that. I assume promotion is a big piece of that. You mentioned advertising was up 25% in North America. Was that the highest amongst the divisions? And just if you could talk a little bit more about how you think about the ROI and the timing of the impact of that higher advertising. Thank you.
Noel Wallace: Yes, thanks and good morning, Olivia. Again, as I mentioned earlier, we’re pleased with the progress. Again, this is a very deliberate and strategic execution of how we’re trying to get the health of our brands and the health of our P&L in a better place. And as I mentioned in the second quarter call, we may have pulled back a little bit too far on some of the promotional cadence, but we’re adjusting that, but adjusting it very prudently where we see the ROI and where we believe we can drive sustained volume and share opportunity moving forward. The 25% increase was not the highest. As I just mentioned, Hill’s continues to receive the disproportionate amount of the advertising increase. But North America, again, given the vibrancy of that market and the long-term strategic importance of that market, we will continue to invest for the long term.
Great progress on the operating margins, as you saw move through that P&L. That is a reflection, again, I think of a much more prudent approach to pricing in the market and our promotional cadence. And we feel good about the sequential growth that we saw in the quarter and the sequential growth that we’ll continue to see in the fourth quarter.
Operator: The next question will come from Bryan Spillane of Bank of America. Please go ahead.
Bryan Spillane: Thanks, operator. Good morning, everyone. Had a question on ad spend. I think year-to-date now we’re over 12 – we’re running at a rate that’s about a little over 12% as a percentage of sales. And so, given the increase that will end the year at, is this a good base to think of in terms of ad spend going forward, or would you consider taking up further? So, just trying to get a sense now if we’ve kind of rebased or if this is a new base in terms of ad spend.
Noel Wallace: Yes, thanks, Bryan. Listen, it’s not as much as a percent of sales. It’s really about how we’re getting – what return on investment we’re getting for that. And clearly, you’ve seen that play through the P&L on the strong organic in the business, the continued growth on market shares around the world, particularly in those strategic categories that we’re pushing more deliberately with the advertising. So, it’s really about an ROI. And as we see that play back through the P&L, which we clearly are, we’ll continue to invest. So, we’re really focused now, I’ll say, on making sure we continue to optimize that investment. We put a lot more focus on programmatic buying, a lot more focus on personalization and getting content right.
You heard E talk about when we were down in Florida with regards to the importance of advertising creative and content development. So, putting a lot more focus to get better ROI for what we’re delivering. So, not necessarily a percent, but overall, we’re getting the performance through the P&L and through our businesses on the ground.
Operator: Our next question will come from Steve Powers of Deutsche Bank. Please go ahead.
Steve Powers: Hey, great, thank you, and good morning. Maybe just two questions if I could. One is to follow up and round up the volume conversation. You talked about line of sight to improvements in North America and in Asia Pacific. The other area of softness in the quarter was Europe. Just love some perspective on sort of your path to volume improvement in that region. And then more broadly, stepping back, I guess this builds a little bit on the question Bryan was just asking, but you’ve had just tremendous success this year in driving underlying margin improvement, which has allowed the AMT reinvestment that we’ve seen year-to-date. I guess, as you are scenario modeling and starting to plan for the year ahead, how do you weigh the puts and takes on margins as you look ahead? And what’s your level of confidence you can continue to drive that underlying margin improvement to enable the investment should the ROI exist?
