Campbell Soup Company (NYSE:CPB) Q2 2024 Earnings Call Transcript
Campbell Soup Company (NYSE:CPB) Q2 2024 Earnings Call Transcript March 6, 2024
Campbell Soup Company beats earnings expectations. Reported EPS is $0.8, expectations were $0.77. Campbell Soup Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, ladies and gentlemen, and welcome to the Campbell Soup Company's Second Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After today's presentation, [Technical Difficulty] to ask questions. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host Rebecca Gardy, Chief Investor Relations Officer. Please go ahead.
Rebecca Gardy: Good morning and welcome to Campbell's second quarter fiscal 2024 earnings conference call. I'm Rebecca Gardy, Chief Investor Relations Officer at Campbell. Joining me today are Mark Clouse, Chief Executive Officer, and Carrie Anderson, Chief Financial Officer. Today's remarks have been pre-recorded. Once we conclude the prepared remarks, we will transition to a live webcast Q&A session. The slide deck and today's earnings press release have been posted to the Invest Relations section on our website, campbellsoupcompany.com. Following the conclusion of the Q&A session, a replay of the webcast will be available at the same location, followed by a transcript of the call within 24 hours. On our call today, we will make forward-looking statements which reflect our current expectations.
These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk. Please refer to Slide 3 of our presentation or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in the forward-looking statements. Because we use non-GAAP measures, we have provided a reconciliation of each of these measures to the most directly comparable GAAP measure in the appendix of our presentation. Slide 4 outlines today's agenda. Mark will provide insights into our second quarter performance as well as in-market performance by division. Carrie will then discuss the financial results of the quarter in more detail and outline our guidance for the full fiscal year 2024, which we reaffirmed this morning.
And with that, I'm pleased to turn the call over to Mark.
Mark Clouse: Thanks, Rebecca. Good morning, everyone, and thank you for joining our second quarter fiscal ‘24 earnings call. As you saw in our press release this morning, we once again delivered on our commitments with sequential improvement in volume trends and year-over-year operating margin expansion in both divisions. While it is true that category trends have slowed over the last year, I'm encouraged by a variety of stabilizing consumer indicators, like consumer sentiment, household penetration, and average categories purchased. However, we are also continuing to see economic pressure impacting select categories and certain consumer demographics. While we expect these trends to improve over time, we're certainly not there yet.
In the meantime, I continue to be very happy with our team's ability to control the controllables, including managing our supply chain and in-market execution. Looking ahead, we are affirming our full-year outlook as we anticipate continued sequential improvement in top line earnings and margin progress while sustaining our best-in-class navigation of this volatile environment. Carrie will elaborate on that a bit later. With that strong foundation in place on the base business, we are eagerly anticipating the closing of the Sovos Brands acquisition in the coming week, adding the best volume-driven growth story in food to our portfolio. At an upcoming Investor Day in late June, we look forward to sharing the vision for Campbell's next chapter, driven by what will be one of the most focused and advantaged portfolios in the industry.
Turning to Slide 7, as expected, organic net sales in the second quarter decreased 1% to $2.5 billion, in line with consumption, with many of our brands exceeding their respective category growth rates and growing share. On a two-year compound annual growth rate basis, top [Technical Difficulty] grew 6%, adjusted EBIT increased 1%, and adjusted EPS was comparable to the prior year, following double-digit increases in both key measures a year ago. On Slide 8, we've highlighted the success of both businesses during the holiday season, including in strategic categories such as condensed cooking in our Meals & Beverages division and cookies in our Snacks division. Our holiday-focused brands delivered a 4% increase in total volume compared to the prior year, driven by our strong brand support programs, terrific in-store execution and robust consumer demand.
Specifically, we had healthy volume and dollar share gains across key seasonal categories such as condensed cooking soup, broth, Pepperidge Farm cookies and Pepperidge Farm Stuffing. During the quarter, condensed cooking holiday volume share reached a five-year high, with volume share gains in each of the nine weeks during the holiday period. In addition, we saw momentum in our Snacks portfolio with brands like Lance, Snack Factory and Late July all reaching five-year highs in volume share. Importantly, we delivered these results while addressing an important question about our ability to achieve this while also balancing profitability. I believe we demonstrated this, evidenced by the operating margin expansion in both divisions. Turning to Slide 9, I wanted to take a moment to discuss the top line expectations for the second half of the fiscal year, as this is both an important driver and a somewhat difficult area to forecast.
As we have consistently shared since providing initial guidance, our net sales expectations reflect a range of timelines for the category stabilization and consumer recovery. Our results through Q2 have been aligned with our outlook. As we look at far easier comparisons ahead, we remain confident in modest sequential improvement throughout the remainder of fiscal 2024. More specifically, we expect flat to low single digit organic net sales growth in Q3, with continued sequential improvement in the fourth quarter. Although this trajectory suggests the lower end of our net sales guidance range, we have half the year remaining and a variety of compelling drivers to help accelerate the recovery. With our supply chain in full force, effective marketing and accelerating innovation, and strong but disciplined promotional activity, we look forward to monitoring the pace of consumer recovery closely, with in-market results serving as a clear indicator of that progress.
Turning to our Meals & Beverages business, we experienced a low single-digit organic net sales decline in the second quarter, which, as expected, tracked closely to consumption. On a two-year compound annual growth rate basis, top line grew 4%, while consumption grew 2%. For the balance of the year, we remain confident in the growth and margin trajectory of this business as consumers continue to seek out our brands for value and quality in a dynamic environment and year-ago comparisons moderate significantly. Turning to Slide 11, consumers continue to prioritize value as shown by their preference for home cooked meals, purchasing food that help them prepare stretchable meals, and smaller and less frequent shopping trips. Our soup portfolio is especially well suited to meet these needs.
Our condensed cooking portfolio saw both dollar and volume share increase in the quarter, marking the sixth consecutive quarter we've held or grew both metrics. We also saw similar strength in our broth portfolio, with Swanson Broth and stock growing above the category rate and dollar consumption up 13%. In addition, while growing consumption, this portion of our portfolio also had dollar and volume share gains in the quarter. While the eating soup landscape remains more challenging, we did see sequential improvement in the second quarter as it relates to dollar share on Chunky and our condensed eating portfolio. The longer term outlook for ready-to-serve soup remains quite strong, supported by a combination of continued Chunky innovation and marketing, expansion of the successful launch of Pacific ready-to-eat soup, and we're also excited about the impact of including the strength of the super-premium Rao’s soup line, adding approximately a full point of share growth to the portfolio.
On Slide 12, let's look more broadly at what the potential next chapter of this great division could be as we prepare to welcome the talented Sovos team to Campbell's. As we announced last month, both companies have certified substantial compliance with the Federal Trade Commission's second request and we're excited to be one step closer to completing the acquisition. Just last week, with their fourth quarter and full-year fiscal '23 earnings results, Sovos announced that they had surpassed $1 billion in annual net sales, a 16% increase versus prior year, led by Rao's, which continues to showcase its premium brand equity with consumers with dollar consumption up nearly 32% in pasta sauce and 53% in the combined frozen meals and pizza segment, jarred soup and dry pasta categories.
When paired with our Meals and Beverages’ iconic category-leading brands and our distinctive fast-growing Pacific Foods brand, the Sovos Brands portfolio will strengthen the division for years to come. In fact, although not an apples to apples comparison, if we were to simply overlay Sovos results in the last quarter with our Meals and Beverage results, we would have gained approximately four points of organic top line growth. Imagine for a moment now the value of combining this with our differentiated Snacks portfolio, and you can appreciate our confidence in the strength of this portfolio headed into the future. So now let's turn to our differentiated Snacks business on Slide 13. We delivered a second quarter organic net sales increase of 1%, a point ahead of consumption in measured channels.
Our power brands net sales grew 4%, following a 20% increase in the prior year for 12% growth on a two-year compound annual rate basis. We were pleased with the net sales performance on brands such as Goldfish, Lance, Kettle Brand and Cape Cod, adding to the remarkable track record of our power brands portfolio even as consumers continue to navigate a tough economic environment. During the quarter, we experienced anticipated pockets of pressure in some of our lower-margin businesses, specifically partner brands and fresh bakery. We continue to balance short-term competitiveness and sustainable margins while taking steps to optimize this portfolio for the future. Partner brands were a one point growth headwind to the portfolio. Although we expect this to continue going forward, it further strengthens the focus of our portfolio on our advantaged power brands.
On the next slide, we highlight the sustained resilience of our power brands. As dollar consumption has grown 24% versus two years ago, we're encouraged by the continued appetite for our core portfolio, which now represents two-thirds of total Snacks net sales. More importantly, we see continued progress on dollar share as power brands have held or gained share for seven straight quarters. Turning to Slide 15, I want to highlight our Goldfish business, which has now held or grown dollar share for six consecutive quarters. Our exciting innovations, proven limited time-only strategy, and strong marketing execution have fueled continued momentum for our portfolio. And our latest innovation, Goldfish Crisps are off to an amazing start. Launched in January, we realized strong velocities greater than other recent category launches and it has exceeded our initial expectations as we begin to move Goldfish into adjacent occasions.
The news on Goldfish gets even more exciting. Goldfish has now officially crossed $1 billion in net sales, making it the second billion-dollar brand in our portfolio, alongside Campbell's iconic red and white soup. Our strategy over the past few years and our continued innovation momentum has propelled Goldfish to its next phase of growth. We remain excited about this brand's momentum and see an incredible road for growth ahead as we strive to make Goldfish a North American mega brand. On Slide 17, I am also excited to share the continued progress we've made on our Snacks margin roadmap. On a two-year compound annual growth rate basis, we grew organic net sales by 8% and operating earnings by 15% with approximately 200 basis points of margin expansion.
We've made great progress this year and remain on track to finish fiscal '24 at an operating margin of approximately 15%. And as we continue to solidify our margin roadmap, we are confident in our ability to add about 100 basis points per year for the next couple of years, thus reaching our target of 17% operating margin for the division by the end of fiscal '26. Even more exciting is the fact that as we further refine our route to market and direct store delivery, or DSD model, we are identifying even more potential efficiencies and savings to fund further investment in the brands or to further expand operating margins beyond 17% in the future. Turning to our DSD transformation initiative on Slide 18, I wanted to provide an update on our route strategy, which adds another important element for our plans to create essentially a single Snacks network.
As we discussed during our first quarter earnings call, we're already executing the integration of our warehouse and depot network as well as upgrading technology across our network and the independent distributor network with the goal of improving efficiency and effectiveness. This leaves independent distributor DSD routes as our next optimization area. Today, the majority of our routes are already operating efficiently where the scale of the business supports separate routes for Pepperidge Farm snacks and Snyder's Lance. We expect no change in these routes. However, for some of our routes, we do not have enough scale to help maximize the economics or efficiency of these routes if they remain separated. To solve this, we've been testing the combination of the entire Snacks portfolio on one truck.
In these limited, underscaled markets, we purchase certain Pepperidge Farm snacks and Snyder's Lance routes, combine them and sell the combined routes back to independent distributors. We're seeing that beyond the efficiency of this, independent distributors have an opportunity to provide better execution and improved service for our customers. When we pair this improved route with our already existing plans to combine the warehouse system into a single location, the net impact should create better scale and help unlock growth for our business, while also helping to benefit both the area independent distributors and our customers with more compelling economics. It's still early days, but the results we've seen thus far give us confidence to expand our pilots and execute a pay-as-you-go model in creating these combo routes.
We expect to convert about a fifth of the Snacks routes nationwide into combo routes over a multi-year roadmap. This plan will not require significant upfront financial outlay, and as I mentioned earlier, we plan to manage it as a pay-as-you-go model. Let me share a little more detail behind this strategy. First, these routes will vary in location, including urban, rural and suburban areas. Second, there are no plans to combine the Pepperidge Farm bakery routes as the focus is on gaining scale and capturing growth across our Snacks portfolio. Third, in markets where we've executed this strategy, the time between purchase and resale has been swift. And finally, given the financial attractiveness of these routes, we're seeing a meaningful increase in multi-route ownership by experienced independent distributors that are existing snacks and bakery IDPs. So wrapping up, the second quarter was another solid and consistent quarter while keeping us on track for the year.
Looking ahead, there is so much to be excited about as we continue the transformation of Campbell's, and again, we look forward to providing these details this summer in a full Investor Day. Next up, Carrie will take you through the second quarter and the second half outlook in a bit more detail.
Carrie Anderson: Thanks, Mark, and good morning, everyone. I'll start by providing an overview of our second quarter results with a top line that came in as expected, operating margin expansion in both the Meals and Beverages, and Snacks divisions, and adjusted EPS ahead of our expectations. Second quarter organic net sales decreased 1%, lapping a 13% increase in the prior year for a two-year compounded annual growth rate of 6%. Adjusted EBIT increased 1% to $364 million, reflecting higher adjusted gross profit, partially offset by higher adjusted expenses including other expenses, R&D expenses and administrative expenses. Adjusted EPS of $0.80 in the quarter was in line with prior year and lapped double-digit growth last year.
Slide 22 provides the drivers of our second quarter net sales performance. Excluding the impact of the divestiture of the Emerald nut business, organic net sales were lower by 1%. During the quarter, we generated 1 percentage point of growth from net price realizations, offset by volume and mix, which was unfavorable by 2 percentage points, in line with the sequential improvement from Q1 that we expected. As shown on Slide 23, second quarter adjusted gross profit margin was 31.4%. We were pleased with the 70 basis point margin expansion, which was driven by supply chain productivity improvements, net price realization, cost savings initiatives, and the favorable impact of volume and mix, which more than offset cost inflation and other supply chain costs.
Core inflation in Q2 was low single digits, consistent with Q1, and significantly lower than the 14% in the prior year, driven by attenuation in inputs such as flour and oil. We continue to expect core inflation to stay within this low single-digit range for the remainder of fiscal '24, down from the double-digit range last year. Net pricing averaged 1% for the quarter, reflecting the remaining contribution from our Wave 4 pricing, our smallest and most focused pricing round. As a reminder, our Wave 4 pricing is now fully lapped. During the second half of the fiscal year, we do not expect net pricing to be a material driver of net sales growth, reflecting our continued balanced and disciplined promotional activity. We continue to deploy a range of other levers to mitigate remaining inflation, including supply chain productivity improvements and broader margin-enhancing initiatives.
We expect these other levers to contribute to margin performance in the second half of the year as inflation remains moderate and volume trends continue to sequentially improve. Through the first half, we have achieved $915 million of total savings under our multi-year cost savings program, inclusive of Snyder's Lance synergies. We remain on track to deliver savings of $1 billion by the end of fiscal 2025. Moving on to other operating items, adjusted marketing and selling expenses were comparable to the prior year. Marketing and selling also remained approximately 9% of net sales, consistent with our targeted level. Adjusted administrative expenses increased by $2 million, primarily due to higher general and administrative costs, and inflation, mostly offset by the benefits of cost savings initiatives.
As shown on Slide 25, adjusted EBIT for the second quarter increased 1%, primarily due to higher adjusted gross profit, partially offset by higher adjusted expenses, including other expenses, R&D expenses, and administrative expenses. Overall, our adjusted EBIT margin increased 20 basis points to 14.8% in the quarter, primarily driven by a higher adjusted gross profit margin. Turning to Slide 26, adjusted EPS of $0.80 was comparable to the prior year and was driven by a slight increase in adjusted EBIT and the benefit of lower weighted average diluted shares outstanding, partially offset by a higher adjusted effective tax rate. Turning to Meals and Beverages, second quarter organic net sales decreased 2%, driven by unfavorable volume and mix.
Lapping an 11% increase in organic net sales in the prior-year quarter, Meals and Beverages organic net sales grew 4% on a two-year compounded annual growth rate. During the quarter, modest declines in US retail were partially offset by increases in Canada and food service. Sales of US soup decreased 3%, following a 7% increase in the prior year, primarily due to lower sales of ready-to-serve and condensed soups, partially offset by an increase in broth. We were encouraged by the sequential volume improvement trends we achieved in the quarter with Meals and Beverages volume only down 2% year-over-year compared to a 6% decline in Q1. On a first half basis, organic net sales decreased 3%, lapping a 13% increase in the prior year. We were also pleased with the progress we've made on Meals and Beverages operating margins.
While segment operating earnings in the quarter for Meals and Beverages were down just slightly, operating margin increased 20 basis points to 17.9%. This was better than expected and we anticipate continued sequential improvement into the second half. Meals and Beverages operating margin for the first half was 19.2%. In Snacks, second quarter organic net sales increased 1%. On a two-year compounded annual basis, organic net sales increased 8%. For Q2, the increase reflects a net price realization of 3%, partially offset by unfavorable volume and mix of 2%. Similar to the comments I made when discussing Meals and Beverages results, we were also pleased with the sequential improvement in volume trends in our Snacks business, with Snacks volumes only down 2% year-over-year in the second quarter compared to a 4% decline in the first quarter.
Sales of our eight power brands increased 4% in Q2 with volumes relatively flat, and for the first half, organic net sales increased 1%, lapping a 15% increase in the prior year. We delivered solid operating earnings and margin performance in Snacks with a 7% increase in segment operating earnings and a 110 basis point improvement in operating margins in the quarter. The higher operating earnings were driven by higher gross profit, partially offset by planned higher marketing and selling expenses. Gross profit margin increased due to the impact of net price realization, supply chain productivity improvements, the benefit from cost savings initiatives, and favorable volume and mix more than offsetting higher cost inflation and other supply chain costs.
Snacks operating margin reached 15% in Q2, and for the first half, operating margin was 14.7%. As a reminder, the Snacks margin in the third quarter of fiscal '23 was 16%, up 330 basis points. This was driven by the benefit of last year's Wave 4 pricing net of inflation and the timing of marketing spend. So although we do expect negative pressure on Q3 margins given the lap from the prior year comp, we remain on track to approximately 15% margin for the year. As Mark mentioned earlier, we further expect Snacks margins to increase approximately 100 basis points per year over the next two years, reaching our stated goal of 17% by the end of fiscal '26. I'll now turn to cash flow on Slide 29. We generated $684 million in operating cash flow in the first half and deployed that cash consistent with our capital allocation priorities to maximize long-term shareholder value.
Year-to-date capital expenditures were $263 million, $108 million higher than in the prior year, reflecting our commitment to invest for growth, particularly in capacity for our Snacks division as well as investments to drive productivity and enhance business capabilities. We also continued our commitment to return cash to our shareholders with $224 million of dividends paid and $29 million of anti-dilutive share repurchases in the first half. Our balance sheet continues to be stable with net debt of $4.4 billion and a net debt to adjusted EBITDA leverage ratio of 2.6 times. At the end of the second quarter, we had approximately $169 million in cash and cash equivalents and approximately $1.85 billion available under our revolving credit facility.
All in, with the $2 billion delayed single draw term loan credit agreement, we are well positioned to close the pending Sovos Brands acquisition. As you'll see on Slide 30, given the consistent and improving performance in Q2, we are reaffirming our full-year guidance provided on August 31st. In the second half of fiscal '24, we continue to expect earnings growth and margin progress, particularly in Q4, benefiting from improving volume and mix trends, moderate inflation levels, and the flow-through of ongoing productivity improvements, as well as second half marketing and selling expenses at our stated targets, which will provide some year-over-year margin benefit in the second half. To provide a bit more clarity about the phasing of the second half, in Q3, we would expect adjusted EPS to be in the lower $0.70 range.
As Mark mentioned earlier, top line guidance reflects a range of outcomes based on the speed of in-market category stabilization. We are encouraged by the sequential improvement in year-over-year sales with first half volumes coming in largely as anticipated, and we remain highly confident in the continued stabilization and ultimately returning to growth in the second half. We are currently pacing to the lower end of the net sales guidance range for the full year. However, we still have half of the year remaining with excellent plans and innovation to help accelerate the rate of sequential improvement moving forward. We will continue to invest in our brands with marketing and selling expenses as a percent of net sales expected at the low end of our targeted 9% to 10% range.
From a phasing perspective, we expect to spend more in the third quarter relative to the fourth quarter. All other guidance assumptions remain unchanged. Additionally, the pending acquisition of Sovos Brands is currently expected to close the week of March 11th, 2024 and is not included in our current fiscal '24 outlook. After the transaction closes, we expect to update guidance for the combined business during our third quarter call. To wrap up, our second quarter tracked closely to our expectations, driven largely by the actions we undertook to position our business for second half momentum. We are confident in our plans for the rest of the fiscal year and our team remains focused on executing our strategy. Within both segments of our business, we expect to deliver margin momentum in the second half, paired with improvements in the trajectory of volume and mix.
In addition, we are excited to be one step closer to completing the Sovos Brands acquisition and look forward to welcoming their team to Campbell's. With that, let me turn it over to the operator to begin Q&A.
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