Campbell Soup Company (NYSE:CPB) Q3 2024 Earnings Call Transcript June 5, 2024
Campbell Soup Company beats earnings expectations. Reported EPS is $0.75, expectations were $0.709.
Operator: Greetings, ladies and gentlemen, and welcome to the Campbell Soup Company Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After today’s presentation, there will be an opportunity 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 third quarter fiscal ‘24 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 prerecorded. 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 Investor 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 third quarter performance as well as our 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 updated this morning.
As a reminder, we completed the acquisition of Sovos Brands on March 12th, and as such, third quarter and third quarter year-to-date financial results include a partial quarter of contribution of Sovos Brands. And with that, I am pleased to turn the call over to Mark.
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Mark Clouse: Thanks, Rebecca. Good morning, everyone, and thank you for joining our third quarter fiscal ‘24 earnings call. As we announced today, we had a solid third quarter with sequential volume improvement, stable organic net sales, double digit year-over-year adjusted EBIT and EPS growth while expanding margins. The integration of the Sovos Brands is off to a fantastic start and has already added significant incremental growth to our company in the third quarter. We feel great about the confirmation of our diligence during the acquisition process and are excited about Sovos’ long runway for growth. We are also excited to be working with the many talented Sovos Brands team members who have joined Campbell’s. We saw stabilizing in-market performance on our base Meals & Beverage business, but faced some moderate category pressure in the Snacks business.
However, we’ve seen improvement in the latest weeks and remain very confident in the continued consumer demand for snacking and the strength of our portfolio of advantage brands. Additionally, we are pleased with our continued Snacks operating margin progress. We are updating our fiscal ‘24 outlook to reflect the addition of Sovos Brands and the ongoing pace of the consumer recovery. Carrie will provide further details on this guidance a bit later. Turning to Slide 7, organic net sales in the third quarter were comparable to the prior year period. As we expected, volume improved compared to the second quarter. Both adjusted EBIT and adjusted EPS increased by double digits, with the recent acquisition having no material impact to adjusted EPS.
In-market consumption was down 2%, but up 6% versus two years ago, as we continue to normalize pricing and volumes. The 2 points of difference in organic net sales versus consumption was primarily driven by strength in unmeasured channels as foodservice and Canada both had strong quarters. It is exciting to see the positive impact on the business from adding Sovos Brands. In Q3, on a pro forma basis, we see a 200 basis point improvement in top line and volume and mix growth. Looking at the now combined Campbell’s, we would rank among the fastest volume driven growth companies in the food sector over recent periods. As integration progresses, we expect to realize further top line and bottom line benefits. I look forward to providing more details at our Investor Day in September about how this acquisition when paired with the rest of our iconic portfolio will fuel the next chapter of long-term growth for the company.
On Slide 9, I want to go into more detail about the current consumer environment. Unquestionably, as prices have begun to moderate, consumers are starting to recover. This is substantiated by the first improvements in consumer confidence in a long time. In addition, we are seeing significant growth in the percentage of the Top 50 edible categories that are maintaining or increasing household penetration compared to the same period last year. Most importantly, we are seeing food volume stabilize as pricing normalizes. Yet it is fair to say that the pace of this recovery has varied depending on the specific category and the consumer’s income level. For example, our Snacks business, which has been the most resilient to date, is now facing some short-term pressure, especially among lower and middle income consumers.
We are seeing some modest improvement in the snacking segment in the most recent weeks, with the expectation of more of a full recovery in the first half of fiscal 2025. Overall, we’re staying focused on what we can control with an emphasis on execution, innovation and strong collaboration with our retail partners to remain relevant and win by meeting them both on quality and value. Growing and improving share trends along with stabilizing volumes are clearly a positive indication, and we expect that to continue going forward. Moving to our Meals & Beverages division on Slide 10, we achieved comparable organic net sales in the quarter. More importantly, we delivered volume improvement from the second quarter as planned. Organic net sales outpaced consumption, reflecting the strength in unmeasured channels.
As mentioned earlier, this was primarily in food service in Canada. As we look at Meals & Beverages on a pro forma combined basis with the addition of Sovos Brands, Meals & Beverages net sales grew 5%. Similarly, combined dollar consumption grew 3% for the quarter. This supports the ongoing transformation of our Meals & Beverages business and demonstrates the ability for this key business to be a positive driver of Campbell’s growth going forward. Now, let me briefly cover our soup portfolio on Slide 11. We had an improvement in share on soup during the quarter fueled by improving trends across most key segments. In particular, as consumers continue to focus on stretchable meals, the cooking side of the portfolio benefited in the quarter with notable dollar share gains in condensed cooking and broth.
It’s important to note that the industry has been experiencing some supply issues more broadly on broth. Given the strength of our supply chain, we’ve been able to step-up production to help meet that need which has accelerated growth in this normally stable category. Although we expect industry capacity to return over time, it’s adding significant new households for Swanson, that we see as a positive indicator for the future. In our ready-to-serve business, although more pressured as a segment, we now have Rao’s ready-to-serve soup business under our umbrella, which had strong dollar share gains in the quarter. Slide 12 illustrates that we have now surpassed one of our main strategic plan goals, which was to build a billion-dollar sauce business.
With the addition of the ultra-distinctive Rao’s Italian sauce, Campbell’s has strengthened its leading share position in the total Italian sauce category in terms of both dollars and units, gaining 3.1 points of unit share and 3.1 points of dollar share in the third quarter. Even more encouraging is the household penetration momentum we are seeing for Prego and Rao’s with both increasing compared to the prior year. On Slide 13, we updated the slide we presented in August when we announced the Sovos transaction. As we had suggested at the time, there were many factors that support the potential for additional growth on Rao’s. I’m happy to say almost a year later, we have seen the validation of those assumptions as we continue to progress toward our next billion-dollar brand.
I’m excited that Rao’s is exceeding our expectations regarding household penetration and that we’re seeing faster growth among younger consumers. The path ahead will continue to be fueled by household penetration gains and strengthening distribution and assortment. With innovation in adjacent categories as additional growth drivers, the future is bright. Moving to frozen on Slide 14, although not a particularly big bet in our growth model, it was encouraging to see the progress in the quarter. Our total frozen meal business maintained positive momentum with strong velocity increases as the team has optimized assortments and distribution and with the continued strong performance from our expanding frozen pizza portfolio, we continue to see strong potential in this business.
Overall, we continue to be encouraged by the success of Rao’s disciplined and thoughtful brand extensions and we’ll provide a comprehensive update on our plans going forward during our upcoming Investor Day. I’ll wrap up my remarks on the Meals & Beverages division by discussing noosa on Slide 15. The noosa business has been one of the more positive surprises in the Sovos Brands acquisition. It is an excellent product and brand that continues to perform very well. In fact, in the quarter, the noosa’s spoonable business returned to dollar growth, driven by the success of its 8oz yogurt. Additionally, the 8oz yogurt has now experienced 14 quarters of consecutive dollar consumption growth. Even though we have decided to explore strategic alternatives for the business, as yogurt is not a strategic category for Campbell’s, the business has truly exceeded our expectations.
I am grateful to the noosa team for their tremendous focus and commitment. It is a well-run business with a dedicated team and great tasting unique products. Turning to our Snacks business on Slide 16, organic net sales declined by 1%, slightly better than dollar consumption. On a two-year compounded annual growth rate basis, organic net sales increased 6%, matching dollar consumption growth for the quarter. Our power brands increased net sales by 2%, following a 16% increase in the prior year, showing the continued resilience of brands like Goldfish and Late July, which increased net sales by 5% and 26%, respectively. On a two-year compounded annual growth rate basis, our power brands grew net sales and dollar consumption by 9%. Now that our power brands represent two-thirds of our Snacks business, this is a great foundation for sustained growth going forward.
The strength of the power brands in the quarter was tempered by declines in lower margin partner brands, contract manufacturing, and fresh bakery. We look forward to our Investor Day where we can provide both a clear growth acceleration path for power brands and a clear path to further optimize the remaining parts of our current Snacks portfolio. On Slide 17, I want to provide some context on the slower trends in the snacking categories seen over these past couple of quarters and add some proof points as to why we remain very bullish on the snacking occasion. First, over the past three years, Snacks categories have been the most resilient across food, essentially reflecting very little, if any, price elasticity. Recently, we have experienced some slowdown as low and middle-income consumers have sustained economic pressure for so long it’s finally impacting Snacks.
However, even with this category moderation, we’re still averaging 8% consumption growth over the last three years, which is well above total food and historical Snack growth averages. Second, the slowdown so far has been more modest compared to other edible categories, which is consistent with historical performance and learnings that Snacks meet a variety of consumer needs, including emotional support during difficult times, making it more resilient than many other categories. Finally, we’re already seeing improvement as we enter the important summer holiday windows where Snacks are the star of the show for backyard barbecues and entertainment. So although I anticipate some continued pressure in the short term, we expect Snacks will recover over the next couple quarters and are confident in our overall expectation for outsized growth in snacking over the longer term.
In fact, a couple of standouts in the third quarter were Late July and Pepperidge Farm cookies, fueled by innovation and great marketing. We spiced up our Late July portfolio with the addition of Scorchin’ Sauce and Hawaiian Habanero, just in time for the summer snacking season. Late July net sales in the quarter increased 26% compared to prior year as the brand displays remarkable momentum supported by our great new product development, brand investment, and execution. On the sweeter side, we continue to drive strong levels of velocity in cookies with new innovations in our Pepperidge Farm Milano cookie portfolio, such as the launch of our London Fog limited time offering. Most importantly, our Pepperidge Farm cookies portfolio continues to grow buyers across all generations, a positive proof point that as consumers are more selective on how they spend their snacking dollars, our elevated brands are well positioned to win.
Slide 19 illustrates the continued margin progress in our Snacks business. On a two-year compound annual growth rate basis year-to-date, Snacks organic net sales grew 7% and operating earnings increased 14%. This growth came with approximately 190 basis points of margin expansion. Key drivers of this margin expansion are initiatives to optimize our network, better execution in our manufacturing facilities, and disciplined spending. We expect to reach our 15% operating margin goal for the full year and are on track to reach our longer-term target of 17%. Before I wrap up, I wanted to address the recent announcement about further optimization of our supply chain. We are making significant investments to continue the transformation of our manufacturing and distribution network to maintain our competitive advantage, while also selectively rationalizing less efficient or redundant areas to lower cost.
We are investing approximately $230 million through fiscal 2026 in various facilities to modernize our supply chain, including added capacity and capabilities. These projects will create approximately 210 new roles, especially with new aseptic technology opportunities in Maxton, North Carolina. This is in addition to the previously announced $160 million investment in our Richmond, Utah site to expand Goldfish capacity. We are also closing our Tualatin plant as we shift soup and broth production to more advantaged sites, while also simplifying our Jeffersonville, Indiana plant to focus on Late July tortilla chip production and move potato chip production to more scaled locations. The impact of these changes will be the reduction of 415 roles and be executed over the next two years.
We continue to evaluate additional optimization opportunities across the network to build our supply chain of the future. At our upcoming Investor Day we plan to provide full program details and savings to lay out the next source of fuel for growth and earnings. In summary, the third quarter was a solid quarter where we advanced in every aspect of the business. We saw stabilizing trends on growth and volumes, compelling earnings with margin improvement, and a great start to the integration of Sovos Brands. As we continue to control the controllables in a dynamic environment, I remain confident in our outlook and continue to see this moment as a tremendous time for the company to begin its next chapter of sustained growth. I’m looking forward to laying out that path fully for you at our upcoming Investor Day in September in New York City.
With that, let me turn it over to Carrie.
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Carrie Anderson: Thanks, Mark, and good morning, everyone. I’ll start by sharing some highlights from our third quarter. We have a lot of positives including the better-than-expected contribution of the Sovos Brands business to our performance. Reported net sales were up 6% driven by the partial quarter of sales contribution from Sovos Brands. Organic net sales excluding the impact of acquisitions, divestitures, and currency, were comparable to the prior year and continued to show sequential volume improvement. On a two-year compounded annual growth rate basis, organic net sales grew 2%. Both adjusted EBIT and adjusted earnings per share increased double digits in the quarter with expansion in both adjusted gross margin and adjusted EBIT margin.
Adjusted EBIT increased 13%, primarily driven by the contribution of Sovos Brands, as well as higher adjusted earnings in the base business. Adjusted EPS increased 10% to $0.75, with the impact of the acquisition approximately neutral in the quarter, exceeding our initial expectations. Slide 24 shows that organic net sales were stable with nominal impacts from net price realization and volume and mix. We experienced sequential improvement in the third quarter and expect these volume trends to modestly improve in Q4. And during the quarter, Sovos Brands added 7 percentage points to reported net sales growth, which exceeded our expectations. On Slide 25, third quarter adjusted gross profit margin expanded 30 basis points compared to the prior year to 31.2%.
The drivers of margin expansion included supply chain productivity, cost savings initiatives, and favorable volume and mix. These contributors more than offset cost inflation and other supply chain costs and the impact of the Sovos acquisition, which has a lower margin profile than the base business. Core inflation in the quarter remains in the low single-digit range, consistent with rates we experienced in the first half, and much lower than the 8% reported in the prior year. We anticipate core inflation to remain in this range for the balance of fiscal ‘24, and we will stay focused in areas of our portfolio with increased input cost, such as tomatoes, olive oil, cocoa, and other areas of persistent inflation, such as labor costs and warehousing costs.
Through the end of the third quarter, we achieved $940 million of our $1 billion multiyear cost savings program. Similar to Q3, we expect our productivity initiatives and cost savings programs to offset the impact of inflation in the fourth quarter. Turning to Slide 26, other operating items include adjusted marketing and selling expenses, which increased 2% to $198 million. The increase was primarily due to the impact of the recent acquisition, partially offset by lower costs in the base business, including lower advertising and consumer promotion expense, lower incentive compensation expense, and lower selling expense. Adjusted administrative expenses increased $2 million, or 1%, to $156 million, due primarily to the addition of the recent acquisition.
Adjusted administrative expenses benefited from approximately $3 million in cost synergy realization from our acquisition integration plan that I will touch on a bit more when covering our next slide. As shown on Slide 27, third quarter adjusted EBIT increased 13%, and adjusted EBIT margin increased 90 basis points, primarily due to higher adjusted gross profit from the contribution of the acquisition and the base business. This was partially offset by higher adjusted expenses, including marketing and selling, administrative, research and development, and other expenses, primarily due to the addition of Sovos Brands expense in these P&L categories. As mentioned earlier, these higher adjusted admin expenses were partially offset by approximately $3 million in cost synergies related to our Sovos Brands integration plan.
We expect to realize a total of $50 million in annualized cost synergies by the end of the second year post-close, of which about two-thirds are expected in the administrative expense area and the balance in cost of products sold. As Mark indicated, we are pleased with the pace of the integration and look forward to sharing more about the next phase of our cost savings initiatives at our Investor Day in mid-September, which will encompass Sovos synergy savings as well as incremental supply chain network savings. On Slide 28, adjusted EPS increased double-digit to $0.75, primarily reflecting higher adjusted EBIT and a lower adjusted effective tax rate, partially offset by higher adjusted net interest expense related to higher levels of debt to fund the acquisition.
As we mentioned earlier, the acquisition was approximately neutral to adjusted EPS. In Meals & Beverages, third quarter reported net sales increased 15% due to the partial quarter contribution of the Sovos Brands acquisition. Pro forma third quarter net sales growth for the division, as if the acquisition had occurred at the beginning of the third quarter of fiscal ’23, was approximately 5%, driven by the respective pro forma Q3 growth of Sovos Brands of approximately 27%. This Q3 pro forma Sovos growth benefited from the timing of Rao’s sauce inventory builds and a shift in the timing of a promotion in non-measured channels. Organic net sales for Meals & Beverages, excluding the acquisition, were flat with the favorable impact of volume and mix offset by net price realization.
In the quarter, gains in our foodservice business were offset by lower sales in US retail, where we saw declines in beverages, Campbell’s pasta, and Swanson canned poultry, partially offset by gains in Prego pasta sauce and US soup. In US soup, sales increased 2%, an encouraging indicator in the business and supportive of the expected sequential improvement in the second half of fiscal ‘24. The 2% sales increase was primarily due to an increase in broth sales, partially offset by lower sales of ready-to-serve and condensed soups. In addition, we were pleased with the third quarter Meals & Beverages operating margin of 18%, which improved 160 basis points year-over-year, more than absorbing the impact of the recent acquisition, which as I mentioned earlier, has a lower margin profile than the base business.
Third quarter organic net sales in Snacks were slightly lower by 1%, but we were encouraged by the continued sequential improvement of the year-over-year volume trends from the second quarter. The lower sales were primarily driven by declines in third-party partner brands, contract manufacturing, and bakery, partially offset by a 2% increase in our Snacks power brands. On a two-year compounded annual basis, Snacks organic net sales and power brands net sales increased 6% and 9% respectively. Net price realization was neutral in the quarter. Third quarter operating margin for Snacks was 15.2%. This was a lower margin compared to last year but came in as expected due to lapping a tougher comparison with last year’s Q3 margin benefiting from the combination of pricing waves and the timing of fiscal ‘23 marketing and selling expenses.
Year-to-date margins of 14.9% have improved 40 basis points from the prior year and are approaching our 15% goal for the full year fiscal 2024. We intend to share more details related to our longer-term roadmap for a Snacks margin of 17% during our Investor Day. Turning to Slide 31, we continued to generate strong cash flow from operations of nearly $900 million through the end of the third quarter. This result was slightly lower than prior year, primarily due to cost related to the acquisition. Year-to-date capital expenditures were $376 million, up from $257 million in the prior year, as we continue to prioritize key growth and capability building investments. We also remain committed to returning cash to our shareholders with $334 million of dividends paid and $46 million in anti-dilutive share repurchases year to date.
With the closing of the Sovos Brands acquisition in the quarter, our net debt to adjusted EBITDA leverage at the end of the third quarter was 3.9 times as expected. We remain committed to investment grade ratings and our goal to return to our 3 times net leverage target by the end of year three, post-close. At the end of the third quarter, we had approximately $107 million in cash and cash equivalents and approximately $1.85 billion available under our revolving credit facility, which we renewed this quarter. We are updating our fiscal 2024 full-year guidance to reflect the expected performance of the base business and the impact of the recent acquisition. Full-year reported net sales are expected to increase approximately 3% to 4%, driven by the partial year of net sales contribution of Sovos Brands.
Full-year organic net sales growth is currently pacing to the midpoint of our updated range of approximately flat to down 1%, reflecting the current pace of consumer recovery. At the midpoint, this represents about 0.5 point lower than what we indicated on our second quarter earnings call when we said we expected organic net sales to be at the low end of flat to 2%. As Mark mentioned, and like other companies in the food industry, we continue to be impacted by a dynamic macroeconomic environment and observing a discerning consumer that is particularly impacted at lower income levels. At the midpoint of our updated net sales guidance, implied fourth quarter organic net sales growth is expected to moderately increase sequentially from Q3, and we expect a low teens pro forma net sales contribution from Sovos Brands in Q4, reflecting the timing shifts from Q3 that I mentioned earlier.
We feel really good about the performance of Sovos Brands, specifically Rao’s, with sales growing faster than our expectations at the time of the deal announcement, thus enabling us to benefit from a higher level of adjusted EBIT contributions since closing. Moving forward, we still expect long-term Sovos Brands net sales growth to be in the mid-single-digit range. We’ll provide more specifics on near-term fiscal ‘25 expectations on our fourth quarter earnings call. Full-year adjusted EBIT growth for the combined business is expected to be approximately 6.5% to 7%, reflecting the partial-year contribution of the acquisition, inclusive of integration savings, and base business performance, including lower adjusted marketing and selling expenses, and favorable net price realization, productivity, and cost savings more than offsetting inflation and other supply chain costs.
This outlook implies fourth quarter double-digit adjusted EBIT growth driven by the contribution of the acquisition and the performance in the base business, including improving adjusted gross margin as well as lapping a 23% increase in A&C in the prior year. As a reminder, the adjusted EBIT contribution of Sovos in our results includes stock-based compensation expense and acquisition-related depreciation and amortization expense. Whereas historically, when Sovos was a standalone company, these costs were not included in their adjusted results. Annual transaction-related depreciation and amortization expense is expected to be in the range of $15 million to $20 million, in line with our original expectations. Full-year adjusted EPS for the combined business is expected to be up approximately 2% to 3% in a range of $3.07 to $3.10.
This includes expected dilution from the Sovos acquisition between $0.01 to $0.02 per share for fiscal ‘24. This full year outlook also implies double-digit growth in Q4 adjusted EPS driven by expected higher adjusted EBIT, partially offset by higher net interest expense related to the acquisition. And then a few other guidance items that I’ll update. Full-year cost savings towards our $1 billion enterprise-wide program are expected to be in the range of $55 million to $60 million. Full-year adjusted net interest expense is now expected to be approximately $245 million versus our prior forecast of $185 million to $190 million, reflecting incremental interest expense associated with the new acquisition-related debt. And full-year capital expenditures are expected to be approximately $500 million as we continue to invest in our business for the long run.
All other underlying guidance assumptions remain unchanged. To wrap up, we were pleased with our third quarter results delivering double-digit growth in both adjusted EBIT and EPS and margin expansion, as well as better than expected acquisition performance. As we head into Q4, we remain encouraged by the continued expectation for improving volume trends in the business, another quarter of double-digit adjusted EBIT and earnings per share growth, and building on the great start to the integration of the Sovos Brands business. With that, let me turn it over to the operator to begin Q&A.
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