The Campbell's Company (CPB) Earnings Call Transcript & Summary

Good morning, everybody and welcome back to our fireside chat with the Campbell Soup Company. joining us today from the company are CEO; Mark Clouse and CFO; Mick Beekhuizen. Welcome gentlemen and thanks for being here with us today. Maybe what we can do, Mark, is we'll just kind of jump right in and sort of set the stage maybe with a broader question here. And that would be -- If you could maybe provide us with a bit of an update on the progress Campbell's made, really since you've arrived. Specifically, it's perhaps a bit tough to parse out. But maybe we put the impact of sort of COVID aside for a minute, where do you think Campbell is on the journey that you laid out when you first arrived? And then as COVID sort of accelerated the journey or made it more difficult or just postponed it?

Sure. Yes. Great way to start. Well, I think if you take a step back and think about where the company was 3 years ago, it was a tough moment. There were some serious questions, and I think from opportunity to improve performance, it was a pretty clear mandate. And so if you remember in our first Investor Day, we laid out a longer-term algorithm of 1% to 2% on the top line. 4% to 6% on EBIT and 7% to 9% on EPS and then kind of provided this trajectory, if you will, of kind of stabilization in '19, kind of getting into the low end of the range in '20 and then hopefully well within our long-term guidance within the third year in '21. And certainly, as you mentioned, COVID has an influence, and I'll talk about that in a second. But if we just kind of start with the numbers over that period of time, we're pleased with the progress that we've made. So it's 3% on the top line, 5% CAGRs for those 3 years, 5% on the EBIT and 14% on EPS. And I think underpinning that number is a more rapid reduction of debt and kind of cleaning up, if you will, a bit of the balance sheet that Mick and team has done a very nice job on it. So when you look at that, you feel good about the progress that we're making performance wise. But perhaps the most significant is when you start to talk about some of the strategic imperatives that we laid out. And it started with really resetting the portfolio. This idea of one geography, North America, 2 divisions, pretty much 50-50 between snacks and Meals & Beverages and then 13 kind of core categories. I think now reflecting on that journey, it has been a significant enabler for us to really focus our resources, both financially and human on a tighter set of objectives. And I think it's aided us in advancing things like the one in soup strategy or progressing parts of the portfolio that needed to be turned around. I think it's been very helpful in accomplishing that. We've also been able to integrate successfully almost, not all the way there yet, but on Snyder's-Lance and our Pacific Foods acquisition, I think good after a couple of challenging integrations to have too -- that have really gone very well. And evident in the cost savings objectives, we've got about $45 million left of the 80 -- $850 million that we set out to achieve, which is a balance between value capture and enterprise savings, but I feel terrific about that. And perhaps the most significant and again, doesn't always get the airtime is the cultural transformation that's happening in the company. And when I think about resetting the operating model really aligning to a more metric-driven organization that is very focused on accountability and execution really delivering and then upgrading capabilities. As far as this 3-year period of turnaround and resetting the foundation, I feel terrific. And I think, clearly, as we talk about COVID, there's no question that it's had an impact on our business and it's accelerated strategic progress in certain areas, especially as you think about our brands, in particular, on Meals & Beverages, but to some degree on snacks as well. And you kind of tick down the line of what's going on, on those brands and what are the macro trends. No matter how we cast what the world will look like in a more normal environment, there is no question that the relevancy of our brands has been stepped forward. But I will say, I'm also quite happy that we had a year to kind of set the stage before COVID. And you think about condensed soup, for example, that's been growing share for 10 quarters we had momentum building on those -- on that business even before we walked into the pandemic. But certainly, as you look backwards, 15 million new households are on our soup business, a lot of those millennial and younger consumers, a Pacific business that's been the fastest growing. I think, a broadening of the goldfish consumer target to a much more all-family position and macro trends like cooking and at-home lunches as well as e-commerce, which we've essentially doubled the business over 3 years and grown share in most of our categories. When I look at that combination of momentum and macro trends, I really do think it's positioned us well, and you see that in the more recent share performance that we were able to drive in 2021 and certainly, accelerate even into the fourth quarter. So I think it leaves us in a position where we're a much stronger foundation, a much more focused and capable company, and I think ready to turn the page, if you will, from the turnaround chapter to really being now about unlocking the full potential of the company. And that's a big kind of framework or setup, if you will, to the December Investor Day that we're going to talk about. But hopefully helpful and kind of a lot of puts and takes, but I think not every day was perfect. But I think in the scheme of things, a lot of road has been traveled and progress made for the company strategically.

Yes. No, very helpful perspective. Campbell's end market performance has been notably strong over the year. 75% of your brands held or grew share versus FY '20, with really strong performance across both divisions. As you look at the drivers of the recent share gains and contemplate, what a return to normal might ultimately look like, I guess, what portion of your recent share gains do you think are maybe sustainable longer term? And do you think the businesses could be sort of more consistent share gainers over time?

Yes. Certainly, I think my kind of philosophical belief is that share for the most part is perhaps the best barometer of the health of your business. Because certainly, it's feasible to go out and buy share, and we've seen that and that's not what I'm talking about. But in a balanced approach, I do think share becomes a really good indicator of the health of the business. And I think it's a good indicator in times of high demand or in times of more normalized demand as you think about the environments we're in. So my expectation for the team is for us to continue to progress on share. And I think the good news for us is that if you think about the contributors or where are the areas of opportunity as you go forward, there have been many things that I feel really good that we've been able to execute and do our marketing much better and significantly improved, our investment levels are at very good levels. I do think an area of opportunity that still remains is innovation which arguably, over the last 18 months, probably a little bit of a pump on the brakes as we've been navigating more focus on the core for supply. But as you see, even in what we talked about in the earnings call, in particular, on Meals & Beverages and in soup, you see a significant inflow of innovation and continued renovation on our business that I'm really excited about. And so when you think about further runway to continuing to win share in market, I'm feeling really good about the combination of what we've set up fundamentally while still having a little bit of dry powder in some areas that I think are going to be very exciting to watch and see contribute that arguably we've not been able to utilize fully until as we get into this year.

Yes. I know recently, obviously, a key topic with regard to Campbell and really the entire group has been, of course, rising in broad-based inflationary pressure impacting the industry. Last week, Campbell laid out its expectation for high single-digit year-over-year inflation in '22. Maybe could you talk a little bit more about sort of the -- specifically, the pressure you're facing. How you see this maybe playing out in sort of the duration of some of these elevated costs, and the, obviously, the ability to mitigate some of that?

Yes. So maybe Mick, I'll have kind of lay out. Why don't you tackle the kind of where we are, as far as inflation coverage may be interesting enough. And then I'll talk a little bit about how pricing and our mitigating efforts are going and how we're feeling about that as we're in early days, but certainly seeing some results so far.

Yes, it sounds good. So we had -- as you might recall, we had about 4% core inflation in Q3, than on our last quarter, Q4, we had about 5% core inflation. And now you're right, Andrew, we guided towards high single-digit core inflation going into our fiscal '22. If you look at kind of the year, you -- we are expecting as the year progresses inflation to increase a bit. That's also partially because of the way that our fiscal year goes, right, with kind of one part following in calendar year '21, one part following in calendar year '22. And as you can imagine, certain contracts are obviously resetting at the beginning of the next calendar year. That includes, for instance, steel. Steel is obviously one of the areas that we're seeing quite a bit of inflation in on the M&B side. Proteins is another area where we're seeing quite a bit of inflation. And then if you look on the snacks portfolio, we're seeing areas like, for instance, vegetable oil, resins, but also something like flour, where we're seeing the overall inflation manifest itself. Now if you then look to Mark's earlier point at kind of the coverage on our ingredients and packaging side, we are currently for the full year, about 2/3 covered. However, obviously, just like what I just said about kind of some of the timing of the contracts, we have much higher coverage at the beginning of the year and as some of the contracts are being renewed. Of course, throughout the year, our coverage will continue to increase.

Yes. I definitely would say though, that 1/3 that's not covered though. I don't want to imply that we somehow have some hope or prayer for things to change dramatically. We're using a pretty rigorous economic forecast and then conservatism as we look at that as we think about it. So our guidance and our plan for the year, I think has a fairly good assessment of where we think costs will ultimately be. And even if contracts are coming in January, as you would imagine, we're pretty close and on top of what we expect that to look like, and are planning accordingly. I think the good news is that -- and we're certainly in reading a little bit of your prior conversations over the last couple of days, I think, a fairly consistent theme, which is that we're feeling good about the actions that we're taking. I think our ability to navigate the pricing that we initiated really at the -- more in the beginning of the summer that's really coming into effect now. We feel good about that collaboration with retailers and the execution of that. I think further to that, I would say, a big question mark for, I think, all of us has been how might the elasticities look versus historical levels. And again, early days in the journey but so far, so good. And in fact, I would say better than what we initially expected. And I think there's 2 fundamental reasons for that. I think one of them is that you do have unfortunately or sadly, as the resurgence of COVID is occurring, I do think it's keeping an elevated level of demand out there that probably is, to a certain degree, dampening what would be normal elasticities. And I also think that certainly, in my time, this is the broadest based inflation that I've seen that's resulting in a more comprehensive lift of prices. So therefore, you're not getting quite that cross elasticity that you experience sometimes when one category is dealing with commodity costs and another one is not and more interchangeable behavior and occasions. I think it's just a more normalized level of rising prices across the board. Now of course, I do think there are catalysts that we'll want to watch closely, like stimulus programs and how that unfolds over the course of the year. But from where we're sitting right now, I think we're feeling very good about our ability to navigate. And as Mick said, we probably will come back with a little more pricing as the year unfolds. And again, I think that will be done in a much more surgical or specific way. And of course, as we always talk about pricing, this is not all about, let's price increase. I think we'll use the kind of full tool bag, if you will, that includes promotion and trade as well as price pack architecture. And obviously, we've got a very robust productivity and cost savings program already built into the plan. So overall, I think -- and again, our range, as I said, for earnings. I think a little bit of the -- if you think high and low relative to our guidance range is it probably reflects a little bit of just how well do we execute that, but well represented within the guidance that we've given.

Right. That's helpful. Maybe as a generalization, I'm just curious in sort of core soup are there any generalizations you can make about sort of the competitive environment? I mean given your comments about elasticity and such, even though it's early, seems like generally, it's playing out maybe the way you would expect when the industry faces this type of cost environment?

Yes. Well, one of the things that I think is a little bit -- and maybe even for myself, underappreciated walking into an environment like this is where scale does bring some advantage. And so as everybody is trying to navigate both costs and availability of materials, I think our position, our relationship and scale has really, I think, proven to be an advantage versus some of the more smaller kind of challenge or, if you will, brands or lower-priced regional brands. I also think, though, part of this is the nature of what I described before, which is soup. Obviously, in-home consumption stays elevated, soup correlates very well with that. And I think we'll continue to benefit from this kind of tenuous environment. We're in of not quite yet opening and certainly watching COVID play a big role in that. So I will tell you, I stay very vigilant on what's going on with competition. But when you think about some of the core elements like steel, for example, that we talked about, these are not exclusive to Campbell costs. So everybody is going to have to deal with it. And I think that, therefore, we're seeing a fairly constructive environment so far. The idea that people can kind of hang on to grab share is just not what we're seeing.

Yes. I mean one last question in this vein of things that are sort of affecting the overall industry would be sort of the questions around labor, and really labor availability. And I guess it's a little less about cost maybe and more about just how it impacts supply chain and ability to sort of source product and such. I think it sounded like on your recent call, one of the comments was sort of along the lines of, something you're feeling better about sort of where demand is sort of heading. And oddly enough, a little less good -- again, around industry-wide concern around, making sure we can source to that demand given some of the issues around labor, which is not maybe what the average investor who's followed packaged food for a long time. I thinks it's almost reverse of what -- how people have thought about this industry for a long time. So curious how you think the sort of the labor issue sort of plays out, how long that's with us. I mean, some of this is not -- it's based on broader policy, of course, but I'm curious on your thoughts there.

Yes. Yes. Certainly, a somewhat unique challenge in our industry, certainly in these more recent quarters. But I don't think it's a unique again area for us. This is, I think, fairly broad. And even beyond food, quite frankly, as we think about a little bit of the challenge of labor across a variety of different industries. I think what's interesting about it is that the competition for labor and the variables that will influence our ability to continue to succeed in attracting and retaining labor has probably proven to be a little different than we might have thought going in. Of course, intuitively, you tend to go to wages right away as the -- as your primary lever to try to increase your competitiveness. But what's been interesting is we've tended to have more success with -- certainly, wages play an important role. I don't want to diminish that. But there's a lot of other elements that are going into our strategy for attracting labor, whether it's work schedule, predictability, whether it is environmental things that we're doing to improve benefits and other experiences. And especially as you think about younger talent that's choosing from a variety of different entry points and hourly labor, those things are extremely important. We also -- one of the areas of greatest pressure for us has been in our temporary labor -- pool, which gets a little harder to differentiate. And the good news, I think, for us is that the demand that we're seeing and the predicted demand even beyond this period is enabling us to convert many of those temporary roles into permanent full-time roles, which gives us a dramatic advantage and attracting talent versus what it takes on the temp side. I think the reality is though none of these are silver bullets, right? You got to do it all well. If you're going to succeed, and I do think in the balance of '22 is going to be a very important variable. And I think relative to how we navigate inflation, next up to me is a little bit of how you're going to navigate labor. Again, I will say though, I do think we're making good progress. And as I think about the year, I do think this will be an area where we will see improvement as the year unfolds. And clearly, that has to do with some policy and programs as part of that. But I think, in general, I would expect to see us continuing to progress. In the meantime, we've gotten pretty good at figuring out how to run in constrained supply environment. So our ability to kind of pivot on planning and really thinking about how we're ensuring that the products that are needed the most in certain windows, the collaboration with customers so that we're kind of working in a common way, all kind of rowing in the same direction, very, very important aspect of this. And as I said, unfortunately, to some degree, a skill set that we've built a pretty robust playbook on. So although I think it will be a factor or a bit of a governor maybe, I do feel good about our ability to navigate through it and continue to execute as we move forward.

Yes. Last week, I think you discussed about 150 basis points of margin pressure in your Snack segment related to sort of transitional costs that are perhaps masking some of the productivity and savings work that Campbell has accomplished over the last couple of years. Maybe you could talk a bit more in detail about what these costs are and sort of the cadence at which you think they might ultimately dissipate?

Yes. So as I said, I -- and I completely understand the question, and I think it's kind of a imperative for us to be able to unpack and talk through this in a way, especially as you think about the longer-term value proposition of expanding margins in the future on snacking, which I continue to feel very confident in our ability to do. So if you kind of go back to the beginning of the story, we've added about 600 basis points of kind of hypothetical margin with the savings programs that we have built and that we've executed against. And as I said, we're getting to the tail end of that program now, about $45 million of savings planned for fiscal '22. Of that 600 basis points, we had always intended to invest about half of it back on the business. If you go back to the original proposition that we discussed, there's a variety of different places where that investment would be needed, and we've executed that very well. So that leaves you with about 300 basis points of expansion that we would have expected, and we've gotten about half of that. If you look at where we are today coming out of '21 relative to where we were when we started on the kind of the combined margin of the business at the beginning. And the difference is really this 150 basis points that is a combination of both the -- just the speed at which we've been able to cover inflation. So if you think about the combination of what was primarily a logistics cost inflation that we were absorbing in '21 and then the walk into the speed of being able to fully cover the inflation that we're seeing in '22, along with what I would call some of the inefficiencies as we've been navigating the broader environment that we've cycled through. And that we continue to make progress on. So I don't see any of it is necessarily structural in nature. But I do think, as you think about what '22 looks like, it's going to be a bit transitional to recover that. But the good news is, I think, as you think about the future state of where we are margin-wise, finishing the year 13.5% in that range a little better. But with 150 of potential behind us over at least the next 12 to 18 months, that gives you some confidence that there's some underlying tailwinds that then will pair with what will be the next kind of generation, if you will, of savings. Now that we've run this business for 3 years, really understand the network in a better way, kind of get to a period of time where we're not navigating the kind of here and now complexities of COVID. We see a great potential to lay out a road map that should be able to provide steady sequential improvement that's going to be aided by the recovery of some of this transitional headwind that we've experienced. So that kind of gives you a lay of the land of where we are now, of course, the -- I know it's probably been the longest tease of a program. But in fairness, I think part of what I want to make sure we're doing is addressing the things that we need to execute against right now, and then we'll get into how that looks. But I can promise you, we're not slowing down our efforts and continuing to work on the margin for snacks.

Great. Back at your 2019 Investor Day, Campbell laid out a 3-year road map for soup. And fiscal '21 was seen as a pretty big year, I think, in terms of, as you called it, sort of reframing the soup category for Campbell through innovation and other means. Obviously, we had a -- we had COVID and there's pumping the brakes on some innovation. And I guess it would be reasonable to conclude that some of these plans were likely pushed back a bit as you focus primarily on just keeping up with demand. So I guess, is some of the innovation maybe that you talked about on last week's earnings call, maybe part of the original plan towards framing the soup category? Or are there some different platforms coming on this front that we've sort of yet to see?

Yes. So I think a little bit of both, right? So the great news is, if you think about the win in soup strategy and what that was built upon, it was really about rejuvenating relevance of this category. And as we looked at the soup category and really refocus the company on the core business, we saw the platform of soup to be a far better starting point than some other categories that I've worked on over the years. And I think when you think about kind of the nutritional density paired with the emotional fulfillment or the enjoyment of the product. There's a lot of inherent or positive sentiment that existed. I just don't think we were doing the things to drive the relevance. And so the initial plan was a pretty balanced attack, if you will, on core base renovation and marketing paired with innovation. And I think what's happened is that as we have needed to, but also been able to be very successful with that core base work has really driven transformation. I talked about the share growth and condensed within soup. But if you look at, for example, as a subset of soup or cooking condensed soup, we've added 4.5 points of household penetration over 2 years on that business. That's an extraordinary step forward than in any of the models that we would have created to measure success of progress of the strategy, we would not have expected that kind of expansion. And as I said before, one of the things that we feel really good about is the split of those households to younger consumers. And even within the broader condensed soup area, we've added 3 share points within the millennial target during that period of time. And so as we've enrolled that consumer base into our business, that was exactly what we set out to do. We just haven't needed if you will, as much of the contribution from innovation as we might have originally drawn up. But all of the renovation work, quality improvements, the packaging reset that you see us rolling out now. All of those are having a tremendous impact as is the relaunch of, well, yes, the work we've done to kind of shift Chunky from being perceived as kind of this more value, more satiating, positioning to really being protein-based unique, convenient and affordable proposition with younger consumers. And then Pacific, the resurgence of that brand really has set us up in a place where I would say we're well ahead from a consumer standpoint with where we expect it to be. Now as we retain those households going forward, I do think you're going to see innovation playing a bigger role, and you begin to see that. And I would say, there's a good mix in our innovation that you're seeing that were things that we had originally anticipated rolling out that we just had to slow down, given the circumstances of the environment we're in, paired with some steps up in some things that as we recognize this opportunity for things like in-home lunches. And the significance of that is an occasion that we've added a few things to the mix as well that I think are going to be quite powerful while driving forward on trends and occasions, that we knew and had planned on all along. I think as you now look forward, so what's next, I do think that we're feeling more confident too in our ability to bring some truly new-to-the-world ideas and platforms that build upon this growing consumer behavior and occasion that continues to solidify our relationship with the younger target as we continue to think about ways in which we're going to bring relevance back. And perhaps I'll just conclude that -- statement with the fact that maybe in the world of what becomes self-fulfilling prophecies, we have a retail environment and a customer dynamic where before grabbing attention or piece percent of mind or thought on soup was not the easiest thing to do. It's completely different now. When we think about how do we bring a true transformation to center a store, this soup and sauce area within the grocery store is really going, I believe, to continue to be a catalyst that can rejuvenate, not unlike frozen vegetables might have been in the freezer case 5, 6 years ago, I think -- I feel like, and I see a lot of things that feel very similar to that when we're talking about super sauces.

Yes. Perfect. Well, I think that's a great place to leave it. We very much appreciate your time, Mark and Mick, and really look forward to tracking the progress as we go through the rest of the year into soup season. So thanks, again.

Yes. Thanks, Andrew. We'll talk to you later.