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

Good afternoon, everybody, and thanks for joining the Evercore ISI Consumer Conference. It's the 4:15 slot and I'm very happy to have Campbell Soup with us today. Joining us in this fireside chat is Mark Clouse, CEO. Mark joined from Campbell as CEO in January of 2019 and prior to that was CEO of Pinnacle Foods, which was ultimately sold to Conagra. Also with us today are Carrie Anderson, CFO. Prior to joining Campbell in 2023, that's this year, and congrats to her for joining and welcome, Carrie was CFO of Integra LifeSciences and prior to Integra, she held various leadership roles at Dover Corporation, including senior roles within finance. We look forward to discussing a range of topics, including how to think about drivers to sustain -- by the way, Rebecca is also on camera with us, Rebecca Gardy, Investor Relations. She'll be here to make sure I stay within the boundaries but we'll look forward to discussing a range of topics, including how to think about drivers to sustain sales growth after an unprecedented period of pricing, gross margin recovery. And of course, we'll be talking about the multiyear sales and profit opportunity within the Snack segment. Thank you, Mark, Carrie and Rebecca for joining us.

Great to be here. Thanks, David.

Lots of topics to discuss. Maybe we can first just dig into 1 of the 2 big segments. First, we'll start with Snacks and then we'll go into Meals and Beverages next. Last quarter was a reminder of the powerful snack portfolio within Campbells. Perhaps you can just give us the state of the union on snacks and some of the balance you think investors may not be fully appreciating at this point?

Sure. Yes. Well, I wish it would have been a little bit more of a reminder, David, if I'm modest. But look, it's a great -- it's really to me was really an important quarter because in many ways has kind of, I think, helped answer a little bit of the question of what is going to be the potential of the margin journey, especially in light of what has been a really a sustained period of substantial growth on the business. And I think overall, most people -- there's not a lot of question marks when it comes to the strength of snacking as a category, it's relevance with consumers, pre-COVID, during COVID, post COVID, inflation, whatever backdrop you create, snacks has probably been one of the most consistent drivers within food for the last at least a decade, if not more. I think what's great about the Campbell's portfolio as it relates to growth is that we tend to be in these advantaged segments within some of the bigger categories, which makes our brands, I think, uniquely positioned to benefit as we go forward. So think of potato chips, but with Kettle and Cape Cod, Tortilla chips, better-for-you, natural, GMO-free late July, even on pretzels where we have pretzel crisps that have -- that are marketed out of the Deli but have been wildly successful. I think those businesses and, of course, a Goldfish that almost is in a category all by itself. But these are businesses that really set up well for where consumers are moving and going. And that's why we have been so confident and bullish about the portfolio. And then further, when we set up the thesis of the acquisition of Snyder's-Lance, we talked a lot about bringing the innovation and marketing prowess of Pepperidge Farm into those Snyder's brands. And really, across the board, you've seen tremendous progress. I mean if you look at kind of pre-COVID today, so kind of a 4-year perspective, you see in every case on those power brands that were Snyder's-Lance, up multiple share points. I mean the one exception is a little bit of the Snyder's Hanover business. But it's been driving a 10% growth rate as that category has really just been on fire. So I think from the growth narrative part of the business, it was just yet another rung in the ladder of solidifying what the potential of the business is. What made Q3 so unique in my mind is we've been asking investors to be somewhat patient on the margin story as we've kind of navigated this kind of choppy water of a complex macroeconomic backdrop, COVID is -- a lot of things that worked a bit against some of the synergy that we've been able to deliver. And that's why for the most part, we've been kind of stagnant a little bit at that 13% EBIT margin. And what you're seeing this year unfold and in particular, Q3 is as some of those areas are beginning to normalize, you're starting to experience the margin expansion that we expected. And so as you look at the business today, we're up about 150 basis points year-to-date with a fairly clear runway in the north of 14% as we close out the year. And that, I think, is going to be a very important mile marker for investors to start to understand or see the potential. And honestly, although early to be giving guidance as it relates to '24, what I said on the earnings call and have continued to say is that we expect that trajectory to continue going forward. And even to the point where I've been asked multiple times, how you talked about 17%. Is that still a potential? And I absolutely see the continued runway there. I'm sure we can talk a little more about margins on snacks in a moment. But the general narrative, if you will, around the snacks business to me, just continues to get filled in and more complete as we've gone forward and this quarter was a great quarter for that. And again, I know everyone knows this, but remembering that it is now half of our business at Campbell's, I think, is very, very important. As you think about comparing us to other food names, we've got 50% of the business in this advantaged position, but also the self-help story on margin, I think, gives us a unique clarity of earnings growth potential that may be favorable to comparing some other players and what they're going to have to do to continue the momentum going forward. So we feel great about the snacks business. And honestly, I feel like more and more, that's just not us kind of promoting it as much as it is. We're seeing it in the numbers now.

I totally agree. It was exactly the area I was going to drill down next. Perhaps we could just go into some of the reasons why you're seeing the margin expansion you've -- in the past, I think at your Analyst Day, you talked about over time, using that 17% is the north star that you would get pricing net of commodity benefits, better plant performance. improved mix, network optimization. I know that's been a big topic for people, that's how complex, what you're combining as a snack business. So maybe you could talk about the buckets you're seeing.

Sure. Yes. Let's kind of bridge it a little bit off of the 13% that we've been at for a while. If you remember that, that already incorporates essentially the first kind of 100 basis points of synergy from where we started from. But quite frankly, this is where we've been kind of level off at for a couple of years now. So probably a great place to start the dialogue from. We've been pretty consistent. And I do think the fact that our reporting on our value capture and synergies have been very consistent with our expectations, I think the question for investors has been more where is it and the margin, if you're delivering it. And what we've said is that through this period, there's been a lot of these environmental factors that really, in some ways, the synergies and the value capture were used to counter, why you've seen a little more of a stable margin. I will say a little different than others that may have taken a step back on margin for us. It kind of stayed flat partly because we were utilizing the benefit of the value capture to offset some of those. And what we've said is there's probably about 200 basis points or more of margin recovery that in essence, we've already taken the actions to deliver, we just need a little bit of the normalization of the environment to kind of uncover that. And that's exactly what's happening right now. And so if you think about our pacing for the year north of 100 basis points, you're probably getting a bit more than half of it in this year, and we would expect and have pretty good line of sight to the second half of it as we go forward. And so that takes you mathematically from roughly about 13% to 15% in that range. And that, I think, again, is a little bit of wait to see it. But I think with the evidence in this year, hopefully, that's going to start feeling better to investors as we go forward. Then beyond that, what we've laid out is a basic framework, and I get this -- I get asked this question a lot, and I do think in the months ahead, we'll probably talk a little bit more granularly about each of the contributors. But the best way I would think about it is in kind of 3 broad buckets, right? So the first bucket, I would call kind of the network optimization umbrella. And to me, there's a couple of different elements that will play into that. The biggest and the most significant is the warehousing and, call it, warehouse/depot, which is think of it as a small warehouse that supports our DSD operations. That has been essentially a network that was created for 2 very separate DSD organizations. And so the opportunity for us is to consolidate that, and really reduce the square footage if you think about what we're paying for and the cost structure and really driving scale through that consolidation. And that has nothing to do with how many trucks are on the road or whether I've got 1 or 2 networks, that's simply opportunity of just consolidating your piles of inventory under a more efficient and effective network. And when we do that, we're also going to take advantage of some opportunities to upgrade capabilities, whereas it's automation or ease of use to really make sure that our independent distributors are maximizing their time, and we think there's going to be an inherent benefit to performance as well. And that's part of what's exciting about the network is that it's an opportunity to improve costs, but also, in some ways, it's going to be adding capabilities that we might not previously have had. So that's part 1 under network optimization. The other is our manufacturing footprint and network. And I talked a little bit about Charlotte as this example of the first kind of manufacturing facility that includes both Pepperidge Farm and Snyder's-Lance products under one roof. And as you may have heard recently, we sold the Emerald business, which actually opens up a pretty good sized footprint for further consolidation in that Charlotte area. But the opportunity for us to create more of these integrated hubs of manufacturing is something that we see as another opportunity for outsized productivity because it does give us a little bit more scale in some of our less scaled positions and, over time, may create the opportunity for rationalization as well. And so I see both of these as being great network optimization opportunities for us as we go forward. I think always the question that I get, well, how big is that? How much is that? I would tell you that I think kind of from a relative perspective, it's probably in the neighborhood of another couple of hundred basis points. And I think that's been pretty consistent to what we alluded to even in an Investor Day. I see nothing that doesn't support that assumption that we made. And so that's a great now if you're stacking that on top of the first 200. And now you're getting a line of sight to getting close to that 17%. With 2 other areas of opportunity that aren't fully contemplated plus a little bit of spend back and investment on the marketing side that we talked a bit about in this earnings call. But I'd say the other 2 areas, number one is portfolio. One of the things that we've gone to some pretty great lettings to do is to reduce the dependence on what we call partner or contract brands that traditionally are lower-margin businesses. So as we continue to move that agenda forward, we see a significant mix benefit that's contributing as we work that down. And so contributing to that overall margin journey, you have the benefit of driving that kind of mix, if you will, benefit by being able to focus more on the power brands where we tend to have advantaged margins versus some of the other areas of the portfolio that are less important. In fact, already, if you look at our contract and partner brands, when we started this journey, it was over 10% of the business. It's now down to about 7% and we're continuing to work on that. We've got a good mix. That will never go away because it is part of the tools we use to drive scale on the truck, but -- and there are some great relationships and partnerships that we have that make a lot of economic sense. But that continues to be an area of opportunity that will contribute going forward. And then the final one and probably the one that gets a lot of the interest from the investor world is what about the DSD network? And is there opportunities to consolidate? And what I can tell you is over the last 2 years, we have spent a lot of time learning. And we've been piloting, testing, trying a variety of different things to ensure that we can optimize scale where scale matters. One thing to remember about our DSD network that may not be immediately obvious, but in many parts of the country, the business is too big to put on one truck. So even if you were to incline to do that, you've got enough business that justifies both the Pepperidge Farm and Snyder's-Lance business. In essence, the entire Mid-Atlantic and East Coast all fall into that category. So there's a lot of our network that really is about just kind of optimizing the warehousing and the depots, not so much the routes. But where we do have opportunity, I think we've learned a lot, and we're probably not yet today, but ready to kind of talk a little bit more about that in the future. And I think we can share a little bit more. If you remember that was on our road map about 50 bps, I would tell you, there may be opportunity there based on what we see now and understand better. So as you think of those 3 areas of building blocks and creating enough room for another 100 basis points or so of marketing and selling expense that we want to invest, it gives you a very credible path to 17%. And as I've said many times, 17% is not the top of the mountain on snacks margins, right? We're not assuming that we're going to be necessarily best-in-class on that. But I do think, as you start to look at our growth potential now paired with a margin expansion story that continues to get clearer and hopefully, more credible as we put points on the board, it really does shape up, I think, to being one of the most attractive stories in food right now relative to the strength of the brands and the ability to control our own destiny, if you will, with some of the margin initiatives that we've got in place.

Thanks for all that. That's great detail. I want to pivot over to Meal and Beverages in a minute, but before we do, I want to just give you a chance to talk about your top line drivers on the snack business, the biggest ones, whether it'd be along the channel side of things, distribution or maybe that your biggest horses in terms of brands that you see driving top line.

Yes. Well, what's great about our portfolio is the -- let's kind of ladder it up, if you almost like a due to. But the good news is snacks as a category in general, has grown roughly around 3% over a much longer take out the peaks and valleys, if you will, of COVID. But let's call it an underlying kind of go-forward rate of around 3%. Our power brands have outgrown that consistently. And as they become a bigger percent of our business, that gives you a very strong conviction or belief that on the inertia of our business, we have the ability to outgrow that 3%. So you're already north of that on 50% of our business as a company which is pretty compelling. Now layer on top of that, a couple of things that are somewhat unique to our business. One of the things that I'm reminded of pretty frequently is that a lot of these brands, especially the Snyder's-Lance brands, for the most part are not yet even fully in national distribution. You look at brands like Kettle as an example, which is just a fantastic brand. It has significant distribution geographically in the U.S. to expand. And as you look at that more broadly, there's probably easily $100 million of potential if you were to elevate your distribution or your coverage, if you will, to a level more consistent with where we are on Pepperidge Farm. There's probably another 100 if we now, as we've kind of re-tooled our supply chain, we now have the ability to bring different pack sizes and configurations that opens up channels like convenience, where we really don't play very consistently or in a very concentrated way. And that is, as you know, a great channel for snacking that's just not been one that's been developed yet by us. And I would throw on a little bit of further upside in Canada where we've yet to have the firepower until right now from a supply standpoint, to really go after expansion there. And so when I put those together on top of the, let's call it, the organic growth within the snacks world, it helps you build even more outsized growth. And the last thing I would say is that we've been on a journey to kind of climb the ladder of expectations for innovation. And historically speaking, 4% contribution from innovation for a snacks business is certainly not unheard of. We've tended to be -- we started at kind of 1% to 2%. We've -- now we're going to cross 2% this year and be about 2.5%. Our goal to kind of make our way to that 3% to 4% is very much the game plan and the pipelines. And as you might imagine, we've got a little bit of a logjam of ideas as the supply chain was kind of redirected to kind of just supply-based business. We now have got the room and the space to go after that and certainly, I think whether you look at some of the limited time offers we've done on goldfish or air-fried, on kettle or bites on pretzel crisp, it's -- we've proven that we know how to do this well, but getting the firepower behind it gives you yet another rung of the ladder. So when I think about our ability to outrun snacks or the snacks category and continue to grow share and do what we've really been doing, I'm actually more confident in the next chapter than I've been in the more recent chapter. And so I think it positions us very well to be a real winner in an already winning segment.

Well, I want to switch gears over to Meals and Beverage. Perhaps we're going to do the start the same way, just giving a state of the union there. Clearly, I think people could see that not all of the parts in Meals and Beverages were the same this last quarter, condensed versus ready-to-serve, for example, and you had some bright spots with pace. But clearly, there were some awareness of competition in some of -- and causing you to promote and perhaps indirectly hurting your gross margins. So could you perhaps talk about what's going on there and the outlook beyond even this next quarter, you already gave guidance implicitly for the fourth quarter as well. So just sort of a medium-term around plan for that segment?

Yes. I mean, look, the first thing that I would just say on Meals and Beverage before you even have the conversation on kind of the state of the union, you got to extrapolate out what was unique in the quarter. And the first thing that I would tell you is that your in-market growth was much more significant than what you were seeing on the net sales line because we cycled a period where a year ago, our supply chain recovery was arguably, call it, 6 to 12 months ahead, really -- of many of our peers, partly because we needed it, right? So I've said this a few times. It was one of those circumstances where the catalyst for action was that we had to have action. The benefit of that is that it probably forced us to take action faster than perhaps maybe some of our peers that weren't in as tough of a spot as it related to supply chain. But what it's generated is service levels right now on the business that truly are best-in-class. So we are back to pre-COVID levels. The Meals and Beverage business service levels are 97%, which I'd love it to be 98%, but compared to 75%, we've come a long way. And a lot of that pipeline that came back in was last year in the third quarter. And so for the company, it was probably about 5 points of a headwind. But if you look at our Meals and Beverage business, it was probably closer to 7 points, right? It's even more as it was a greater benefactor. And in particular, the biggest one was soup, where it was almost 10 points. And so I think you got to start with that coming out. The next thing that you've got to do, which I get is a little bit of complex math. And any time I have to explain anomalies, I don't like it, right? No one does. But if you take out -- if you take that dynamic that I just explained and you think about what that impact would have on mix within our company, within the Meals and Beverage business, you're taking out high-margin soup at a much higher rate as you're cycling that inventory, there was a couple of hundred basis points of headwind that was associated with that mix impact. And then layer on top of it, one more, which was the storm insurance benefit that was 100 basis points in the quarter which essentially, if you roll all that math up together, it would have put Meals and Beverage, I think, consistent with where our run rate was, which was modest top line growth, a relatively stable margin and that is what we expect to generally see as the longer-term position of Meals and Beverage. Now it is true, and I talked about this, you're going to see a little bit less pricing benefit, but this is not a promotion story, right? This is not about us spending more. In fact, in the quarter, the relationship of promotion spending really had no bearing, if you will, on the margin at all. It was really a function much more of the other elements that I talked about that were the headwinds. Now I do think it's fair to say that as pricing does come down, you're going to probably feel a little bit of that narrowing relative to where our margins may feel a little bit of short-term pressure, but it's not because of us upping our spend to chase volume down. Look, we have to stay competitive. We've got to make sure price gaps are consistent, but I see nothing in the current environment or landscape that would suggest that we're going to have to do something that is going to undermine the longer-term profitability of the business or, as I said, just really chasing volume at the expense of margin. What I do think we've got to do is make sure that we're executing really well in some of the areas where we are experiencing a bit more pressure from private label or maybe as others are recovering on supply, are we seeing a little bit more of a normal competitive but normal landscape that we're in. But when I start to unpack the strategic areas of the business that matter most to us as a company, I continue to see many, many signs of encouragement. And the thought that somehow our Meals and Beverage business is going to rush back to the pre-COVID world is just not grounded in any of the facts, right? I understand the -- a little bit of the anxiousness of it, especially when I've got multiple things to explain in a quarter. But the reality is, is that when I look at condensed, I look at who's eating condensed, I look at how it's being utilized, far more in cooking, the versatility of that business just in a completely different spot, younger consumers that are using it. Yes, is there private label pressure in condensed? There are but we've been able to protect the icons where -- that's tomato, chicken noodle, cream of mushroom, cream of chicken and we've been able to grow our cooking business within condensed. And if we do that longer term, I'm not concerned. I'd never like to lose any share at all, but I recognize that we've got to be balanced in our approach. We've got to play a little bit of a longer-term view here. And the goal in mind is to maintain affordability, but not undermining the profitability of the category. On ready-to-serve, honestly, that is 100% a story of the core business doing great. We've got some flankers, supported cast members like convenience that are more premium offerings that are being squeezed a little bit more in the economic environment. But our Chunky business, our Pacific business, Pacific was the fastest-growing share player in ready-to-serve this quarter. Those are the bets for the future, right? That's what's going to fuel the business. And yes, we did get some competition from our big competitor in ready-to-serve soup, but honestly, it's a very constructive dynamic. If you look at the last 4 weeks, Chunky's back to growing share. I feel very good about our position. A pleasant surprise was the strength of home style which is a little bit more of a value generator that's really been powerful in this particular moment. So you may see us lean into that a little bit. It's a great product and arguably one we've not focused on as much. So I think when I start to peel back in Prego, again, within its competitive set, which is mainstream Italian, we continue to do very well. We're the clear definitive leader there. It's a behavior that has grown substantially over these last several years. And paces, as you point out, we're back into full supply. So you see that recovering as well. And when I -- when we get those businesses, the core of our Meals and Beverage business, that's why you hear us continue to talk about the belief and the consistent belief that Meals and Beverage can be a contributor, right? It's not going to be snacks. It doesn't need to be snacks. But it's stability and the sustainable contribution that it can make, we feel great about. And although we do have to get our head around less price and the dynamics of the category, I don't see anything that is suggesting some of the dialogue that I've been part of where, hey, you're going to have to take all the profitability out to chase people down on shares. It's not going to happen that way.

Yes. No, I think you're right that the concern is something greater than that, that there's some sort of a massive profit value equation to the negative that has to happen for stabilization to happen. And right now, I mean, in the past at your Analyst Day, you were talking about getting to a margin for that segment of 21% and the -- with modest top line growth. The Street right now is in the 18s for this year. So I guess my question is, do you at least see upside from here? Or do you see there may be a step back before we can take a step forward?

No, I don't. And that -- I think that's important. I do not see a step back to take a step forward. I do think, as I've said, a couple of times over the course of the last year or so. There's no question that there is some structural inflation that I don't expect to go away either, especially as it relates to labor which is a place that I do think generally is probably not the worst thing that happened to us to kind of get our eyes wide open on ensuring that we're an attractive proposition and keeping great workers at our factories. And -- but at the end of the day, I think our goal in mind is to continue to close that gap to where we were before COVID. And is that -- it's material. I think we continue to see the ability or the road map to get back into that ZIP code, and that's what we're going to try to do, and I do not think there needs to be some sort of reset because what we're experiencing right now is a little bit of this dynamic of inflation paired with some of those macroeconomic cost structures that have really created perhaps the most tailwind you're going to experience. And as we contemplate a road map forward, I think it's in conjunction with how we see that environment evolve without needing to necessarily spend it all back in a way that would create the kind of dynamic that I think some people may be hypothesizing or expecting. I'll just remind everybody, this is something that I probably could do a better job of articulating or could have over the years is, if you really look at the last 15 to 20 years on soup, right? Because that -- at the end of the day, what we end up really talking about is how soup is going to do. And the reality is that the times over that period that the soup business has struggled. Honestly, it's been times we've taken our eye off the ball and not been focused on it. When we decided to go to the perimeter of the store, when we've decided to shift our focus to other parts of the portfolio, that was when the business struggled. Every period of time that we've been committed to soup, like we are now, we've been able, at minimum to keep it relatively stable. And obviously, there's going to be some periods where competition may be different. We went through a nice period where there are supply challenges on private label were significant. As those have recovered, it's kind of normalized again a little bit of that dynamic. But it's important to note that over the years, and I recognize we were a little bit of the storytellers on the concerns of soup. But the reality is, is that every time we have focused on that business, we've been able to do a fairly good job of keeping the category relevant and keeping the business relatively stable.

Right. We're out of time, but I want to just squeeze one more in, and that is just a comment on M&A. You recently announced the sale of Emerald. I wonder if you'd be contemplating other brand sales. And of course, there's also some other stuff going on in the sector where people are splitting up the company, selling -- making more of a snack co. I wonder if that's maybe an option that you thought about.

Yes. So on the divestiture side, to be completely honest with you, Emerald was a business that, although we had identified it not as core, was not a business we were concerned about. It's great business. It is kind of a steady eddy, if you will, and to some regards, we just got a great offer to think about it. And so it's not core to us. I do think it frees up, as I said, some real estate within our manufacturing footprint that I like a lot. And arguably, if it's not core, it could be tomorrow's problem, and I think it's a great owner with a great vision and they're getting a great business. So I think that was more of a circumstance of opportunity more than it was a big strategic statement. I think the rest of the portfolio, as I see it today, I feel great about it. I feel good about where we are. We've obviously taken some pretty bold and big steps over the last 4 or 5 years to clean it up, get geographically focused. I do think focus has been powerful for us as I think about what we needed to accomplish and do on the business. As far as other organic or nonorganic structural changes, I look at it this way, right? There should be a compelling reason to look at those kinds of opportunities. And so we evaluate them all the time through the lens of shareholder value creation. And obviously, I fully get and understand a little bit of the arbitrage between multiples on snacks businesses and center of store businesses. But today, the work that we've got to do is the same work whether we were together or apart. And so in my mind, the ability to bring to bear the benefit of the portfolio makes sense. And if there's a day in the future where it doesn't, then I think we'll always look at the best path forward for creating shareholder value. But as I sit here today, I think our best opportunity to address kind of the foundational elements that we need on both businesses can very much be accomplished as a joined-up Campbell's and arguably a little bit of a benefit given the highly cash generative nature of our Meals and Beverage business and our incredibly high growth potential in our snacks business, and that combination is not a bad one in the world we're in right now.

Well, thank you, Mark. Thank you, Carrie and Rebecca, and thanks, everybody, for dialing in here. We appreciate it. We will continue with day #3 of the conference tomorrow. Thanks, everybody.

Great. Thanks, David. Great to see everybody.