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

Good afternoon. Welcome again, and we're coming up towards the end of the Evercore ISI Consumer and Retail Conference. I'm very excited in this afternoon session to have Campbell's CEO, Mark Clouse; and CFO, Carrie Anderson joining us here today. Mark, he became the CEO in 2019 after having a successful run at Pinnacle Foods, which was sold to Conagra. Carrie joined Campbell's as CFO in early 2023. And before that, was CFO of Integra LifeSciences. I'm happy to have you both here and thanks again for joining.

Thanks, David.

Good to be hear, David.

Just a programming note for all of you. If you want to ask a question to see if maybe we can work it in to the presentation, there's a button on your screen. Feel free to hit that, and we'll see if we can work it in.

But I'll just start by doing a little retrospective and asking about the future. It's been 2.5 years since your last Analyst Day. And as we look forward to the next one in September, what can you tell us about the progress? What can you tell us about the opportunities you see in the business today? Any thoughts ahead of the upcoming Analyst Day in September?

Yes. No. That's a great place to start. So we are looking forward to seeing everybody in September. I think it will be a great moment to take a little bit of stock on where we've been and more importantly, talk about where we're headed in the future. When I think about the journey that we've been on in arguably the last 2.5 years, but really the last 5 years from when I arrived in 2019, and what the world was looking like, of course, I did not anticipate global pandemics and generational inflation and a couple of other twists and turns. But the path has been a pretty clear one. And in my mind, I think the 3 things that are really quite important that we've done, first and foremost, we have transformed this portfolio, right? It's a different portfolio today than what it looked like 5, 6 years ago. We've got, I think, arguably, the most focused, but yet still with meaningful scale and breadth, set of brands that one could ask for. 50% of our portfolio is in snacking. We've now added what I would argue is the most compelling growth story in food with Sovos and, in particular, the Rao's brand well on its way to being a $1 billion brand. And really positioned ourselves, I think, in a world of volatility, a little bit of uncertainty, a lot of different ways in which we can win. And I think that's a pretty unique posture. And when you think about the -- as an example, when you think about our soup business, which I love, of course, and remain very bullish on, but even if you were so inclined to say, well, gosh, what's -- how much of our portfolio is soup? We're now in a position where it represents less than 25% of the portfolio and still an important business. But certainly, in the world of a variety of different ways to win, I think that's critical. I think the second area of transformation has really come in what I would describe as kind of strengthening the foundation of the company, and probably the most indicative area of focus for us has been supply chain. And for many of the folks on the call, we've talked a lot. And even 3 years ago, I would have said to you, truth be told, our supply chain is probably a point of weakness or a little bit of a liability. And I will say with the help of a great leader, Dan Poland, who worked with me at Pinnacle in driving transformation on that supply chain, I think we've now turned that tide into a real strength. And I say that because both the delivery productivity and stability of cost but also our service level's best-in-class. A great example is with the challenges on broth with private label in the marketplace. 5 years ago, I wouldn't have been able to respond the way we have to step in and fulfill the needs. Now I've got that capability and skill sets that are within that supply chain. And that is a tremendous gift in providing us then a mechanism not just to fund or fuel growth but also to drive earnings and productivity as well. And certainly, across the board, I think probably one of the other biggest areas that I would say a transformation has occurred is in the area of innovation. When I got to Campbell's, we talk about it in the form of renewal rate, which is a rolling 3-year accumulation as a percent of our net sales. So world-class innovation, arguably a little bit different between a grocery business and snacking. Snacking, I think of it as around 4%. So that's -- think of it as adding 4 points of growth through innovation on a rolling basis. Meals & Beverage, probably a little closer to 3. You can have too much of a good -- it is possible to have too much of a good thing. But the reality is when I started, we were more like 1, 1.5. And today, when I look at the innovation plans that we have in 2024, it's $1 billion of innovation, and we're right there at around 3%, still a little bit of headroom as we move into the next chapter. But really, a significant transformation in a variety of other areas as well. And then, look, I think the final area I would just point to is probably something that I feel like, historically speaking, had not been a hallmark, perhaps, of Campbell's. And that's the consistency of delivering what we say. We've delivered 18 out of 19 quarters with one tough one 2 years ago, where we were cycling a lot of transformation on our snacking business. But nonetheless, our ability to have consistently delivered what we say is a very important part of what we've tried to change, not just from a business or investor standpoint, but really from a cultural standpoint within the company. So driving accountability, ensuring that people really understand what expectations are. And so when I put those 3 things together, I really feel like this is somewhat of an inflection point for the company as we come out of this kind of prolonged period of macro economic and environmental challenges. And we really start to walk into a period where I think it will be more about our ability to execute the strength of our brands, so a little bit of a back to history, if you will. I can tell you with a high degree of confidence, I really feel terrific about where we are. And I feel really good about how I think we're positioned against competition, both from the brand as well as the self-help story on margin and earnings growth. So a good moment to take another look at Campbell's.

Thanks, Mark. That's a great kickoff. And like you said, your business isn't too complex in that we can maybe talk about the parts and get to the businesses. Snack's half the company. Your goal at the last Analyst Day was to deliver about 3% organic sales growth. At times, that seemed like a joke. You're like blowing by that, but lately...

That's 8% over the last 3 years.

Right, yes. And then lately, things have obviously been tougher in snacks. I know you hope to have some acceleration into the fiscal '25 first half. Can you just talk about the strategies to make that happen?

Yes. Look, I think in many ways, and we tried to cover this in a couple different forums last week coming through the earnings. But first of all, when I look at snacking, I do think some context is important, remembering that these categories have been incredibly resilient throughout this period. I think in a world where we've -- there's been a lot of hand wringing, if you will, about a relatively flattish trajectory on snacking. When you think about it coming on the heels of 3 years of an 8% CAGR -- and yes, true, a lot of that is from pricing and inflation, but still at 8%, that you've got a really good story and much less erosion of volume as you might have had in some other categories. As we come into this period, certainly in the last couple of quarters, we have seen cycling all of that growth. I remind people, we were growing in the mid-teens last year in the third quarter in snacking still. And so although we probably were a little overly ambitious in our projections, I have no concern in the structural nature of the behavior of snacking, what it means to consumers, how I think about our portfolio, in particular, which is really well positioned in what I would call the more elevated or added value experience spaces, which has really been the primary driver of growth in snacking, where people are seeking either unique flavors, texture, a more unique experience. And that's where we play. That's where our brands are, right? We're not in mainstream cookies. We're not in mainstream crackers. Yes, we have a little bit of a pretzel business in mainstream, but even our potato chip business. So I think the strategy really doesn't evolve or change. Yes, we've got to make sure that our -- as I said on the call, that we've got the right price gaps, the right promotional strategy. But at the end of the day, snack's story will continue to be about fueling that consumer behavior, differentiating among a very competitive landscape and continuing to drive innovation and news, which is really the heartbeat or the lifeblood, if you will, of snacking. And I feel terrific. You look at air fried on Kettle and crisps on our Goldfish businesses, those have been 2 of the biggest innovations in snacking over the last several years. And we've got a great pipeline of news coming as we go. Limited time offers have been really effective bringing some excitement. Old Bay, we're out there right now. Old Bay, Goldfish, just seem to sell those as fast as we can make them. So there's a lot of reasons to believe in snacking. And there's really a lot of reasons to believe that Campbell is really well positioned. So I don't think you'll see a big strategy swing. I think it's really about continuing to fuel what we think is the strength, being a bit more vigilant and mindful about where we need to be on pricing and promo, but nothing that looks out of the realm of historical approaches and programs.

Maybe just one more retrospective then. What do you think is the consumer reason for the category slowing down? Is there -- do you think there's a little bit of an at-home snacking fatigue in some way or is it maybe...

No, I don't know -- one of the things that I said last week, and I think this is true, is we would like the world of consumer behavior and reaction to be a relatively linear path, where all things are happening at the same speed at the same time. But the reality is, is that it moves in a more staggered way depending on the income level of the consumers and the categories. And I think what you're seeing a little bit is just the fact that snacks held on and kind of remain strong for really longer than any other category. The behaviors we're seeing that are driving a bit of the slowdown, some trade-down, a little bit of trade-out in certain moments, a little bit lower purchase rate and frequency. These are things that we navigated on the Meals & Beverages categories 12 and 18 months ago. It's partly why you're seeing a little bit faster recovery today on Meals & Beverages. And I think we just are seeing a little bit of the catch-up of that cycle on snacks. But the good news is the intensity of the impact and what I think will likely end up being the duration of impact already is looking like less than what you might have seen in the broader food universe. So I don't think there's anything unique or different. I don't think this is GLP-1. I don't think this is a function of a conscious decision to move away from snacking. I mean, one of the encouraging things that we saw was, of course, Memorial Day and the summer holidays are big snacking weekends, and we saw very healthy trends during those key weeks. Now I need to see that stay. And as I did say, I do think you're going to continue to see a little bit of a muted backdrop as we go into fiscal '25. But through the first half, I think you'll see improvement as you get into the holiday season into '25. Into our fiscal '25, I think you'll start to see a little bit more normalization. And what I mean by that is back into that kind of 3%-ish range of where snacks has been, which I expect to still be on the upper end of food growth. And then it comes down to a little bit of, as my dad would say, the pick-and-shovel work of great execution, good innovation, good marketing, all the things that are necessary to win a fight in a highly competitive segment like snacking. But that's kind of how I feel that it will play out and why. Although we're seeing a little bit of it, I would not -- this idea that we've overpriced and there needs to be some major correction, it's -- I'm not seeing that. I think perhaps, if you are in heavily penetrated private-label segments, that might be a little bit more prevalent for you. I will say in the world of pretzels, as an example, where we are a bit more mainstream, I do see a little bit more pressure from private label in that segment than I've seen arguably in the past. But for most of our categories, they can tend to play in a slightly different way. And it's really a little bit more about competing with other branded players than it is necessarily a private label question.

I wanted to also ask you, maybe if you can [ tune up ] for like a few years, think longer term about the snack category. Where are the biggest opportunities that you see within your portfolio? Where are you maybe not hitting your full stride that you think you're going to be able to grow a little bit more?

Well, it's interesting. There's a -- as I kind of started the conversation on snacking, one of the things that I continue to like very much about our portfolio is what we refer to as our power brands. This is 2/3 of our business today and it's 8 power brands, and they are very well positioned into where I think consumers are going, which is this continued desire to trade up into experience. So I'm not necessarily saying premium or higher priced in nature, but they do tend to be a little bit more premium subsegments, and they tend to be a bit more differentiated. And when you look at our brands compared to some of our peers, some of the big peers, they tend to have a little bit more of a concentration in the mainstream space. And we tend to be in a bit more of the added value, even brands like Goldfish, where we would argue that's not a premium business, but is a highly differentiated brand and platform within the cracker segment. And that's what we were seeing as longer-term consumer migration. It's almost like a -- the way I describe it to people is almost the consumer wants a little bit higher ROI for their snacking moments, right? They want -- and sometimes, that manifests in health and wellness. And sometimes, that may manifest in indulgence or permissibility. A big area that we play in with a lot of our products, clean label, GMO-free, these are areas like Late July, Kettle brand do such a nice job of playing in those spaces. So I think that's one macro trend that you will continue to see. I do think health and wellness and better-for-you continues to be an important space, although I think it has continued to evolve beyond absence of negative and more about presence of positive and/or origin of ingredients. When people think health and wellness in snacking, the honest answer is the things that have been the more dramatic removal are really not where the growth has been. It's really been more about are you able to bring to bear things like protein? Are you able to bring to bear things like healthier grains or alternative grains that have driven more of the health and wellness trends? So I think you'll see us continuing to play in those spaces with the brands that it's relevant. I think the other thing we've all learned in snacking is if you're a Milano, be a Milano, right? Don't -- you don't need to try to be something that you're not. And I think that's -- that will continue to be a little bit of our game plan as well. Now I will say there are some interesting areas out there, as I think longer term about our portfolio. We're very happy in the process of integrating Sovos right now, so I'm not anxious to go out and do more M&A. But I do think that one of the things that's interesting is to see the growth in, what I would call, more ethnic or authentic ethnic snacking. And the ability to bring more of that authenticity into the portfolio is yet another place of added value. So I do think there are still some interesting or intriguing spots -- spaces for us to think about in the future. But I feel very good about how our portfolio is positioned to match ultimately with where consumers are going.

I wanted to ask you about promotions. Right now, people are focusing on that. They're seeing promotion mix rising for many companies. I think people are anxious that, that's not going to get a return or certain players that are doing that. Maybe you could talk about where you are versus '19. What is your promotion strategy? And where are you migrating and what you're seeing?

It's a -- look, I've been kind of answering this. And I can remember, maybe it's 3, 4 quarters ago where I ended up on the real hot seat for having the audacity to suggest that snacking might require some promotion in the industry. But the reality is that in particular, within the world of snacking, it is still a -- it's a high-impulse -- these are high-impulse categories, meaning that the decision-making process for consumers is very much influenced by point of purchase. And a lot of times, that means display and a lot of the promotion ultimately that you see happening in snacking is really, yes, there's a price component to it. But ultimately, it's about getting that secondary placement and getting that display. What I see happening right now is essentially a return, so a normal historical level of promotion, which is absolutely going to appear to be at a higher level than where we needed to be in the last several years, especially for those coming through supply chain and capacity issues. The good news is we cycled a lot of that, I think, a little faster. As I said earlier, the supply chain journey has been a really positive one for us. So I think you will see modest increases but nothing that looks dramatic. As you compare it to pre-COVID, there's a lot of reasons to see that as being, to a certain degree, even more benign than it was back then. I mean I have said this too, I think one of the advantages of having to go through some of the supply chain challenges that we had was that as we've added it back, right, we've -- I use the analogy a little bit of weeding the garden, right? We've tried to weed the garden and get rid of some of the less efficient price points or promotions and really be left with these beautiful rose gardens and trying to put promotion into a positive light. But we're finding -- I know the question was also about ROI and how are we seeing effectiveness. We have seen that promotion and where we've been applying it to be very effective. And in a world where you have almost all 3 of your income levels, low, middle, higher incomes, all being sensitized to the environment we're in, it has been a little bit more conducive for people seeking out promotion or a deal, even if it's not a material price drop, just to feel a little better buying something on deal right now, I think, if you're fighting or struggling within the economic environment. But our percents of promo, of volume on promo, our depth of promotion, all of that is very much in line or favorable to history. So I know investors are very concerned about a material chunk of margin being redeployed into that. I'm just not seeing it. And look, the third quarter is a good example for us where although we acknowledge that there's some steps up in promotion, our gross margins are still healthy. And even where we signaled we would see that in Q4 as well, we continue to signal very strong margin expansion and trajectory as well.

I know margin improvement in the cost productivity side, what you talked about in the past about optimizing your DSD networks, your manufacturing productivity. Could you give us an update? I think it was 250 basis points of opportunity when you talked about it. Where are you in the journey? And maybe give us an update there.

Yes. So again, as we've talked about in the past, this margin road map on snacking has been kind of a multiyear journey with a variety of different kind of key areas of contribution. We think it's been everything from what I would call better execution and better mix, as we've seen more of the business shifting to the power brands, which is a good thing for us. A little bit less on the partner brand side, all the way up to more material network re-imagination and transformation. You saw recently a couple of weeks ago us announcing a couple of moves within our manufacturing facilities. A lot of that was Meals & Beverages, but there's also some right-sizing of our Jeffersonville, Indiana facility, where we're concentrating Kettle manufacturing and a little bit more advantaged facilities. And so I would tell you that in the cadence of progress, you're probably about halfway through to 2/3 of the way through your journey on this process. As we said, we felt we'd be approximately about 15% EBIT margin this year, approximately 16% next year, and then on our way to 17%. And again, that remaining 200 basis points after this year will be a combination of that remaining network strategy improvements in mix and then some contribution from the last kind of piece of the puzzle, which was our DSD network, where that took a little more time to really understand it. But as I said, I think it was 2 quarters ago, the validation of the ability that in under less-scaled markets, we can bring Pepperidge Farm and Snyder's together on the same truck is a great unlock for us. Not in a dramatic percent of the country, but in a meaningful percent in a place where I really see opportunity going forward for that. And I also think that as we improve that scale, it makes us less dependent on partner brands. I think we'll always have a role for our partner brands, but being able to make that less of our business. In fact, today, although still a headwind for us as we continue to right-size it, we've made material progress from where we were 3 years ago and expect to continue to do that as we go forward. But it's an unlock for that opportunity as we're not as dependent on others for scale as we were before. And I also think as the economics of the routes improve, right, although it may not be as much of a margin contribution, it can be real fuel for revenue growth, right? You asked me before what are some reasons to believe growth can continue. I think a more effective network, a more profitable one will attract better independent partners to really drive and execute the business and enable us to potentially add some distribution on brands today that aren't full national brands. It's interesting when you look at our portfolio and if you were to take Goldfish as a proxy of our best distributed product and then line up our other brands, across the board, you see opportunity, material opportunity as it relates to brands like Kettle potato chips. Still a well -- a big opportunity for us for growth.

Wanted to switch gears here as we come down the stretch. Can you just talk a bit about Meals & Beverages? Obviously, the other half. I think the targeted organic sales growth was 1% the last time you gave us that update. But could you just give us an update about how you're thinking about that category [ will return ]? And maybe give us a sense of where you are now in the price gaps, the subcategories, what you're seeing in the marketplace?

Yes. Look, a lot of good news on Meals & Beverages. I always feel like you end up spending a lot of your time talking about any of the variances that you're seeing, which I understand. But when you look at our Meals & Beverage business, very important for us in Q3 to see volume recovery and stabilizing, and you saw that. And I think -- and a lot of conversations that I had with investors following Q2, I think, to a certain degree, maybe appropriately, a lot of skepticism on whether or not Meals & Beverage would be able to get into the right side of the ledger as it relates to volume growth. And by the way, I'm talking about that absent of Sovos. So I'll talk about that in a second. And what's fueling that is an underlying significant improvement in our soup business, where you really see market share recovery across the board. But you're also seeing some category improvement and volume improvement, especially in those subsegments that tend to be more relevant with what consumers are looking for right now, which are quick value-driven meals. So think condensed cooking, think broth. Now broth, we are getting some help, as I said on the call, due to some manufacturing limitations in private label that won't be there likely forever. But in the meantime, a lot of new households see household penetration growing on brands like Swanson are really good to see. And I think our job is to make sure that when those go into consumer homes, that they're having a great experience with the brand. And we're really managing and working hard on that from a marketing and recipe standpoint and what the points of difference are for those brands. So a lot of good things going on, on soup across the board. Great to have brands like Pacific and now having Rao's as well just gives us another boost. Rao's has been doing terrific in a really tough subsegment. The one segment that's remained very challenged is the ready-to-serve, which I think is a little more a function of, as we talked about, snacks being a little bit stickier later in the cycle. I would say single-serve meals, in general, right, whether it's ready-to-serve soup, frozen, single-serve meals, those have tended to be a little more challenged as consumers are trying to stretch that dollar a little bit further. I think over time, right, I do expect that to normalize. We're already seeing trends improve somewhat. But within that, there's a couple of real standouts. Interestingly enough, a brand we don't talk a lot about, which is Campbell's Homestyle, is more of a value play in ready-to-serve. It's doing really well. I mean, in fact, it's helping us compensate for the discontinuation of Well Yes! which was a strategic decision this year. You see kind of a neutralization of those 2. And then you've got Pacific, Rao's, Chunky, along with Homestyle, that will make up our foundational ready-to-serve portfolio going forward. And I feel very good about it longer term. But that's been -- that soup turnaround is very important. It's what we expected. But still, I think, important for investors to see that as well. Our Prego, our Pace business continues to be a very, very good business. I think, somewhat of an underrated business, if you will, in our portfolio. They're #1 salsa on shelf in the grocery aisle, fighting out with Tostitos, as you broaden it to include snacks. But Pace, from a center-of-store component, a very, very strong player. And of course, Prego, still the #1 overall Italian sauce and a category highly relevant today. It's done well. We just launched -- one of the things we've learned that's very interesting. I was interested to see how these did because it does move a little bit away from the core of Prego. But one of the things we're hearing a lot is the traditional pasta sauce dinner, which has been so relevant through this period, can we get some different variety? Can we get something new? So we launched 3 pesto flavors on Prego and are just flying right now. And it's simple, right? I mean, it's easy solution, adds a little bit of variety, really good as we've seen also with some of the Rao's flankers in innovation. And then, look, I probably beat this horse to death last week. But obviously, we are very bullish on the Sovos acquisition. In my mind, the Rao's brand really transforms the predictability and the sustainability of Meals & Beverage to be a dependable contributor to this business over time. When I look at Rao's and I kind of go down the laundry list of [ cash ], what did I need to see, what did I want to see, really across the board, we're feeling great. And yes, I wish it would grow at 27% into perpetuity, but that's probably not going to be the answer as we begin to cycle some distribution. But as a contributor, right, to our Meals & Beverage business and a strong compelling reason to believe in growth, as we said at the acquisition, a mid-single-digit billion-dollar brand in your portfolio ain't all bad. And so I feel like when we talk about Meals & Beverage historically, within the context of Campbell's -- and I get it. I understand, in many circumstances, that's where you might get the, yes, I love snacking, and I'm just not so sure about the Meals & Beverage side. Are you feeling good about it? Well, yes, we are feeling good about it. And I think in a world, as you imagine trajectory and how this business looks going forward, to have the 1-2 punch now of the Snacks business and a Meals & Beverage business that you can count on -- and look, I also think the world hopefully has gotten a little bit more open-minded when they think about the role of center of store, and if you have great brands that are in relevant categories, right, that actually can be a real asset and a real help in insulating, if you will, where you might have some volatility in a snacking segment like we're walking through right now. Great to have a brand like Rao's in the portfolio that kind of still enables us to ensure that we're growing. I mean, we -- if we did a pro forma of the company with Rao's in and you looked at a total business in the third quarter, we would have been up 2% about the same in volume would have put us at the very top of all of food. Our Meals & Beverage business was growing 5% in the quarter. And by the way, that is our business. I say pro forma like it's somehow not one of our business, but that is our business. That's the business we have today, and that's what we've built. And that, for me, when I talk about transformation of the portfolio, that's a different narrative around Campbell's than it was even 2 or 3 years ago. And I think in my mind, when I think about what are the calls to action to see Campbell's in a different light, that those numbers, that point of view and profile, even as you start to manage the cycle through in the years ahead, to have that kind of potential for growth and it's -- I said this to someone the other day, it really is true. In all of my years in food, I have never seen a new brand come into such a well-established category with such a differentiated and insulated proposition as I've seen with Rao's. I mean you simply cannot copy it. It's just not -- I mean there are other ultra distinctive brands that are out there. But I'm telling you, go home, dump both of them on some pasta, taste them blind, and tell me that there's not a difference between the two. It is a unique product that is very, very special. So anyway, I am beating the horse a little more. But it's a great story. It's a great story.

Well, it certainly is. Thank you very much. We reached the end of our time. But Mark, thank you. Carrie, thank you. Rebecca, thank you as well. Thanks for joining us, everybody at the conference as well.

Thanks, David. Great to see everybody.

Thanks, David.

Bye-bye.