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

Sure. Yes. So as we laid out last week, Q1 is going to be tough. Snack volumes are going to be sharply down. We don't have any pricing kicking in yet. So that will not kick in to Q2. And in fact, as you mentioned, we're actually making some pricing investments primarily on the meals area of our business, and that is really driven around execution around the key holiday period. We feel great about those investments, but they come at a cost. I think we think they're going to drive a lot of volume. We think you're going to see some nice consumption increases on the Meals business as we get into Q2 when that consumption actually hits around the holiday period, but that does come at a cost. And so as we get in -- so Q1 is going to be a tough quarter. Q2 will get progressively better as the pricing kicks in as some of the cost savings additions start to build, it will build sequentially bigger and bigger as each quarter as we go through. And as I said earlier, in the second half, we are expecting gross margin expansion after a tough first half. And in fact, in Q4, as that continues to build, we actually think we'll be EPS positive in Q4. If we can do that, we -- I think we're going to have a successful end to the year, and it again sets us up really nicely for the following year.

The new $500 million cost-saving program runs through fiscal approximately $150 million rolling over from the previous program and about $350 million representing incremental identified savings. Maybe you can break down the incremental opportunity for us across sort of headcount and overhead, direct and indirect procurement, manufacturing and network optimization and some other areas. And I guess, what are the elements that carry the greatest execution risk?

Yes. So as you said, our old peak program, which went through fiscal year '28, still had $150 million left on it. That was a very identified $50 million that we're going to go get. We rolled that over into a bigger, longer program through fiscal 30 for a total of $500 million. So as you said, an incremental $350 million -- the biggest incremental pieces to where we were before is, as you know, we've announced a number of headcount reductions, both an early retirement program and some involuntary cuts, those are in place. Those are done. So those were locked and loaded. We just launched a very substantial procurement savings project, both direct and indirect literally every line item on the P&L will be tackled. We have a couple of consulting partners who have done this with other major companies and have done this extremely well. So we have very clear visibility to what that looks like. So we feel very good about that. And then in the outer years, it's tougher to quantify at this point, but we're very confident we'll get there. And there's going to be some more plant network optimization that has to be done. So there's a lot of work underway there. More to come. It's going to take a little bit longer to get there, but I feel good about those. And look, there's always going to be new things that will build within that $500 million over the next couple of years.

Maybe picking up on that last point. I mean closer in, I think the challenge is that additional pricing and assortment simplification could place some further pressure on volumes in a business that already faces meaningful fixed cost deleverage. How do you avoid a scenario in which sort of pricing improves unit economics, but the resulting volume pressure limits or delays the anticipated margin recovery.

So it's got to be everything, right? So we have to start to stabilize the business. We've got to start to stabilize the volumes, even if the volumes are still down, which we do anticipate in the near term will be the case, we do have a lot of cost savings initiatives, both up in the supply chain side of the business, plus significant cost savings down in the SG&A buckets as well that we are confident that we'll be able to offset those margins.

Goldfish is both the largest and one of the most profitable brands in snacks, and the core business focused on households with kids is, I think, as you mentioned, began to stabilize and return to growth. What gives you the confidence that the recent improvement is sustainable rather than simply reflective of easier comparisons or sort of temporary activations. And I guess what roles will National Media, omnichannel execution, multipacks and sort of better-for-you innovation that you talked about playing returning the overall brand to what'll call it, more consistent growth.

Yes. So again, as I mentioned earlier, I'm very much encouraged by the progress that we're making in Goldfish. Since we focused on that core consumer, which is really the families or the households with kids is where we're seeing that we're gaining traction. And it's not just because to your earlier point around earlier comparisons really because of the actions that we're taking. And on the one hand, I see it with regards to the work that we are doing right now around the national advertising campaign around the snack that smiles back which is really back to, hey, that's the core consumer focus on that, the back-to-school activation that we're right in the middle of right now. But then also some of the innovation that we are launching, which is focused on better-for-you Goldfish, but really within that core consumer, so gluten-free Goldfish is a core component of that. And then as you mentioned, I mean there is -- I refer to that often as call it like in-market execution. It's around making suited on the e-com side. we're really executing that we are making sure that we're winning in that space. At the same time, when we look at our pack type, or packaging, making sure that we have very clearly articulating some of the benefits of Goldfish because it's a baked snack with real cheese and some of these things, again, back to focus on the core consumer and focus on what does the consumer really care about? What is -- how does that translate into what we need to do as an organization around a brand like Goldfish.

Maybe talk a little bit about the right to win in Salty. Salty snacks remains the most challenged area with 4Q -- fiscal 4Q retail sales down about almost 8% and chips down over 9%. And as you assess brands, let's call it, such as Snyder's of Hanover, Cape Cod, Kettle and Snack Factory, where does Campbell have a clear right to win? Where might the appropriate strategy be to narrow the assortment accept a smaller revenue base or allocate less investment?

Yes. So as I mentioned, like with Goldfish we're a little bit further in on Salt, we have much more work to do. Doesn't mean that we're not doing the work. It doesn't mean that we aren't working through the pieces, and we're making also very conscious choices around where do we have a right to win, but also what is the core consumer? And what is that core part of the portfolio where we should be winning with each of these brands. I look at our salty portfolio. There's 2 pieces. On the 1 hand, you have pretzels. On the other side, you have chips within pretzels a good example of focusing on what are these areas where we have a right to win. It is coming back to Snyder's of Hanover unflavored pretzels. And you saw this past quarter that we actually made good progress when we had the America 250 activation, and you saw some positive momentum in and around the unflavored Pretzels. We need to do more of that. At the same time, with regard to Snack Factory, a couple of years ago, we made the choice to not only be in the [ Daillial ] as where the brand was born and where the brand has a very clear right to win. We were also in the Saltiel, and we had started to innovate with Snack Factory in the salty -- that makes for a very complicated brand positioning. So as a result, back to the core, where do we believe we have a real right to win, not in the salt, but in the deli aisle focus on that. So -- and as a result, that's what the team is going after right now. At the same time, on chips, we have more work to do in food transparency. The chips piece where we have great brands like late July, Cape Cod and Kettle that space is very competitive right now. And as a result, we're working on, hey, where is our true point of differentiation because we really need to make sure that we lean into that with the brands.

Got it. More than half of the Meals & Beverage retail sales are exposed to cooking oriented occasions. And that portfolio has grown at roughly a 5% CAGR over the past 4 years. I guess what gives you confidence that the semi scratch cooking is sort of a durable behavioral shift rather than simply a response to, call it, near-term economic pressure. And how can Campbell expand its relevance from holiday heavy occasions into everyday meals without requiring disproportionate investment.

Yes. I feel very good about that aspect. And it's because of the portfolio that we have and what we focused on in the past. And I'll talk a little bit more about that, is if you start with what have we focused on in the past, we have often focused on the holiday occasions or special occasions where we believe with part of the Campbell's portfolio we could win. We are finding, again, back to consumer insights that semi scratch cooking has been a growing trend. Semi scratch cooking, by the way, means I am making a meal on the 30 minutes with 5 ingredients or less. So it's a, call it, like simple of making food at home. That's -- our portfolio very clearly has benefited from that overall trend. And we have an opportunity to not only participate in that during the holiday period with some of our products, but also outside of the holiday period. So that is one of the -- and we refer to that as empowering everyday cooking. So I feel like there is a big opportunity there, and we're working on that, not only with our existing portfolio, but also with some of the innovation like the launch of command sauces that we just launched under the Campbell's name. Then at the same time, back to kind of our broader portfolio, if I look at Rao's, Rao also plays right within that consumer occasion. And Rao has obviously grown -- has had very healthy growth rates -- and I'm relatively confident that with all the work that we're doing, that we're going to be able to continue to grow that brand way beyond where it's currently at.

Yes. Yes, on Rao's, I mean, continues to deliver strong growth. Household penetration sauce consumption was up high single digits last year. How do you frame the remaining runway in core pasta sauce versus the adjacencies such as soup, pasta and frozen? And how do you ensure the expansion creates incremental usage occasions without maybe stretching the brand beyond what makes it sort of premium proposition distinctive?

Yes. So again, [indiscernible] boss. We always say that within the Rao's brand, the brand, as you're pointing out, has grown significantly. Currently, 90% household penetration, which is about 300 basis points higher than when we bought the brand a couple of years ago. That being said, that is still significantly below where a brand like Prego is. If you look at also the unaided awareness metrics, you see that a lot of people don't know the Rao's brand yet. People haven't tried the Rao's brand yet. So continued to focus on brand building, which we've started now probably about like 18 months ago or so, and we invested in the brand last year. We are going to continue to invest in the brand this coming year or during this fiscal year. It's important to continue to get the brand out there and that should allow us to continue to build that overall household penetration within Sauce, that being said, even within Sauce, we've launched some great innovation. Of course, there are some star SKUs like Marinara is working really well. I personally like Arabiata. If you haven't tried it yet, please try it. And then at the same time, innovation like the creamy sources is working really well. That was innovation that we launched this past year. That's working really well. So we're going to continue to build out, call it, like the rail SaaS franchise. At the same time, as you're pointing out, some of these ancillary categories and the products that we've launched within that have worked. A good example is, for instance, Rao's suping glass has actually worked really well for us. It grew double digit this past year. I believe there's continued opportunity there. If you look at nearing categories like dry pasta, that works well together with the sauce. And particularly when you are selling product on an online modality like on e-com, actually bundling the sauce with the dry pasta is a great opportunity. And then we have obviously continued to grow in frozen. Frozen really consists of 2 pieces -- right now, it's on the one and pizza where actually we just now reduced the price to slightly below $10. So it's $9.99, which is actually a price point that we believe is very important for the consumer, back to a consumer that's very focused on value. And as a result, I'm encouraged by that move that the team has been working on. And then at the same time, frozen meals is something that we continue to work through. So long story short, there's a lot of opportunity around rails. It's a great addition to the Meals & Beverage portfolio, and it plays right within that semi scratch cooking.

Campbell ended last fiscal year at approximately 4.3x net leverage continues to be maintaining an investment-grade rating is imperative. Can you walk through the expected contributions from retained dividend, cash, working capital improvements, earnings recovery and debt repayment to reach approximately 3x. And what's a realistic time frame if the top line recovery takes a bit longer than planned.

Yes. So look, whether it is a debt holder or an equity holder being over 4x leverage is just not where we can be. So we need to get it down to as quickly as possible. It's probably going to take realistically without any big action 3 to 4 years to get there. So the dividend cut was a big step forward to show how serious we are about reducing debt. Working capital is going to become a huge focus of mine over the last next couple of years. We're going to take out a minimum of $100 million this year and more to come. And then CapEx, where we typically spend over $400 million a year on CapEx, we only spent $370 million this past year, and we set a budget of only $300 million for fiscal year '27, that will probably be a similar budget for the next couple of years. So we're doing a lot of initiatives to increase free cash flow and obviously stabilize stabilizing earnings is really, really important to get that leverage down. Separately, from a financing perspective, we are looking -- we're looking at potential of doing a hybrid debt facility. That comes at a higher coupon, but it also gives us about a 50% equity credit. That will be very helpful to getting our leverage down as well. So this is a very important imperative for the Board, for us, and we need to get that leverage down to 3 over the next couple of years.

In our remaining sort of minute or a little less before we head to the breakout. Maybe Campbell has a number of recognizable brands, right, attractive underlying opportunities, but investors have heard versions, I guess, of the stabilization and recovery message before. What gives you confidence that the combination of the sharper portfolio choices the stronger commercial capabilities, more aggressive cost action and a less constrained balance sheet will produce a different outcome this time. And what should investors hold management accountable for over the next, call it, 12 to 24 months.

Yes. Very much what gives me confidence is facing the real Rao as an organization truly focus on the transformation, truly focus on speed put in the consumer front center and holding each other throughout the organization accountable towards delivering results. And at the same time, back to the speed piece really because we are collaborating across the organization with speed. And again, all in service towards delivering on our commitments, delivering results. I also feel like when I look at where we're at -- on the 1 hand, within Meals & Beverage, we need to make sure that we maintain the momentum that we have, particularly within that so much scratch cooking that we talked about. And at the same time, we've got to continue to make progress on the turnaround of snacks. It's very early stages. I'm encouraged by Goldfish, but we have much more work to do. and that's what we're going to continue to talk about and bring people along on the journey.

Okay. All right. So please join us in the breakout and join me in thanking Mick and Todd for being here today.

Thank you.