Campbell Soup Company
Q2 2021 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Campbell Soup’s Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. . Please be advised that today's conference is being recorded. . I would now like to hand the conference over to your speaker today, Ms. Rebecca Gardy, Vice President of Investor Relations. Ma'am, you may begin.

[Rebecca Gardy:]

[Mark Clouse:]

Thanks, Rebecca. Good morning, everyone, and thank you for joining us today. Before I turn to the results of the quarter, I want to take a moment to thank all of our teams again, especially our frontline colleagues. We have now passed the 1-year mark of working within this challenging COVID-19 environment, and I'm very proud of their continued performance and dedication. Campbell delivered strong second quarter results, with growth in all 3 key financial metrics. Organic net sales increased 5%, with continued demand across both divisions, fueled by accelerating in-market results, including positive share progress across most of the portfolio and a strong holiday period. Net sales were tempered by continued foodservice weakness following a resurgence of COVID-19 cases in December, which led to greater away-from-home restrictions, as well as some supply constraints given these cases led to increased absenteeism rate in our plants during the month. The foodservice weakness and supply constraints each created about 1 point a headwind in the quarter versus our expectations.

[Mick Beekhuizen:]

Thanks Mark. Good morning everyone. Turning to Slide 11, as Mark just shared, we once again delivered strong results, with another quarter of sales growth driven by continued elevated consumer demand, as well as growth in adjusted EBIT and adjusted EPS. Our topline growth of 5% reflected healthy in-market consumption of approximately 8% in the quarter, tempered by declines in foodservice and some COVID-19-related supply challenges that Mark discussed. Adjusted EBIT increased 8% as higher sales volumes were only partially offset by higher adjusted administrative expenses. Adjusted EPS from continuing operations increased by 17% to $0.84 per share, reflecting an increase in adjusted EBIT as well as lower adjusted net interest expense. Year-to-date, our organic net sales, which exclude the impact from the sale of the European chips business, increased 7% driven by strong in-market consumption growth in both Meals & Beverages and Snacks. Adjusted EBIT increased 13% reflecting higher sales volume, improved adjusted gross margin performance and higher adjusted other income, offset partially by increased adjusted administrative expenses. Year-to-date our adjusted EBIT margin increased year-over-year by 110 basis points to 18.5%. Adjusted EPS from continuing operations increased 23% to $1.86 per share, reflecting the increase in adjusted EBIT and lower adjusted net interest expense. I’ll review in the next couple of slides our second quarter results in more detail and provide guidance for the full fiscal year 2021. Breaking down our net sales performance for the quarter, reported and organic net sales increased 5% from the prior year. This performance was largely driven by a 4-point gain in volume across the majority of our retail brands, partially offset by declines in foodservice and in partner brands within the Snyder’s-Lance portfolio. Additionally, we took a strategic approach to dialing back promotional spending in both segments where we faced supply constraints and those actions, net of price and sales allowances, contributed 1-point to net sales growth.

[Mark Clouse:]

Thanks, Mick. Before we conclude, I want to share my perspective on the key factors underpinning our confidence in our outlook beyond the pandemic. By now, I know you have heard a great deal about the stickiness of all new households gained throughout the pandemic from essentially all of our peers, with a wide range of data and facts supporting that thesis. We very much agree, and we see similar trends in our own research and data. I’d like to conclude today with three critical and differentiating points

[Operator:]

. And our first question comes from Andrew Lazar from Barclays.

[Andrew Lazar:]

Mark, I first wanted to just touch base a little bit on organic growth in the quarter. You went through some of the factors that limited organic growth maybe relative to your ingoing assumptions. One would assume, obviously, foodservice recovers a bit, of course, as restrictions are lifted and such. But I'm trying to get a better handle on where the company is around supply and capacity. Is that largely behind the company at this point? Or does some of that still linger? And the reason I ask you is I'm trying to get a better handle on the relationship between sort of consumption and shipments as we go through the fiscal third quarter. Do those -- are those more consistent with each other? Is there the opportunity to rebuild inventory such that shipments maybe exceed consumption for a period of time? I'm just trying to get a handle on that, and then I've just got a quick follow-up.

[Mark Clouse:]

Yes. So a couple of thoughts. First, again, I think as we said in our comments, a bit frustrating, of course, to see the top-line when the underlying fundamentals are as strong as they are. In-market consumption was up 8%. And a really important step forward for us was the shift in share performance, where we had 75% of the portfolio growing share, including some businesses that were really important for us to get back on our front foot, like ready-to-serve soup, for example, and Snyder's of Hanover pretzels. Both of which had been a bit challenged on share, and we wanted to make sure we turned them around. I guess the other good news about the timing and sequence of some of the pressure we experienced, we had all of the inventory in place for the holiday and kind of the key drive period, which is why we did so well during that timeframe in-market. Where it hurt us was a bit in the replenishment of that as we were exiting the quarter, and as you said, driven really by 2 things. The significant step back up in COVID cases was the root cause, but it impacted both our foodservice business, as well as absenteeism specifically in our plants. We were -- in the month of December, we crossed the double-digit line on absenteeism, which was really the highest we had seen, which really did reduce a little bit of our firepower as we had expected to be able to get in front of consumption and ship a bit ahead of it. The good news is, both of them I would describe generally as episodic in nature, and that as we finish the quarter and went into Q3, both of those we're seeing normalize and improve. And remember, in Q3, one of the things that we're going to have as a dynamic is that we shipped about 12 points behind consumption a year ago in Q3. And so as you think about that overall shipment to consumption comparison, despite the fact that -- in the spirit of a lot of volatility in our world today, despite the fact we're going to have to navigate a little bit of this pressure out of Paris, Texas, where our plant was closed for a couple of weeks, that plant makes primarily Pace and Prego, just as a reference point. But we expect the overall elements to be positive as it relates to shipments versus consumption, but with a little bit of choppiness as we go into Q3. As we roll through the back half, we're feeling very comfortable that we'll be back in a strong position. I think also of note, we've talked a bit about the recovery of the SKUs that we had swapped out for base business during the pandemic. All of those are back up and running. That we're going to return is -- if you look at our numbers today, you'll see about a 6% decline in TDPs. We expect that to be about 3% ongoing. The reason you're not seeing all of it is some of those items are still in pipeline. But as the quarter unfolds, we expect that all to be back in place as we manage through the back of the year. So a little bit of a longer answer, but I know a very important element to get your hands around. So I think there's reasons to believe that we'll see that room to catch up a little bit and kind of get back on our feet as it relates to inventory.

[Andrew Lazar:]

Great. And just a very quick one. It might be too early, but in markets where we've seen certain restrictions get lifted, maybe fully lifted in some cases, and getting back to some form of normalcy, I appreciate all the survey work you've done and a sense of where consumers sort of heads are at. Any sort of real-time data that you see in some of these regions or states that have more fully reopened around what maybe retention has looked like in actuality? I realize it's still on the early edge of things.

[Mark Clouse:]

Yes. It's a little bit too early. But what I can tell you we've done is we've created essentially a bit of a map of the country in evaluating the specificity of different data points in conjunction with reopening. And so us like you are looking for those proof points to validate what is a lot of the hypothesis that we have. And so I would say it's too early to give you any conclusions, but we're set up well to read that as quickly as possible, make any adjustments we need and really begin to put some facts, specific facts behind some of those assumptions we've talked about.

[Operator:]

Our next question comes from Ken Goldman from JPMorgan.

[Ken Goldman:]

So I wanted to pick up a little bit where Andrew just left off. It sounds like most of the work you've done on the stickiness side is still theoretical. And I appreciate that you're doing some really good work in terms of surveying consumers and so forth. But we're in such unique times that I just wonder how much rate we really should put on things like surveys at this point just given that I don't think consumers necessarily know what they're going to do coming out of this. And -- but I would love for -- you ought to be right, all my CEOs to be right, it will be much more fun to cover a space where things are growing and sales are good in the opposite. But is there any -- I guess what I'm getting with this, is there any particular data point that you have that gives you the amount of confidence that you might need to make the kind of confident statements that you're making today about stickiness? And I'm not trying to suspect. I really just want to understand it, Mark.

[Mark Clouse:]

Yes. Sure. Sure, Ken. No. Look, I understand the question. And certainly, this is not a unique conversation, and it happens pretty frequently these days in our industry. I will say we did a few things. And we have targeted our research in a few ways to try to inform certain thinking that's just simply different than how many people are going to continue to cook or how many people are claiming that they'll continue to use our products. I'd kind of give you 2 areas. One, we've gotten a lot sharper on how we feel using the survey work to really understand how we hold up against competitive choices. Because one of the things that I think will matter a lot here very quickly as we start to lap the initial surge and get into COVID is how do we feel about our comparative position, and therefore, our ability to manage through share positive performance or differentiated performance. And that was an important part of the work that we've been doing and trying to identify where we think we're in stronger positions. And I was pleased. I was really pleased with some of the items that are in more competitive spaces. And setting aside for a moment, whether you're going to continue to use us, did you feel we perform better than some of our competitors, I think is an important insight and a little different than just, are the households going to remain sticky? I think the other thing that we're doing a lot of is looking for places where we could be exposed where there may be dissatisfiers. So instead of just simply focusing our work on trying to build the case or prove the point that people are going to keep using it, we actually kind of spun it around the other way and really looked at why you wouldn't keep using it, what were the barriers, what were the things that we could be doing differently in our brands. And we're using that very rapidly as we try to inform things like innovation as well as our marketing to try to really kind of go at those areas a little bit more head on. So -- and again, as I've said a couple of times, I recognize that until we have facts and kind of points on the board, this remains theoretical. But it is hard to imagine that no matter where you are on that continuum, a business like our Meals & Beverage and our Soup business isn't going to be even in a modest interpretation in a better position than it would have been coming into this. And I think that is something that, obviously, quantifying it will be important. But I do feel very comfortable in suggesting that just through the trial and experience and the work we've done, and remember, we don't have the benefit of seeing how all that work would have done pre-pandemic, but I was fairly confident that a lot of the things that we had put in place before were going to help improve this business as well.

[KenGoldman:]

No. I think that's very fair on a qualitative level. I would just hope that as you think about guiding ahead and so forth, maybe it would behoove a lot of companies to not assume as much stickiness as they think will happen and then maybe surprise to the upside. But I will leave it there.

[Mark Clouse:]

Yes. And one thing I'll just say, Ken, as you leave, I mean that was also part of the reason why I wanted to highlight a few things that are really not related to COVID within our portfolio. I mean, remember, we've got 50% of our business that is a Snacks business that has been growing pretty steadily before and through. And we really expect it to continue to grow afterwards. Not all of our peers have that particular composition. And further to that, again, I know I'm kind of baiting the hook here for conversation on margin around Snacks. But there is, I think, a continued opportunity for value creation. And with the work that we've done on our balance sheet, our ability to invest thoughtfully and in a disciplined way to create value, I think, gives you some reasons to think about the business differently, that doesn't require anything as it relates to stickiness of households. And so I want to -- I know a lot of discussions around household retention, but we've got a couple of really big things in the business that are far less related to that.

[Operator:]

Our next question comes from Bryan Spillane from Bank of America.

[Bryan Spillane:]

And I guess I'll take the bait on the hook, right, in terms of margins in Snacks. But maybe, Mark, if you could maybe tie that into also capital allocation, right? Because you've talked about that. And arguably, that's going to be the more important driver once we get past whatever the pandemic is. So I guess 2 related questions. One, does an acquisition that creates more scale in Snacks, is that a pass to higher margins? And then the second, just as it relates to capital allocation and I think what you're implying in terms of M&A, maybe could you think about how Campbell's -- and M&A strategy at Campbell's might line up relative to some of the companies you've been at before, right? Pinnacle was pretty good at it. Obviously, Mondelez was a creation of a lot of M&A. So just trying to get a sense of how you're thinking about that capital allocation.

[Mark Clouse:]

Yes. Okay. So let me start a little bit with the Snacks question. And again, I really do expect us in the next few months, again, not to put a particular date, but I do imagine as we go into the fall, we're going to be in a good position to have a more robust dialogue with you about kind of this next chapter of the company's strategy, which will include, in my mind, a lot more granularity around some of the things that we're talking about now. But I will say this, on the margins on Snacks, if you look at kind of where we are in our journey right now, we're about 80% of the way through value capture. We're now up and running on SAP, which is a really important step, as many of you know, in these integrations and transitions. And so it's allowing us to continue to build our insights as we look forward. And where that value capture has put us, if you think about the beginning of the journey to where we are now, the gap between our margin and kind of the snacking averages, we've closed about 1/3 of that gap. So there's still about 2/3 of that remaining. And if you look at the reasons why, and you kind of start from manufacturing, all the way to the store, you see a fair amount of inefficiencies even after we complete the value capture, that gives us a lot of confidence that we're going to find opportunities. For example, we've got 1,300 locations holding inventory right now in our supply chain. And yes. No matter how you cut the pie, that is not our most efficient foot forward. And so our ability to go after each of those elements with kind of a next wave of plans gives me a lot of confidence that we can reduce that gap further. And again, quantifying that and giving you a little more clarity on the building blocks, we will do that, but not today. So we're working on it and more to come. But I think there's a lot of reasons to believe. And if you pair that with what the growth rate of this company is and what we continue to see as improved opportunities, as we move from integration orientation really to growth and focus on innovation, we feel very good about it. And so if you think about some of that work, there may be some investment opportunities that are there. So as we think about capital priorities, kind of pivoting now to your second question. First of all, our capital priorities as a company remain the same. We invest in the company. We pay our dividend. We continue. At this point, we've really done a good job of managing down debt. So we're quite happy with that progress. And then we're looking in a very disciplined way. I mean you mentioned some prior historical places that I've been that I think have had very good decision matrix, very good discipline. Our focus continues to be things that we believe are highly aligned or nearing adjacencies to our core strengths. And I think there is a role that M&A can play. But it's in conjunction with also evaluating where we can invest in the company and generate high returns. I think the important thing to note is that we will apply that discipline, but we're going to be applying it to an availability of capital that, as you say, I think, is going to be a very, very important indicator of value. And especially as you think competitively across places to go, I'm feeling very good about our flexibility and capability to generate a significant amount of value in that space. Does that make sense, Bryan?

[Bryan Spillane:]

Yes. That makes sense. Thanks, Mark.

[Operator:]

Our next question comes from Jason English from Goldman Sachs.

[Jason English:]

I'm going to take another nibble at that hook from a slightly different angle. I hear you loud and clear, Mark, if we benchmark against some of the bell others in the space, like a Frito or a Mondelez, but that just seems like an unfair comparison. If I look at, say, your 18% to 19% EBITDA margins in Snacks, they look great, especially when I contemplate you're somewhat subscale relative to the big leaders, your profit sharing arrangement with independent distributors. Your portfolio is exceptionally complex. And you've got a decent chunk of sales that are derived on a pretty low price point, suggesting that it's not really a cost per ounce issue. It's a price per ounce issue for much of that. So how is attacking costs, like where are the opportunities? Because when I look from the outside looking in, I don't really see the opportunity. I see a business that's sort of already been rightsized in terms of margin and one that's probably where it should be. What am I missing? Can you put more teeth on this one, please?

[Mark Clouse:]

Yes. I mean, I think it's really, Jason, is if you look at the redundancy and the inefficiencies that exist in a network that was built independently and really not through the lens of efficiency. I think the -- as you described, the complexity of our portfolio, there is no question that what is a little unique about us is the opportunity, I'd say, both the scale and strength of operating within 2 aisles of the store. But our portfolio is really not as complex as you may think. The partner brands is something we've been working hard on over the last 2 years. And we've got a little bit of work still ahead of us to make sure that we've got the right partnership model that enables us to eliminate a lot of that complexity while still generating the benefits. So still more work to do there. But I think if you really kind of go from our manufacturing footprint, to our distribution and warehousing footprint, all the way to our route to market, you're going to see opportunities across all 3 of those buckets where we're going to be able to drive greater levels of efficiency than what's there today. And again, the good news here is, it doesn't necessarily require us to get to a Frito-Lay to the highest end of the Snacks margins. But even as we move into closing that gap, there's significant value to be created. And as you think about kind of our historical growth rate of 3%, with a headwind of about 1%, as we've navigated kind of the managing down of the partner brands, I think you could expect that growth rate to at least continue, if not improve, as we go forward. And so you put those pieces together, and I think the contribution of what represents 50% of our company becomes a significant benefit and a tailwind for us that I think can continue to contribute going forward. Now in fairness, Jason, I think you like others are going to want to see a little bit more of that blueprint, and I get that. And that's what we're working on now and certainly would anticipate sharing more granularity with you as we go forward. I kind of raised it now though because I think a lot of the conversation, rightfully so, is about what's coming next, where our company is focused in the future coming out of the pandemic. And I point to this, it's just an area that's not related, kind of to Ken's question earlier, on stickiness of households. This is really about our ability to execute into and to identify those areas within our own existing business model.

[Operator:]

Our next question comes from Robert Moskow from Credit Suisse.

[Robert Moskow:]

I have a different kind of question about Meals & Beverage. There's been capacity constraints for about a year, for understandable reasons. You say a lot of it has to do with labor absenteeism, but also just overall capacity. So I was curious. As you entered this year, in retrospect, is there more that the company could have done to either hire more or take on more co-packing capacity to meet this surge in demand? And did you choose not to? Did you say, we're going to choose not to do that? Maybe it's not the sustainable thing to do. And then the second part of this is, as you get more data on the stickiness, what happens next? Do you then have to take those steps? Do you have to expand soup? Do you have to expand sauce's capacity? There's a lot talking -- a lot of talk here about Snacks. But are the things that you're going to have to do in Meals & Beverage to cope with a higher demand plateau?

[Mark Clouse:]

Yes. No. It's a very fair question and one that I can tell you, we've spent a fair amount of time asking ourselves. I think let me start with the labor standpoint. I really don't think there's any more we could have done on hiring. I mean we have hired 20%, an additional 20% of our entire workforce over the course of the pandemic. And we did that because we understood that we needed some flexibility as it related to our protocols around quarantining as well as the expanded demand that we were seeing. So when I think about, did we let up there at all or should we have pushed harder? There really was not anything more that I can see that we could have done on the hiring side. They simply ran into -- and if you think about where some of our facilities are, there just was a limit to how many -- how much availability we ultimately had to incrementally hire, but it was certainly not for lack of effort. I can tell you there are career fairs around the country. And I'm happy that we were able to hire 2,000 people. I think that was a -- it came at a good moment. But certainly, would it have been nice to continue to have a little bit of more flexibility? Certainly. In the month of December and January where we saw this renewed surge, it would have been helpful at that moment. But I think the teams have done a very good job at trying to maximize what that potential is. On the capacity side, so what have we been doing or what have we done? I think it's a little different by brand. If you really look under the hood and you say, okay, where is the real pressure on capacity? I mean notwithstanding a bump or 2 or a winter storm like we may be dealing with in Paris, Texas right now. The biggest concern that we've had is on broth. And there, we have already made the commitment to invest in capacity. We are in the process of putting that in place. It is -- I will say it's been a little tougher and a little slower through the pandemic installing new capital as it might have been in a normal period. But there's no question about the commitment and what that will mean for us when we have that up and running as well as creating a very healthy network of co-manufacturing that helps us ebb and flow. And Rob, you talked a little bit about the future. Remember, part of the dynamic on the Meals & Beverage businesses are these peaks and valleys as it relates to seasonality. And part of what we're doing is creating a network that allows us to create more flexibility and flex a bit more to the upside. Let's say, we're on the high end of our assumptions, that we can flex there. Let's say, we're on the lower end. We can flex there and still be responsible as it relates to capital, while still enabling us to meet all of the ongoing dynamics of building inventory into soup season and matching kind of that footprint. So I do feel very good about the investments we've made and what we've done to add some flexibility to our business to be able to handle a variety of different situations. Part of the pressure has been to get back into some of these SKUs, that were B and C SKUs that honestly have been very, very important and key to us regaining share that we've had to put back in place. But we're now in a pretty good position on those and are really coming back fully. And so, I feel good about the future, but that's kind of the dynamics that we've gone through as we've thought through that.

[Operator:]

And that does conclude our question-and-answer session for today's conference. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect. Everyone, have a wonderful day.