Campbell Soup Company

Ladies and gentlemen, thank you for standing by, and welcome to the Campbell Soup First Quarter 2020 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker today. Mr. Ken Gosnell, Vice President, Finance Strategy and Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone. Welcome to Campbell's first quarter 2020 earnings call. As usual, we've created slides to accompany our earnings presentation. You'll find these slides posted on our website this morning at investor.campbellsootcompany.com. This call is open to the media who participate in a listen-only mode. Turning to slide three, today we will make forward-looking statements which reflect our current expectations. These statements rely on assumptions and estimates which could be inaccurate and are subject to risk. Please refer to slide three or our SAC filings for a list of factors that could cause our actual results to vary materially from those anticipated and forward-looking statements. Because we use non-GAAP measures, we have provided a reconciliation of these measures to the most directly comparable GAAP measure, which is included in the appendix of this presentation. On slide four, you can see what we plan to cover today. With us on the call today are Mark Klaus, Campbell's President and CEO, and our new Chief Financial Officer, Mick Bakehausen. Mark will share his thoughts on our performance in the quarter, and then Mick will walk through the financial details and our updated guidance for fiscal 2020. With that, let me turn the call over to Mark.

Thanks, Ken. Good morning, everyone, and thanks for joining us today. Before I get to our performance, I want to acknowledge that Ken has decided to retire from Campbell, and this should be his last earnings call as Vice President of Investor Relations. Ken, thank you for your contributions to the company through the years, and we wish you the best in your retirement. Our results to start the year were largely consistent with our expectations. As we discussed during our fourth quarter call, fiscal 2020 will be a year of stabilization for the company as we invest in the business, optimize the portfolio, and fully implement our new operating model, including further integrating our snacks division. We continued to make great progress across these focus areas, building upon the foundation we put in place in fiscal 2019. Looking at our results, organic sales were slightly below a year ago, just under 1%. Performance reflected continued strength in the snack segment, where sales increased 2% with contributions across the business. This was more than offset by a 3% sales decline in meals and beverage. in large part due to the timing of U.S. soup shipments related to the Thanksgiving holiday. Although this timing shift resulted in a headwind in Q1, I fully expect that to balance in Q2. What I'm most encouraged by is our in-market performance, where we are building momentum across both divisions. In fact, in measured channels, our total company in-market consumption grew more than 1%. Our brands grew or held share in categories representing more than 80% of our total business and finally in 10 of our stated 13 priority categories. This was led by gains in soup share for the first time in nearly three years. We continue to execute upon the other key elements of our strategic plan, including a 30 basis point gross margin expansion supported by productivity improvements and cost savings. We delivered $45 million in cost savings in the quarter, inclusive of our multi-year enterprise program and the synergies from our snacks integration. Adjusted EBIT was better than we expected, although the majority of the upside was timing, resulting in double-digit adjusted EPS growth. Turning to a discussion of our segments on slide 7, let's start with meals and beverages. As a reminder, when we spoke last quarter, I indicated we had a great deal of work to do to stabilize this business, and the mixed results in Q1 reflect many of those actions. This includes optimization of our portfolio and increased investments. For instance, A&C is up 2% in the division in Q1, including a 15% increase on our U.S. soup brands behind earlier in-season advertising. while overall TDPs in the division were down around 6%. The net of this is improving consumption only down about 1% and share in market positive. But clearly, we have not yet achieved our overall goal of stabilization. This will take some time, but I am happy with the progress. As previously mentioned, the difference in our net sales and consumption was primarily holiday timing of shipments, which we expect to recover in Q2. and some proactive decisions that we have made to optimize certain lower-profit food service volume. Turning specifically to U.S. soup, while the impact of timing of Thanksgiving shipments was most pronounced on soup, where our condensed varieties and broths play a sizable role in many holiday recipes, we are making encouraging progress in market on the business. we are injecting much-needed investment and continuing to strengthen important retailer relationships while also rationalizing the portfolio. As we've discussed before, in my view, the first step in this journey is stabilizing share. This quarter marked the first time in 10 quarters that Campbell gained overall soup share. In fact, we grew or maintained share across the condensed, ready-to-serve, and broth categories. This is one of the early indicators of progress on our three-year journey to revitalize U.S. soup. On slide 9, while soup sales declined 3% in the quarter, consumption only declined about 1%. Improved velocities in soup were essentially offset by TDP losses in the quarter. And I'll unpack that more on the next slide. As you can see, the two-point gap between net sales and consumption is due entirely to the timing of Thanksgiving. Turning to slide 10, we are investing more in the category, both on condensed and ready-to-serve, with advertising dollars up. We started our advertising earlier a month sooner this fiscal year, and while it's early days, the response to our initial investments is encouraging. For example, our new tomato soup advertising went on air September 30th, and we saw positive lifts immediately. Through the start of the second quarter, we've improved on those lifts, which are now up 7%. We have also increased our promotional frequency across the portfolio, which is a product of our improving retailer relationships and select high ROI investments. Moving on to TDPs, as we mentioned back in August, we've experienced distribution headwinds due to historic lack of support and some of our own choices to optimize our SUP portfolio. Approximately 80% of these TDP losses are what I would characterize as non-regrettable, meaning that they were lower velocity SKUs coming from the tail of our condensed and ready-to-serve segments. However, about 20% are SKUs that should remain, and with the support we've added, we have even higher, stronger velocities. We're pushing hard to get those back. But what is most important right now is to sustain our velocity as we head into the heart of the soup season. With each month of progress, we are laying the foundation for the sustainment of the category. And next year, with more innovation, the aim is to ultimately expand the category. In summary, I feel good about the direction in which we are headed on soup, including the improvements we're seeing on Pacific, which we expect to return to top-line growth this year. I'm also encouraged by how the portfolio is responding to the actions we are taking. As I've emphasized from day one, change won't happen overnight. Looking ahead to the second quarter, we expect that our net sales profile in the U.S. soup business will continue to improve. In other parts of the division, I'm pleased with the performance of our Prego brand, which continued its strong momentum and maintained its number one share position in the Italian sauce category. Turning to V8, the shelf-stable juice category remained challenged as we continued to optimize our portfolio, primarily on Splash. We are reshaping the portfolio around the plant-based positioning of V8 Red, the V8 Plus Energy product, which is outperforming the category, and our overall single-serve platform. Our new campaign focuses on a master brand story for V8 as the original plant-powered drink. We believe we have the right to own this space and are pleased with early indications of this investment. While the declines on splash more than offset these improvements, they aligned with our expectations. It's early days in our efforts to stabilize our meals and beverages business, but I feel good about our progress thus far, and I have confidence in the team to continue to improve our performance. Let's look at our snack segment on slide 12. This was another very good quarter for the business, with organic sales increasing 2%, which includes a nearly 4% in market result, offset by the 1% headwind for partner brands that we discussed last quarter. We continued to drive strong consumption on our nine power brands, while also making steady progress on our integration plans and value capture targets, both of which give me further confidence in our strategy, our investments, and our team. Operating profit was comparable to the prior year as we front-loaded marketing investment in the first quarter. We expect our profit performance to improve as the year unfolds. Once again, eight of our nine power snack brands grew or held share in the quarter. The snacks business is maintaining momentum behind our proven growth model, which we are now deploying across the full portfolio. Marketing investments are up significantly across our nine power brands with select trade investments to maintain price gaps. These investments continue to pay off. Total snacks consumption grew nearly 4% in measured channels, while our power brands grew 6%. We are seeing nearly two times the consumption growth on our power brands versus the rest of the snacks portfolio. As we focus the portfolio and invest behind these differentiated brands, that are truly driving the business. The Pepperidge Farm portfolio continued to lead the way with its 20th consecutive quarter of organic sales growth. Goldfish continued to perform well with increases on the core business. Our bakery business continued its growth behind buns and rolls, sandwich bread, and swirl. Marketplace performance was also strong on our salty snacks brands. where we drove double-digit growth on late July, while Cape Cod, Kettle, and Snyder's Pretzels continued to respond well to our increased marketing investments with both consumption and share growth. As discussed last quarter, the partner brands in our portfolio are performing in line with expectations, impacting our snack sales by 1%. We expect this headwind throughout fiscal 2020. Let's take a closer look at the progress we're making on our integration and value capture on slide 14. I remain satisfied with the pace of our progress. In the first quarter, we continued to deliver additional savings across the three key areas, synergies in procurement, around packaging, the consolidation of sales headquarters and related operations, and driving operational efficiency in our manufacturing. We expect to continue to deliver savings against these three initiatives in the first half of the year, and we're off to a strong start. Looking to the back half, we expect initiatives around manufacturing and logistics to begin to contribute to our overall savings. In summary, I'm very excited by the progress and potential of our snacks business. I continue to view it as a unique advantage and differentiated portfolio that is responding well to our investments and the best of both capabilities of the combined businesses. With that, let me introduce Mick Bakehausen, who joined Campbell in October after serving as CFO at Chobani for the past three years, where he helped improve the company's capital structure and supported its growth and expansion. He brings significant experience in debt reduction and cash flow generation, both of which are key priorities at Campbell. Mick's diverse experience will be a tremendous asset as we continue to reposition Campbell for sustainable, profitable growth.