Campbell Soup Company

Good morning. My name is Myra, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Campbell-Soup Third Quarter Fiscal 2021 Earnings Conference Call. Today's call is being recorded. All participants will be in a listen-only mode until the formal question-and-answer portion of the call. At this time, if you would like to ask a question, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your questions, press the pound key. Thank you. With that, I would now like to hand the conference over to your host, Ms. Rebecca Gaudi. Ms. Gaudi, you may begin your conference.

Good morning and welcome to Campbell's third quarter fiscal 2021 earnings presentation. I'm Rebecca Gaudi, Vice President of Investor Relations. Following the completion of this call, a copy of this presentation and a replay of the webcast will be available at investor.campbellsoupcompany.com. A transcript of this earnings conference call will be available within 24 hours at investor.campbellsoupcompany.com. On our call 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 3 or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in forward-looking statements. Because we use non-GAAP measures, we have provided a reconciliation of each measure to the most directly comparable GAAP measure, which is included in the appendix of this presentation. On slide four, you will see today's agenda. With us on the call today are Mark Klaus, Campbell's president and CEO, and Chief Financial Officer Mick Bakehausen. Mark will share his overall thoughts on our third quarter performance and our in-market performance by division. Mick will discuss the financial results of the quarter in more detail and review our guidance for the full year fiscal 2021. Mark will then make some closing remarks before moving to an analyst Q&A. And with that, I'm pleased to turn the call over to Mark.

Thanks, Rebecca. Good morning, everyone, and thank you for joining us today. Throughout the last year, we rallied through the pandemic and made decisions focused on prioritizing the safety and well-being of our employees while meeting the needs of our customers and consumers. This approach has served us well over the past 15 months as we progressed our strategy in a volatile operating environment. Our team pulled together, we executed with excellence, and we delivered strong results. As you saw in our press release this morning, our results this quarter reflected the challenging comparisons to the prior year as we cycled the demand surge that accompanied the onset of the COVID-19 pandemic and navigated several current headwinds. However, you will also have seen the continued strength in market on market shares, underpinned by healthy retention of new and younger households and the full recovery of distribution levels. we did face a significant inflationary environment in the quarter, as well as shorter-term increases in supply chain costs. We anticipated the vast majority of these drivers, but in certain areas, the pressures intensified, especially around inflation and some of the transitional costs moving out of the COVID-19 environment. We are confident that we can address these issues, and we have plans and pricing already in place as we exit the fiscal year and enter fiscal 2022. Our confidence is further strengthened by our continued in-market momentum and the structural health of our business and brands. I will first review our results and then share the context and actions we are taking to address these challenges and the improving trajectory we expect for the rest of the year as we head into fiscal 2022. As we outlined during our second quarter earnings call, we expected this would be a challenging quarter, and we recognized that there would be headwinds as we lap the peak of COVID-19 demand, manage the volatility of current market dynamics, and continue to navigate our own transformation agenda. We delivered sales of $1.98 billion in line with our expectations as we cycled a 17% organic growth comparison to a year ago. Our sales results benefited from the continued momentum of our snacks power brands and our U.S. retail products in our meals and beverage division, as well as the early signs of recovery from our food service business. Importantly, our brands remained strong with nearly three-quarters of our portfolio gaining or holding share in the quarter. In our core categories, most of our brands grew at higher rates than pre-pandemic levels, and our brand consumption on a two-year comparison grew 9%. These results were driven by our decision to invest in supply and service while preserving brand investments with advertising and consumer promotion expense as a percentage of net sales comparable to last year. Looking ahead, we expect organic sales in the fourth quarter to decline versus last year as the COVID-19 lap continues. We do expect a sequential improvement from the third quarter as the comparison to prior year eases a bit and our food service business continues to recover. From a margin perspective, our decline versus prior year, excluding the net benefit from mark-to-market adjustments on outstanding commodity hedges, stemmed from certain headwinds which are grouped into three main buckets. First, external factors were larger than we had anticipated. We, like others, face pronounced inflation related primarily to steeply higher transportation costs, some of which was an outcome from the strain of the Texas winter storms on supply chain logistics and the closure of our Paris, Texas facility for two weeks. These factors, partially offset by our productivity improvements, reflect about a third of the gross margin erosion in the third quarter and will continue into fiscal 2022. We currently expect the benefit from pricing actions we have put in place across our portfolio and our strong productivity plans to mitigate this inflation pressure in fiscal 2022 while we remain vigilant monitoring the ongoing dynamic nature of the current environment. The second bucket I would characterize as transitional items that we are working our way through as we move out of the COVID-19 environment and fully recover on supply. This includes areas like lower fixed cost leverage, as we lapped the year ago elevated levels of demand, sustained labor challenges, and added investment in higher cost co-manufacturers to recover fully on supply. We had factored these pressures into our plans, but in some cases they were more significant than anticipated, as either the time to recover or the magnitude of the impact were greater than expected. These transitional costs reflect about half of our gross margin erosion in the quarter, and while we expect the impact of these costs to moderate into the fourth quarter, they will continue to add pressure as we fully cycle the COVID-19 environment. The third bucket is execution, related to the high degree of transformation we have underway in our snacks division. Throughout my time at Campbell, we have taken significant steps to improve our execution as we have steadily advanced our agenda. However, this quarter, the convergence of multiple transformation efforts including systems, logistics, and capacity all put additional executional pressure on the business in a tough third quarter environment. We have already taken decisive actions to allocate more resources and better phase projects to address these issues. We do not expect these elements will have a material impact on the fourth quarter. And more importantly, they do not alter our long-term expectations for this next margin expansion opportunity we highlighted last quarter and will share in greater detail during our investor day later this year. Although all these headwinds put pressure on our near-end performance, they do not represent structural issues and we remain confident in our strategic plans. As a result of the third quarter pressures on margin, adjusted earnings per share came in lower than we expected at 57 cents. As Mick will discuss in more depth, we're updating our guidance accordingly. Turning to our division performance, let me begin with meals and beverages. Our net sales decline of 14% and in-market performance of minus 24% in the third quarter reflect lapping the historically high consumption levels that we experienced during the onset of the pandemic last year. On a two-year basis, we had net sales momentum in key categories, with share gains over prior year in condensed soup, ready-to-serve soup, Swanson broth, Prego, and Pacific foods. Compared to the third quarter of fiscal 2019, we delivered strong consumption growth of 9% against organic net sales growth of 3%, with the gap driven by our food service business, which continued to recover as governments gradually eased on-site dining restrictions in some markets. Overall, as we have invested in our service levels, they are stabilizing, and we are now in a better position on supply across the division. We have restored the shelf in the majority of our categories, and our share of total points of distribution is consistent with pre-COVID-19 levels across U.S. soup, Prego, and V8 beverages. In-market consumption for soup was strong versus two years ago, growing at 9% and gaining dollar share. we delivered record share growth in u.s soup of nearly two points driven by condensed soup swanson broth chunky and pacific foods we also made significant progress on the retention of new households since the onset of the pandemic soup gained dollar share in all three categories with millennials driving strong growth in condensed cooking broth and ready to serve soup We are confident that the brand investments made are working as buyers and buy rate remain elevated compared to pre-COVID-19 levels. We continue to be encouraged by the sustainment of quick scratch cooking behaviors and in-home eating occasions, even as COVID-19 restrictions are lifted. In fact, Condense delivered its ninth consecutive quarter of dollar share gains, growing share nearly three points. Notably, with millennial consumers, condensed grew share by nearly four points. Within ready-to-serve, Chunky delivered double-digit in-market consumption growth on a two-year basis. Pacific Foods continued to be a powerful growth engine within our soup portfolio, with in-market consumption growth of nearly 30% on a two-year basis and continued share gains versus prior year, marking its sixth consecutive quarter of share improvement. On Swanson Broth, as we invested to restore distribution and service, we increased share by nearly two points versus prior year. On a two-year basis, we grew household penetration by more than a point and saw higher repeat rates on our brand. Prego delivered its 24th consecutive month with the number one share position in the Italian sauce category and achieved its strongest share gain in over three years. Compared to pre-pandemic levels, we are seeing strong repeat rates and buyer retention on this brand, as well as strong resonance with millennial consumers. Overall, the Meals and Beverage Division delivered a strong in-market quarter against difficult comparisons. With share gains in key categories, especially among younger consumers, TPD gains and improved service levels continuing to support our confidence that it will emerge from the pandemic in a stronger position. Let's now turn to snacks, where our power brands continue to fuel performance with in-market consumption growth of 14% on a two-year basis, despite being down 5% year over year. On a two-year basis, total snacks consumption grew 10% against organic net sales growth of 3%, with the gap driven by the decline in our partner brands and continued pressure in the convenience channels. We grew share on many of our power brands over prior year, and repeat rates on seven of nine power brands are ahead of pre-COVID-19 levels. We delivered our fifth consecutive quarter of share growth on late July snacks, Kettle Brand Potato Chips, Snack Factory Pretzel Crisps, and Lance Sandwich Crackers. On a two-year comparison within the power brands, our salty snack brands grew in market consumption nearly 20% and increased household penetration across the majority of these brands. Our Pepperidge Farm farmhouse products also continued to deliver exceptional results with in-market consumption growth of 9% on top of the prior year increase. Turning to Goldfish, we returned to share growth, increasing by more than one point compared to prior year. This was in part due to an improved performance on multi-packs, continued momentum on flavor-blasted goldfish, and new broadened digital activation. We also exited the quarter with early momentum from the launch of limited edition Frank's Red Hot Goldfish. With that, let me turn it over to Mick to discuss our third quarter results in more detail and our guidance for the full year.