Campbell Soup Company (CPB) — Q1 2020 Earnings Call Transcript

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.campbellsoupcompany.com. This call is open to the media who will participate in a listen-only mode. Turning to Slide 3; 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 these measures to the most directly comparable GAAP measure, which is included in the appendix of this presentation. On Slide 4, you can see what we plan to cover today. With us on the call today are Mark Clouse, Campbell's President and CEO, and our new Chief Financial Officer, Mick Beekhuizen. 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 continue 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 year ago, just under 1%. Performance reflected continued strength in the snacks segment where sales increased 2% with contributions across the business. This was more than offset by a 3% sales decline in Meals & Beverage, in large part due to the timing of US 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 end market performance where we are building momentum across both divisions. In fact, in measured channels, our total company end 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 & 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 US 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 foodservice volume. Turning specifically to the US 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 ten 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 US 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 2-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 onto 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 Soup 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 an even higher, stronger velocity. 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 US 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 remains challenged as we continue 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-power 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 & 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 Snacks segment on Slide 12. This was another very good quarter for the business with organic sales increasing 2%, which includes nearly 4% in market result, offset by the 1% headwind for partner brands that we discussed last quarter. We continue 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 continued 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 Snacks sales by 1%. We expect this headwind throughout fiscal '20. 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 and 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 Beekhuizen, who joined Campbell in October after serving as CFO at Chobani for the past three years where he helped to 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. Now let me turn it over to Mick.

Thanks, Mark. Before reviewing our results, I wanted to give you my perspective on the quarter and outlook for the balance of the year. As Mark stated, sales were slightly down but were largely in line with our expectations. Within Meals & Beverages, soup shipments were down 3 points of which approximately two-thirds reflects the timing of shipments with the later Thanksgiving holiday. Consumption remains solid and share trends continued to improve. And Snacks delivered 2% growth, which included a 1 point headwind from partner brands. We are pleased with improving trends in our gross margin, as we benefited primarily from productivity improvements, cost savings, and pricing, partially offset by cost inflation and trade investments. We continue to make strong progress against our cost savings target of $850 million by the end of fiscal 2022, delivering $45 million of incremental savings in the first quarter, bringing the program to-date total for continuing operations to $605 million. Year-over-year, adjusted EBIT increased 6%, slightly better than expected, benefiting from some timing on the cost side. We continue to make progress on our divestiture program with the sale of Kelsen completed in September, the sale of the European Chips business completed in October, and the remaining portion of Campbell International expected to close before the end of our second quarter. Proceeds received to date along with positive cash flow from the business have enabled us to reduce debt levels by approximately $1.5 billion over the past 12 months. Lastly, we are updating our fiscal 2020 sales guidance to reflect the sale of the European Chips business, which was not included in our guidance previously provided in August. Our underlying outlook for organic sales as well as adjusted EBIT and adjusted EPS remains unchanged. Overall, we had a solid quarter and we are currently on track to achieve our fiscal year goals. Given the seasonality of our business combined with increased marketing support in the second quarter, we expect to see our performance through the first half to be more in line with our full year guidance, excluding the impact of the 53rd week, which obviously falls in the second half of the year. I'll now review our results in more detail. For the first quarter, reported and organic sales decreased 1% to approximately $2.2 billion as gains in Snacks were more than offset by declines in Meals & Beverages. Adjusted EBIT increased 6% to $392 million as sales declines were more than offset by lower adjusted administrative expenses, higher adjusted other income and improved gross margin performance. Adjusted EPS from continuing operations increased by 10% or $0.07 to $0.78 per share due to our adjusted EBIT performance and lower interest expense. Breaking down our net sales performance for the quarter, organic net sales were down 1%. Overall volumes were stable as declines in Meals & Beverages were offset by increases in Snacks with gains across much of the portfolio. Sales benefited by slightly less than 1 point from pricing actions primarily within Meals & Beverages taken in fiscal 2019. Promotional spending investments within both Snacks and Meals & Beverages negatively impacted net sales by a little over a point. The impact from currency translation in the quarter was neutral, as we refocus our portfolio on North America. We would continue to expect currency translation impacts to be minimal. All in, our reported and organic net sales were down just under 1%. Our adjusted gross margin percentage increased by 30 basis points in the quarter to 33.8%. Cost inflation and other factors had a negative impact of 170 basis points. On a rate basis, overall input prices increased by approximately 3% reflecting higher prices on steel cans as well as areas such as vegetables and flour. Net pricing led to a 30 basis point decline in adjusted gross margin as the benefits from list pricing actions were more than offset by increased promotional spending. Going the other way, our ongoing supply chain productivity program contributed a 130 basis points and our cost savings program also added 90 basis points to gross margin expansion. Mix was favorable by 10 basis points, bringing the gross margin percentage to 33.8%. We are pleased with these gross margin results as we continued to achieve improvement in performance. Moving on to other operating items, adjusted marketing and selling expenses decreased 1% in the quarter to $206 million as increased investments in advertising and consumer promotion were more than offset by the benefits of cost-saving initiatives. Adjusted administrative expenses decreased 7% to $126 million, primarily reflecting the benefits of cost-saving initiatives. And while not shown on the chart, adjusted other income was $8 million compared to zero in the prior year period. The year-over-year impact of $8 million contributing to our EBIT performance in the quarter reflects lower losses on investments and higher pension and post-retirement benefit income. Going to the next slide, we have continued to successfully deliver against our multi-year enterprise cost savings program. This quarter, we achieved $45 million in savings, inclusive of Snyder's-Lance synergies. To-date, that brings our savings for the overall program to $605 million. We expect incremental cost savings in the range of $140 million to $150 million for the full year and continue to track to our cumulative savings target of $850 million by the end of fiscal 2022. For additional perspective on our performance, the next chart breaks down our adjusted EPS change between our operating performance and below the line items. Adjusted EPS increased $0.07 from $0.71 in the prior year quarter to $0.78 per share. Adjusted EBIT had a positive $0.05 impact on EPS. Net interest expense declined year-over-year by $10 million, delivering a $0.03 positive impact to EPS, as we have used proceeds from completed divestitures and our strong cash flow to reduce debt. Lastly, our adjusted effective tax rate of 24%, while slightly higher than prior year, rounds to no impact, completing the bridge to $0.78 per share. Now turning to our segment's results; in Meals & Beverages, sales decreased 3% to $1.2 billion, primarily reflecting declines in US Soup as well as Foodservice, which were partially offset by gains in Prego pasta sauces. Sales of US Soup decreased 3% with shipments lagging in-market consumption by 2 points, which were negatively impacted by movements in retailer inventory levels in both broth and condensed soups related to the timing of the Thanksgiving holiday. Sales of ready-to-serve soups were comparable to the prior year. As mentioned, our Soup share trends continued to improve, gaining 50 basis points of share in the quarter. Segment operating earnings declined 3% to $282 million. The decline was driven primarily by cost inflation and sales declines, offset partially by the benefits of cost-saving initiatives and supply chain productivity programs. In Snacks, sales in the quarter increased 2% to approximately $1 billion. This performance was driven by gains in Goldfish crackers as well as gains in fresh bakery products, Pepperidge Farm cookies and Cape Cod and Kettle Brand potato chips, offset partially by declines in the partner brands. As we discussed with you last quarter, we are continuing our planned prioritization of select partners to reduce complexity and improve execution. And as Mark mentioned, eight of our nine snack power brands grew or held market share in the quarter. Segment operating earnings of $125 million were comparable to the prior year, as the benefits of cost-saving initiatives and supply chain productivity programs were offset by cost inflation and increased marketing support. Cash from operations for Q1 fiscal 2020 decreased year-over-year by $49 million to $182 million primarily related to the year-over-year increased payout of incentive compensation. We continued to make progress regarding our working capital management efforts. And while cash flow for the year will benefit from these efforts, we expect the impact to be at a lower level of improvement than what we achieved in fiscal 2019. Cash from investing activities increased by $369 million to $269 million primarily related to the net proceeds from the sale of Kelsen and the European Chips business. The cash outflow for capital expenditures was $98 million; $13 million lower than the prior year. We continue to forecast capex of approximately $350 million for fiscal 2020. Cash outflows for financing activities were $453 million compared to $148 million a year ago. The year-over-year incremental cash flow reflects the use of divestiture proceeds to pay down debt levels. Dividends paid in the amount of $107 million were comparable to the prior year, reflecting our current quarterly dividend of $0.35 per share. Overall, we continue to make progress to delever our balance sheet. Net debt of $8.2 billion declined by approximately $1.5 billion compared to the prior year as proceeds from the completed divestitures along with positive cash flow generated by the business were used to reduce debt. We expect to complete the remaining divestiture of Arnott's and certain other International businesses in the second quarter of fiscal 2020 and we will use the net proceeds to further reduce our debt level. With our current outlook, we expect our net debt to adjusted EBITDA ratio to be well below 4 times by the end of fiscal 2020. Now, I'll review our updated guidance for continuing operations for 2020. The only thing that has changed is that we are updating our guidance for the sale of the European Chips business which we completed in October. The impact from this divestiture was not included in the guidance previously provided on August 30th. Unlike other recent divestitures, primarily given its size, it is not treated as a discontinued operation and has been, through the date of sale, included as part of continuing operations. This divestiture will have about a negative 2 percentage point impact on sales for the balance of the year and no impact on adjusted EBIT or adjusted EPS. Also, as previously discussed, fiscal 2020 is a 53-week year resulting in an additional week which we believe to have about a 2 percentage point impact across net sales, adjusted EBIT and adjusted EPS. As a result, we expect reported and organic net sales of minus 1% to plus 1%; adjusted EBIT of plus 2% to plus 4%; and adjusted EPS of plus 9% to plus 11% or $2.50 to $2.55 per share. And for clarity, our outlook for organic sales excludes the negative 2 point impact from the sale of the European Chips business as well as a 2 point contribution from the 53rd week. Overall, I'm excited to be part of the team and pleased with the results of my first quarter with Campbell. I will now turn it back over to Mark.

Thanks, Mick. Before taking your questions, I wanted to add a new section to our comments for this quarter and the remainder of the fiscal year. As we discussed at our Investor Day, transparency and clear milestones are important to track the progress of our turnaround. You may remember this page from June, which I believe continues to serve as a great scorecard for our progress against the key metrics we outlined. I feel very good about the underlying progress we have made to start the new fiscal year. While we have more work to do in terms of stabilizing the top line, we are slightly ahead of schedule on margins and EBIT and I'm very pleased with our progress around building a winning team and culture, especially the speed at which we have implemented our new operating model and how we are adding new skills and capabilities while saving cost. On balance, we are doing what we said we would do. With that, let's take some questions.

Thanks, Mark. We'll be happy to take your questions. Krystal, let's open the lines and take our first question.

Good morning everybody. And thanks for all your help over the years, Ken, and welcome to you Mick. Two questions from me. I guess first, Mark, in thinking about Soup at this point. On the one hand, shipments were down this quarter against an easier comp, but on the other, there was the negative impact from a late Thanksgiving that you talked about, some of which should reverse, and also Campbell gained share, obviously, for the first time in 10 quarters, I think you said. So, perhaps you can put these results maybe in broader context with where you are in the overall Soup turnaround plan for starters. And then second, maybe for Mick, just the cost savings and synergies obviously came in strongly at $45 million in the first quarter, well ahead of, I guess, what would have been implied by your goal of $140 million to $150 million for the full year. So, with such a strong first quarter performance included in the original plans for the year, if not like what drove the upside and maybe how do we think about the cadence of savings and synergies for the remainder of the year? Thank you.

Great. Alright, let me address the soup question first, Mick, and then we can discuss the timing of the savings. I would categorize Soup for the first quarter as being very much in line with what we described in the fourth quarter. If we ignore the timing of the Thanksgiving shipments, the overall Soup business was down about 1%. The challenge here is to start with the positive aspects. Honestly, a couple of these areas performed better than I anticipated at this stage of the journey. It begins with market share. As we have consistently stated, our primary objective is to halt or reverse the market share decline we have faced over the last several years. We accomplished this in condensed, ready-to-serve, and broth during the same quarter, which I believe is a significant milestone in our progress. If you consider why and how this occurred, what excites me the most is the positive market reaction to our investments. Throughout this year, especially in the first two quarters, we've focused on investing in various parts of the business. Our initial investments included launching advertising that resonates with mothers, which I’m sure you’ve noticed, along with our campaigns promoting condensed soups, particularly tomato and chicken noodle. The response has been exceptionally strong. In recent weeks leading into the second quarter, we’ve seen that momentum increase even more. Specifically, our ready-to-serve products have seen a growth of about 7% in the last four weeks, while our condensed soups are approaching double-digit growth, with both segments also demonstrating very strong market share performance. And I think a big part of it is we're tackling head on some of the challenges that the business had. So, our condensed ads are focused on driving the quality perception. If you see how the ads are constructed, we're actually embracing the can and really connecting it to the quality of the food inside, whether that's no added preservatives on chicken noodle or whether that's six tomatoes or romancing it in the occasion of grilled cheese sandwich and tomato soup which we haven't advertised in a long time. And I think those are all very, very strong and what we're going to see now in the weeks ahead is condensed on the cooking side and our broth business, which are both areas that really didn't start until Q2. I also feel good about how our price gap management and our differentiation strategies are going as it relates to private label. We've seen a major turnaround in the share relationship on condensed as it relates to private label. And although, I'm still a little weary on the broth side and I'll talk about that in a second, I am happy to see the recovery of share on condensed that we had lost over several years. And no doubt, underlying that too is this improvement I would say in our retail partnerships, where people are embracing the fact that we're coming back to the table with the vision and a direction. And I think as this continues to build momentum, we could see velocities which were up 4% in Q1. I think we could see those accelerate as we go forward. And as we said, in the next iterations adding innovation seeing the full impact of advertising over time, I would say, on balance, I feel really good about where we are right now. I think the headwinds, as we talked about in the fourth quarter, is primarily the distribution side. And again if I'm honest here, I think 80% of this is what I would call non-regrettable as I described in my remarks. And about 20% of it I think are things that should be in there. And I think as we continue to build the case on velocity, we're going hard at getting those back in and I think we'll experience success if we're able to maintain this in-market momentum that we've seen. I mean the fact of the matter is, we're living a little bit with the history of not having supported the category and the businesses. And a lot of these decisions on the category and the resets were made on a historical set of performance factors that honestly warranted some rationalization. As I said, I think the name of the game right now is keep month-in month-out building our case for the category and showing the demonstrated improvement and the impact of focusing on the right areas. And then the other two areas that I think are working as headwinds; one is Pacific, but we're seeing steady increase. In fact, if you look at the latest four weeks on Pacific you're actually seeing a decline in market of just over 1% which is a significant improvement from where we've been, and I do expect that to swing into positive territory as the year unfolds. And then broth is a little bit of a wildcard. I'm anxious to see these next two weeks, which are the key weeks of Thanksgiving to really see if both the advertising and some of the price gap management we're doing is going to be enough to balance what is an aggressive growth trajectory that private labels had. But I do think with the support and Pacific, which obviously plays an important role on broth for us kind of having support for the first time in a lot of years we're, I would say, cautiously optimistic of how that looks. So that reality of where we are, if you think about this going forward, I think the drivers are not going to change materially in Q2. Obviously, we're going to get the benefit of the timing, I think more of the underlying variables are going to be roughly the same. But again, I wouldn't be surprised if we continue to build some momentum in a few areas as well. So net-net, I kind of feel like we're right where we wanted to be in Q1 and some green shoots and some areas that we still need to work on.

Great. And then, I think Mick is in the cost saves cadence.

Yes, regarding the cost savings, that's a great question. I have dedicated a lot of time to this since I joined the company, especially focusing on the cost-saving programs and the synergies related to Snyder's-Lance. In the first quarter, we achieved approximately $45 million in cost savings, which is a solid start. I am optimistic about our progress. However, it is still early in the year, and as we examine the details, I remain confident in our goal of reaching $140 million to $150 million in savings for the full year.

Yes, I think the reality is that we are a little ahead of where we expected in terms of EBIT, and some of that is due to cost savings coming in quicker than anticipated. While we don’t view these savings as additional for the year, we’re pleased to achieve them sooner. However, I would say that the upside in Q1 is primarily a timing issue, which I expect will stabilize in Q2. As Mick mentioned in his comments, we anticipate finishing the first half aligning closely with our 52-week guidance for both the top and bottom lines. There may be some additional opportunities if we maintain our momentum with Soup and continue realizing savings. For now, we believe much of this is related to timing.

Great. Thanks so much everyone.

Hi, good morning. I have two questions. First, you mentioned that shipments were trailing behind consumption due to the Thanksgiving shift. Mark, as we look at the first few weeks of the second quarter, have you noticed shipments surpassing consumption as the shift reverses? That’s my first question. My second question is regarding the 20% reduction in distribution, which some might consider regrettable. Some of your customers have recently mentioned how retailers are adjusting their shelf sets to simplify things and reduce out-of-stocks. Have you observed any impact on your business from this? I'm trying to understand where the distribution losses are coming from that you weren't anticipating. Thank you.

Yes. No, it's a great question. First on the phasing. So what I would tell you is, let me kind of hit it both on the shipment and the consumption side. So on the shipment side, I would say, we see a fair amount of the first month of the quarter and it's building very strong confidence that this idea of the phasing shifting from Q1 to Q2 will in fact occur. I think on the consumption side, we also continue to be very encouraged by what we're seeing in the latest four week numbers. They're some of the better performance on, like I said, the places that have gotten the majority of the advertising. However, what I will say is the next two weeks of consumption that we don't have will be inclusive of the key weeks of the holiday. So I would tell you in a couple of weeks from now, I'll have a very good feel for how we fared through Thanksgiving, which of course is a pretty quick turn from that one into Christmas and the December holiday period. So we'll have a little bit of foreshadowing there. But like I said, all of the indicators I see right now are, for the most part, either very much in line or in some cases a little bit ahead and more positive than I might have expected at this point. Let me discuss distribution. Retailers are evaluating their space and recognizing where value is being created in the store. In some instances, this could mean streamlining their product range to make room for core items that are selling more quickly. We are noticing some of this trend within the Soup category. And in our mind that's okay, right. That's where a lot of the non-regrettable rationalization is happening. If you take the last 10 items within our condensed soup business, it's in the third and fourth quartile. As it relates to velocity, those aren't our most efficient SKUs anyway. And so the idea that we get to a little bit more focused and tighter set and especially given some of the early successes we're having on supporting the core, I would say we feel pretty good about that and kind of are managing it and expecting it. I think the 20%, in some ways, has to do with the fact that I would describe it a little bit as collateral damage as retailers may have kind of cut a bigger piece, given a backward look at the performance of the category and our businesses. And I think that is a risk that we certainly identified and understood. And I think we'll reverse that. I don't think it's a key point to focus on whether it's systemic and will continue. I believe it won't. We're reaching a solid foundation for distribution, and I need to regain that 20%, which I think we're making progress on. We plan to introduce smart innovations on top of that, including our convenience platforms, where over time we'll provide a variety of options such as seven ounces, 11-ounce sipping, and up to 12-ounce sizes, which are more suitable as meal replacements. By incorporating more relevant formats into the aisle, we are creating room for growth, and I believe we will have a compelling story moving forward.

Thanks so much.

Good morning, everyone. I have a quick question. Did you provide an outlook for capital spending for the year?

Yes, we did. $350 million, it hasn't changed. It's basically in line with what we previously provided.

Okay. And then second, there's been a lot of discussion about shipments versus consumption in Soup. So I guess just for the full year, should we expect that your shipments would be in line with consumption or is there anything that would cause the two not to sort of converge for the full year?

No, I think you should expect them to be pretty close over the course of the year. There may be some timing fluctuations to consider, especially regarding key holidays. For instance, we have Easter coming up in the upcoming quarters. Overall, I believe that for the full year, consumption and shipments should align closely. We see no reason to anticipate a significant reduction in inventory levels or any other factors that would disrupt this alignment beyond the usual quarterly variations.

Okay. And then just the last question, you mentioned expecting that debt-to-EBITDA would be significantly below 4 times by year-end. So Mark, could you share your thoughts on capital allocation, share repurchases, raising dividends, and reinvesting in the business as we move toward a point where free cash flow provides some flexibility? How should we think about your approach if you find yourself with substantial cash on hand?

Yes. As we discuss our capital priorities today, they remain aligned with our previous communications, focused on supporting business growth, reducing debt, and sustaining our dividends. This has been our guiding framework. While I don't expect this to happen today, or probably even this year, I believe that once we approach that 3 times debt level, we will be open to conversations about capital allocation. We will continue to prioritize investing in growth, managing our debt level, and paying our dividend. But then at that point. I think it's right to have the conversation on would we look at other tuck-in M&A that might fill in some holes within our portfolio or be valued combinations with some of the businesses we have today. I would not expect us to be heading into transformational and bigger M&A. I just don't think that's where we are right now in the journey. But I could imagine that as we get into a reasonable debt level that we might look at some smaller contributions as well as of course always, although not approved today, I think there is always room for conversation around share repurchasing or increasing dividend, depending on the circumstances and kind of how we view the outlook going forward. So I think that conversation happens kind of as we're exiting this year into next year.

Excellent, thank you very much.

Thanks. Good morning, everyone. Mark, could you provide some insights into consumer behavior? It seems that the Campbell Soup business is improving. Can you help us understand what's happening at the consumer level? Are you re-engaging lapsed consumers, attracting new ones, or just shifting market share? Any additional context would be appreciated.

Yes. I believe there are a few dynamics occurring at the consumer level. I can summarize this in three main areas. The most significant area we are targeting is bringing back lapsed users, which is our primary goal. We recognize that the main obstacle here is how the product is perceived, and so we have been focused on improving quality and context. When considering the appeal of tomato soup and grilled cheese, it's encouraging to see how positively consumers have reacted to that message. Our chicken noodle soup, which contains no added preservatives, is making a significant impact by providing people with more options. We've noticed a slight increase in penetration, which is something we haven't seen in a while. Additionally, new consumers are entering the cooking scene, particularly millennials. As they grow older, they are increasingly engaging in home cooking, which we refer to as quick scratch cooking—putting together various components to create meals. Our broth brands, Swanson and Pacific, along with our condensed soups like cream of mushroom and cream of chicken, are convenient and easy to use. By promoting our message of fresher ingredients without added preservatives, we are becoming more relevant to millennials and aligning with their lifestyles, which is crucial for our long-term growth in this category. And then I think the third area that we're although early days that I continue to be very encouraged by is the performance of our sipping soups which allows us to kind of move into a more snacking occasions and we're doing that with the Well Yes! platform right now. But as the year unfolds, we'll be rolling out the bone broth, which is a big protein nutritional play, which we know is very relevant along with some continued expansion of different flavors. All three of those dynamics and that's why this is not a simple turnaround and it takes some time, all three of those areas are places where we're influencing consumers positively. And the good news in all of it is, as we think about those actions that we're taking, they also help us differentiate within the category and that differentiation is why I'm happy to see the share improvement because, again, I think our opportunity to improve is a little bit of a heavier lift to really get the category fully moving. But if we can at least ensure that we're winning the fight within the category and growing share and all the actions I just described are helping us do that, that's what we're kind of looking for. Does that help, Nick?

Yes, very helpful. I'll pass it on. Thank you.

Good morning, everyone. Thank you for having me. Ken, we'll miss collaborating with you, and I wish you the best in your next endeavor. Mick, welcome aboard; I'm eager to get to know you better.

Yes.

I have a couple of quick questions. First, regarding some housekeeping, you mentioned a few times that EBIT is already ahead of schedule due to timing impacts. In the press release, you referenced gains on open commodity contracts and some pension income. Can you quantify what sort of tailwinds these were and when you expect them to reverse?

Sure. Yes, let me take that Mark and you can add in the back-end but just if I look at the P&L and then consider Q1 EBIT by breaking down the different components, that’s probably the easiest way to analyze it. There was a slight decline in the topline, which was offset by improvements in gross margin. In sales and marketing, the savings from our selling expenses slightly exceeded our increased marketing investments. Regarding admin expenses, these were mainly driven by savings from the restructuring of our operating model. Lastly, in other income, there were some one-time items that I detailed in my prepared remarks.

Yes. So, I think part of it Jason is the one-time items are just going to give a little bit of a bump into Q1 that was contemplated in the year, but certainly shows Q1 up a little bit. That obviously we expected. I do think some of the underlying improvement on the cost side is what we were pleasantly surprised with a little bit earlier, both on the operating model within this admin costs and SG&A side as well as a little bit of some of the cost savings that sit within the selling and marketing number. One of the numbers that's really important to think about is, our marketing and selling was down about 4%, but that was driven primarily by about a 9% decline on the selling, which had to do with a little bit of what we've done through the reorganization. Our marketing was up about 4%, but even more importantly within that our A&C was up 12% in the quarter and Snacks was up 23%, Meals & Beverage was up 2%, but Soup was up 15%. So, I think what happened was, we got a little bit better inflow of those savings in Q1. I would expect that most of that should smooth out in Q2. It's not like we pulled fourth quarter savings into Q1. I think it was more kind of months of timing that it was full year. So as I said, I think if I'm looking at the first half, I'm kind of expecting the first half total to look very consistent with what our full year outlook or guidance is.

That's helpful, thank you. I believe you partially addressed my second question about the margin profile of Snacks. Given the overdelivery on savings, it was surprising to see margins decrease sequentially and also appear softer year-over-year than we anticipated. With the 23% increase in marketing for Snacks, can you quantify the impact on margins? This would help us better understand the underlying margin dynamics for that business.

Sure. Yes, happy to do that. Yes, I think if you look at kind of the building blocks as you went through it. Our cost savings and our productivity that was in there was about the same amount as the investment and that's why you're seeing a relatively flat bottom line and the way to think about the year on Snacks, this might help give you perspective is, if you remember, we kind of started this investment model on Snacks in Q3. And so if you imagine that the synergies being relatively stable across the four quarters, your first couple of quarters are going to have material steps up in the marketing and advertising as well some investment in trade that we're still working on to get those price points right primarily on the Snyder's-Lance businesses. As you go through the year, the incrementality of what we're spending from a marketing standpoint will drop and more of those cost savings will come through. So I think as you look at subsequent quarters, I would expect the margin to improve in each quarter. And by the time you get to the end of the year, I think it's probably going to be much closer to what you might have modeled for the year with all of the puts and takes we've given you.

Helpful stuff. Thanks a lot guys. I'll pass it on.

Okay, yes.

Hi, and welcome, Mick. And Ken, we wish you all the best. Just to follow on to your answer there and I think Mark you mostly answered it to Jason's question, but obviously some of those timing differentials has a negative effect on the second quarter. At the same time, you have shipments that hopefully will benefit the second quarter. So just trying to get my head around, you provide any color around Q2 EPS, just given all the moving pieces in that quarter?

Yes, Chris, I usually prefer not to offer specific quarterly guidance, but I can share our expectations for the first half. Your observations are definitely on point. There is some opportunity on the top line, but we must keep in mind our baseline and what we experienced in Q1, which was somewhat challenging. We are maintaining our guidance for the first half overall. For EBIT, we expect it to align with our annual guidance based on the 52-week figures. I believe this will also impact EPS, although it's important to note that the primary factor affecting the difference between EBIT and EPS is interest. As we anticipate completing the divestiture process in Q2, we see this as a key opportunity to drive EPS growth further.

That's great. That was good color. I appreciate your insights. Thank you for that. I have a quick follow-up regarding the gross margin. Is the inflation expected to be more significant at the beginning of the year? How do you foresee the gross margin performing throughout the year? Additionally, will the promotional spending increase in Q2 and Q3, potentially putting more pressure on the gross margins as you consider your reinvestment in the business?

Yes, you know again, I think call it over the years of doing this. I'm always a little hesitant to direct the gross margin, but I do think the way I would expect the building blocks to work is, we do think inflation is a bit front-loaded. We do expect that to have some moderating effect over the balance of the year. The investment profile doesn't really have a major spike in any of the quarters. I mean, I think if there was a little bit more, it would be around this holiday period which kind of sits a bit in Q1 and Q2. So, there's a little bit of an uptick there as I talk about some of the investment in Snacks, in particular. So that might be a little bit of distortion early on, but I think for the most part we expect this kind of profile of an inflation rate that's a little higher than our base productivity offset by cost savings of which half will go to the business and again that half part is in gross margin part of it's in admin costs and then of course the other half of that cost savings is going into the investment uptick that we're making. So that $140 million to $150 million, half of it is going to the bottom line spread between margin and below margin and the other half goes to fund the investment. So that's kind of the way the year looks and for the most part I think on the gross margin side, you'll see pretty steady pacing through the year.

Okay. Again, very good color. Thanks so much for your help there.

Yes.