Campbell Soup Company (CPB) — Q4 2021 Earnings Call Transcript

Good morning, and welcome to Campbell's Fourth Quarter and full-year Fiscal 2021 Earnings Conference call. I am Rebecca Gardy, Head of Investor Relations at Campbell Soup Company. Joining me today are Mark Clouse, Campbell's President and Chief Executive Officer, and Mick Beekhuizen, Campbell's Chief Financial Officer. Today's remarks have been pre-recorded. Once we conclude the prepared remarks, we will transition to a live webcast Q&A session. The slide deck in today's earnings press release has been posted to the Investor Relations section on our website, campbellsoupCompany.com. Following the conclusion of the Q&A session, a replay of the webcast will be available at the same location, followed by a transcript of the call within 24 hours. On our call today, we will make forward-looking statements that 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 of 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 of these measures to the most directly comparable GAAP measure in the appendix of this presentation. On Slide 4, you will see today's agenda. Mark will share his overall thoughts on our fourth quarter and full-year performance as well as an in-market performance by division. Mick will discuss the financial results of the quarter and the year in more detail, and then provide our guidance for the full-year fiscal 2022. And with that, I'm pleased to turn the call over to Mark.

Thanks, Rebecca. Good morning, everyone. Thank you for joining us today. In fiscal 2021, the pandemic continued to present challenges across North America. But I am so proud of how our teams, particularly our frontline and supply chain teams, adapted and rallied to keep each other safe and meet the sustained demand for our products. On behalf of the entire Campbell's leadership team, I am deeply grateful for their dedication. And we continue to make their safety and well-being paramount as they work to meet the needs of our customers, consumers, and our communities. As difficult and complex as this time has been, it has also been an extraordinary period for Campbell. And we've made clear meaningful progress advancing our strategic plan. We've evolved into a different company; one that is stronger, more agile, and with increasingly relevant brands that are better positioned for the future. For the full year, I'm pleased to report that Campbell's organic net sales were comparable to fiscal 2020 and grew 3% on a 2-year compounded annual growth basis driven by both divisions, reflecting strong in-market performance. In fact, 75% of our portfolio grew or held market share for the year, reflecting our continued momentum. Adjusted EBITDA lagged fiscal 2020 as we lapped dramatic scale and efficiency from a year ago, and navigated a much higher inflationary environment this year. However, on a two-year CAGR, adjusted EBITDA grew 5% and adjusted EPS grew 14% as we improved our balance sheet. Turning to slide 7, full-year organic net sales were comparable to the prior year, which included a positive fourth-quarter finish to fiscal 2021 in light of last year's remarkably strong performance. If you recall, our first half of fiscal 2021 was driven by strong elevated in-market performance, as we continued to gain share and made steady progress to restore inventory on shelves. The third 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 headwinds, including increased inflation and executional pressures in our Snacks division. In the fourth quarter, we delivered solid results that exceeded our expectations across all key metrics: net sales, adjusted EBITDA, and adjusted EPS, addressing the executional pressures we experienced last quarter. Organic net sales declined 4% as we lapped 12% growth in the prior year, but delivered 4% growth on a 2-year CAGR basis. Our fourth-quarter performance accelerated relative to the third quarter, driven by strong in-market results, particularly in U.S. Soup and Goldfish, and the continued recovery of our food-service business. In Snacks, we delivered sequential operating margin improvement, up 270 basis points compared to the third quarter, despite ongoing industry-wide supply chain challenges. An important barometer of the health of our brand portfolio is our in-market performance. For the full year, 75% of our brands grew or held share versus the prior year, and the majority of our brands in our 13 core categories grew ahead of pre-COVID levels. Total company in-market consumption was minus 1% compared to fiscal 2020 on a 52-week basis. Importantly, consumption grew 10% compared to the fiscal 2019 period, driven equally by strength in both our Meals & Beverages and Snacks divisions as we continue to advance in attracting and retaining consumers, especially the critical Millennial cohort. Turning to our division performance on Slide 9, let me begin with Meals & Beverages. Our fourth-quarter organic net sales decline of 9% and in-market performance of -2% reflect cycling the partial inventory recovery and elevated consumption levels in the prior-year quarter. We continued to grow share in Swanson broth, Condensed Soup, Prego, Ready to Serve soup, and Pacific Foods. On a two-year basis, we delivered strong consumption growth of 13% against organic net sales growth of 10%, as our foodservice business continued to stabilize. On U.S. Soup, we delivered another quarter of record share growth of nearly 2 points. Household penetration and repeat rates remain elevated compared to pre-COVID levels. Condensed Soup increased dollar share for the tenth consecutive quarter. Our share of TPD grew for the fourth consecutive quarter this year. Pacific Foods continues to strengthen its position as the number one organic soup brand, with the fourth quarter marking seven straight quarters of share gains in measured channels. On Swanson broth, we increased our share by 3.7 points, driven by our investment in supply recovery. Prego delivered its best year of dollar share gains in 4 years and maintained the number one share position for 27 consecutive months. Overall, the Meals & Beverages division delivered strong in-market performance against difficult comparisons to the prior year, and achieved share gains in key categories, particularly with millennials. On Slide 11, we are excited to share with you a glimpse into our Meals & Beverages innovation plans for fiscal 2022. Our new items focus on new occasions and relevant wellness trends. Expanding on the re-launch of our Better For You Well Yes! brand, we have the launch of Well Yes! power bowls with 5 unique varieties for both lunch and snack occasions. We have also expanded our successful Slow Kettle crunch innovation with 4 varieties of Campbell's red and white crunch. We are launching additional plant-based products, including Creamy Oat Milk Soups and Creamy Plant-based Protein Broths. Finally, if you haven't tried the new Chunky Spicy Chicken Noodle, it's fantastic and brings variety to the critical at-home lunch occasion. In addition to our innovative new products, another element of our winning soup strategy is a refresh of our Campbell's Condensed Soup. We are contemporizing the brand to better align with our growing millennial consumer base while improving the product and its shopability as we continue to support our positioning as the starting point for delicious meals. We also have continued our journey of simplifying our ingredient lines and improving quality. It's always tricky when looking to evolve such an iconic design and product, but our new graphics and improved ingredient lines strike the right balance and have been met with a very positive customer and consumer response.

Thanks, Mark. Good morning, everyone. Turning to Slide 19 for the fourth quarter organic net sales, which excludes the impact from the additional week and the impact of the sale of the Plum Baby Food and Snacks business, declined 4%. Compared to the fourth quarter of fiscal 2019, organic net sales increased 4% on a 2-year CAGR. Adjusted EBIT decreased 13% compared to the prior year to $267 million driven by lower sales volume, partially offset by lower adjusted marketing and selling expenses and lower adjusted administrative expenses. Our adjusted EBIT margin was 14.3% compared to 14.6% in the prior year. Adjusted EPS from continuing operations decreased $0.08 or 13% versus the prior year to $0.55 per share, partially driven by the estimated $0.04 contribution from the additional week in fiscal 2020. For the full-year organic net sales, which excludes the impact from the additional week. Divestitures and the impact of currency were comparable to the prior year and grew 3% compared to fiscal 2019. Adjusted EBITDA decreased 3% versus the prior year to $1.4 billion. The decline reflected a lower adjusted gross margin and lower sales volume. Our marketing and selling expenses represented 9.6% of net sales compared to 10.9% last year. The full-year 2021 adjusted EBITDA margin was 16.6%, compared to 16.7% in the prior year. Full-year adjusted EPS from continuing operations increased 1% to $2.98 per share. Overall, our adjusted marketing and selling expenses represented 9.3% of net sales during the quarter, a 330 basis point decrease compared to last year. Adjusted administrative expenses decreased $30 million or 18%. Adjusted administrative expenses represented 7.4% of net sales during the quarter, a 60 basis point decrease compared to last year. Overall, the full-year 2021 results were reflective of the company's overall strategic direction and the challenges of the current market environment.

Thanks, Mick. In closing, we feel good about how we landed fiscal 2021, amidst the difficult environment. We expect fiscal 2022 will be a complicated transitional year, but I'm confident that with our strong in-market momentum and the progress that we've made, we will successfully navigate through it. I look forward to sharing our view on how we intend to unlock the full growth and value potential of this fantastic company going forward at our Investor Day on December 14th. With that, we'll now turn it over to the operator to take your questions. Thank you.

Great. Thanks very much for the question. I was hoping we could get into maybe some of the key assumptions underpinning the full-year EPS range for fiscal '22, in terms of assumptions around retention of new households, gross margin, and SG&A, marketing spend in particular, really just to better assess the level of confidence and conservatism in the full-year forecast, particularly in light of the expected challenging 1Q and the higher inflation anticipated in the second half that could mute the second-half recovery. And I really ask this because I still get the feel from many investor conversations that the broader food group is maybe still not fully factoring in the full challenges ahead in guidance. So thank you.

Sure. Thanks, Andrew. That's a full question, so let me try to piece out a couple of different elements in there. First, let's talk a little bit about the kind of the basis of the assumptions for our guidance and how we're thinking about it. So first let's talk a little bit about the top line. I think on part of the composition of the year is going to be a little bit of a tale of two halves because I do foresee a first half that's going to feel a little bit more like what we've been experiencing in the fourth quarter while seeing sequential improvement as pricing comes into play, which is obviously a significant contributor as we go forward. And then in the back half, even though we do expect to see some pressure from packaging inflation, we are expecting overall improvement and momentum as we exit the year. So, I think when you think about the top line next year, I do think we see terrific momentum in our business today. We accelerated that momentum in Q4, and we expect to continue to see positive in-market performance as we move forward. We are going to lap a pretty significant inventory replenishment that occurred primarily in the first quarter, and we expect the underlying health of the business to continue to be positive. I also continue to be very encouraged by the retention of households, and the sustainment of repeat levels that are very broad-based across our portfolio. I do think a governor a little bit on this and a recognition of a little bit of consumer pressures related to labor availability. We are running about 2 times our normal vacancy rates. So I think you sense or feel a little bit of that balance in our top line projections for the year. And I'll say this a couple of times, but if you go top of the range to the bottom of the range, it reflects how we do on that.

Good morning, everyone. I just wanted to ask for a follow-up on inflation. The high single-digit inflation you mentioned, is that gross inflation or is that net of productivity?

That's gross, Bryan.

Okay, thanks. And in terms of how much of that high single-digit inflation expectation is more or less locked-in? And how much is variable? I know there's been a lot of volatility and freight, even if you've got the contract. It just seems like there's a lot of volatility there. And then anything resin-based has probably complicated that a bit. Anyway, just any context there in terms of how much is fixed and how much could be variable.

I'll let Mick walk through kind of our coverage position and then I'll give you a little bit of qualitative view of it. I totally understand the question, and there's a little bit of mix here, I would say, of certainty and pragmatic forecast positions. Mick?

Yes. If you look at it from an ingredient-impact perspective, at this point in time in the year, we are covered to about 2/3s. So for the fiscal year next year, which is very typical, and probably a little bit more front-end loaded coverage.

Of the remaining one-third, we have a significant portion related to our cans and steel prices. We're finalizing that as we approach the start of the new calendar year. Nonetheless, I believe we have a clearer understanding of our situation and are making progress as we speak.

I just want to drill into the third of the exposure that's out there. Specifically, just to understand where steel costs fit in. Can you give any sense of what assumptions you've made around it, and I assume the timing of finalizing those terms is consistent with prior years?

Yes. We're engaging in more iterative collaboration with suppliers to gain real-time insights into their perspectives, which allows us to plan effectively. This means that as we observe costs rising, our forecast for the year takes this into account. We are not expecting a significant decrease in steel prices as the year progresses.

Hi, thanks. Have you said how much you think your pricing is going to be up in fiscal '22? And is it also going to be back half-loaded? I'm just trying to do back-of-the-envelope math, because it looks like your internal inflation could be up as much as 10% in the back half of your year, which would mean your pricing would need to be up 5 or 6?

Yes, you're in the right ballpark. I'd say a little bit lower as it relates to the full year for back half inflation. On pricing, I think as you take all of the variables into account, as we've said before, we're probably somewhere in the middle, single digits in that area.

Just a follow-up to that question. Pricing net of inflation through the year, how should that trend? Is pricing going to track with that, or perhaps be accelerating more through the year as cost pressures ease?

Yes. The way I would think about plotting that course is gaining traction through Q1. Taking a little bit of time to get that fully reflected well in place as we go through Q2, I do think you'll see efforts for us to balance the step-up in inflation as we get to the back half. But I do think you may see a little bit more pressure there. However, I would note that you have several tailwinds as you're getting to the back half of the year, so I think the ability to still show that sequential progress in margins.

And then just a follow-up on Biscuits and Snacks. With the roughly 13.5% segment margin, it seems like there would be some reasons for that to get better over time. Could you perhaps help us squint and look through the inflation cycle and think about what could be happening there from a segment perspective basis on margins?

Yes. I continue to believe very strongly in the potential for us to improve margins on Snacks. I think we continue to get better clarity and a better understanding of the building blocks and the variables that will help us get there. As you're looking at the here and now, if you think about where we started the journey to where we find ourselves, there is probably about 150 basis points of margin that I would call just transitional costs.

Great, thank you. The IR team is available for follow-up discussions. And thank you for your time and interest in Campbell Soup Company.