Campbell Soup Company (CPB) — Q4 2023 Earnings Call Transcript

Good morning, and welcome to Campbell's fourth quarter fiscal 2023 earnings conference call. I'm Rebecca Gardy, Chief Investor Relations Officer at Campbell. Joining me today are Mark Clouse, President and Chief Executive Officer; and Carrie Anderson, Chief Financial Officer. Today's remarks have been prerecorded. Once we conclude the prepared remarks, we will transition to a live webcast Q&A session. For us to give as many participants as possible the opportunity to ask questions, we ask that you limit yourself to two questions. The slide deck and today's earnings press release have 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, 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 of our presentation or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in the 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 our 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 in-market performance by division. Carrie will then discuss the financial results of the quarter in more detail and review our guidance for the full fiscal year 2024. And with that, I'm pleased to turn the call over to Mark.

Thanks, Rebecca. Good morning, everyone, and thank you for joining our fourth quarter fiscal 2023 earnings call. Speaking on behalf of Campbell's management, I would like to extend our recognition of the dedication and hard work demonstrated by our teams throughout this year. We delivered the fourth quarter consistent with our expectations. And for the full year, we delivered strong growth across all three key financial metrics, coming in well ahead of our initial expectations and advancing many of our strategic initiatives. Collectively, we continue to solidify the foundation that has delivered consistent and dependable results over the past several years. Furthermore, our progress has set the stage for increased momentum in fiscal 2024 that we believe will result in broad-based growth and deliver compelling shareholder value creation. Let me begin with the highlights of the fourth quarter. As expected, we delivered 5% organic net sales growth, led by inflation-driven net price realization and solid in-market performance enabled by an advantaged supply chain and effective marketing and selling investments. Fourth quarter consumption increased 3% versus the prior year and 25% versus four years ago. As expected, we did experience declines in adjusted EBIT and adjusted EPS in the quarter given our planned brand investments and the pension headwind, which we pointed out on prior earnings calls. For the full year, we delivered double-digit organic net sales growth of 10% and strong adjusted EBIT growth of 5%. Adjusted EPS of $3, representing 5% growth versus prior year, was at the top end of our guidance range. As a reminder, the pension headwind was approximately $0.11 to adjusted EPS and four points of growth for the year. Consumption for the full year increased 8% versus the prior year and reflected share growth across many brands. These strong results reflect the ongoing effective execution of our focused strategy along with the sustained consumer demand for our brands. We have strategically balanced the interplay between pricing and promotional frequency, while enhancing the tremendous equity and differentiation of our brands. We also continued to invest in expanding capacity for the future and enhance our capabilities in supply chain, marketing, sales and innovation. Looking ahead to fiscal 2024, we're excited about the next stage of Campbell's growth. The snacks business will continue to deliver on the value proposition of the Snyder's-Lance acquisition with top line and margin building momentum. Our Meals & Beverage business will be further strengthened and diversified with the planned strategic acquisition of Sovos Brands, which will extend our portfolio into the ultra-distinctive sauces segment and provides significant growth opportunities. This combination will make Campbell one of the most dependable growth-oriented names in food. Carrie will provide full fiscal 2024 guidance later in the call. Before I review the division results, I'd like to provide some perspective on the current consumer landscape. We've spent a great deal of time analyzing the drivers and importantly, the potential implications going forward. We see three factors currently putting some transitory pressure on category in market results. These are primarily impacting our Meals & Beverage businesses, and all influenced Q4 to some extent. The first area is the residual effects of COVID surges from the summer of fiscal 2022. These surges notably benefited categories like soup in the prior year, particularly during the summer, a period which historically has lower sales. We expect this effect to continue into Q1 and greatly diminish as we approach the second quarter of fiscal 2024. Directionally, the impact of this factor contributed about 50% of the decline in soup in the fourth quarter. This dynamic likely helped mitigate price-driven elasticities in Q4 fiscal of 2022. The next factor is lapping of double-digit pricing actions from a year ago. This was a dynamic we expected and one that likely will continue to be a headwind throughout fiscal 2024, but sequentially lessening in the second half of the year. We do also expect sequential volume improvement to mitigate this pricing headwind as we move into Q2 in the second half. The third factor and likely contributing to the limited volume recovery to date is the consumer behavior in response to ongoing economic uncertainty and prolonged inflation. First, consumers began prioritizing categories based on more immediate needs and value, leading to fewer categories in the shopper basket. This pattern of behavior resulted in a real focus on seasonal priorities and has obviously created a headwind on categories like soup in the summer. We expect our categories like soup, which is a top 10 category in the fall and winter, to increase in priority, and we're already seeing some early signs of improvement. The second behavior is a growing shift to more value-driven stretchable meals, which has had a mixed effect on our business. It has undoubtedly been a positive driver on categories like pasta sauce and condensed cooking soups, as well as broth, while also adding pressure on categories like ready-to-eat soup. We expect this behavior to subside as inflation continues to moderate. The positive news as it pertains to our Snacks division is that our brands consistently maintain a strong presence in consumers' top categories throughout all seasons of the year. Moreover, our Snack power brands have displayed remarkable resilience as consumers, even while prioritizing value, continue to sustain their purchases across our differentiated portfolio. Broadly speaking, we see these dynamics as transitional in nature. While we do anticipate the persistence of these dynamics in the near term, we're confident in the equity and the value of our brands within this environment. In fiscal 2024, we'll maintain our support of our brands and remain vigilant on value to ensure we remain competitive, but do not see this as a catalyst for dramatic shifts in promotional or margin dilutive actions to chase volume or share. Turning to our division results. Our Meals & Beverages portfolio remains well positioned as consumers employ multiple strategies to stretch their food dollars. In the fourth quarter, we delivered organic net sales growth of 1%. As a reminder, the fourth quarter is the lightest in terms of seasonality for this business, and we're also wrapping strong performance of 7% organic net sales growth in the prior year, primarily driven by inflation-driven pricing and some of the COVID surges I mentioned earlier. While end market consumption was down in the fourth quarter by 4%, we saw strong performance by Prego, up 5%; and Pace, up 7%; and Pacific, up 11%. Compared to pre-COVID levels, dollar consumption for the division was up 17% overall. Diving more specifically into our Meals & Beverages portfolio, I wanted to highlight the progress we've made within several areas of our soup business. This year, we've refined our soup portfolio to establish distinct areas for growth and identified areas where scale and optimization will be more of the focus. The great news is our growth focus segments represent over two-thirds of our U.S. soup business and have consistently delivered strong growth and share results even where private label is present. Brands like our condensed icons, our condensed cooking soups, Chunky, Home Style and Pacific soup are compelling areas of consumer relevance even among younger households and continue to demonstrate long-term growth potential. They are also brands where our marketing and innovation efforts have been very effective. In the quarter, our shares in this portion of the business were essentially flat. And versus four years ago, we've gained 1.2 share points with consumption up 27%. We're confident in the trajectory of this business and are committed to continuing to fuel these segments going forward. The optimized portion of our soup portfolio, which represents less than a third of our U.S. soup business, has experienced recent share softness and thus remains an area of opportunity for us. These are areas where the segments are a bit more commoditized or value sensitive, like broth. So they have tended to be where private label or lower cost options have sourced some share. The team remains vigilant in this segment of the portfolio, continuing to ensure we remain competitive without undermining any long-term profitability. Interestingly, this portion of the business represents only 14% of Meals & Beverages and is approximately 7% of Campbell's total net sales and will become even smaller after the pending acquisition of the Sovos Brands business. Turning to Snacks on Slide 10. We finished the year strong with fourth quarter organic net sales up 9%, driven by our eight power brands. We maintained strong in-market momentum, growing consumption by 8% and 31% compared to four years ago, also driven by the strength of our power brands, which delivered double-digit dollar consumption for the fifth consecutive quarter. Overall, fiscal 2023 was another fantastic year for Snacks, with net sales growing at 13% and operating earnings growth at 24%, these results provide compelling proof that our strategic focus on highly differentiated and relevant brands is working and can lead to sustainable profitable growth. The next slide highlights the impressive performance and continued growth of our power brands, which grew consumption 10% versus the prior year. On a four-year basis, consumption was up 39%, with all eight brands growing double-digits in the quarter while holding volume share. This illustrates the strength of our core portfolio and reflects the continuation of heightened consumer demand for snacking. Turning to Slide 12, our Snacks business has delivered tremendous growth over the past two years. The business has grown net sales at a 7% CAGR with operating earnings growth at a 12% CAGR over a two-year period. In the last fiscal year, we drove a step change in operating margin, growing from 13.1% in fiscal 2022 to 14.4% in fiscal 2023. This is consistent with our Snacks margin roadmap and gives us increased confidence that we'll continue to deliver on our long-term goals and show steady improvement in fiscal 2024, where we expect to be north of 15%. I'm excited and very optimistic as we enter the new year with proven strategies and strong fundamentals and an advantaged strong supply chain and arguably one of the most focused portfolio stories in the industry. Within Snacks, we continue to expect accelerated growth and to build on the margin trajectory from this year. And in Meals & Beverages, we expect to continue to strengthen the business with sequential and steady improvement throughout the year. This story will only be made stronger following the completion of the Sovos Brands acquisition, adding the most compelling growth story in food to the Campbell's portfolio. It's an exciting combination. We understand and have planned for some short-term broad-based category dynamics in the early part of the year, especially in Q1. However, we have strong plans in place and are well positioned to gain momentum and deliver another strong year, adding further evidence of the transformation of the Campbell's business. With that, I'll pass it to Carrie, who will review our fourth quarter and full year results and present our fiscal 2024 outlook.

Thanks Mark, and good morning everyone. I'll begin with an overview of our fourth-quarter results, which came in largely as expected with a mid-single-digit organic net sales increase and an adjusted EBIT performance that reflected planned fourth-quarter investments in sales and marketing, especially in our Snacks business and continued headwinds related to a non-operating item. Fourth-quarter organic net sales increased 5% to nearly $2.1 billion, reflecting inflation-driven net price realization, partially offset by some unfavorable volume and mix. Adjusted EBIT of $242 million was a 10% decrease to prior year as higher adjusted gross profit was offset by planned investments in marketing and selling and higher adjusted other expenses related to lower pension and post-retirement benefit income. Adjusted EPS decreased 11% to $0.50, driven primarily by lower adjusted EBIT. The impact of lower pension and post-retirement benefit income reduced adjusted EBIT margin by 40 basis points and adjusted EPS by $0.02 in the quarter. We are pleased with our overall performance for the full year. Our fiscal year net sales results exceeded our initial guidance expectations provided a year ago, finishing the year with organic net sales growth of 10%, driven by higher net price realization. Adjusted EBIT grew 5% and adjusted earnings per share finished at $3, also up 5% and ahead of the top end of our initial expectation range despite a $0.02 greater adjusted EPS impact than originally planned from pension and post-retirement income. Overall, for the year, this non-operating item reduced full year adjusted EBIT by $44 million and adjusted EPS by $0.11. Slide 17 summarizes the drivers of our fourth quarter net sales growth. Excluding the impact of the sale of the Emerald nuts business, organic net sales grew 5% in the quarter. We generated 10 percentage points of growth from inflation-driven net price realization. Volume and mix declined five percentage points across both divisions. Our fourth-quarter adjusted gross profit margin of 30.6% was generally in line with Q3 with the year-over-year change in margin driven primarily by unfavorable volume and mix. As shown in the bridge, net price realization and productivity improvements more than offset cost inflation and other supply chain costs. Moving to Slide 19. Our teams continue to successfully mitigate inflationary headwinds that averaged 12% for the year. We saw steady moderation as we move through the quarters with Q4 core inflation finishing at 6% compared to a high of 18% in Q1. Fourth quarter's rate reflected improved trends in oils and flour as well as improvement in logistics and transportation. Net pricing averaged 13% for the full year, reflecting contributions from three waves of pricing aimed at offsetting double-digit inflation. We ended the year with a fourth quarter net pricing contribution of 10%, still benefiting from the impact of pricing waves three and four with price wave three fully wrapped as of July. In addition to pricing, we continue to deploy a range of other levers to mitigate inflation including supply chain productivity improvements and broader margin-enhancing initiatives, including a focus on discretionary spending across the organization. We are pleased with the progress we have made on our cost savings initiatives. Through the fourth quarter, we have achieved $890 million of total savings under our multiyear cost savings program, inclusive of Snyder's-Lance synergies. We remain on track to deliver savings of $1 billion by the end of fiscal 2025. Moving on to other operating items. Adjusted marketing and selling expenses increased 9%, driven by higher advertising and consumer promotion expense, or A&C, which increased 23% compared to the prior year, and higher selling expenses, partially offset by increased benefits from cost savings initiatives. The increase in A&C this quarter was primarily driven by the planned increases in our Snacks division. Overall, our adjusted marketing and selling expenses represented approximately 9% of net sales for the quarter and the full fiscal year. And adjusted administrative expenses increased by $11 million or 7% to $164 million due to higher general administrative costs and inflation, partially offset by increased benefits from cost-saving initiatives. As shown on Slide 21, adjusted EBIT for the fourth quarter decreased 10%, primarily due to higher adjusted marketing and selling expenses, higher adjusted administrative expenses and higher adjusted other expenses related to lower pension and postretirement benefit income this year, partially offset by higher adjusted gross profit. Lower pension and postretirement benefit income this year drove an approximate $7 million impact to adjusted EBIT. Overall, our adjusted EBIT margin decreased to 11.7% in the quarter, primarily driven by a lower adjusted gross profit margin, higher adjusted marketing and selling expenses and the impact of lower pension and postretirement benefit income. Turning to Slide 22, adjusted EPS of $0.50 was down 11% or $0.06 per share, compared to the prior year. This was primarily driven by the decrease in adjusted EBIT and slightly higher interest expense, partially offset by a lower adjusted effective tax rate and a reduction in the weighted average diluted shares outstanding. Turning to the segments in Meals & Beverage, fourth quarter organic net sales increased 1%, reflecting net price realization, partially offset by unfavorable volume and mix. Sales increases in foodservice and Prego pasta sauces were partially offset by declines in beverages, U.S. soup and Canada. Sales of U.S. Soup decreased 2%, primarily due to declines in ready-to-serve soups, partially offset by strong increases in broth and modest increases in condensed. Segment operating earnings in the quarter for Meals & Beverages decreased 18% to $132 million, primarily due to lower gross profit. Fourth-quarter operating margin declined to 14.1%, driven by lower gross profit margin, which was largely due to higher cost inflation and other supply chain costs, as well as unfavorable mix between retail and foodservice, partially offset by net price realization and supply chain productivity improvements. For the fiscal year, segment operating margin declined to 18.2%, compared to 19% in the comparable year-ago period. In Snacks, fourth quarter organic net sales increased 9% driven by sales of Power Brands, which were up 13%, and reflected net price realization, partially offset by modest unfavorable volume and mix. Segment operating earnings in the quarter increased 12% to $158 million, primarily due to higher gross profit, partially offset by higher marketing and selling expenses as well as higher administrative expenses. Gross profit margin increased due to the impact of net price realization and supply chain productivity improvements, more than offsetting higher cost inflation and other supply chain costs and unfavorable volume and mix. Overall, within our Snacks division, fourth quarter operating margin increased year-over-year by 60 basis points to 14%. For the fiscal year, we were pleased with our margin progress posting a 130 basis point improvement to 14.4%, compared to 13.1% in the prior year. I'll now turn to our cash flow and liquidity. Fiscal 2023 cash flow from operations was $1.14 billion, compared to $1.18 billion in the prior year, primarily due to changes in working capital partially offset by higher cash earnings. In line with our commitment to return value to shareholders, we have returned nearly $590 million through dividends and share repurchases through this fiscal year. Cash outflows from investing activities reflected capital expenditures of $370 million, $128 million higher than in the prior year, as we invested in key growth areas, particularly in our Snacks division. Our year-to-date cash outflows from financing activities were $723 million, including $447 million of dividends paid and $142 million of share repurchases. At the end of the quarter, we had approximately $301 million remaining under the current $500 million strategic share repurchase program and approximately $104 million remaining under our $250 million anti-dilutive share repurchase program. Our balance sheet ended the fiscal year in a strong position, with net debt of $4.5 billion and with a net debt to adjusted EBITDA leverage ratio of 2.6 times, well below our targeted three times range. This puts us in great shape as we plan for the pending Sovos Brands acquisition. As of year-end, the company had approximately $189 million in cash and cash equivalents and approximately $1.85 billion available under its revolving credit facility, providing a significant excess liquidity and flexibility. Turning to Slide 26, let me walk you through our full year fiscal '24 guidance. As a reminder, the sale of our Emerald nuts business, which we divested in May of fiscal 2023, is estimated to reduce net sales by approximately 0.5 percentage point and have a $0.01 per share dilutive impact in fiscal 2024. Additionally, the acquisition of Sovos Brands is expected to close by the end of December 2023, and therefore, is not yet included in our current fiscal 2024 outlook. For revenue, we expect reported net sales growth to be in a range of down 0.5% to plus 1.5% and organic net sales growth of flat to 2% for the year. Our expectations reflect improving volume trends throughout the year with an expected lower contribution from pricing and disciplined levels of promotional activity. In terms of phasing, we do expect volume declines to continue in the first half of fiscal 2024 with sequential improvement leading to positive trends in the second half. This dynamic will be most pronounced in Q1, where we would expect top line to be very much in line with consumption. For earnings, we expect adjusted EBIT and adjusted EPS growth of 3% to 5% with an adjusted EPS range of $3.09 to $3.15. We also see the opportunity for modest margin progress. Having exited Q4 with core inflation of 6%, we expect sequential quarterly improvement throughout fiscal 2024 and expect full year core inflation in the low single-digit range. We also expect productivity improvements of approximately 3% and cost savings of approximately $35 million to $40 million towards our $1 billion savings program. As a result of improved second half volume trends and these cost dynamics, earnings growth and margin expansion are expected to be second half weighted. Additionally, in line with our continued commitment to brand investments, we expect marketing and selling expense as a percent of net sales to be at the low end of our targeted 9% to 10% range with a step-up in marketing and selling spend in the first quarter of fiscal 2024, both on a year-over-year basis and sequentially compared to the fourth quarter of fiscal 2023. Division operating margins are expected to improve overall for fiscal 2024 with Snacks operating margins expected to be above 15% and modest operating margin expansion in Meals & Beverage expected in the second half of the fiscal year. Our full year adjusted EBIT and EPS guidance also comprehends an estimated pension headwind of approximately $13 million to adjusted EBIT or $0.03 per share. This is significantly lower than the impact we saw in fiscal 2023 and represents approximately 1% of both adjusted EBIT and adjusted EPS growth compared to the 3% to 4% impact we saw in the prior year. This headwind will be most pronounced in the first quarter. Other key assumptions underlying our guidance included an expected net interest expense of approximately $185 million to $190 million and an adjusted effective tax rate of approximately 24%. As we think about the phasing for the year, we expect the first quarter adjusted earnings growth rate to be the lowest of the year due to the concentration of higher inflation, increased marketing and selling expenses, the highest quarter impact from lower pension income, and some costs related to a non-material cyber incident. As you know, we don't provide quarterly guidance. Given the unique dynamics in Q1, however, we expect first-quarter adjusted EPS likely in the upper $0.80 range with momentum building as the year progresses. As I wrap up guidance, capital expenditures are expected to be approximately 4.7% of net sales. Our priorities for fiscal 2024 include select capacity expansion projects, including the recently announced Goldfish investment, our headquarters consolidation and other programs to support our Snacks margin improvement plan as well as important IT and productivity investments. We see great opportunity to reinvest back into the business in support of growth and improve profitability. This is fueling the modest step-up in investment compared to the last couple of years and remains very much aligned with our long-term algorithm and capital allocation priorities. We are also committed to maintaining a competitive dividend and a strong balance sheet. In closing, we are confident that the relevance of our brands, our strength and capabilities in marketing, innovation, and supply chain execution provide a solid setup for accelerated growth in the second half of the year and into fiscal 2025. That concludes my prepared remarks, and I'll turn it over to the operator for Q&A.

Good morning, everybody.

Hi, Andrew.

Mark, thank you for your comments on the current operating environment in the industry and how it affects your outlook for the upcoming year. You mentioned several impacts and timing factors to consider as we look ahead. Could you provide more insight into how you see the phasing, especially regarding volume recovery throughout the year? Also, for the full year, how do you envision the organic growth target you set being divided between volume and pricing? Additionally, do you believe that given it's a back-end loaded year, you have enough flexibility to meet those targets, especially considering the recent industry trends you mentioned? Thank you.

Yes, that's a great question and we've devoted significant time to understanding it. As you've noted, it begins with grasping our current experiences. We've observed a general slowdown in the industry over the past few quarters, leading to less volume recovery than originally anticipated. Delving into the reasons behind this is essential for building confidence in our full-year outlook. I mentioned three key factors that affect our numbers, with varying impacts over the year. The first factor, not initially on many radars, is the lingering effects of COVID. We didn’t discuss this extensively last year, but as we analyze category baselines, particularly for those less popular in summer, like soup, there's a clear connection to surges we faced towards the end of fiscal '22 and beginning of '23. While we view this as a notable influence in some areas, we anticipate diminished effects as we progress through Q1 and into Q2. Reflecting on it, it likely helped us achieve unexpectedly better elasticities, although I believe they were still healthier than historical averages. This is a transitioning phase that we expect to feel in Q1, but it shouldn’t pose a challenge as the year unfolds. The second factor is pricing. This will remain relevant throughout the year, but we'll see significant improvement as the peak impact—around 16%—in Q1 moderates quarter by quarter. Consequently, this influence will become less pronounced. As we continue to support our brands, I expect improvements in volume, contributing positively as we reach a more stable environment. Finally, consumer behavior is crucial as it may ultimately signal recovery. We've observed a split in how seasonal categories are performing. With consumers tightening their budgets, they seem to prioritize categories that are more applicable to the season. For instance, summer favorites perform better than items like soup, which sees a notable drop in household penetration during summer. However, as we approach fall and winter, soup typically sees a surge in popularity, reaffirming its importance in consumer baskets. Moreover, snacking, which consistently ranks high in consumer priorities, has shown steady demand. This illustrates how consumers are making trade-offs while also trying to maximize their spending power. They are gravitating towards items that provide more servings, evidenced by strong performances in categories like pasta and cooking soups, while single-serve products have taken a hit from the current economic climate. I expect these trends to persist, but as inflation eases, we should see a shift back towards normalcy throughout the fiscal year. When considering the factors of COVID impacts, easing pricing, and seasonal category relevance, alongside normalization of inflation, we anticipate improvements as the year unfolds. This outlook supports our belief that we won't need to compromise with unhealthy promotions to achieve our goals. We're confident in our projections for the year and even though Q1 might present challenges similar to those seen in Q4, we expect the overall trajectory to be positive. It's important to remember that last year in Q1, we achieved substantial growth across all metrics, with each seeing a 15% increase. This year's comparisons are skewed favorably towards the first half, which should provide reassurance in our projections.

Great. Thanks for the detail. Have a good holiday.

Yes. Thanks. See you next week.

Hi. Thanks so much. Mark, you discussed some of the reasons for volumes to improve in the second half. I certainly appreciate the reasons why. I'm also curious to hear a little bit more about the plan to maybe improve market share, especially in soup and broth. I'm just curious, how we should think about share trends that we can see in Nielsen. Should we expect them to remain, I don't know if the word challenged is right, but a little bit underwhelming until we can see some of the maybe bigger declines lapped. Or are there any changes you can make to pricing or other marketing efforts that maybe will help us see some of the scanner data in terms of market share reverse a little bit sooner?

It's a great question, Ken. There are clearly different areas in our portfolio that we can assess today. One standout area for us has been our Snacks business. While we often discuss Meals & Beverages, I feel very positive about the resilience of our brands, particularly since they account for 50% of our business. Although we're seeing some challenges with pretzels due to category shifts, most of our brands, especially the key ones, are well-positioned. We are also cycling through some pricing adjustments, but I feel confident about our competitive standing with brands like Goldfish and our Pepperidge Farm cookies, with an exciting holiday season ahead and innovative products in the pipeline. Our Snack Factory line has performed strongly, although we have noticed increased competition with Kettle potato chips. Nonetheless, we have a compelling value proposition for Kettle and Cape Cod, along with great innovations. Overall, in terms of snacks, I feel optimistic about our positioning. In contrast, Meals & Beverages has faced more challenges in terms of market share. If we analyze the situation further, such as looking at soup, excluding broth—which faces pressure from private labels—we find that our share remains steady in that category. This highlights the core areas of growth, which comprise 70% of our soup portfolio and where I expect ongoing growth and positive share trends, similar to what we've seen in recent years. Brands like Chunky are regaining share, Pacific is performing well, and our condensed cooking segment is doing excellently in terms of competition. Even in categories with private label competition, the unique strengths of our brands have been effective. In broth and some of our flankers where we've felt the most pressure, our focus will be on maintaining value, especially during critical seasons or holidays, while ensuring we remain competitive. I see opportunities with these flankers to clarify our value propositions. In some cases, we may need to refine our offerings as we strengthen our portfolio for the future. While discussing the soup business, it's important to recognize that only 7% of our sales come from the most challenging segments, and we see room for improvement. Therefore, I remain confident, as I hope our investors do, in the overall strength of our portfolio. Pace has also been a highlight, with positive share trends and a strong value proposition, particularly in cooking. Prego continues to grow alongside a robust pasta sauce category, although we recognize high growth in a distinct segment where Prego does not compete. I do understand the impact on market share but believe the potential acquisition of Sovos will nicely complement our Prego business and enhance our growth outlook. Overall, I don't view our share performance in critical areas as problematic. The segments needing attention are manageable, and there's plenty of evidence that our strengths will support continued growth moving forward.

Very helpful. Thank you. Have a great weekend.

Bye. Thanks, Ken.

Hi. Good morning, Mark, Carrie. How are you guys?

Hi, Peter.

Mark, I just wanted to kind of hone in a little bit and not to make you do math on the call. But I think if you just kind of take the midpoint of the range you put into the outlook, it implies something like 100 basis points of gross margin expansion in '24 relative to '23. And understanding that's probably a back half-weighted number, I just wanted to maybe give you a chance what gives you the confidence between, I guess, cost savings and COGS productivity maybe moderating inflation just to get there that we should kind of have confidence that, that can come back in the second half of the year?

Well, we did a pretty good job laying out the drivers right there, Peter. I mean I think, remember, you've got a wonderfully helpful tailwind in our Snacks business and the margin agenda that we're anticipating there. As we mentioned in the call, we feel terrific about the step change that we made in fiscal '23, getting up over 14% from our starting point back kind of pro forma around the 12% range. And as we look at '24, we've got a lot of confidence in the initiatives that are there that will keep driving that, and we expect that to be north of 15% as we get into the year. So another important step in our journey to our longer-term margin goals for snacking. But I think underlying kind of macro across the business, you do have a dynamic where you've got reducing inflation as you sequence through the year, especially as we come off a relatively high peak in '23, you're at low single digits today, our outlook is for low single digits as we go into the year. And arguably, that's front-loaded improving through the year is a big driver for that reason why. And then I do think with that kind of moderation, you are enabling your productivity and your cost savings to be more incremental and get back to driving margin expansion. And even on our Meals & Beverage business, where we're anticipating more of modest margin improvement, that will be a big factor for that business and why we believe we'll start that journey back to some stronger margins as we get into the, in particular, into the back half of the year. But I think as you imagine that landscape, that's how we're seeing this margin bridge or progression through the year. And although we are pointing to a tougher Q1, as many of the dynamics in Q4 still are around in Q1, we're not imagining a significant headwind on gross margins or margins that are going to really impact dramatically and then improve as we go. Carrie, did I miss anything in there?

Let's discuss food service a bit.

That's a great point. Yes.

It will normalize, that growth normalized, which brings itself a little bit of unfavorable mix in fiscal 2023. We won't have.

Yes. I mean that's a great point. I mean if you look at mix for this year, even in this quarter, if you look at especially Meals & Beverage. And if you're wondering a little bit the drivers of that margin that we anticipated, but it's certainly significant, about a-third of that is coming from mix, which is really driven by the outsized contribution of food service. As we get into Q1, that actually goes away because the recovery of food service was really most pronounced starting right in the beginning of fiscal '23. So that mix benefit as you start to go through the balance of the year will be yet another absence, I would say, of a headwind that we had this year.

Got it. Very helpful. Thanks, Mark.

Okay. Thanks, Peter.

Thank you. Good morning.

Hi, Mike.

I wanted to focus on margins a bit. There are two parts to this. You mentioned that the outlook for 2024 is over 15% in Snacks. Can you confirm if you still believe you're on track for 17% by fiscal '25, or has that timeline shifted? Additionally, regarding Meals & Beverage, there are certainly inflation challenges ahead. With pricing pressures easing, will it be primarily increased productivity that drives better improvements in the latter half of the year? Could you clarify that further?

Yes. So I think on the snack side, and Carrie will do this one together as well. But I would tell you that, I continue to feel very confident in our roadmap to 17%. I think as far as do we get all the way there in '25, it will depend a little bit, I think, on some of the environmental elements that have been creating a little bit of the challenge that we've seen over the last couple of years. But I feel very good now with what we put on the board in '23 and what the outlook is for '24. And so I think we're in the hunt. But I'm a little hesitant. I want to see a couple more variables as it relates to inflation and more environmental costs. One of the things we've talked a little bit about that we've had to try to work our way through is some of the fixed let's call it, fixed inflation like labor has been tougher, more challenging than we originally put into the model. The good news is we found other means in which to continue to drive further productivity. And so I think we're - although, I see the kind of line of sight, if you will, to '17, probably want to see a couple more of those variables come in to confirm for sure exactly that timing. And I know we owe that back to folks and we're working on that, and we'll provide that in the near future. I think on Meals & Beverages, it's a little bit of a function of kind of cycling out of some of the environmental elements that are there. I will say one of the things that on Meals & Beverage has been a little tougher in the more recent period is we've been very judicious on pricing relative to inflation, and that's probably put a little more pressure in Q4 as well as, to some degree, in the first part of the year. As inflation moderates through the year, we expect that dynamic to normalize and then we expect to be able to utilize the productivity more incrementally to drive that kind of moderate margin improvement that we're expecting on meals and beverage for the year. So it is a little bit of a dynamic of Meals & Beverage needing to be a little bit more balanced. I'm not talking about spending back on promo. I'm simply talking about as we talked previously, through our waves of pricing, how to make sure some of our categories like broth and condensed soup, where we know we're going to be a little bit more value-driven how to manage that. And although that's provided a little bit of short-term pressure, we expect that as that normalizes in '24 and productivity is more incremental to the business, you'll start to see that pivot back and start to see margin recovery there that I know we're expecting and I think will be very helpful for us as you think about the algorithm and the phasing of '24. Anything I missed?

Okay. Great. Thanks so much.

Yes. Okay. Great.

Hi. Good morning, folks. Thanks for fit me in.

Hi, Jason.

Congrats on the margin progression on Snacks. It's good to see.

Thank you.

But sticking on margins and turning to the other side, Meals & Beverages. Obviously, some challenges there, particularly in the back half of the year. Based on normal seasonality, it suggests that it looks like you're probably going to enter the year with margins down a couple of 100 basis points in the first quarter and maybe down up to 100 basis points or so in the second quarter. To get to margins up for the full year, if I'm right on that, and please confirm or deny, it implies material margin expansion in the back half of the year. So is that cadence roughly in line with your expectations? And if so, what drives that ramp in the back half?

Yes, a significant part of this, Jason, is that we have observed noticeable dynamics in Meals & Beverages, especially in Q4, which we touched on in Q3 as we anticipated the fourth quarter. While the results were largely in line with expectations, about a third of the impact on Meals & Beverages stems from a mix issue that we expect to reverse in the second half. As we anticipate a stronger contribution from foodservice and other lower-margin segments, we recognize that the pressures we’ve experienced relating to consumer dynamics have impacted our soup business, known for its solid margins. Therefore, the mix is a major factor driving this situation. Additionally, another significant factor contributing to the margin pressures is a condition we expect to see in Q4 and Q1. We understood that pricing would slightly lag behind the tail end of inflation due to our decisions around pricing adjustments in areas like broth and somewhat in condensed soup. As inflation levels stabilize throughout the year, we expect a notable change in margin impact. With the considerable productivity initiatives we have implemented, acknowledging some of the structural inflation and costs anticipated to manifest later in the year, I foresee a substantial margin recovery in the latter half. While your observations on the phasing illustrate this, they align closely with our expectations for the year. We can pinpoint the underlying drivers, which are primarily mechanical and not just reliant on favorable external conditions. This is why we feel confident about projecting a more pronounced margin improvement in the latter part of the year for Meals & Beverages. I hope this clarifies the variables we are considering.

And that's super helpful. But I'm still a little bit confused. So maybe you can unpack that mix component for me a little bit more because my understanding, my thought was that this was more of a normalization, that foodservice was recovering and now we're back to more normal mix. You're saying it's abnormal. It's going to reverse. So, what is abnormally going to reverse?

Yes, I think you've got the dual impact of greater pressure on higher margin portions of your business while also having a much higher growth contribution from foodservice. I think both of those variables flip in the back half of the year. I think you'll see a stronger relative performance out of our Soup business and higher-margin portions of the business, while also having, as you point out, a more normalized contribution from foodservice. So, I do think it is a little outsized right now as it relates to what we're modeling for the back half of the year.

Predicate on pretty meaningful volume growth in Soup in the back half of the year, am I understanding that correctly?

I believe that when it comes to volume growth, it will be significant for Soup, and I anticipate that it will indeed result in meaningful growth.