Campbell Soup Company (CPB) — Q2 2024 Earnings Call Transcript

Good morning and welcome to Campbell's second quarter fiscal 2024 earnings conference call. I'm Rebecca Gardy, Chief Investor Relations Officer at Campbell. Joining me today are Mark Clouse, Chief Executive Officer, and Carrie Anderson, 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 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. Slide 4 outlines today's agenda. Mark will provide insights into our second quarter performance as well as in-market performance by division. Carrie will then discuss the financial results of the quarter in more detail and outline our guidance for the full fiscal year 2024, which we reaffirmed this morning. And with that, I'm pleased to turn the call over to Mark.

Thanks, Rebecca. Good morning, everyone, and thank you for joining our second quarter fiscal '24 earnings call. As you saw in our press release this morning, we once again delivered on our commitments with sequential improvement in volume trends and year-over-year operating margin expansion in both divisions. While it is true that category trends have slowed over the last year, I'm encouraged by a variety of stabilizing consumer indicators, like consumer sentiment, household penetration, and average categories purchased. However, we are also continuing to see economic pressure impacting select categories and certain consumer demographics. While we expect these trends to improve over time, we're certainly not there yet. In the meantime, I continue to be very happy with our team's ability to control the controllables, including managing our supply chain and in-market execution. Looking ahead, we are affirming our full-year outlook as we anticipate continued sequential improvement in top line earnings and margin progress while sustaining our best-in-class navigation of this volatile environment. Carrie will elaborate on that a bit later. With that strong foundation in place on the base business, we are eagerly anticipating the closing of the Sovos Brands acquisition in the coming week, adding the best volume-driven growth story in food to our portfolio. At an upcoming Investor Day in late June, we look forward to sharing the vision for Campbell's next chapter, driven by what will be one of the most focused and advantaged portfolios in the industry. Turning to Slide 7, as expected, organic net sales in the second quarter decreased 1% to $2.5 billion, in line with consumption, with many of our brands exceeding their respective category growth rates and growing share. On a two-year compound annual growth rate basis, top line grew 6%, adjusted EBIT increased 1%, and adjusted EPS was comparable to the prior year, following double-digit increases in both key measures a year ago. On Slide 8, we've highlighted the success of both businesses during the holiday season, including in strategic categories such as condensed cooking in our Meals & Beverages division and cookies in our Snacks division. Our holiday-focused brands delivered a 4% increase in total volume compared to the prior year, driven by our strong brand support programs, terrific in-store execution, and robust consumer demand. Specifically, we had healthy volume and dollar share gains across key seasonal categories such as condensed cooking soup, broth, Pepperidge Farm cookies, and Pepperidge Farm Stuffing. During the quarter, condensed cooking holiday volume share reached a five-year high, with volume share gains in each of the nine weeks during the holiday period. In addition, we saw momentum in our Snacks portfolio with brands like Lance, Snack Factory, and Late July all reaching five-year highs in volume share. Importantly, we delivered these results while addressing an important question about our ability to achieve this while also balancing profitability. I believe we demonstrated this, evidenced by the operating margin expansion in both divisions. Turning to Slide 9, I wanted to take a moment to discuss the top line expectations for the second half of the fiscal year, as this is both an important driver and a somewhat difficult area to forecast. As we have consistently shared since providing initial guidance, our net sales expectations reflect a range of timelines for the category stabilization and consumer recovery. Our results through Q2 have been aligned with our outlook. As we look at far easier comparisons ahead, we remain confident in modest sequential improvement throughout the remainder of fiscal 2024. More specifically, we expect flat to low single digit organic net sales growth in Q3, with continued sequential improvement in the fourth quarter. Although this trajectory suggests the lower end of our net sales guidance range, we have half the year remaining and a variety of compelling drivers to help accelerate the recovery. With our supply chain in full force, effective marketing and accelerating innovation, and strong but disciplined promotional activity, we look forward to monitoring the pace of consumer recovery closely, with in-market results serving as a clear indicator of that progress. Turning to our Meals & Beverages business, we experienced a low single-digit organic net sales decline in the second quarter, which, as expected, tracked closely to consumption. On a two-year compound annual growth rate basis, top line grew 4%, while consumption grew 2%. For the balance of the year, we remain confident in the growth and margin trajectory of this business as consumers continue to seek out our brands for value and quality in a dynamic environment and year-ago comparisons moderate significantly. Turning to Slide 11, consumers continue to prioritize value as shown by their preference for home cooked meals, purchasing food that helps them prepare stretchable meals, and smaller and less frequent shopping trips. Our soup portfolio is especially well suited to meet these needs. Our condensed cooking portfolio saw both dollar and volume share increase in the quarter, marking the sixth consecutive quarter we've held or grown both metrics. We also saw similar strength in our broth portfolio, with Swanson Broth and stock growing above the category rate and dollar consumption up 13%. In addition, while growing consumption, this portion of our portfolio also had dollar and volume share gains in the quarter. While the eating soup landscape remains more challenging, we did see sequential improvement in the second quarter as it relates to dollar share on Chunky and our condensed eating portfolio. The longer-term outlook for ready-to-serve soup remains quite strong, supported by a combination of continued Chunky innovation and marketing, expansion of the successful launch of Pacific ready-to-eat soup, and we're also excited about the impact of including the strength of the super-premium Rao’s soup line, adding approximately a full point of share growth to the portfolio. On Slide 12, let's look more broadly at what the potential next chapter of this great division could be as we prepare to welcome the talented Sovos team to Campbell. As we announced last month, both companies have certified substantial compliance with the Federal Trade Commission's second request and we're excited to be one step closer to completing the acquisition. Just last week, with their fourth quarter and full-year fiscal '23 earnings results, Sovos announced that they had surpassed $1 billion in annual net sales, a 16% increase versus prior year, led by Rao's, which continues to showcase its premium brand equity with consumers with dollar consumption up nearly 32% in pasta sauce and 53% in the combined frozen meals and pizza segment, jarred soup, and dry pasta categories. When paired with our Meals and Beverages’ iconic category-leading brands and our distinctive fast-growing Pacific Foods brand, the Sovos Brands portfolio will strengthen the division for years to come. In fact, although not an apples-to-apples comparison, if we were to simply overlay Sovos results in the last quarter with our Meals and Beverage results, we would have gained approximately four points of organic top line growth. Imagine for a moment now the value of combining this with our differentiated Snacks portfolio, and you can appreciate our confidence in the strength of this portfolio headed into the future. So now let's turn to our differentiated Snacks business on Slide 13. We delivered a second quarter organic net sales increase of 1%, a point ahead of consumption in measured channels. Our power brands net sales grew 4%, following a 20% increase in the prior year for a 12% growth on a two-year compound annual rate basis. We were pleased with the net sales performance on brands such as Goldfish, Lance, Kettle Brand, and Cape Cod, adding to the remarkable track record of our power brands portfolio even as consumers continue to navigate a tough economic environment. During the quarter, we experienced anticipated pockets of pressure in some of our lower-margin businesses, specifically partner brands and fresh bakery. We continue to balance short-term competitiveness and sustainable margins while taking steps to optimize this portfolio for the future. Partner brands were a one point growth headwind to the portfolio. Although we expect this to continue going forward, it further strengthens the focus of our portfolio on our advantaged power brands. On the next slide, we highlight the sustained resilience of our power brands. As dollar consumption has grown 24% versus two years ago, we're encouraged by the continued appetite for our core portfolio, which now represents two-thirds of total Snacks net sales. More importantly, we see continued progress on dollar share as power brands have held or gained share for seven straight quarters. Turning to Slide 15, I want to highlight our Goldfish business, which has now held or grown dollar share for six consecutive quarters. Our exciting innovations, proven limited-time-only strategy, and strong marketing execution have fueled continued momentum for our portfolio. Our latest innovation, Goldfish Crisps, is off to an amazing start. Launched in January, we realized strong velocities greater than other recent category launches, and it has exceeded our initial expectations as we begin to move Goldfish into adjacent occasions. The news on Goldfish gets even more exciting. Goldfish has now officially crossed $1 billion in net sales, making it the second billion-dollar brand in our portfolio, alongside Campbell's iconic red and white soup. Our strategy over the past few years and our continued innovation momentum has propelled Goldfish to its next phase of growth. We remain excited about this brand's momentum and see an incredible road for growth ahead as we strive to make Goldfish a North American mega brand. On Slide 17, I am also excited to share the continued progress we've made on our Snacks margin roadmap. On a two-year compound annual growth rate basis, we grew organic net sales by 8% and operating earnings by 15% with approximately 200 basis points of margin expansion. We've made great progress this year and remain on track to finish fiscal '24 at an operating margin of approximately 15%. And as we continue to solidify our margin roadmap, we are confident in our ability to add about 100 basis points per year for the next couple of years, thus reaching our target of 17% operating margin for the division by the end of fiscal '26. Even more exciting is the fact that as we further refine our route to market and direct store delivery, or DSD model, we are identifying even more potential efficiencies and savings to fund further investment in the brands or to further expand operating margins beyond 17% in the future. Turning to our DSD transformation initiative on Slide 18, I wanted to provide an update on our route strategy, which adds another important element for our plans to create essentially a single Snacks network. As we discussed during our first quarter earnings call, we're already executing the integration of our warehouse and depot network as well as upgrading technology across our network and the independent distributor network with the goal of improving efficiency and effectiveness. This leaves independent distributor DSD routes as our next optimization area. Today, the majority of our routes are already operating efficiently where the scale of the business supports separate routes for Pepperidge Farm snacks and Snyder's Lance. We expect no change in these routes. However, for some of our routes, we do not have enough scale to help maximize the economics or efficiency of these routes if they remain separated. To solve this, we've been testing the combination of the entire Snacks portfolio on one truck. In these limited, underscaled markets, we purchase certain Pepperidge Farm snacks and Snyder's Lance routes, combine them, and sell the combined routes back to independent distributors. We're seeing that beyond the efficiency of this, independent distributors have an opportunity to provide better execution and improved service for our customers. When we pair this improved route with our already existing plans to combine the warehouse system into a single location, the net impact should create better scale and help unlock growth for our business while also helping to benefit both the area independent distributors and our customers with more compelling economics. It's still early days, but the results we've seen thus far give us confidence to expand our pilots and execute a pay-as-you-go model in creating these combo routes. We expect to convert about a fifth of the Snacks routes nationwide into combo routes over a multi-year roadmap. This plan will not require significant upfront financial outlay, and as I mentioned earlier, we plan to manage it as a pay-as-you-go model. Let me share a little more detail behind this strategy. First, these routes will vary in location, including urban, rural, and suburban areas. Second, there are no plans to combine the Pepperidge Farm bakery routes as the focus is on gaining scale and capturing growth across our Snacks portfolio. Third, in markets where we've executed this strategy, the time between purchase and resale has been swift. And finally, given the financial attractiveness of these routes, we're seeing a meaningful increase in multi-route ownership by experienced independent distributors that are existing snacks and bakery IDPs. So wrapping up, the second quarter was another solid and consistent quarter while keeping us on track for the year. Looking ahead, there is so much to be excited about as we continue the transformation of Campbell's, and again, we look forward to providing these details this summer in a full Investor Day. Next up, Carrie will take you through the second quarter and the second half outlook in a bit more detail.

Thanks, Mark, and good morning, everyone. I'll start by providing an overview of our second quarter results with a top line that came in as expected, operating margin expansion in both the Meals and Beverages, and Snacks divisions, and adjusted EPS ahead of our expectations. Second quarter organic net sales decreased 1%, lapping a 13% increase in the prior year for a two-year compounded annual growth rate of 6%. Adjusted EBIT increased 1% to $364 million, reflecting higher adjusted gross profit, partially offset by higher adjusted expenses including other expenses, R&D expenses, and administrative expenses. Adjusted EPS of $0.80 in the quarter was in line with the prior year and lapped double-digit growth last year. Slide 22 provides the drivers of our second quarter net sales performance. Excluding the impact of the divestiture of the Emerald nut business, organic net sales were lower by 1%. During the quarter, we generated 1 percentage point of growth from net price realizations, offset by volume and mix, which was unfavorable by 2 percentage points, in line with the sequential improvement from Q1 that we expected. As shown on Slide 23, second quarter adjusted gross profit margin was 31.4%. We were pleased with the 70 basis point margin expansion, which was driven by supply chain productivity improvements, net price realization, cost savings initiatives, and the favorable impact of volume and mix, which more than offset cost inflation and other supply chain costs. Core inflation in Q2 was low single digits, consistent with Q1, and significantly lower than the 14% in the prior year, driven by attenuation in inputs such as flour and oil. We continue to expect core inflation to stay within this low single-digit range for the remainder of fiscal '24, down from the double-digit range last year. Net pricing averaged 1% for the quarter, reflecting the remaining contribution from our Wave 4 pricing, our smallest and most focused pricing round. As a reminder, our Wave 4 pricing is now fully lapped. During the second half of the fiscal year, we do not expect net pricing to be a material driver of net sales growth, reflecting our continued balanced and disciplined promotional activity. We continue to deploy a range of other levers to mitigate remaining inflation, including supply chain productivity improvements and broader margin-enhancing initiatives. We expect these other levers to contribute to margin performance in the second half of the year as inflation remains moderate and volume trends continue to sequentially improve. Through the first half, we have achieved $915 million of total savings under our multi-year 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 were comparable to the prior year. Marketing and selling also remained approximately 9% of net sales, consistent with our targeted level. Adjusted administrative expenses increased by $2 million, primarily due to higher general and administrative costs, and inflation, mostly offset by the benefits of cost savings initiatives. As shown on Slide 25, adjusted EBIT for the second quarter increased 1%, primarily due to higher adjusted gross profit, partially offset by higher adjusted expenses, including other expenses, R&D expenses, and administrative expenses. Overall, our adjusted EBIT margin increased 20 basis points to 14.8% in the quarter, primarily driven by a higher adjusted gross profit margin. Turning to Slide 26, adjusted EPS of $0.80 was comparable to the prior year and was driven by a slight increase in adjusted EBIT and the benefit of lower weighted average diluted shares outstanding, partially offset by a higher adjusted effective tax rate. Turning to Meals and Beverages, second quarter organic net sales decreased 2%, driven by unfavorable volume and mix. Lapping an 11% increase in organic net sales in the prior-year quarter, Meals and Beverages organic net sales grew 4% on a two-year compounded annual growth rate. During the quarter, modest declines in US retail were partially offset by increases in Canada and food service. Sales of US soup decreased 3%, following a 7% increase in the prior year, primarily due to lower sales of ready-to-serve and condensed soups, partially offset by an increase in broth. We were encouraged by the sequential volume improvement trends we achieved in the quarter with Meals and Beverages volume only down 2% year-over-year compared to a 6% decline in Q1. On a first half basis, organic net sales decreased 3%, lapping a 13% increase in the prior year. We were also pleased with the progress we've made on Meals and Beverages operating margins. While segment operating earnings in the quarter for Meals and Beverages were down just slightly, operating margin increased 20 basis points to 17.9%. This was better than expected and we anticipate continued sequential improvement into the second half. Meals and Beverages operating margin for the first half was 19.2%. In Snacks, second quarter organic net sales increased 1%. On a two-year compounded annual basis, organic net sales increased 8%. For Q2, the increase reflects a net price realization of 3%, partially offset by unfavorable volume and mix of 2%. Similar to the comments I made when discussing Meals and Beverages results, we were also pleased with the sequential improvement in volume trends in our Snacks business, with Snacks volumes only down 2% year-over-year in the second quarter compared to a 4% decline in the first quarter. Sales of our eight power brands increased 4% in Q2 with volumes relatively flat, and for the first half, organic net sales increased 1%, lapping a 15% increase in the prior year. We delivered solid operating earnings and margin performance in Snacks with a 7% increase in segment operating earnings and a 110 basis point improvement in operating margins in the quarter. The higher operating earnings were driven by higher gross profit, partially offset by planned higher marketing and selling expenses. Gross profit margin increased due to the impact of net price realization, supply chain productivity improvements, the benefit from cost savings initiatives, and favorable volume and mix more than offsetting higher cost inflation and other supply chain costs. Snacks operating margin reached 15% in Q2, and for the first half, operating margin was 14.7%. As a reminder, the Snacks margin in the third quarter of fiscal '23 was 16%, up 330 basis points. This was driven by the benefit of last year's Wave 4 pricing net of inflation and the timing of marketing spend. So although we do expect negative pressure on Q3 margins given the lap from the prior year comp, we remain on track to approximately 15% margin for the year. As Mark mentioned earlier, we further expect Snacks margins to increase approximately 100 basis points per year over the next two years, reaching our stated goal of 17% by the end of fiscal '26. I'll now turn to cash flow on Slide 29. We generated $684 million in operating cash flow in the first half and deployed that cash consistent with our capital allocation priorities to maximize long-term shareholder value. Year-to-date capital expenditures were $263 million, $108 million higher than in the prior year, reflecting our commitment to invest for growth, particularly in capacity for our Snacks division as well as investments to drive productivity and enhance business capabilities. We also continued our commitment to return cash to our shareholders with $224 million of dividends paid and $29 million of anti-dilutive share repurchases in the first half. Our balance sheet continues to be stable with net debt of $4.4 billion and a net debt to adjusted EBITDA leverage ratio of 2.6 times. At the end of the second quarter, we had approximately $169 million in cash and cash equivalents and approximately $1.85 billion available under our revolving credit facility. All in, with the $2 billion delayed single draw term loan credit agreement, we are well positioned to close the pending Sovos Brands acquisition. As you'll see on Slide 30, given the consistent and improving performance in Q2, we are reaffirming our full-year guidance provided on August 31st. In the second half of fiscal '24, we continue to expect earnings growth and margin progress, particularly in Q4, benefiting from improving volume and mix trends, moderate inflation levels, and the flow-through of ongoing productivity improvements, as well as second half marketing and selling expenses at our stated targets, which will provide some year-over-year margin benefit in the second half. To provide a bit more clarity about the phasing of the second half, in Q3, we would expect adjusted EPS to be in the lower $0.70 range. As Mark mentioned earlier, top line guidance reflects a range of outcomes based on the speed of in-market category stabilization. We are encouraged by the sequential improvement in year-over-year sales with first half volumes coming in largely as anticipated, and we remain highly confident in the continued stabilization and ultimately returning to growth in the second half. We are currently pacing to the lower end of the net sales guidance range for the full year. However, we still have half of the year remaining with excellent plans and innovation to help accelerate the rate of sequential improvement moving forward. We will continue to invest in our brands with marketing and selling expenses as a percent of net sales expected at the low end of our targeted 9% to 10% range. From a phasing perspective, we expect to spend more in the third quarter relative to the fourth quarter. All other guidance assumptions remain unchanged. Additionally, the pending acquisition of Sovos Brands is currently expected to close the week of March 11th, 2024, and is not included in our current fiscal '24 outlook. After the transaction closes, we expect to update guidance for the combined business during our third quarter call. To wrap up, our second quarter tracked closely to our expectations, driven largely by the actions we undertook to position our business for second half momentum. We are confident in our plans for the rest of the fiscal year and our team remains focused on executing our strategy. Within both segments of our business, we expect to deliver margin momentum in the second half, paired with improvements in the trajectory of volume and mix. In addition, we are excited to be one step closer to completing the Sovos Brands acquisition and look forward to welcoming their team to Campbell's.

Good morning.

Hi, Andrew.

How are you doing? Mark, maybe to start off, you talked about sales tracking towards the lower end for the full year. I don't think that comes as a big surprise, just given the broader sort of industry challenges that a lot of the food companies are facing at the moment. But obviously, even at that lower end, it does require a pivot, right? The positive growth in the second half. And with no benefit expected from pricing, obviously volumes got to drive that. Maybe you can go through just a couple of the key points. You mentioned a few, but just what really drives your visibility and confidence to that outcome? And then as Carrie talked about, EPS a little more fourth quarter weighted, given the cadence of spending and some other things. But maybe you can also comment a little bit on that, what drives that specifically, so we have a better handle on that?

Sure. Carrie and I can discuss this together. Let's first address the top line. The good news is that through the second quarter, we're right where we expected to be. The sequential improvement from Q1 to Q2 is significant because it supports the trajectory we anticipated for the second half. We are adopting a slightly more cautious tone regarding the ranges. From the start, we've indicated that our guidance range is influenced by how quickly we see responses in certain categories. What we're conveying now is more of a cautious approach to ensure we see the expected variables, which will help determine whether we land towards the low or high end of the range. So we're certainly not suggesting that we are for sure on the low end of the range. But from what we can see in variables today, I thought it was prudent to kind of position it that way. Now why do we see sequential improvement in the back half? Well, the first thing I just would point out, this is not some massive hockey stick, right? So we kind of down 2% in Q1, down 1%, as we said, kind of flat to 1% in Q3, sequentially better in Q4. So it's a pretty steady drumbeat of more modest improvement as we go through the back half of the year. And I think as we've said all along, one of the biggest variables that gives us confidence, and this is one of those areas that I think, in looking at kind of pacing or benchmarking with other companies in this moment of transition, part of it is what you're lapping and when you're lapping it, that sets up a little bit of the speed of recovery. We are comparing the first half of the year, where growth rates were closer to 13% to 14%, with the second half, where we will be seeing a growth rate of 5%. In terms of volume, during the first half of 2023, we experienced about a 1.5% decline in volume mix. In the second half, we will be comparing against a 6% decline in volume mix. Therefore, both net sales and volume mix comparisons will become significantly easier. Consequently, if there were no improvements in consumer dynamics, we could still see some sequential improvement that aligns with our expected progression. Now what we're hoping for is that the combination of what we're doing, which I think our execution to date has been a point of pride for the company, especially as you look at our performance through the holidays. And we've got a lot of ammunition. We probably have one of the strongest back half innovation funnels we have on paper, about 1% of growth contributed from our innovation, very strong marketing. You won't see the incremental step-up in the back half that you've been seeing as we've kind of settled in at that 9% of net sales for marketing and selling as we go into the back half. But I would say very, very focused, highly relevant. We continue to learn a lot about what works in this environment, and we will keep pushing forward. On a positive note, we're starting to see some encouraging signs. Reporting after CAGNY, I get insights from various perspectives on the consumer, and I'm pleased that much of the conversation aligns with what we're observing. Consumer sentiment is improving, and household penetration in many categories has turned a corner. While there are still fewer trips to the supermarket, we're noticing a slight increase in the number of categories purchased and servings bought. All of this provides strong evidence that a turnaround is on the horizon. And just as a reminder, our two-year comps, right, are continuing to look very strong, plus 6% in the second quarter as an example. And even with the numbers that I was giving you relative to outlook for the back half, you'd be in a similar two-year comp range. And so it's not as if on a two-year basis, you're seeing some catastrophic structural change. But there is no doubt that the speed of recovery is what we're all trying to pay. So those are all good signs for us and give us the potential of seeing improvement faster than what we may be projecting today. But that gives you a little bit of probably pretty broad real estate of exactly why we feel very good about the back half, although we may be a little bit more pragmatic with our outlook right now, I'm still hopeful that there's a lot of variables in the last six months that we could see that accelerate.

Right. I’ll leave it there. Thank you so much.

Great.

Hi, thank you. I would like to explore further the wording regarding the second half guidance. Mark, you mentioned that you are currently on track for the lower end of the annual guidance due to prudence. However, you also indicated that the revenue for the first half met expectations. Could you provide more specifics on whether third-quarter shipments are starting off slower than you anticipated? Additionally, you noted that Chunky share trends are improving but still face challenges. I'm trying to understand which areas of the business are primarily contributing to this cautious approach. Thank you.

I think, Ken, from Campbell's perspective, our performance in the categories is showing consistent improvement and strength in various areas. We've observed continued strength in broth and all our cooking businesses, which remain highly relevant to consumers. However, there has been slightly more softness in ready-to-eat soups, though that aligns with our expectations. The hesitation we've noticed seems to be more related to the pace at which the categories are recovering. From a Meals and Beverage perspective, everything is largely aligned with our expectations. January was quite a robust month, possibly even better thanks to the favorable weather. The positive takeaway is that the weather conditions are returning to normal compared to the past couple of years. While discussing weather can be tricky, I believe January was generally strong, and the underlying trends in the categories align with our forecasts. However, Snacks seems to be experiencing a bit of a slowdown. If there's one where in the category dynamics, we're seeing a little bit more moderation. But I do continue to be reminded that when I look at these businesses and look at these categories on a two-year basis, you continue to see really strong results. I mean, in fact, our power brands which are two-thirds of our business on a two-year basis are up 12%. So there probably was a little bit maybe of overshooting relative to expectation on the speed of recovery in the Snacks ones. But I think relative to what we expected or what's giving us a little bit of, I would say, pragmatism, because again, I want to be really clear, we've got a lot of months left in the year to see us continue to shape the curve based on our own execution. But I would say those are the areas that are giving us a little bit more of this outlook that's moving a bit down. And remember, we guided in pretty tight ranges too. So the difference between one and zero is not insignificant, but certainly, I think in a world where it's pretty variable right now, I think a little bit of pragmatism is probably appropriate.

And then can I ask a very quick follow-up to that, and thank you for the color. When I speak with investors about, I guess, the bull and bear cases on your stock and other companies, one of the bearish cases I hear is that the salty snacks category in general is a little weaker than what people expected, and that maybe that will continue if some of the larger players get a little bit more nervous about their share, maybe invest a little more in price. Are you seeing any of these dynamics take place, whereby there's an irrational amount of maybe price investments? Just trying to get a little bit better sense of what you're seeing in salty snacks that's maybe not going quite as well, because it's been such a great category for so many years and decades.

I think what you're observing is generally consistent with historical trends. It’s important to unpack these categories in detail. As I mentioned earlier, when looking at the two-year compound annual growth rate for our power brands, the salty snacks category shows the strongest growth rates in the business. Salty snacks are facing the toughest comparisons given their strong performance a year ago. However, it's important to remember that this category will continue to see promotions and competition among the different players in the market. I don't see any signs that consumers are becoming irrational or trying to follow the downward cycle. Whether it's that we underestimated the strength we were experiencing or that the category is facing more challenges than we anticipated in the short term, I'm not concerned about this being a structural issue. When I examine some of the early consumer indicators I've mentioned before, I see positive trends. I believe it's not a question of if these categories will respond, but rather when they will, and timing that makes the current situation a bit more complex. However, fundamentally, I don't see anything that causes me real concern regarding what I predict will be a very healthy long-term growth path for us, both in salty snacks and in the cookie and cracker segments.

Thank you.

Hey guys, good morning. Thanks for taking the question. Carrie, maybe just to start, can you just help us out, like the contribution from both foodservice in Canada to Meals and Beverages, I think you said was a positive offset in the quarter. Maybe just what that was and what's embedded kind of throughout the second half on those two pieces of Meals and Bevs?

So maybe I'll jump in first on the top line. So Canada and foodservice continue to be performing extremely well. Now as you might remember, Peter, we had the nice recovery of a year ago in foodservice, but it was still positive, low single digits. Canada had an especially strong quarter. It contributed about 1 point of growth. And so if you're doing the math between net sales and end-market consumption, one might ask the question of, all right, if you got a point of contribution from NAFS and Canada and Meals and Beverage, why were you a little bit lower? And that was a function of actually seeing a bit more depletion of inventory in the second quarter. And again, I think I wouldn't call that a big indicator of an upsized recovery in Q3, but I think a little bit of just normalizing as we ran through the holiday season, which is always a little bit of a guessing game relative to inventory. So I think we're finishing in a very good spot, but we got a little bit of help from NAFS and Canada that we're able to balance a bit, a little bit of inventory pressure on the base business, but you're talking in totality within about 1 point of movement on the meals and beverage side.

Great. Thanks, Mark. That's helpful. And then maybe, Mark, just to switch over, you did spend some time talking about the combo strategy on the DSD routes. I know it's pretty early days, but maybe you can just give us a sense of that 20%? Are you less than 1% kind of converted at this point? And what have you kind of learned, I guess, both positive and maybe any challenges you brought into thus far? Thanks very much.

Yeah. So needless to say, this is maybe more exciting to us than the outside world, but this is a really important step in the journey because really, since I've been on the business, when you look at our business and you see the complexity of multiple DSD routes on snacking and you see the disparity geographically in scale, it does really beg the question of is there no way to put these businesses together? And I think what we did, which was smart was to kind of tread lightly and move in a very methodical and pragmatic way. But you now hear us kind of through what has been a couple of years of really working on what's possible and feeling really good about what we're learning on the combo routes. One of the questions we needed to address was how to support an independent distributor managing products in two store aisles. It's essential to achieve sufficient scale that remains economically advantageous for the distributor to focus more time in a single store. To ensure this works effectively and benefits both parties, we need to optimize in-store execution while ensuring the size of the drop is significant enough to make these routes appealing. It's important to recognize that if the economics of these routes are not favorable for an independent distributor, it poses significant challenges for them in terms of investing in their business and committing the necessary time and effort. And so the better we make the economics, the better it is for the IDP and the better the service and support is for our business and for the customer. And so I think what you hear us saying today is that we actually feel really good about it. And I just would say the other big question that we had was, okay, if we're buying back routes, how complicated or difficult, how long will we have to hold the routes before we get a buyer? And I would say what's been really exciting, although, again, I think you hear a level of, again, pragmatism in the rollout as we continue to validate this as we go, but the early signs are it's a fairly expedited process. We kind of line up the right buyers, we get them ready, we acquire the routes and then in many cases, these are people that are in our network already. They may be an owner of existing Pepperidge Farm route or a Snyder's-Lance route. And so the speed at which to convert on that has been very good. And so now this gives us kind of the final piece of the puzzle to being able to plot forward, to really a single snacks network, even though in much of the country, you'll still see a dedicated Pepperidge Farm and a dedicated Snyder's-Lance truck, it's all running through the same singular network. And in places where we didn't have the scale, you'll see these combo routes that are going to give us a great expansion of what I would call the same level of support we're getting in those scaled markets. We'll now be able to deliver in a much larger percent of the country, which is why we're so excited about it.

Thank you, good morning. I wanted to follow up on the DSD color. It seems to represent about a fifth of the total, which is a smaller portion. Can you provide an estimate of the potential savings from this and explain the economics as it develops?

It's about 20% of the routes we have. We've discussed this part of the journey as being a key element of several factors that come together to effectively address our route to market. This includes the combination of warehouses, depots, enhanced technology and capabilities for both the independent distribution partners and our warehouse network, as well as the ability to convert into combo routes across a fifth of the country. The economics of this, in relation to our investment management, is focused on both efficiency and effectiveness. So the good news is you're getting margin and efficiency, arguably a bit more through the warehouse consolidation and the depot consolidation, although I would say combo routes are going to give you some intrinsic savings as well. But then as you move to the idea of where the effectiveness comes from, I think the technology upgrades as well as the combo routes are going to give us a very healthy boost in some markets where arguably, we've been underperforming as we've been just lighter on scale and support. The economics here are really a combination of what we see as improvement in revenue, which is still central to our goals for Snacks, and its contribution to the business. We will discuss this further on Investor Day, but what you are observing, consistent with our previous discussions, is roughly 50 basis points of margin that is more directly linked to distribution. This is expected over a timeframe extending to 2026. I do think as you look beyond it and the timeline for completing this will give us a little bit of dry powder, even beyond the 17% that will give us some optionality, either to spend back and invest in the business or potentially drive margin even further beyond the 17% that we talked a little bit about today in fiscal '26. But in the near term, probably relative speaking, about 50 bps of margin benefit from it is a good kind of approximation.

Okay. That's really helpful. Thanks. And just a quick follow-up on some of the comments on the portfolio. You've touched on the attractive balance and the Investor Day slide, looks like you'll highlight how you're thinking about that. We've had questions in the past about would a split ever make sense. It sounds like that's not on your radar. Is that how you're thinking about how you go forward and just how the two pieces of the business fit together?

I appreciate the question. The short answer is that we're going to let shareholder value guide our discussions. I've consistently stated that if we consider a split of the company, it would be from a position of strength. The changes we've been implementing to transform our portfolio and business over the past few years will establish what I believe will be a top-notch grocery business in Meals and Beverage, along with an excellent snacking division. On the Meals and Beverage side, we are integrating strong growth stories with our distinctive or premium brands, while maintaining a solid foundation of mainstream brands. Additionally, our Snacks business now features a simpler route to market and manufacturing platform, positioning both divisions in their strongest state. As we move forward over the next year or so, I believe we will gain a better understanding of the potential value and how to compare it with other options. We will continue to evaluate our choices. However, I currently believe that our focus should be on executing and fulfilling the vision we have for both divisions. If we accomplish this, we will have a compelling narrative in the food industry.

Hi, guys. Thanks for taking our question.

Hey, Jim.

Mark, I wanted to circle back to some of the commentary around the back half cadence for the top line. If I look at Goldfish in particular, I believe they gained dollar share in the second quarter, which is up from flat in the first quarter. Just any color around what's driving the success there, if that's something that can be kind of replicated across some of the other snacking brands? And if we think about a reacceleration or an acceleration in the back half, what components of the snacking portfolio, would you expect that to come from?

Yeah. So, it's a great question. Goldfish is, as we said, kind of foundational in many ways, has been this great example for us of how do we drive these iconic differentiated snack brands. And the magic in Goldfish has really been this combination, I would say, of good base business support while expanding into adjacent consumer targets initially, and now with Crisps really into adjacent occasions, so that we're now able to source from other snacking categories that fit better, like think of chips or more of a munching occasion that Goldfish is now competing with and off to an extraordinary start. You pair that with the success of our limited-time offerings and much of our innovation in the past has been successful as well. You might have heard a little bit too of kind of a subtle nod to geographic opportunity, as I mentioned, as a more North American mega brand, and there is significant runway on Goldfish as we think about Canada and even Latin America. As we continue to dig deeper there, we're seeing real opportunity for white space in those areas. And so when I think about Goldfish, and I think about what we've done now to prove the expandability of the brand, I think it is a great blueprint. I would argue that we've been successful with other brands like Late July and Kettle Brand by introducing new occasions, such as air frying with Kettle, and offering a variety of flavors that generate excitement, along with our limited-time offerings. We're now applying this approach to other areas of our business, including cookies. If you haven't tried the London Fog Milano, it's an excellent product. There are many valuable lessons to apply to brands that are highly relevant, and when you combine these elements, it enhances our confidence in the ongoing potential for Goldfish and even more opportunities ahead. And look, I don't think it's exclusive to snacking. I think the ability for us to bring the Goldfish playbook to Meals and Beverage is equally relevant. And I would argue that although, yes, we're cycling through a little tougher time on ready-to-eat soup, if you look over the last several years, I mean, Chunky has just had a great, great run, again, driven by a very similar approach of great foundational based marketing and just some super innovation that we've been bringing to the table, including some limited-time offerings that have been quite effective as well. So I think the company in general has distilled down a pretty good playbook now that, yes, was probably born of Goldfish and Chunky, but that you see us applying now more broadly across the portfolio. And I'll just conclude by saying, I think we're going to inherit another great playbook in the Sovos team and what they've been doing on building the Rao's brand. So I'm excited to kind of get that on the table as well and continue to use that as kind of evidence or support for why I think these businesses in the future are going to really be best-in-class in contributing steady, predictable, sustainable growth.