Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Campbell Soup first quarter 2020 earnings conference call. At this time, all participants' lines are gonna listen only mode.
After the speakers presentation, there will be a question and answer session.
Ask a question during this session you need a press Star then one on your telephone.
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I would like to hand, the conference over to your speaker today, Mr., Ken Gosnell, Vice President Finance strategy and Investor Relations, Sir you may begin.
Thank you good morning, everyone welcome to Campbell's first quarter 2020 earnings call as usual, we created slides to accompany our earnings presentation.
And these slides posted on our website. This morning at Investor Day Chemistry Company Dot Com. This call is open to their media who participate in listen only mode.
Turning to slide three today, we will make forward looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be an accurate and are subject to risk.
Please refer to slide three or 60 filings for a list of factors that could cause our actual results to vary materially from those anticipated and forward looking statements.
Because we use non-GAAP measures we have provided a reconciliation of these measures to the most directly comparable GAAP measure which is included in the appendix of this presentation.
On slide four you can see why we plan to cover today well, there's some a call today are mark Clouse, Campbell's President and CEO .
Our new Chief Financial Officer, Mick They Carlson.
Mark will share his thoughts our performance in the quarter and then Mick will walk through the financial details and our updated guidance for fiscal 2020.
With that let me turn the call over to Mark Thanks, Ken Good morning, everyone and thanks for joining us today.
Before I get to our performance I want to acknowledge the Ken has decided to retire from Campbell.
And this should be his last earnings call as vice President of Investor Relations.
Ken. Thank you for your contributions to the company through the years and we wish you the best in your retirement.
Our results to start the year were largely consistent with our expectations as we discussed during our fourth quarter call fiscal 2020 will be a year of stabilization for the company as we invest in the business optimize the portfolio and fully implement our new operating model, including further integrating our snacks.
Division.
We continue to make great progress across these focus areas building upon the foundation, we put in place in fiscal 2019.
Looking at our results organic sales were slightly below year ago, just under 1% performance reflected continued strength in the snack segment, where sales increased 2% with contributions across the business.
This was more than offset by a 3% sales decline and meals in beverage in large part due to the timing of U.S. soup shipments related to the Thanksgiving holiday. Although this timing shift resulted in a headwind in Q1 I fully expect that to balance in Q2.
What I'm most encouraged by is our end market performance, where we are building momentum across both divisions in fact in measured channels. Our total company in market consumption grew more than 1%. Our brands grew were held share in categories, representing more than 80% of our total business and finally in 10 of our state.
<unk> 13 priority categories.
This was led by gains in soup share for the first time in nearly three years.
We continued to execute upon the other key elements of our strategic plan, including a 30 basis point gross margin expansion supported by productivity improvements and cost savings.
We delivered 45 million in cost savings in the quarter inclusive of our multiyear enterprise program and the synergies from our snacks integration.
Adjusted EBIT was better than we expected, although the majority of the upside was timing, resulting in double digit adjusted EPS growth.
Turning to a discussion of our segments on slide seven let's start with Nielsen beverages. As a reminder, when we spoke last quarter I indicated we had a great deal of work to do to stabilize this business and the mixed results in Q1 reflect many of those actions.
This includes optimization of our portfolio and increased investments.
For instance, AMC is up 2% in a division in Q1, including a 15% increase on our U.S. soup brands behind earlier in season advertising, while overall TDP isn't the division were down around 6%.
The net of this is improving consumption only down about 1% and share in market positive, but clearly we have not yet achieved our overall goal of stabilization. This will take some time, but I am happy with the progress as previously mentioned the difference in our net sales and consumption was primarily holiday.
The timing of shipments, which we expect to recover in Q2.
And some proactive decisions that we have made to optimize certain lower profit foodservice volume.
Turning specifically the U.S. sue while the impact of timing of Thanksgiving shipments was most pronounced on sue where condensed varieties in bras play a sizable role in many holiday recipes, we are making encouraging progress in market on the business.
We are injecting much needed investment and continuing to strengthen important retailer relationships, while also rationalizing the portfolio.
As we've discussed before in my view the first step in this journey stabilizing share.
This quarter Mark the first time in 10 quarters. The Campbell gained overall soup share in fact, we grew or maintain share across the condensed ready to serve and broth categories.
This is one of the early indicators of progress on our three year journey to revitalize U.S. soup.
On slide nine while soup sales declined 3% in the quarter consumption only declined about 1% improved velocities in soup were essentially offset by TDP losses in the quarter and I will impact that more on the next slide as you can see the two point gap between net sales and consumption.
Is due entirely to the timing of Thanksgiving.
Turning to slide 10, we are investing more in the category both on condensed and ready to serve with advertising dollars up we started our advertising earlier a month sooner this fiscal year and while it's early days. The response to our initial investments is encouraging for example, our new tomato soup.
Advertising went on Air September Thirtyth, and we saw positive lifts immediately through the started the second quarter, we've improved on those lifts, which are now up 7%.
We have also increased our promotional frequency across the portfolio, which is a product of our improving retailer relationships and select high ROI investments.
Moving on to TD piece as we mentioned back in August we've experienced distribution headwinds due to historic lack of support and some of our own choices to optimize our soup portfolio approximately 80% of these TDP losses are what I would characterize is non regrettable, meaning that they were lower velocity.
He SK use coming from the tale of our condensed and ready to serve segments, however, about 20% or SK use that should remain and with the support we've added we have an even higher stronger velocities, we're pushing hard to get those back but what is most important right now is sustainable.
Lastly, as we head into the heart of the soup season.
With each month of progress we're laying the foundation for the Sustainment of the category and next year with more innovation. The aim is to ultimately expand the category.
In summary, I feel good about the direction in which we're headed on soup, including the improvements we're seeing on Pacific, which we expect to return to top line growth. This year I'm also encouraged by how the portfolio is responding to the actions. We are taking as I've emphasized from day, one change won't happen overnight looking.
I had to the second quarter, we expect that our net sales profile in the U.S. soup business will continue to improve.
In other parts of the division I'm pleased with the performance of our Prego, Brad which continued its strong momentum and maintained its number one share position in the Italian sauce category.
Turning to V. Eight the shelf stable juice category remained challenged as we continue to optimize our portfolio primarily on splash. We are reshaping the portfolio around the plant based positioning a V. Eight read the V.A. plus energy product, which is outperforming the category and our overall single serve.
Platform, our new campaign focuses on a master brand story for V. Eight as the original plant powered drink.
We believe we have the right to own the space and are pleased with early indications of this investment.
While the declines on spice more than offset these improvements they aligned with our expectations.
It's early days in our efforts to stabilize our meals and beverages business, but I feel good about our progress thus far and I have confidence and the team to continue to improve our performance.
Let's look at our snack segment on Slide 12. This was another very good quarter for the business with organic sales, increasing 2%, which includes a nearly 4% end market result, offset by the 1% headwind for partner brands that we discussed last quarter.
We continued to drive strong consumption on our nine power brands, while also making steady progress on our integration plans and value capture targets, both of which give me further confidence in our strategy or investments and our team.
Operating profit was comparable to the prior year as we front loaded marketing investment in the first quarter.
We expect our profit performance to improve as the year unfolds.
Once again eight of our nine power snack brands grew or held share in the quarter.
The snacks business is maintaining momentum behind our proven growth model, which we are now deploying across the full portfolio marketing investments are up significantly across our nine power brands with select trade investments to maintain price gaps.
These investments continue to pay off total snacks consumption grew nearly 4% in measured channels, while our power brands grew 6%. We are seeing nearly two times the consumption growth on our power brands versus the rest of the snacks portfolio as we focus the portfolio and invest behind these differential.
Created brands that are truly driving the business.
The Pepperidge farm portfolio continued to lead the way with its twentyth consecutive quarter of organic sales growth.
Gold fish continued to perform well with increases on the core business. Our bakery business continued its growth behind buns and rolls sandwich bread and swirl.
Marketplace performance was also strong on our salty snacks brands, where we drove double digit growth on late July while Cape Cod cattle and Snyder's pretzels continued to respond well to our increased marketing investments with both consumption and share growth.
As discussed last quarter the partner brands in our portfolio are performing inline with expectations impacting our snack sales by 1%. We expect this headwind throughout fiscal 20.
Let's take a closer look at the progress, we're making on our integration and value capture on slide 14.
I remain satisfied with the pace of our progress.
The first quarter, we continued to deliver additional savings across the three key areas synergies in procurement around packaging the consolidation of sales headquarters and related operations and driving operational efficiency in our manufacturing.
We expect a continued to deliver savings against these three initiatives in the first half of the year and we're off to a strong start.
Looking to the back half, we expect initiatives around manufacturing and logistics to begin to contribute to our overall savings.
In summary, I'm very excited by the progress and potential of our snacks business I continue to view it as a unique advantage and differentiated portfolio that is responding well to our investments and the best to both capabilities of the combined businesses.
With that let me introduce Mick Bake House, who join Campbell in October after serving as CFO at CER Bonnie for the past three years, where he helped improve the company's capital structure and supported its growth and expansion. He brings significant experience in debt reduction in cash flow generation, both of which are.
Key priorities are Campbell mixed diverse experience will be a tremendous asset as we continue to reposition Campbell for sustainable profitable growth now, let me turn it over to Mick Thanks, Mark before reviewing our results I wanted to give you my perspective on the quarter and outlook for the balance of the year.
As Mark stated sales were slightly down but were largely inline with our expectations, whether meals and beverages soup shipments were down three points of which approximately two thirds reflects the timing of shipments with the later Thanksgiving holiday.
Assumption remains solid and share trends continued to improve.
And snacks delivered 2% growth, which included a one point headwind from partner brands.
We are pleased with improving trends in our gross margin.
As we benefited primarily from productivity improvements cost savings and pricing, partially offset by cost inflation and trade investments.
Continuing to make strong progress against our cost savings target.
$850 million by the end of fiscal 2022.
Delivering $45 million incremental savings in the first quarter, bringing the program to date.
Total for continuing operations to $605 million.
Year over year, adjusted EBITDA increased 6% slightly better than expected.
Benefiting from some timing on the cost side.
We continue to make progress on our divestiture program with the sale calcium completed in September the sale of the European chips. The business completed to October and the remaining portion of Kimball International expected to close before the end of our second quarter.
Proceeds received to date, along with positive cash flow from the business have enabled us to reduce debt levels by approximately $1.5 billion over the past 12 months.
Lastly, we are updating our fiscal 2020 sales guidance to reflect the sale of the European chips business, which was not included in our guidance previously provided in August .
Our underlying outlook for organic sales as well as adjusted EBIT and adjusted EPS remains unchanged.
Overall, we had a solid quarter and we are currently on track to achieve our fiscal year goals.
Given the seasonality of our business combined with increased marketing support in the second quarter, we expect to see outperformance through the first half to be more inline with our full year guidance, excluding the impact of the 50, Threerd week, which obviously falls in the second half of the year.
I'll now review our results in more detail.
For the first quarter reported and organic sales decreased 1% to approximately $2.2 billion as gain since snacks were more than offset by declines in Nielsen beverages.
Adjusted EBIT increased 6% to $300 million to $92 million.
Sales declines were more than offset by lower adjusted administrative expenses.
Our adjusted other income and improved gross margin performance.
Adjusted EPS from continuing operations increased by 10% or seven cents to 78 cents per share due to our adjusted EBIT performance and lower interest expense.
Breaking down our net sales performance for the quarter organic net sales were down 1%.
Overall volumes were stable as declines in Nielsen beverages were offset by increases snacks with gains across much of the portfolio.
Sales benefited by slightly less than one point from pricing actions, primarily within meals on paphitis taken in fiscal 2019.
Promotional spending investments within both snacks and meals and beverage has negatively impacted net sales by a little over a point.
The impact from currency translation in the quarter was neutral as we refocused our portfolio on North America.
We would continue to expect currency translation impacts to be minimal all in all reported and organic net sales were down just under 1%.
Our adjusted gross margin percentage increased by 30 basis points in a quarter to 33.8%.
Cost inflation and other factors had a negative impact of 170 basis points on the rate basis overall input prices increased by approximately 3%, reflecting higher prices on steel cans as well as areas such as vegetables and flower.
Net pricing led to a 30 basis point decline in adjusted gross margin as the benefits from less pricing actions, where more than offset by increased promotional spending.
Going the other way our ongoing supply chain productivity program contributed a 130 basis points and our cost savings program also at at 90 basis points to gross margin expansion.
Mix was favorable by 10 basis points, bringing the gross margin percentage to 33.8%.
We're pleased with these gross margin results as we continued to achieve improvement in performance.
Moving onto other operating items, adjusted marketing and selling expenses decreased 1% in a quarter.
Two to one at a $6 million has increased investments in advertising and consumer promotion, where more than offset by the benefits of cost saving initiatives.
Adjusted administrative expenses decreased 7% $226 million, primarily reflecting the benefits of cost savings initiatives.
And while not shown on the chart adjusted other income was $8 million compared to zero in the prior year period.
The year over year impact of $8 million contributing to our EBIT performance in the quarter reflects lower losses on investments and higher pension and postretirement benefit income.
Going to the next flight we have continued to successfully deliver against our multiyear enterprise cost savings program.
This quarter, we achieved $45 million in savings inclusive of Snyder's Lance synergies.
To date that brings our savings for the overall program to $600 million to $5 million.
We expect to incremental cost savings in the range of 140 $250 million for the full year and continue to track to our cumulative savings target of eight trying to $50 million by the end of fiscal 2022.
For additional perspective on our performance. The next chart breaks down our adjusted EPS change between our operating performance and below the line items.
Adjusted EPS increased seven cents from 71 cents in the prior year quarter to 78 cents per share.
Adjusted EBIT had a positive five cent impact on EPS.
Net interest expense declined year over year by $10 million delivering a three cents positive impact to EPS.
As we have used proceeds from completed that fast, yes, and our strong cash flow to reduce debt lastly, our adjusted effective tax rate of 24%, while slightly higher than prior year rounds to no impact.
Leading to bridge to 78 cents per share.
Now turning to our segments results in Nielsen beverages sales decreased 3% to $1.2 billion, primarily reflecting declines you a soup as wells food service, which were partially offset by gains in prego pasta sauces sales of you a soup decreased.
3% with shipments lagging in markets consumption by two points, which were negatively impacted by movements in retailer inventory levels in both bras and condensed soups related to the timing of the Thanksgiving holiday.
Sales of ready to surf shops were comparable to the prior year as mentioned our soap share trends continued to improve.
Turning 50 basis points or share in the quarter.
Segment operating earnings declined 3% to $282 million decline was driven primarily by cost inflation and sales declines offset partially by the benefits of cost savings initiatives and supply chain productivity programs.
In snacks sales into quarter increased 2% to approximately $2 billion.
This performance was driven by gains in goldfish crackers as well as gains in fresh bakery products, Pepperidge farm cookies, and Cape Cod and Kettle brand potato chips.
Offset partially by decline seen a partner brands.
As we discussed with you last quarter, we're continuing our plans prioritization of select partners to reduce complexity and improve execution.
And as Mark mentioned, eight or nine snack power brands grew or health market share in the quarter.
Segment operating earnings of $125 million were comparable to the prior year as the benefits of cost savings initiatives and supply chain productivity programs were offset by cost inflation and increased marketing support.
Cash from operations for Q1 fiscal 2020 decreased year over year by $49 million to $182 million, primarily related to the year over year increased payout of incentive compensation.
We continued to make progress regarding our working capital management effort.
And while cash flow for the year will benefit from these efforts, we expect the impact to be at a lower level of improvement than what we achieved in fiscal 2019.
Cash from investing activities increased by $369 million $269 million, primarily related to the net proceeds from the shelf kelsen and the European chips business. The cash outflow for capital expenditures was $98 million $13 million lower down there.
Hi here.
We continue to forecast capex of approximately $350 million for fiscal 2020.
Cash outflows for financing activities were $453 million compared to $148 million a year ago, the year over year incremental cash flow reflect the use of divestiture proceeds to pay down debt levels dividends paid in the amount of $107 million were comparable to the price.
Reflecting our current quarterly dividend of 35 cents per share.
Overall, we continue to make progress to Delever, our balance sheet net debt of $8.2 billion declined by approximately $1.5 billion compared to prior year as proceeds from the completed divestitures along with positive cash flow generated by the business, we're used to reduce debt.
We expect to complete the remaining divestiture of our notes and certain other international businesses in the second quarter fiscal 2020, and we will use the net proceeds to further reduce our debt level.
With our current outlook, we expect our net debt to adjusted EBITDA ratio to be well below four times by the end of fiscal 2020.
Now I'll review, our updated guidance for continuing operations for 2020, the only thing that has changed instead, we are updating our guidance for the self the European chips business, which we completed in October .
Impact from this divestiture was not included in the guidance previously provided on August Thirtyth.
Unlike other recent divestitures, primarily given its size. It there is not treated as a discontinued operation and has been through to date upscale included as part of continuing operations.
This divestiture will have about a negative two percentage point impact on sales for the balance of the year and no impact on adjusted EBIT or adjusted EPS also as previously discussed fiscal 2020 is it 53 week here, resulting in an additional week, which we believe to have.
About a two percentage point impact across net sales adjusted EBIT, an adjusted EPS.
As a result, we expect reported and organic net sales of minus 1% to plus 1% adjusted EBIT of plus 2% to plus 4% and adjusted EPS of plus 9% to plus 11% or two dollar 52.
Two dollar 55 per share and for clarity our outlook for organic sales excludes the negative two point impact from the sale of the European chips business as well said two points contribution from the 50 Threerd week.
Overall I'm excited to be part of the team I'm pleased with the results of my first quarter with Campbell's I'll now turn it back over to Mark. Thanks, Mick before taking your questions I wanted to added new section to our comments for this quarter and the remainder of the fiscal year as we discussed at our Investor day transparency and.
Clear milestones are important to track the progress of our turnaround.
You May remember this page from June , which I believe continues to serve as a great scorecard for our progress against the key metrics, we outlined I feel very good about the underlying progress we've made to start the new fiscal year.
While we have more work to do in terms of stabilizing the topline. We are slightly ahead of schedule one margins in EBIT and I'm very pleased with our progress around building, a winning team and culture, especially the speed at which we have implemented our new operating model and how we are adding new skills and capabilities, while saving cost.
On balance we are doing what we said we would do.
With that let's take some questions. Thanks, Mark we'll be happy to take your questions Crystal, Let's open the lines and take our first question.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered.
So from the Q. Please press the pound key once again to ask a question. Please press Star then one now.
And our first question comes from Andrew Lazard from Barclays. Your line is open.
Good morning, everybody and thanks for all your help over the years and welcome to your mix.
Andrew.
Two questions for me I guess first mark in thinking about stupid at this point.
On the one hand shipments were down this quarter against you know an easier comp but on the other there was the negative impact from elite Thanksgiving that you talked about some of which should reverse.
And also camel Gainshare, obviously for the first time in 10 quarters I think he said so.
Perhaps you can put these results.
Maybe in broader context, with where you are the overall soup turnaround plan for starters and then second maybe for Mick just the cost savings and synergies obviously came in strongly at 45 million in the first quarter well ahead of I guess, what would have been implied by your goal of 140 to 150 for the full year.
With such a strong first quarter performance included in the original plans for the year, if not like what drove the upside and maybe how do we think about the cadence of savings in synergies for the remainder of the year. Thank you.
Great all right. So what am I hit the suit question first making then we'll talk about phasing of the savings.
I think it's.
Categorize Sue for the first quarter is essentially very much in line with what we kind of described in the fourth quarter, we set aside the timing.
Of Thanksgiving shipments, where you had an overall soup business that was.
Centrally.
Down about 1%.
The balancing act here is let's start with the things that we're feeling very good about and in all honesty. A couple of these areas were better than I expected for for where we are in the journey.
And I think it starts with share as we've said all along really what we want to do as a first step is kind of slowed down or stop the share loss that we've been experiencing over the last several years and so have done that in condensed ready to serve and then brought.
In the same quarter I think was what's very important.
Milestone and continuing to move us forward and if you think about why and how that happened.
I think the part that probably has me. The most excited is the response that we're seeing in market to the investments, we're making and if you think about this as a continue on through the year of investing or at least through the first two quarters of investing in different parts of the business. The first investments we made.
Looking back on air with our chunky advertising, bringing mom back into the picture.
I'm sure you've seen that seemed the ads.
As well as the advertising that we have on that can dench businesses, where we focus on the eating soups, so primarily tomato and shaken neutral and in both cases. The response to that has been very very strong and if you look at the more recent weeks.
That are that are going to fall into Q2, you see that momentum accelerating even further in fact, our ready to serve businesses in the latest four weeks are up about 7%.
Condensed eating soups are up almost double digits and so it would both having very strong share performances as well.
I think a big part of it is we're tackling head on some of the challenges with the business had so our condensed ads are focused on driving the quality perception. If you see how the ads are constructed were actually embracing the CAD and really connecting it to the quality of the food and side, whether that's no added preservatives.
On chicken noodle or whether that six tomatoes or romancing. It in the occasion of the grilled cheese sandwiches tomato soup, which we haven't advertised in a long time and I think those are all very very strong and what we're going to see now in the weeks ahead is condensed on the cooking side and our bra business.
Which are our both areas that really didn't start until Q2.
I also feel good about how our price gap management and our differentiation strategies are going as it relates to private label, we've seen a major turnaround in the share relationship on condensed as it relates to private label and although I am still a little weary on the brought side I'll talk about that in second.
I'm happy to see the recovery of share on condense that we had lost over several years and no doubt underlying that too is just improvement I would say in our retail partnerships where people are embracing the fact that were coming back to the table with a vision and a direction and I think is just continues to build momentum.
Tom.
You know, we could see velocities, which were up 4% in Q1, I think we can see those accelerate as we go forward and as we said in the next iterations, adding innovation seeing the full impact of advertising over time.
I would say on on balance I feel really good about where we are right now I think the headwind as we talked about in the fourth quarter is primarily the distribution side and again by modest here I think 80% of this is what I would call non regrettable as I described in my remarks.
At about 20% of it I think are things that shouldn't be in there and I think as we continue to build the case on velocity more going hard at getting those back in and I think we'll experience success.
We're able to maintain this in market momentum that we see I mean, the factor the matter is we're living a little bit.
With the history of not having supported the category in the businesses and a lot of these decisions on the category in the resets you know were made on a historical said about performance factors that honestly warranted. Some rationalization as I said I think the name of the game right now is keep month in month.
Building, our case for the category and showing the demonstrated improvement and the impact of focusing on the right areas and then the other two areas that I think are are working as headwinds one is specific but we're seeing steady increase in fact, if you look at the latest four weeks on.
Specific you're actually seeing a decline in market up just over 1%, which is a significant improvement from where we've been and I do expect that swing into positive territory.
Year unfolds, so still a headwind.
But I think significantly improved from the double digit declines we experienced and then bras is a little bit of a wildcard I'm anxious to see these next two weeks, which are the key weeks of Thanksgiving.
To really see yes, both the advertising and some of the price gap management, we're doing is going to be enough.
To balance what is an aggressive growth trajectory that private label Chad.
But I do I do think with the support and Pacific, which obviously plays an important role and draw for us kind of having support for the first time and a lot of years. We're we're Ivan I would say cautiously optimistic.
How that looks so that reality of where we are if you think about this going forward.
I think the drivers are not going to change materially in Q2, obviously, we're going to get the benefit of the timing I think more of the underlying variables are going to be roughly the same but again I wouldn't be surprised if we continue to build some momentum in a few areas as well so net net I kind of feel like we're right where.
Are we wanted to be in Q1, and some green shoots in some areas that we still need to work on.
Right.
And then anemic join us in the cost saves kids Yep.
So with regard to the cost savings. It's a good question I spent quite a bit uptime and it since joining the company, particularly obviously to cost saving programs and as well as folks on the synergies with regard to Snyder's Lance and.
Going looking at first quarter generated about 45 million of cost savings.
We're off to a good start I feel good about it that food, where we are that being said, it's still early in the year and.
All that kind of looking at the details I do feel very good about the target of $140 million to $150 million for the full year, Yes, I mean, I think the reality Andrew is that we are a little bit ahead of where we expected as it relates to EBIT and some of that into the reflection of cost savings coming a little faster we don't necessarily.
I see them to be incremental on the year, but but we were always happy when we can get to savings a little faster, but I would I would suggest that that the upside in Q1 is a little bit of timing on that I would expect smoothed out over Q2 and as we you know as Mick said in his comments.
We're kind of expecting to exit the first half pretty much right down the center of the fairway as it relates to where our 52 week guidance sits relative to both kind of top and.
And bottom line.
You a little bit of opportunity.
We continue to see some of that momentum on soup and continue to move forward on savings, but for where we are right now we see a little bit more of it is the as a timing factor.
Thanks, so much everyone.
Thank you Sir our next question comes from Ken Goldman from JP Morgan Your line is open.
Hi, good morning.
Mccain me Hey.
Question, you talked about shipments trailing consumption, obviously, thanks to the Thanksgiving shift.
Mark as we think about the first I guess few weeks, so far the second quarter.
Are you seeing shipments outpace consumption as this shift reverses that would be my first question and then my second one is on.
On the 20% of distribution reduction that was I guess regrettable is the word because some of your peers. Some of your customers have talked lately about how retailers are shifting their shelf sets, maybe simplifying them to reduce some out of stocks are you seeing any impact on that.
On your businesses as far as you can tell just trying to get a sense of how.
Where the sort of distribution losses are coming from that you're not necessarily hoping for thank you yeah.
Great question.
First on the on the phasing so what I would tell you is.
Let me kind of hit it both on the shipment and the consumption side. So.
On the shipment side I would say, we see a fair amount of the first month of the quarter and it's building very strong confidence that this idea of the phasing shifting from Q1 to Q2 will in fact occur.
I think on the consumption side. We also continue to be very encouraged by what we're seeing in the latest four week numbers. There is some of the better.
You know performance on and like I said to places that have gotten the majority of the advertising.
However, what I will say as the next two weeks.
Consumption that we don't have will be inclusive of the key weeks of the holiday so.
I would I would tell you have in a couple of weeks from now have a very good feel for how how we fared through Thanksgiving, which of course is a pretty quick turn from that went into Christmas.
In the December holiday period so.
We'll have a little bit more shadowing, there, but like I said, all the indicators I see right now are for the most part.
Either very much in line or in some cases, a little bit ahead and more positive than than I might have expected at this point.
And then let me talk about the distribution.
It's.
I do think the that there is.
Hey reality of retailers really rationalizing their space.
And understanding where the value creation is happening in the store and in some cases that may be reducing assortment to create greater slots for core items that may be turning it much faster pace and I think that we are seeing a little bit of that within the way.
World of soup and you know in our mind, that's okay, right, that's where a lot of the non regrettable rationalizations happening if you take the last head items within our condensed soup business. It's in the third and fourth quartile as it relates to velocity.
Those are in our most efficient skews anyway, and so the idea that we get to a little bit more focused and tighter said and especially given some of that early successes, we're having on supporting the core.
I would say, we feel pretty good about that and kind of our managing it and expecting it I think the 20% in some ways has to do with the fact that.
I would describe it a little bit as collateral damage as as retailers may have kind of.
Cut a bigger piece given a backward look at the performance of the category and in our businesses and I think that is a risks that we certainly identified and understood.
I think will reverse that I don't think it said the key that I think people should be focused on is do we think its systemic and going to continue and the answer is I do not believe that'll happen I think we're getting to a very good set now where the foundation of the distribution I need to get that 20% back.
I think we're building some good cases to do it.
And then build smart innovation on the top of that things like our convenience platforms, where overtime, we're going to see a range of options that include seven ounces that include our leveled out sipping going up all the way to 12 ounce, which is a little bit more of a meal replacement size. This combination.
Bringing more relevant formats into the Iowa, that's what we're making some room for it I think that we're going to have a very strong story going forward. So I think your insight is right I think we're certainly experiencing it here, but I also feel good that we're turning the tide and even as we're having conversations with customers we already have.
Agreement in certain areas, where we're going to bring stuff back or that the acceptance of our innovation. So far has been very very strong.
Thanks, so much.
Yep.
Thank you. Our next question comes from Bryan Spillane from Bank of America. Your line is open.
Hey, good morning, everyone.
Couple of quick ones from me first.
I'm not sure that I don't if I, miss that or not but could you give an outlook for capital spending for the year.
Yes, we did 350 billion it hasn't changed it's space.
We previously provided okay, and then second theres been a lot of discussion about shipments versus consumption in soup, but so I guess just for the full year should we expect that your shipments would be in line with consumption or is there anything that would cause the the to not to sort of converged for the full year.
No I think you should expect over the course of the year for them to be pretty close you know, it's always a little theres always a little bit Choppiness as you think about timing. So you know I would as you look forward really think about where the key holidays hit will have Easter here ahead of us in the in the quarters ahead, but I think the.
Full year should be pretty close.
Our consumption in shipments should be aligned we see no reason do expect on material step down.
In further inventory levels and or any other causal factor that would change would be on what we're going to experience a little bit from quarter to quarter.
Okay, and then just last one I made some comments commentary about expecting that debt to EBITDA would be meaningfully below four times.
By year end, and so I guess.
Maybe mark if you could just philosophically you know if you're getting at that point, where theres some flexibility with free cash flow just how you think about capital allocation share repurchases raising dividends.
Investing back in the business just how we May think about just how you're thinking about that if you're starting to sit on a pilot study.
Yes, so as we sit here today, the capital priorities would be consistent with what we previously.
Communicated where essentially.
It's about supporting the growth of the business, reducing our debt and paying our dividend side thats kind of been.
The framework of of what we've been living into I do think and I don't think this day is necessarily today and for the most part probably won't be within this year.
As we get ourselves back closer to that three times level.
I do think we're open to that conversation of course will continue to maintain kind of that.
Those top two of our top three of investing in growth.
Of course, managing that level down and paying our dividend, but then at that point I think its right to have the conversation on when we look at other tuck in.
Today that might fill in some holes within our portfolio.
Or or be valued.
Combinations with some of the some of the businesses we have today I would not expect us.
To be heading into transformational and bigger M&A I, just don't think Thats, where we are right now in the journey, but I could imagine that as we get into a reasonable debt level that we might look at some smaller contributions as well as of course always although not approved today.
I think there's always room for conversation around share repurchasing or increasing dividend depending on the circumstances in kind of how we view.
Look going forward. So I think that conversation happens kind of as we're exiting this year into next year excellent. Thank you very much okay. Thanks, Brian .
Thank you. Our next question comes from Nick money from RBC. Your line is open.
Thanks, Good morning, everyone.
Mark maybe you can just.
Hey, good morning, maybe you could just provide some consumer diagnostics I mean, clearly to the category or at least Campbell soup business has been improving can you help us kind of understand what's going on at the consumer level.
Bringing lapsed consumers back new consumers are you get share shifting any context around that would be helpful. Yeah. So I think there's a couple of dynamics that are happening at the consumer level I think I'll put it into kind of three buckets.
Biggest bucket I do I do see us influencing has lapsed users, which is our primary initial objective and this is we know that the primary barrier to that is the perception of the product and so as we have gone aggressively after quality and kind of context right.
When you think about the wholesomeness tomato soup, and grilled cheese, which I think.
All of US here are a little bit Joe I guess pleasantly surprised at how well consumers have responded to that so that message as well as the understanding that giving people a bit more permission with our chicken noodle soup would know added preservatives is making a big differences targeting right. There in fact, we've seen slight.
Picks up and penetration, which is something that I don't I don't know that we can determine when the last I saw that occur so that I think thats one area.
Do I think the other thing that is really helping us at the consumer level is this idea of new consumers entering into cooking. So a lot of discussion around millennials over the years and the reality is that as millennials age we are finding them participating more and more an in home preparation we call. It quick scratch.
Bookings, which is essentially assembling several components to make a meal at of course, our broad business, both Swanson and Pacific as well as our condense cooking soups like cream of mushroom and cream of chicken.
Our very very.
The convenience and again as we reinforced the message of more fresh cream no added preservatives for that millennial audience. We are beginning to find a role within their lifestyle and that relevance is really important for us as you imagine our ability to turn the category overtime and then I think the.
Third area that were although early days that I continue to be very encouraged by is the performance of our sipping soups, which allows us to kind of move into a more snacking occasions.
We're doing that with the well, yes platform right now, but as the year unfolds, we'll be rolling out the bone BRAF, which is a big protein.
Nutritional play, which we know it's very relevant along with some continued expansion of different flavors. All three of those dynamics and that's why this is not a simple turned around that it takes some time all three of those areas are places, where we're influencing consumers positively and the good news at all of it is.
As as we think about those actions that we're taking they also help us differentiate within the category and that differentiation is why I'm happy to see the share improvement because again I think our opportunity to improve its a little bit of a heavier lift to really get the category fully moving.
But if we can at least ensure that we're winning the fight within the category and growing share and all the actions I. Just described are helping us to do that that's what we're kind of looking for does that help Nick.
Yes, very helpful. All profit on thank you okay.
Thank you.
Our next question comes from Jason English from Goldman Sachs. Your line is open.
Hey, good morning folks. Thanks, Thanks for slot me in a very much appreciate it can will miss working with you and good luck next chapter and mill Mic welcome aboard looking forward to getting to know anymore.
A couple couple of quick questions.
First sort of housekeeping.
I think you mentioned a couple of times EBITDA already ahead of schedule because of some some timing impacts.
And I noticed in the press release, you referenced some things like gains on open commodity contracts and some pension income can you quantify what do you sort of tailwinds or where and when you expect into online to reverse the other way.
Sure Yeah.
Let me take that them more.
Going out on the back then, but just if I look at kind of.
I tend to look at probably a little bit more cross the PML and dividend look at kind of Q1, EBIT and breakdown the different components, that's probably the easiest way to look at it you see that basically there was a slight topline declined which supports them basically offset by some gross margin improvements then.
Sales and marketing we had savings for my selling expense a slightly more than offset increased marketing investments and then if you look at the admin expenses those were primarily driven by savings from the restructuring of our operating model and then finally within particularly other income February .
Onetime items that I described more detail. We can open my prepared remarks, yes. So I think part of the Jason is the onetime items are just going to give a little bit of a bump into Q1 that that was contemplated in the year, but certainly shows Q1 up a little bit that obviously, we expected I do think some of the underlying.
Prudent on the cost side is what we were pleasantly surprised with a little bit earlier, both on the operating model.
Within this admin costs in SJ side, as well as a little bit of some of the cost savings that sit within the selling and marketing number one of the numbers, it's really important.
Think about is.
Our marketing and selling was down about 4%, but that was driven primarily by had about a 9% decline on the selling which had to deal with a little bit of what we've done through the reorganization, our marketing was up about 4%, but even more importantly within that.
See was up 12% in the quarter.
And stacks was up 23 meals and beverage was up two but soup was up 15. So I think what happened was we got a little bit better inflow of those savings in Q1, I would expect that most of that should smoothed out in Q2.
It's not like we pulled fourth quarter savings into Q1, I think it was more kind of months of timing than it was a whole year. So as I said I think if I'm looking at the first half a kind of expecting the first half total to look very consistent with what our full year outlook for Guidances.
That's helpful. Thank you and I think you partially answered my second question.
Which was.
The the margin profile of snacks, given the over delivery on savings. It was surprising for me to see to see margins sequentially go lower into this and even from a year on year. They looked like softer than what we would have expected.
The 23% jump on marketing and snacks, how much of it can you quantify the drag on margins. Just so we can get a slightly cleaner read on sort of what's happening to the underlying margin profile for that business sure. Yes happy to do that yes, I think if you look it kind of the.
You know the building blocks as you went through it our cost savings.
And our productivity that was in there was about the same amount as the investment and that's why you're seeing a relatively flat bottom line.
At the way to think about the year on snacks might help give you perspective is if you remember we kind of started this investment model on snacks in Q3, and so if you imagine that synergies being relatively stable across the four quarters. Your first couple of quarters are going to have material.
Steps up in the marketing and advertising is well some investment in trade.
That we're still working on the get those price points right primarily on the Snyder's Lance businesses as you go through the year. The Incrementality of what we're spending from a marketing standpoint will drop and more of those cost savings will come through so I think if you look at subsequent quarters I would expect the margin to improve in each quarter.
And by the time you get to the ended the year I think it's probably going to be much much closer to what you might have modeled for the year with all of the puts and takes we've given you.
Helpful stuff, Thanks, guys I'll pass it off.
Up.
Thank you and our next question comes from Chris Curly from Stifel. Your line is open.
Hi, good morning.
Hi, Chris and high and welcome Mic and can we wish you all the best.
Just a follow on your answer there I think Mark you, mostly answered at the Jasons question, but obviously some of the timing differential has a negative effect on the second quarter at the same time, you have shipments that hopefully will benefit the second quarter. So just trying to get my head around are you provided any color around Q2, EPS just given all the moving pieces in the quarter.
Yes, you know.
Chris I was trying to avoid giving direct quarterly guidance, but I do I do think the best way I can give at TS is in the context of kind of what we expect for the first half add if you if you kind of plot out what I'm, what I'm essentially say.
You are absolutely your variables are absolutely right, so a little bit of opportunity on the topline, but again remembering that it's off.
The base and relative to what we would have experienced perhaps on the downside in Q1 to kind of be right, where we are guiding.
For the first half in totality and I think for EBIT will be roughly in that same bucket as what we're guiding for the year on the 52 week number.
On the EBIT side, and I do think that will.
Flowed through to EPS, although we member.
The big driver for the year as we look at the Delta between EBIT and EPS is obviously the interest and as we expect to complete the divestiture process.
In Q2.
That will be the unlocked for kind of accelerating S. A little further so.
Take that into mind as you're thinking about how building those.
All those pieces back into get to a Q2.
Thats, great color without giving quarterly guidance that's fine.
Hopefully that's helpful.
I understand that was helpful. Thank you just one quick follow up then on the gross margin I just wanted understand the.
The is the inflation more front end loaded through the year, how do you put the gross margin to perform through the year and I just wanted overlay on that some of the promotional spending is that kick up seeing Q2 in Q3 has got a little more of a incremental driving the gross margins I think about how you're investing back in the business here.
Yes.
Again I think.
Call it over over the years of doing this I'm always a little hesitant to direct the gross margin, but I do think.
I do think the way I would expect the building blocks to work is we do think inflation is a bit front loaded we do expect that to have some moderating effect over the over the balance of the year. The investment profile doesn't really have a major spike.
And any of the quarters I mean, I think if there was a little bit more it would be around this holiday period, which kind of sits a bit in Q1 and Q2.
So there is a little bit of an uptick there as I talk about some of the investment and snacks in particular, so that might be a little bit of distortion early on but I think for the most part we expect this kind of profile of a inflation rate that's a little higher.
And our base productivity offset by cost savings of which half will go to the business and again that half parties in gross margin part of its an admin costs and then of course, the other half of that cost savings is going into the investment. So that 140 to 150 half of it is going to the.
Bottom line spread between margin.
And below margin and the other half goes to fund the investment uptick that we're making so thats kind of the way the year looks and for the most part I think on them on the gross margin side, you'll see pretty steady pacing through the year.
Okay. Good very good color. Thanks, so much for your help there.
Yep.
Thank you and that does conclude our question and answer session for today's conference.
Ladies and gentlemen, this now concludes today's call. Thank you for your participation you may now disconnect everyone have a wonderful day.
Oh.