Q2 2020 Earnings Call
And gentlemen, thank you for standing by and welcome to the Campbell Soup second quarter 2020 earnings call at this time, all participants' lines around listen only mode.
After the speakers presentation, there will be a question and answer session.
Ask a question during the session you'll need to press Star then one on your telephone.
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The conference over to your Speaker today, Mr., Ken Gosnell, Vice President Finance strategy Investor Relations, Sir you may begin.
[music]. Thank you good morning, everyone welcome to Campbell second quarter 2020 earnings call.
As usual, we created slides to accompany our earnings presentation.
You will find these slides posted on our website. This morning at Investor Day, Campbell Soup company Dot com.
This call is open to the media to participate and they listen only mode.
Turning to slide three today, we will make forward looking statements, which reflect our current expectations.
These statements are why I'm assumptions, and estimates, which could be an accurate and are subject to risk.
Please refer to slide three or our SCC 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 what we plan to cover today.
It is somewhat called today are mark Clouse, Campbell's president and CEO and make big Kowlzan Chief Financial Officer.
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 on the call.
I guess last quarter I was a bit premature in saying goodbye to CAD looks like he'll be with us one more time.
Seriously, though thank you Ken for your contributions to the company and for bridging as to your replacement.
As you may have seen we announced that Rebecca Gardy will be joining Campbell as VP of Investor Relations on March Thirtyth, Rebecca and Ken will work together to ensure we have a smooth transition.
Our results in the quarter were again in line or above our expectations and we continued to successfully execute our plans to stabilize the company by investing in the business optimizing our portfolio officially implementing our operating model and successful de leveraging of our balance sheet.
In fact in the quarter, we use the net proceeds from the divestitures along with positive cash flows to reduce our net debt to three and a half times adjusted EBITDA.
Overall, I'm encouraged by our progress and how we're building a track record of improved execution.
But I also recognize that we have more to do to deliver sustainable growth and performance across both of our businesses.
Turning to slide six this quarter, we delivered growth across all key metrics, including organic sales adjusted gross margin EBIT and earnings.
Looking at our specific results for Q2 organic net sales increased 1%, reflecting continued strength in snacks, where organic net sales increased 2% and improved performance in meals and beverages, where organic net sales were comparable to a year ago.
Importantly, soup performance improved meaningfully from the first quarter solid holiday results along with some timing from Thanksgiving resulted in about a 1% growth rate for Q2.
Our end market performance maintained its momentum from the first quarter was solid results across both divisions in measured channels. Our total company in market consumption increased 1% in the quarter consistent with our first quarter performance. This included a headwind from a year ago shift in timing of.
Snap payments at the end of January in addition, our brands grew or held share in categories, representing approximately 80% of our total business and in 10 of our 13 stated priority categories. This includes share gains in U.S. soup for the second consecutive quarter, reflecting system.
Same progress of our when ensue plan.
We also continued to deliver against other key elements of our strategic plan, including 150 basis point adjusted gross margin expansion supported by productivity improvements and cost savings.
We wrapped up cost savings of another 45 million in the quarter inclusive of our multiyear enterprise program and the synergies from our snacks integration.
Adjusted EBIT performance came in stronger than expected. Despite a significant increase in marketing spending as gross margin gains more than offset these planned investments.
This along with our lower adjusted interest expenses resulted in another quarter of double digit adjusted EPS growth.
As you saw this morning, we raised adjusted EPS guidance for the year.
The improved outlook is being driven by lower adjusted interest expense following our successful deleveraging in the quarter and adjusted EBIT momentum through the first half which was better than we anticipated.
We expect these benefits to be partially mitigated as we plan to increase some strategic investments in the business to drive continued momentum in the back half of the year.
Well start or segment discussion would meals and beverages on slide seven.
I'm pleased with the progress, we're making in the division and the sequential improvement in sales performance in the second quarter net sales were comparable to the prior year just.
This reflected the impact of improved retailer relationships investments in our core brands and overall stepped up execution on the business.
While we're certainly not all the way to break the business is responding favorably to the actions we've taken to optimize some portfolio and our increased investments to improve the quality of our food and building equity in our brands.
In fact in Q2, we increased our level of marketing investment versus prior year with AMC up 20%.
The majority of this spending was targeted against the soup portfolio, where consumer response has been very encouraging.
Let's go a little deeper now on soup on slide eight.
After a little over a year in role I continue to believe in the potential of the category and I'm, even more confident in our brands ability to lead.
As expected our net sales profile improved in the quarter with sales of our U.S. retail soup portfolio up 1% behind strong performance in condensed and broth, including Pacific.
Which was partly offset by playing declines and ready to serve and the continued headwind from TDP declines helping this number was also the shift of some Thanksgiving shipments.
Our net sales slightly outpaced our in market results, which were comparable to prior year underlying that end market result, we continued to see strong indicators on several measures related to the improving health of our soup brands and much better execution in the key holiday period.
For instance, we grew share for the second consecutive quarter with gains in condensed and BRAF. Another important metric that we're particularly excited about his household penetration, which increase versus the prior year driven by our condensed portfolio.
Not only are we attracting new households, we are attracting younger households, which bodes well for the future.
In particular on tomato soup, a good percentage of the gains came from millennial households, frankly. This is a trend that many believed was not possible.
Of course, there were puts and takes across the portfolio and not everything worked perfectly so let's break it down.
Starting with condensed you can see our enthusiasm for our return on investment, especially with our icon SK use tomato chicken doodle cream of mushroom and cream of chicken, where we continued the turnaround consumers responded favorably to our messaging and quality improvements as a result, we saw improve.
Lift in the business across both eating and cooking varieties given the importance of the business. This was a key pillar in our strategy and was the single biggest priority going into the season.
Although we did benefit from some competitive supply challenges in the marketplace. We also were lapping some benefits from winter storms and the previously mentioned snap timing from a year ago.
The net of this is that overall, we're very encouraged by our progress on this very important part of our soup business.
Next we were very encouraged that the Pacific food soup portfolio returned to growth in this past quarter.
We regained distribution with key customers, which contributed to the strong sales growth in the quarter, we see an opportunity to further grow Pacific food soup portfolio as we continue to further integrate the business increased capacity and step up our equity building an innovation efforts around this highly relevant brand.
Next well the Swanson broth business had a solid performance in the quarter share was just marginally better reflecting the continued need to sharpen our plans to ensure price gaps and quality differentiation our in place.
We have good learnings coming out of the holiday and we'll be making further refinements as we go into Easter.
Finally, our ready to serve portfolio mitigated much of the other segments growth as planned we expected ready to serve to decline this quarter as our plans called for reductions and the depth of our trade events around chunky and the continued impact of the distribution losses in the segment.
While we maintain support and have seen more recent trends improve these actions negatively impacted volume and share in the quarter.
While painful this was the right decision for the long term health of the brand I anticipate that in fiscal 21, we'll get back to playing full offense on all of our Rts brands based on the steps we've taken this year to fix the foundation.
Not just on Rts, but an overall headwind continued to be driven by the pressure on distribution.
As stated last quarter about 20% of our PDP declines have been regrettable. The team has been making great progress in two areas to help address this one making the case for recovering lost core SK use as the retailers reset their shelf later this year and to protecting overall shelf space by adding facings of our core.
SK use this is helping as you see the TDP declines moderating and shelf space has been improving.
Finally, as previously discussed we made proactive decisions to optimize certain lower profit foodservice volume.
Balance of the remaining foodservice soup business posted a solid gain in the quarter led by restaurants at hospitals with sales up 10%.
As we cycle these decisions and think about the future will be in a much better position to see foodservice contributing positively to our overall when ensue plans.
In summary, as we head out of the heart of the soup season, we feel good about our progress and the fundamentals of the business. We showed marked improvement and executed well in what was the most important quarter for soup. We also continued to create confidence in the category with our important retail partners.
I know you've heard me say this before but it does bear repeating the change on soup won't happen overnight steady sustainable improvement is the name of the game.
In other parts of the division on Slide 10, we continued to see strong growth from our prego pasta sauce brand. It grew share again and maintained its number one position in the category for a third straight quarter. This is really strong performance in a very relevant unhealthy category.
Turning to V. Eight the shelf stable juice category remain challenged for US It's really a tale of two cities with the main bright spots being our V eight plus energy and our multipack single serve business, which continued to be offset by the declines and the splash infusion varieties.
This is consistent with our strategy of actively reshaping the portfolio around the plant based positioning a V. Eight read the VA plus product platform and single serve it will take time, but as the portfolio changes occur we will be much better position for the future.
Its next look at our snack segment on slide 11.
This was another very good quarter for the business with organic net sales, increasing 2% and operating profit up 3% I'm pleased to see sustained momentum behind our proven growth model. The sales growth is partly offset by the 1% headwind from partner brands, which we spoke about earlier in the year and will come.
10, you throughout fiscal 20.
Once again eight of our nine power snack brands grew or held share in the quarter.
In fact, these brands grew 4% for the quarter demonstrating their continued strength and differentiation in the market.
Let's dig a bit deeper to see what's behind the healthy growth of these brands.
First our marketing investment in the power brands continued to be strong we maintained an increased marketing investment with AMC up 20% versus prior year.
And these investments continued to pay off the power brands grew at three times versus the rest of the portfolio.
Additionally, it's resulting in increased household penetration for seven of the nine brands another indicator of sustained growth.
The Pepperidge farm portfolio, specifically delivered its 20 onest consecutive quarter of organic growth.
Goldfish performed well with increases on the core.
We're coming up now on the three year anniversary of the launch of our newest snacks brand farmhouse. This brand continues its growth trend with strong performance in bread and cookies.
However, overall, our fresh bakery business did decline in the quarter after a fairly strong stretch of great performance.
We experienced some softness in certain segments, particularly in breakfast and healthier Green Bay spread.
We know where and what is driving the softness and we have plans in place to help improve trends.
But expect to deal with headwinds in this business for the balance of the year.
Marketplace performance was also strong on our other snacks brands, where we drove double digit gains on late July with Cape Cod Kettle and Lance continuing to respond positively to our increased marketing investments leading to both consumption and share growth.
With respect to our snacks innovation I'm pleased with the early progress we are seeing on our new products and look forward to sharing more details in the quarters ahead.
Let's finish our discussion of snacks with a review of our progress against integration and value capture on slide 13.
The headline here is that we're very much on plan.
I continue to be pleased with the consistent progress of the integration.
Much like in Q1, we delivered synergies and procurement around packaging continued to realize savings from last year's consolidation of sales headquarters and related operations and benefits from increased operational efficiency in manufacturing through the buildout of new mixing centers.
We also recently have taken actions to improve the effectiveness of the snacks organization by simplifying and streamlining our operations. Looking ahead. We expect these recent actions along with other initiatives around manufacturing and logistics to begin to deliver savings in Q3.
As you may have seen we appointed Valerie Oswald as the new President of the snacks Division on Monday I.
I am confident that Val is the right leader and a strong cultural fit for our snacks business due to or two decades of experience in snacks and her track record of leading people and delivering results. She brings a diverse background of cross functional expertise and experience across large organizations such as Kraft foods.
Among the lease and also entrepreneurial startups I've had the pleasure of working with valve for many years and cannot be more excited to have heard joined the team and accelerate the growth of this business with that let me turn the call over to mic for a deeper dive on our financial results and segment performance.
Thanks, Mark before reviewing our results I want to give you my perspective on the quarter an outlook for the balance of the year as Mark stated organic net sales, which excludes the negative impact from the divestiture of the European chips business increased 1% from the prior year.
And were inline with our expectations.
Net sales for meals and beverages were flat for the quarter, which is an improved trend from Q1 as we continue to invest in.
In snacks, we continue to focus on the integration of Snyder's Lance while we delivered top line organic growth of 2% driven by gains across all nine of our power brands.
We're pleased with improving trends of our adjusted gross margin as we benefited primarily from productivity improvements cost savings and favorable product mix, partially offset by moderating cost inflation with net price realization essentially neutral as the benefit of price.
Sing actions was offset by trade investments.
We continued to make strong progress against our cost savings target of $850 million by the end till fiscal 2022, delivering $45 million of incremental savings in the second quarter, bringing the program to date total for continuing operations to $650 million.
Taking into account the topline growth gross margin improvement and delivery on a cost savings programs combined with continued investments in our brands.
Adjusted EBIT increased year over year by 4% in the quarter.
During the second quarter, we completed our divestiture plans as we close on the divestiture of the remaining portion Campbell International in December proceeds from the divestitures along with positive cash flow from the business have enabled us to reduce net debt levels from continuing operations by approximately 3.3.
3 billion over the past 12 months.
Lastly, we are updating our fiscal 2020 adjusted EPS guidance based on favorable adjusted net interest expense.
Actually driven by the successful debt reduction and slightly better than expected year to date, adjusted EBIT, partially offset by some incremental investment opportunities in the second half of the year consistent with our overall strategy.
Underlying outlook for reported and organic net sales as well as adjusted EBIT remains unchanged.
Overall, we had a solid quarter and are currently on track to achieve our fiscal year goals I will now review our results in more detail.
For the second quarter reported net sales were flat, while organic net sales increased 1% to approximately $2.2 billion driven by gains in snacks, adjusted EBIT increased 4% two or $364 million as improved gross margin performance was offset partially.
By increased marketing investments.
Adjusted EPS from continuing operations increased by 11% or seven cents to 72 cents per share due primarily to our lower adjusted net interest expense and adjusted EBIT performance.
For the half reported net sales declined 1% organic net sales were comparable to the prior year.
Adjusted EBIT increased 5%.
To 756 million, reflecting benefits of cost saving initiatives supply chain productivity improvements and favorable product mix offset partially by cost inflation and increased marketing investment.
Adjusted EPS from continuing operations increased by 11% or 15 cents to $1.51 per share due primarily to our adjusted EBIT performance and lower adjusted net interest expense.
Breaking down our net sales performance for the quarter organic net sales were up 1%.
Overall volumes increased driven by snacks with gains across much of the portfolio driving and one point benefit.
Sales also benefited by one point from pricing actions, primarily within Nielsen BAF Rochas. Although this benefit was mostly offset by promotional spending investments.
Also within Nielsen beverages, the impact from currency translation into quarter was neutral as we have refocused our portfolio in North America, we would continue to expect currency translation impacts to be minimal.
The divestiture of the European chips business negatively impacted net sales by almost a point and a half in the quarter and rounding to one point on this bridge all in our reported net sales were comparable to prior year.
Our adjusted gross margin percentage increased by 150 basis points in the quarter to 34.4%.
Product mix improved our adjusted gross margin performance by 70 basis points, driven primarily by the snacks portfolio, which is benefiting from strong performance of our power brands as well as the favorable impact from sale of the European chips business and the impact from the priorities.
In addition of select partner brands.
Net pricing that's to a 10 basis points increase in adjusted gross margin as the benefit from list pricing action from a year ago, primarily in meals and beverage slightly outpaced an increase in promotional spending we will start to lap the benefit of these pricing actions as we move into.
Our third quarter.
Cost inflation and other factors had a negative impact of 160 basis points on the rate basis overall input prices increased by approximately 2%.
It was mostly offset our ongoing supply chain productivity program, which contributed 140 basis points. This program includes among others initiatives around logistics optimization ingredient sourcing and planned asset utilization.
And our cost savings program, which is incremental to our ongoing supply chain productivity program added 90 basis points to our gross margin expansion.
It's program includes the benefits of various initiatives such as the integration of Snyder's Lance.
Simplifying and streamlining our organization.
And last year's closure of our manufacturing facility in Toronto, Ontario.
All in our adjusted gross margin percentage for the quarter was 34.4%.
We're pleased with these gross margin results as we continued to achieve improvement in performance.
Moving onto water operating items.
Adjusted marketing and selling expenses increased 7% in the quarter to $235 million.
This increase was driven primarily by our planned increased investment in advertising and consumer promotion expenses.
Which is up 17% for a year ago, and largely driven by support of our meals and beverage business.
Adjusted administrative expenses decreased 1% to $135 million.
Primarily reflecting the benefits of cost saving initiatives.
Going to the next slide.
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.
$650 million.
We expect incremental cost savings of approximately $150 million for the full year and continue to track to a cumulative savings target of $850 million by the end of fiscal 2022.
For additional perspective on our performance. The next chart breaks down our adjusted EPS change between our operating performance and below the line items.
Adjusted EPS increased seven cents from 65 cents.
In the prior year to 72 cents per share.
Adjusted EBIT had a positive four cents impact on EPS.
Adjusted net interest expense declined year over year by $20 million delivering a five cents positive impact to EPS as we have used proceeds from completed divestitures and our strong cash flow to reduce debt, our adjusted effective tax rate of 24.9%.
Slightly higher than the prior year rate of 24% leading to a one cents negative impact to EPS and lastly, our higher diluted share count also had a negative one cents impact to EPS completing the bridge to 72 cents per share.
Now turning to our segments results.
Meals and beverages organic net sales remained flat at $1.2 billion, reflecting gains in prego pasta sauces, and us troops, partially offset by declines in beverages.
Net sales of U.S. soups increased 1% compared to the prior year with gains in condensed soup and broth.
Offset partially by declines in ready to serve soups.
Segment operating earnings declined 4% to $242 million. The decline was driven primarily by increased marketing investments and reinvestment back into capabilities offset partially by improved gross margin performance.
In snacks organic net sales increased 2% to just under $1 billion, driven primarily by gains in goldfish crackers, Some pepperidge farm cookies, as well as gains and Kettle brand and Cape Cod potato chips.
Offset partially by declined in fresh bakery products and the partner brands within the Snyder's Lance portfolio as we continue our plant prioritization of select partners to reduce complexity and improve execution.
Segment operating earnings increased 3% to $136 million. The increase was primarily due to improved gross margin performance offset partially by increased marketing investments.
Cash flow from operations through the first half of fiscal 2020 decreased year over year by $183 million to 663 million, primarily driven by changes in accrued liabilities, principally due to higher incentive compensation from fiscal 2019 performance.
Payouts, while lapping lower payouts in the prior year from fiscal 2018 and accrued interest.
Additionally, last year's cash flow benefited from significant working capital improvements and while cash flow for the year will benefit from these efforts again, we expect the impact to be at a lower level of improvement and what we achieved in fiscal 2019.
Cash from investing activities increased by $2.6 billion to $2.4 billion driven by net proceeds from our divested businesses. The cash outlay for capital expenditures was $167 million $31 million lower than the prior year, we continue to fall.
Forecast capex of approximately $350 million for fiscal 2020.
Cash outflows for financing activities were $3.2 billion compared to $663 million a year ago, the year over year incremental cash outflow reflects the use of divestiture proceeds to pay down debt levels.
Dividends paid in the amount of $230 million were comparable to prior year, reflecting our current quarterly dividend of 35 cents per share.
As stated we continue to make progress to Delever, our balance sheet as expected net debt of $5.8 billion declined by approximately $3.3 billion compared to prior year as proceeds from the completed that fast that just along with positive cash flow generated.
The business, we're used to reduce our debt.
Our leverage ratio.
Which represents net debt to trailing 12 month adjusted EBITDA from continuing operations is now at 3.5 times.
Now I'll review, our updated guidance for continuing operations for 2020.
We continue to expect reported and organic net sales of minus 1% to plus 1%.
And adjusted EBIT of plus 2% to plus 4%.
We are however, updating our adjusted EPS guidance for our revised outlook for adjusted net interest expense, which is now estimated to be approximately $200 million to $70 million. As a result, we expect adjusted EPS of plus 11% to plus 13.
Ascent or two dollar 55 to $2 60 per share.
And as a reminder, fiscal 2020 is a 53 week year, resulting in an additional week, which we believe to have about a two percentage point impact across net sales adjusted EBIT and EPS.
And for clarity our outlook for organic sales excludes the negative two point impact from the sale of the European chips business as well as a two point contribution from the 50 Threerd week.
So for those doing the math, excluding the benefits of the 50 Threerd week, we are expecting lower year over year adjusted EBIT levels in the second half compared to first half of our fiscal year as we lap the pricing benefits from meals and beverages the benefit of cost savings moderate.
We continue to make significant investments back into the business through the balance of the year.
And while we don't provide quarterly guidance that third quarter will be done most difficult comparison, as we will lap the pricing benefit while still making incremental promotional investments, which we want lap until the fourth quarter.
Overall I'm pleased with our results this quarter and we'll now turn it back over to Mark.
Thanks, Mick before opening up the call for questions I wanted to review our progress against the milestones we outlined at our Investor day.
As you know I believe a candid conversation about this is critical for investors to track our progress.
So how did we do in the second quarter.
I continue to feel very good about our progress against these key metrics.
While we improved on topline we have more work to do to make this truly sustainable, but clearly seen key elements of our business improving is encouraging and I would say a step forward from Q1.
We are slightly ahead of schedule on margins and EBIT, which is very positive as its creating some flexibility to make sure we optimize the investments we need.
Our cost savings programs are tracking to plan and we improved our balance sheet in the quarter by significantly reducing debt with the proceeds from the divestitures, resulting in debt levels at 3.5 times adjusted EBITDA.
I'm also excited about our progress around building, a winning team and culture, especially as it pertains to our new team members increased focus execution and accountability of our teams. The overall business is essentially on track with growing positive indicators of the full potential of this portfolio and clear.
Or areas, where continued focus is still needed.
With that let's take some questions.
Thanks, Mark we'll be happy to take 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 it where you wish to remove yourself from the keel. Please press the pound key once again ask a question. Please press Star then one now.
And our first question comes from Andrew as our from Barclays. Your line is open.
Good morning, everybody and all the best going forward Ken.
Sure.
Mark now that most of this soup season is behind the company I'd love to get a better perspective, maybe on what some of the key learnings you may have garnered.
That help inform campbell's direction going forward I guess, particularly given next season is one in which you expect.
Handle that take a more substantial leap in terms of re framing the soup category in launching some of the more impactful lets say platform innovation.
And then rate while it's in malls early.
Just as a separate what I want to get a sense of have you seen any evidence of of pantry loading thus far in soup, but really the more important part of this and why I ask it is where do you have any researcher evidenced that shows you know when product gets back into households that may have moved away from it that theres, some stickiness to that and it can ultimately maybe bring new households.
Back into the category sort of like more like a trial.
Trials sort of process. Thank you.
Yeah, great. Yeah. Thanks for the question, Andrew I think a lot of lessons in the season and having it be my first time through the soup season I think.
The general over arching theme or perspective is that I would say positive encouragement that when we do support the businesses, whether that is with marketing and advertising or perhaps even in this year more importantly, our relationship with our key retailers that we can.
Moving the needle on the on the business and I think whats probably most encouraging to me.
Is the focus that we had on the condensed segment as you know it's a significant part of our business. It also happens to be a highly profitable portion of our soup business and probably I would say.
Arguably the one that that perhaps most folks had questions about our ability to drive improvement and for the quarter to see consumption up.
2.5% and up almost a share point.
As we spent behind advertising quality improvements we saw increases in display in the marketplace and all of that resulted not just in the growth, but also perhaps the most important aspect which is to your second question, which was that our household penetration went up and you think about that is kind of the gift that keeps on.
Giving as we expand the base of consumers.
And build the relevance of our category and bring new households in that bodes quite well for us in seeing that translate to more sustainable growth and just promoting perhaps into a period, where you might have people more apt to pantry load on a good deal or a good program or even a reminder, I think.
Even more important didnt add is that we're starting to see the dynamic of where those new households are coming from ads as younger and I think.
A lot of his question, whether the relevancy of condense could could match that demographic, but I think the quality improvements along with the way in which we're positioning the usage.
Has been a very positive influence to that and although it's early I mean, I think you need to see the household penetration over time.
I think the positive.
Both the positive demographic as well as the substantial net some of the turn around.
The window is bodes very well for us going forward I think on the other side you know I would say the brought business, which is a really important segment and one that's been growing.
As a tough segment and I think what we learned a little bit on condensed is that we need to get a little further out in front of our support and we've got to continue to be incredibly sharp on our price gaps until we successfully build enough of the differentiation around the Swanson brand I am thrilled, though that Pacific is back in the game.
Because as you know that's a big player in bras and with the capacity back to fall in the distribution coming back I feel much better about how we will bode in total broth as we go forward and we're going to try to do a little bit of a fast adapt on learnings as we go into Easter.
Ready to serve side that was not have not a pleasant.
Set of results delivered through but it was what we expected to happen and I do think we're in a much better position on chunky and as we go into next year, although that's not the big player during the holidays. It certainly plays around the holidays in a very important way.
I am encouraged that even if you look at like the latest four weeks as we've kind of gotten ourselves through a lot of the tough comparables on the merchandising side in the promotion side, we're seeing a return to more stable and actually some growing share in the last.
In the last four weeks, so overall advertising worked well, especially when paired with quality good to have Pacific back in the game Bras a battle.
Ready to serve was tough, but the right things to do.
And I think the great news about all of this is we're building a stronger sense of confidence among our retail partners and that's helping us make the case to getting not only the some of the distribution. We lost that we think was regrettable back in but also setting the stage as we continue to build innovation out as we go forward.
Great. Thanks very much.
Thank you.
Next question comes from Ken Goldman from JP Morgan Your line is open.
Hi, Thanks and.
Ken from one Kenny GE to another thanks for all your help over the years and best of luck.
Thank you.
I wanted to ask two questions. If I can first I wanted to get a little more.
Sufficiently if we could on the comments about the strategic Reinvestments Mark could you just maybe focus a little bit.
Focus a little bit on sort of which areas you might be reinvesting in what form other equals reinvestments might take.
First question.
I can leave it there and and follow up yes, yes, yes.
I can hit that when they will come to the to the second one.
I think there's three places where I see opportunity to continue.
To invest the first area is as you will see and are probably beginning to see.
I think we've talked about this dynamic before where the snacks business arguably it's kind of a year ahead as it relates to innovation than our meals and beverage business and so what you've got happening in the back half of the year is that kind of first wave of.
Concentrated innovation, so great products like our.
Veggie line on gold fish as well as our potato chip launch on late July and so what I want to make sure we do.
Is adequately support the innovation and perhaps even double down in some areas, where we're seeing early success. So I think the first bucket is really around the snacks innovation bundles that are are launching the second is one of the things that was really interesting for us on soup was that the condensed advertising that we.
Started early this year. So we started about a month or two earlier than we normally do especially around some of the eating friday's like tomato soup.
And grilled cheese, which which is one of the areas, where we saw a very very positive response, so I'd like to continue to do some learning on extending the seasonality right. One of our goals is to try to.
Broaden and extend.
Our soup season by by doing things that are a little less anchored specifically on cold weather and able to kind of bring usage through so whether it's some of the eating skews, where we are going to add a little bit of advertising or even some of the recipe elements on condense that we know that behavior goes beyond just.
The winter months as an opportunity to evaluate the ROI and see where kind of those barriers are and then I think also going into Easter.
As I mentioned on broad, although I would call it solid performance in the holiday.
Were some clear areas of opportunity and so I want to make sure that our price points and the promotion calendars are set up well there and we may do a little bit of tactical investment on promotions as we as we get a little closer to that holiday and so the great news is that the flexibility by getting ahead as it relates to.
EBIT stronger.
Gross margin than we'd anticipated with a little bit better mix.
A little bit faster accumulation of our cost plan as well as the.
A little bit of I'd call, a dampening of inflation is giving us that flexibility and I think putting us in a really good spot.
That's very helpful and then.
Thank you for that and then quickly you just highlighted at the end of your comments third quarter. If you're most difficult comparison, you just elaborate a little bit on the message you're sending with that comment are you concerned a little bit that.
Maybe street EBIT numbers are slightly aggressive or is there some other messaging that I didnt pick up on.
Yes, let me let me take that is.
So when I think about it I mean, we generally obviously don't want to give guidance with regard to individual quarters. However, I thought as I also said that my prepared remarks I thought it was important to highlight that we're starting to lap the MNB pricing benefit in the third quarter.
And some of the promotional activities that.
We have continue Andy we don't start to Ben don't start to lap until the fourth quarter. So as a result, I just wanted to highlight that I think the other thing to can just as you will note if you're trying to modeling the balance of the year as we've said, we're we're now kind of.
Directing on the cost savings to a little bit at higher into the range. At 150. If you think about the fact that we've got 90 in the first half that leaves you about 60 to go so you take the dynamic that.
That Mick just described as long with a little bit of a softer contribution.
I think what you'll see is a little bit of this kind of.
Add through Q3 and into Q4.
We feel really good about the underlying fundamentals, there's nothing that's like a looming issue a problem that we're expecting it really just happens to be the dynamic of the phasing.
And I think again, you know inclusive of our ability to spend a little bit more into the business, which is great news for us.
Thank you so much.
Thank you.
Question comes from Brian Lane from Bank of America. Your line is open.
Hey, good morning, everyone.
Hey, Brian.
So I guess.
My question is.
Going back to that commentary made that household penetration into and millennial.
I guess my question.
There are a chance or what how much cannibalization maybe has there been if you've got a bet.
The sizing on condense with a better product.
Value at all taking from ready to serve so is that sort of.
Is it household penetration of content, that's going up and that it all cannibalizing ready to serve especially since you didn't have the same type of messaging at least for this season I'm ready to serve.
Real quick underneath that is how incremental is.
The improvement you've made and then to the overall stupid or has it really just sort of taken some some share from ready to serve yeah. It's an interesting question and again you know we are watching very closely the dynamics between the different segments as it as it relates to where is the source.
Volume coming from and.
No. There's no doubt that there is some interaction between the two but we act when we look at our numbers the ready to serve declines are essentially what we expected.
Relative to what we.
We're doing based on the promotional side of the pricing side and when you look at who were adding to the to the condense side.
These are not primarily the same consumers that would be buying chunky and so that's good news now are we sourcing from from some other condensed.
Or other.
Ready to serve players within the within the category I do think there is some dynamic there one of the things that that has been very important about how we've repositioned condensed is this strong permission as it relates to quality, whether that's adding more fresh cream or no added preservatives on chicken neutral or.
For the six Tomatoes, and tomato soup, we really feel like that has been a big enabler.
To like I said to kind of create permission in and so if you think about where we're sourcing from its likely coming from what would be perceived as healthier.
Or or options that are a little bit more relevant to that area. So again as I think about the portfolio going forward I still very much like how we set up I think we've got great.
Brands to position against particular benefits and occasions as well as consumer cohorts. So I'm I'm not worried right now about our we just moving people from one to the other but even if we did given the margin advantage of the condense business, that's not a terrible.
Terrible trade for us to make but that's not really what we're seeing right now.
Okay, great. Thanks, Mark.
Yep.
Thank you.
Our next question comes from Modi from RBC. Your line is open.
Yes, good morning, everyone.
Mark I had a two questions maybe I know you on how you Chief marketing officer.
Late last year, so maybe just give us some context background on why when does the right person or for the overall CMO job on the second question is some of the research we've done with the consumer level would suggest convenient is really resonating the convenience message is resonating with consumers and perhaps that's why they're coming back to that handles franchise.
I just wanted to kind of get your thoughts on as you kind of we established relationships with retailers as you play on that means team even more is there an opportunity to broaden the portfolio strategy not just to be institute the to kind of get into more of that can be yields area in terms of more sauces more toppers things like that any thoughts on that would be.
Useful.
I I love the question.
The answer let me start with Linda.
You know as as you may have seen.
Let me just first second talk broadly about meals and beverage.
You know you do see when you look at the meals and beverage team now a relatively new set of leaders across our business and you know the Genesis for that is really a fundamental shift or change in what we're trying to accomplish with Nielsen beverages, we returned to more growth orientation and.
Really are looking at marketing and investment behind the businesses in that division.
And so you know in fairness, if you're trying to just cut costs and kind of manage for cash it's some different.
Skillsets, albeit those are still very important to us, but if you're going to drive growth and innovation, we want to make sure. We assembled a team that is best positioned to do that and so the combination of a Chris fully coming from our Pepperidge farm in snacks business over to lead the Division and then Linda has a rich history I've known window, a long time did a great job and individually.
Franchises has been out working in some of the more entrepreneurial spaces that that skill set I think is a very good combination for us as we look at really upping our game as it relates to marketing and innovation and then complementing that we have terrific supply chain leader R&D leader that really helps kind of round out a lot.
The team and also a new leader of sales and I think what we're trying to do.
As brig kind of a whole new look and feel to what our meals and beverage businesses and I think that team is doing a wonderful job in early days reengaging in connecting with with our customers.
I think the convenience messages is actually right on now I think the condensed is a combination of the fact that convenience is an underlying need for consumers now weve paired it with a little bit better product healthier.
Proposition, which is going very well, but what I didnt talk about which has been a continued point of success for us is our convenience offerings and so what we absolutely believe is exactly what you're suggesting and as you see us going into next year and innovation becomes a bigger player.
Got a whole host of new packaging forms product forms and benefit propositions that will be coming through our convenience platform and even where we've started whether it's the Super Bowl well, yes platform or some of our new cup sizes or even as we've tested some new products like toppers think.
But as I kind of yogurt with the top or is that you add in very similar to soup. So you get that multi texture experience as a snack or complement so a meal.
Are all doing very well very positive and we're gaining I would say a lot of victories as we talk about kind of reshaping the shelf for the future and so I think this combination of goodness in convenience coming together is really what is enabling us to kind of.
As we said from the very beginning is where suit could really play and where we're seeing the resurgence and as we complement that with the cooking and I would even describe quick scratch cooking.
As a bit of a convenience driver as well as it simple assembly of ingredients to get a meal.
And in particular within younger millennial households.
Dynamic underpins a lot of the work that we're doing so absolutely right that that that's an underlying help to us, but I think when paired with goodness. That's when we really unlock the potential of the category and a lot of what we're seeing right now.
Great. Thank you very much.
Thank you.
Our next question comes from Jason English from Goldman Sachs. Your line is open.
Hey, good morning folks. Thank you for slot me and I appreciate it.
Jason.
Two questions first a follow on to this the soup discussion.
And I'm looking at the penetration data now to it it's definitely encouraging to see the uptick on your condensed penetration it looks like it's up around 3% or sell latest 13 weeks, but what's surprising is that it's coming with a 3.5% drop for the category. So it looks like consumers are still fleeing the category and all of your penetration growth is coming from.
Our swap out of private label.
How much of that trade out into your Brad do you think is due to the supply disruptions with one of the major suppliers out there.
And what would you expect as we go forward, we know that another one of the suppliers. There you started to biopsied the lines that looks like that capacity issue should be our mark to before we get into next soup season.
How does these years this year's gains don't become next year's pain points right Yeah, great Great question.
Firstly I just would say.
Im not this is always a little bit of a mystery to me the difference between Nielsen and IRI, but that the category numbers for us in the quarter that we see on condensed is down under a percent versus the run rate of being down three so I would have said we saw a notable impact I would have said that we've seen a notable improvements.
In the underlying category dynamic, although not fully to positive yet is that penetration mark that you're given that I'm seeing that because I'm only looking at the penetration and the number of buyers you kind of anchored US there yeah penetration, yes, I think on penetration the sourcing for us is a little bit.
Like I said, we've seen a combination of what we would call lapsed users and that may be a little bit of a trade up from private label to to us, but some of the new households that are truly new consumers I think are benefiting us from a kind of sustainability aspect as we go.
Into next year I think the overall purchase in the category improvement is also a bit of an encouraging number for us as it relates to private label I mentioned in my comments there were some supply issues they werent everywhere.
But on private label, but certainly it did help us a bit in the quarter, but we also were lapping some other onetime headwinds as it related to storms from a year ago, and a little bit of the snap dynamic, especially at the end of the quarter I think the good news is we're seeing some of those customers make the disk.
Vision not to come back in with private label, but to just stick with us given the strength.
Of our performance during the holiday. So that's good news as well and that along with I think the lapping next year of the headwind of the distribution losses that we would hope to greatly mitigate as we go into next year I think we've got a lot of theres going to be a lot of puts and takes but I think the net of it as I feel very good about the underlying health.
As something that we can build off of next year versus that we just go out and by some share that we're going to get back next year. So I think those are the drivers that I'm looking at and of course, we're going to have to watch very closely as as we move forward.
Got it that's helpful I'll pass it on okay. Thanks, Jason.
Thank you and any interest so time will be taking our last question from Chris Growe from Stifel. Your line is open.
Thank you good morning.
Congrats and happy retirement 10.
Just quickly RMB on the gross margin I'm, just curious are you seeing their benefits.
Or is that how much of the benefit of the gross margin driven it's been from productivity said.
Versus say sooner.
An understanding of how that's going to 400.
100 glance integration in relation to your results were going to strong productivity environments, but as well.
Sure sure why don't I start off with that thanks, Chris. Good question. So if you also look at kind of the breached at I included in the presentation you see.
There to kind of the building blocks 4800, 50 basis point improvement and you see kind of two different components in data that helped our gross margin. In addition to the overall mix one of them as the productivity improvements, which is activity throughout our supply chain in.
Order to continue to help offset some of the inflationary pressures that we see but then separately. We are also highlighting the cost savings program and it's also where you would see the benefits from the integration of the Snyder's Lance business. If you look at it from kind of but total comp.
Let me perspective, you'll see that we generated year to date about $19 million of cost savings that particular program. However, it goes across the piano that 19 million I'd say about 50 50 of that is within that the.
Comps or Caulks and then the remainder it's within the other components of our PNM Im thinking about it Chris. So if you go back to the kind of gross margin bridge for a second you've got inflation, a 2%, which is about 160 basis point headwind and productivity based productivity as Mick said those are the.
Programs that that we're doing kind of on a on a more annual basis was about 140 basis points of good so the net of inflation and productivity not quite equal, but about a 20.
Headwind and then we picked up 90 basis points as it relates to the cost savings and so if you think about productivity at a 140 and cost savings about 90 that gives you kind of the relationship that you're looking for.
And just the industry clear and one final question Peter.
They see the synergies within that I get them to some extent corporate.
Full integration so far the business is synergies as part of the I'd say, yes, the two coal cost savings that.
Helping drive that incremental cost number.
Yes, I got you, Okay, I see what you're saying, yes. The if you took the split of the of the $90 million is mixed set in the first half.
Got about half and half so half is what we call enterprise cost saving so those were like.
Supply chain reinvention and network optimization and the synergies were about 45 million of the 90. So you're about 50 50 for the first half of the year is that does that the question you wanted.
Yes, okay perfect. Thanks, so much yes.
Thank you and that does conclude the question and answer session for today's conference.
Ladies and gentlemen, thank you for participating in today's call. This does conclude the program you may all disconnect everyone have a wonderful day.
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