Q2 2021 Campbell Soup Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Campbell soup second quarter fiscal 'twenty 'twenty One earnings conference call. At this time, all participants lines are on a listen only mode. After.
After the Speakers' presentation and will be a question and answer session.
The asked the question during the session you'll need the press Star and then one on your telephone.
Please be advised today's conference is being recorded if you require any further assistance. Please press star and then zero.
And I like to hand, the conference over to you speak of today and this went back of the Garden Vice President of Investor Relations Ma'am you may begin.
Good morning, and welcome to Campbell second quarter of fiscal 'twenty 'twenty, one earnings presentation, I'm, Rebecca Gardy, Vice President of Investor Relations. Following the completion of this call a copy of this presentation and the replay of the webcast will be available and invest.
True Dr. Campbell Soup company and Dot Com a transcript of this earnings conference call will be available within 24 hours at Investor Day at Campbell Soup company Dot com.
On our call today, we will make forward looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk. Please refer to slide three or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated and forward looking.
And 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 the presentation.
On slide four you will see our agenda with us on the call today are Mark Clouse, Campbell's President and CEO, and our Chief Financial Officer, Nick Bakehouse, and Mark will share. His overall thoughts on our second quarter performance and end market performance by Division and <unk>.
I'll discuss the financial results of the quarter and more detail and review our guidance for the full year fiscal 'twenty 'twenty, one and Mark will come back to share his perspective on our outlook beyond the pandemic and we will close the call with an analyst Q&A with that please let me turn the call over to Mark.
Thanks, Rebecca and good morning, everyone and thank you for joining us today.
Before I turn to the results of the quarter I want to take a moment to thank all of our teams again, especially our frontline colleagues.
We have now passed the one year Mark of working within this challenging COVID-19 environment and I'm very proud of their continued performance and dedication.
Campbell delivered strong second quarter results with growth and all three key financial metrics organic net sales increased 5% with continued demand across both divisions fueled by accelerating and market results, including positive share progress across most of the portfolio and a strong holiday.
The period net.
Net sales were tempered by continued foodservice weakness following a resurgence of COVID-19 cases, and December which led the greater away from home restrictions.
As well as some supply constraints given these cases led to increased absenteeism rate and our plants during the month of the.
And the foodservice weakness and supply constraints, each created about a point of headwind and the quarter versus our expectations.
The labor situation has since improved significantly and we continue to make steady progress on supply going into the second half of the year.
We reacted quickly to these headwinds appropriately shifting spending to reflect this pressure.
But where supply was available we executed our planned increased investment and advertising and consumer promotion on our core brands.
Taking everything into account, we had 8% adjusted EBIT growth and 17% adjusted EPS growth leading to a very good quarter.
By segment meals and beverages posted 6% net sales growth punctuated by a very successful soup season, and the continued strong performance of brands like V eight and prego.
This was partially mitigated by declines in foodservice.
The snacks business delivered another solid quarter with sales growth of 4% largely driven by our power brands and salty snacks, including Kettle brand potato chips late July snacks, and Cape Cod potato chips as well as Pepperidge farm farmhouse bakery products.
Most notably we achieved the primary objective we outlined in our Q1 earnings call to returned to share growth.
Nearly 75% of our portfolio held or increased share and the second quarter versus the prior year. This included meaningful share improvement and key focus areas like ready to serve soup prego and Snyder's of Hanover Pretzels with continued momentum on condensed soup V. Eight our salty snacks portfolio and goldfish.
There were a few exceptions such of Swanson broth, where we knew we'd be challenged on supply we feel very good about how we are addressing the challenges on broth by expanding overall capacity and growing Pacific foods, which was the fastest growing broth brand and measured channels and the second quarter.
E Commerce continued to be an important growth channel for us within market dollar consumption, increasing 89% over the prior year with the click and collect fulfillment model representing slightly more than a third of our E. Commerce retail sales, we are sharply focused on partnering with our customers to deliver value to our consumers.
Including bundling products for easy meal prep and inspire and creative snacking options.
Turning to slide seven within the meals and beverages Division, we had another strong quarter with consumption growth of 9% principally due to volume gains we delivered on our objective of share growth and saw positive end market consumption growth and almost all categories led by condensed soups Prego V a bed.
<unk> ready to serve soup and Pacific Foods, soups and broth, we continued to execute our plans and feel great about our progress against our win in soup strategy led by a great start to soup season, and a strong holiday period in fact U S. Soup sales grew 10% with strength across all categories.
This was fueled by more than a third of the end market consumption growth coming from new buyers.
The number of retained soup buyers and this quarter is the highest since the pandemic started almost a year ago.
Our condensed soups were once again, the highlight of the quarter with double digit net sales growth and continued share gains, especially among millennials.
With a 0.7 share increase condensed had its eighth consecutive quarter of share gains and amazing run and that started well before the pandemic.
This performance was driven by our quality improvements strong advertising and the retention of new households.
Additionally, during the important holiday season, the number of buyers of condensed cooking soups grew double digits and we continued to grow household penetration this quarter versus prior year.
Year to date, our condensed soups have the highest household retention rate within the entire meals and beverage division.
Within ready to serve share improved this quarter, driven by strong base velocity growth and chunky and improved availability chunk.
Chunky had an exceptional quarter with double digit net sales gains and in market consumption growth outpacing competition and increasing share nearly two points with growth among all cohorts, including millennials the.
Civic Foods is now the fastest growing wet soup brand on a dollar share basis outperform against competitors on many fronts by delivering on trend innovation and impactful advertising the.
This important growth engine continues to perform above our expectations and the second quarter Pacific soup and broth outperformed the category posting dollar consumption growth of 25% the fifth consecutive quarter of share gains driven by brand strength and a meaningful increase and household penetration.
We are thrilled with the performance of Pacific Foods and are equally excited about our robust innovation pipeline that includes new canned offerings as well as additional plant based products as I mentioned earlier Swanson broth struggled on share as we expected we continued to recover on supply throughout the quarter and we.
We're making steady progress through a combination of expanding internal capacity and bringing on additional co manufacturing.
And the most recent period, we are seeing both share and supply levels improve a trend we expect to continue through the balance of the year.
Beyond soup of standout and the meals and beverages portfolio was prego, which maintained its number one share position and the Italian sauce category for the twenty-first consecutive months and has widened the gap against competitors prego.
Prego sales growth came primarily from the gain of an additional 4 million new households across the all demographic cohorts.
Our VA beverages also performed very well this quarter delivering its fourth straight quarter of both share and household gains.
Notably in Q2 these gains were across all sub brands of the business and we saw new households, coming into the VA portfolio driven by both V. Eight original and V eight plus energy.
Overall meals and beverages delivered a strong quarter as it continued to drive relevance with its brands to a younger consumer base and delivered share gains and many of its key categories.
Let's turn to the snack segment, which represents about half of our total annual revenue.
Our performance was again fueled by our power brands, which grew dollar consumption by 8% over the previous year.
Within the power brands, our salty snacks brands grew dollar consumption by double digits and realized share growth.
This was in part due to the implementation of our capacity expansion projects as well as the increased ANC investments to support our media campaigns and innovation and.
Including Snyder's of Hanover, Pretzel rounds, and twisted sticks on the Snyder's of Hanover brand. The combination of successful innovation fundamental execution and brand activation led to share growth double digit dollar consumption and nearly 5 million new households, turning around what had been a challenge.
Share period.
Our Pepperidge farm farmhouse products also delivered exceptional results across bakery and cookies growing dollar consumption by 41% and household penetration by 1.5 points.
On goldfish, we improved our performance. According to the plan, we outlined last quarter, returning to growth and net sales and improved dollar consumption. We adapted marketing content during the holidays with digital partnerships focused on new ways for the consumer to enjoy goldfish, such as moving night snack mixes or classic lunch combination.
<unk> with Campbell's tomato soup, all leading to positive engagement metrics and increase purchase intent.
Additionally, we are launching new flavors within flavor blasted goldfish, which continued to grow consumption by double digits.
As Youll see on slide nine this is only the beginning of what is arguably our strongest slate of innovation, yet which includes twisted pretzel sticks and better for you options like late July Veggie Tortilla chips. We are very excited about the breadth of our snacks pipeline and the second half of the fiscal year, which will complement what we have on <unk>.
<unk> later this year from meals and beverages.
Overall, we feel very good about our snacks performance and the steady growth of delivered as we provide consumers with elevated snacking experiences through our unique and differentiated portfolio of power brands.
We also made significant steps on value capture including the recent transition to S P to streamline and improve capabilities.
Looking ahead, we believe we have additional runway to improve snacks profitability with further network optimization opportunities and we remain confident and our long term strategy and our ability to deliver additional cost savings.
With the strong results and the second quarter and our overall first half performance, we are confident and the outlook for the full year.
With that let me turn it over to Mick to discuss our second quarter and first half financial results.
Thanks, Mark good morning, everyone.
Turning to slide 11, and as Mark just shared we once again delivered strong results with another quarter of sales growth driven by continued elevated consumer demand as well as growth and adjusted EBIT and adjusted the EPS.
Our topline growth of 5% reflect the healthy end market consumption of approximately 8% and the quarter tempered by declines in foodservice and some COVID-19 related supply challenges that Mark discussed.
Adjusted EBIT increased 8% as higher sales volumes were only partially offset by higher adjusted administrative expenses adjusted the EPS from continuing operations increased by 17% to 84 cents per share, reflecting an increase in adjusted EBIT as well as lower adjusted net interest.
The expense.
Year to date, our organic net sales, which excludes the impact from the sale of the European chips business increased 7% driven by strong in market consumption growth and both meals and beverages and snacks and.
Adjusted EBIT increased 13%, reflecting higher sales volume improved adjusted gross margin performance and higher adjusted other income offset partially by increased adjusted administrative expenses.
Year to date, our adjusted EBIT margin increase year over year by 110 basis points to 18, 5% of.
Adjusted EPS from continuing operations increased 23% to $1 86 per share.
Reflecting the increase and adjusted EBIT of <unk> and lower adjusted net interest expense.
I'll review and the next couple of slides, our second quarter results in more detail and provide guidance for the full fiscal year 2021.
Breaking down our net sales performance for the quarter reported and organic net sales increased 5% from the prior year. This performance was largely driven by a four point gain in volume across the majority of our retail brands, partially offset by declines in foodservice and in partner brands within the Snyder's Lance portfolio.
Additionally, we took a strategic approach to dining back promotional spending in both segments, where we faced supply constraints and dose actions net of price and sales allowances contributed one point to net sales growth.
Our adjusted gross margin decreased by 10 basis points in a quarter to 34, 3%.
While product mix was slightly negative and the quarter were estimating a 50 basis points growth margin improvement from better operating leverage within our supply chain network as we increased our overall production.
Net pricing drove a 90 basis point improvement due to lower levels of promotional spending in the quarter inflation and other factors and a negative impact of 330 basis points a little over half of the increase was driven by cost inflation as overall input prices on the rate basis increased approximately.
<unk>, 3%, which we expect to continue to be of headwind for the rest of the fiscal year the.
And the remainder was driven by increases in other operational costs and continued COVID-19 related costs.
Inflation and the quarter was partially offset by ongoing supply chain productivity program, which contributed 140 basis point improvement and included initiatives among others within procurement and logistics optimization of.
Of cost savings program, which is incremental to our ongoing supply chain productivity program added 50 basis points to our gross margin.
Moving on to other operating items, adjusted marketing and selling expenses decreased $3 million or 1% and the quarter. This decrease was driven primarily by the benefits of cost savings initiatives and lower marketing overhead costs, largely offset by an 8% increased investment in a N C.
These investments primarily reflect higher levels of media spend to support our salty snacks brands, including new product launches as well as our true business as we continue to drive usage through new recipes and inspire meal solutions and support our innovation.
Adjusted administrative expenses increased $17 million of 13% driven primarily by higher benefit related costs and higher general administrative costs, partially offset by the benefits from our cost savings initiatives.
Overall, our adjusted marketing and selling expenses represented 10, 2% of net sales during the quarter, a 70 basis point decrease compared to last year.
Adjusted administrative expenses represented six 7% of net sales during the quarter, a 50 basis point increase compared to last year moving to the next slide we have continued to successfully deliver against our multiyear enterprise cost savings initiatives. This quarter, we achieved just over $20 million and the incremental year over.
Year savings, we expect an additional $40 million to $50 million evenly spread over the balance of fiscal 2021 on track good lift of $75 million to $85 million of cost savings for the fiscal year with the majority of the savings from the Snyder's Lance integration, we remain on track to deliver a QE.
Relative savings target of eight hundreds of $50 million by the end of fiscal 2022.
To help tie this all together we are providing an adjusted EBIT bridge on slide 16 to of highlights the key drivers of performance. This quarter as discussed adjusted EBIT grew by 8%. This was driven by the increase and demand for our products with sales gains contributing $40 million of EBIT growth.
Which was partially offset by the previously described adjusted gross margin declined. In addition, the increase and adjusted administrative expenses was only partially offset by lower adjusted marketing and selling expenses lower adjusted R&D expenses and higher adjusted other income are.
Our adjusted EBIT margin increased year over year by 40 basis points to 17, 2%.
The following chart breaks down our adjusted EPS growth between our operating performance and below the line items adjusted EPS increased 12 cents from 72 cents in the prior year quarter to 84 cents per share adjusted EBIT had a positive seven cents impact on adjusted EPS adjusted net interest expense.
Declined year over year by $17 million delivering a four cent positive impact to adjusted EPS.
As we have used proceeds from completed divestitures and fiscal 2020, and our strong cash flow to reduce debt the impact from the adjusted tax rate was nominal completing the bridge to 84 cents per share.
In meals and beverages net sales increased 6% to $1 $3 billion, primarily reflecting strong volume growth driven by in market consumption for many of our U S retail product, including gains in U S. Soup V eight beverages, prego pasta sauces and camera.
Pasta.
Partially offset by declines in foodservice driven by COVID-19 related restrictions net sales of U S soup, including Pacific Foods increased 10% compared to the prior year, primarily due to volume gains and condensed soups and ready to show of shops across the division we moderated promotional.
Activity and part due to supply constraints, particularly on broth.
Operating earnings for meals and beverages increased 7% to $258 million. The increase was primarily driven by sales volume growth offset partially by a lower gross margin and higher administrative expenses.
Within snacks net sales increased 4% driven by volume gains fueled by the majority of our power brands and lower levels of promotional spending on supply constraints brands.
The sales gains were driven by a salty snacks brands within the power brand portfolio.
The Kettle brand potato chips late July snacks, Cape Cod, potato chips, and pop secret popcorn as wells of fresh bakery products, including Pepperidge farm farmhouse products, partially offsetting sales gains were declines in partner brands within the Snyder's Lance portfolio as well as declines and Lance Sandwich crackers.
Cash, resulting from supply constraints in the quarter operating earnings for snacks increased 6% driven by sales volume gains and lower selling expenses, partially offset by higher marketing investment administrative expenses and a lower gross margin.
I'll now turn to our cash flow and liquidity.
Fiscal year to date cash flow from operations decreased from $663 million and the prior year to 610 and $11 million as changes in working capital were only partially offset by higher cash earnings. Although we continue to make progress on working capital we are lapping significant benefits and accounts payable.
And the prior year.
Our year to date of cash from investing activities was largely reflective of the cash outlay for capital expenditures of $132 million, which was $35 million lower than the prior year, primarily driven by discontinued operations of.
Year to date cash outflows from financing activities were $405 million, reflecting cash outlays due to dividends paid of 210 and $15 million, which were comparable to the prior year, reflecting a quarterly dividend of 35 cents per share in December we announced an increase in the quarter.
The dividend to 37 cents per share or an increase of 6%, which from a cash flow perspective will be reflected in the third quarter. Additionally, we reduced our debt by one hundreds of $76 million.
We ended the quarter with cash and cash equivalents of nine hundreds of $46 million, we expect to utilize the majority of this cash during the second half of the fiscal year for repayment of upcoming debt maturities of $721 million and $200 million in March and May respectively.
And.
As covered in our press release based on our strong first half performance, we are providing guidance for the full year fiscal 2021, we expect net sales for fiscal 2021, two declined 3.5% to 2.5%.
Excluding the impact from the 50 <unk> week in fiscal 2020, and the impact of the European chips divestiture, we expect organic net sales to decline one and half to half a percent.
We expect adjusted EBIT of minus 1% to plus 1% as we will lap. The initial COVID-19 demand surge in the second half of our fiscal year combined with headwinds from increased promotional activity, partially offset by lower year over year, COVID-19 related expenses and last year.
And one time marketing investments.
We continue to expect net interest expense of 200 of $15 million to $220 million.
And an adjusted effective tax rate of approximately 24% as a result, we expect adjusted EPS of $3.03 to $3.11 per share representing year over year growth of 325% the EPS impact of the 53rd week.
And fiscal 2020 was estimated to be four cents per share with respect to our guidance. Let me add that we expect the third quarter to be somewhat more challenged from a net sales and EBIT perspective than Q4 as the before mentioned COVID-19 related demand surge was more pronounced in the third quarter of Fiske.
2020, while the benefit from COVID-19 related costs, and one time marketing investments will disproportionately benefit of fourth quarter comparison. Additionally, we expect our third quarter to be impacted by some isolated supply challenges as we navigate the recent winter storms in particular we of.
Experienced about two weeks of disruption at our Paris, Texas plant, which produces pace and prego and we expect improving momentum as we go forward regarding capital expenditures and light of the current operating environment with limited access to our factories, we now expect to spend 10% below the three hundreds of <unk>.
$50 million, we had previously indicated for the full year largely driven by the impacts from COVID-19 on the operating environment.
Before I turn it back to Mark for some additional commentary, let me close by expressing how proud I am of the continued strong execution by our teams throughout the company. We delivered another strong quarter with the return to positive share growth in the majority of our portfolio and growth in all three key financial <unk>.
Tricks, despite all the challenges of COVID-19, Mark.
Mark.
Thanks, Mick before we conclude I want to share my perspective on the key factors underpinning our confidence and our outlook beyond the pandemic.
By now I know you've heard of great deal about the stickiness of all new households gain throughout the pandemic from essentially all of our peers with a wide range of data and facts supporting that thesis.
We very much agree and we see similar trends and our own research and data.
I'd like to conclude today with three critical and differentiating points key factors that serve to underscore Campbell's advantage position going forward and will fuel our future growth trajectory and.
Importantly, two of them have very little to do with COVID-19, or the stickiness of new households.
The first is our snacks business, which as I mentioned earlier consists of a unique and differentiated portfolio of brands that represent approximately 50% of the company's annual revenues the.
This business was growing before the pandemic and we expect to sustain or exceed those historical growth rates going forward.
Snacks also includes of margin structure, which we believe still has significant opportunity for improvement versus the snacking peer group average even after we deliver our current value capture.
We are finalizing our plans to unlock more value and we look forward to sharing more details with you as we move forward.
Second no matter, where you stand on the retention of new households gained during the pandemic. It is undisputable, the Campbell's business, particularly our meals and beverages division and especially soup is coming out of this period more advantaged and with renewed relevance nearly 13 million new households purchase.
Campbell soup since the initial peak of the pandemic of which almost a third are millennials outpacing both key competitors and the category average and we have also seen macro behaviors like quick scratch cooking take root and our research indicates more than 30% of consumers are cooking more with soup since the <unk>.
Out of the pandemic.
Additionally, we believe increased at home lunches will endure as many people are expected to work from home more often post pandemic.
Beyond the role that our meals and beverages offerings play and the lunch occasion snack foods of company nearly 30% of all lunches, which bodes well for our entire portfolio. We've conducted extensive consumer research and an effort to determine sediment model consumer behavior exiting the pandemic and sharpen our play.
<unk> to ensure the sustainability of our recent gains.
The consumers, who we've surveyed had and overall high level of satisfaction with Campbell's products, and our meals and beverages and snacks portfolio.
In fact about four out of five new users surveyed said they were very or extremely satisfied with our brands. As a result of this high satisfaction. Those surveyed told us they'll continue to count on our brands going forward turning to us for things like cooking solutions and quick lunches and meals and this gives us every reason to be.
Please consumers will continue to purchase our brands well after the pandemic.
Even more importantly, 70% of the consumers surveyed told us our brands better met their needs than competitive products. The same consumers also told us the taste and convenience of our brands, where the top drivers of overall satisfaction.
We feel this sets us up well for continued share progress going forward.
The research also has provided us with the actionable insights and our opportunities to strengthen the retention of our consumers.
These include areas, such as adding more convenient packaging options and sizes across our portfolio developing new and inspiring recipes and satisfying consumers need for permissible and more intense snacks by providing a variety of flavors and healthier ingredients.
This specificity will focus our plans and innovation to target the areas with the highest probabilities of retaining these new consumers, particularly younger consumers for our brands.
For the third and final differentiating point that underscores our strong position going forward, we look to the strength of our balance sheet.
Given the cash generative nature of our business and our reduced leverage which is now below three times, we are well positioned to generate significant cash flow well above our ongoing commitment to base capital investments and dividends and the next three years.
This can and will be a source of opportunity the can be invested and high ROI initiatives or other actions to drive value creation.
So to wrap it up our mission is clear number one and sustain or accelerate our historical snacks growth, while improving margins number to solidify our meals and beverages business as a steady and stable contributor behind recent transformational consumer trends and trial and number three deploy what will be significant cash.
Capital to fuel this growth and create differentiated value.
We look forward the sharing more and the months ahead about this next chapter as Campbell moves from turnaround to sustainable growth.
And with that operator, let's open it up for questions.
Thank you.
Ladies and gentlemen, if you have a question at the time. Please press the star followed by the number one key on your Touchtone telephone.
The question has been on importantly, which the remove yourself from the queue. Please press the pound key.
And our first question comes from the <unk> from Barclays. Your line is open and good.
Good morning, everybody, Hey, and.
Andrew and there.
Mark I first wanted to just touch base, a little bit on on organic growth and the quarter. You went through some of the factors that limited organic growth maybe relative to your ingoing assumptions, one would assume obviously foodservice recovers a bit of course as restrictions are lifted and such but I'm trying to get a better handle on where the company is around supply and capacity.
And <unk>.
Is that largely behind the company at this point or does some of that still linger and the reason I ask is I'm trying to get a better handle on the relationship between sort of consumption.
And shipments as we go through the fiscal third quarter do those are those more consistent with each other is or the opportunity to rebuild inventories such the shipments maybe exceed consumption for a period of time I'm trying to get a handle on that and then I've just got a quick follow on.
So a couple of couple of thoughts first.
Again, I think as we said and our comments.
A bit frustrating and of course to see the top line and when the underlying fundamentals are as strong as they are.
And market consumption was up 8% and.
A really important step forward for us was the shift and share performance where.
And where we had 75% of the portfolio growing share, including some businesses of a really important for us to get back on our front foot like ready to share. The soup for example, and Snyder's of Hanover Pretzels, both of which had been a bit challenged on share and we wanted to make sure we turned them around I guess the other the good and other.
Good news about the timing and sequence of some of the pressure we experienced we had all of the inventory in place for the holiday and kind of the key drive periods, which is why we did so well during that.
Time frame and market, where it hurt us was a bit and the replenishment of that as we were exiting the quarter.
And as you said driven really by two things the.
The significant step back up and Covid cases was the root cause but it impacted both our foodservice business as well as absenteeism.
Specifically and our plans we were at and the month of December we crossed the double digit line on the absenteeism, which was really the highest we had seen which which really did reduce a little bit of our firepower as we had expected to be able to get in front of consumption.
And ship and get ahead of it. The good news is both of them I would describe generally is episodic in nature and that.
We finished the quarter and.
And went into Q3, both of those we're seeing normalize and improve and remember in Q3, one of the things that we're going to have as a day.
Dynamic is that we shipped about 12 points behind consumption.
Year ago, and Q3, and so as you think about that overall shipments of consumption comparison.
Despite the fact that and.
And the spirit of.
A lot of volatility and our world today. Despite the fact, we're going to net have to navigate a little bit of this pressure.
Out of the Paris, Texas will of plant was closed for a couple of weeks of that plant makes primarily paste and prego and just as a reference point, but we.
We expect the overall elements to be positive as it relates to shipments versus consumption.
But with a little bit of Choppiness as we go into Q3 as we roll through the back half.
Feeling very comfortable that we'll be back and a strong position I think also of note we've talked a bit about the recovery of the skus that we.
<unk> had swapped out for base business during the pandemic of all of those are back up and running that we're going to return is if you look on our numbers today youll see about a 6% decline and Tdp's, we expect that to be about three ongoing on the reason you're not seeing all of it is some of those items are still on pipeline, but as the quarter on <unk>.
We expect that all to be back and places we manage through the back of the year, So a little bit of a longer answer, but I know of very important.
Element to get your hands around so I think there's there's reasons to believe that we'll see that room to catch up a little bit and kind of get back on our feet as it relates to inventory great. Thank you for that and just a very quick one it might be too early but in markets, where we've seen certain restrictions get lifted and may be fully lifted and some cases and.
And getting back to some form of normalcy.
I appreciate all of the survey work, you've done and a sense of where consumers sort of of heads are at.
And any any sort of real time data that you're seeing some of these regions or states that are more fully reopened around what maybe retention has looked like in actuality I realize its still on the early edge of things, yes. It is of.
A little bit too early but what I can tell you. We've done is we've created.
Essentially.
A bit of a map of the country.
And evaluating the specificity of different data points.
In conjunction with reopening and so.
US like you are looking for those proof points to validate what is a lot of the hypotheses that we have and.
So I would say it's too early to give you any conclusions, but we're set up well to read that as quickly as possible, we'll make any adjustments we need and.
Really begin to put some facts specific facts.
And behind some of those assumptions and you've talked about thanks.
Thanks very much.
Thank you. Our next question comes from Ken Goldman from JP Morgan Your line is open.
Hi, Thank you so I wanted to pick up a little bit.
Left on.
It sounds like most of the work you've done.
On the stickiness side, it's still theoretical.
And I appreciate that you're doing really good work in terms of the survey.
Consumers and so forth, but were and such.
Lead times that.
And I just wonder how much.
And really should put on things like surveys at this point just given the I don't think consumers necessarily know what they're going to go.
One of the home.
And local.
The multiple upon the corporate space.
The growing in the world.
And I guess, what I'm getting.
Particular data point.
On the.
The model.
And you might need to the multiple kind of confidence statements that we're making today.
On the local football.
Yes, sure sure Ken.
I understand the question and certainly this is not a unique conversation and.
It happens pretty frequently these days and our industry.
We'll say we did a few things and we have targeted our research and a few ways to try to.
And in form of certain thinking that's just simply different than how many people are going to continue to cook.
Or how many people are claiming that they will continue to use our products.
Kind of give you two areas one we've gotten a lot sharper on how we feel and using the survey work to really understand how we hold up against competitive choices because one of the things that I think will matter a lot here.
Very quickly as we start to lap of the initial surge and get into Covid is how do we feel about our comparative position and therefore, our ability to manage through share.
The positive performance of our differentiated performance and that was an important part of the work that we've been doing and trying to identify where we think we're and stronger positions and I and I was pleased I was really pleased with some of the items that are in more competitive spaces and.
And setting aside for a moment, whether youre going to continue to use US did you feel we performed better than some of our competitors I think is an important insight and a little different and just are the are the household is going to remain sticky and I think the other thing that we're doing a lot of us.
Looking for places, where we could be exposed where there may be dissatisfied so instead of just simply focusing our work on trying to build the case of proved the point.
The people are going to keep using it we actually kind of spun and around the other way and really looked at it why you wouldn't keep using it and what would the barriers of what were the things that we could be doing differently and our brands and we're using that very rapidly.
As we try to inform things like innovation.
As well as our marketing to try to really kind of go at those areas a little bit more head to head on and so.
And again as I've said a couple of times.
Recognize the.
Net debt until we have facts and.
And kind of points on the board this remains theoretical but it is hard to.
Imagine that no matter, where you are on that continuum.
Our business like our meals and beverage and our soup business isn't going to be even and a modest interpretation.
And of better position than it would've been.
Coming into this and I think that.
That is something that obviously quantifying it will be important but I do feel.
Very comfortable and suggesting that the <unk>.
Through the trial and experience and and the work we've done and you know remember.
We don't have the benefit of seeing how all of that work would have done pre pandemic, but I was fairly confident that a lot of the things that we had put in place before.
We're going to help improve this business as well.
I think that's very fair on the qualitative level and we just hope that and you think about guiding and home and so forth.
With the who a lot of companies and not as soon as much stickiness and they can go happen and then maybe surprised to the upside, but I will leave a mark.
One thing I'll, just say Ken as you leave I mean that was also part of the reason why I wanted to highlight a few things that are really not related to COVID-19.
And then our portfolio I mean remember, we got 50% of our business that is the snacks business that has been growing pretty steadily before it through and we really expect it to continue to grow afterwards and that all of our peers have that particular.
Composition and further to that again, I know I'm kind of beating the hook here for conversation on margin around snacks, but there is I think of continued opportunity for value creation and with the work that we've done on our balance sheet, our ability to invest thoughtfully and in a disciplined way to create.
Value I think gives you some reasons to think about the business differently that doesn't require anything.
As it relates to the stickiness of households, and so on.
I wanted and I know a lot of discussions around household retention, but we've got a couple of really big things and the business that are far less related to that.
That makes sense. Thanks, so much.
Thank you our next call.
I think comes from Bryan Spillane from Bank of America. Your line is open.
Hey, good morning, everyone.
And.
I guess I'll take the bait on the book right in terms of margin and snacks.
But maybe mark if you could.
Maybe tie that into also capital allocation and you've talked about that and arguably that's going to be the more important driver once we get past whatever the pandemic is so I guess two related questions one.
Does the acquisition that creates more scale and snacks is that a path the higher margin and.
And then the second just as it relates to the capital allocation and I think what you're implying in terms of M&A.
Could you think about how Campbell and M&A strategy of Campbell White lineup realm.
Relative to some of the company who had been at before right Pinnacle was pretty good at it.
Obviously model and the creation of a lot of of M&A.
So just trying to get us into how you're thinking about.
That capital allocation yeah. Okay. So so let me let me start a little bit with the with the snacks question and again I really do expect guys and.
The next.
Next few months.
And again not to put a particular day, but I do imagine as we go into the fall, we're going to be and a good position to have a more robust dialogue with you.
About kind of this next chapter of the of the company's strategy, which will include.
And my mind, a lot more granularity around some of the things that we're talking about now what I will say this on and on the margins on snacks. If you look at kind of where we are and our journey right now we're about 80% of the way through value capture we're now up and running on SAP, which is the really important step as many of you know and these.
The integrations and transitions and.
So, it's allowing us to continue to build our insights as we look forward and where that value capture has put us. If you think about the beginning of the journey to where we are now the gap between our margin and kind of the snacking averages we've closed about a third of that GAAP.
So there is still about two thirds of that remaining and if you look at the reasons why.
And you kind of start from manufacturing all the way to the store.
You see a fair amount of and inefficiencies even after we complete the value capture that gives us a lot of confidence that we're going to find the opportunities. For example, we've got 1300 locations holding inventory right now and our supply chain and.
No matter, how you cut the pie that is not our most efficient put forward and so our ability to go after each of those elements with kind of the next wave of plans gives me a lot of confidence that we can reduce that GAAP further and.
Again, quantifying that and giving you a little more co.
<unk> on the building blocks, we will do that but.
But not today, so we're working on it and more to come but I think theres a lot of reasons to believe and if you pair that with what the growth rate of this company is and what we continue to see.
And as improved opportunities as we move from integration.
Orientation really the growth and focus on innovation, we feel very good about it and so.
So if you think about some of that work there may be some investment opportunities that are there. So as we think about capital priorities kind of pivoting now.
To your second question first of all of our capital priorities of the company remains the same we invest and the company we pay our dividend.
We continue at this point, we've really done a good job of managing down the debt. So we're quite happy with that progress and.
And then we're looking and a very disciplined way I mean, you mentioned.
Some some prior historical places that I've been that I think of had very good decision matrix very good discipline on.
Our focus continues to be things that we believe are.
You know highly aligned or and near and Adjacencies to our core strengths.
And I think there is the role that M&A can play, but it's in conjunction with also evaluating where we can invest and the company and generate high returns I think the important thing to note is that we will apply that discipline, but we're going to be applying it to and availability of capital that as you say.
It's going to be a very very important.
Indicator of value and and especially as you think competitively across the places to go on.
Feeling very good about our flexibility and capability to to generate a significant amount of value and that space does that make sense Brian.
That makes sense thanks Mark.
Thank you on.
The next question comes from both on the English from Goldman Sachs. Your line is now open.
Hey, good morning folks thinks of caught me and I'm going to.
I'm going to take another nibble at the book.
From a slightly different angle.
I hear you loud and clear of markets, if we benchmark against some of the bellwethers in the space like of Frito, our models, but that just seems like a non fair comparison.
If I look at say your 18, and 19% EBITDA margin in snacks and they look good.
Great, especially of what I contemplate your somewhat subscale relative to the big leaders.
The profit sharing arrangement with independent distributors and your portfolio is exceptionally complex and you've got a decent chunk of of land sales the.
There are of derived on a pretty low price point, suggesting that its not really of cost per ounce issue. It's the price per ounce issue for much of that.
So how is attacking the carpet where are the opportunities just because of what I look from the outside looking in and I don't really see the opportunity I see a business that's sort of already been of right size in terms of margin.
And one that's probably where it should be what am I basically can you put your more of teeth. On this one thing I think it's really Jason is if you look at the redundancy and the inefficiencies that exist in the network that was that was built independently.
And really not through the lens of efficiency.
I think the.
As you described the complexity of our portfolio.
There is no question that what is a little unique about us is the opportunity I'd say, both the scale and the strength of operating within two aisles of the store, but our portfolio is really not as complex. As you may think the partner brands is something we've been working hard on over the last two years and we've got a little bit of work still ahead.
Head of us to make sure that we've got the right partnership model that and.
Enables us to eliminate a lot of that complexity while still.
Generating the benefits of still more work to do there.
But I think if you if you really kind of go from our manufacturing footprint to our distribution and warehousing footprint all the way to our route to market.
Going to see opportunities.
<unk> all three of those buckets.
And we're gonna be able to drive greater levels of efficiency than what's there today and again.
The good news here is.
It doesn't necessarily require us to get to of frito lay or to the highest and of the snacks margins, but even as we move into.
Closing that gap there is significant value to be created and as you think about kind of our historical growth rate of 3% with the headwind of about 1% as we've navigated kind of the mark.
Managing down of the partner brands.
I think you could expect that growth rate to at least continue if not improve as we go forward and so you put those pieces together and I think the contribution of what represents 50% of our company.
Becomes a significant benefit and a tailwind for us.
And can continue to contribute going forward now and fairness, Jason and I think you like others are going to want to see a little bit more of that blueprint and I get that and.
And that's what we're working on now and certainly would anticipate sharing more granularity with you as we go forward.
And I kind of raise it now, though because I think of lot of the conversation.
Rightfully so its about whats coming next where companies focused in the future coming out of the pandemic and a.
I point to this is just an area that is not related.
Ken's question earlier on stickiness of households, this is really about our ability to execute into anti <unk> of those areas within our own existing business model.
Got it thanks, and I look forward to hear more I'll pass it on thank you.
Thank you. Our next question comes from Robert Mark Now from Credit Suisse. Your line is open.
Hi.
Thanks Mark.
And I have a different kind of question about meals and beverage and.
There's been capacity constraints.
And for about a year for understandable reasons.
And you say a lot of it has to do with labor absenteeism, but also just overall capacity and so I was curious as you entered this year and retrospect is there more of that the company could have done to either hire more or take on more co packing capacity to meet the surge in demand.
And did you choose not to did you say, we were going to choose not to do that maybe it's not the sustainable thing to do.
And then the second part of this is as you get more data on the stickiness and what happens next do you then have to take those steps do you have to expand Sue do you have to expand sauces capacity and there's a lot been talking to a lot of talk here about snacks, but there are the things that youre going to have to do and meals and beverage.
The cope with the higher demand plant to plateau.
Got it.
Yes, very fair question and one that I can tell you. We've spent a fair amount of time asking ourselves.
I think let me start with the labor standpoint.
And I really don't think there's any more we could have done on hiring I mean, we have hired.
20% and additional 20% of our entire workforce over the course of the pandemic.
And we did that because we understood that we needed some flexibility.
And it related.
Of our protocols around quarantining as well as the expanded demand that we were seeing so.
And I think about did we let up there at all on or should we have pushed harder there.
And there really was not anything more that I can see that we could have done on the hiring side, they're simply ran into and if you think about where some of our facilities are there just was a limit to how many how much availability, we ultimately had to incrementally higher but it was certainly not for the.
Lack of effort I can tell you their career fairs around the country and and.
And I'm happy that we were able to hire 2000 people.
I think that was a it came at a good moment.
But certainly what it a bit and nice to continue to have a little bit of more flex more flexibility certainly and the month of December and January where we saw this renewed surge of it would have been helpful. At that moment, but I think the teams have done a very good job of trying to maximize what that potential is.
On the capacity side, so what have we been doing or what have we done.
I think it's a little different by brand. If you really look under the Hood and you say, okay, where is the real pressure on.
And on capacity I mean, notwithstanding.
Bumper, two or winter storm like we may be dealing with and.
And and Paris, Texas right now.
The biggest concern that we've had is on broth and there we have already made the commitment to invest and capacity. We are in the process of putting that in place.
It is I will say, it's been a little tougher and a little slower through the pandemic installing new capital is it might've been in the normal period, but the.
There's no question about the commitment and what that will mean for us when we have that up and running as.
And as well as creating a very healthy network of co manufacturing that helps us ebb and flow and Rob you talked a little bit about the future.
And remember part of the dynamic on the meals and beverage businesses are these peaks and valleys as it relates to seasonality and part of what we're what we're doing is creating.
A network that allows us to create more flexibility and flex a bit more to the upside you know, let's say we're on the high end of our assumptions that we can flex the there let's say we're on the lower and we can flex the there and.
Still be responsible as it relates to capital, while still enabling us to meet all of the ongoing dynamics of building inventory and the soup season, and matching kind of that footprint. So I do feel very good about the investments we've made and what we've done the adds some flexibility.
And to our business to be able to handle a variety of different situations. You know part of the pressure has been to get back into some of these skus that were B and C skus that honestly.
It had been very very important and key to us regaining share that.
And that we've had to put back in place, but we're now and a pretty good position on those and are really coming back fully and so I feel good about the future, but that's kind of of the dynamics that we've gone through as we've thought through that.
Got it alright, thank you.
Thank you.
And that does conclude our question and answer the first one for today's conference.
Okay.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a wonderful day.
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