Q3 2021 Campbell Soup Co Earnings Call
Yes.
Good morning, My name is my really know beer.
Thanks, operator today.
At this time I would like to welcome everyone stay Campbell soup and the third quarter of fiscal 2021 earnings Conference call.
Today's call is being recorded.
All participants will be in a listen only mode until the formal question and answer a question off the call.
At this time, if you would like to ask a question simply press star followed by the number 1 and your colleagues from Keybanc.
If you would like to draw your question, that's the power and Keith Thank you.
With that I would now like to hand, the conference a week and host Mr. Baca body and Scotty you may begin your conference.
Good morning, and welcome to Campbell third quarter fiscal 'twenty 'twenty, 1 earnings presentation, I'm, Rebecca Gardy, Vice President of Investor Relations. Following the completion of this call a copy of this presentation and a replay of the webcast will be available at Investor Day, Campbell Soup company and Dot Com a transcript of this earnings conference call will be available within 24 hours.
And at Investor Day, 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 3 or our SEC filings for a list of factors that could cause our actual results to.
And materially from those anticipated and forward looking statements because we use non-GAAP measures. We have provided a reconciliation of each measure to the most directly comparable GAAP measure which is included in the appendix of this presentation on slide 4 you will see today's agenda with us on the call today are mark.
Clouse, Campbell's president and CEO, and Chief Financial Officer, Mick Bakehouse, and Mark will share his overall thoughts on our third quarter performance and our in market performance by Division make will discuss the financial results of the quarter and more detail and review our guidance for the full year fiscal 'twenty 'twenty, 1 Mark will then make some closing remarks.
Marks before moving to and analysts' Q&A and with that I'm pleased to turn the call over to Mark.
Thanks, Rebecca good morning, everyone and thank you for joining us today.
Throughout the last year, we rallied through the pandemic and made decisions focused on prioritizing the safety and wellbeing of our employees, while meeting the needs of our customers and.
Consumers. This approach has served us well over the past 15 months as we progressed our strategy and a volatile operating environment. Our team pulled together, we executed with excellence and we delivered strong results.
As you saw in our press release. This morning, our results this quarter reflected the challenging comparisons to.
The prior year as we cycled the demand surge that accompanied the onset of the COVID-19 pandemic and navigated several current headwinds.
However, you will also have seen the continued strength and market on market shares underpinned by healthy retention of new and younger households, and the full recovery.
Distribution levels.
We did face a significant inflationary environment and the quarter as well as shorter term increases and supply chain costs. We.
We anticipated the vast majority of these drivers, but in certain areas the pressures intensified, especially around inflation and some of the transitional costs moving.
Out of the COVID-19 environment, we are confident that we can address these issues and we have plans and pricing already in place as we exit the fiscal year and enter fiscal 2020.2 our confidence is further strengthened by our continued and market momentum and the structural health of our business and brands.
I.
I will first review our results and then share the context and actions we are taking to address these challenges and the improving trajectory. We expect for the rest of the year as we head into fiscal 2020.2.
As we outlined during our second quarter earnings call. We expected this would be a challenging quarter and we recognize.
Dyes that there would be headwinds as we lap the peak of COVID-19 demand manage the volatility of current market dynamics and continued to navigate our own transformation agenda, we delivered sales of $1.98 billion in line with our expectations as we cycled a 17% organic.
Ganic growth comparison to a year ago.
Our sales results benefited from the continued momentum of our snacks power brands and our U S retail products and our meals and beverage division as well as the early signs of recovery from our foodservice business and.
Importantly, our brands remained strong with nearly 3.
<unk> of our portfolio, gaining or holding share in the quarter.
And our core categories most of our brands grew at higher rates than pre pandemic levels and our brand consumption on a 2 year comparison grew 9%. These results were driven by our decision to invest and supply and service while preserving brand investment.
<unk> co with advertising and consumer promotion expense as a percentage of net sales comparable to last year.
Looking ahead, we expect organic sales and the fourth quarter to decline versus last year as the COVID-19 lap continues we do expect a sequential improvement from the third quarter as the comparison to prior year.
Eases, a bit and our foodservice business continues to recover.
From a margin perspective are declined versus prior year, excluding the net benefit from mark to market adjustments on outstanding commodity hedges stemmed from certain headwinds, which are grouped into 3 main buckets.
First external factors were larger than we had anticipated.
We like others face pronounced inflation related primarily to steeply higher transportation costs, some of which was an outcome from the strain of the Texas winter storms on supply chain logistics and the closure of our Paris, Texas facility.
Facility for 2 weeks these factors, partially offset by our productivity improvements reflect about a third of the gross margin erosion and the third quarter and will continue into fiscal 2020.2.
We currently expect the benefit from pricing actions, we have put in place across our portfolio and our strong productivity.
Activity plans to mitigate this inflation pressure and fiscal 2020.2 while we remain vigilant monitoring the ongoing dynamic nature of the current environment.
The second bucket I would characterize as transitional items that we're working our way through as we move out of the COVID-19 environment and fully recover on.
And supply.
This includes areas like lower fixed cost leverage as we lap the year ago elevated levels of demand sustained labor challenges and added investment and higher costs co manufacturers to recover fully on supply we.
We had factored these pressures into our plans, but in some cases they were.
Were more significant than anticipated as either the time to recover or the magnitude of the impact were greater than expected.
These transitional costs reflect about half of our gross margin erosion and the quarter and while we expect the impact of these costs to moderate into the fourth quarter. They will continue to add pressure as we fully cycle.
Cycle, the COVID-19 environment.
The third bucket is execution related to the high degree of transformation, we have underway and our snacks division.
Throughout my time at Campbell, we have taken significant steps to improve our execution as we have steadily advanced our agenda.
However, this quarter.
And the convergence of multiple transformation efforts, including systems logistics and capacity all put additional execution will pressure on the business and a tough third quarter environment.
We have already taken decisive actions to allocate more resources and better phase projects to address these issues.
We do not expect these elements will have a material impact on the fourth quarter and more importantly, they do not alter our long term expectations for the snacks margin expansion opportunity, we highlighted last quarter and we will share in greater detail during our Investor day later this year.
Although all of these headwinds put pressure.
And year end performance, they do not represent structural issues and we remain confident and our strategic plans.
As a result of the third quarter pressures on margin adjusted earnings per share came in lower than we expected at 57 cents as Mick will discuss in more depth, we're updating our guidance accordingly.
Turning to our division performance, let me begin with meals and beverages, our net sales decline of 14% and in market performance of -24% and the third quarter reflect lapping the historically high consumption levels that we experienced during the onset of the pandemic last year on.
On a 2 year basis, we had net sales momentum in key categories with share gains over prior year in condensed soup ready to serve soup Swanson broth, prego and Pacific Foods comp.
Compared to the third quarter of fiscal 2019, we delivered strong consumption growth of 9% against organic net.
Growth of 3% with the GAAP driven by our foodservice business, which continued to recover as governments gradually eased onsite dining restrictions and some markets.
Overall, as we have invested and our service levels. They are stabilizing and we are now and a better position on supply across the division.
We have restored the shelf and the majority of our categories and our share of total points of distribution and is consistent with pre COVID-19 levels across U S soup prego and V 8 beverages.
And market consumption for soup was strong versus 2 years ago growing at 9% and gaining dollar share with.
We delivered record share growth and U S soup of nearly 2 points driven by condensed soup Swanson broth chunky and Pacific Foods. We also made significant progress on the retention of new households, since the onset of the pandemic.
Soup gained dollar share and all 3 categories with millennials driving strong.
<unk> growth and condensed cooking broth and ready to serve soup. We are confident that the brand investments made are working as buyers and buy rate remain elevated compared to pre COVID-19 levels.
We continue to be encouraged by the Sustainment of quick scratch cooking behaviors and in home eating occasions, even as COVID-19.
And 19 restrictions are lifted in fact condensed delivered its ninth consecutive quarter of dollar share gains growing share and nearly 3 points, notably with millennial consumers condense grew share by nearly 4 points within ready to serve chunky delivered double digit and market consumption growth on a.
Year basis.
Pacific Foods continued to be a powerful growth engine within our soup portfolio with end market consumption growth of nearly 30% on a 2 year basis and continued share gains versus prior year, marking its sixth consecutive quarter of share improvement.
On Swanson broth as we invest.
Vested to restore distribution and service, we increased share by nearly 2 points versus prior year.
On a 2 year basis, we grew household penetration by more than a point and saw higher repeat rates on our brand.
<unk> delivered its 24th consecutive month with the number 1 share position and the Italian sauce category.
Free and achieved its strongest share gain and over 3 years compared to pre pandemic levels. We are seeing strong repeat rates and buyer retention on this brand as well as strong resonance with millennial consumers.
Overall, the meals and beverage division delivered a strong and market quarter against difficult comparisons.
With share gains in key categories, especially among younger consumers T. P D gains and improved service levels continuing to support our confidence that it will emerge from the pandemic and a stronger position.
Let's now turn to snacks, where our power brands continued to fuel performance within market consumption.
Growth of 14% on a 2 year basis, despite being down 5% year over year.
On a 2 year basis total snacks consumption grew 10% against the organic net sales growth of 3% with the GAAP driven by the decline and our partner brands and continued pressure and the convenience channels.
We grew share on many of our power brands over prior year and repeat rates on 7 of 9 power brands are ahead of pre COVID-19 levels, we delivered our fifth consecutive quarter of share growth on late July snacks, Kettle brand potato chips snack factory Pretzel, Chris and Lance Sandwich crackers.
On a 2 year comparison within the power brands, our salty snack brands grew in market consumption, nearly 20% and increased household penetration across the majority of these brands.
Our Pepperidge farm farmhouse products also continued to deliver exceptional results within market consumption growth of 9%.
On top of the prior year increase.
Turning to goldfish, we returned to share growth increasing by more than 1 point compared to prior year.
This was in part due to an improved performance on multi packs continued momentum on flavor blasted goldfish and new broadened digital activation we.
We also exited the quarter with early momentum from the launch of limited edition Frank's Red-hot goldfish.
With that let me turn it over to Mick to discuss our third quarter results in more detail and our guidance for the full year.
Thanks, Mark Good morning, everyone turning to slide 12, as Mark just shared a third.
Quarterly results were impacted by last year's demand charge related to the start of the COVID-19 pandemic as well as the gross margin impact due to pronounced inflation, our transition out of the COVID-19 environment and some execution of pressure as we continued to advance our transformation agenda.
Primarily and our snacks division.
During the quarter organic net sales declined 12% and adjusted EBIT decreased 27% driven by lower sales volume and a lower adjusted gross margin, partially offset by lower marketing and selling expenses adjusted.
Adjusted EPS.
From continuing operations decreased 31% to 57 cents per share primarily reflecting the decrease in adjusted EBIT year to date, our organic net sales increased 1% driven by lower promotional spending in both divisions meals and beverages increased 1% mainly driven by growth.
And in U S soup and V 8 beverages, partially offset by declines in foodservice and snacks organic net sales were flat as declines in Lance sandwich, crackers, and and partner brands within the Snyder's Lance portfolio were offset by gains in our salty snacks portfolio and our fresh bakery product.
Year to date adjusted EBIT of $1.14 billion was comparable to prior year as a lower adjusted gross margin and increased adjusted administrative expenses were offset by lower adjusted marketing and selling expenses higher adjusted other income and sales volume gains.
Within marketing and selling expenses lower selling and other marketing costs were partially offset by a 3% increase and advertising and consumer promotion expense or a and see year to date, our adjusted EBIT margin was 17, 2% compared to 17, 3% and.
And the prior year.
Adjusted EPS from continuing operations increased 4% to $2.43 per share, primarily reflecting lower adjusted net interest expense.
I'll review and the next couple of slides, our third quarter results in more detail and provide revised.
And for the remainder of fiscal 2021, reflecting these results and our expectation for sustained inflationary pressures through the remainder of the year.
Our organic net sales decreased 12% during the quarter lapping the prior year organic net sales increase of 17%.
Guymon and demand for at home consumption searched at the onset of the COVID-19 pandemic.
<unk> to the third quarter of fiscal 2019 organic net sales grew 3%.
Our adjusted gross margin decreased by 290 basis points and a third quarter from 34.
4.7% to 31.8% on the slides, you'll see the various items bridging the year over year change and our overall gross margin now let me tied back to Mark's earlier comments, which excludes the 250 basis points net benefit from mark to market adjustments on outstanding commodity hedges included.
<unk> and inflation and other in the bridge.
First external factors led to about 1 third of the year over year decrease and margin. These external factors included approximately 290 basis points of inflation and some temporary disruption from the Texas storm back in February.
Both reflected in inflation and other and the bridge.
Cost inflation was approximately 4% on a rate basis, which was higher than anticipated largely driven by freight rates, partially offsetting these headwinds was our ongoing supply chain productivity program, which contributed 150 basis points to growth.
Those margin and included initiatives among others within procurement and logistics optimization.
And second headwinds related to our transition into the post COVID-19 operating environment represented about half of the gross margin decline as we transitioned from last year's demand search.
6 and operating leverage each had an approximate 110 basis point negative impact on gross margin in the third quarter.
Net pricing drove a positive 30 basis point improvement.
The remainder were incremental other supply chain costs within inflation and other such as.
Net costs associated with co manufacturing to support supply and distribution recovery.
Third execution of challenges, which represented the remainder of the decline where most of the incremental other supply chain costs within inflation and other these costs were mainly.
<unk> to the transformation of our snacks division and were partially offset by our cost savings program, which added 60 basis points to our gross margin.
Moving onto other operating items marketing and selling expenses decreased $37 million or 15% and a quarter. This decrease.
Chris was driven by lower a and C lower incentive compensation lower selling expenses and the benefits of cost savings initiatives overall, our marketing and selling expenses represented 10, 2% of net sales during the quarter compared to 10, 7% last year as a percentage of net sales.
Larry total ANC was comparable to the prior year quarter.
Adjusted administrative expenses decreased $2 million or 1%, driven primarily by lower incentive compensation, partially offset by higher benefit related costs.
Adjusted administrative expenses represented 7.2.
2% of net sales during the quarter and 80 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 $20 million and incremental year over year savings, resulting in year 2.
To date savings of $55 million, we expect an additional $20 million in the fourth quarter to deliver and aggregate $75 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 our cumulative.
<unk> savings target of $850 million by the end of fiscal 2022.
On slide 17, we are providing a total company adjusted EBIT bridge to summarize the key drivers of performance. This quarter as previously mentioned adjusted EBIT declined by 27%.
The previously mentioned net sales decline resulted in a 88 billion dollar EBIT headwind, while the 290 basis point gross margin decline resulted in a $58 million EBIT headwind, both were partially offset by lower marketing and selling expenses.
Overall, our adjusted EBIT margin.
Decreased year over year by 290 basis points to 14, 3%.
The following chart breaks down our adjusted EPS growth between our operating performance and below the line items.
Adjusted EPS decreased 26 cents from 83 cents in the prior.
Prior year quarter to 57 cents per share due to the negative 26 cents impact of adjusted EBIT and.
Slightly lower interest expense offset by slightly higher adjusted taxes.
In meals and beverages organic net sales decreased 15%.
$2.1 billion, primarily due to declines across U S retail products, including U S soup, and prego pasta sauces, as well as declines in Canada and foodservice.
Sales of U S soup decreased 21% due to volume and declines in condensed soup ready to serve soups.
And broth lapping a 35% increase in the prior year quarter.
For meals and beverages volume decreased in U S retail driven by lapping increased demand or food purchases for at home consumption and the onset of the COVID-19 pandemic in the prior year quarter.
And organic net sales increased 21 per cent compared to the third quarter of fiscal 2019 organic net sales in meals and beverages grew 3%.
Operating earnings for meals, and beverages decreased 35% to $179 million decrease.
Was primarily due to sales volume declines and a lower gross margin, partially offset by lower marketing and selling expenses.
The lower gross margin resulted from higher cost inflation, including higher freight costs other supply chain costs, such as external sourcing and the weather related disruptions.
Corruption at the beginning of the quarter.
Reduced operating leverage and unfavorable product mix, partially offset by the benefits of supply chain productivity improvements overall.
Overall within our meals and beverage division the operating margin decreased year over year by 550 basis points to 17 point.
And 2%.
Within snacks organic net sales decreased 8% driven by volume declines within our salty snacks portfolio, including pop secret popcorn, Cape Cod potato chips, and Snyder's of Hanover, Pretzels, as wells and Lance Sandwich Crackers, Wagner brands and fresh bakery.
Volume declines were partially driven by lapping increased demand or food purchases for at home consumption at the onset of the COVID-19 pandemic in the prior year quarter, when organic net sales increased 12% comp.
Compared to the third quarter of fiscal 2019 snacks.
Organic net sales grew 3%.
Operating earnings for snacks decreased 29% for the quarter driven by a lower gross margin and sales volume declines, partially offset by lower marketing and selling expenses and lower administrative expenses.
The lower gross margin resulted from higher.
Higher cost inflation and other supply chain costs reduced operating leverage and unfavorable product mix, partially offset by the benefits of supply chain productivity improvements.
Overall within our snacks division the operating margin decrease year over year by 350 basis points to.
11, 5%.
I'll now turn to our cash flow and liquidity fiscal year to day cash flow from operations decreased from $1.1 billion and the prior year to $881 million, primarily due to changes in working capital principally from lower accrued liabilities and lapping.
<unk> significant benefits and accounts payable and the prior year.
Our year to day cash for investing activities were largely reflective of the cash outlay for capital expenditures of $119 million.
Which was $30 million lower than the prior year primarily.
Driven by discontinued operations.
Our year to date cash outflows for financing activities were $1.4 billion, reflecting cash outlays due to dividends paid of $327 million. Additionally, we reduced our debt by 1.
$1 billion.
We ended the quarter with cash and cash equivalents of $209 million.
As you saw in our press release, given the continued strong cash flow generation and progress regarding the reduction of our leverage in addition to the increase of our dividend announced in December.
The board of directors authorized a new anti dilutive share repurchase program of up to $250 million to offset the impact of dilution from shares issued under our stock compensation programs.
The company's March 2017 strategic share repurchase program.
And suspended.
Turning to slide 22, as Colbert and our press release, we are updating guidance to reflect our third quarter results and the impact of the sale of the Plum baby food and snacks business, which was completed on May 3.2021.
And.
<unk> quarter, we expect more pronounced inflationary pressures to negatively impact margins, while pricing actions take hold in the beginning of fiscal 2022.
In addition.
Although we expect to make progress on the transition into the post COVID-19 environment. It will remain.
And the fourth from a margin perspective.
While we expect gross margin headwinds to persist through the fourth quarter, we expect a sequential improvement of our EBIT margin relative to prior year due to easier comparables improved execution and normalizing marketing investments.
That's where we expect net sales for fiscal 2021 to decline, 3.5% to 3% excluding the impact from the 53rd week in fiscal 2020, and the impact of the European chips and Plumbed divestitures, we expect organic net sales to decline 1.2.
And 2 -0.7%.
To put our fiscal 2021 organic net sales guidance into perspective at the midpoint of our guidance range, we expect fiscal 2021 to be 6% above fiscal 2019.
We expect adjusted EBIT of my.
Per sub 5 to -4%.
We expect net interest expense of 200, and tens to hundreds of $15 million and an adjusted effective tax rate of approximately 24%.
As a result, we expect adjusted EPS of $2.90 to.
Minus valor and 93 per share representing a year over year decline of -2% to -1% to the prior year.
The EPS impact of the 50 <unk> week in fiscal 2020 was estimated to be 4 cents per share.
To put our fiscal 2021 EPS guidance.
2 day perspective at the midpoint of our guidance range, we expect fiscal 2021 to be in line with fiscal 2020, considering the impact of the 53rd week and 27% above fiscal 2019 adjusted EPS.
Regarding capital.
And to just we now expect to spend approximately $300 million for the full year, which is below previous expectations driven by the impact from COVID-19 on the operating environment.
In closing I want to reiterate Mark's conviction in the long term performance of Campbell.
We are working diligently.
Gently to deliver the results. We know we are capable of delivering and I remain optimistic about our strategy our team and the underlying strength of our brands and with that let them and turn it back to Mark.
Thanks Mick.
In closing we expected this to be a challenging quarter for the company.
Expand but it was made even tougher by several additional factors. However, we do not see these challenges as structural nor do they temper in any way our confidence and the transformation we are implementing at Campbell.
We knew this would not be simple and we remain confident and how we're responding and the actions already underway.
Finally, and most importantly for the long term health of our business is the progress, we're making on our categories and brands and the overwhelmingly positive indicators that we're seeing from consumers and customers, we will address the inflation and execution and as we continue to demonstrate sustainable.
<unk> growth, we will unlock campbell's full potential.
With that we'll now turn it over to the operator to take your questions. Thank you.
Thank you at this time I would like to remind everyone in order to ask a question Craig spine.
And then the number 1 and your telephone Keith.
Favorable, let's take just a moment.
To compile the Q&A roster.
We have our first question comes from the line of Andrew <unk> from Barclays. Your line is open please Carlos.
Good morning, Mark and Mick.
Hi, Andrew good morning.
And I guess.
Well, Bob Thanks for going through the detail on some of the challenges and the quarter given how fiscal <unk> played out I'm trying to get a sense of maybe what gives you. The confidence that you now have I guess the appropriate visibility for fiscal <unk> and then maybe more important it sounds like you have comfort that these issues are addressable and and largely not structural.
And so it's obviously early to be talking with any specificity about fiscal 'twenty do but some of these some of these challenges I think you mentioned are likely to persist a bit and be margin headwinds next year. So I'm trying to get a sense of you know between the combination of pricing per.
Productivity some of the actions that you're taking and the snacks.
I'll start out and such I mean, do you anticipate you'll have sort of and obviously elevated sales potentially as well do you anticipate youll have the firepower so to speak to.
And at least help address or mitigate some of those costs to sort of protect profitability and a better way and 22 or are those things that I mentioned maybe.
<unk> segment at this point not not expect it to be enough given some of the some of the pressures you've gone into into next year.
Yes, great Great question, and Andrew Let me, let me start with Q4 and.
And then obviously, we'll stop short of kind of given a lot of detail R 22, but I'll give you a perspective on kind of how we see that.
And how we thought about the variables that we talked about for this quarter.
Affecting the business going forward, but first on Q4 I do you know again I'm always.
And the current environment. We're in certainly we've had a couple tough.
Tough to predict a couple of the.
And the variables, we've seen but I do feel good.
That what we experienced in Q3.
And how that translates into Q4, we've done a very good job of.
Connecting those dots and I do think you'll see sequential improvement for a variety of reasons first I think we're not going to have the winter storm.
And then just as a perspective.
Closing, the Paris facility for 2 weeks and Texas.
And that ended up being right around that $10 million additional headwind in Q3.
And that we obviously have not anticipated as part of the reason that we were off our expectations.
So clearly we're not going to have that circumstance as we go into Q4.
I think the second thing is the comparable numbers and Q4 are just an easier comp right. So you've got higher COVID-19 costs and Q4, a year ago. You also have the opportunity to as we've said all along and the back half.
And that we moderate marketing spending to kind of equate to the percent of net sales and so that will give us a bit of a tailwind as well and the fourth quarter and as I talked about some of the transformational kind of execution issues on snacks.
And again, just as a little bit of deeper.
Or perspective on that.
And the and the third quarter. It was really you know I've been very proud of that team and done an amazing job through the integration from my perspective, I do think and the third quarter.
The accumulation of initiatives, we cut over to SAP and we.
And we closed our Columbus.
And facility, we had 3 major capacity expansion.
<unk> going on and the backstop of co.
Covid and not and the way of an excuse but certainly I think that puts some added pressure on and already tough quarter for us as it related to snacks, but as we look forward. We've added the right resources, we've stage and <unk>.
George and worked through some of that work and so we expect that execution will.
The headwind that we saw and the third quarter to really kind of be behind us as we go through the fourth quarter. So that's really the reason why we see the sequential improvement and and EBIT and operating leverage and some of the things that.
We're.
Right way bit bigger and nature and third quarter I think for that that carries over.
Got good estimates now so we can kind of see how that operation works. We're now running all of the Skus that we had simplified a year ago I think that was a little bit of the dynamic as we added those back introduced.
We're a little bit of new complexity back into the supply chain.
Continuing to push hard through some of the labor challenges that we've had so I think youll see that mitigate but still be present, and so I think when you think about 'twenty 2.
And obviously the things I just described execution, Larry I think will be behind us.
As far as inflation goes.
And we feel very good about the progress we're making on pricing.
Conversations that we're having with customers are very constructive I'm really grateful that we've had this time to really build equity I mean, this is probably the healthiest the portfolio has ever been going into that conversation.
And so that's a good thing.
I would be remiss not to say, though that inflation is a little bit of a moving target right now and so although I feel great about what we're doing I think I kind of want to wait for the next quarter to see kind of where we're landing on a couple of the variables and a couple of the commodities and then as it.
<unk> to kind of this transitional.
And of headwind I think it's a little bit of a mixed bag, obviously, we're going to be working hard to address those areas, but we will cycle through the COVID-19 environment at least into the first half of next year. So we will give you a lot more granularity on it but I think it's a very balanced.
<unk> certainly.
I think Q3 very much is the is the outlier, but I do think some of these variables will continue but we've got very good plans against them. So hopefully that helps put it into a little bit of context.
And then just a very quick follow up just I want to make sure I understand what we mean by sort of some of these transitional.
<unk> plus.
Is it just simply lapping.
Some of the benefits around operating leverage and things of last year or are there other aspects involved in making this transition from a sort of COVID-19 surge environment to a more normalized environment and I want make sure I'm clear on that thank you, yes. So let me let me make it let me break.
And as you know very hopefully a very simple.
Answer I think there are 3 distinct things that we're watching occur and that bucket. The first is really just lapping right that is the kind of cycling.
A network, that's fully loaded and and that leverage from year to year.
And it down the second piece I think that we saw transitional in Q3 and again I think these become more.
<unk> mitigated cost going forward, but.
We have really continued to see labor as a bigger challenge than I think we had expected it to be.
Year of course that has a bit of a knock on effect that as that labor has not enabled us to kind of meet the full targets on production. We've had to go to some higher cost co Mans.
That we consciously invested in to make sure that supply and inventory was where we needed it.
But those.
And every variables of kind of leverage.
Labor and the external investment and co manufacturers and what we're describing as that transitional bucket and so I do think the lapping will continue.
But the other 2 were going to get better and manage through that as we go into next year does that helps Andrew.
Yes, thanks very much.
Okay.
We have our next question comes from the line of Brian from the line from Bank of America. Your line is open. Please go ahead.
Hey, good morning, everyone.
Hey, Brian So I guess, what and just wanted to follow up on on.
On the inflation question.
And I guess, just 2 quick ones.
1 is.
And youre thinking about the sort of things that could move around and for <unk>.
For kind of the.
And the outlook for fiscal 'twenty, 2 is it really like grain and cooking oils. It just seems like what's inflated mode. Since the last earnings call and I've been more of the <unk>.
Cultural commodities.
Freight has already been inflationary packaging to a certain degree so I just want to make sure that we're kind of thinking that we're trying to monitor what's moving around it.
Just talking about mostly the AG commodity.
I think certainly that's where you've seen.
Some of the rising costs more recently.
<unk> I would also point to some of the volatility though on things like steel.
Where we've seen some ups and downs and again I'm kind of.
Cautious to kind of lock in on where we think that is obviously 1 of the other areas that has emerged.
A little bit more recently as protein.
But but I would just say that.
As we've all been watching this there have been ups and downs and so we continue to try to.
Calibrated and as we kind of went forward.
With our pricing actions that'll be in place the first quarter as we start the first quarter.
'twenty 2.
Yes, I feel very good about how that was informed and kind of how we saw the environment, but I think kind of the name of the game for 'twenty 2 is going to be to remain pretty.
<unk> and nimble and even as we're talking to customers, we're having that conversation where things may go up or down and we need to have that.
<unk> ability to have the dialogue as we go forward. So I don't know Mick if you got any other.
And I.
I think it's a good question I think if I look at it sequentially between the quarters as well between Q2 Q3, you continue to see to Mark's point to steady increase and ingredients and pack and those.
Items that you all show highlight it and of course some of it we expect to continue particularly as we start to look further out and <unk>. Some of the dialogue that we're having around pricing 1 of the other aspects and inflation is obviously freight costs and we've seen that.
Increase kind.
And sort of year over year perspective to continue in Q3, we obviously saw already some of that and Q2 and.
And.
Although we are anticipating that we might see a little bit of relief. There we continue to see freight.
Freight currently at an elevated level.
While that's going on as you would expect Brian we're looking for a lot of other.
Element sort of levers that we can utilize to manage a little bit of that volatility.
Obviously through productivity, but also how we contingency plan and set up the year. So I feel very good about how that plan has come together like I said I also feel very good.
About how the conversations.
On price and we're going never easy, but I think generally understood that the what the inflation looks like and.
And I certainly feel like we've been having very strategic and collaborative conversations about it and to put it and perspective, maybe if you look at Q2, you saw inflation on a rate basis up 3% and you see inflation.
Basis up and Q3, 4%.
Okay, and then just maybe just 1.
Quick thought on just how you're modeling elasticity as you know where it's at.
It seems like most companies now are anticipating or have already put through price increases and I guess, especially maybe in.
On a ramp meals just.
Just how you are.
Protein modeling elasticity, just just given how much inflation and consumers can see thanks yeah.
We're being very very thoughtful and strategic on how.
We're we're reflecting critical price.
And thresholds.
Got a very good plan that I think and.
Tables us to feel like.
Well first and foremost that we will remain competitive but also that and some of these categories, where we are.
And a significant leader.
And that we're also going.
Price you're able to sustain.
Momentum, where we built it and the last thing we want to do.
Cut down growth and share that we've worked fairly hard to have in place. So we're going to be thoughtful about it but it also enables us I think to me.
Model, if you will.
And based.
Based on historical.
Elasticity, we're able to model a pretty good understanding of where those key thresholds are we understand kind of how to balance. This what do you do and list price versus what are you do and trade, obviously theres a full range of.
Levers that we're going to be using across revenue management to get that right.
But.
I think for right now we feel like given the historical significance given our ability to protect certain price points overall as far as the health of the business growing into it and we feel very good.
Yeah.
Alright, thank you.
Our next question.
And that comes from the line and Ken Goldman from Jpmorgan. Your line is open. Please go ahead.
Hi, Good morning, 1 for Mark and 1 from Mick if I may.
Mark I think and general list pricing and this sector takes maybe 2 to 3 months to go into effect once announced if this is accurate and given that you have somewhat.
Or I guess hours and your quiver, Besides just list pricing.
It won't pricing be a tailwind until the first quarter I might have expected some of the conversations you're having with customers to be honest and we started a bit earlier and for net price and do it started offsetting your cost a bit sooner. So I'm just trying to get a little into the weeds there.
Some other I think Ken the honest answer is you will see it as a bit of a tailwind in Q4 to help mitigate.
But the effective date rates, so relative to how we think about.
And then when are we targeting.
Pricing really to fully be in place that has the essential.
Yeah, the first day of fiscal 'twenty.
And so you know although I do think there are circumstances as we're going through this for people.
We are making some moves a little quicker the reality is that you know.
I'd rather.
Kind of point to win I think the concentration of that will occur but I do.
Sensual and you look into Q4, you will see some help from it.
But probably not to the point that it's able to mitigate it until we get into Q4 or into Q1.
Okay. That's helpful. And then Mark can you give us a sense I didn't maybe you talked about this and I missed it but how to think about the gross margin and <unk>.
<unk> and I guess on the positive side you won't have the same headwind from the Texas storm impact.
I think it's also fair to maybe assume mark to market will be a tailwind again, but youll have worse inflation. You said you have a harder comparison. So just any color on this line I think would be would be helpful.
Yeah, no. It's a very good question and.
Think as kind of maybe just stepping back if you look at the overall.
Net point of our Q4 guidance you see that we're at about 13, 5% EBIT that implies approximately 110 and.
10 basis points decline from an EBIT.
And which and perspective year over year, that's obviously better than what we have experienced this past quarter. If you kind of break that down to Mark's earlier comments on the 1 and 2 obviously have an easier comparison versus F. 'twenty, but it also at the same time, we're obviously lapping.
<unk> Mark.
Marketing.
EIT Mark investment and last year. So as a result, we expect it to normalize more in Q4 for F. 'twenty and then to your question and what's happening with regard to gross margin. We expect gross margin from a year from a.
Sequential perspective to be largely similar however.
To your point, we obviously will have a negative mark to market and Thats, a little different and you said youre going to get a little bit anticipated reversal.
And the benefit that we saw in Q3 flip a little bit and Q4.
It'll be it'll be a little bit.
And when.
And even if you go to a year ago as a reminder, and the fourth quarter last year, we had a benefit so youre actually lapping a benefit as well as a little bit of a reversal of the Q3 benefit so that'll that'll that'll moderate a little bit what youll see but that's consistent with what mixed numbers are and what he's walking through segment.
Yes.
So I think overall similar gross margin. However of course, we had the benefit in Q3 to Mark's point from a mark to market perspective, however headwinds from a year over year comparison in Q4.
Sure.
That's helpful. Thanks, so much.
Sure.
Our next question comes from the line of Chris Growe from Stifel. Your line is open.
Please go ahead.
I have 2 questions for you.
The first 1 is in relation to the pricing you've announced so far and released we can't talk about prospective pricing.
Pricing.
And I guess, if you can give a general number or perhaps even a little bit by division how much pricing do you have in place and then just to reiterate you expect them to overcome inflation and fiscal 'twenty..2 so let me share that's accurate.
Yes, I think Chris what what we feel good about is when we went out with.
Our pricing actions as you might imagine it's been a while ago as we kind of kicked that off.
We felt very good about the combination of pricing or productivity. Some of the other actions, we're taking as well as the benefit.
That will get especially as you get to the back half.
Half of next year and.
And lapping the period, we're in right now.
We felt very good about it I think what's your sense from us is a little bit of caution.
And because of the volatility that we're watching on commodities and so you know obviously as we move forward through the fourth quarter, we start to set up.
'twenty 2 guidance and get another couple of months of.
Coverage behind us as well as understanding.
And our commodities are coming in and we'll have a better sense I know what everyone's trying to get at which is you know do you feel like you can fully cover inflation next year with the tools and <unk> got I can tell you.
Feel good but we're going to have to really watch what happens over these next couple of months to kind of solidify our position.
As far as magnitude of pricing as you might imagine, it's a little bit of a.
And depending on which business it is where the commodities are impacting it more we've been very clear.
We found transparent on kind of the translation of inflation, so where that pricing resides obviously.
As I said before we're also overlaying a very.
Detailed kind of strategic lens to it to make sure that we're not doing anything that that we're going.
And Brad.
The health of the business. So it's a pretty it's a pretty broad range I mean kind of mid single digits is probably a good.
Assumption, if you were trying to cost average it across all of our businesses if that helps a little bit.
And it does thank you and just isn't editorial point and.
Going to revisit the head and go back for and took.
Took a price increase earlier in the year and go back again, so it's kind of volatile environment I get it so.
Yes.
<unk>.
Yes, I, just forgot to say, Chris and you know.
We're kind of having conversations with our customers that say you know what we've got to probably compared to.
<unk> approaches to pricing, where you kind of.
Publish and then.
No.
And kind of see.
And 12 months. This is much more of a collaboration and dialogue around what's inflation doing and again our pricing is.
I think going to need.
Need to be a bit dynamic now of course, 1 of the variables. We have that helps a lot with that as trade spending and the ability for us to.
Use that a bit as a way to kind of manage a little bit of the ups and downs, but im not surprised to hear that so yes.
And just 1 other quick follow on which is in relation to your ANC spending.
<unk>.
Strongly and the prior year Donlin and down less so this year. So your overall spending still is higher.
And I guess I wanted understand what you think you need to spend and retain all of these households.
You're spending overall I guess on a 2 year basis still be up a lot to try to retain these households, and I'm just trying understand how you.
You can rightsize that and the fourth quarter still but yet retain these households and consumers.
Yes, well I think a couple of things 1 is Chris as Youll remember and the fourth quarter last year, we really invested.
And into the opportunity that we had.
Given the elevated demand.
Manned and.
And profitability that we were experiencing and we did that for a variety of reasons, 1 of which was to.
Solidify the equity of the businesses continue to really work.
On building equity with those households, especially younger households, we also learned a lot during.
And that time, so we used it as a bit of and opportunity to really fine tune, where the best Rois, where and as an example, you would've seen and the third quarter.
Our digital spend went up almost 20 points, we're now over 60% of our spend.
Has ended.
Digital, which which I'd love for a variety of different reasons, but 1 of which is that it's a very high ROI and a very efficient.
<unk> and so although I do think there are some key thresholds.
We want to manage to and as we've said kind of the percent of net sales is a good.
Good proxy, what I look at that relative to where we've been.
I feel like that's a good level and we've been able to kind of manage to that through the last couple of quarters into this quarter and certainly we're going to try to apply that.
That kind of standard of philosophy as we go.
So into the.
As we go into 'twenty 2.
Okay. Thanks for all your percentage from there.
Our next question comes from the line of Robert Moskow from Credit Suisse. Your line is open. Please go ahead.
Hi, Thanks, a couple of questions.
1 is mark.
I thought that I heard you last quarter talk about kind of a broader or more extensive rollout of the transformation plan and snacks and capturing more savings and more actions to do it.
Regarding what happened and this quarter does that change at all.
Youre planning to do there and.
Or do you need to rethink how you go about it at all and and then secondly on steel cost.
Maybe I'm I'm unfamiliar with how your contracts work with your suppliers, but I thought that they tend to lock in a price pretty early and mid year and then when you go forward with that price.
For the fiscal year for your fiscal year and.
Is it is it just that it's not possible to lock in a price right now because the underlying commodities jumping around so much or something.
And something change regarding the normal timing for for locking and yeah.
Yep.
No youre right, Rob and we sense that.
We will.
And eventually lock in at 22.
Price its been a little bit moving around I would say from quarter to quarter. So.
As we as we kind of lay that down for 'twenty 2 is a little bit of what we're reacting to so we know its elevated right. We know we know what kind of the inflations.
Pegged at but it is a little bit of a pass through.
Based on a certain time as you said, so we're kind of.
Working through that right now and as again I think when we get to the fourth quarter earnings and set the 'twenty 2 guidance will be and a much better position to kind of give.
A bit more comprehensive view of.
Our coverage and where exactly we are.
Okay and regarding snacks.
Oh, yes, so let's talk about snacks, so no nothing changes I mean I think.
As I said before I have been.
And really impressed with what we've been able to accomplish and the integration.
And I continue to see tremendous potential as we look ahead, we are a bit behind as you would expect given the headwinds I. Just described for Q3 and Q4 on an absolute basis, but the underlying initiatives the value capture all of the foundational work that.
And that although may have created some strain on us and the quarter as far as execution and costs overall.
As we normalize that over the really the months ahead, I expect us to be back on that trajectory and again I think as we as.
We said before and what kind of lay that.
Out with a lot more granularity and Investor day, but it doesn't change in any way structurally what I think we should be capable of doing.
Think.
We are the ambition for the quarter and executing all of those.
Initiatives at the same time.
Probably in hindsight staging them a little.
Differently would've been a better idea but.
We've kind of played through that now and are feeling very good about how that looks going forward.
Got it alright. Thanks.
Our next question comes from the line of David Palmer from Evercore ISI. Your line is open.
And then please go ahead.
Thanks, and thanks for the discussion on gross margins earlier in the presentation.
Input inflation part you said, maybe that might be 100 basis points based on the third comment and then the transitional items and maybe somewhat more than that I guess my question is about those.
Additional items are clearly you matched up pricing against the input side, but how much of those transitional items are really fair game for pricing offset.
The mirror side of that is how much is Campbell specific I would imagine labor and logistics is fair game for that and how much do you think these trends.
Transitional items can be offset by pricing into fiscal 'twenty 2.
Yeah, I think the I think we're not I mean, some of these are I would describe them very much as as well at least to my knowledge. Some of them are Campbell specific I. You know I think you are right about labor and logistics.
But the need for us to kind of invest.
In the.
And the supplement of co manufacturers to kind of recover on supply honestly that feels like.
Kind of a unique item to us that was very much of a headwind that will.
Navigate through I expect that to be better.
In Q4, and obviously a much better as we go forward I think on the operating leverage a little bit of it was.
And as needing to understand exactly how much benefit we have gained a year ago. When we were at our peak how much the value of.
The simplicity of the portfolio versus adding those TDP is back in place, we're going to take and so I think what I would tell you is we've now calibrated that.
I do think it will remain throughout the cycle of COVID-19, but some of these other elements ones that are capable of being priced and the others that are more kind of unique.
I think we will we'll work through those we've got good plans in place and I do see those as as we described and transitional in nature.
And I think on balance we will be able to address a great deal of those and just kind of be dealing with the leverage lap as we go into 'twenty to make any.
Yes, no that's exactly how I would describe it and it's really the lapping of the leverage where you saw last year some of the benefits around the operating leverage and you see kind of some of that coming out right now and I mean net net is relatively neutral, but I will say that.
We have been.
Again, I don't know how this is affecting other.
Other companies, but I will say labor.
Has been a challenge and I think I feel very good about what we've done to address it but even as you're kind of replacing labor.
And to kind of full efficiency.
C training, new individuals' and kind of getting back.
Squarely at the levels we were.
Earlier in the year.
It's taking a little bit of time and so.
Think that.
I said, although I see the steady progress I think we're being pragmatic as.
Because assumptions so that we don't underestimate what that transition or time looks like.
And I just wanted to and this is more of a heavy topic and maybe 1 for the analyst day and.
Maybe 1 for just later and general, but we're going to be getting past COVID-19 here and there was a pre COVID-19.
Year of fiscal 19, if you will by.
And the end of 'twenty 2.
You might have $250 million of productivity the street's modeling.
Sort of a mid ones and $160 million or so of gross profit growth from 19 to 22.
And I know and what you're kind of.
As we've made and here is that 'twenty, 2 where part of it feels like also a sort of and exit transition period out of Covid that might hamper profitability, but big picture. We would think that you should be bridging to much significantly higher gross profit dollars versus pre COVID-19, particularly with the multi year stacked organic revenue.
Note that you will have had from trial and repeat coming out of Covid. So.
And I.
Do wonder about some of the offsets that you're thinking about internally the reinvestments that you've made and other friction costs that would offset those theoretical step ups.
Yeah, It's a great question and and I do.
Thank you know.
There's a couple of different and.
Important variables within that dialogue that we will spend time talking about when were.
And our Investor Day, obviously, you know 1 of those pieces is kind of bridging for folks the snacks margin that we already talked about how did the value.
Growth of work, where would the investments versus the upside how are you how did the headwinds were experiencing an inflation effect that but maybe this is a way to kind of give.
I'll give you a little bit of context, and Mick had mentioned this earlier, but I think it's a really important aspect and obviously.
Captured and we were disappointed with the quarter I mean, our standard is that we do what we say and and this particular quarter.
We didn't do that but I continue to see the challenges that were in the quarter as being very transitional in nature and the underpinning of the of the great.
<unk> market results and being ahead of expectations as it relates to the share and the retention of these households, all bode well for us for the future and and maybe to give a little context to your question specifically if you take the midpoint of our 'twenty, 1 guidance and again I'm going to repeat a little bit.
And Mark said, but I think its important at the mid point of our guidance. It represents versus that 2019 base of top line growth of 6%. So a CAGR of about 3%, obviously, we know that theres, some foodservice and there and a little bit of partner brands, but in general a 6% versus 19 R.
During that same period with the midpoint of the range, so even with the adjustment and our guidance is up 9% versus 2019 or and about a 5% CAGR for the 2 years and and as Mick and said earlier EPS is up 27%.
Since 19 with.
And E motion up 9% during the same period. So if you look at that all of those and and again I think people would expect this but all of those are well above or well within.
Our strategic plan targets and I think that as we navigate into 'twenty 2.
And we would expect to see.
Yes, some challenges as we continue to lap a few of these areas I do want to.
And a nail down.
Good number for inflation next year, but.
But I feel very good about where we are on the journey.
Don't love the don't love the quarter, but I love the the progress that we're making and.
And <unk>.
And in particular, what I think will be longest lasting which is the strength of the brands and the businesses. So I don't know if that helps with perspective I know what youre looking for for 'twenty, 2 and we will do a good job of providing you that bridge when we get together at the end of the year, but I think not a bad perspective.
Specter of to kind of close out a little bit of the discussion with.
Helpful.
It looks like that's all the questions that you have at this time.
And I'd like to turn the call back over to Ms. Connie.
Thank you and Euro that concludes our call. Thank.
Thank you all for participating and we will speak later in September.
This concludes today's conference call you may now disconnect.
Okay.
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And.
Yeah.
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