Q4 2021 Campbell Soup Co Earnings Call
Okay.
Good morning, My name is <unk> and I'll be your conference operator today.
At this time I would like to welcome everyone should they come to US you fourth quarter and full year fiscal 'twenty 'twenty. One 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.
I'll ask a question during the Q&A session, you will need to press the star one on your telephone.
With that I would like to hand, the conference over to your house, Mr. Rebecca Gardy Biscardi, you may begin your conference.
Good morning, and welcome to Campbell's fourth quarter and full year fiscal 2021 earnings conference call I am Rebecca Gardy head of Investor Relations at Campbell Soup Company. Joining me today are Mark Clouse, Campbell's President and Chief Executive Officer, and Nic Bake housing Campbell's Chief Financial Officer, today's remarks had been pretty.
Recorded once we conclude the prepared remarks, we will transition to a live webcast Q&A session. The slide deck in today's earnings press release has been posted to the Investor Relations section on our website Campbell soup company Dot com. Following the conclusion of the Q&A session and a replay of the webcast will be available at the same location followed by a transcript.
As a call within 24 hours on our call today, we will make forward looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk. Please refer to slide three or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated.
Aided in forward looking statements because we use non-GAAP measures. We have provided a reconciliation of each of these measures to the most directly comparable GAAP measure in the appendix of this presentation.
On slide four you will see today's agenda, Mark will share his overall thoughts on our fourth quarter and full year performance as well as in market performance by Division, Nick will discuss the financial results for the quarter and the year in more detail and then provide our guidance for the full year fiscal 'twenty 'twenty, two and with that I'm pleased to turn the call over to Mark.
Thanks, Rebecca good morning, everyone. Thank you for joining us today.
In fiscal 2020, one the pandemic continued to present challenges across North America.
But I am so proud of how our teams, particularly our frontline and supply chain teams adapted and rallied to keep each other safe and meet the sustained demand for our products.
On behalf of the entire Campbell's leadership team I am deeply grateful for their dedication and we continue to make their safety and well being paramount as they work to meet the needs of our customers consumers and our communities.
As difficult and complex as this time has been it has also been an extraordinary period for Campbell and we've made clear meaningful progress advancing our strategic plan.
We've evolved into a different company one that is stronger more agile and with growing more relevant brands that are better positioned for the future.
In fact, three quarters of our portfolio grew or held market share for the year, reflecting our continued momentum.
Adjusted EBIT lagged fiscal 2020, as we lap dramatic scale and efficiency from a year ago and navigated a much higher inflationary environment. This year.
However on a two year CAGR adjusted EBIT grew 5% and adjusted EPS grew 14% as we de Levered and improved our balance sheet.
Turning to slide seven full year organic net sales were comparable to prior year, which included a positive fourth quarter finish to fiscal 2021 in light of last year's remarkably strong performance.
If you recall, our first half fiscal 2021 was driven by strong elevated in market performance as we continued to gain share and made steady progress on supply to restore the shelf.
The third 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 headwinds, including increased inflation and execution pressures in our snacks division.
In the fourth quarter, we delivered solid results ahead of our expectations across all three key metrics net sales adjusted EBIT and adjusted EPS and address the execution pressures, we experienced last quarter.
Organic net sales declined 4% as we lapped a 12% growth in the prior year and delivered 4% growth on a two year CAGR basis.
Our fourth quarter performance accelerated relative to third quarter, driven by strong in market results, particularly in U S soup and goldfish and the continued recovery of our foodservice business.
In snacks, we delivered sequential operating margin improvement of 270 basis points versus the third quarter. Despite the continued industry wide supply chain challenges.
An important barometer of the health of our brand portfolio is our in market performance for the full year, 75% of our brands grew or held share versus the prior year and the majority of our brands and our 13 core categories grew ahead of pre COVID-19 levels.
To node repeat rates on our brands in all core categories are ahead on a two year basis.
Total company in market consumption was -1% compared to fiscal 2020 on a 52 week basis importantly, compared to the fiscal 2019 period consumption grew 10% driven equally by strength in both our meals and beverages and snacks divisions as we continue to make material adverse.
<unk> and attracting and retaining consumers, especially the critical millennial cohort.
Turning to our division performance on slide nine let me begin with meals and beverages.
Our fourth quarter organic net sales decline of 9% and in market performance of -2% reflects cycling the partial inventory recovery and elevated consumption levels in the prior year quarter.
Compared to the fourth quarter of fiscal 2020, we continued to grow share in Swanson broth condensed soup prego ready to serve soup and Pacific Foods on a two year basis, we delivered strong consumption growth of 13% against organic net sales growth of 10% narrowing.
GAAP as our foodservice business continued to stabilize.
On U S soup, we delivered another quarter of record share growth of nearly two points with gains in all segments. This.
This included gains from Swanson broth condensed soup, well, yes, and slow kettle driven by the continued recovery in our total points of distribution or T. P. DS.
Our share of T. P. DS grew for the fourth consecutive quarter. This year U S. Soup two year dollar sales growth of 16% in the fourth quarter exceeded the growth in total shelf stable meals and was just slightly behind total edible growth in that same time period.
Household penetration and repeat rates remain elevated compared to pre COVID-19 levels.
Condensed soup increased dollar share for the 10th consecutive quarter with the largest driver of share growth coming from condensed eating varieties as we nearly restored the full range of offerings to the shelf.
As our ability to supply improved we were also pleased to see household gains in ready to serve versus the prior year as a result of the shelf recovery.
And favorable at home consumption behaviors, particularly for lunch occasions.
Ready to serve end market consumption grew an impressive 21% on a two year basis led by chunky slow kettle and the successful relaunch of well yes.
Pacific Foods continues to strengthen its position as the number one organic soup brand with the fourth quarter, marking seven straight quarters of share gains in measured channels.
We expanded distribution and have recovered the majority of our supply while bringing in more millennials to the category than any other soup or broth brand.
On Swanson broth, we increased our share by three points seven points, our highest quarter of share growth in over three years, driven by our investment in supply recovery. This is important as it demonstrates the strength of the brand as we recovered loss share to lower priced players as our supply improved.
Prego delivered its best year of dollar share gains in four years and maintained the number one share position for 27 consecutive months.
The brand grew in market consumption on a two year basis and delivered 5% growth over the prior year.
Household penetration was elevated versus fiscal 2019 in every quarter and grew one point in the fourth quarter.
Overall, the meals and beverages division delivered strong in market performance against difficult comparisons to the prior year and achieved share gains in key categories, particularly with millennials.
On slide 11, we are excited to share with you a glimpse into our meals and beverages innovation plans for fiscal 2022 are new items focus on new occasions and relevant wellness trends.
Expanding on the relaunch of our better for you well, Yes brand is the launch of well, yes power bowls with five unique varieties for both lunch and snack occasions.
We have also expanded our successful slow kettle crunch innovation with four varieties of Campbell's red and white crunch, including our iconic classic tomato soup with goldfish toppings.
On our Pacific Foods business, we are launching additional plant based products, including creamy oat milk soups and creamy plant based protein brass. Finally, if you haven't tried the new chunky spicy chicken noodle, it's fantastic and brings variety to the critical at home lunch occasion.
In addition to a relevant and consumer driven innovation another element of our win in soup strategy is a refresh of our Campbell's condensed soup.
We are contemporize the brand to better match, our growing millennial consumer base, while improving the product and its shop ability as we continue to support our positioning as the starting point for delicious meals.
We also have continued our journey of simplifying our ingredient lines and improving quality.
It's always tricky when looking to evolve such an iconic design and product, but our new graphics and improved ingredient lines strike the right balance and had been met with a very positive customer and consumer response.
Let's now turn to snacks. This quarter was the second highest 13 week quarter of net sales for the snacks division since the Snyder's Lance acquisition.
Organic net sales grew 1% over the prior year quarter and 7% on a two year basis.
In market performance declined only 1% year over year, but grew 11% on a two year basis.
Turning to our snacks power brands, which continue to fuel performance with end market consumption growth of 2% this fiscal year and 15% on a two year basis, driven by double digit consumption growth in the majority of our brands.
Compared to the prior year, we grew share on many of our power brands, most notably Cape Cod potato chips snack factory Pretzel crisp goldfish crackers and late July snacks.
Compared to pre Covid levels household penetration remains elevated and repeat rates are higher on all power brands.
Turning to goldfish, we delivered sustained share growth increasing for a second quarter in a row by more than one point compared to this time last year.
On a one and two year basis goldfish delivered strong results, including double digit consumption growth increased household penetration and higher repeat rates. This solid performance on goldfish was due in part to the successful launch of limited edition Goldfish, Frank's Red Hot crackers. Additionally, the reinstatement.
Shipment of promotions improved performance on multi packs and an effective marketing campaign contributed to our strong results. We are excited to continue to introduce on trend limited editions on goldfish with the launch this week of goldfish Jalapeno Popper and plans for additional innovation later this fiscal year.
Entering the fourth quarter amid rising inflation labor shortages and some execution pressures, we better focused our agenda in the snacks division driving operational excellence and allocating additional resources throughout the supply chain network.
We are very pleased with the speed and progress we have made to address the execution of pressures we experienced in the third quarter, we head into fiscal 'twenty 'twenty, two with a stronger foundation and confidence we can continue our significant transformation on this important business.
On slide 17, we do expect the challenging environment in fiscal 'twenty 'twenty, two as Covid persists at inflation and labor availability remain highly volatile. However, we also anticipate our effective pricing actions supply chain productivity programs and cost savings initiatives to.
Significant offsets, resulting in an improvement in the second half of the fiscal year relative to the prior year and exiting fiscal 'twenty 'twenty two with momentum as we continue to make progress on our strategic plan.
Mick will provide more details on our fiscal 2022 outlook and assumptions in a moment.
With that let me turn it over to Mick to discuss our fourth quarter and full year results in more detail.
Thanks, Mark good morning, everyone.
Turning to slide 19 for the fourth quarter organic net sales, which excludes the impact from the additional week and the impact of the sale of the Plum baby food and snacks business declined 4% as we cycled both the elevated demand in food purchases for at home consumption and a partial retailer inventory.
Recovery in the prior year compared to the fourth quarter of fiscal 2019, which we view to be more meaningful given the COVID-19 impact to prior year organic net sales increased 4% on a two year CAGR.
Adjusted EBIT decreased 13% compared to prior year to $267 million driven by lower sales volume, including the impact of the additional week in the prior year quarter and a lower adjusted gross margin, partially offset by lower adjusted marketing and selling expenses.
And lower adjusted administrative expenses, our adjusted EBIT margin was 14, 3% compared to 14, 6% in the prior year adjusted EPS from continuing operations decreased eight cents or 13% finished prior year to 55 cents per share.
Actually driven by the estimated four contribution from the additional week in fiscal 2020.
For the full year organic net sales, which excludes the impact from the additional week divestitures and the impact of currency were comparable to the prior year and grew 3% compared to fiscal 2019 on the two year CAGR basis compared to prior year meals and beverages organic net sales.
<unk>, 1% driven by declines in foodservice, partially offset by growth in V. Eight beverages and snacks organic net sales were flat as gains in our salty snacks portfolio, including late July snacks, and snack factory Pretzel crisps and in goldfish crackers were offset by declines in.
Lance Sandwich crackers and in partner brands within the Snyder's Lance portfolio.
Full year, adjusted EBIT decreased 3% versus the prior year to $5.0 billion.
The decline reflected the lower adjusted gross margin and lower sales volume, including the impact of prior years additional week, partially offset by lower adjusted marketing and selling expenses and higher adjusted other income our marketing and selling expenses represented nine 6% of net sales compared to 10, 9%.
Last year.
Full year 2021, adjusted EBIT margin was 16, 6% compared to 16, 7% in the prior year full year adjusted EPS from continuing operations increased 1% to $2.98 per share.
On the next slide I'll break down our net sales performance for the fourth quarter organic net sales decreased 4% during the quarter lapping an increase of 12% in the prior year quarter when the demand for at home consumption remained elevated and retailers partially recovered on the inventory.
The organic net sales decline was driven by a five point headwind due to volume declines, partially offset by favorable price and sales allowances and lower promotional spending which each drove a one point gain in the quarter.
The impact of one last week in the quarter subtracted seven points and the recent sale of Plumb subtract that one point all in our reported net sales declined to 11% from the prior year stronger than anticipated as in market demand remained elevated.
Turning to slide 22, our fourth quarter adjusted gross margin decreased by 420 basis points from 35, 6% last year to 31, 4%. This year, which was generally consistent with our expectations mix and operating leverage had a negative impact of approximately 70 basis points in <unk>.
40 basis points, respectively on gross margin as we continue to transition from last year's elevated demand net pricing drove a 100 basis points of improvement due to lower levels of promotional spending in the quarter as well as favorable price and sales allowances, which do not yet reflect the price increases.
Effective first quarter of fiscal 2022.
Inflation and other factors had a negative impact of 640 basis points with slightly more than half of the decline driven by cost inflation as overall input prices on a rate basis increased by approximately 5%. The remaining impact was driven by higher other supply chain costs largely due to last year's.
Victor and cost efficiencies related to our higher production levels to service the elevated the map as well as lower mark to market gain on the outstanding commodity hedges, partially offset by lower COVID-19 related costs.
Our ongoing supply chain productivity program contributed 150 basis points to gross margin, partially offsetting these inflationary headwinds are.
Cost savings program, which is incremental to our ongoing supply chain productivity program added 80 basis points to our gross margin.
Moving onto other operating items.
Adjusted marketing and selling expenses decreased $91 million or 34% in a quarter on a year over year basis. This decrease was driven by lower advertising and consumer promotion expense lower selling expenses and lower marketing overhead costs, a N C declined 52%, reflecting our elevated <unk>.
Driven level of investment in the prior year to attract and retain new households, However, ANZ was comparable to the fourth quarter of fiscal 2019 overall, our adjusted marketing and selling expenses represented nine 3% of net sales during the quarter, a 330 basis point decrease compared to <unk>.
Last year adjust.
Adjusted administrative expenses decreased $30 million or 18% with approximately one half of the decrease driven by the estimated impact of the additional week no prior year quarter. The balance of the decrease reflected lower general administrative costs higher charitable contributions in the prior year and benefits or <unk>.
So shaded without cost savings initiatives, partially offset by higher costs adjusted administrative expenses represented seven 4% of net sales during the quarter, a 60 basis point decrease 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 $25 million in incremental year over year savings, which came in ahead of our expectations, resulting in full year savings of $80 million with the majority of the savings from the Snyder's Lance integration.
We remain on track to deliver our cumulative savings target of $850 million by the end of fiscal 2022.
On slide 25, 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 13% as to net sales decline, including the impact of the additional week in the prior year quarter, and the 420 basis point gross margin.
Contraction resulted in a 84 million dollar and 77 million dollar EBIT headwind, respectively, partially offsetting this was lower adjusted marketing and selling expenses contributing 330 basis points to adjusted EBIT margin and lower adjusted administrative and R&D expenses.
Contributing 50 basis points, the estimated impact to EBIT from the additional week in fiscal 2020 was $22 million.
Overall, our adjusted EBIT margin decreased year over year by only 30 basis points to 14, 3%.
The following chart breaks down our adjusted EPS change between our operating performance and below the line items, a 10 cent impact of lower adjusted EBIT and a one cent impact of higher adjusted taxes, partially offset by a 3% favorable impact from lower interest expense result.
Is it embedded in expected adjusted EPS of <unk> 55 cents down eight cents from 63 per share in the prior year of which an estimated four cents was driven by the additional week in fiscal 2020.
In meals and beverage as declines across U S retail products, including U S soup, prego pasta sauces and pace Mexican sauces led to a 9% decrease in fourth quarter organic net sales compared to the prior year the decline.
It was driven by volume decreases in used retail due to last year's partial retail inventory recovery and increased demand of food purchases for at home consumption and the prior year quarter. However for the comparable periods in fiscal 2019 organic net sales increased 10%.
In the fourth quarter of fiscal 2021 sales of U S soup decreased 21% seven points of which were driven by the additional week in the prior year, while at the same time cycling a 52% increase in the prior year quarter.
Operating earnings for meals and beverages decreased 30% to $139.0 million. The decrease was primarily due to sales volume declines, including the additional week and a lower gross margin, partially offset by lower marketing and selling expenses as well as lower administrative expenses.
Lower gross margin resulted from higher other supply chain costs net of lower COVID-19 related costs higher cost inflation, including higher freight costs and ingredients and packaging inflation and unfavorable product mix, partially offset by the benefits of supply chain productivity improvements.
Overall within our meals and beverage division fourth quarter operating margin decrease year over year by 290 basis points to 15, 2%.
Within snacks organic net sales increased 1% to $1 billion driven by volume gains in goldfish crackers, and our salty snacks portfolio, including snack factory Pretzel Crisps Snyder's of Hanover, Pretzels, and Cape Cod potato chips, partially offset by declines in partner brands and fresh.
Bakery.
Raw price and sales allowances and lower promotional spending also contributed to sales growth compared to the fourth quarter of fiscal 2019 snacks organic net sales grew 7%.
Operating earnings for snacks increased 7% for the quarter, driven by lower marketing and selling expenses, partially offset by sales volume declines, including the impact of an additional week and a lower gross margin.
The lower gross margin resulted from higher cost inflation and other supply chain costs net of lower COVID-19 related costs, partially offset by the benefit of cost savings initiatives supply chain productivity improvement favorable price and sales allowances and lower promotional spending.
Overall within our snacks division fourth quarter operating margin increased year over year by 170 basis points to 14, 2%.
I'll now turn to cash flow and liquidity.
Fiscal 2021 cash flow from operations decreased from $1.4 billion in the prior year to $1 billion.
Primarily due to changes in working capital, mostly from a significant increase in accounts payable in the prior year and lower accrued liabilities in the current year.
Our year to date cash for investing activities was reflective of the cash outlay for capital expenditures of $275 million, which was slightly lower than the prior year driven by discontinued operations and the net proceeds from the sale plus a.
Our year to date cash outflows for financing activities were one $7 billion, reflecting cash outlays due to dividends paid of $439 million as we continue to focus on delivering meaningful return of cash to our shareholders. Additionally, we reduced our debt by one point to bill.
In dollars.
We ended the year with cash and cash equivalents of $69 million.
In June the board authorized a $250 million anti dilutive share repurchase program to offset the impact of dilution from shares issued under our stock compensation programs. As you saw in today's press release, we reinstituted, our strategic share repurchase program with a 500 million dollar program.
Replacing the suspended 1.5 billion dollar program, which has been canceled.
The company expects to fund the repurchase out of its existing cash flow generation.
Turning to slide 30 as covered in our press release, we are providing guidance for full year fiscal 2022, we expect continued uncertainty around the duration and effects of the pandemic on industry wide supply chain networks, resulting in accelerating inflationary pressures.
In a constrained labor market, we expect to partially mitigate these headwinds with well executed pricing and planned productivity initiatives as well as our cost savings program.
First half margins, particularly in the first quarter will continue to be impacted by translational headwind cycling prior year's elevated sales and scale efficiencies with comparisons easing in the second half of the fiscal year.
We expect organic net sales to be minus one to plus 1% adjusted EBIT of minus eight to -5% and adjusted EPS of minus eight to -4% for the fiscal 2021 results.
Fiscal 2021 results include a 12 cent benefit from Mark to market gains on outstanding commodity hedges and an approximate two cent adjusted EPS contribution from flow for additional context on mark to market. Please refer to today's form 8-K.
Importantly, when considering these items the upper end of our fiscal 2022 adjusted EPS range is in line with fiscal 2021 performance.
As you'll see on slide 31, we expect core inflation for the year to be high single digits with a more pronounced impact in the second half of fiscal 2022, which we plan to address with price increases and trade optimization supply chain productivity improvements and cost savings initiatives and a key.
Continued focus on discretionary spending across the organization.
Moving to additional assumptions, we expect ongoing supply chain productivity gains of approximately 2% to 3% for the year, excluding the benefit of our cost savings program. As previously mentioned, we expect continued progress on our cost savings program and expect to deliver an incremental $45 million in fiscal <unk>.
1022, keeping us on track to deliver $850 million by the end of the fiscal year.
Additionally, we expect net interest expense of 190 to $100 million to $95 million and an adjusted effective tax rate of approximately 24%, which is largely in line with fiscal 2021, while cognizant of our current operating environment, we expect to continue to invest into.
The business targeting capital expenditures of approximately $330 million, which includes carryover projects from fiscal 2021.
Additionally, we expect that net of adjusted administrative expenses and adjusted other income to increase as a percentage of net sales, reflecting the planned information technology investments and related costs and the cycling of lower administrative items in the prior year all in we expect year over year.
Margin improvement in the second half of the year.
Overall as Mark said, we had a positive finish to the year, we are truly grateful to our teams and for their continued dedication and commitment as we head into fiscal 2022 and with that let me turn it over to Mark.
MC and.
In closing we feel good about how we landed fiscal 2021 amidst the difficult environment, we expect fiscal 'twenty 'twenty two will be a complicated transitional year, but I'm confident that with our strong in market momentum and the progress that we've made we will successfully navigate through it.
I look forward to sharing our view on how we intend to unlock the full growth and value potential of this fantastic company going forward at our Investor Day on December 14th with that we'll now turn it over to the operator to take your questions. Thank you.
And as a reminder to ask a question you will need to press star one.
To withdraw your question. Please press the pound key.
First question.
Your first question comes from the line of Andrew Lazar with Barclays. Your line is open.
Great. Thanks, very much for the question.
I was hoping we could get into maybe some of the key assumptions underpinning the full year EPS range.
For fiscal 'twenty two in terms of.
Assumptions around retention of new households, gross margin and SG&A marketing spend in particular really just to better assess the level of confidence in conservatism.
In the full year forecast, particularly in light of the expected challenging <unk> and and the higher inflation anticipated in the second half that could mute the second half recovery and I really ask this because I still get the feel from many investors sort of conversations that sort of the broader food group is maybe it's still not fully factoring in the full.
<unk> ahead in in guidance. So thank you.
Sure, Yes, so thanks Andrew.
That's a full question. So let me let me try to piece out a couple of different elements in there first why don't we talk a little bit about the.
You know kind of the basis of the assumptions.
For our guidance and how we're thinking about it so first let's talk a little bit about top line.
I think you know and part of the part of the composition of the year is going to be a little bit of a tale of two halves because I do.
Foresee a first half that's going to feel a little bit more like what we've been experiencing in the fourth quarter, while seeing sequential improvement as pricing comes into play which is obviously.
A significant contributor as we go forward and then in the back half, even though we do expect.
Really driven on the back of the packaging inflation as it relates to steel in particular is our contract turns on the calendar year.
But even with that in mind, we're expecting improvement in the back half and overall momentum as we as we exit the year. So I think when you think about top line next year I do think that you know.
We see terrific momentum on our business today.
We accelerated.
That momentum in Q4, we expect to continue.
To see.
Positive in market performance as we move forward, we are going to lap a pretty significant inventory replenishment that occurred primarily in the first quarter, but through into the second quarter, but I think the underlying health of the business. We expect to continue to be positive and of course sadly.
With Covid resurgence.
Think some of the consumer dynamics that supported.
Demand is likely going to be with us for a while longer.
I also and continue to be very encouraged by the retention of households, and really the sustainment of repeat levels. That's very broad based across our portfolio. Obviously soup is one that we're watching very closely and again I don't think we've ever had or at least not in recent history a sustained peer.
Area to progress so broadly across that part of our business and with what we're bringing relative to innovation and other elements, where we're feeling very good about that I do think a governor or a little bit on this in a recognition of a little bit of then will wire is your guidance. The way. It is is because we also have to be mindful of.
What is a very significant pressure on labor that we're experiencing right now.
And as I talked about that a little bit in the last quarter.
We've seen that sustained through the fourth quarter and expect to still be wrestling with that although I think we're taking some terrific actions and we're seeing some progress in some areas arguably one of the toughest moments certainly that I've seen as it relates to to labor, where we're running about two times our normal vacancy rate.
<unk> and <unk>.
As a.
Translation into what that means think about it is around somewhere in the neighborhood of 6% of our positions that are open either either vacant or absent and that is making it tougher to fully meet the demand. So I think you sense or feel a little bit of that balance in our top line.
Projections for the year and I'll say this a couple of times, but if you go top top of the range to bottom of the range. It kind of reflects how we do on that in that area and so that's how we've thought about the top line. When you get some margin it's more distinctively a first half second half discussion were real.
Really primarily in the first half, but really more so even in the first quarter.
You know as we see pricing come into fruition of course inflation now as we kind of leave the cupboard positions of 'twenty one into 'twenty two.
We definitely are seeing higher inflation, but also field.
Feeling very good about the traction we're getting relative to the pricing actions that we put in place we've got good strong productivity that.
That we think will will certainly help mitigate that as well, but certainly youre going to be in that that transitional quarter.
Pricing coming in with higher inflation, and then is pricing is fully in place we expect that to stabilize as we did note at.
As steel prices have gone up significantly we.
We are expecting a tick up in inflation in the back half not enough to offset the progress in the other areas in the comparable.
Numbers that we're going to be lapping, but generally a little bit more mitigation.
And that's you know, although we've got good programs I think we've got a good plan for it.
That's a that's a pretty significant driver as we look through.
<unk> of the year and then what we've been calling transitional costs, which again in the fourth quarter were fairly consistent with what we saw in the third quarter.
We expect that to be consistent in the first quarter and then begin to mitigate as we move forward from there. So I do think as the year unfolds I feel like we are assuming that as we both lap as well as see some.
Relief in a couple of areas, while we get pricing fully in place I think we have a fairly balanced approach and not unlike what I was talking about.
Around top line I think the high end and the low end of the ranges of guidance or a little bit reflective of of what variability could occur relative to you know where were seeing inflation or coverage of that inflation to give you a sense of kind of how we've thought about the year and then of course as you dropped the EPS a little less.
Difference between where EPS.
And EBIT is relative to what.
What we see kind of happening below the line. So that I don't know from a macro basis, that's kind of the way we're thinking about the pieces.
Maybe worth just going back to you to see if you've got any specific.
Element you want to dive into a little bit more I know this is a big question for the day, though yeah. No very helpful. Overall perspective I appreciate it I guess really it's just more on marketing spend and that's certainly where all the questions. This morning, just to get a sense of how you see they're playing out for the year.
Yes, So let me, let me kind of hit that one head on and maybe a good way to start with it is to give you a little bit of an explanation on Q4, because I know as you unpack the numbers and again I think we foreshadowed this.
But it's important to remember that in fourth quarter.
<unk> of 20, you know we were in a position, where we had a significant opportunity to kind of double down and invest in AR.
A more significant way, which by the way I'm very glad that we did because as I've said before.
I think it did two things gave us some momentum as we were solidifying relationships with a lot of new consumers, especially millennials, but it also gave us a great opportunity to learn and figure out kind of what was working what wasn't working which helped us really kind of dial in to the most efficient or the highest returning spans as you.
Flip the page to Q4 of 'twenty, one you see a significant drop in marketing and selling but underpinning that what you have is essentially advertising and marketing that are at about the same level as Q4, 19, and as you've seen our results behind it and again.
Arguably you're always a little bit of a lag, but as you see our results relative to it I think I feel great about the investment levels overall that we have and as you think about.
Going into next year I do think you may see a little bit of movement between the quarters, but overall from a marketing spend I think we're at a good level, we may have a little bit of incremental investment in a couple areas as we're adding innovation and.
Working through the balance of the year, but it'll be a relatively stable investment year, we're not expecting marketing to be a source of opportunity to offset inflation at all right. We feel good about the levels we're at.
And we want to we want to make sure that we continue to refine the effectiveness of it but we're committed to spending behind the businesses I mean, I think the last thing in the world we'd want to do is slow down the momentum that we're seeing in market because it's certainly been for us a bit of an unprecedented period of really.
A broad based.
Market share expansion and growth in key businesses and so we want to we know long term coming out of this thing that's what's going to matter most and so you know we're going to be very guarded on it even though I recognize on paper Q4, you know needs a little bit of context, but relative to how we're thinking about it going forward.
We're expecting very stable investment great. Thank you so much.
Your next question is from the line of Bryan Spillane from Bank of America. Your line is now open.
Good morning, everyone.
Hey, Brian I, just wanted to ask a follow up on.
On inflation and I guess, just two points.
To cover one the high single digit is that gross inflation or is that net of productivity. That's first one.
That's gross Brian Okay. Thanks, and then the second one just in terms of trying to understand we get a lot of questions about just.
How much of that high single digit inflation expectation is.
More or less locked in and how much is variable right, meaning could could swing up or down.
Depending on conditions and I guess, you know one of the things that.
We've been hearing consistently through the month of August as we've touched base with companies is.
There's a lot of volatility in freight even if you've got contracts I mean, it's sometimes it's not even the truck doesn't even show up.
Let alone paying higher for the contract. So it seems like there's just a lot of volatility there and then anything resin based whether it's snack bags bag liners.
Resin cups and <unk> probably.
Complicates that a little bit just just given what it's doing to the to the refining complex. So anyway, just just any any context there in terms of how much is fixed and how much would be variable.
I'll, let nic walked through kind of our coverage position and then I'll give you a little bit of qualitative view of it I I totally understand the question and there's you know there's a little bit of.
Mix here I would say of certainty and.
Pragmatic forecast.
You know positions as we look at the at anticipating some variables that arent necessarily locked down but that I think we have a good sense of where it will likely be yes. So if you look at it from a ingredient impact perspective at this point in time in the year were covered about two thirds, so florida for the <unk>.
Full year next year, which is very typical and probably a little bit more front end loaded coverage and then throughout the year you have a little bit more exposure, but about I would say two thirds right now yes.
I would say of that remaining third as you know we do have a.
Pretty significant.
Piece of this which is relative to our cans.
As it relates to steel prices and so what we're doing there is using.
And that gets really locked in more at the turn of the calendar year. Although I do think we have a much clearer picture of kind of where we are and are working through that as we sit here today, but we've got an economic forecast that I think is.
Generally.
Consistent with where prices are today you are right resin is another area that we've seen some tick up in cost as well, but I think we've covered that.
And again as we navigate through the balance of the year I think you should expect us to continue to use the full tool bag to cover that whether it's some combination of promotion and trade spending some price pack architecture that we've worked on as well as the likelihood that there may be some places where we're coming back.
With a a second wave of pricing.
Designed to match very clearly in a very transparent way, where we have some of these more explicit cost I would say I think that will be much more surgical and.
And specific than than the.
And then the pricing that we already have in place, but I do think as we look at the outlook, we see a mix of those variables in our plan to help us cover that.
Okay, great. So just just in.
And the two thirds, one third would that include logistics and freight as well.
No that's more related to the raw and packaging side of things and then.
We have a pretty decent chunk of our affray.
Freight and logistics covered as well at this point in time with contracts that we put in place yeah. It's definitely been volatile you're right I mean in particular I think we've seen more variability in areas like Ocean freight, which was you know had been a bit more stable and I think that's adding some volatility, but I think as as we.
Remember you're also beginning to as you go into 'twenty two begin to lap some of the volatility we were experiencing in fiscal 'twenty, one and so.
Your comparable as do get a little bit easier as the year unfolds, but as we said you know as we think about some of these transitional costs in the first half that's partly why we see a little bit more of that headwind.
In the beginning of the year as we've tried to be prudent.
And making the appropriate estimate as it relates to where those costs are going to come in based on kind of how we're seeing them today, okay. Great. Thanks, Mark Thanks, Nick.
Your next question is from the line of Ken Goldman from JP Morgan. Your line is now open.
So much.
Mark last quarter. When you were asked about pricing you said a number of things, but one thing was that you were I think being thoughtful and strategic about reflecting critical price thresholds. I think you said the last thing you want is to shut down growth in share.
Some people came away from that with the idea that you want to have some pricing, but a little bit of a balanced approach I'm. Just curious if your thoughts on that has evolved at all right, maybe you've seen elasticity, a little bit lower than eastern net unexpected across food at home to be a little bit more inflation. So I'm just trying to get a sense are you willing to be a little bit more.
Or aggressive on pricing just given some of the changes you've seen in the last few months or do you still want to kind of take that balanced approach to things.
Yes.
Great question.
I think the first thing I would say is we definitely have.
Been encouraged by what we're seeing early on as it relates to elasticity.
And I think just the.
Perhaps the broad based nature of the inflation.
Is.
Is supporting perhaps.
A little lower than historical levels as it relates to what what the what the elasticities are I also think that the strength of our brands right now in.
And the momentum relative to businesses are Great example, is our Swanson business, which as we've returned supply into the marketplace as you might remember over the last year.
Or so we'd lost a lot of share to lower cost players.
Which I think for me was going to be an important test for that brand as we came back in the supply.
And we've done extremely well on recovering the share that we had that we had surrendered and so I do think.
Perhaps my.
View of where the boundaries are have expanded however, I do think there still are some boundaries and so I think although it's giving us perhaps permission.
To reflect and continue to.
Do the best job, we can and juggling the pressure relative to inflation.
With with wanting to protect the franchises and the brands longer term.
I think we've got more room, and I think that that although there will be some places where I think we still want to make the right smart tradeoff for the long term health.
There's no question that I'm I am feeling more confidence in our ability to carry pricing than I might have initially as we were talking in the third quarter.
Okay, Great I'll, let it go there thank you.
Yep.
Your next question is from the line of Michael <unk> from Piper Sandler Your line is now open.
I just wanted to drill into the third.
Of the Cogs that's exposed.
Specifically just to understand where steel cost of it and I know you've touched on that's not finalized yet given just the calendar nature of that contract can you give any sense of what assumptions you've made around it and I.
I assume the timing of finalizing those terms is consistent with prior years, but I don't think the magnitude of increase in the spot rates. We're seeing is really similar so.
Can you help us understand your planning position there yeah, we're doing a lot more what I would say iterative.
The collaboration with suppliers to understand more in real time, what they're seeing so that we can plan appropriately.
Appropriately and so that what that implies is that.
As we've seen the increase occur.
Our outlook or our reflection on costs for the year includes that so we're not assuming some big.
Relief on steel prices as we.
As we go through the year I do think what we're going to want to do is probably work with <unk>.
Suppliers to make sure that we're able to kind of accommodate variability that may be occurring throughout the year, but I think from a planning standpoint.
We've taken what I think is probably.
Balanced to conservative in our position.
But of course, you know I think the volatility around in particular that.
That cost has been quite significant as you know, but I think no no one's banking on.
A reversal of that in the current forecast that we've got.
Okay. That's that's helpful and just a quick follow up on that.
So it sounds like maybe in a way that's.
Unprecedented you may have a much more flexible or variable contract and recognizing that it sounds like it's still not finalized would we be right to think that that could go up or down.
You know it's a good so I would just say we're we're having.
As you would expect pretty meaningful conversations on that right now.
I think you know again philosophically.
My My perspective on this is predictability is really the priority and so I.
I would want to be careful and balanced in our <unk>.
Ability to.
You know have certainty versus.
Banking on something going a better direction, so generally speaking.
Going to want to know what what we're dealing with.
But I also think you're right. It has a certain certainly somewhat of an unprecedented window and so you know how do you think about where there are floors and ceilings to certain things may be a conversation that we continue to have hopefully that helps but a little bit of a work in progress, but I think for now.
Assuming kind of not a major change I think is probably a pretty prudent position.
Okay. Thanks, so much.
Your next question is from the line of Robert Moskow from Credit Suisse. Your line is now open.
Hi, Thanks.
Okay.
Forgive me if I missed this but have you.
How much do you think your pricing is going to be up in fiscal 'twenty two.
And is it also going to be back half loaded I'm, just trying to do back of the envelope math.
It looks like your internal inflation could be up as much as 10% in the back half of your year.
It would mean your pricing would need to be up.
Five or six.
Yeah.
Yeah. So.
Youre in the right ballpark, I'd say a little bit.
A little bit lower as it relates to kind of.
Full year and back half inflation.
And then on pricing.
I think you know as you take all of the variables into account as we've said before.
We're we're probably somewhere in the middle single digits in that area.
You know again that that obviously incorporates a variety of tools, but that's that's a pretty good assumption relative to where we are.
Okay. My follow up is that would imply a volume decline of the same amount. So how did you go about this.
Germany.
What that volume decline would look like.
And how do you factor in the possibility anyway.
There'll be declining food at home consumption as well.
Yes, I think we've looked at the.
It is a set of variables that are that are in there again, we talked a little bit earlier about.
Elasticities, and a little bit of a growing confidence as it relates to our ability to navigate.
Pricing, perhaps without seeing some of the historical levels.
That would translate necessarily into the 5% I think you know youre working a little bit of a couple of different puzzle pieces together.
One we continue to imagine.
That will be investing we're adding innovation we are on the flipside lapping some.
Inventory replenishment that we saw in the beginning of last year, but I think the net of it is we do expect that to be to result in a relatively flat.
Year for topline and that's kind of reflected in our.
In our ranges and again, if we remember in the backdrop of all of this to Rob is a little bit of the labor situation and how.
How how we are going to be able to meet the level of demand and our ability to navigate that I think we're a lot smarter a lot more experienced in that now than we were perhaps a year and a half ago when the journey began.
But at the same time.
Again.
I would say consistent with many of my peers.
The labor challenges that we're seeing are certainly tougher than that I ever remember and I think that.
The combination of those variables is how we're getting to the outlook, but I don't think we're leaning.
Out on any of those assumptions, so I think we've been fairly.
Like I said, you know pragmatic or or balanced in our view, but I think theres going to be puts and takes and so although I think you know you may see pressure downward as it relates to pricing I think there is likely going to continue to be.
Catalysts for growth and progress as well and remember.
Some of our businesses, especially like our snacks businesses.
<unk> had been pretty steady contributors of growth, even even through a little bit of the ups and downs as we've been navigating the pandemic. So I think theres going to be a mix of variables, but I think where we've kind of pegged it is probably about right.
Okay. Thank you so much.
Thanks, Rob.
Your next question is from the line of David Palmer from Evercore. Your line is now open.
Just a follow up to that question from Rob pricing net of inflation through the year, how should that trend.
It sounds like second half is higher than inflation is pricing going to track with that or perhaps be accelerating more through the year as such the relationship gets better for gross margins and I have a quick follow up.
Yes, so so the way I would think about kind of plotting that course.
As you know kind of gaining traction through Q1.
So taking a little bit of time to get that fully reflected kind of.
Well in places we as we go through Q2, I do think you'll see.
Efforts for us to balance the step up if you will in.
Inflation as we get to the back half.
But I do think you may see a little bit more pressure there, but remember you've got several tailwind as youre getting to the back half of the year. So I think the ability to still show that sequential progress.
And margins as we get to the back half of the year, even with those assumptions relative to inflation I think still.
Still will be positive.
And then just to follow up on biscuits, and snacks that roughly 13, 5% segment margin.
It seems like there would be some reasons for that to get better over time that we're independent from this cop cost absorption year.
And that's lapping a supply chain for one plus all the improvements that you've been making could you perhaps help us squint and look through the inflation cycle and think about what could be happening there from a segment perspective basis on margins.
Yes.
That will be a.
Prime topic of discussion.
When I say you get when I see you guys in December but here's what I can tell you I continue to believe.
Very strongly in the potential for us to improve margins on snacks and for us to.
Continue to close or reduce the gap between where we are today.
And where we see.
See ourselves relative to kind of snacks.
Margin averages I think as time goes on.
We continue to get better clarity and better understanding.
Of the building blocks and the variables that will help us get there and at the same time I just would say that as youre looking at the here and now if.
If you think about kind of where we started the journey to where we find ourselves there's probably somewhere around 150 basis points of margin that I would call just transitional cost that are dampening some of the productivity and savings that we've been generating over the last several years.
Theres part of it is planned investment so part of the you know kind of offsets to the productivity.
<unk> has been or the value capture has been planned investments in both the infrastructure and in marketing in some cases.
But I think beyond that we're probably looking at about $150 like I said basis points that are dampening. The baseline and then as we project forward I think what youre going to see is a combination of building blocks that will help us build off of that adjusted base.
And hopefully in December I'll be able to give you greater confidence in what those look like I know, we've been kind of dripping that out for several quarters now but.
It'll it'll be good to kind of get to the December period, and I think I felt like it was important to kind of keep playing through a little bit of the short term.
You know kind of transitional pressure.
As we as we get ready for that conversation, but hopefully that gives you a little bit of a sense of how we're looking at it and then how we're thinking about the future.
That's great. Thank you.
And ladies and gentlemen, this concludes our question and answer session.
During the conference back over to the management team for your final remarks.
Great. Thank you.
Our team is available for follow up discussions and thank you for your time and interest in Campbell Soup company.
And with that this concludes today's conference call. Thank you for attending you may now disconnect.
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