Q2 2022 Campbell Soup Co Earnings Call
Good morning, My name is April and I will be your conference operator today at this time I would like to welcome everyone to the Campbell soup second quarter fiscal 2022 earnings conference call.
Today's call is being recorded all participants will be in a listen only mode until the formal question and answer portion of the call.
With that I would like to hand, the conference over to your host Ms. Rebecca Gardy Ms. Gardy you may begin your conference.
Good morning, and welcome to Campbell's second quarter fiscal 2022 earnings conference call I'm, Rebecca Gardy head of Investor Relations at Campbell Soup Company. Joining me today are Mark Clouse, Campbell's President and Chief Executive Officer, and make Big housing Campbell's Chief Financial Officer.
Today's remarks had been prerecorded once we conclude the prepared remarks, we will transition to a live webcast Q&A session. The slide deck and 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 a replay of the webcast will.
Be available at the same location followed by a transcript of the 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 of our presentation or our SEC filings for a list of factors that could cause our actual results to vary materially from there.
Those anticipated 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 second quarter performance as well.
I was in market performance by Division, Nick will discuss the financial results of the quarter in more detail and then review our guidance for the full year fiscal 2022 and with that I'm pleased to turn the call over to Mark.
Thanks, Rebecca good morning, and welcome to our second quarter earnings call for fiscal year 2022.
Before I turn to the results of the quarter I want to take a moment to thank all our teams, especially our frontline colleagues for navigating the impact on our operations during another difficult period of the pandemic.
We are now at the two year Mark of working within this challenging COVID-19 environment and I'm very proud of their perseverance continued performance and dedication.
I also want to take a moment to express our concern for the people of Ukraine, our sympathies and support go out to them during this crisis.
As we outlined during the Q1 earnings call and as you saw in our press release Q2 was challenging as we expected including industry wide constraints on labor and materials availability, maybe even tougher by the winter omicron surge as well as ongoing commodity and logistics inflation.
However, more recently labor and service levels are improving as Covid cases decline and we see greater impact from our aggressive hiring and training.
Since October our fulltime filled head count increased by 10 points and we now see absenteeism and vacancy rates trending back to normal levels. This is translating to more production and the beginning of a return to normal distribution and inventory levels.
We do continue to expect inflation to remain persistent, especially as it relates to logistics and although we have no direct exposure to Ukraine or Russia, we are monitoring any broader economic impact from the current crisis, especially on commodities.
As we look forward and including the balance of these factors combined with the greater impact from pricing actions easing prior year comparisons and continued strong demand across our portfolio. We remain confident in reiterating our previously communicated full year fiscal 2022 guidance, we look forward.
To returning the business to growth while building momentum in the back half and exiting the year, a more capable and stronger business.
Now lets cover some specifics from Q2.
Organic net sales were down 2%, primarily driven by industry wide labor and supply challenges more than offsetting the favorable impact of net pricing in the quarter.
On a two year basis organic net sales remained elevated growing 3%.
In market performance remained positive up 1%. This was three points ahead of net sales in the quarter, reflecting a lag and inventory replenishment and lower distribution levels due to previously mentioned supply constraints there.
The end market demand was balanced across both divisions.
On a two year basis consumption grew 9% and importantly, our brands in 12 of our 13 core categories continued to grow in market consumption.
Despite this growth as expected we experienced short term market pressure on certain brands.
These share losses tend to line up very closely with where our distribution levels are down supporting supply is the key driver of this pressure.
As we recovered distribution and can fully support our portfolio, we expect to return to share recovery as we move through the second half of the fiscal year.
Turning to profit lower volume and accelerating inflation weighed on margins and earnings resulting in a 17% decline in adjusted EBIT and a 16% decline in adjusted EPS in the quarter, both very much in line with our expectations.
Turning to our meals and beverages division I continue to be pleased by the underlying health and strength of demand for our portfolio.
Consumption grew 1% over prior year and was up 11% versus two years ago. Despite our supply challenges organic net sales decreased 2% versus prior year lapping 5% growth in the prior year.
Turning to soup on slide nine the next chapter of our win in soup strategy continues to deliver growth.
In market soup consumption continued to be ahead of the elevated levels in the prior year, increasing 3% versus prior year and 10% compared to two years ago.
In the quarter, we continued to see strong share performance on key brands, but as expected we did see pockets of share declines in particular on condensed soup. We continued to remain very confident in our overall competitive position. However, we experienced some share pressure as private label lapped an extended period of supply.
Strengths.
As you see on Slide 10, we had continued success with younger buyers, we performed very well and brought in additional millennial and Gen Z buyers to both our condensed eating and cooking varieties in the second quarter.
On total U S soup household penetration in the quarter was up versus both the prior year and two years ago and importantly, we continue to see more consumers participating in the soup category and purchasing our suite brands compared to pre pandemic levels.
While dollar spent per buyer increased due to our pricing actions volume per buyer remained relatively stable to pre pandemic levels. Despite specific supply constraints in the quarter for.
For the important holiday period, our soup and broth posted its second largest holiday in the last five years only down compared to last year as consumers return to fewer larger gatherings. During this holiday season.
In ready to serve chunky had a very strong quarter, increasing consumption, 9% on top of the 13% growth in the prior year quarter.
Leading to an astounding, 25% consumption growth and over two points of share growth on a two year basis as we shared at Investor Day lunch is a key occasion for this brand and people are now eating even more low prep lunches compared to prior year, our focus on the lunch occasion highlighted through a successful advertising.
It ties in campaign lunchtime Miss your halftime with Super Bowl, winning coach from the Ram Sean Mcveigh is driving a positive sales lift including among younger households, also our latest innovation chunky spicy, which we are expanding is adding to the strong results of this important brand in fact chunky spicy.
Can noodle launched earlier this year is already in the second quartile of all ready to serve items was strong trial and repeat.
Turning to Swanson broth and stock the continued supply recovery led to a fourth consecutive quarter of share growth up 1.2 points in the quarter a clear win during the important holiday season, and a good example of where supply recovery directly translated to share recovery.
On sauces Prego continues to be the number one share leader. However, some supply challenges on our prego Alfredo sauce put pressure on share we expect a steady recovery of supply beginning in the fourth quarter.
<unk> share continues to improve while V. A beverage experienced some share loss in the quarter due to high single digit declines in total points of distribution or TD piece compared to prior year, driven by material shortages, especially aluminum cans.
Turning to our snacks division on slide 12, organic net sales were down 3% versus prior year, but compared to two years ago grew 3%.
On snacks, we expected a significant impact from supply constraints, we experienced despite these constraints in market consumption grew 1% over the prior year quarter and 8% on a two year basis, reflecting the underlying strength of our brands, especially our power brands.
In fact, our snacks power brands continue to fuel performance within market consumption growth of 3% versus the prior year and 9% compared to two years ago, reflecting our efforts to prioritize power brands and to remain competitive we are encouraged to see repeat rates ahead of prior year answer.
Seven of the power brands and ahead on a two year basis on all power brands.
Particular, standouts were our kettle brand potato chips, and Cape Cod potato chips, where we have successfully added capacity each had a strong quarter with consumption growth of 26% and 20% compared to two years ago and share growth of almost two share points combined.
Turning to goldfish also an area of significant capacity expansion in supply recovery, we performed well in the quarter holding share in a competitive marketplace and growing consumption by 9%.
As we outlined at Investor Day, We recently launched our goldfish megabytes, a bigger bolder cheesier goldfish cracker and our family sized goldfish aimed at meeting key consumer trends. Both are off to strong starts we are executing our plan to elevate innovation based on consumer insights.
Salting and bigger more impactful ideas.
Since the launch in January megabytes achieved the fastest distribution growth in recent history of goldfish innovation launches early consumer repeat rates are promising as consumers, who purchased ones are already coming back to buy again.
We launched in January with a highly impactful PR and social campaign and within its first week alone megabytes achieved over 1 billion earned media impressions.
The full activation will run through the summer and I have to say it feels good to return to what we do best building our brands.
This is an important proof point as we pivot from supply recovery to now running the business and what we believe will be more predictable conditions as we come through the rest of the fiscal year and into fiscal 2023.
Lastly on goldfish, continuing our successful limited time offer strategy. We're excited about the launch of the limited edition Star Wars, The man Delorean Cheddar crackers.
We have another limited time offer goldfish release plan for the early summer, including another surprising one of a kind flavor collaboration.
As we mentioned last quarter, we expected short term share headwinds due to supply constraints on certain snack brands.
Specifically in late July snacks, Snyder's of Hanover, Pretzels, and Lance Sandwich crackers.
Similar to supply pressures on meals and beverages share pressure aligned with lower T D piece in the quarter compared to prior year.
We have taken actions to improve overall performance, including core S. Ku prioritization efforts to increase production, while reducing complexity as well as prioritizing plant labor recruiting training and retention.
We feel confident these share headwinds are temporary as we've already seen strong improvement in our labor and production levels. As a result, we will return to our planned levels of investment through the back half of the fiscal year and expect to be fully back on track for what our snack brands do best growing consumption and share.
To conclude we expected Q2 to be tough as we navigated challenges and lap strong performance from a year ago and it was we also expect stronger year over year performance in the second half of the fiscal year as we lap easier prior year comparable.
In addition, we are in an improving position to meet our strong brand demand throughout the balance of the year as our staffing levels and vacancy rates are improving with nearly 3500, new hires in the last seven months.
Also in the second half through the combination of our most recent pricing actions our continued supply chain productivity improvements and cost savings initiatives, we will be better positioned to help offset ongoing inflationary pressure, we will remain nimble and use our full range of tools to offset additional inflation as need.
It including potential further pricing actions where appropriate.
Accordingly, we expect meaningful improvement and recovery in margins profit and EPS in the balance of the year and we remain confident in our plans and full year outlook.
Before I turn it over to Mick I would like to share a change to my leadership team first I'd like to take a moment to thank Bob Furby, Our executive Vice President Global supply chain officer, who will be retiring after nearly 40 years with Campbell.
Bob has had a remarkable career Campbell and has been a key part of our transformation. We are deeply grateful for his contributions and wish him the best in his retirement.
As we announced in January our incoming executive Vice President Chief supply chain Officer, Dan Poland is working to drive operational excellence across our network. He brings extensive experience at all levels of the C. P. G supply chain and has a track record of building high performing teams delivering.
Exceptional product quality and driving execution, which will be invaluable as we continue to deliver growth. While also navigating one of the most dynamic and challenging supply chain environments.
With that I'll turn it over to Mick.
Thanks, Mark and good morning, everyone. Our second quarter fiscal 2022 results are generally consistent with our expectations. Despite the industry wide inflation and supply constraints.
As you heard Mark described earlier strong demands for our portfolio of brands continued in the second quarter, however, higher than expected supply chain volatility resulted in lower service levels. Additionally, as expected accelerating core inflation in the quarter pressured margins we continue to.
<unk> good about our initiatives to mitigate inflation, which include price increases trade optimization supply chain productivity improvements and cost savings initiatives, our cash generation remains strong with cash flow from operations of $766 million through the first half addition.
Really in line with our commitment to return value to shareholders year to date, we have returned nearly $300 million to shareholders through dividends and share repurchases, our first half performance and improving second half outlook, including inflation mitigation actions and continued strong consumer demand despite.
A tight but improving labor market give us confidence in reaffirming our full year guidance.
Turning to slide 19, organic net sales declined 2% in the quarter lapping 5% growth in the prior year the.
The year over year volume decline due to industry wide labor and supply challenges more than offset the favorable impact of net pricing in the quarter.
Consumer demand has remained strong with second quarter dollar consumption in measured channels three points above our total organic net sales performance relative to the second quarter of 2020 organic net sales grew 3% adjusted EBIT decreased 17% compared to the prior year quarter.
And it was 12% lower on a two year basis due to significant levels of inflation on ingredients and packaging transportation and labor remember that our wave two pricing will not be fully reflected until the third quarter. Adjusted EBIT margin declined by 240 basis points to 14 point.
4% compared to 16 point to 8% in the prior year.
Adjusted EPS from continuing operations decreased 13 cents or 16% versus prior year quarter and was 4% lower on a two year basis to 69 cents per share.
Year to date organic net sales declined 3% lapping 7% growth in the prior year period, resulting in a 4% growth on a two year basis, adjusted EBIT decreased 16% compared to prior year and was down 6% on a two year basis given significant inflation.
Year to date, adjusted EPS decreased 13%, but grew 6% on a two year basis as a result of deleveraging.
On the next slide I'll break down our net sales performance for the second quarter as I mentioned, the industry wide labor and supply challenges held back our ability to meet the continued strong demand organic net sales decreased 2% during the quarter driven by an eight point volume and mix headwind, which reflects the supply cost.
Strange favorable price and sales allowance since drove a five point gain in the quarter and lower promotional spending in the quarter drove a one point gain.
The impact of the sale of Plumb subtracted one point all in our reported net sales declined 3% from the prior year.
Turning to slide 22, our second quarter adjusted gross margin decreased by 340 basis points from 33, 8% last year to 34%. This year volume slash mix had a negative impact of approximately 170 basis points on gross margin largely due to.
Reduced operating leverage net price realization drove a 480 basis point improvement due to the benefits of our pricing actions as well as lower promotional spending due to supply constraints.
Inflation and other factors had a negative impact of 820 basis points with nearly three quarters of the decline driven by core inflation as overall input costs on a rate basis increased by approximately 9%.
Along with other industry participants, we experienced significant inflation across all input cost categories, including ingredients and packaging transportation and labor the remaining.
Decline was driven by increases in other operational costs due in part to supply chain disruptions.
That said our ongoing supply chain productivity program contributed 140 basis points to gross margin, partially offsetting these inflationary headwind of cost savings program, which is incremental to our ongoing supply chain productivity program added 30 basis points to our gross margin.
The previously described initiatives to mitigate inflation highlighted on the next page include price increases and trade optimization supply chain productivity improvements and cost savings initiatives.
And a continued focus on discretionary spending across the organization.
We remain focused on inflation mitigation as we now expect core inflation for the year to be low double digits.
Up from previously expected high single digits.
With a more pronounced impact in the second half of fiscal 2022.
Wave two pricing was effective at the end of the second quarter and will be fully reflected in the third quarter and although for the second half of the fiscal year, we have a large proportion of our raw materials covered from a pricing perspective as Mark previously mentioned, we continue to closely monitor any economic impact from the <unk>.
Current crisis in Ukraine.
Moving to the next slide we have continued to successfully deliver against our multiyear enterprise cost savings initiatives. This quarter, we achieved $15 million in incremental year over year savings, bringing program to date savings to $835 million and we remain on track to deliver total savings of one.
In dollars by the end of fiscal 2025, as we shared during our Investor day move.
Moving onto other operating items marketing and selling expenses decreased $35 million or 15% in the quarter on a year over year basis. This decrease was largely driven by lower advertising and consumer promotion expense or a N C. <unk>.
Although ANC declined 27% as investment was moderated to reflect supply pressure, we expect it to normalize our supply strengthened throughout the year overall, our marketing and selling expenses represented eight 9% of net sales during the quarter, a 110 to 30 basis point D.
Kris compared to last year.
Adjusted administrative expenses decreased $8 million or 5% due to benefits from cost savings initiatives and lower benefits related costs.
Adjusted administrative expenses represented six 5% of net sales during the quarter, a 20 basis point decrease compared to last year.
On slide 26, we are providing a total company adjusted EBIT bridge to summarize the key drivers of performance. This quarter as previously mentioned adjusted EBIT declined 17% as the sales volume decline in the three hundreds a 40 basis point adjusted gross margin contraction resulted in a $17 million.
And $29 million EBIT headwind respectively.
Partially offsetting this was lower marketing and selling expenses contributing 130 basis points to our adjusted EBIT margin.
Lower adjusted administrative and higher R&D expenses had a neutral impact and lower adjusted other income had a 30 basis point negative impact overall, our adjusted EBIT margin decreased year over year by 240 basis points to 14, 4% to <unk>.
Blowing chart breaks down our adjusted EPS change between our operating performance and below the line items.
<unk> 16 cents impact of lower adjusted EBIT was partially offset by a <unk> <unk> favorable impact from lower interest expense, a one cent impact of lower adjusted Texas and a one cent impact from the benefit of lower weighted average diluted shares outstanding. This resulted in adjusted <unk>.
S of 69 cents, which was down 13 cents per share or 16% compared to the prior year.
Turning to the segments in meals and beverages organic net sales, which exclude the impacts from the sale of the Plum baby food and snacks business declined 2% driven by declines in U S retail, including U S soup, and Campbell's pasta as well as in Canada, partially offset by gains in foodservice.
Volume declined due to supply constraints, driven by labor and materials availability fragrance sales allowances were favorable in the quarter, partially offset by increased promotional spending relative to moderated levels in the prior year quarter.
Sales of U S soup decreased 1% cycling, a 10% increase in the prior year quarter due to declines in condensed soup.
Partially offset by gains in ready to serve soups and broth segment.
Operating earnings in a quite a decreased 19%. The decrease was primarily due to sales volume declines and lower gross margin performance, partially offset by lower marketing and selling expenses gross margin performance was impacted by higher cost inflation and other supply chain costs unfavorable volume slash mix.
Which was largely due to reduced operating leverage as well as higher levels of promotional spending partially offset by the benefits of pricing actions and supply chain productivity improvements overall within our meals and beverages division the second quarter operating margin decreased year over year by 320 basis.
Points to 16, 7%.
Within snacks organic net sales decreased 3% while sales of power brands were up 1% segment sales decreased due to declines in noncore businesses and inserts and salty snacks, primarily late July snacks, partially offset by gains in goldfish crackers overall favorable <unk>.
Rice and sales allowances and lower promotional spending were more than offset by volume declines driven by significant supply constraints due to labor.
Segment operating earnings in the quarter decreased 14% driven by sales volume declines and increased administrative expenses, partially offset by lower marketing and selling expenses increased pricing and lower promotional activity combined with the results of our productivity and cost savings initiatives largely offset core inflation.
Higher other supply chain costs, and unfavorable volume slash mix, which was largely due to reduced operating leverage overall within our snacks Division second quarter operating margin decrease year over year by 160 basis points to 13%.
I'll now turn to our cash flow and liquidity fiscal 2022 cash flow from operations increased from $611 million in the prior year to $766 million, primarily due to changes in working capital, partially offset by lower cash earnings.
Our year to date cash outflows for investing activities were reflective of the cash outlay for capital expenditures of $129 million, which was comparable to prior year.
Given the challenging operating environment, we are now forecasting full year capital expenditures of approximately $200 million to $75 million for fiscal 2022.
Year to date cash outflows for financing activities were $352 million, the vast majority of which or $293 million represented the return of capital to our shareholders, including $228 million of dividends and $65 million of share repurchases.
At the end of the second quarter, we had approximately $400 million to $75 million remaining on the current $500 million strategic share repurchase program. We also have a 250 million dollar anti dilutive share repurchase program of which approximately $174 million what's remaining we.
We ended the second quarter with cash and cash equivalents of $357 million.
Turning to slide 31, we continue to expect full year fiscal 2022, net sales adjusted EBIT and adjusted EPS performance to be consistent with the guidance. We provided during our first quarter earnings call.
Our full year guidance reflects expected continued strong demand for the balance of the year with steady supply recovery and improved service levels, particularly in the fourth quarter as labor recovers, we have seen consistent improvements in labor attraction and retention driven through the recent recruiting actions.
And wage increases however, core inflation is now expected to be low double digits for the full year wave two pricing will be fully reflected in the third quarter and we expect to continue managing inflationary headwinds through pricing supply chain productivity improvements and cost savings initiatives.
We expect these actions and improved labor outlook and easier prior year comparisons to result in margin progress and earnings recovery in the second half.
For the full year, we expect organic net sales to be minus one to plus 1% adjusted EBIT of minus four and a half two minus 1.5% and adjusted EPS of minus 4% to flat first D. Adjusted fiscal 2021 results the sale of Plum.
Is estimated to have an impact of one percentage point on fiscal 2022 net sales.
This implies for the second half net sales growth of low to mid single digits and double digit growth in adjusted EBIT and adjusted EPS.
Overall, our first half was generally aligned with our expectations. Thanks to all the hard work by our teams I'm truly grateful for their continued dedication and commitment I will now turn it back to Mark for closing comments. Thank you. Thanks.
Thanks, Mick to conclude although we fully recognize the volatile nature of the environment. We remain in we continued to deploy more of our time and resources to future plans growth and supporting the full potential of our business as we outlined at our recent Investor Day, We believe we have an advantage.
Portfolio and position going forward and we are excited that in the second half of this fiscal year will begin to transition from defense to offense. After this unprecedented period and I could not be more confident in our team brands and campbell's value creation potential.
With that I'll turn it over to the operator to take your questions. Thank you.
If you would like to ask a question. Please press Star then the number one on your telephone keypad.
And your first question is from Andrew Lazar with Barclays.
Great. Good morning, Thanks, very much for the question.
Hey, Andrew Hey, there.
I guess I'd start with Mark with with more gross margin pressure in fiscal <unk>.
Now higher forecast for low double digit inflation for the full year. It would seem that campbell's leaning on greater SG&A leverage to sort of deliver the year. So would you say this is a fair characterization and if so how do you balance lower A&P spend in light of the supply constraints, you've talked about just sort of hit guidance with the opportunity.
To lean in even harder or spend more on consumer outreach to retain as many new households, as you can heading into really it's about fiscal 'twenty, three and 'twenty four and as you said kind of playing offense if you will.
So much yet yes.
Yes so.
The short answer is Andrew we actually see the back half.
Where the opportunity really resides to be more in the gross margin space and Theres a couple of reasons why.
First I'll, just say from a Q2 standpoint.
So a little more pressure on the top line as we went through omicron.
In January and saw labor, even tougher than what we had expected from a margin standpoint.
And profitability standpoint, we were generally in line with what our expectation was and so as we look into the back half of the year, certainly we're not expecting inflation to subside, but what we do believe is that with the combination of the full impact of the of the second wave of pricing along with.
The fact that we're going to be lapping.
Pretty significant declines from a year ago. In fact, they are in the three to 400 basis point range as a comparison and then the recovery that we expect on the supply side, which drives a host of efficiencies as well as our underlying productivity and cost savings initiatives, we feel like we're in a much better.
<unk>.
With with many of the variables pointed in the right direction, even though youll still have inflation is a significant variable and so underpinning those assumptions is a fairly consistent level of cost as it relates to SG&A in total and our marketing and selling in particular, where.
Where we have been a bit below our under a year ago over these last couple of quarters, we expect it to be more in line and more consistent with where ultimately we would want to get I still think probably a bit of management of that through the third quarter it into the into.
Into the balance of the year, but generally is a good rule of thumb, we want to be around 10% of net sales we've been hovering around closer to eight to nine.
I think youll see us closer to nine to 10 as we got through the back half of the year, So our ability to invest behind the recovery of supply given the room that we that we believe will have relative to the pricing as well as the comps gives.
It gives us a lot of confidence in the ability to drive a positive back half and Ste.
Generally on track with where we're where we expect it to be at the turn here and this moment that we expected to be in where we begin to transition from lapping a lot tougher comparable is a lot higher.
Starting points to a period, where we can return to positive momentum, which is really something that.
We're we're excited to get to but also I think a good way to kind of build momentum as we exit the year got.
Got it thanks, so much.
Your next question is from Ken Goldman with J P. Morgan.
Hi, good morning.
I'm curious.
Hey.
Thank you I'm curious to what degree.
Guidance factors the recent rise in costs for things like transportation fuel and energy.
The main drivers behind your decision to raise your expectation for core inflation I guess I'm asking because you said you are still monitoring the situation in Ukraine I wasn't sure if that indicated your.
These items are or how to think about that yeah. No. So it's a couple of things in there that are probably good to talk about first let me, let me start with kind of the.
Pre.
Ukraine, Russia challenges and.
I think what as you know at this point in the year were were fairly well covered so we're roughly 95% of our costs about 90% in particular on commodities.
But that still does leave some variability as it relates to logistics and the.
Added pressure that we've seen relative to fuel that has been aggravated a bit more as we've gone into this latest.
Conflict in crisis in the Ukraine, So I think that that where we see those variables are generally contemplated in our numbers as it relates particularly to Ukraine and Russia. You know first is.
Be remiss not to just say again.
Our our our Hearts go out to the folks that are that are dealing with this conflict.
You know an unbelievable circumstance to be in but I think from a business standpoint, what I would just say is that from a direct.
Operation or impact we have no sales we have no direct sourcing we have really no specific business of course. The question then becomes the macroeconomic impact of the conflict and as we look at 'twenty two.
Got about 90% of our commodities cupboard, which leaves us about 150 million in cost that we're still navigating through and as we look at the variability as it relates to what of that is really residing within things like wheat that could be impacted or certain metals or packaging.
That could be part of what as you look a little more broadly of course, and then of course on energy and oil.
We believe that we've created space within the plant to contemplate that and then of course as we talk about going forward into 'twenty. Three there is a lot of variables there that will come into play and we'll talk more about that in the future, but I think we have a.
Again in the World that we live in today I would never.
Presume that we can see every variable possible is that certainly approve in the last couple of years to be tough to do but I think relative to all the inputs. We have today I think we've got a fairly good contemplation of that and even where we see some potential variability we've tried.
To build that into the contingency planning <unk> just within the range that we've got relative to the guidance.
Vic anything to add to that.
No I think you've got it I think.
As we've mentioned in the past think about kind of ingredients and act being give or take 50% of all grow overall.
Cost of goods sold.
And to Mark's earlier point I have to take the call. It 95% of that is currently covered and then you get close to that under the $50 million that Mark mentioned and then on the logistics transportation. So obviously a combination of both availability.
To drive price as well as the overall appeal.
A market that we're monitoring very closely and we got some coverage on that as well. So generally of course now with where we're at we've got still half the year to go.
In a relatively comfortable with where we're at that being said the piece. That's on Calvert, We're obviously monitoring very closely and managing.
Thank you for that can I ask a quick follow up Nick historically.
As cable generally bought.
Head for the items that can ingredients and packaging throughout the year at somewhat consistent levels from quarter to quarter or historically has tended to lock in a significant amount.
At the end of the fiscal year with less purchasing at other times and I guess I'm talking everything other than cans of course, which I think we have a good sense of.
Yeah, we tend to have a pretty steady coverage model. So I think our history on this is to try to generate predictability more than it is to.
You don't necessarily try to win the commodity.
Guessing market and I think that consistency.
Been fairly.
In line as you look at our coverage position certainly there is some variability depending to the exact market. We're in but generally speaking our quarterly coverage for the year. The rolling forward coverage is pretty consistent.
Thank you.
Yep.
Your next question is from Chris <unk> with Stifel.
Hi, good morning.
Hey, Chris Hi.
Just a follow up on the questions around.
Margin.
You have obviously accelerating pricing coming through you have inflation.
Inflation accelerating at the same time I'm, just curious little elasticity like one other element to that equation.
It's hard to assess that at this point it seems like a very low overall for the industry and it has been for many of your products do that accelerating through the year as you take more pricing and just be curious what youre seeing there right now.
Yeah, I mean, it's.
So a couple of things that that we're we're watching through and then I'll tell you what we've kind of planned for the balance of the year, but.
As you point out early on and certainly through the first wave of pricing, we've not seen a lot in the way of elasticity, although I will say that as we have.
Navigated some of these supply challenges, it's a little bit harder to gauge as we've been essentially shipping to what we've been making.
Regardless, so I do think we want to continue to watch that very closely but as we plan the balance of the year.
What we've assumed is that elasticities do go up and that there is some.
Incremental impact from what we would've seen in our first wave of pricing.
And our second wave of pricing, although historical levels. We think we will still be below you know given the breath of inflation that is being experienced across the industry. So we're not taking.
You know necessarily the full level of elasticity, but we are assuming a step up from what we've experienced and I think you know again as I've said from the get go on this our goal here is obviously to manage appropriately the cost but also to make sure that we're keeping price gaps in that as we reach.
Turn to full supply and support that we've got the right balancing act as it relates to shares.
Protecting our equities of our brands as you know we realize that we've spent a couple of solid years building that the last thing we want to do is undermined that with without a reasonable pricing and so I think everything that we're doing up to this point generally is consistent and aligned with the marketplace.
And we would expect that to continue.
Although I do think with a bit more elasticity as the year unfolds and if we're wrong and it's better than that then.
That will just create opportunity for us as we are.
As we go through the balance of the year, but I think a prudent.
Position and one that generally is informed by just kind of I'd say at this point, where we are on absolute pricing, which which is not insignificant on some of our categories.
Okay, and then just a quick follow on you talked about the fourth quarter being a period, where youre going to have a better supply situation for.
The business is that the quarter than where you are is that a quarter, where you likely ship ahead of consumption and if you is there a rough you know.
Approximation of how much inventory you you need to build or would like to build in to the market to try to have better inventory availability in the store.
Well I think you know the good news is I don't think we'll be waiting fully to fourth quarter to see some of that replenishment as well.
We pointed out we were a little lighter.
In Q2 on top line than we expected I actually think.
That we'll see some more recovery of that earlier on in the third quarter and then really.
I do think though the fourth quarter is a period, where we would expect to be more.
Fully back in business, if you will on the broader range of the full portfolio I think youll see TDP levels coming back in the normal ranges I think youll see our support both from a marketing and trade standpoint, you know kind of at a at a sustainable ongoing level. That's the game plan and so I think we'll probably be.
<unk> ahead.
Notwithstanding what exactly demand will look like in Q3, but I think relative to what we expect probably.
Probably a bit ahead in Q3, and probably a bit more in Q4.
Thank you.
Your next question is from Nik Modi with RBC capital markets.
Hey, Good morning, guys. This is philippe colonial for Nick.
So you mentioned strong underlying trends from a consumption base.
I just wanted to check on your assumptions for household penetration.
In the balance of the year as the economy reopens and as we started to see a restaurant reservation and restaurant trends to improve.
I guess why you're assuming for penetration into second half of the year.
Yes, I think as we now kind of navigated this up and down.
You know period, where okay, we're kind of into a new normal and then a surge comes back in January and.
This kind of up and down as we project out I think we've got a fairly good base of time now where we can see.
Periods, where there were less constraints and what does that mean relative to periods that are more COVID-19 driven or influence then so I think our assumptions as we think about the back half of the year and remember that.
The added factor of our ability to more fully supply because our issues. If you will relative to being able to fully meet demand. We're present in the back half of last year, especially on certain brands like late July or a few of the other areas, where we where we've struggled a bit more on labor and had.
Real challenge is kind of getting to that full capacity that we need so the combination of those elements together along with returning support level. We think we're going to hold up very well on demand and even if there is.
Kind of a return to kind of this more balanced between away from home and in home. We think the combination of what we're doing as well as what we expect that baseline to remain at which although may come down a bit from what we would've experienced in January we think not necessarily inconsistent with what we might've seen in the summer of last year and some other.
Periods that that looked a little bit more consistent to what we expect the back half to be so I think youre going to have a little bit of normalization, there offset by improved supply and support and that I think in general is what's leading us to see a better overall top line and remember too not unlike the margin conversation.
The first half of this year, we were still lapping significant elevated levels when we get to the from Covid. The original kind of Covid period, when you get to the second half of this year, we begin to lap the declines or the or kind of the reduction that already occurred in the back half of last year. So your comps on.
Both margin and on topline are much better as we're in the back half of the year.
Got it that makes sense.
And then on innovation.
You mentioned a strong start two megabytes.
And goldfish, just keep you can expand on like.
General expectation for innovation this year, and then particularly for golf fish megabytes are you trying to expand the demographic profile of the brand with innovation and what are the early trends from a consumer standpoint.
Yes, so it's a so let me answer the question a little bit of a.
A different way to start it and then I'll specifically get into it I think what's really important and what I would imagine that a lot of investors are going to be interested in seeing is what the recovery model looks like as we come back into full supply and what I like about our goldfish and our kettle and Cape Cod on our snacks business.
As well as our chunky business on our meals and beverage those are all great. Examples of where we have invested in capacity, we're back fully into supply and with that came the full level of support we protected marketing on those businesses. We added innovation, whether it was mega bytes.
On goldfish with family size on goldfish, which was some of the new price pack architecture that we were creating whether it was some of the new pack sizes on kettle and Cape Cod.
Or it was flavor innovation on spicy for chunky with a full.
Very very robust marketing campaign.
All three of those businesses are great. Examples of what we expect to see as we come back fully on other brands along the way and I think that with that comes the opportunity to unlock innovation and so as we think about the balance of the year.
Our innovation levels on our snacking business are going to be up significantly from a year ago, and where it would have been talk about it in terms of kind of three year rolling contribution as a percent of revenue.
So last year, we would've been in the 1% to 2% range. This year will add about a full point of contribution from innovation in snacking Nielsen beverage on a similar level with.
With the combination of what we're doing on our chunky business, but also some of the innovation that we have on the restage and relaunch of well, yes, which is another component of soup, that's going very well and I would encourage you to look at when you look at shares within soup look at some of those core brands on how well theyre due.
Because I think it is a little bit of us selecting where we're placing the bets right now as we as we navigate some of these supply challenges.
But at the end of the day I think the idea is that we should see momentum building on innovation. We've got a great start on the brands that are already back in the profile that we want and we would expect the others to follow as we go through the balance of this year and then into 'twenty three of course, where we expect to be back kind of fully.
Load across the portfolio.
Got it thank you guys.
I'll pass it on.
Your next question is from Peter Galbo with Bank of America.
Hey, Mark can make good morning, thanks for taking the question Hey, Peter Good morning.
Mark I guess I just want to go back to your comments around the puts and takes.
On some of the AG commodity beyond where you're you're hedged for this year.
I guess as I as I read through kind of what you were saying, hey, we're going to get material improvement or improvement in the gross margin line in the back half of this year, but.
Some of these add commodities hedges roll off for coverage rolls off.
Maybe you could see that step back down in the front half of next year.
And some of these other you know again.
<unk> kind of stay up here.
I wanted to see if I was kind of understanding that that comment and then with that if that is the case just your potential to take a third wave of pricing and how you think about that.
Yeah, no. It's a great. It's a great question and one that is.
An area, where we're spending a great deal of time, right now which is recognizing.
Kind of covered uncovered positions as we go into next year.
A little early to start to talk about 'twenty three as far as how we see inflation.
Inflation.
The puts and takes remember you'll also have.
Full kind of impact of the rollover of the pricing that we're taking now as well as some of the added benefits I think of the supply chain that's operating at.
At a far more consistent and.
Kind of fully loaded way, which which will be very beneficial to us, but I think you're right and I think that indicates also to us.
We are absolutely not ruling out any additional pricing that may need may need to happen in.
In the spirit of what we've kind of learned to date.
We're looking at that right now and you know understanding where and what in the surgical nature of of how to digest, a little bit of what we're seeing.
Right now again I would just caution there's a lot of volatility.
In certain commodities as it relates to Ukraine, and Russia, I think we need a little bit more stability of time to know what the underlying availability and thus then a pricing looks like but theres no doubt theres going to be pressure, that's associated with that and so I absolutely would not rule that out I think again as you bake each step in pricing I think the.
The need to be.
Even more strategic.
More surgical in nature really tying it directly to where commodity pressure could reside.
As areas, we're going to continue to explore.
And that May mean that even in this count or in this fiscal year that we've got to look at more pricing.
In a way to position kind of the back end of this year as well as into next year.
Great. Thanks, very much Mark that's really helpful I'll pass it on.
Okay.
And your next question is from David Palmer with Evercore.
Thanks, Thanks for your comments earlier on shipments versus consumption I wanted to maybe get a sense from you about what's going on behind the scenes there what's what's helping.
Going into after school to age.
As you know is it your own staffing levels, its freight or co packers in any detail would be.
Interesting and helpful.
Yes, so so the overwhelming predominant improvement is in labor.
If you remember back in the first quarter, we had anticipated a trajectory of recovery.
That was really through the second quarter.
Into the back half and.
What what occurred in December and January with Omicron, just kind of delayed it I think what's good news about what we've experienced is that although that kind of came fast and furiously into the into.
Into the quarter. It also subsided a lot faster than we'd seen prior.
Iterations of pressure and so it allowed us to get back on track.
And as I said, a couple of times throughout the quarter.
The fact that we had hired as many new folks as we had allowed US I think to weather the storm, a little bit better and get us in a position in the back half, but just to put it in context, we were running if you combine absenteeism and vacancy rates.
We were running low double digit percent of gap relative to that and if you look at where we are now historically, we tend to be around 3% to 4% and worried about 4% right now and so that has been the single biggest movement, if you will and improving.
Our our production levels relative to meeting demand and meeting expectations. So that's first and foremost I think the other thing is.
That we are really working hard on continuing to add capacity.
One of the things that that's really interesting is if you look at the last 24 months and I would say. This is this has been a little slower than I would've liked but if you look at the last.
24 months, we've added almost 8% of capacity to our network and in particular.
You see that manifesting on brands like goldfish.
Like our kettle potato chip business, where youre seeing the benefit of that added capacity. So those two areas right and we have that coming as it relates to tortilla chips as it relates to cookies. These.
These are areas that we're also experiencing sandwich crackers on land, which is another bit of a challenging area. So I think the combination of those two things together are what's really giving us.
The better confidence and again throughout this process. Our overall execution has actually been very good relative to what we do.
Might have experienced a year ago or prior levels and I only expect that to get better as we continue to focus on that as a really core capability. We continue to add resources. This is a specific area of expertise for Dan Poland, who I mentioned earlier is joining the company.
Very very good at driving standardization and operational excellence across the network in particular in our Snyder's Lance facilities that is a network that really we see the biggest opportunity and elevating that level of consistency and performance and so.
With that that set of tools, along with kind of the structural improvement of labor and capacity. It's why we feel as good as we do.
About that recovery. So hopefully that helps give you a little bit of color, but it's a great question and one that we.
We think is really paramount to the believability of the second half recovery and why we see it as a.
A more likely outcome.
And might that it might look like on paper.
That is helpful and just a small follow up on that is if you retailer inventory.
Would you say that is versus history, and and I think you were alluding to maybe being having shipments above consumption in fiscal <unk> and I don't know if I picked it up correctly.
Yes, and yes.
Yes.
Were low as what I would say I mean, obviously it depends a little bit on the category that you're speaking to.
I would tell you versus our historical position in particular, given the pressure that we experienced.
In January and again, I will say that we.
We we are we're already seeing some recovery in that as we go forward, but the reality is.
I think on many of our businesses.
And you see it again like I think a great proxy for people to watch the development of our supply and availability is through Tdp's, which.
To the to the item, if you will or to the brand lines up with the share of challenges and the percent loss in distribution and Conversely, where you see that beginning to recover is where you see the return to kind of more normal levels of of share growth and performance and so.
I think as you see that recover.
Come back into full inventory the combination of those things together are going to be a nice tailwind for us to give you a little bit greater confidence that we're going to be in that positive territory and I think as I said before.
I think it will take us likely through till Q4, so you're kind of more fully loaded if you will across the board, but I do think youre going to see recovery in Q3 and likely opportunity to ship, perhaps ahead of consumption, even as early as parts of Q3.
Thank you.
Okay.
We have now reached the allotted time for questions today.
Conclude today's conference call. Thank you for participating you may now disconnect.