Q3 2022 Campbell Soup Co Earnings Call
Okay.
Greetings, ladies and gentlemen, and welcome to the Campbell Soup Company third quarter 2022 earnings Conference call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again Press Star One as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Rebecca Gardy Chief Investor Relations Officer. Please go ahead.
Good morning, and welcome to Campbell's third quarter fiscal 2022 earnings conference call I am Rebecca Gardy head of Investor Relations at Campbell Soup Company and joining me today are Mark Clouse, Campbell's President and Chief Executive Officer, and make Bakehouse, Campbell's Chief Financial Officer, today's remarks have been pre.
We recorded once we conclude our 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 be making 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.
As 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 perspective on our third quarter performance as well as 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 am pleased to turn the call over to Mark.
Mark.
Thanks, Rebecca good morning, and thank you for joining our third quarter earnings call for fiscal 2022.
You read in our press release, we reported strong year over year performance.
While expected the performance represents a positive proof point for our continued successful execution in what remains a highly dynamic environment.
Over the last several years, we've been navigating substantial headwinds, including the ongoing impact of COVID-19, labor and supply pressures significant transformation and a rising level of inflation. The team has done a great job of controlling the controllable.
We have improved our execution and strengthened our supply chain by increasing labor and capabilities, while working with our retail partners to deploy inflation driven pricing effectively and thoughtfully our results this quarter reflect this work.
We delivered accelerated growth in sales driven by continued consumer demand for our brands and significantly improve supply.
The underlying health of our portfolio remains strong. So we did experienced some expected share pressure due to select remaining supply constraints and private label improvement in certain categories.
Also returning to growth for adjusted EBIT, and adjusted EPS, reflecting our successful efforts to mitigate inflation and recover on labor and supply.
Although we expect the environment to remain challenging we are confident that we are on a considerably stronger foundation and in a much better position to navigate the volatile macro environment moving forward.
Our year to date performance and improved execution have led us to raise our previously communicated net sales guidance for the year.
We are maintaining our adjusted EBIT and adjusted EPS guidance for fiscal 2022 to reflect the ongoing inflation pressure.
Now lets cover some specifics from Q3.
Organic net sales were up 9%, primarily driven by the impact of our second wave of inflation driven pricing, which is now reflected on shelf across both divisions. Our service levels also continued to recover supported by improved labor hiring and retention, which enabled us to meet this.
Demand recovered distribution and enable retailers to begin to rebuild product inventories.
Volume declined in the quarter, driven by select labor and materials constraints, and some price elasticities, albeit much lower than historical levels.
We anticipate and have plans for similar volume trends going forward, where demand and inventory replenishment is mitigated by some ongoing materials availability and price elasticity.
We are remaining vigilant on elasticities with a variety of contingency plans in place if they begin to accelerate.
Turning to profit net price realization and our strengthened supply chain execution offset the impact of accelerating inflation and lower volume, resulting in a 23% increase in adjusted EBIT and a 37% increase in adjusted EPS in the quarter while.
Our adjusted EBIT margin was up 190 basis points versus the prior year I want to remind you of our challenging margin performance in the prior year quarter.
I would characterize the improvement is more of a stabilization that a full recovery as the combination of our pricing actions productivity improvements and cost savings initiatives began to catch up with the current inflation in ingredients packaging freight and labor.
We expect continued inflation pressure going forward and have already announced a third wave of select pricing to take effect as we transition into fiscal 2023.
Now turning to in market performance for the quarter, we saw increased consumption across both businesses and market performance remained positive up 4% versus the prior year.
Net sales were five points ahead of consumption in the quarter, reflecting the retail inventory rebuild previously noted.
On a three year basis consumption grew 14%.
Turning to slide eight building on our in market performance briefly discussed on the previous slide we are very excited about the continued consumption and share growth of our key brands.
In fact, all our key brands have grown consumption considerably over the last three years with many of our most important brands at or above pre pandemic share levels.
That said, we experienced some short term market share pressure on certain brands as we expected.
These share losses tend to line up very closely with where our distribution levels were down evidence that supply was one of the key drivers of this pressure.
As we continue to recover distribution and are fully supporting our portfolio, we expect to see ongoing share recovery.
We are already seeing this recovery in snacks in the most recent period.
In the quarter. We also experienced some continued share pressure from private label following their distribution recovery and the market's higher overall prices, causing some trading down.
Turning to meals and beverages I continue to be pleased by the underlying health and strength of demand for our portfolio.
Organic net sales in the division increased 9% versus prior year.
Consumption grew 4% over prior year, including brands and four of our five core categories. We feel great about the progress we've made especially when you compare this business to where we were three years ago prior to the pandemic with consumption growth of 14% over that period and share gains in <unk>.
Any of our categories.
Let's turn to the next slide where I wanted to spend a moment framing how the meals and beverage portfolio is poised to win in the current dynamic environment of accelerating inflation and some recent trading down consumer behaviors.
In times of rising inflation out of home meals are the number one occasion people cut back on <unk>.
Grocery store occasions are the number one go to occasion when consumers feel pressure.
Despite recent average prices on shelf, increasing in our key categories of soup and Italian sauce in the low to mid double digits volumes are still elevated versus the prior year, indicating that both the soup and Italian sauce categories are staying in consumer's baskets as prices are rising.
In fact, even in categories, where we may be experiencing some share pressure from private label it as consistently where consumers tend to be trading down into our categories driving overall accelerated growth.
As an example in condensed soup, where private label share has expanded the category and Campbell's are growing significantly at nine and 6% respectively versus the prior year.
To keep fueling this growth we are also continuing to shift our marketing message toward more value.
Turning to our soup portfolio on slide 11 in market soup consumption continued to grow increasing 5% versus prior year and 14% compared to three years ago.
In the quarter, we continued to see strong share performance on key brands, but as expected. We did see pockets of share pressure in particular on condensed soup, and Swanson, where inflation and slower private label pricing puts some pressure on share power.
However, we remain very confident in our overall competitive position. One proof point is we are growing shares in key strategic areas like our condensed icons chicken noodle tomato cream of chicken in cream of mushroom the largest S. Skus in the condensed business.
In addition, overall sharing condensed is up nearly two points versus three years ago. Prior to COVID-19, even with the most recent recovery of private label.
Finally on condensed we are thrilled that we are retaining the younger millennials that we've added in the last three years.
The share losses tend to be more concentrated in the baby Boomer cohort, who are a bit more price sensitive.
As a result, we are very pleased to see our new consumers remain committed to our brand and our household retention remains high.
On our ready to serve our Rts business share was down in the quarter due to the prioritization of core brands chunky and well, yes in.
In fact chunky strong performance resulted in 14% dollar consumption growth and nearly two points of share growth versus prior year.
In the third quarter prego consumption increased 7% versus the prior year.
First is three years ago consumption is up 25% and repeat rate up nearly five points. Prego also continued to maintain its share leadership in the Italian sauce category.
For pace, a significant recovery in service during the quarter drove share growth, a 0.2 points and household penetration a plus <unk> five points and added 800000, new households in the quarter, driven primarily by millennials versus the prior year.
Versus three years ago, we grew consumption, 14% and we're pleased with our strong progress to date and remain confident in our ability to achieve our goals of building a $1 billion source business.
As we outlined at our Investor day in December driving the core is critical to achieving our goals as is meaningful innovation and smart M&A on slide 13, we're excited to share a glimpse into our meals and beverages innovation plans for fiscal 2023.
Innovation on our business is critical and now with supply improving we can focus on rolling out a robust pipeline of new products.
Starting with a new innovative approach to home quick scratch meals will be launching our Campbell's flavor up line. This brings a versatile concentrated flavor source that will enable a variety of recipes and the consumer can control flavor intensity and portions a quick meal for one or.
Convenient family dinner.
<unk> will also be expanding its lineup in fiscal 2023 as consumers continue to eat more at home to save money and seek value in the current inflationary environment.
Young consumers, especially are seeking new specialty flavors and ways to enhance their at home meals.
Craig as new items will offer bold flavors to meet the growing need to bring greater variety to the in home Italian sauce experience.
Chunky spicy, which is adding to the strong results of this important brand will also be expanding their lineup in fiscal 2023.
In fact, chunky spicy chicken noodle launched earlier this year is already rapidly approaching the first quartile of all ready to serve soup was strong trial and repeat we are also launching an old bay season variety of claim chowder in conjunction with the limited edition launch of old base season goldfish.
Finally, we're also excited about Pacific ready to serve soups, and chilis, which we'll be launching in the fourth quarter of fiscal 2022.
We continue to drive innovation in this business and expect these new products to be a significant growth driver next fiscal year solidifying our leadership inorganic soup the.
The combination of our chunky, well, yes, and now organic Pacific ready to serve soup will create a formidable portfolio and a full range of choices for all consumer cohorts and price points.
Turning to our snacks division on Slide 14, we delivered organic net sales growth of 8% versus prior year.
We also experienced strong end market performance of 4% over the prior year quarter and 14% on a three year basis. This acceleration in growth reflects the continued underlying strength of our brands, especially our power brands and significant improvement in our supply chain and service levels.
Yeah.
Our snacks power brands continued to fuel performance with end market consumption growth of 6% versus the prior year and 19% compared to three years ago, reflecting our efforts to prioritize power brands. We feel good that six of eight of our power brands grew consumption year over year with the exception.
<unk> being late July and Pepperidge farm cookies, both of which were negatively impacted by our remaining supply challenges.
With respect to share we experienced some expected pressure on our power brands as supply and promotional recovery took time through the quarter.
Great examples of brands, where supply is in place and we're supporting the business fully include both Kettle brand and Cape Cod potato chips with share gains of one five points and 0.2 points respectively.
Additionally, we have seen very little elasticity or trade down due to price sensitivity so far.
This is true more broadly across all of salty snacks in fact private label and value brands lost share and the snacks category in the quarter.
Another standout has been our largest snacks brands goldfish, which has grown from a favorite kids food to a top choice of their teen siblings and their parents.
In the quarter goldfish consumption was up 8% and up 18% on a three year basis.
On slide 16, I'll highlight a few of the recent goldfish new product successes.
Family size in megabytes are the number one and number two fastest turning cracker innovation in calendar year 2020 to fueling our buy rate increase of 11, 4% year over year for this iconic brand.
Family size is over delivering across all metrics with strong velocity distribution and trial.
Goldfish megabytes continues to outpace our target and over deliver on our expectations driven by strong velocity trial and repeat rates.
Our strategy to broaden our consumer base is working as evidenced by more than half of buyers being households, without children and megabytes performing well with older consumers.
Additionally, we are building upon the successful limited time only strategy that brought Frank's red Hot and Jalapeno Papa goldfish to consumers. We recently launched our old Bay season Goldfish.
We quickly created a buzz among a passionate consumer base logging more than 1 billion impressions in 48 hours the products sold out within nine hours on shop Mccormack with velocity is very strong across all retail outlets.
To conclude while we feel very good about the progress we've made the operating environment remains challenging and we expect ongoing margin pressure from inflation.
However, we're in a better position to navigate it and now very much on our front foot.
Going forward in Q4, you should expect to see US one continue to work hard to use all our tools to combat inflation and manage margin pressure.
To leverage improving supply in execution to further recover distribution and inventory levels.
Three return promotional and marketing investment to strengthen competitiveness and combat private label trade down and finally four worked to create a compelling fiscal 'twenty two 'twenty three plan that balances the many nearing challenges, while maintaining the momentum and progress on our long term strategic.
Plans.
Although this environment may be different than our original expectations. We are pleased with the continued progress on the business and remain very confident in our ability to achieve our long term objectives.
With that let me turn it over to Mick to discuss our results in more detail. Thanks, Mark and good morning, everyone. We delivered solid growth in the third quarter across net sales adjusted EBIT and adjusted EPS admits meaningful macro headwinds as Mike reviewed the sustained consumer demand for our portfolio of brands improved supply chain execution.
Combined with inflation, driven pricing and limited elasticity resulted in strong topline growth.
Productivity improvements and the benefit of continued cost savings initiatives mitigate a continued inflationary environment driving growth in both adjusted EBIT and adjusted EPS in the quarter Q3, adjusted gross margin performance represents the gradual recovery of the year to date, the impact of significant inflation and select some.
Fly chain constraints.
Also recall that we're lapping a favorable prior year comparison.
Our cash generation remains strong with cash flow from operations of $1 $1 billion through the first nine months. Additionally in line with our commitment to deliver value to shareholders. We have returned over $450 million year to date to shareholders through dividends and share repurchases as I will review in more detail.
The moment, we are raising net sales guidance based on our performance year to date as well as our expectations for continued strong consumer demand for our brands limited price Elasticities continued supply recovery and improved service levels and given the persistent inflationary environment, we are reaffirming our full.
Year guidance on adjusted EBIT and adjusted EPS.
Turning to the next slide organic net sales increased 9% in the quarter as consumer demand was strong and we experienced limited price elasticities third quarter organic net sales performance outpaced consumption in measured channels by five points, primarily driven by retailer inventory rebuild adjusted EBIT.
<unk> increased 23% compared to prior year quarter due to improved adjusted gross margin performance and lower marketing and selling expenses, partially offset by sales volume declines and lower adjusted other income.
Adjusted EBIT margin increased by 190 basis points to 15, 1% compared to 13, 2% in the prior year.
Adjusted EPS from continuing operations increased 37% to <unk> 70 per share driven primarily by the increase in adjusted EBIT lower adjusted net interest expense and the benefit of lower weighted average diluted shares outstanding.
Year to date organic net sales increased 1% and adjusted EBIT decreased 7% compared to the prior year adjusted EBIT margin decreased by 110 basis points to 15, 6% compared to 16, 7% in the prior year year to date adjusted EPS decreased 2% first.
All year.
On the next slide I'll break down our net sales performance for the third quarter inflation, driven pricing more than offset the impact of volume declines in the quarter as we experienced lower than historical price elasticities organic net sales increased 9% during the quarter driven by 11 points of favorable pricing reflecting.
Inflation driven price increases this was partially offset by a three point volume slash mix headwind, reflecting select supply constraints as well as elasticity is partially offset by retailer inventory rebuild.
The impact of the sale Lum subtracted one point in the quarter all in our reported net sales increased 7% over the prior year.
Turning to the next slide our third quarter adjusted gross margin increased 90 basis points to 31, 5% from 36% last year.
In addition to lapping a sizable decline in the prior year. This margin expansion represents a gradual recovery of the significant year to date the impact of increased cost inflation and other macro issues, such as labor and materials availability net.
Net price realization drove an 800 basis points improvement due to the impact of our inflation driven pricing actions, which only partially offset the inflationary headwinds experienced in the quarter.
Our ongoing supply chain productivity program and our cost savings program contributed 110 basis points and 20 basis points to adjusted gross margin, respectively inflation Slash Aldar had a negative impact of 790 basis points with the majority of the impact driven by cost inflation as overall input prices.
On a rate basis increased by approximately 15%.
Along with other industry participants, we experienced the impact of significantly increasing cost inflation and other macro issues, such as labor and materials availability.
Other supply chain costs had a favorable impact as we lapped higher other supply chain related costs in the prior year third quarter.
Including those related to last year's Texas storm, which caused a temporary disruption to the meals and beverage division supply chain operations in.
In addition, we received a one time benefit in the current year for insurance claims related to the Texas storm.
The benefit of these items improved our adjusted Q3 gross margin year over year by approximately 100 basis points Lastly.
Lastly, volume Slash mix had a negative 50 basis point impact from gross margin largely due to reduced operating leverage.
The previously described initiatives to mitigate inflation highlighted on the next page includes 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 the inflation mitigation as we expect core <unk>.
<unk> for the year to be low double digits with a more pronounced impact in the second half of fiscal 2022, a wave two pricing was fully reflected throughout the third quarter and as Mark noted in his opening remarks, we have already announced a third wave of select pricing to help me.
Gates the continued increase in inflation as we head into fiscal 2023.
Moving onto other operating items marketing and selling expenses decreased $14 million or 7% in the quarter on a year over year basis advertising and consumer promotion expense or ANC declined by 16% in the quarter as investments were moderated due in part to the pacing of <unk>.
Supply recovery and some ongoing materials availability issues overall, our marketing and selling expenses represented approximately 9% as a percentage of net sales, which was in line with our expectations.
Adjusted administrative expenses increased $4 million or 3% to $146 million as a potential third quarter net sales adjusted administrative expenses were six 9%, a 30 basis point decrease compared to last year.
On the next slide we are providing an adjusted EBIT bridge to summarize the key drivers of performance this quarter.
As previously mentioned adjusted EBIT increased 23% in the quarter, primarily due to a 90 basis points or $87 million improvement in adjusted gross margin lower marketing and selling expenses contributed $40 million or 140 basis points to our adjusted EBIT margin.
The continued headwind of sales volume declines primarily from the impact of select supply constraints as well as price elasticities, partially offset by retailer inventory rebuilt negatively impacted EBIT by $24 million.
Lower adjusted other income had a negative impact of $13 million or 70 basis points. Despite adjusted administrative and R&D expenses, increasing $4 million first to prior year. It was lower as a percentage of net sales for as to prior year, and therefore had a positive impact to our adjusted <unk>.
EBIT margin of 40 basis points overall, our adjusted EBIT margin increased year over year by 190 basis points to 15, 1%.
The following chart breaks down our adjusted EPS change between our operating performance and below the line items, a 15 cent impact of higher adjusted EBIT was further benefited by a <unk> <unk> favorable impact from lower adjusted net interest expense, a one cent impact of lower <unk>.
Texas, and a <unk> <unk> impact from the benefit of lower weighted average diluted shares outstanding. This resulted in adjusted EPS of <unk> 70.
Which was up 19 per share or 37% compared to prior year.
Turning to the segments in meals and beverages organic net sales, which exclude the impact from the sale of the Plum baby food and snacks business increased 9% driven by increases in U S soup foodservice and prego pasta sauces, partially offset by declines in Canada.
Inflation, driven pricing and sales allowances were partially offset by increased promotional spending volume decreased primarily due to supply constraints, driven by labor and materials availability and price elasticities, partially offset by retailer inventory rebuild.
Sales of U S soup increased 15% due to increases in both condensed and ready to serve soups, while broth was comparable to the prior year.
Segment operating earnings in the quarter increased 18%. The increase was primarily driven by improved gross margin performance and relatively stable marketing and selling expenses, partially offset by sales volume declines gross.
Gross margin performance reflects the ongoing cost inflation, which was offset by pricing actions lower other supply chain costs and supply chain productivity improvements.
The lower other supply chain costs were positively impacted by the previously mentioned, Texas storm impact.
Unfavorable volume mix also pressured gross margins largely due to reduced operating leverage as well as higher levels of promotional spending.
These results also reflect lower base operating earnings in the prior year third quarter.
Overall within our meals and beverages division the third quarter operating margin increased year over year by 200 basis points to 19, 5%.
Within snacks organic net sales increased 8% while sales of our power brands were up 13% snacks sales increased due to increases in salty snacks, primarily snyder's of Hanover, Pretzels, and Kettle brand potato chips as well as cookies and crackers primary.
Goldfish crackers.
Overall inflation, driven pricing sales allowances and lower promotional spending were partially offset by volume declines.
Despite some inventory rebuild volume declines in the quarter driven by supply constraints based on materials availability and price elasticities.
<unk> operating earnings in the quarter increased 25%, primarily driven by improved gross margin performance and lower marketing and selling expenses, partially offset by higher administrative expenses.
Gross margin performance improved as higher inflation and increased other supply chain costs were more than offset by pricing supply chain productivity improvements execution improvements and cost savings initiatives.
These results also reflect lower base operating earnings in the prior year quarter overall within our snacks division the third quarter operating margin increased year over year by 160 basis points to 12, 7%.
I'll now turn to our cash flow and liquidity year to date fiscal 2022 cash flow from operations increased from $881 million in the prior year to $1 $1 billion, 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 $179 million, which was down from $190 million in the previous year.
Our year to date cash outflows from financing activities were $805 million, the majority of which or $456 million represented the return of capital to our shareholders, including $340 million of dividends paid and $116 million of share repurchases.
At the end of the third quarter, we had approximately $425 million remaining under the current $500 million strategic share repurchase program and approximately $173 million under our 250 million dollar anti dilutive share repurchase program.
In the quarter, we settled the redemption of all $450 million of our senior notes due to mature in August 2022, with a combination of cash and short term debt.
We ended the third quarter with cash and cash equivalents of $196 million.
Turning to the next slide.
We are raising our full year fiscal 2022 net sales guidance to reflect year to date performance expectations of continued strong demand for our portfolio of brands and limited price elasticities admits a heightened inflationary environment as well as continued supply recovery and improved service.
Although our third quarter adjusted EBIT margins improved relative to the prior year, we expect core inflation to exceed prior estimates for the balance of the year, we expect margin pressure for the full fiscal year. Despite ongoing mitigating actions such as net price realization productivity improvements and cost savings initiative.
Accordingly, adjusted EBIT and adjusted EPS performance are expected to be consistent with the guidance provided on March nine 2022.
For the full year, we expect organic net sales to be plus one two plus 2%.
This is a change from minus one to plus one reported on March nine 2022, we continue to expect adjusted EBIT of minus four and a half to minus one 5% and adjusted EPS of minus 4% to flat first do you adjusted fiscal 2021 results the sale of Lam is.
Estimated to have a negative impact of one percentage point on fiscal 2022 net sales in.
In closing, while the macro environment remains challenging and increased inflation is certain we are confident in our outlook for the balance of the year given the continued demand for our trusted brands and a focused execution of our teams. We are pleased with our quarter financial results and overall business.
Performance and we continue to look forward to closing out the year on a strong foundation, we will now turn it over to the operator to take your questions. Thank you.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Andrew Lazar from Barclays. Your line is open.
Great. Thanks, very much good morning, everybody hi.
Hi, Andrew.
I guess, mark and in light of recent industry chatter regarding consumer behavior shifts and retailer commentary I thought it might make sense to start with having to address this sort of building investor notion that the <unk>.
<unk> window has sort of all of a sudden effectively completely closed for the industry, which obviously is an important topic given expectations for more inflation to come in going forward in your fiscal 'twenty, three and I guess specific to Campbell you mentioned, a third wave of pricing was announced does that mean, it's sort of locked in with key retail partners at this point and does this pricing.
Essentially cover what inflation, you're seeing in fiscal 'twenty three at least as we stand here today or might there needs to be more still.
So yes. Good question, Andrew that's surprising easier either but I think the first thing I just would say is as we mentioned today.
We feel very good about the execution on pricing so far through the first two waves and then as we mentioned also today, we announced a third wave back in April and we did that.
Really as you might remember in 'twenty, one we tended to lag.
Inflation, especially through the first couple of quarters of the year and we wanted to make sure that we were a bit more nimble going into.
22, and really into 'twenty, three and so as we solve.
Projection and the outlook for inflation, we've moved very quickly to get the third.
Wave out there and we've been working through that with customers for really the better part of the last couple of months and so we've made.
A lot of progress on that front and we feel very good about that as well as feeling good about how that sets us up into exiting 'twenty two into 'twenty three.
I think we also feel very good about the other levers that we have and the progress we're making.
To help us manage the inflation, primarily I would say the significant step forward in our supply chain.
Both from a labor standpoint, but also from an execution standpoint.
Really nice to see the progress.
Cutting through that.
That we've been working hard and certainly that was an area of opportunity, but as we start to think about our position going into 'twenty. Three certainly feels much stronger of a foundation feels good to have that wave three pricing out there and moving.
And I think you start to ask about future.
And this idea that there is no room for any more pricing.
I don't think thats, particularly accurate or or realistic I think what is true is that we've got to be incredibly mindful of the consumer dynamics and where consumers are relative to the elasticities that we're experiencing and being quite.
Strategic in our thinking about where there might be pricing and where we're at limits and probably need to think of other tools within the bag to solve for inflation. So I certainly would hate to be sitting here today ruling out that there is no chance for further pricing I just think we've got to be very prudent about it.
And I think Thats, a similar sentiment that we're hearing with our retail partners. I think we are collectively wanting to make sure that we're thoughtful about where pricing.
As possible, where we where we may be seeing elasticity is begin to creep up we obviously have to be a lot more.
Careful there and I think one of the topics that starting to emerge more in these dialogues is what are you doing the support the brands do you have innovation are we spending can get on marketing and promotion and so as you think about our roadmap going forward, that's going to be an important overlay as well but.
I think for where we sit today and things that we can see on the horizon, we feel very good about the position that we're in and how we're going to play through the balance of the year and move into 'twenty. Three of course, we will give you more on that when we see you next quarter, but I think for where we are today, that's probably a good assessment great. Thank you so much.
Yes.
Your next question comes from the line of Ken Goldman from Jpmorgan. Your line is open.
Hi, Thank you.
Our guidance for annual sales growth implies.
Hey, it's a fairly wide range of outcomes for your topline in the fourth quarter. So two questions on this if I may 1st.
At the midpoint of that range I think the implication is that your fourth quarter sales growth would be around 5% year on year. So just curious if that's a reasonable starting point.
Think about modeling the quarter understanding that much can still change and then I guess second could you perhaps walk us through what some of the key puts and takes might be that would lead to either I guess, the higher or lower end of that range as you see them today. Thank you.
Yes, Thanks, Ken.
I think first off I, just would say that from a Q3.
Just to give you a little bit of a frame of reference essentially the quarter came in.
Very consistent where we expect it to be as it related to EPS I think the composition of the quarter, we were a little stronger on top line and maybe a little more pressure.
On inflation in the middle of the P&L, but generally came in a profile that delivered more or less our expectations. I think as you think about what we've put out there for the for the balance of the year and kind of lives into that.
That framework of that perspective, and Thats how were anticipate.
Anticipate in Q4 to play out I think.
You raise a good point, which is all right. There is a range here what would be the variables that drive the difference in a lot of this we think really will come down to the ability and the speed at which we're going to continue to replenish the.
Inventories that are in market demand and elasticity, we're leaving ourselves a little bit of flexibility. There. We also want some room to be able to invest in the business.
As we continue to move through the quarter. The goal in mind is to try to exit the year with good momentum going into fiscal 'twenty, three but I think a lot of the variability that you see in that range will depend on just how quickly we recover in a couple of these areas on that top line I think this kind of mid single digit.
Area four kind of that mid point for top line is a good place to be.
Great. Thanks very much.
Yeah.
Your next question comes from the line of Peter Galbo from Bank of America. Your line is open.
Hey, guys. Good morning, Thanks for taking the question.
Maybe if I can just ask a follow up to Ken's question kind of Mark similar to the bottom line I think theres, a pretty wide range of EPS outcomes as well and I think you mentioned.
Investment in leaving yourself, some room to invest in the business, but anything that would kind of drive that the higher or lower end of that EPS range at the bottom and then maybe Mick.
Just thinking about the chart you have on core inflation.
As we think about it over the next few quarters, that's obviously going to have a pretty material step up it seems like in the fourth quarter, but then does that does that rate of change going into the first half of next year kind of start to level off or wherever it may be mid high teens low <unk>.
Just any color there would be would be helpful. Thanks, guys.
Yes, so on the on the bottom line guidance range I do think it is linked pretty intrinsically with the top line. So as you move the top line to the higher ends of the range or the lower ends of the range those tend to coincide pretty directly so I see that as a little bit more perhaps of where the <unk>.
The ability as.
I think again too.
So.
Reinforce what I said before I also think that as we've thought about this.
Fourth quarter, we do want to see as supply comes back in as our distribution recovers as we're in a much stronger footing for supply in general.
Part of this is returning the marketing and the promotion spending.
To the business, so that we're able to continue to drive.
That strength of equity, especially in face of some of the pricing.
Elasticities that we're navigating and so I think giving ourselves a little bit of room there.
Is the smart smart play right now and again the goal in mind as to is to really try to leave the year in a very positive position as we move into 'twenty three.
And then Mick I'll, let you answer the second one yes, no and I think with regard to inflation you obviously saw the uptick with regard to inflation between the second quarter in the third quarter in particular that so.
<unk>.
Related to the fact that you have some of our contracts that reset on a calendar year basis, and we spoke about that obviously in the past you see that we expect.
When I look.
Throughout the quarter quarterly progression of inflation as Mark mentioned earlier, we follow that very closely and as a result as Mark also described one of the decisions that we made is the announcement of the wave III pricing in order to make sure that we continue to track.
And help offset is one of the difference.
Tools in our toolbox the inflation that we see come yes and of course that would anticipate.
That outlook into into.
Into the first half of certainly of 'twenty three.
Got it thanks, so much.
Your next question comes from the line of David Palmer from Evercore. Your line is open.
Hi, Thanks, just a just a general question, maybe you can answer on behalf of the food space, It's something we're wrestling with it when we look at consumer panel data it looks like the under 60000 household income consumers drove outsized growth during COVID-19.
Seemingly at the expense of private label brands, gaining share and then of course fast food restaurants suffered during that time as well from a traffic perspective.
These lower to middle income consumers tended to skew younger as well, which could be good news because that's a lot of trial I'm wondering if your consumer does your consumer data show this as well and Im wondering how youre feeling about repeat levels and other plans to kind of keep these younger and lower income consumers in the tent in your brands.
Perhaps mobility increases in private label becomes more available. Thanks.
So a lot to unpack, there, but but a very important question. So what I would start with is just by saying to you that I think and I've said this consistently and I'll give you a couple of real time.
<unk> is that are.
<unk> portfolio is very well positioned and resilient as it relates to challenging economic environments. However, you might.
Categorize that and so a lot of times, what we the dynamic that we see is yes, let's take condensed soup as a as an example, where we are seeing and expected to see some pressure from private label. You also have significant migration of trading down into the.
<unk>.
So that the overall category growth rates are up pretty significantly and volume volumes are holding up very well even in the face of pricing that can be double digit. So far that we've seen I think what's been knew about this or what's been a little bit more unique than maybe what we've seen in the past is where were experienced.
More of the trade down tends to be more in the baby boomer little bit older consumer.
<unk> tends to be a bit more price sensitive and we're picking up a lot of these new consumers.
As they are moving into the category you know another great example of that is chunky chunky pricing is up.
Mid teens right now and what we're learning is although that seems like a lot of pricing and it is.
But for a can of soup that is still under $3 for a large part of the population trading down into the ready to serve soup category becomes a very economic move for them and that's why on chunky, we see right now.
Pricing mid teens consumption is up 14%, but units are still up 3% and our volume was up 8% in the quarter. So you've got a very very healthy dynamic that exists in several of our brands and I'd say, it's not far off for categories like prego pasta sauce in EBIT on the snack side.
It tends to be a little bit more in the I'd say in the more.
Belgian spaces like cookies, and some of our salty snacks, but the elasticities have been very very low and historically speaking those are categories that you tend to think of is discretionary but tend to hold up very well remember backstopping. All of this discussion is an overarching migration from away from home into her.
And the idea that eating at home is one of the enablers to combat pressure.
As it relates to economic challenges and so I think look it's complicated because every category brand is a little different and Thats. The way you've got to go at this so it's not as simple as answering it in a broad stroke, but as we look at our portfolio.
Certainly we feel very good about how we're positioned today as well as heading in to the environment ahead, and I think certainly the evidence that we've seen so far is that there's probably even some more reasons to be encouraged.
And then what we would have seen historically and all of that is caveat it with the appropriate amount of vigilance here to make sure that.
If we do find ourselves in a position where elasticities begin to really accelerate that we've got the appropriate contingency plans and support plans to navigate through it. So again, there's not a really.
Singular answer for it but I do think as it relates to Campbell.
We feel that we're positioned very well, but will of course continue to be highly.
Aware of what's going on around us.
Thank you.
Your next question comes from the line of Nik Modi from RBC capital markets. Your line is open.
Thanks, Good morning, everyone.
And then a quick clarification.
In terms of the shortage of materials can you just provide more.
More details around that but my broader question is just on trap costs.
Think about all of the excess cost that you guys are incurred during COVID-19 as a result of retailer penalties and just supply chain issues can you just give us any context on the magnitude of those costs.
And that kind of things normalize I know this.
Might take some time for this to normalize but as you think about these costs in the normalization.
Would that just dropped to the bottom line of philosophically would you say look we got to build some capabilities.
Future shock like this so maybe we should we invest in we localizing supply chains.
Diversifying our supply base, what have you any thoughts on that would be helpful.
Sure that's great Great point I think.
The first step for US was really let me answer the second one first and then I'll come back.
To the materials question, but.
I think the first step for us.
Does to make sure that we had the appropriate labor and staffing to run our plants.
In their current configuration and current state.
And so I think the team did an amazing job in a very difficult labor environment to <unk>.
Recover on that front and to significantly improve retention and its a full tool box full of things that were applied to get that job done.
And I do think that's an area, where we improved quicker than we had even expected and that really enabled us to begin to get that service and distribution and start to replenish some inventory very quickly.
Now with that in place as we start to operate on a more steady state for the supply chain.
It is now an opportunity to go after a lot of these areas of productivity.
And some of it is I think I think it's coming from a couple of different areas I think one of the areas.
Certainly looking back and saying, Okay, where we are the inefficiencies that we may have given up over the last year and how do we build the right road maps to recover that in many ways I see that as the easier the lower hanging fruit.
Fruit to go after and I do think you'll see a meaningful productivity profile.
As we go into the next year to support that and then secondarily I think we have not been standing still on capabilities throughout this whole process and perhaps some of the challenges. We faced were may be biting off a few too many of those initiatives at the same time in the past, but now it's paying dividends right. So now we have.
New capacity in place that's more efficient capacity, we've got capabilities. We're the entire company is on a singular system with SAP. Now. These are these are incredibly important aspects in your supply chain that enable you to build future productivity and so that's why when we say.
How do you feel about the inflation coming forward, yes pricing is certainly a pivotal component of it but there are a lot of other variables and in the end of the day, what we're really trying to do is honestly.
Keep prices as reasonable as we possibly can right. We know the pressure that consumers are feeling and so the more that we can do on that productivity side, the better off we're going to be and so the emphasis there and focus there is quite significant and perhaps this quarter more than anything else to me.
It was the proof point of being able to get back on both feet with the supply chain that is such a critical step.
In creating the reasons to believe going forward and I just feel like that's going to be an enabler for us to do a lot of things in the future.
As it relates to material availability, so when we talked about supply chain challenges in the third quarter I would really cut cut that into two buckets. One was the labor and just the network yield right the ability to produce out of our existing network.
Up product to match demand for the most part that we've now recovered on or will be recovering very shortly through the next months or so.
On the other side of supply challenges as material availability that is far more concentrated.
So a couple of specific places probably most notably on both are.
Prego business as it relates to certain flankers skus in our beverage business in particular, where we continue to really fight for aluminum cans that continues to be one of the toughest materials to recover from.
Don't think its a endless stream I think there is light at the end of the tunnel for those but my guess is that those will probably take us into the better part of 23 to fully recover all of those and then of course, there's always odds and ends here and there.
I think we've done a very good job of creating some flexibility in packaging and formulation to allow us to.
Necessarily be solely dependent on single sourcing, but I think at the end of the day. We've got a couple that will probably linger with us while the network more or less fully recovers.
Very helpful. Thank you.
And your final question comes from the line of Jason English from Goldman Sachs. Your line is open.
Hey, folks thanks for slipping me in adjacent congrats.
Congrats on the progress you're making on loosen up the supply chain.
I wanted to I wanted to talk a rather than the supply chain and cost more on the investment side.
The business had found itself in a fair amount of difficulties and problems in fiscal 18, which obviously led to a rebase in fiscal 19.
To reinvest.
<unk> got it looks like on the surface, you've now taken all of that incremental investment and pull it back out of the business trailing four quarter basis, your marketing and selling expense pretty much matching fiscal 2018, despite underlying inflation.
Mark how do we get comfortable with this level of spend what is the right level of spend and should we be expecting another rebase to restore that and get your market share back in growth.
Yeah good.
Good question, Jason So let me first talk a little bit about where we sit today. So as we think about the spending profile.
We're at some marketing and sales.
For the quarter was about eight 8% and as you've heard me say before I'm a lot more comfortable with that around 10%.
The 9% to 10% range.
Depending on the.
A couple of variables relative to inflation or innovation.
Other sources of investments. So there is no question that where we are today, we would want to move up from I don't think it represents any kind of rebase like we would've experienced because a lot of that.
Was was.
About repositioning of Reframing.
Lot of categories that we were moving away from our shifting to this is really about in the broader scheme of things the difference between that eight eight.
And where we want to move to over time I think what's important to note is the ANC.
Traction has really been singularly minded on where the supply is this is not simply a tool to try to hit.
<unk> ability it was really designed to reflect where we just don't have it didn't have the supply to support and so shaping demand a bit through pulling back on some of that spending as you think about or as we think about our future plans, we've contemplated that and so as we.
We see recovery in supply and supply chain I would expect to see that number begin to move forward and again I don't think it has to be.
Any type of Big Bang, but I think as we move from <unk>.
Eight eight up the up the ladder a bit.
I think we can begin to do that and you should expect to see that as part of.
The ongoing plan as we move forward of course, I think that will again it will follow very closely as we recover fully in supply. We do have a robust innovation pipeline, we talked about today. So we expect to fully support that so I guess, what I would say is there's no question, there's been a step back.
I think really again related much more to supply unnecessarily.
The targeted for savings, but as we move forward I think in a very thoughtful and kind of pay as you go mindset, we would expect to see that recovering over the next quarters and certainly into 'twenty three.
Okay. Thank you I appreciate it.
And this concludes our question and answer session I will now turn it back over for some final closing comments.
Thank you so much for joining us today and I think as you saw.
This area, we will be attending the Deutsche Bank Conference next week.
Hi, Bonnie.
I think that's the right ankle formats.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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