Q1 2023 Campbell Soup Co Earnings Call

Greetings, ladies and gentlemen, and welcome to the Campbell Soup Company first quarter fiscal 2023 earnings conference call. At this time, all participants are in listen only mode.

After todays presentation, there will be an opportunity to ask questions 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 would like to withdraw your question again press Star one.

As a reminder, this conference call is being recorded it is now my pleasure to introduce your host Rebecca Gardy Chief Investor Relations Officer, you May begin your conference.

Good morning, and welcome to Campbell's first quarter of fiscal year 'twenty twenty-three earnings conference call I'm, Rebecca Gardy, Chief Investor Relations Officer at Campbell Soup Company I am joined today by Mark Clouse, Campbell's President and Chief Executive Officer, and make Big housing Campbell's Chief Financial Officer and.

President of meals and beverages.

As remarks had been prerecorded 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 of 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.

Then 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 anticipated in <unk>.

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 first quarter results as well as in market performance by Division Nick will discuss this in.

Results of the quarter in more detail and then review our guidance for the full year of fiscal 'twenty 'twenty, three and with that I am pleased to turn the call over to Mark. Thanks, Rebecca Good morning, everyone and thank you for joining our first quarter fiscal 2023 conference call I Hope you had a happy Thanksgiving and filled up on Green Bean casserole.

Average farm stuffing and plenty of our delicious snacks and cookies.

As you read in our press release. This morning, our fiscal year is off to a fast start our strong year over year performance across all three key metrics reflects the continued strength of our portfolio and our successful efforts to substantially mitigate significant inflation through a combination of pricing and productivity improvements.

I'm also encouraged that we delivered those results, while increasing investments in our brands and ensuring we remain a good value to consumers in this difficult economic time.

We also made significant progress on market share versus the fourth quarter growing or holding share in most of our categories year over year.

We are very pleased that the combination of stronger supply accelerating innovation and an appropriate investment is translating into strong profitable share growth as we had planned.

Overall Campbell's portfolio continues to demonstrate compelling consumer relevance and is well positioned for the current economic environment.

We recognize it's still early in our fiscal year and the environment does remain challenging but given the strength of the first quarter performance the health of our brands and our consistent execution, we've increased our guidance to reflect our current outlook.

<unk> will provide more details on the drivers shortly but this quarter's results and the full year outlook demonstrate the significant progress we've made across our brands supply chain culture and capabilities. Although there remains more to do on the business as we continue unlocking our full growth potential there.

This quarter's results represent a positive milestone in our journey.

Organic net sales increased 15% to $2 $6 billion due to both inflation driven pricing and strong consumer demand. While we did see some volume declines it was partially mitigated by expected retail inventory recovery and a strong rebound in unmeasured channels, especially.

Holly foodservice.

Dollar consumption was up 10% in the quarter versus the prior year and 21% versus three years ago as expected. We shipped ahead of consumption in the quarter as our supply chain execution and service levels continued to improve and retailers rebuilt inventory levels the improved supply.

Also allowed us to significantly increase our marketing investment in both divisions as planned.

Turning to adjusted EBIT higher adjusted gross profit, partially offset by higher marketing and selling expenses and higher adjusted other expenses resulted in a 15% increase in adjusted EBIT.

The team has done an excellent job navigating inflation leveraging a good balance of different tools. I also can see that our agility has improved and reacting to the volatile environment.

As an example, we recently announced a very targeted way for pricing action on products, where our input costs have gone up further.

Adjusted earnings per share were $1. Two also up 15% as the flow through of adjusted EBIT and lower weighted average diluted shares were partially offset by higher adjusted taxes.

I'm thrilled with our progress on dollar share we grew or held share in most categories year over year and also grew share versus the prior quarter. In fact 10 out of 15 of our key brands grew share in the quarter.

Some of which responded faster and more significantly than expected as inventory and support were added.

Even in categories, where we experienced modest share decline such as soup and pretzels, our share performance improves sequentially as planned.

There is no question that the focus of our portfolio from a category and geographic perspective is a distinct advantage right now and is enabling us to effectively deploy investment and drive consistently strong execution.

Let's look at our divisions, starting with meals and beverages, which delivered a strong first quarter with reported and organic net sales growth of 15%.

In market performance continues to show the underlying health of our portfolio with dollar consumption growing 8% over the prior year and up 17% versus three years ago. The recovery in our supply chain resulted in materially improved service levels up over 18 points versus the prior year enabled.

Retailers to replenish inventory in the quarter and be well positioned on supply heading into the critical holiday season.

We also saw a marked recovery in our foodservice business as supply has also improved in this important channel.

Turning to slide 10, our strong dollar consumption growth was across most of our meals and beverages portfolio as we are well positioned within growing categories.

The growth of our brands in key segments, namely ready to serve our Rts soups, Italian sauces, Mexican sauces, and select segments in our condensed soup well outpaced the growth of their respective categories.

Turning to slide 11, our consumer insight show the consumers continue to cutback on out of home eating and are migrating from more expensive grocery categories as they seek ways to ease the impact of inflation.

Consumers are making changes to stretch their budget and following several years of becoming more confident and comfortable with cooking. They continue to turn to our categories and importantly, our brands as evidenced by the continued growth of our meals and beverages business.

With consumers preparing about 80% of meals from home our brands are well positioned for sustained growth delivering consumers the quality value and convenience they seek for simple at home meals and quick scratch cooking.

For example, our spaghetti carbonara recipe as a top performer year over year as it easily and economically feeds a family for about $1 53 is serving <unk>.

Turning to slide 12 U S soup net sales grew 11% over the prior year with gains in ready to serve condensed and broth. We continued to see a favorable net pricing benefit with dollar consumption up 5%, partially offset by pricing related volume declines elasticities remain below.

Oracle levels and while our total dollar share of U S. Soup declined it was by less than one point, we had positive dollar share growth in the quarter and key strategic segments, partially offset by competitive share losses to private label in total condensed and broth as expected we continue to focus on price gap.

And are adding equity support with meaningful innovation to maintain the strength of the category and our brands over the long run.

Chunky continued its positive momentum with dollar share up one six points in the quarter coming from strong base velocities as we further recovered on shelf and 13% dollar consumption growth versus the prior year.

This was the fifth consecutive quarter chunky held or gained volume share, reflecting the powerful combination of our strong base business highly relevant innovation and increased investment in compelling advertising versus three years ago Chunky grew dollar consumption by 26% or.

Our chunky digital and social Activations are seeing notable year over year increases in engagement and our lunchtime is your halftime campaign is resonating, particularly with younger consumers as we expand our reach through our NFL partnership and gaming via a a madden.

Closing out the slide Pacific has returned to growth as a result of restored supply and innovation with dollar consumption of Pacific Rts soup up 21% versus prior year and share grew by <unk> four points in the quarter specifics growth is outpacing organic sub segments in the quarter.

And the launch of our T. S cans is the leading contributor to the growth with millennial buyers up 16% versus prior year.

Turning to the next slide and our progress on building a $1 billion source business Prego continues to solidify our position as the brand the dollar share leader in the Italian sauce category.

Growth in the quarter was driven by both pricing and higher volume, reflecting improved service versus a year ago.

The brand had strong end market dollar consumption of plus 21% and share growth of 1.1 points versus prior year.

Pace also performed well with dollar share gains of <unk> four points, marking the third consecutive quarter of dollar share growth and increased dollar consumption of 16%.

Turning to snacks, we had an impressive quarter as our brands rapidly responded to the recovery of supply and increased investment with accelerated top line growth and share improvement.

The strong 15% topline growth, which was fueled by our power brands reflected pricing actions offset by slight pricing related volume declines say.

Sales growth exceeded dollar consumption of 13% versus prior year due to the replenishment of retailer inventory, which had been depleted in the prior year due to supply challenges.

As Youll see on the next slide in market dollar consumption and our power brands was up 15% with six of eight brands growing double digits on a three year basis dollar consumption was up 28% with all eight power brands growing double digits and four of our five salty power brands growing over 30.

Percent.

This also supports the historical learning that consumers snacking behavior is very resilient and relevant in tough economic environments.

Overall six of our eight power brands grew dollar share in the first quarter, including Cape Cod snack factory and Lance each of which grew share by over one point.

As we have recovered from significant supply constraints that began in the second quarter of fiscal 2022, we began to see sequential dollar share improvement quarter to quarter.

Specifically over the last four quarters goldfish gained six points Snyder's of Hanover gained three five points Lance is up four eight points and Pepperidge farm cookies were up <unk> four points.

Our snack brands are also highly differentiated against competition with positive velocity trends in fact on slide 16, you'll see that our brands are growing faster than their respective categories and five out of seven power brand categories, including crackers Kettle chips Deli snacks.

Organic tortilla chips and sandwich crackers.

Consumers continue to show their love for goldfish and respond to the steps we've taken to broaden the appeal of this iconic brand.

This is a remarkable growth story for one of our most important brands, we continue to deliver against our strategy to expand our consumer base with robust and relevant innovation and effective marketing that engages the entire family not just younger kids.

In fact for the third time in a row goldfish crackers were teens, most preferred snack brand. According to Piper Sandler fall 2022, taking stock with teens survey.

Our goldfish Duncan Pumpkin, Spice crackers, where the top turning new cracker item and leading pumpkin spice stacking item during the quarter.

We've continued this momentum with a new partnership with Disney Marvel at our limited edition Black Panther, what kinda forever, goldfish, which hit the store shelves last month and keep an eye out for the limited return of goldfish, Frank's Red Hawk crackers in the coming months.

We also continued to win in salty snacks with dollar consumption and dollar share gains in Kettle chips, Cape Cod snack factory and late July .

Our snack factory Pretzel crisp and Snyder's of Hanover will have new holiday activations, inspiring new occasions, and elevating every holiday snack tray.

And finally, I want to highlight Pepperidge farm cookies, the holidays or their Super Bowl and was supply back we're able to return to full speed through the holidays.

We've introduced new packaging designs across the portfolio from Melano to Chessman and brought back holiday favorites like Linzer cookies. We also have new limited edition Melano hazelnut Hot cocoa and with the return of the Melano Fancy Santa activation, we hope to do our share and making the holidays a little more.

Paul.

In closing I'm really pleased with our strong year over year performance and the fast start to the year.

This is perhaps one of the most complete quarters we've delivered.

We continue to build momentum and confidence with a powerful portfolio of brands in both divisions and the continued strength of our supply chain execution.

We're recovering on share and driving growth in key categories and with our portfolio focus we are well positioned for the current consumer and economic environment.

Our innovation is resonating with consumers driving more engagement, especially among younger households, and theres more to come.

It's important to remember that there is still much to do on our business and the environment does remain challenging but being able to face those challenges off a stronger and more stable foundation is very encouraging and bodes well for the future.

Before turning it over to Mick I wanted to comment on our recent management changes as we announced in November Mick has been appointed president meals and beverages and Chris Foley is now president of snacks, Mick will continue to serve as Chief financial officer until a successor to this role is in place the search is going very well and I.

Look forward to updating you in the future.

Both Mick and Chris have played a significant role in Campbell's transformation over the last several years by enhancing our culture and improving our business performance I am confident that they are the right leaders to continue to build our momentum and unlock our full growth potential.

In closing I'd like to thank all of the Campbell's team for their hard work and wish all of them and you happy holidays with that over to Mick Thanks, Mark and good morning, everyone. We are pleased by the strong results. We delivered in the first quarter with 15% growth across all three key metrics net sales.

Adjusted EBIT and adjusted EPS topline growth was due to inflation driven pricing sustained brand health and improved supply chain execution, partially offset by modest volume declines.

First quarter net sales growth of 15% outpaced consumption growth due impart to retailer inventory rebuild as well as the strong recovery in our foodservice business.

Strong sales growth a relatively flat gross profit margin as cost inflation and unfavorable volume and mix were mostly mitigated by pricing and productivity improvements combined with continued support of our brands and expected lower pension income resulted in a 15% increase.

And adjusted EBIT on a margin basis, adjusted EBIT was comparable to the prior year at 17, 4% adjusted EPS increased 15% to a dollar and <unk> <unk> per share driven primarily by the increase in adjusted EBIT, partially offset by a higher adjusted effective.

Tax rate.

Our cash flow from operations in the first quarter was $227 million, which allowed us to continue to invest in the business. While we returned over $150 million to our shareholders through dividends and share repurchases with Q1 results ahead of expectations and our strong.

As in the health and momentum of our brands and improved supply chain, we feel it's appropriate to raise our guidance that said, let's first discuss our first quarter results versus prior year in more detail.

Net sales in the quarter, both reported and organic increased 15% driven by 16 points of inflation driven pricing. This was partially offset by a one point volume and mix headwind promotional spending in the quarter was down 1% in meals and beverages and up 1% in snacks and thus overall comparable.

To the prior year as an aside going forward, we will combine the impact of promotional spending with the impact of pricing in our quarterly earnings materials.

Turning to slide 22, our first quarter adjusted gross profit margin decreased 30 basis points from 32, 5% to 32, 2% inflation and higher other supply chain costs had a negative impact of 1200 60 basis points with the majority of the impact drift.

By continued cost inflation.

Input prices on a rate basis increased by approximately 18%, which was slightly higher than the fourth quarter of fiscal 'twenty. Two Additionally, unfavorable volume and mix had a negative impact of 150 basis points in the quarter.

These factors were mostly mitigated by a higher net realized price, which drove an 1100 40 basis point improvement, reflecting the impact of our inflation driven pricing actions. In addition, our ongoing supply chain productivity and cost savings programs contributed 240 basis points today.

Adjusted gross profit margin.

In the first quarter, we continued our efforts to mitigate inflation highlighted on the next page through.

Through a combination of targeted price increases and trade optimization as well as supply chain productivity improvements cost savings initiatives and a continued focus on discretionary spending across the organization.

As discussed during our previous earnings call, we expect cost inflation to continue throughout fiscal 2023 to mitigate the expected inflation. We are currently implementing selective additional pricing in both divisions, which should become effective in the second half of our fiscal year, we continue to focus on.

All other areas of inflation mitigation, while we diligently protect the important value proposition for consumers.

Moving onto other operating items marketing and selling expenses increased 18% or $31 million and represented approximately seven 8% of net sales versus seven 6% in the prior year. The primary drivers of higher marketing and selling expenses were higher advertising and consumer promotion expense or.

E&C, which increased by 31% for answers to moderated levels in the prior year and higher selling expenses, partially offset by increased benefits from cost savings initiatives.

Administrative expenses on an adjusted basis increased 1% to $155 million due to a higher general administrative costs and inflation, partially offset by lower expenses related to the settlement of certain legal claims.

As a percentage of net sales adjusted administrative expenses were 6% a 90 basis point decrease compared to last year on slide 25, we are providing an adjusted EBIT bridge to summarize the key drivers of performance. This quarter as previously mentioned adjusted EBIT increased 15%.

In the quarter, primarily due to a 14% or 110 $2 million improvement in adjusted gross profit while the increase in adjusted gross profit benefited adjusted EBIT. It was lower as a percentage of net sales, resulting in a 30 basis point decrease of our adjusted gross profit.

Jen and a corresponding decrease of our adjusted EBIT margin marketing and selling expenses increased $31 million versus the prior year and had a negative impact on our adjusted EBIT margin of 20 basis points.

Just that administrative and R&D expenses were $176 million, a 1% increase over prior year. This increase resulted in a 100 basis point contribution to the adjusted EBIT margin as these expenses were lower as a percentage of net sales versus prior year adjusted other expense.

<unk> of $3 million compared to adjusted other income of $7 million in the prior year had a negative adjusted EBIT margin impact of 40 basis points.

This headwind is largely due to a reduction in pension and postretirement benefit income compared to prior year.

Our adjusted EBIT margin was in line with prior year at 17, 4%.

The following chart breaks down our adjusted EPS growth between operating performance and below the line items higher adjusted EBIT impact of 16 was partially offset by a four cent headwind of higher adjusted taxes earnings per share also benefited from a reduction of the weighted average diluted share.

Outstanding all in adjusted EPS increase year over year by 15% to dollar and two cents.

Turning to slide 27, our meals and beverages division delivered a strong quarter with both reported and organic net sales increasing 15% versus prior year, primarily due to increases in U S retail product, including soup and prego pasta sauces as well as gains in our foodservice business.

Inflation, driven pricing and sales allowances and lower levels of promotional spending were partially offset by volume declines.

Sales of U S soup increased 11% due to sales increases in ready to serve soups condensed soups and broth.

Segment operating earnings in the quarter increased 18%. The increase was primarily driven by higher gross profit, partially offset by higher marketing and selling expenses overall.

Overall within our meals and beverages division first quarter operating margin increased year over year by 60 basis points to 22, 7%.

On slide 28 reported and organic net sales in our snacks division increased 15% driven by sales of power brands, which were up 21% sales growth was driven by increases in cookies, and crackers, primarily goldfish crackers and in salty snacks, primarily in snyder's of Hanover Pretzels.

And both Kettle brand and Cape Cod potato chips inflation, driven pricing and sales allowances were partially offset by volume declines and increased promotional spending relative to moderated levels in the prior year quarter.

Segment operating earnings in the quarter increased 20%, primarily due to higher gross profit and lower administrative expenses, partially offset by higher marketing and selling expenses overall within our snacks Division first quarter operating margin increase year over year by 50 basis points to 13 seven.

I'll now turn to our cash flow and liquidity physical 2023 cash flow from operations decreased 21% year over year to $227 million, primarily due to changes in working capital, partially offset by higher cash earnings cash outflows from investing activities were reflective.

Of the cash outlay for capital expenditures of $77 million, which was an increase from $69 million in the previous year.

Outflows from financing activities were $127 million, including a $115 million of dividends paid and $41 million of share repurchases at the end of the first quarter, we had approximately $375 million remaining under the current $500 million strategic share.

Repurchase program and approximately $131 million remaining under our $250 million anti dilutive share repurchase program we.

We ended the quarter with cash and cash equivalents of $130 million.

Before I turn to guidance I wanted to touch on a few additional items first at the end of September as it be global upgraded our credit rating to triple B with a stable outlook.

Currently our November 15, we raised a delayed draw term loan totaling up to $500 million. We plan to use the proceeds of the loan to refinance our existing $500 million to $66 million notes maturing in March 2023.

And lastly on November 21, we entered into a 12 year renewable power purchase agreement with <unk> now in North America to support our goal to reduce greenhouse gas emissions improving the sustainability of the agriculture and food value chain is important to Campbell and disagreement is a substantial step forward in meeting.

Our science based emissions reduction target.

With that let's turn to slide 30, as previously mentioned, we are raising our financial guidance for the year given the strength of our first quarter performance the health of our brands and our consistent execution for the full year. We now expect net sales, both organic and reported to be plus 7% to plus.

9% adjusted EBIT of plus 2.5% to plus six 5% and adjusted EPS of plus 2% to plus 5% first of fiscal 2022 results, resulting in fiscal 2023, adjusted EPS of $2 92.

$3 Lastly, as we mentioned on our fourth quarter call.

This reflects an approximate 3% headwind to adjusted EBIT and adjusted EPS from lower pension and postretirement income.

All in we're off to a great start to fiscal 2023 and are confident in our strategy and execution as Mark mentioned, while we expect the environment to remain dynamic our brand momentum remains strong as both supply and investment return to pre pandemic levels I'd like to close by thanking all.

All our teams for their commitment and wishing everyone a wonderful holiday season, and with that let me turn it over to the operator to begin Q&A.

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.

First question comes from the line of Andrew Lazar from Barclays. Your line is open great.

Great. Thanks, very much good morning, everybody.

Hi, Andrew Good morning, Hi, there to start off I guess last quarter I think Mark you mentioned that you expected sequential improvement in gross margins as the year progressed.

Given how much better gross margins came in in <unk> I'm trying to get a sense of if that's still the case and if so if that would mean your full year gross margins could be better than the flattish outlook that you gave last quarter. So I'm basically trying to get a sense of just sort of a cadence over the next couple of quarters in terms of the margin profile.

I had a quick follow up yes.

Yes no.

Great question Andrew.

I guess, maybe let me start with a little bit of what was better in Q1 than perhaps we had expected.

I think it really does begin with top line, we were stronger performance on the top line really driven by two things.

I think the first was was better in market.

Hum.

Lower elasticity than we had expected paired with the marketing effectiveness I'm always a little bit tough to tease those two things out but.

At the end of the day that that end market performance share recovery was stronger and faster than we had expected I think the second area is we continue to execute really well on the supply chain and the recovery in supply was fast enough that it allowed us to accelerate availability.

For that inventory that we had planned but also you saw places like unmeasured channels growing even faster than we had anticipated.

In particular foodservice was was very <unk>.

Very strong and as you drop that down into margin and you say, okay top line better.

What was different in the margin.

As you know.

When you get that top line going there's a lot of positive effects throughout the P&L.

And I do think consistent with that we saw greater efficiency and again I do think the execution.

The company has been very strong as well whether it was the execution of pricing our wave three.

Whether it was our supply chain I think the combination of those elements were all very positive and it did result in a better top line and a better margin than we had initially expected I do think as you look out then across the balance of the year.

What we would continue to expect I'm I'm not making abroad.

The balance of the year move in our elasticity assumptions in fact you were.

Would've heard Mick talk a little bit in his comments about some pockets of increases.

And inflation that are resulting in a wave four although very targeted I'm still a bit more pricing that we're in the midst of executing right now and so balancing that ongoing view of consumer resilience I think we're being pragmatic.

Necessarily carrying that elasticity favorability.

Through the year I think then if you start to say, okay, well, how does that kind of play out across the year as.

As you think about the next quarter I think the two things you will see that are going to be a little different in Q1.

Won't have the inventory recovery opportunity and you probably will see a little bit of modest increase in promotional spend and the continued.

Investment in the year and that might be a little different than what you saw in Q1, and then of course as you get to the back half of the year you are beginning to lap the significant pricing from a year ago as well as some tougher comps to get through I think the net of this I just would say is that we are in Q1.

This does remain a pretty volatile environment I think we've tried to be.

Appropriately pragmatic in and looking at the balance of the year, but if you take our guidance versus where we were it does imply and I think a little bit of this is the way for pricing and inflation dynamic, but if you take the midpoint of the two guidance ranges were about 20 bps actually lower.

And margin assumption for the year and that is a little bit of reflective of the dynamics that I just explained.

Like I said, it's very early in the year and I think we the good news is we feel great about starting really on our front foot and the things that we can control, we really saw positive outperformance across those variables into Q1 and that certainly does give us greater confidence heading into the balance of the year based on where we are.

Today.

Great. Thanks, so much.

Your next question comes from the line of Ken Goldman from JP Morgan Your line is open.

Hi, Thank you good morning.

Hey, Ken.

Hi.

We've seen some of your competitors in soup and broth.

Maybe a bit more aggressive with pricing on shelf lately.

Just curious is there anything youre seeing thats surprising.

In terms of competitive levels in these categories and as we head into <unk> are you hearing anything or seeing anything that would suggest that.

As you get more promotional as well, which you mentioned.

And maybe your competitors will do the same or step it up even more.

Yes, I would say first off just to kind of make sure I.

Appropriately caveat this.

Everything that we're doing as it relates to an investment side, especially on the promotional side.

Would be very rich.

Responsive to the marketplace very well.

Modest in the sense of it being quite normal and just kind of how supply has recovered.

This is not a overly aggressive stands for one that we're trying necessarily to distort a position.

As it relates to share or Mark because we don't really need it I think that.

The reality is that the combination of the marketing innovation.

Innovation and what we're doing on the brands have been very effective in again.

With my.

With my Druthers, I'd, rather be supporting the equity side, but at the end of the day.

Horton that we stay very vigilant on the price gaps and so everything that we're doing is really about watching where those price gaps are and how we feel about the value proposition I think what's been really impressive across our portfolio is that although we're watching and seeing consumers change behavior.

And how their purchasing and which categories they're migrating into.

This has been very very <unk>.

Helpful. In the sense of getting the relevancy of our brands continuing to remain quite high and.

And so I think as we look forward.

Not seeing anything that would suggest that our pricing would be overly aggressive or unnecessarily.

<unk>.

Conservative and I think thats the way, we want to be and that's where we want to be balanced.

I think you mentioned Sue obviously in places, where we're seeing more private label pressure.

We want to make sure that we're especially vigilant there and keeping those price gaps reasonable and I think we're right now we're exactly where we expect it to be on the soup business actually a little bit better as we continue to see just tremendous momentum.

On our ready to serve side with both chunky and the introduction of specific cans are ready to serve soup has done very very well.

Probably a little bit ahead, there, but on the condensed and broth side.

Very much in line with our expectations.

Great. Thank you.

Your next question comes from the line of Peter Galbo from Bank of America. Your line is open.

Hey, guys good morning.

Mark I was actually kind of hoping to circle back on the guidance a little bit.

Or are you largely caught up now on the shipment inventory replenishment.

Should we kind of expect a shipment relative to consumption to be a lot closer obviously.

Versus I think the 700 basis point spread that you saw in meals and in the first quarter and then I just have a quick follow up.

Yes, I think we're pretty caught up if we think about what we expected as I said I think if you remember.

We talked a little bit about the unmeasured channels and a little bit of lagging there I do feel really good.

Again, you see that in the 500 basis point Delta between our net sales in our consumption that really does reflect some of the both the inventory recovery in retail, but also those unmeasured channels recovering and I think.

As I look forward I would expect us to be closer.

And and much more in line between consumption and sales as we go forward.

Got it that's helpful. And then just back on Andrew's question around the gross margin I think you said the implied math is that your your margins are 20 basis points lower maybe than the flattish from before I just want to make sure that that was what you said Peter that was our gross margin comment not an operating margin comment thanks very much.

Yes, it's more a operating margin discussion right if you take the implied.

Math of our EBIT and our.

Top line evolution in the guidance it nets to about a 25th E.

Vit difference and again I would say that as we look at the year.

I would suspect that what I would what I would be thinking about for margin as some of the drivers that I discussed probably putting a little bit of pressure on that through the year make you want to give a little.

Yes.

Question. When you look at the 20 basis points of reference, it's really to change versus the previous guide guidance, yes that versus a year ago, yes, not first year ago. So you do see I mean, as we already described last time around it was a little bit of margin pressure year over year in the mid level of our guidance range.

And you basically have a little bit more of that.

<unk> in the updated guidance.

Great.

<unk> numbers, but look but yes some pressure.

Your next question comes from the line of Jason English from Goldman Sachs. Your line is open.

Hey, good morning folks. Thanks, Dara, Thanks, a lot Jason.

Hi, there a couple of quick questions.

First can you remind us how big food services as a percentage of sales and your meals and beverages division and give us a little more color on how robust the growth was this quarter.

Yes, Jason I'd say mid single digits as a percentage of overall net sales for the enterprise.

And it was up about 40, 45%, 45% of significance and I think if you kind of.

Right now in Q1, it was in and around 6% of the overall enterprise I think one of the things to keep in mind on that number Jason as it was one of the harder hit.

When we were rationalizing supply a year ago.

It was perhaps one of the places that felt that the most significantly so although I would say where you are seeing.

Increase in demand the biggest driver of that recovery is really the recovery of supply.

Got it Thats helpful.

In context of that you said, we should expect consumption sales speak tracking.

Tracking reasonably close.

With that type of robust growth shouldn't we actually expect to reported results to be outstripping, what we see in measured retail sales data going forward.

Yes, I do think there'll be some.

Some delta there, but as it relates to retail in particular I think those two things will be close I do think your overall net sales, we will get a little bit of bump as foodservice and some of the other unmeasured channels recover however, I don't think Youll see this kind of.

Difference because we as we did start to stabilize supply you see kind of a steady recovery. So although I agree with you some delta not as significant as this quarter.

Got it makes sense and one more if I can on inflation.

Most companies are seeing the level of year on year inflation, if not stabilized.

Generally begin to moderate you're going the other way with the acceleration here quarter on quarter.

What is driving that.

Yeah, Nick why don't you cover that yes, three areas really.

When you think about our overall inflation for the year, we're seeing a very similar dynamic what you're describing.

It is low teens.

Inflation, yes.

Year over year for the full year. However.

I mean, basically that Q1 number was as expected.

18% because as you might recall when we spoke about kind of our outlook for the full year, we're expecting.

Double digit inflation in the first half, but then we cut over into the new calendar year and certain contracts reset and of course, then you start to comp also high inflation levels from this past year and then in the second half of the year as a result, we expect more in the call.

At a high single digit type of inflation. So it's really call. It a little bit first half versus second half story first half still continued.

Double digit inflation you saw in Q1, however, again in the second half you start to see that installation is starting to moderate however, still inflationary and I think the places where we saw deltas are really in the in the protein.

Resin areas and a little bit of this at times like for example in steel we might have expected a little bit faster.

Walked out and prices that may not have materialized at the same level and so part of what we're reacting to us a little bit of the change.

<unk> outlook for the costs relative to what we talked about for wait for pricing.

Again, it's a very targeted pricing actions in particular.

Certain areas, where you may have experienced some of that pressure.

Dynamic that Marc is describing between on the one end the pricing, but also a little bit additional pressure on the inflation around whether its deal on protein that's really a second half dynamic.

Thank you all really helpful. Congrats on a good start to the year I'll pass it on.

Thanks.

Your next question comes from the line of Chris Growe from Stifel. Your line is open.

Hi, good morning.

Hey, Chris.

Hi.

My first question was just in relation to the wave of pricing you're taking have you said, how much that is and I thought it might be just good to hear how those conversations are going with retailers as we near the end of this incremental inflation is there any change in the tenor if you will in those discussions with retailers.

Yes. So it is it is a much more <unk>.

Targeted action, probably low single digits overall.

I would say that as we've navigated through this last.

A couple of years of of elevated inflation.

The level of transparency and almost a mechanical nature of understanding.

The validity of our pricing actions has become a muscle that has really been built well I think on both sides of the table. So it's really much more about the dialogue of where our costs what how did those reflect what we're suggesting on price. So I do think we are.

In a moment now where this is more of the tail end and thus then.

Ensuring that everything that we're doing is really clear and transparent rationalized by the the costs that we're dealing with but I think when that happens.

It's relatively constructive in.

And the conversations kind of move forward I would say in a very.

Almost mechanical way.

I do think that the sensitivity around ensuring that we're doing everything possible to support the brands and the categories. We're in maintaining affordability for consumers in this tough environment.

Certainly top of mind for both us and the retailer as we work together and so we're quite conscious of.

Of those dynamics and ensuring that we're making the right strategic choices for the business for the long term.

That's great and I'm sure the increase in marketing it helps a lot and communicating that to the retailers thats great.

One follow up with you.

One follow up which is in.

So you're starting to lap some pricing from the prior year. So.

You have a little bit more pricing coming through sequentially as well. So just want to get a sense from like the pricing contribution in that pricing versus cost inflation is that a similar dynamic in <unk> as it was in <unk> in rough terms.

Yes, so I think it will be closer in Q2, I do think you might see a little bit more promotional.

Promotional spend in Q2 than Q1.

Again, all within a very reasonable range.

It's really than the back half, where you start to see the significant impact of a year ago pricing and the incremental contribution from pricing would be significantly lower as we get into Q3 and Q4.

That's great. Thanks, so much for your time today.

Your next question comes from the line of Michael Lavery from Piper Sandler Your line is open.

Thank you and good morning.

Hey, Michael.

It was just about a year ago, you set your 17% margin target for snacks by 2025.

But obviously with just the environment being a little bit more difficult than we might have imagined that and just the margin outlook for this year and what last year looked like.

Can you just give us an update of how much that might be on track or what might be needed to get there.

Yes, that's a good.

Good question.

I think let me start with the.

The elements of the strategy of our margin roadmap on snacks are very much intact and so the ability.

For us to see the progress.

The initiatives that we had as part of that whether it was the original completion of the original value capture or the next wave of opportunity that we've seen relative to network route to market.

All very much on track and in line I will also say further to that the top line performance continues to be very very strong and as we all know at the end of the day on stacks.

Growth is really and it has been the top priority for that division from the beginning but I think the good news is all the things that we expected to be delivering we're delivering I think what we can't predict exactly right now is how the environmental will evolve over time, there's no question that the combination.

Both inflation and some of the costs associated in the supply chain relative to Covid and all of the things that that we've been navigating over these last couple of years.

How that comes off as.

As we go forward in the environment begins to normalize.

We talked in the past if I were to kind of put a.

Let's call it a rough framework around it I think there's probably a couple hundred basis points of just what I would call environmental.

Overhang that I do expect us to be able to improve by so when I think about longer term on the business I still remain very confident that that margin objective and goal is in place I think we just need to see how the environment unfolds to put a better qualification on time.

But I think the good news is the elements that we need to see progressing we are seeing progress.

Okay. That's helpful.

Maybe just on sources you also touch at the Investor day on a potential new soft brand.

There organically or M&A as part of the path to $1 billion is that still part of your thinking and what can you give any latest on what how that might unfold.

Yes, I mean, we continue to be very bullish on the on the sources area. This is a this is a place that quite frankly before COVID-19 was growing very well in <unk>.

Certainly has continued through the pandemic and even in this moment of economic pressure, we continue to see a very high degree of relevance in that space and when you look at our portfolio.

Sources, and you say, okay, where are the opportunity areas are the white spaces I do continue to believe that there is opportunity at different price points and I also think.

That that in adjacent segments, there's opportunity as well and I do think as you see our strategy kind of unfold over time, you'll continue to see us.

Driving that base business aggressively.

Aggressively while adding strategically.

Kind of.

Either small tuck in acquisitions or some perhaps organic developed new items to complement not unlike what we're doing with flavor up and the relaunch of our sauces, which again very early to different.

Model of launching but but at the end of the day continuing to build out one thing I'll just mention that's quite interesting in this moment.

We're economic pressure is putting barriers to away from home eating a little bit more what's been very interesting is the younger consumers.

I have been one of the bigger sources of migration back into in home cooking as their confidence and capability through Covid was established or built you see them returning to that area and so our opportunity of continuing to kind of armed them with.

New products are also innovation as it relates to recipe or usage is very much a focus of our strategy. One that's working very well at this moment and we would expect to continue to do.

Do both through innovation as well as the marketing side.

Okay, great. Thanks, so much.

And your final question comes from the line of Robert Moskow from Credit Suisse. Your line is open.

Yes.

Hey, Thank you.

I thought I remember three months ago.

Mark you've given guidance for a 2% headwind from promotional spending for the full year.

And this quarter's is zero.

Are you pushing out some of the spending into future quarters or do you think the promo headwind will be less than you originally expected.

I think Rob certainly in Q1 I think.

As I said I think the execution and the growth certainly supported a lower rate than that.

And I think as you look forward I have not made a big adjustment to any out quarter outlook I think again as.

As we navigate through this environment we're trying.

Make sure we stay as pragmatic as we can.

And as I think about it what are the things that were.

Watching very closely it does revolve around that consumer resilience in the <unk>.

Continued overall value proposition and so I haven't changed much of the outlook for the balance of the year, but I would acknowledge Q1, certainly was was better than than I might have originally expected.

Okay can you help me understand what made it better do you think was it well I mean, one of the top line was better and that helps I think there are also as we as you go through as you might remember we were in the midst of executing a fairly significant wave three pricing.

As you kind of go through that process, you've always got assumptions that as you execute.

Need a little less promotion in one area.

Maybe a little bit more effective than another area competition of price gaps, maybe a little different than what you anticipated and so theres always a bit of agility that goes into this and.

Actually this is a muscle that I would say historically may not have been as strong as it is today and so kind of making some of those decisions in real time.

It's very much an important part of the tool bag right now and so I think that that combination of elements really kind of led to what I would say is a better time.

On paper, if you will lower bps of spending than than what we might have anticipated.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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