Q1 2025 Campbell Soup Co Earnings Call - Q&A
Speaker Change: Good morning and welcome to the Campbell's Company Q1 Fiscal 2025 Earnings Conference Call. All participants are in a listen-only mode. After the speaker's remarks, we will conduct a question and answer session. To ask a question at this time, you'll need to press star followed by the number one on your telephone keypad.
As a reminder, this conference call is being recorded.
Speaker Change: I would now like to turn the call over to Rebecca Gardy, Chief Investor Relations Officer at Campbell's. Please go ahead.
Speaker Change: Good morning and welcome to the Campbell's Company first quarter fiscal 25 earnings conference call. I'm Rebecca Gardy, Campbell's Chief Investor Relations Officer, and joining me today are Mark Clouse, Chief Executive Officer, and Carrie Anderson, Chief Financial Officer.
Speaker Change: Today's remarks have been pre-recorded. Once we conclude the prepared remarks, we will transition to a live webcast Q&A session.
Speaker Change: The prepared remarks, the slide deck, and earnings press release have been posted to the investor relations section of our website, TheCampbellsCompany.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.
Speaker Change: Slide 2 outlines today's agenda. Mark will provide insights into our first quarter performance as well as our in-market performance by division. Please note, effective first quarter fiscal 25 and going forward, we are using Cercana Mulo Plus for in-market data.
Speaker Change: Carrie will then discuss the financial results of the quarter in more detail and review our guidance for the full fiscal year 25, which we reaffirmed last night. On our call today, we will make forward-looking statements which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk.
Speaker Change: Please refer to slide 3 of our presentation or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in the forward-looking statements.
Speaker Change: Because we use non-GAP measures, we have provided a reconciliation of each of these measures to the most directly comparable GAP measure in the appendix of our presentation.
Speaker Change: Before I turn it over to Mark one last time, I wanted to personally thank you, Mark, for your extraordinary leadership and unwavering commitment to excellence.
Speaker Change: And now, with that, Mark. Before we review our results, I want to take a moment to address last night's announcements of my plans to retire from Campbell's and transition with the incoming CEO over the next two months.
Speaker Change: I'd like to congratulate McBakehausen on becoming the 15th CEO in Campbell's 155 year history. The board and I have full confidence in his readiness to lead this great team and company.
Speaker Change: As I prepared to step back, Campbell's could not be better positioned for the future.
Speaker Change: I believe that Campbell's has the top leadership team in the business.
Speaker Change: They are experienced, engaged, and fully committed to setting the standard for performance.
Speaker Change: Together we built the best portfolio on all of food and transformed the company.
Speaker Change: This enables me to make this decision with the utmost confidence in the company's trajectory going forward. With our strategy firmly rooted and our team highly engaged and aligned, I'm certain that Campbell's future is bright. Leaving Campbell's was not an easy choice.
Speaker Change: Since I was a boy, sports have played a very important part of my life and the idea of working in the world of sports, and in particular the NFL, has been a lifelong goal. It is truly a once-in-a-lifetime moment to become the team president of the Washington Commanders.
Speaker Change: I'm incredibly grateful to Josh Harris and the Washington Commanders' Ownership Group for the opportunity to lead this iconic franchise into a new chapter of growth. I look forward to supporting ownership and the entire Commanders' team and doing everything in our power to build a championship caliber organization.
Speaker Change: These last six years have been an incredible privilege and honor, as well as the most rewarding professional experience in my nearly 30 years of working in the food industry.
Speaker Change: Without question, what made it so special is the entire Campbell's team.
Speaker Change: seeing their passion and commitment day in and day out was a great source of inspiration for me through what proved to be an incredible journey. I'd also like to thank the Campbell's Board of Directors and investors for their trust and support over these last six years.
Now, let's turn to Campbell's first quarter results.
Speaker Change: We began fiscal 25 with the first quarter generally in line with our expectations, with net sales up 10%, reflecting the momentum that Sovos added to our top-line performance.
Speaker Change: Organic net sales were down 1% reflecting a continued dynamic consumer environment and some impact due to movements in retailer inventory levels influenced by the later timing of the Thanksgiving holiday this year.
Speaker Change: We delivered 6% year-over-year growth in adjusted EBIT and an adjusted EPS of 89 cents.
Speaker Change: Excluding Sovos, in-market performance was flat, in line with expectations. With the difference between our organic net sales and in-market consumption, explained by the later Thanksgiving holiday that I mentioned earlier for meals and beverages, and lower partner brands' net sales and snacks.
Speaker Change: Importantly, our 16 leadership brands showed growth in both dollar consumption and share in the quarter. Including Sovos on a pro forma basis, in-market dollar consumption was positive 2%.
Speaker Change: The team continues to do an excellent job navigating the complex environment while delivering strong productivity, cost savings, and remaining ahead of our plans on the integration of the Sovos business.
Speaker Change: We reaffirmed our fiscal 25 guidance which reflects our expectation of steady progress and incorporates an appropriate level of pragmatism.
Speaker Change: The upcoming second quarter, which includes the critical holiday season, will serve as an important milestone for progress in delivering our full year commitments.
Speaker Change: We expect sequential top line and market share momentum in Q2, with continuing progression into the second half of our fiscal year.
Carrie will provide more details on guidance in a moment.
Speaker Change: On slide 6, I want to briefly expand upon the material benefit we are experiencing with the integration of Sovos.
Speaker Change: While our Q1 organic net sales declined 1% from the prior year with flat volume and mix, when including the pro forma contribution from Sovos, total company net sales would have been flat to the prior year with positive volume and mix.
Speaker Change: The growth of Sobos, and specifically the Rayos brand, is exceeding our expectation and adding important momentum to our meals and beverages division and the company.
Speaker Change: The overall food sector continues to reflect improvement, with favorable trends across multiple fronts starting with improving consumer confidence.
Speaker Change: We're seeing further stabilization in food volumes as prices continue to normalize, and we continue to anticipate ongoing recovery throughout FY25.
Speaker Change: Although not every category is recovering at the same pace, we continue to be encouraged by this overall progress. And with 75 percent of our portfolio in growing categories, we continue to be in an advantage position as the consumer recovery continues.
Speaker Change: As we recently discussed at our Investor Day, we have transformed Campbell's portfolio and have evolved the way we talk about our most important brands. We call these 16 brands our leadership brands with 8 in meals and beverages and 8 in snacks.
Speaker Change: In the first quarter, these brands represented the majority of total enterprise net sales and segment operating earnings, and held advantage number one or number two positions in almost all of their respective categories.
Speaker Change: In Q1, leadership brands grew dollar consumption by nearly 2%, with positive share growth.
Speaker Change: We continue to experience pockets of competitive pressure in certain snack categories from new entrants and some continued trade down to private label in salty snacks and cookies.
Speaker Change: However, we remain confident in the strength of our leadership brands and our plans throughout the balance of the year. Now let's take a closer look at each respective division.
Speaker Change: Moving to our Meals and Beverages division on slide 9, organic net sales were flat compared to the prior year with volume and mix growth of 1%.
Speaker Change: Net sales were impacted by movements in retailer inventory driven by the later timing of the Thanksgiving holiday this year. This is evident in the higher two percent dollar in-market consumption growth reflecting a 200 basis point difference to organic net sales growth.
Speaker Change: On a pro-forma basis, with the addition of Sovos Brands, meals and beverages net sales grew 2%, fueled by 3% volume and mixed growth, with in-market dollar consumption increasing 5%.
Speaker Change: Turning to page 10, our soup portfolio strengthening Q1 as expected, with Campbell's dollar consumption increasing modestly ahead of or in line with the category average.
Speaker Change: This is the third consecutive quarter of dollar share growth driven by broth in our condensed cooking segments, along with improving ready-to-serve trends as we head into soup season.
Speaker Change: In broth, Swanson continued to benefit from the combination of increased category usage and private label service challenges.
Speaker Change: Private Label is recovering and we expect modest share headwinds in the second quarter with that increasing in the second half of the fiscal year as Private Label fully recovers.
Speaker Change: As we have said previously, although we expect share to normalize over the next 12 months, the incremental growth and households we added to our brands during this period gives us an excellent opportunity to retain more of those consumers going forward.
Speaker Change: Our condensed soup segment grew share for the fourth consecutive quarter, led by our red and white cooking soups, growing share and outpacing private label, as consumers continue to cook at home with quality brands they trust.
We expect condensed eating soup to improve with colder weather.
Speaker Change: And finally, as expected, we saw stabilization in our ready-to-serve portfolio. We gained share led by strong performance in Chunky, Raios, and Homestyle, driven by our focus on innovation, marketing, and in-store execution across the entire ready-to-serve portfolio.
Speaker Change: This growth also includes the planned delistment of WellYes, representing just under a share point of Headwind in the quarter.
Speaker Change: Looking at our Italian sauce portfolio on slide 11, the combination of Reos and Prego continues to deliver exceptional momentum across this billion-dollar platform.
Speaker Change: The remarkable performance of Raios stands out, with in-market consumption maintaining a robust 15% growth.
Speaker Change: This momentum pairs beautifully with Prego, which delivered a 5% increase in market. By positioning these powerhouse brands to serve distinct consumer segments and price tiers, we've created an impressive platform to expand our market presence and fulfill diverse consumer preferences.
Speaker Change: Reyes continues to perform better than expected and now we expect pro forma growth in fiscal 25 to be slightly above 10% versus the previous guided high single digits.
Speaker Change: Over the long term, we continue to expect Rayos Growth to settle in at a mid-single-digit growth range. Additionally, integration is progressing exceptionally well as the distinctive brands team drives both operational excellence and strategic advancement across the portfolio.
Speaker Change: What excites us most is a substantial headroom for expansion. While Reyes leads the Italian sauce category in dollar share, it achieves this despite reaching only half as many households as Prego and maintaining just 60% of the SKU assortment of Prego.
Speaker Change: Our research shows particularly strong momentum with millennial household adoption surging at more than twice the category's pace. This remarkable traction with younger demographics strengthens our conviction about Rayos' long-term potential.
Speaker Change: One area that continues to fuel incremental growth is the strong value and quality comparison between Reos and mainstream Italian takeout. This position allows Reos to source volume from a far bigger addressable market and a broader range of consumer income levels.
Speaker Change: Turning to our snacks business on slide 14, we delivered encouraging progress in several key areas despite facing a two percent decline in organic net sales. Worth noting is that organic net sales were impacted by approximately one percentage point from our planned reduction in partner brands.
Speaker Change: reflecting our strategic and deliberate portfolio reshaping efforts discussed at our recent Investor Day. This strategy allows us to concentrate resources on our differentiated leadership brands where we see the greatest potential for sustainable growth and margin enhancement.
Speaker Change: As shown on slide 15, in Q1 we saw overall snacking categories beginning to recover as expected.
Speaker Change: We held or grew share in several areas with solid performance in our crackers, fresh bakery, and deli snack segments while navigating a more competitive environment in the salty snack segment in cookies.
Speaker Change: Let me start with what's working well. Goldfish held its number one position with teens in the first quarter during the important back-to-school season, and consumers continued enthusiastic response to platforms like Goldfish Crisps, validating the extendability of this $1 billion brand.
Speaker Change: Pepperidge Farm Bakery continued its momentum from the fourth quarter growing both in volume and share as both innovation and in-market execution continue to fuel momentum.
Speaker Change: And in Delhi, Snack Factory, including our seasonal pumpkin spice pretzels, delivered in-market growth and share gains.
Speaker Change: We are incredibly excited about Snack Factory expanding into the Pretzel Aisle with Pop'ems and Bites, unique munchable and big flavor additions that will now sit alongside our Snyder's of Hanover unique platforms.
Speaker Change: In Salty Snacks, although new entrants and some stepped-up promotion are putting pressure on shares, the competitive environment has remained constructive.
Speaker Change: We have fully integrated plans in Q2 that include innovation, marketing, and some increases in appropriate promotion to remain competitive and defend in key core segments.
Speaker Change: In cookies and pretzels, we've experienced more pressure from private label. In these areas, we'll remain disciplined on pricing, while ramping up advertising and innovation, especially as we head into the key holiday season.
Speaker Change: These past weeks you would have seen our full line of Pepperidge Farm holiday cookies is on display with our first ever collectible holiday cookie jars. Fancy Santa returns to help support the launch of White Chocolate Milanos and get ready to build Snyder's Pretzel Log Homes and give the gingerbread people a break this holiday season.
Speaker Change: In summary, consumer trends and category recovery continue to make progress. Although not every category is recovering at the same pace, we continue to expect an improving environment through the balance of our fiscal 25.
Speaker Change: Our first quarter results were generally aligned with our expectations propelled by the Sobos brand's acquisition, strong leadership brand performance, and continued best-in-class execution.
Speaker Change: We are ensuring that we are well positioned in Q2 for the key holiday season and expect Q2 to demonstrate sequential improvement as we maintain our pace toward delivering our full-year fiscal 25 guidance.
Speaker Change: We've made significant progress with the Sovos Brand's integration and behind the strength of the Rayos brand, we now expect the acquisition to be accretive to adjusted EPS in fiscal 25.
Speaker Change: Overall, with our continued confidence in the team, portfolio and execution, we remain well positioned to continue to navigate the environment as it continues to improve.
Speaker Change: With that, let me turn it over to Carrie. Thanks, Mark, and good morning, everyone. Our first quarter results were generally in line with our expectations with overperformance from Sobos brands and an earnings performance in line with expectations.
Speaker Change: reporting that sales were up 10% driven by the strong sales contribution from Sovos.
Speaker Change: Organic net sales, excluding the impact of acquisitions, divestitures, and currency, decreased one percent, reflecting a continued dynamic consumer environment and some impact due to the movements in retail or inventory levels influenced by the later timing of the Thanksgiving holiday this year.
Speaker Change: Adjusted EBIT grew 6% reflecting the strong contribution from the acquisition, while adjusted EPS decreased 2% to $0.89 due to higher interest expense stemming from higher levels of debt.
Speaker Change: The impact of the acquisition was approximately neutral to adjusted EPS in the quarter, which continued to exceed our expectations.
Speaker Change: Turning to slide 21, as mentioned earlier, organic net sales for the first quarter were down 1%.
Speaker Change: On slide 22, first quarter adjusted gross profit margin declined 70 basis points, primarily driven by a 60 basis point impact from the acquisition.
Speaker Change: Excluding the acquisition, our base business adjusted gross margin was down a modest ten basis points with productivity improvements and cost savings initiatives largely offsetting inflation and other supply chain costs and planned unfavorable net price realization.
Speaker Change: For the full year, we expect our planned productivity and cost savings initiatives to be more than sufficient to offset the impact of low single-digit core inflation for the full year.
Speaker Change: In the first quarter, we delivered approximately $30 million of savings under the new $250 million cost savings program, of which approximately $9 million was SOBOS integration savings.
Speaker Change: Turning to slide 23, marketing and selling expenses and admin expenses increased in total dollar spend from the prior year reflecting the integration of Sobo's brands.
Speaker Change: However, both expense areas remained flat as a percentage of net sales. Within marketing and selling expenses, advertising and consumer promotion expenses rose by 13%, primarily driven by the impact of the acquisition.
Speaker Change: Adjusted administrative expenses increased 9% again driven by the impact of the acquisition as well as higher general administrative cost and inflation partially offset by the benefits from cost savings initiatives.
Speaker Change: As shown on slide 24, first quarter adjusted EBIT increased 6% primarily due to adjusted gross profit partially offset by an increase in adjusted marketing and selling expenses and adjusted administrative and R&D expenses.
Speaker Change: On slide 25, Adjusted EPS moved modestly lower to 89 cents, primarily as EBIT growth was more than offset by higher interest expense related to the acquisition and the refinancing of $1.15 billion of our outstanding bonds. As was mentioned earlier, the acquisition was approximately neutral to Adjusted EPS in the quarter.
Speaker Change: would have been approximately 2%, driven by the respective pro forma Q1 growth of SOBOs of 14%.
Speaker Change: Organic net sales were flat to prior year, driven by gains in Prego pasta sauces, Canada and food service, offset by later Thanksgiving timing-driven inventory declines. Positive volume and mix of 1% was offset by unfavorable net price realization.
Speaker Change: U.S. soup in-market consumption was positive 1% compared to a decline in U.S. soup organic net sales, with the difference driven in part from the impact on retailer inventory of the later Thanksgiving holiday this year.
Speaker Change: Additionally, first quarter operating earnings in the division increased 17%, primarily due to the benefit of the acquisition and lower marketing and selling expenses in the base business.
Speaker Change: Q1 operating margin for meals and beverages decreased 60 basis points to 19.8% driven by the impact of the acquisition as expected.
excluding the acquisition operating margin improved year-over-year.
Speaker Change: First quarter organic knit sales and snacks decreased 2% driven by declines in partner and contract brands, Pepperidge Farm Cookies, Goldfish Crackers, and late July snacks.
Speaker Change: Sales were impacted by volume and mixed declines of 1% reflecting an approximate 100 basis point headwind from lower partner and contract brand sales and lower net price realization of 1%.
Speaker Change: Snacks operating earnings in the quarter declined 12% due to lower gross profit as the impact of inflation and other supply chain costs and lower price realization were partially offset by supply chain productivity.
Speaker Change: Q1 Operating Margin for SACs decreased 120 basis points to 13.3%.
Speaker Change: This was driven by lower gross profit margin and higher marketing and selling expenses as a percent of net sales.
Speaker Change: We expect stronger operating earnings growth and margin performance in the second half of the year, reflecting improving volume trends, a more neutral second half net price impact compared to the prior year, favorable mix with stronger contribution from leadership brands, and a higher benefit of productivity and cost savings, net of core inflation, and other supply chain costs.
Speaker Change: Turning to slide 28, we generated $225 million in operating cash flow in the first quarter, a 29% increase from the prior year. We continue to prioritize reinvestment back into the business to drive incremental growth, productivity, and enhance business capabilities with Q1 capital expenditures of $110 million.
Speaker Change: We also remain committed to returning cash to our shareholders, with $116 million of dividends paid and $54 million in anti-dilutive share repurchases in the quarter.
Speaker Change: Our net debt to adjusted EBITDA leverage ratio at the end of the first quarter was 3.7 times, reflecting the financing of the Sovos acquisition and in line with our ratio at the end of fiscal 24. We remain committed to investment grade ratings, and our goal is to return to our 3 times net leverage target in fiscal 27.
Speaker Change: and approximately 1.85 billion dollars available under our revolving credit facility. On October 2nd, we completed the issuance of 1.15 billion dollars in bonds to refinance existing debt.
Speaker Change: Based on our Q1 performance, we are reaffirming our fiscal 25 full year guidance provided on our fourth quarter earnings call. Accordingly, guidance ranges reflect a balance between expected sequential progress and pragmatism as the company continues to navigate the current environment.
Speaker Change: The upper end of the range anticipates a quicker normalization of the consumer landscape, while the lower end of the range assumes a slower, more conservative pace of recovery.
Speaker Change: As Mark mentioned, and like other companies in the food industry, we continue to operate in a dynamic macroeconomic and consumer environment. To continue to meet this near-term challenge, we have planned for less than 100 basis points of net price investment for fiscal 25, with a step up in Q2 to support the crucial holiday period.
Speaker Change: To balance this need, we have a robust pipeline of savings and performance opportunities to support this investment.
These opportunities include the following.
Speaker Change: First, an acceleration in full-year Fiscal 25 cost savings pursuant to our new three-year $250 million program. Savings for Fiscal 25 are now expected to be in the range of $90 million, up from our prior expectation of $70 million.
Speaker Change: Second, full year adjusted net interest expense is now expected to be in a range of approximately $340 to $345 million.
Speaker Change: A $10 million dollar improvement from our prior guidance, primarily driven by the lower coupons on the debt issued to refinance $1.15 billion of debt that matures later this fiscal year. And third, as was mentioned earlier, Sovos Brands, specifically Rayos, continues to perform better than anticipated.
Speaker Change: Accordingly, SOBUS' pro forma growth for fiscal 25 is now expected to be slightly above 10 percent, an increase from our earlier expectation of high single-digit growth. The acquisition is now expected to be accretive to adjusted EPS in the second half and for the full fiscal year.
Speaker Change: Collectively these three areas provide confidence to maintain our guidance range while also creating the necessary room to continue to invest behind our brands and stay competitive while navigating this dynamic environment. The second quarter will be an important indicator of progress in meeting our expectations.
Speaker Change: Should the consumer recovery be prolonged beyond the second quarter, the lower end of the company's sales and adjusted EPS guidance would become more likely.
Speaker Change: Specifically for Q2, we expect to see sequential improvement from the first quarter with organic net sales growth to be relatively flat versus the prior year with positive volume and mix.
Speaker Change: Adjusted EPS is expected to be in the low $0.70 range, reflecting a sequential step up in investment levels in both marketing and selling expenses as a percent of net sales and net price to support holiday and innovation launches and to maintain competitiveness.
Speaker Change: Looking at the second half of fiscal 25, we expect organic growth to modestly improve from the first half, reflecting the contribution of Sovos Brands moving into organic growth as of March 12, 2025, and improving trends on the base business.
Speaker Change: Partially offset by lower expected net sales of our broth portfolio as we cycle outsized growth in the second half of fiscal 24 related to a competitor supply issue.
Speaker Change: In addition, we continue to expect adjusted EPS progress in the second half of FY25, reflecting a more neutral net price and marketing expense impact compared to the prior year.
Speaker Change: Higher net benefit of productivity and cost savings, including savings from the integration of SOBOs. A lower year-over-year headwind from interest expense. And a 7-cent benefit from the 53rd week in Q4.
Speaker Change: Recall on November 12th we announced the planned divestiture of Noosa. Our full year fiscal 25 guidance does not yet reflect the impact of the pending divestiture which is expected to close in the first quarter of calendar year 2025.
Speaker Change: We'll plan to update our guidance on our next regularly scheduled earnings call following the closing of the transaction.
Speaker Change: NUSA's trailing 12 months of net sales through the end of October was $177 million, and the transaction is expected to be diluted to earnings per share by approximately one penny in fiscal 25.
All other underlying guidance assumptions remain unchanged.
Speaker Change: To wrap up, we were pleased with our Q1 performance, which was generally in line with expectations with strong results from Sobo's brands. We remain focused on delivering value to our consumers in partnership with our customers, making progress on our productivity and cost savings initiatives, while continuing our capital discipline and consistent cash generation to reward our shareholders.
Speaker Change: For the full year, we are reaffirming our guidance and are taking a measured, balanced approach to a more competitive environment by building out a pipeline of additional savings that enable us to continue to position our brands for the long term.
Speaker Change: That concludes our prepared remarks. Before turning the call over to the operator, I want to congratulate Mark on his new opportunity, and I look forward to working with Mick in his new capacity as Campbell's future CEO. Operator, let's open the call for Q&A.
Speaker Change: If you would like to ask a question, please press star followed by the number one on your telephone keypad to withdraw any questions Please press star one again
Speaker Change: Our first question will come from Ken Goldman from J.P. Morgan. Please go ahead, your line is open.
Ken Goldman: Hi, good morning, and Mark, a hearty congratulations to you. It's incredibly exciting to hear about this.
Ken Goldman: It doesn't happen every day where you see one of our CEOs go into the NFL, so it's unique and I'm happy for you. I wanted to ask about the gross margin and marketing. They came in both a little bit below consensus expectations. You provided a helpful breakdown of the gross margin drivers as usual, but
Ken Goldman: just versus your own expectations. I know the quarter broadly came in line with what you were looking for, you said, but as we think about the gross margin and marketing, kind of those building blocks of the EBIT margin, how did they perform versus what you anticipated coming into the quarter?
Speaker Change: Yeah, it's a good question, Ken, and I'll try to, you know, give you a little bit of insight on a couple differences and then have Carrie add some color to it. But I think, you know, the primary building block, so if you think about what we expected pricing to do, what we expected productivity to do, and cost savings to do,
All of those were...
Speaker Change: very much in line with what we expected. So no surprises really across the board. I think perhaps the the piece that was
Speaker Change: A little bit difference was the mix of the business. So we had a, as you would have seen, a very, very strong performance out of Raios and Sovos.
Speaker Change: of Thanksgiving and the inventory shift that occurred primarily in meals and beverages. If you think about what those categories are, those are generally very favorable to our mix and we would have seen a little bit of more pressure coming in through that combination. I mean, you know, as Carrie mentioned, if you take
Speaker Change: The Sovos mix-impact out, you essentially were neutral, down slightly but neutral. But that was probably...
Speaker Change: the biggest driver of maybe a little bit of the disconnect between what was expected and what came in, although I would say from a materiality standpoint, not a major swing.
Speaker Change: Carrie anything to add to that? Yeah, I would just elaborate on that is that as you think about that mix of gross margin You had higher
and Rayos, which is at a lower margin profile.
Speaker Change: And then our legacy business, which has a higher margin profile, came in a little lower. So that created a mixed issue there.
Speaker Change: In addition, in terms of the beat on the bottom line, the other thing that interest expense came in a little bit better, and I think that's a good thing. I think we've been proactively managing interest expense. We accelerated a refinancing of our debt that's coming due later this year. So all of that was helpful as we continue to move SOBAs to that accretive nature for the full year. And maybe if we, you know, just to finish that bridge all the way, the walk down.
Speaker Change: You know, I know in seeing some of the conversation over the evening and into this morning
Speaker Change: You know, the marketing and selling phasing that we've got for the year, if you would have seen in this quarter, we were on the base business. Obviously, we're up because of the addition of Raios, but essentially flat on the organic business.
Speaker Change: And as we had talked about, we do expect to step that up. I think you'll see that much more significantly in Q2 because obviously that's where the holidays are, but that's also where a lot of our innovation is. So although I think that may have been a little bit of a disconnect.
Speaker Change: You know, we were obviously in a very solid position on investment for Q1, but I think you should expect to see, as we laid out kind of expectations for Q2, a little bit more of a step up in investment there.
Speaker Change: Okay, thanks. And before my follow-up, I've already been messaged by two people saying I was overly effusive in my praise, so I guess I'll throw in a fly-eagle's fly to offset that. But, uh, the, um, the barcode is the right one, Kent. That's the new one that you need to learn.
Speaker Change: I don't acknowledge that. So the bar for 2H remains, I guess, a bit higher, just to jump back to Campbell, than some investors might be comfortable with, I guess is the right way to say it.
Speaker Change: You know, is there anything unusual in terms of timing benefits, tailwinds we should be considering as we model the back half of the year? Just things that may not be obvious to, you know, observers of the company at first glance.
Speaker Change: Yeah, I think there are. And so, you know, Carrie, why don't you walk through a little bit of the, you know, what we would describe as the pathway. Yeah, as we think about the second half, we do expect organic growth to modestly improve from the second half. For the first half, sorry, reflecting so much moving into that organic growth mid-March.
Speaker Change: And then as you think about the underlying business, we do expect improving trends, partially offset by lower expected broad net sales as we outsize that outsized growth.
Speaker Change: from last year related to a competitor supply issue. So overall, again, modest improvement, nothing that's significant in the second half as we think about organic growth trends.
Speaker Change: As we think about the P&L, this is where I think there is some items to call out. We would expect second half EPS progress and margin progress reflecting a more neutral net price and marketing impact versus the prior year.
Speaker Change: we would have a higher net benefit of productivity and cost savings in the second half compared to the first half and that includes savings from the integration of SOBOs as we talk about that moving in to a creative nature in the second half.
Speaker Change: Lower headwind from interest expense, so we'll start to laugh that
Speaker Change: from the acquisition that was mid-March last year. And so that'll be a lower headwind than it was in the first half. And then the other thing to remember is that we have the 53rd-week benefit in Q4. So that's a 7-cent benefit in Q4 that won't be in other companies' fourth quarter, right? That's unique to us in our fourth quarter in terms of the timing there.
Speaker Change: So, as I think about those things, the areas that are doing better was around the interest expense coming in favorable, cost savings being accelerated, so seeing some really strong out-of-the-gate performance in our cost savings, and then overall SOBOs.
Speaker Change: And the last thing I would leave with is the fact that again as we think about all of that continue to have good confidence on our earnings and our cash flow and You know just want to also end on the fact that we did you know increase our dividend as well
Speaker Change: Yeah, which is a good a good I think backstop of of confidence in the business You know, I think I'll just the only thing I would add is
Speaker Change: When you think about the, you know, what will end up being four months...
of contribution from a better-than-expected-performing REOS.
Speaker Change: and the strength that we're seeing in the cost savings agenda overall and a little bit of help from lower interest and as I
Speaker Change: you know, as Carrie said earlier, I do see that as a
Speaker Change: successful execution of managing our debt, which is an important variable in this year, that is giving us a little more confidence even in light of needing
Speaker Change: a bit more investment. Again, when we think, when we talk about price, just to make sure I'm managing folks' expectations.
Speaker Change: When we say we're adding a little bit more support in Q2, I think it's important to understand the drivers of Q2, but for the full year, we're still expecting something less than 100 basis points for the full year, and that, I think, is important.
Speaker Change: is not a material difference from really where we were when we started the year and gave guidance. So hopefully that helps a little bit in bridging that back half expectation.
Thanks very much.
Speaker Change: Our next question comes from Andrew Lazar from Barclays. Please go ahead, your line is open.
Speaker Change: Thanks. Good morning. Let me add my congratulations to you as well, Mark, and also congratulations to Mick.
Speaker Change: Thanks Andrew. Sure, maybe I'm just following on with with the prior question for a minute around the back half.
Speaker Change: You know, organic sales came in sort of down 1% in the quarter versus expectations for kind of a flattish result. And you now expect flat organic sales in fiscal 2Q, where the street was looking for sort of a modest year-over-year increase.
Speaker Change: And I guess, you know, we've seen many calendar year reporters in the food space recently discuss sort of their expectations for, you know, another below algorithm year, next calendar year, which would, you know, kind of correlate to Campbell's, you know, back half of your fiscal 25, when you expect results to continue to sort of improve.
Speaker Change: So I guess I'm just trying to get a sense of, um...
Speaker Change: I know you went through some of the drivers just now around the back half, but I mean, how much are you taking into account?
Speaker Change: some of those factors right that many industry players are already kind of saying hey next year is kind of not a lost cause but like not going to be kind of where we want it to be I'm trying to I'm trying to like square those two things I guess
Speaker Change: Right, right. And I, you know, I think one of the things that's important...
Speaker Change: You know, it's not as if we're anticipating, you know, a comprehensive, you know, hockey stick, if you will. I think
Speaker Change: You know, the way I'm thinking about the back half when I look at both what we're cycling, and I do think.
Speaker Change: If you go back and look at our back half a year ago,
We were starting to experience...
a little bit of tougher headwinds.
Speaker Change: already as we started to see the consumers behaving differently and I think you know that that is a backstop different than the first half.
Speaker Change: gives you a little bit of confidence and a step up. And then I overlay on top of that, the fact that we are going to add some organic help from Raios into our organic numbers. You've got a very robust level of investment that's in our baseline already, along with a very strong innovation program and platform on top of it. So, although I don't necessarily disagree with the perspective of how we feel, and we always have said.
You know, we did not expect 25.
Speaker Change: Fiscal 25 to be an on-algorithm year as it was more of a transitory period, which is inclusive of the of that back half as well Albeit a step up from where we were in the first half again all very consistent with what we have expected and I think
Speaker Change: We've done a nice job, I think, navigating a variety of different variables to lay in where we did. I think we've got a very robust...
Speaker Change: planning Q2, and I think to be completely transparent, I want to see that.
impacting Cher and driving...
Speaker Change: the expectations we have, which will give us greater confidence in what the back half looks like. And again, what you can always count on us to do is give you kind of real-time view of how that's going. But for what we see today, and as we look at what we are cycling, we feel like we're in a good position to see that modest improvement as we get to the back half.
Speaker Change: That's really helpful and then just with the the modest increase it seems like in full year sort of marketing and promotional investment and such most of that to fall in to Q, where where would that sort of put you from a promotional perspective you know at the end of this year versus let's say you know where where you were you know a couple of years ago right pre-pandemic and all of that would that still be relatively in line with where you were where does it take you beyond that trying to get a sense of context there. Thank you.
Speaker Change: you know, the competitive nature of the landscape. And again, none of that's a big, I would say, surprise to anyone. You know, I think we have we have cycled to a level that is consistent with where we've been before. I do not I do not see, nor do I believe we will need any type.
Speaker Change: of disproportionate reduction in the price points, right? I think that's important, especially in categories like cookies and pretzels. We know that at the end of the day, we've got to win those fights through the balance of equity driven by marketing and innovation.
Speaker Change: appropriate levels of promotion but we do not intend to lose sight of the fact that we need to remain disciplined on price and so that's the plan that we have and you know the good news is on both of those categories
Speaker Change: In those particular cases, it's actually all coming from new entrants, right, whether it's salty or whether it's
kettle, pretzels.
or even tortilla chips.
Speaker Change: really what we're fighting there is some new entrants. These are sub-segments that are doing very well relative to the broader Salty universe and so we've got a little more competition. So again there I think the fight's not being waged on price, it's really about ensuring that we're bringing the appropriate news and innovation along with a competitive promotional calendar. So as I look at snacks where we're experiencing more of the competitive pressure, I don't see anything that's pushing us into unsustainable or unreasonable levels of promotion.
Great, thank you so much
Thank you.
Speaker Change: Our next question comes from Peter Galbo from Bank of America. Please go ahead, your line is open.
Speaker Change: Hey guys, good morning. Congrats to Mark and to Mick. And Mark, I guess we'll look forward to Jaden Daniels being in the Campbell's Chunky commercials next year.
Speaker Change: with Thanksgiving later, and if you can just quantify it all, kind of how much you think it moved.
Speaker Change: Yeah, so the easiest way to think about it is if you look at the
profile for the quarter.
you'll see about a two-point.
Speaker Change: roughly a two-point delta between the in-market consumption and the net sales.
Speaker Change: I would tell you that from a Canada and food service, we did just fine.
in those, and so really the majority...
Speaker Change: of that difference is coming through some of that pressure and inventory. Now, I do think it's fair to say that retailers in general have been very focused on managing inventory levels down in general. But I do think the later week of or the week later of Thanksgiving certainly had an impact and, you know, I would say more than half of that would have been related to that swing. And, again, I think
Speaker Change: The good news is, as we pivot into the month of November, still too early to give kind of a full picture of Thanksgiving, but certainly we saw some of that inventory build earlier in the month of November, which would have been a little bit later and moved out of the first quarter into the second.
Speaker Change: Got it. Okay, thanks for that. And if I just go back to the slide you had on on RAOS and some of the sourcing occasions...
Speaker Change: that you mentioned. I'm just curious kind of what what data you're looking at internally or what you're seeing you know that suggests that that's actually the case that you are seeing RAO specifically kind of source share from you know some of the some of the Italian concepts in the Restaurant Channel.
Speaker Change: Yeah, I think one of the, like a couple things that, that, you know, first, you know, more broadly speaking, I would say you're still seeing
Speaker Change: migration from away from home into home for meal occasions. We're up in the low 80s, 83 percent, which is still up versus a year ago, and so that migration continues. I think what we're seeing in Reos that is so encouraging
Speaker Change: is a fair amount of this growth that we're experiencing is coming.
from middle- and lower-middle-income households.
Speaker Change: And as we explore with consumers the appeal, and remember, these are also consumers that are buying Prego as well. And so in trying to understand and segment...
Speaker Change: how to focus on the Prego business as well as the Rails business, we really want to try to understand occasion.
Speaker Change: And one of the areas that we've consistently uncovered, and the team actually has been focused on this even before the acquisition, is this idea of significant value versus what you may get from a takeout or online order, DoorDash, so forth. And that...
Speaker Change: Tracks very well with that income level where we're seeing a lot of growth from from the rails business coming
Speaker Change: And, you know, I think we want to continue to focus on that. And, you know, you would have seen a new advertising campaign for Raios that really focuses on our point of difference in quality, kind of our Italian roots, and really what makes Raios so different and so much worth that price point. And, again, when you put it in the right context, I think it becomes very compelling, as you would have seen in that. And I think that's something you're going to continue to hear us talk more about is really the power of Raios being able to compete in different occasions across multiple income levels.
Great, thanks very much.
Speaker Change: Our next question comes from Robert Moskow from TD Cowan. Please go ahead, your line is open.
Speaker Change: I thank you for the question and, Mark, congratulations to you. Best wishes.
Speaker Change: Thanks, Rob. One question on snacks, you know, the margins were, you know, around 13 and a half percent in the quarter. That's quite a bit lower than what I had expected and I think what Campbell expected too.
Speaker Change: And I just wanted to note, you know, with this environment for pricing being, you know, under pressure.
and costs.
Speaker Change: You seem to have some supply chain inflation that's a little bit higher than what I would have thought. Can you still hit your margin target for this year? I think there was like a 50 basis point expectation for margin expansion.
Speaker Change: And maybe just longer term, you know, I think we're all kind of concerned that the salty snacks category took prices too high during the pandemic and that there's a value correction, value equation correction that needs to be established going forward.
Speaker Change: So, how does that inform the 17% margin goal longer term? Thanks.
Speaker Change: Yeah, great question Ralph. So let me kind of flip the batting order if I could and I'll talk a little bit about the longer term objectives.
Speaker Change: and a variety of different areas from route to market to network optimization.
to improvement and mix as we continue to work down.
the partner brand number.
Speaker Change: all remain very much intact and if anything I would say that the team under Chris's leadership, Chris Foley's leadership, has done a very nice job.
Speaker Change: of continuing to not be satisfied and recognizing that we are in a competitive landscape, how do we continue to identify savings that can be utilized to ensure that we've got a bit of a buffer to manage the pressure that is in the marketplace today? I would tell you on that broader question too of, hey, did,
Speaker Change: Did snacks price too much or is there going to need to be a reset? You know, I think perhaps the difference might...
Speaker Change: why it might feel a little bit that way, um, is, you know, we, we were arguably able to walk back a lot of the promotional level, um, during the covid period and even in the period past that, um, without a significant amount of elasticity. And I think that's a fact, I think, as we've moved now and cycle, you know, several years past that
Speaker Change: The reality is, and if you remember several years ago, I said this and it wasn't wonderfully received, but I think it's played out in a very similar fashion, which is this is a very competitive segment. And so having a level of promotion that drives display remains a very important component of the snacks category. I think the good news for Campbell's is...
where we primarily play.
Speaker Change: are in elevated or added value segments and that's a place where we do not anticipate having significant recalibration in value. As I said before, I do think...
Speaker Change: We've got to be very mindful in watching our base pretzel and our base cookie business as it relates to private label and some of the price pressure that's there. But at the end of the day, I don't feel like we need a material change or structural change backwards. But what I do think is...
We're going to continue to be appropriately.
Speaker Change: plan to promote and to drive that impulse purchase so critical to snacking. As we get to the nearer term...
Speaker Change: You know, maybe Carrie, you can cover that a little bit and talk about this year, because I think there'll be a little bit of discussion as well. Yeah, there are certainly reasons to believe in a second half margin improvement for SNACs, and I think it's aligned with what I had answered earlier, that that's applied for the total enterprise, but it also...
Speaker Change: is applicable to the Snacks division as well. In the second half, you know, our expectation would be improving year-over-year volume trends are going to help the Snacks division versus the first half.
Speaker Change: You're going to have improving snacks mix with a higher leadership brand mix.
Speaker Change: and a lower impact of that partner and contract brands and a lower impact of the POP divestiture as well, the POP secret divestiture. You're gonna have more neutral year-over-year net price and marketing impact in the second half.
Speaker Change: and that step up in productivity and cost-savings initiatives. Remember, in our snacks business, we've got some announced restructuring in our Jefferson manufacturing plant, and we've got our ongoing DSD warehouse and route optimization. All of those things will continue to help us.
Speaker Change: continue to get a pathway to 15 percent. Yeah, and I think, you know, we'll be...
Speaker Change: I think Q2 is going to be, you know, a very helpful quarter to understand. I am encouraged by
Speaker Change: some of the more recent trends on share as it relates to snacking over the latest four weeks and and I think you know I want to see that continue to play out.
Speaker Change: through the holiday season. And just remember, you know, it's important.
Speaker Change: as the margin agenda is for us on snacking and very much.
committed to seeing that come to fruition.
Speaker Change: It's also about ensuring that the growth trajectory on snacks can be sustained as well. And that balancing act is one that we're going to continue to be very thoughtful about as we navigate through the short term. Longer term, again, I continue to feel very good about how we're positioned and where snacks will be, and where the margin trajectory can continue to grow to.
Okay, thanks so much, Mark. Take care.
Speaker Change: Our next question comes from Jim Salera from Stevens. Please go ahead, your line is open.
Jim Salera: Good morning, guys, and Mark just want to echo the congratulations. It's tough to find an industry that's more exciting than packaged food, but I think pro football categorizes as one. I think I wanted to just maybe follow up on
Jim Salera: Some of the comments on snacking, and correct me if I'm wrong here, but I believe that the level of volume sold on promo is still lower than pre-COVID.
Jim Salera: And given some of the, you know, industry category headwinds rather
Speaker Change: Is the industry just taking kind of a, let's say, a more tactical approach on promo and just being less broad-based than in the past? And maybe if I can tack on a second part to that question, if the consumer does normalize throughout the year, do some of these price gap distinctions just become less important? And that's kind of what the industry is looking to.
Speaker Change: Yeah, I think there's a couple things in there. I do, again, I think the nature of promotion in snacking, I am not seeing anything that I feel is
out of line or inconsistent.
with what we would expect. I'm not seeing deep.
Speaker Change: levels of promotion either. I think your point on the level of volume, you know, we've been watching that closely and, you know, although I agree, I think it's, you know, it's moving up and as I expect through the year, we'll see, you know, some stabilization there. I think what's important to remember about the second half of our fiscal year is
Speaker Change: You're going to begin the cycle where we really started to see the step back on snacking or the normalization of snacking occurring and so you're in Q3 of RQ3 you're going to begin to compound
certainly a bifurcation between certain categories and I think again
Speaker Change: When I look at our business, and I get why people may say, well, Campbell seems to see a little bit.
Speaker Change: in essence, playing in some different categories. Although we're in Salty, you know, we're really in, you know.
Natural Organic Tortilla, we're in Kettle Chips, we're...
Speaker Change: in the deli, we're in, you know, maybe a little bit more balanced and a little bit more mainstream at Kretzel. But we're playing in some categories that I think inherently are advantaged and doing a bit better. And like I said, as we get to the back half, we're going to begin to cycle that. So I think, you know, again, I always hate to use comps as the reason why something may be going to get better. But I think in this particular case, as we get to Q3 and Q4,
Speaker Change: you're just going to simply have a lower base that you're beginning the cycle. Now, whether that gets us all the way back...
Speaker Change: to that three to four percent we'd love to all see in snacking is not necessarily what we're expecting or what we're modeling but certainly sequential improvement is part of what's underpinning.
our expectations as we go into the back half.
Speaker Change: Great. And then if I could maybe sneak in a higher level question, you know, in your prepared remarks, you talked about
really strong momentum with rails among millennial households.
Speaker Change: quite fit with maybe some of the broader narrative on, you know, it's a very premium product and millennials tend to have a little bit less spending power than other groups. And so, are there any learnings that you can take from RAOS to apply to other parts of the portfolio where
Speaker Change: Maybe you could have, you know, a premium or better for you clean label value proposition that would drive You know consumer groups that would typically not spend on premium products to engage with different brands
Speaker Change: incredibly differentiated product. The quality of the product and the experience of the product, it is just flat-out better. And so I think the fact that you've got broad-based
acceleration across different households, including those that may be feeling
Speaker Change: a little bit more economic pressure. I think that conversation we had a little earlier on framing the occasions...
Speaker Change: is really a great lesson. And I do think there is some application of that to other premium brands where we have a distinct.
Speaker Change: benefit and quality. And so as we talk about things like
Speaker Change: holiday entertaining or you know moments where it's important to to bring the the best quality or the highest quality
Speaker Change: to the table or to the occasion, I think framing that in a way that allows those points of difference to be most recognizable for consumers and, in essence, making it worth
perhaps the premium.
Speaker Change: price with the broader or mainstream segments, is a great lesson, but I think it all begins, and must have those true quality points of difference. And I'm not sure that's always the case in every premium price product, but certainly, in Raeos, we feel that we that we have that point of difference, and I think, consumers, as they try it,
Speaker Change: you know, reinforce that. And so I think there are some lessons learned, but I think the biggest lesson learned is, you know, you got to make the experience worth it.
Speaker Change: And we're all out of time for questions today. This will conclude today's conference call. Thank you for your participation. You may now disconnect.