Q4 2019 Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again, thank you for your patience and please continue to standby.
If anyone should require operator assistance. Please press star and then zero on your Touchtone telephone as a reminder, today's conference call is being recorded.
I would now like to turn the conference call over to Ken Gosnell, Vice President Finance strategy and Investor Relations. Please go ahead.
Thank you good morning, everyone welcome to Campbell's fourth quarter and full year fiscal 2019 earnings call as usual, we've created slides to accompany our earnings presentation. You will find these slides posted on our website. This morning at Investor Day Campbell Soup company Dot com.
This call is open to the media, who will participate in a listen only mode.
Turning to slide two today, we will make forward looking statements, which reflect our current expectations.
These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk.
Please refer to slide two or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in forward looking statements.
Because we use non-GAAP measures we have provided a reconciliation of these measures to the most directly comparable GAAP measure which is included in the appendix of this presentation.
Additionally, concurrently with the filing of our 10-K in few weeks, we plan to file an 8-K, which will recast historical quarterly and full year unaudited financial information, reflecting the discontinued operations as well as certain non-GAAP financial measures reconciled to the GAAP presentation.
On slide three you can see the agenda, we will cover today with us on the call today are Mark Clouse, Campbell's President and CEO and Anthony Disilvestro, Chief Financial Officer, Mark will share his thoughts on our performance in the core quarter, our progress in fiscal 2019 against our strategic initiatives and provide his perspective on our outlook for fiscal 20, then Anthony will walk through the financial details as well as our guidance for fiscal 2020 with that let me turn the call over to Mark.
Thanks, Ken Good morning, everyone and thanks for joining us today.
This morning, I will make high level comments about our combined results for ease of comparison to our most recently provided sales and earnings guidance.
Anthony will bridge, the various components of our results, including both continuing and discontinued operations given the sale of Campbell fresh and the pending divestitures of the Campbell International businesses.
I'm pleased to say that in the fourth quarter. We continue to do what we said we would this quarter showed meaningful improvement in our performance sequentially and versus a year ago across many measures.
Additionally, Q4 completes a fiscal year, where we've made material progress on our strategic plan across the business.
First and foremost it starts with our performance we are delivering results that are aligned with or exceeding our expectations, which is a critical first step in our journey to sustainable profitable growth.
We have demonstrated improved operating discipline and this marks the fourth consecutive quarter. This year that we have met or exceeded our own financial goals. It also marks the first quarter, we delivered top line gross margin and EPS growth in the year.
Definitely a great way to finish.
Second we are well on our way to completing the divestitures of non core businesses, we identified last year.
Shedding the underperforming fresh businesses that added complexity to the portfolio and working toward closing on the two transactions related to Campbell International both of which are expected to close in the first half of fiscal 20.
This will do two critical things it will improve our balance sheet and better focus the business.
In total we expect net proceeds of approximately $3 billion from these transactions, which will be used to significantly reduce our debt.
Finally, we've also developed a new straight forward strategy.
Which brings clear focus on one geography, and two core businesses. It's a simple yet powerful concept that enables us to concentrate our resources and investment on the things that matter. Most this includes returning resources and innovation to our iconic meals and beverage brands like our Campbell soup business and accelerating support on our unique and differentiated snacking portfolio, including the Pepperidge farm and Snyder's Lance brands.
We have accomplished a great deal this year and I'm very satisfied with our progress we have clearly stabilize the company from where we were a year ago and delivered improved performance over the course of the year.
I know means are we declaring victory we have much to do to continue to strengthen our businesses improve our marketing and innovation and demonstrate Executional excellence consistently. However, the actions we have taken have removed a great deal of unpredictability around our business and created a solid foundation to build upon going forward.
Now lets cover Q4 and more detail on slide six this is the best quarter. We have delivered in terms of performance versus prior year and provide some encouragement for the potential of our new focus portfolio demonstrating what the business is capable of delivering.
Looking at our combined results in the quarter sales increased 2% performance in the quarter reflected continued strength in the snack segment, where organic sales increased 4% with contributions coming from across the business. In fact, we grew or held share in eight of our top nine snack power brands.
Meanwhile, the meals and beverage business continued to stabilize delivering 1% organic sales growth.
We also made progress on gross margin in the quarter. Another important proof point in our turnaround adjusted gross margin increased 60 basis points in the quarter.
Material improvement versus the third quarter year to date, which was down significantly.
We have also continued to successfully deliver our multi year enterprise cost savings program.
This quarter, we achieved $45 million in savings, including the Snyder's Lance synergies.
For the year that brings our total savings to 165 million from continuing operations.
We have achieved $560 million in savings program to date and continue to track to our cumulative savings target of $850 million by the end of fiscal 2002.
Cash flow from operations was $1.4 billion, reflecting major improvements in working capital as we continue to demonstrate increased discipline and effectiveness and optimizing our working capital.
Turning to a discussion of our segments on slide eight let's start with meals and beverages, which continued to stabilize results improved this quarter with organic sales up 1% behind the performance of soup prego and pace.
Declines in operating earnings moderated as we continued to drive base enablers and benefited from our selective pricing actions, which were more than offset by cost inflation.
While we are encouraged by the performance to finish the year, we do not want to get ahead of ourselves as we told you at Investor Day. There is much work ahead in fiscal 2000.
We still expect some volatility as we invest in the business and also make important choices to strengthen the portfolio for the future.
In U.S. soup sales increased 3% with gains in condensed and ready to serve soups, which is encouraging obviously the fourth quarter is the smallest of the year and it's important to keep in mind that we are wrapping significant declines from a year ago. However, it's also great to see end market consumption increased 1.4% in the quarter with strong performance across the portfolio.
This represents a significant improvement over the first three quarters.
Turning to slide nine across the board, we made progress with our fiscal 19 suit plans, which called for improving the fundamentals of the business, including improved retail engagement pricing and promotion and marketing.
This is the foundation will build upon as we execute the next phase of the plans in fiscal 20 and fiscal 21.
As we said, we're taking a full swing it soup with an integrated and holistic plan.
Here's how we're thinking about soup over the next two years in fiscal 20 on the plus side will be injecting much needed investment in the businesses across quality marketing and selective merchandising, including returning our highly relevant Pacific brand to growth.
We also hope to validate the new vision for the Super file that was outlined at Investor day, while continuing to strengthen important retailer relationships. We do expect some mitigating headwinds as we continue to rationalize the portfolio and increase some unsustainable promoted price points.
As we've said previously we expect a more stable soup business in fiscal 20 with an improved trajectory in fiscal 2001. The builds upon the F 20, learnings and increases in investment in areas that are working or read your axes necessary complemented by a more robust innovation pipeline.
This change will not happen overnight. The soup plan is a three year journey with fiscal 20 being the second phase.
In other parts of the division I'm pleased with the performance of our sauces business as we outlined in June we have work to do on the prego and pace brands, but they are responding well to the renewed focus and support prego delivered strong end market performance in the quarter with consumption growth and share gains in fact prego has regained the share lead in the pasta sauce category, adding another number one brand to our roster.
Meanwhile, pays performed well in Q4 fueled by increased merchandising and effective customer programs.
Turning to vacate the shelf stable beverages category remained under pressure.
While there are challenges in this business. Its foundation is strong and its plant based positioning is on trend V. Eight is the number one vegetable juice in the U.S. and the number two overall branded shelf stable juice.
We are continuing to work our way through some of the more disadvantaged parts of the portfolio, particularly splash, which is driving the majority of the decline in the quarter.
And reshaping this business around the plant based consumer macro trend and our single serve business.
That's our biggest opportunity with V. Eight original and the differentiated V eight plus energy and hydration lines, all of which tap into the plant driven benefits consumers are seeking.
Let's take a look at our snacks segment on slide 11.
This was another very good quarter for the business as we continued to drive strong sales performance with organic sales increasing 4%.
I feel very good about the steady progress of the integration of the businesses building on the complimentary strengths of Pepperidge farm and Snyder's Lance.
This year, we have over delivered our value capture while simultaneously unlocking the growth potential of this unique and differentiated portfolio by maintaining our momentum in pepperidge farm and applying our proven growth model to Snyder's Lance.
Our performance was balanced across snacks as I mentioned earlier eight of our nine power snack brands grew or maintained share in the quarter.
The snacks business is really hitting its stride on both the top and bottom line behind increased marketing investments to fuel sales growth and efficiencies and enablers benefiting operating profit.
I continue to be impressed with the proven growth model at Pepperidge farm. This marks the 19th consecutive quarter of organic growth at Pepperidge with sales again, increasing mid single digits behind strong marketplace performance across all the major brands.
Goldfish continued to perform well with increases on the core business.
Fresh bakery continued its strong growth trajectory fueled by the renovation of swirl and new line extensions on buns and Rolls farmhouse cookies also had double digit consumption gains.
Now, let's turn to the Snyder's Lance side of the portfolio marketplace performance was improved this quarter, especially against our power brands. In particular, we're very pleased with the response of Cape Cod, and kettle to increase marketing, which drove consumption and share growth.
In addition, the new campaign in Snyder's of Hanover is making a material difference as that business continues to improve.
Now on slide 13 beyond the power brands that we're investing in for growth. The Snyder's Lance portfolio. Also includes what have been historically referred to as partner brands brands that we distribute but do not own and allied brands regional brands that we own but our non core.
Both play a very important role by providing distribution scale and efficiency, we remain committed to this business, but in the quarter. Our snacks results include about a one point headwind from these brands.
Within this business there are nearly 2000 S.K. use.
We're going to better prioritize select partners to reduce complexity and improve execution, while maintaining the vast majority of this business.
Looking ahead, we expect a similar headwind in fiscal 20.
Let's dig into the progress of our integration and value capture.
Im more than satisfied with the pace and progress of the integration in fact, we over delivered synergies every quarter this year.
The over delivery in the quarter and for the full year is the result of very strong performance in the three areas. We have discussed previously.
Synergies in procurement, specifically packaging the consolidation of the sales headquarters and related operations and driving operational efficiency in manufacturing. In addition, the leadership team continues to do an excellent job in building a winning culture across the combined businesses.
Next on slide 15, I want to provide which should be one of our final updates on the divestitures, we identified last August .
In June we announced the agreement to sell the Kelsen business to an affiliate of Ferraro and in August we announced the sale of the rest of Kimball International to KKR. We expect these divestitures to be completed in the first half of fiscal 20.
The sale of Kimball International was a long and complex process, but we are confident that the end result generated the greatest value from these assets in total we will receive 2.5 billion for the cap Campbell International businesses. When you combine that with the divestiture of the fresh businesses. We expect total net proceeds of approximately $3 billion, which will be used to significantly reduce our debt.
In addition to improving the balance sheet. The divestiture of these businesses allow us to focus our resources on our two core North American businesses, which is already having a positive impact on our efficiency and performance.
As we outlined at Investor Day fiscal 19 was a reset year end fiscal 20 will be a year of stabilization.
Which will include the investments we need to better support the businesses going forward. This translates to what I would characterize as relatively flat with some areas of modest improvement.
This guidance reflects the next step in our journey to sustainable profitable growth.
As I'm sure you all read in our press release yesterday, we announced that Anthony Disilvestro will be leaving Campbell.
This will be his final call as the Chief financial Officer of the Campbell Soup company.
He will be succeeded by Mick bake Hausen, who is joining us from sure Bonnie.
The started the new fiscal year and the near completion of the Divesture provides an opportune time to make this change.
Anthony will stay onboard until mid October to ensure we have smooth and seamless transition to Mick Anthony has made many important contributions during his more than two decades with Campbell.
He has enjoyed a remarkable career and played a significant role in shaping the company.
I want to personally thank him for his partnership over the last several months and getting me up to speed on the business.
For his leadership on the divestitures and driving the cost savings program and for the excellence in execution that has contributed to our improved performance this year.
I speak for all of our employees and the board when I wish Anthony the best as he moves on from Campbell.
With that let me turn it over to Anthony.
Thanks, Mark before getting into the details I'll make a few comments on our performance in the quarter.
Overall, we had a good quarter with results exceeding our expectations.
We are pleased with improving trends on our gross margin performance as we benefited from cost and productivity savings as well as from net price realization.
Our cost savings program continued good progress as we achieved 45 million in savings in the quarter from continuing operations, bringing the year to date total to $165 million.
And the program to date total to $560 million.
We are pleased with the progress on our divestiture program, having recently announced agreements to sell that Campbell international businesses.
Completing the divestiture program will enable us to focus on our core North American market.
And with anticipated proceeds of approximately $3 billion, we will significantly reduce our debt level.
Lastly, as we announced this morning, we are providing our 2020 guidance for continuing operations as we discussed at our Investor Day in June we expect stable performance in 2020, as we make the investments necessary to achieve long term growth.
I will now review our detailed results.
In my discussion I will focus primarily on the results for continuing operations.
However, as we did last quarter, we will provide combined results consistent with the basis of our previous guidance.
In this case, we will combine the results of continuing operations and the result of Kimball International.
I'll start with continuing operations.
For the fourth quarter net sales on an as reported basis increased 2% to approximately 1.8 billion.
Organic sales also increased 2%.
With gains in snacks, as well as in meals and beverages.
Adjusted EBIT of $252 million increased 1% as sales gains and gross margin improvement were partly offset by higher marketing and selling expenses.
Adjusted EPS from continuing operations increased by 14% or five cents to 42 cents per share.
Primarily due to a lower adjusted tax rate and a reduction in interest expense driven by strong cash flow and proceeds from the Campbell fresh divestiture.
For the full year net sales from continuing operations on an as reported basis increased 23% to $8.1 billion benefiting from acquisitions, while organic net sales were comparable to the prior year as gains in snacks were offset by declines in meals and beverages.
Adjusted EBIT from continuing operations increased 1% to $1.266 billion.
And adjusted EPS of $2.30 was down 8%, reflecting the incremental interest expense from acquisitions and a lower adjusted tax rate.
And now on a combined basis and consistent with our previous guidance net sales for the quarter increased 2% to $2 billion adjusted EBIT of $288 million increased 2%.
And adjusted EPS, which exceeded our expectations increased by 14% to 50 cents per share.
For the full year combined net sales increased 18% to 9.2 billion, reflecting the acquisitions of Snyder's Lance and Pacific Foods.
Adjusted EBIT decreased 1% to $1.422 billion.
And adjusted net EPS of $2.63 declined 9% versus the prior year.
Breaking down our net sales performance from continuing operations for the quarter.
Organic net sales were up 2% driven by a combination of increased volume and the benefit of recent pricing actions.
Approximately 70 basis points of the sales growth is the result of lapping the lost sales related to the voluntary recall of flavor blasted goldfish crackers in July 2018.
Volume gains were driven by snack while pricing gains were achieved across our two segments.
Promotional spending was flat year over year, while the impact from currency translation in the quarter was neutral.
As we refocus our portfolio on North America, we would expect currency translation impacts to be minimal all in our as reported net sales were up 2%.
We are pleased with our gross margin result, as we continue to achieve sequential improvement in performance.
For continuing operations, our adjusted gross margin percentage increased by 60 basis points to 33.7%.
Cost inflation and other factors had a negative impact of 320 basis points.
On a rate basis input prices increased approximately 4%, reflecting higher prices on steel cans as to both aluminum and weak.
Going the other way our ongoing supply chain productivity program contributed 140 basis point.
And our cost savings program added 130 basis points to gross margin expansion.
Net pricing contributed 50 basis points as we benefited from lift pricing actions across several key categories and from lapping costs incurred related to the flavor blasted goldfish recall last year.
Reflecting strong sales gains in U.S soup mix was favorable by 60 basis points, bringing the gross margin percentage to 33.7%.
Moving on to other operating items.
Marketing and selling expenses increased 10% in the quarter, primarily reflecting increased marketing investment on snacks and higher incentive compensation driven by improved performance.
Partly offset by benefits from cost savings initiatives.
Adjusted administrative expenses increased 5% to 139 million due primarily to the increased incentive compensation expense.
Partly offset by the benefits from cost savings initiative.
For additional perspective on our performance. This chart breaks down our adjusted EPS change between our operating performance and below the line items.
Adjusted EPS increased five cents from 37 cents in the prior year quarter to 42 cents per share.
On a currency neutral basis, adjusted EBIT had no impact on EPS.
As our increase in sales and gross margin were offset by higher marketing and selling expenses.
Net interest expense declined by $5 million, a one cents positive impact EPS as we have used our strong cash flow to reduce debt.
Adjusted EPS benefited from a lower adjusted effective tax rate, adding two cents TPS.
Our adjusted effective tax rate declined by 4.2 points to 25.6%.
Benefiting from the reduced us federal rate.
And lastly currency translation had no impact on EPS this quarter completing the bridge to 42 cents per share.
Now turning to our segment results in meals and beverages organic sales increased 1%, reflecting sales gains in U.S soup prego and pace.
Partly offset by declines in Veight beverages.
Sales of U.S. soup increased 3% versus the prior year driven by gains in ready to serve and condensed soups.
Segment operating earnings declined 3% to 151 name.
The decline was driven primarily by cost inflation and higher incentive compensation expense.
Partly offset by supply chain productivity gains the benefits of cost savings initiative and the benefit of lift pricing actions.
Here's a look at U.S. wet soup category performance and our share results as measured by Iraq.
For the 52 week period, ending July 28, 2019 that category declined 1.5%.
Our sales in measured channels, including Pacific declined, 3.7% and our market share declined by 130 basis points.
Private label sales grew 5.9% with a market share gain of 120 basis points.
All other branded players collectively experienced a sales decline of 80 basis points, gaining 20 basis points of market share.
As shown on the chart.
Our consumption and share trends are improving.
For the 13 week period, ending July 28, our sales in measured channels increased 140 basis point.
We share declining just 90 basis points.
In Campbell snacks sales in the quarter increased 3% to $967 million.
Organic sales increased 4%.
This performance reflects continued momentum in Pepperidge farm braking products Kettle brand potato chips snack factory Pretzel crisp and late July snacks, as well as gains in Pepperidge farm goldfish crackers.
As the company last the negative impact of the voluntary recall in July 2018.
As Mark mentioned eight of our nine snack power brands grew or held market share in the quarter.
Segment operating earnings increased 2% to 133 million as sales growth cost savings and productivity gains were partly offset by cost inflation increased marketing investment and higher incentive compensation.
Cash from operations for fiscal 2019 increased by $93 million to about 1.4 billion, reflecting significant improvements in working capital performance and higher cash earnings.
The cash outlay for capital expenditures were 384 million $23 million lower than the prior year.
Dividends paid in the amount of 423 million were comparable to the prior year, reflecting our current quarterly dividend of 35 cents per share.
Net debt of 8.533 billion declined by $1.135 billion compared to the prior year as positive cash flow generated by the business.
And proceeds from the divestiture of Campbell fresh were used to reduce debt.
We expect to close the divestitures of the Campbell International businesses in the first half of 2020, and we'll use the proceeds to further reduce our debt levels.
We are very pleased with the progress we have made on our divestiture program on Campbell International we now have agreements to sell our kelsen business or 300 million and the balance of Campbell International for 2.2 million as mentioned, we anticipate closing on the international transactions in the first half of fiscal 2020.
Together with the divestiture of our Campbell Fresh Division, which was completed in the fourth quarter. We expect divestiture proceeds of approximately $3 billion and as discussed these will be used to significantly reduce our debt level.
The results of these businesses are now being reported as discontinued operations.
For fiscal 2020, we are providing guidance for continuing operations, which excludes the result of Kimball International and Campbell fresh.
Fiscal 2020 is a 53 week year, including one additional week, which is included in our guidance and has about a two percentage point impact across net sales EBIT and EPS.
With our portfolio now focused in North America currency translation is not expected to have a material impact as non U.S. dollar sales are now less than 10% of the total.
Net sales are expected to increase 1% to 3%, reflecting the extra week growth in snacks and improving trends in meals and beverages.
Adjusted EBIT is expected to increase by 2% to 4%, reflecting sales growth and the benefits from our cost and synergy program and productivity gains.
Which are funding planned increases in marketing support.
Adjusted EPS is expected to increase by 9% to 11%.
As I'll detail for you in a moment EPS is benefiting from the use the divestiture proceeds.
Including those anticipated from Campbell international to reduce debt.
Although we don't provide quarterly guidance I will say that we expect our first half results to be negatively impacted by accelerated marketing investments to support our snacks business and to improve the performance of use suit.
In addition, we expect cost inflation rates to moderate gradually throughout the year.
Given the many moving parts to our financial reporting we thought it would be helpful to provide additional details behind our EPS guidance.
As discussed 2019 results are a combination of discontinued and continuing operations.
From the 2019, continuing operations base of $2.30.
EPS will benefit from several drivers in 2020.
First interest expense will benefit from the use of C. Fresh divestiture proceeds and the anticipated proceeds from the international divestitures.
Based on our anticipated closing in the first half we expect an interest benefit of approximately 16 cents per share.
This estimate is based on currently anticipated closing date and to the extent those change we will update you.
Next the additional week will add approximately four cents per share while growth on the base business on a like for like basis add zero to five cent together. These drivers get us to our 2020 adjusted EPS guidance for continuing operations of $2.50 to $2.55.
If you are using these numbers to calculate the dilution from our divestitures. Please note that the interest benefit shown here is only a partial year.
There was an estimated incremental seven cents, which will wrap into 2021.
Turning to some of the key assumptions underlying our guidance.
Although moderating somewhat we expect cost inflation to be approximately 3% in 2020.
As we have successfully delivered in the past, we expect ongoing supply chain productivity gains excluding the benefit of our cost savings program of approximately 2% to 3% of cost of products sold.
Against our cost savings program, we expect to deliver an additional 140 million of cost savings, including a meaningful contribution from Snyder's Lance synergies.
Including the anticipated benefit of divestiture proceeds we are forecasting interest expense in the range of 290 to 300 million.
Below the line and comparable to this year, we expect the adjusted tax rate to be approximately 24%.
We are forecasting capital expenditures of approximately $350 million a decrease from 2019 spending reflecting the divestiture program.
Lastly, and as Mark mentioned I will be leaving the company to pursue other interests I have very much enjoyed my time here and certainly waste the company all the success going forward.
That completes my review and now I'll turn it back to Ken for the Q and a.
Thanks, Anthony will be happy to take your questions Candice lets open the lines and take our first question.
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And our first question comes from Andrew is our from Barclays. Your line is now open.
Morning, everybody and Anthony all the best going forward. Thanks for your help over the years.
Just.
Two quick things one would be Mark I realize fiscal 20 is not yet the year, where you have everything firing in terms of re framing the soup category, perhaps you could run through maybe just the sort of top two or three things in that in that core soup business that we should be focused on really in order to monitor the progress as we go through sort of becoming soup season, maybe those key benchmarks are metrics.
That we can sort of focus on again to monitor the progress and then just second.
As we think through the relationship between inflation and productivity and such it seems like.
You are looking for.
I would assume a productivity and maybe some incremental pricing to about help offset what you expect inflation to be.
Is it right to think that that leaves the cost and synergy savings really as.
The.
What's what you have is flexibility to reinvest behind the business this coming year kind of that for $140 million bucket in such thanks. So much.
Yes, Thanks, Andrew well, let me, let me start with the soup.
Question first.
And maybe it will it will be helpful to give a little bit of context on what we're seeing in the marketplace right now and then how that how that kind of leads into the 2020.
Assumptions so on the positive side a couple of things that we're finding are very helpful and it was great to see albeit the summer and that the fourth quarter. It was great to see growth on soup. It's the first time.
In quite a quite a number of years that we've been able to drive growth on the business and I think if you look under what's really driving that I think there's three things the first is.
The power of partnering again with our retailers to really collaborate with them on creating a vision and direction for the category and for the business and I think.
In many ways that is translating into a far better performance in market better merchandising.
Better reflection of our innovation that we do have.
And a good understanding of the right.
Merchandising and pricing combination.
I think the other thing that's been very effective has been almost relaunching well, yes behind the convenience platform.
The fourth quarter that business was up 34% and added three tenths of a share point and so although were light on innovation.
As we've said in the past I think the things that we are doing are working well and so I would expect those positive drivers to carry forward into the 2020 season with the addition of a couple of meaningful.
Adds to that so our marketing and the strength of both the investment levels as well as the quality of that communication.
I'm very excited about as well as the investment in quality and some additional investments in pricing and the shelf, while we continue to cultivate those relationships with partners. Our retail partners. As we go forward I do think though there are a couple of headwinds that will moderate that and I'll get to the kind of benchmarks at the end of if you look under the results today, you do see a fair amount of contribution in the headwinds related to distribution, so where where this is coming from is some of the flankers on the ready to serve side as well as what I would call some of the.
You know tail, if you will of the condensed business. The majority of this distribution loss is not regrettable losses, but it is providing a bit of a headwind of the business I do think that will moderate as we go through 2020, but I do expect still some headwinds from that and then on the merchandising side. It will be a little bit of a balancing act I expect to see us more aggressive on businesses like broad, where we're seeing a lot more competitive tension, especially with private label and I would see promoted prices in some places where there just on the sustainable levels going up which I know in the in and as we expect in the near term, we will see a little bit of headwind from there. So as you go into the season I think you'll want to look for one the executional performance of up seeing the additional.
Supported merchandising and marketing the quality of that the improvement on the products.
And the improved quality on the businesses as well as a more balanced approach to pricing and my expectation is that you should expect them to see a more stable performance through the season.
I, certainly am hoping and I think if we hit things on on all cylinders, we'll see improvement in share as well, but I also think we're being prudent and setting expectations.
In a balanced way as we really validate some of the work were doing but I think going through the season. If you were to see a more stable performance and an improving trajectory on share I think that would be.
Six successful season, and I think a great proof point on this next iteration of the business going forward.
And then Anthony I don't know if you want to take the second.
When we can kind of do it together probably Andrew thanks for the comment I think the way that.
To think about it on our $140 million the cost savings I think of about half of that going into caught and the other half going into marketing. It SGN eight so within gross margin that combination of cost saving.
Productivity and productivity savings should be ahead of inflation. So you give us some slight improvement in gross margin percentage and then that'll provide fuel to reinvest back into the marketing line.
As we go into 2020.
Yes, I just want I, just would say Andrew as you think about that though.
One of the things we've tried to do in this plan as you know there is a little bit in my mind.
I would say flexibility that we won relative to pricing and making sure that our price gaps remain within the targets that we want them. So I think we've.
As you'll note from how we've laid out guidance, we've stopped short of guiding directly to gross margin because I do think we want a little bit of that flexibility, but I think.
General balance of investment as it relates to.
Inflation and productivity is Anthony laid out right. All I would say is I want to leave us a little bit of flexibility where that investment might land, depending on how we see the environment unfold.
Great. Thanks, so much that it does really appreciate the color.
Thank you and our next question comes from Ken Goldman from JP Morgan. Your line is now open.
Hi, Thank you and.
Anthony Best of luck for me as well thanks for all of your help over the years.
Well.
Mark on Slide 13, I think it is you highlighted.
I think 17% of the snacking business being non core.
And sort of broke out how you think about classifying some of those so that some of those.
Assets, Yes history might suggest that when companies do this sometimes.
The signal is that some of these businesses are being considered for divestiture. So I wasn't sure if that's what you're implying by breaking it out and emphasizing it in this way, but I kind of wanted to just.
Get a little bit more color on what you were on the messaging from that slide.
Yes, Thanks, Ken I think that the the at the point of it was I do think.
It's more about the 11%, which is the partner and Allied brands.
I know I know everybody's familiar in general with what those are but we haven't talked a lot about it and I think as we've gone through it Weve now spent.
A year or so running it we recognize the importance of that business, but I also would say there is a tremendous amount of complexity that is inherent with that if you think about the addition, as I said in my comments of almost 2000 S.K. use that we're trying to manage what I would tell you is there is some really good parts of that business and there is some other parts that are very low margin adds a lot of complexity and I think as we go forward and we really want to get this business set for the future.
We're going to balance that so focused on the parts of it that we really see.
As enhancing that efficiency and scale as it was originally set up to do and there's probably some parts of that that will rationalize going forward and I know a lot of times as we reconcile the growth rate on snacks.
For example, you know in this particular quarter.
Our power brands on Snyder's Lance grew 3% in market, while the total Snyder's Lance business was up about one and a half or so and that difference I think it's important just to understand that going forward as I would expect that to continue going forward the balance of the non core businesses, which are primarily our emerald that's business and our pop secret business.
Our actually been pretty stable contributors and right now.
We'll always kind of review the portfolio and look at the longer term desire.
To have the optimal mix I think right now we're feeling pretty good would that base business as we move forward and we'll continue to look at it but but more importantly for US I think in this messaging was really about understanding the partner and Allied brands a little better.
Okay. Thank you for that Thats helpful and then.
You know some of the efforts that you're you're making this year.
Require a little bit of a of a buy in for lack of a better word from from your customers right whether it comes to some on shelf changes for where youd like condensed to be placed or.
Certain changes in Rts.
At the same time I think by your own admission, there's a decent innovation slate coming but most of it or the bigger one is coming next year. So can you update us on sort of.
How your relationship is with those customers right now and with all of those changes and I guess I could mention.
Sort of lifting some promotional prices as well.
Right now is everything going sort of swimmingly, there as you expected or is there a little bit of pushback right now in the process.
I think overall, it's I would say its going very well and in fact, I I think in many ways.
You know is a little harder to quantify this.
As you as you get into the journey, but the reality is I think in many ways. We have been absent from the dialogue strategically with our customers on division in the future.
For these businesses and I think as we're getting back to the table.
Really rolling up our sleeves, and starting to see investment and a focus in a very different way. The receptiveness to work together has been very very positive and you know I think.
A lot of times, we've talked about the challenges in soup as a category, but remember the significance of how big This category is and what it represents for center of store for most of the retailer.
Universe, it's critical.
There is a vision and a plan for this and so as you look again I get it a summer quarter, but as you look at a quarter like Q4, where you see overall positive response, not just in our business, but also improvement in the overall category.
It goes a long ways to keep people interested and engaged now I will say I think.
As as perhaps as appropriate I think a lot of the retail universe wants to see the results as does I think all of us in the effectiveness of some of the programs and the plans were doing but as far as where we are in the journey right now and where we've come from I really could not be more pleased with the receptiveness and the collaboration of our retail partners.
Great. Thank you.
Thank you and our next question comes from Bryan Spillane from Bank of America. Your line is now open.
Hey, good morning, everybody and all the best for me as well Anthony Thank you.
So I guess first question just.
Anthony if you could just.
Give us or let us know net leverage on a pro forma basis. So like once the proceeds are put to work.
I'm getting around three times is that is that right.
Yes, obviously I mean, our target remains three times debt to EBITDA, but we won't quite get there with the current proceeds no maybe a little more time with the base business generating positive cash flow, but we will make a meaningful reduction when we get the proceeds.
Okay, and then I guess Mark is we're thinking about that you're going to get you get closer to that target how do you think about.
Ongoing sort of returning cash to shareholders just you know.
The thoughts about dividend increases or share repurchases, just how you kind of think about that going forward.
Yes, I mean, I think as we as we get to more stable footing. We will continue to look at the best deployment of capital and again I think.
All of those are areas that we will continue to explore and make sure that we're trying to optimize value while also.
You know again I've said this before although I think it will come at a very different context.
Perhaps than where we've been in the in the immediate pass, but I do think there are going to likely be some opportunities for some tuck in M&A as well and as we go forward, we will begin to frame that.
And a little bit more clarity, but I do think.
I'd stop short to say right now what the priorities are but of course, our focus is going to be on maximizing shareholder value and we'll continue to look at all those options.
And working with the board to find the plans going forward, but certainly it is good and I think in many ways.
As I think about 19 as we as we complete the year I think one of the strongest elements of of that this year has been that we have taken a lot of that uncertainty.
For the business off the table and so whether that is the balance sheet, whether that is a much more diverse portfolio as it relates to international and the fresh business I think the good news for US is our core business now in the predictability of it relative to the to the variables that we're controlling I feel really good about that and I think that I hope that will also be a strong statement for investors as well as you're thinking about how to how to view our business going forward and although we've got some important proof points in 20 to deliver taking some of that downside off the table I think is a very good.
Very good progress for us in a in a in a year that saw a lot of moving parts, Okay and if I can just one last quick one are there any stranded costs related to the divestitures that you will be absorbing this year that might go away next year.
Yes, and I think we talked about this last quarter, there is about $20 million with each business. Both Campbell fracking Kimball International I think the way to.
Think about it is that then becomes part of our addressable spend on the core against which our cost saving program thats going to address and get after or said another way, Brian we contemplated to a certain degree those stranded costs as we went through the organizational redesign and restructure that we just rolled out a month ago, so progress to get there, but but we certainly had visibility to that and thought about that in some of the design work. We've been doing all right. Thanks for that have a great labor day.
You too bright thanks.
Thank you and our next question comes from Jason English from Goldman Sachs. Your line is now open.
Hey, good morning, folks and Anthony Congrats on a great career at Campbell and good luck on the next chapter.
Hey, Hey, I've got a couple of questions first real quick housekeeping kind of picking up where where mr. splaine, let us on the leverage can you give us what your expectation for cash from operations at fiscal 20 and.
Your best estimate of where you're going to land from a leverage perspective by year end.
So a couple of comments to make on cash, but we had a fantastic year. This year on cash from operations and free cash flow, but as you think about going forward. We don't expect to be at the same level. We are today and first of all to reason one is.
Campbell fresh was a positive cash flow generator candle international with a positive cash flow generator, we won't have those.
In the portfolio going forward.
We had great progress on working capital this year and so although we expect to continue to reduce our working capital probably not at the same pace that we did this year. So that being said, we do expect to continue to generate significant positive cash from operation Thats one of the attributes of this business but.
I don't think we're going to give you an exact number on that one and in terms of the leverage ratio I think will be meaningfully below four times debt to EBITDA by the end of 2020.
Yes.
And as is the unwillingness to kind of frame the cash so over.
A factor of just too many moving pieces right now.
I guess I'm, a little confused on why the lack of clarity on that.
Yes, we're still working through it in terms of finalizing our 2020 expectations for cat phone. So we just need to work through it ourselves versus first and foremost.
Okay and the next question coming back to Sue.
The last couple of years had been a bit anomalous just in terms of the cadence of your Sip built.
Because of the promotional support at retail historically, you've been much heavier shipping in the first quarter it perhaps for a soup season.
With the improved relationships with retailers and as the slightly more aggressive stance should should we expect this to be a more normalized year.
Yes, I think I think sojitz, we're watching closely I mean, one of the things we are realizing though is that and even if you look at this last quarter Weve been.
Kind of I would say.
Running a bit in front of consumption with our net sales in our shipments and part of that is.
A little bit of what we're lapping from a year ago, but it is also a little bit of the recognition that as we strengthen our merchandising programs.
The inventory levels that retailers are needing to support that is a little bit higher than it might have been historically, but I do expect as we get into 20 to have a more normalized year on that you'll always see.
A bit of inventory that's going to build in front of the season, just because of the step up in display and merchandising, but I do think.
As we kind of manage through the year I don't think you'll see quite the volatility up and down.
As we did in 19.
Okay very good thanks, I'll pass it on.
Thank you and our next question comes from Chris Growe from Stifel. Your line is now open.
Hi, Good morning, Anthony My best wishes to you as well. Thanks, so much for all your help over the years.
I just wanted to ask a quick question if I could on.
Our meals and beverages, it's a business that is.
Stabilizing and he had a good fourth quarter performance and that comes admits it seemed like little incremental spending. This year you talked about some of the factors that led to the better performance, but I want to get a sense of.
Given the success, you're seeing already and your desire to spend more aggressively in fiscal 20.
Do you expect that to really take a step forward in fiscal 20, if I can relate to that how much spending you talked about $70 million very color. So at the Investor day does that all that come through in fiscal 20 years, that's going to spread over the future.
Yes, so a couple of things just to ground back on the numbers. So the 70 million we talked about was the soup investment overall if you include.
The stacks business in the broader meals and beverage business. It's a bigger number what we said was about a half about half of our cost savings target over the next couple of years is what we.
Carved out if you will as the investment dollars were planning I do think you'll see that a bit more front loaded.
In 2020, as we talked about it which is a little bit of why I think the calibration of a more neutral year is expected on meals and beverage I do think there continues to be some puts and takes we are encouraged by the support that we are seeing.
Across the businesses, but we do have some work as we've said to make sure that we're doing the right things to set up the portfolio for the future while getting that investment in place and again I do think it important aspect of this will be the contribution from innovation.
Which really is more of a of a 21 factor.
I also think we're trying to be a bit pragmatic and and how were positioning expectations as we validate some of the work that we're doing it I think the good news is.
If were successful.
More more comprehensively on on many of these things I do think you will see an improvement in that meals and beverage business. As we go forward and I think we will continue to update milestones along the way, but certainly seeing the performance on soup seeing improvement.
In prego and pace, although V eight.
It's still showing declines I would tell you that the primary driver of that decline is splash as we work through how we want to position that business for the future, which is including some rationalization on distribution and really trying to get that to a business.
That we think is the appropriate manageable level, while we then pivot on the support for the more plant based messaging that we see on the core business as well as the V.A., plus which is energy and hydration.
And our single serve can business so.
Again, I think we've got really clear Roadmaps now for these businesses and I certainly hope that we continue to perform well, but I do think I want to be a bit balanced as we go forward until we validate some of this effort in some of the work does that make sense, Chris It absolutely does yes that makes a lot of sense. That's was just that was good color and that's why I was looking for thank you.
I have just one other quick one behind that if I could which is there was a comment about over delivering on the value capture.
Ill. So the integration is on track are you getting savings more quickly or more savings is trying to get my head around what over delivering means there.
Yes, I think it's really savings more quickly.
So I think we've been able to execute on a few initiatives.
Ahead of pace I don't think its truly incremental to the program.
But I do think we're obviously continuing to keep that pressure on it as we go into 20 to continue to try to move.
Initiatives as fast as we can as we want to unlock that and is that the fuel.
For the investments that we need on the business. We're pleased that we're getting to it sooner, but I would not say that we are seeing it as truly incremental savings for the overall program. Okay. That's that's good color too. Thanks, so much for your selling and have a great weekend. Thank you.
Thanks, Chris.
Thank you and your last question comes from the line of Robert Moskow from Credit Suisse. Your line is now open.
Hi, Thanks, and best wishes to you Anthony.
Just a couple of clarifying things Mark.
The the price.
Adjustments that you're making in soup it sounds like Theres several things.
There's is there some deep discounts you want to walk away from.
But then you're are you also saying that theres going to be some items, where you want to reduce price to become more competitive.
And then secondly on soup can you give us a little more specifics on the quality improvements that you want to make and where you think theres quality gaps purchased competition yes.
Great Great Great question so.
Your depiction of the pricing is is exactly right. So.
To give you a little bit more color on that I do think especially as you look at our chunky business I would say we had in the absence of some of the support and marketing.
I think some of the promoted price points that we've seen are more aggressive than what I would say is appropriate and sustainable I mean, one of the things that.
As I've said before that's quite powerful about chunky is the quality of that product in its ability to really be.
To be essentially any of the other ready to eat soups on a quality perspective, and so when we're dealing it so deep on price.
I just don't think that's the right platform now what we will try to do is balance a little bit of that with some frequency and then of course, a much more robust marketing program around it as you know I think though and as we've all seen this before.
I also don't want to over set those expectations as I know there will be some perhaps short term.
Impact of that as we move off it but it's absolutely the right thing to do to create.
The margin stability and really the positioning of the brand going forward.
Conversely, I think if you look at brought where we're seeing the greatest amount of competition I think there although I'm not.
I would not say, we want to get deeper on promoted price points I do think our frequency has opportunity to increase as we make sure that those price gaps.
Especially in critical parts of the season are more competitive.
And so I think on both the broth business and selectively on condensed where we still see a little bit of outlier as it relates to.
Particular price gaps I think you'll continue to see us again, not so much on lowering absolute price points, but adding appropriate frequency on merchandising. So that's the balancing act on pricing and your second question is actually a great combination to that discussion on pricing, which is quality. So the places where I think we have the greatest competitive pressure, whether it's on brought or whether it's on condensed is where you're going to see.
A significant step up in.
Quality and that will come both from some product improvements and investment so think of enhancing ingredients and again as I said at Investor Day, We are really focused on our four core.
SK use in flavors on condensed which are cream of mushroom cream of chicken chicken noodle and tomato. So across all four of those you will see a combination of improvement in quality, while also really heightening.
Some of the inherent benefits of the products within the existing formulations that we think are much stronger differentiation than we've been using in the past whether that is double stock in similar time on brought up whether it's six tomatoes in every case tomato soup. There's a variety of things that we think we can really use to help and we've done extensive research now to really understand especially on our lapsed users. So the consumers that are either trading to lower priced offerings or departing our segments. What is really driving that behavior and we've targeted the quality improvements to really try to answer those questions and so we're feeling really good about that and I think most of that will be ready.
As we go into the season, there will be a few of the quality improvements that will either below in in the back half of the season or couple that likely won't be fully in place until 21, but I am feeling good about what we'll have to work with as we go into the 20 soup season.
It's very helpful and before I, let you go here.
You mentioned some flanker.
Products in Rts and content that lost distribution is that new since the analyst day or was that already contemplated when.
It was already contemplated but I do think as we start to try to help everybody see the detail of the soup results because we're all obviously going to be watching it very closely.
What I'm really trying to do is make sure we're really crystal clear on what the puts and takes are and to a certain degree why why do why are our expectations what they are.
I do think there are some.
Elements within that distribution that again.
I do expect it to mitigate and of course once we get the innovation going that's going to be a big help but I do think there are some things within both of those businesses that I would expect to see especially in the first half of the year.
Thats, great all right. Thanks, so much.
Thank you and that concludes our question and answer session, ladies and gentlemen, Thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a great day.