The Campbell Soup Company is hosting a Third Quarter Fiscal 2023 Earnings Conference Call. Rebecca Gardy, the Chief Investor Relations Officer, is introducing the call and will be joined by Mark Clouse, President and Chief Executive Officer, and Carrie Anderson, Chief Financial Officer. The call will include pre-recorded remarks followed by a live webcast Q&A session. Participants are asked to limit their questions to two. The call is being recorded and a replay and transcript will be available on the company's website. Forward-looking statements will be made and non-GAAP measures will be discussed. The agenda for the call is included in the presentation.

Mark Clouse discussed the company's third quarter performance which was in line with expectations, with strong mid-single digit net sales growth led by favorable net price realization and planned low-single digit declines in adjusted EBIT and adjusted EPS. The performance was led by a tremendous quarter in Snacks, and Meals & Beverages brands benefitted from their strong value and convenience. The company is back to pre-COVID service levels in the mid- to high-90s and there is no expected further significant inventory-driven volatility.

The Meals & Beverages division experienced a 1% decrease in organic net sales, primarily due to a cycling of significant retailer inventory rebuild in the third quarter of fiscal 2022. Despite this, customer service levels improved by 25 points compared to the prior year, and the company is confident in the growth potential of their iconic brands. The soup portfolio experienced flat dollar consumption, due to inflation-driven pricing, below historical norm elasticities, and some increasing share pressure from competitors.

Campbell's soup sales have declined 11%, mainly due to cycling inventory from a year ago, but the company is confident in its ability to grow the business. The company has seen success in its condensed soup, especially cooking, and its condensed eating icons. However, the Healthy Request Kids' flavors have been a weak point. The company has also seen success with its Chunky Soup line, which has been transformed from a product bought on deep discounts to a great everyday value. Pacific has also been a great acquisition, driving new customers to the portfolio.

Pacific's soup business has seen impressive growth over the last four years, with a 56% increase in dollar consumption and 0.9 share points. The Snacks business has also seen strong growth, with 12% net sales growth and a 15% increase in in-market dollar consumption compared to the prior year. The eight power brands within the Snacks business have seen a 40% increase in dollar consumption over the last four years, with double-digit growth in the quarter. Customer service levels have also been improved, now averaging 95%.

The Snacks business has seen steady growth over the past two years, with increased service levels, contributions from new product and packaging innovations, and planned investments. Goldfish has been named teens' most preferred snack brand for the fourth time in a row, and other brands such as Kettle Brand and Late July have seen strong results from new LTOs. Operating earnings have grown by an average of 13% and margins have expanded 130 basis points over two years, with an absolute operating margin for the year of over 14%. The company is confident that it will continue to show steady improvement in fiscal 2024 and remain on track for its longer-term Snacks operating margin goal.

In the third quarter, Campbell's organic net sales increased 5% due to favorable inflation-driven net price realization and supply chain momentum, partially offset by volume and mix declines. Adjusted EBIT decreased 2%, resulting in a 110 basis point decline in adjusted EBIT margin to 14%. Adjusted EPS decreased 3% to $0.68 due to lower adjusted EBIT and a higher adjusted effective tax rate. Year-to-date, however, top-line and adjusted EPS were both up double digits compared to the period last year, and adjusted EBIT was up 9%.

In the third quarter of fiscal '23, the impact of lower pension and postretirement benefits reduced year-to-date adjusted EBIT by $37 million and adjusted EPS by $0.09. Dollar consumption growth was 8%, outpacing net sales growth of 5%, driven by lapping of retailer inventory rebuild in the prior year period. Net sales grew by 12 percentage points from inflation-driven net price realization, but volume and mix declined by 7 percentage points. Adjusted gross profit margin declined 60 basis points to 30.9%, driven by unfavorable volume and mix, but was offset by favorable net price realization and productivity improvements.

In order to mitigate core inflation, which was 8% in the third quarter, the company has implemented targeted pricing and trade optimization, net pricing of 12%, and supply chain productivity improvements, among other measures. In addition, marketing and selling expenses increased 3%, driven by higher selling expenses but partially offset by cost savings initiatives. Advertising and consumer promotion was down 2%.

Adjusted administrative expenses increased by 5%, resulting in an adjusted EBIT margin decrease of 110 basis points to 14%. This was partially due to lower pension and postretirement benefit income, which had a $0.03 impact on adjusted EPS. In the Meals & Beverages segment, reported net sales decreased 2%, with organic net sales decreasing 1% due to inventory and elasticity-driven volume and mix declines. Operating earnings for this segment decreased 17%, with 30% of the decline due to lapping the insurance settlement in the prior year.

In the third quarter, the Snacks division saw a 12% increase in net sales, both reported and organic, due to favorable net price realization and supply chain productivity improvements. Operating earnings in the quarter increased 41%, and operating margin increased 330 basis points to 16% compared to the same period last year. Cash flow from operations was $918 million, and over $475 million was returned to shareholders through dividends and share repurchases.

Cash flow from operations was lower than the prior year, but higher cash earnings partially offset this. Capital expenditures were up from the previous year, and cash outflows from financing activities were $535 million. At the end of the quarter, there was $301 million remaining under the current share repurchase program and $104 million remaining under the anti-dilutive share repurchase program. The company is reaffirming its net sales, adjusted EBIT, and adjusted EPS outlook, and is expecting full year capital expenditures of $360 million, up from the previous guidance of $325 million.

In this paragraph, Mark Clouse discusses Campbell's third quarter results, which were in line with expectations, driven by strong price realization and operational execution. Clouse notes that there was volume and mix decline in the quarter, but it was largely a function of year-over-year comparisons. He also mentions the company's capital allocation priorities and then turns the call over to the operator for Q&A.

Mark Clouse discusses how Campbell Soup was able to recover from the inventory replenishment of the third quarter of last year and is now back to pre-COVID levels of service. He argues that the 5% net sales growth and 7% negative vol/mix should not be seen as an indicator of what is to come as the inventory replenishment had a significant impact on both net sales and vol/mix.

The supply chain gave a benefit faster than expected, but the 5% growth rate was still lower than the 8% consumption in the market. The 60 bps headwind from pension income, 50 bps from insurance settlement, and the mix dynamic of the inventory cycling contributed to the lower gross margin and EBIT margin. Despite this, the company is still on track to meet their guidance for the year. They will continue to invest in Q4 to ensure they have room to do so.

Mark Clouse is feeling positive about the Snack business, which is seeing broad-based growth, significant share improvement, strong and improving vol/mix, and increasing margin. He expects to continue to make progress across all fronts, including margins and profit, and to sustain growth. He does not think that the current quarter is a bellwether for the industry or for the company.

Campbell's unit share losses in condensed have been decelerating, but the company's primary competitor is investing more in price. Mark Clouse states that there is no evidence of a "race to the bottom" in the soup category, but Campbell is focused on three areas to ensure the long-term health and sustainability of soup: relevance, growth (with a CAGR of 4% over the last four years), and two areas of focus in condensed.

The condensed soup market has seen a 5 share point increase in market share, as well as a 0.6 share point increase in the cooking area, particularly from younger households. The company has seen pressure from private label, and is being thoughtful about the value proposition of their higher-priced flankers. The company sees the market in a different space than it was in the past, and is aware of the need to probe to understand it.

The ready-to-serve soup category has seen a resurgence as people have come back into supply. Chunky has been an especially successful transformation, becoming a source of protein and convenience. Pacific has been the fastest-growing ready-to-serve brand and Home Style has been up 10%, growing share in the quarter. These successes have put the company in a good position to benefit from the resurgence in the category.

Mark Clouse is discussing the success of the acquisition of Pacific, which has grown 60% since the beginning of the COVID pandemic. He believes that the portfolio of products is different and there is a higher level of commitment to the product than ever before. He also mentions that they plan to ramp up marketing spending for snacks in the fourth quarter and to use marketing for soup in the next fiscal year to help drive volume without having to be competitive on price.

The author states that despite the economic backdrop, the company has been able to position their products as a great value tool for solving the dilemma of what to eat for dinner. To maintain this success, they need to get the pricing and promotion right, but also focus on differentiation. They have a range of products from Chunky to Pacific to SpaghettiOs, Swanson Chicken and Home Style ready-to-serve that have all seen growth in the third quarter. The goal is to maintain a balanced attack of pricing, promotion and differentiation to ensure continued success.

Carrie Anderson explains that core inflation came in at 8%, which is lower than last quarter's 14%, and price was still a healthy contributor for the quarter. The gross margin bridge is a bit wider than last quarter due to unfavorable volume and mix, as well as the lack of an insurance storm settlement that was present last year. Despite this, the core inflation is going in the right direction and price is offsetting the other items.

Mark Clouse discussed how the company has been reducing their investment in traditional advertising and marketing in favor of in-market marketing and support. He specifically mentioned the success of their meal solution platform in store, which is helping people put together simple meals for a low price. This is due to consumers wanting to stretch their dollar, and the company has seen double-digit growth in categories like soup, Prego, and Pace.

Mark Clouse explains that the company's goal is to get to a 9-10% range for marketing and selling. In Q3, they were at 8.7%, and in Q4 they hope to get closer to 10%. They are focusing more on store marketing and investing in the Meals & Beverage business. He also mentions the $1 billion sauces plan from the Investor Day, where 15% of the target was meant to come from premium brand extensions and M&A. He believes that this area around cooking and quick meals is the sweet spot for the company, as it has high consumer relevance and an opportunity to win.

Mark Clouse discussed the success of the Snyder's-Lance acquisition and how it has helped improve the Snacks segment margin. He noted that the brands Kettle and Cape have seen a 4 share point increase, and [indiscernible] has seen a 3 share point increase. He also mentioned that the balance sheet is in a great position for further M&A and that the vision has not changed since Investor Day.

Mark Clouse discusses the success of the Snyder's-Lance brands, which have seen increases in sales and margins. He attributes this success to the acquisition and the benefit of scale. He also mentions the change in leadership in the supply chain and how it will affect results in the upcoming fiscal year.

Two years ago, the supply chain for the company was average at best. However, despite the challenge of the COVID-19 pandemic, the company was able to improve their supply chain and now they are operating at pre-COVID levels, putting them in a best-in-class position. The company also sees supply chain as a potential contributor to productivity and margin growth in the future. They are confident that they are well-positioned to navigate the current environment.

Mark Clouse states that consumers have been resilient but are beginning to feel pressure in terms of what categories they are buying and when they are buying. He suggests that companies can focus on value without having to resort to chasing pricing down, and suggests different ways to frame value such as comparing a meal cooked with condensed soup to something from the frozen section or ordering food away from home.

The speaker believes that success in the operating environment and customer relationships will depend on providing customers with solutions that meet their needs. This includes executing marketing plans, bringing innovation, and timing and sequence of promotions. Additionally, having a strong supply chain will be important for outperforming competitors and winning in the market.

This summary was generated with AI and may contain some inaccuracies.