Ladies and gentlemen, thank you for standing by, and welcome to the Campbell Soup’s Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ms. Rebecca Gardy, Vice President of Investor Relations. Ma'am, you may begin.

Good morning, and welcome to Campbell's second quarter fiscal 2021 earnings presentation. I'm Rebecca Gardy, Vice President of Investor Relations. Following the completion of this call, a copy of this presentation and a replay of the webcast will be available at investor.campbellsoupcompany.com. A transcript of this earnings conference call will be available within 24 hours at investor.campbellsoupcompany.com. 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. Please refer to Slide 3 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. On Slide 4, you will see our agenda. With us on the call today are Mark Clouse, Campbell's President and CEO; and our Chief Financial Officer, Mick Beekhuizen. Mark will share his overall thoughts on our second quarter performance and in-market performance by division. Mick will discuss the financial results of the quarter in more detail and review our guidance for the full year fiscal 2021. Mark will come back to share his perspective on our outlook beyond the pandemic, and we will close the call with an analyst Q&A. With that, please let me turn the call over to Mark.

Thanks, Rebecca. Good morning, everyone, and thank you for joining us today. Before I turn to the results of the quarter, I want to take a moment to thank all of our teams again, especially our frontline colleagues. We have now passed the 1-year mark of working within this challenging COVID-19 environment, and I'm very proud of their continued performance and dedication. Campbell delivered strong second quarter results, with growth in all 3 key financial metrics. Organic net sales increased 5%, with continued demand across both divisions, fueled by accelerating in-market results, including positive share progress across most of the portfolio and a strong holiday period. Net sales were tempered by continued foodservice weakness following a resurgence of COVID-19 cases in December, which led to greater away-from-home restrictions, as well as some supply constraints given these cases led to increased absenteeism rate in our plants during the month. The foodservice weakness and supply constraints each created about 1 point a headwind in the quarter versus our expectations. The labor situation has since improved significantly, and we continued to make steady progress on supply going into the second half of the year. We reacted quickly to these headwinds, appropriately shifting spending to reflect this pressure. But where supply was available, we executed our planned increased investment in advertising and consumer promotion on our core brands. Taking everything into account, we had 8% adjusted EBIT growth and 17% adjusted EPS growth, leading to a very good quarter. By segment, Meals & Beverages posted 6% net sales growth, punctuated by a very successful soup season and the continued strong performance of brands like V8 and Prego. This was partially mitigated by declines in foodservice. The Snacks business delivered another solid quarter, with sales growth of 4%, largely driven by our power brands in…

Thanks Mark. Good morning everyone. Turning to Slide 11, as Mark just shared, we once again delivered strong results, with another quarter of sales growth driven by continued elevated consumer demand, as well as growth in adjusted EBIT and adjusted EPS. Our topline growth of 5% reflected healthy in-market consumption of approximately 8% in the quarter, tempered by declines in foodservice and some COVID-19-related supply challenges that Mark discussed. Adjusted EBIT increased 8% as higher sales volumes were only partially offset by higher adjusted administrative expenses. Adjusted EPS from continuing operations increased by 17% to $0.84 per share, reflecting an increase in adjusted EBIT as well as lower adjusted net interest expense. Year-to-date, our organic net sales, which exclude the impact from the sale of the European chips business, increased 7% driven by strong in-market consumption growth in both Meals & Beverages and Snacks. Adjusted EBIT increased 13% reflecting higher sales volume, improved adjusted gross margin performance and higher adjusted other income, offset partially by increased adjusted administrative expenses. Year-to-date our adjusted EBIT margin increased year-over-year by 110 basis points to 18.5%. Adjusted EPS from continuing operations increased 23% to $1.86 per share, reflecting the increase in adjusted EBIT and lower adjusted net interest expense. I’ll review in the next couple of slides our second quarter results in more detail and provide guidance for the full fiscal year 2021. Breaking down our net sales performance for the quarter, reported and organic net sales increased 5% from the prior year. This performance was largely driven by a 4-point gain in volume across the majority of our retail brands, partially offset by declines in foodservice and in partner brands within the Snyder’s-Lance portfolio. Additionally, we took a strategic approach to dialing back promotional spending in both segments where we faced supply constraints…

Thanks, Mick. Before we conclude, I want to share my perspective on the key factors underpinning our confidence in our outlook beyond the pandemic. By now, I know you have heard a great deal about the stickiness of all new households gained throughout the pandemic from essentially all of our peers, with a wide range of data and facts supporting that thesis. We very much agree, and we see similar trends in our own research and data. I’d like to conclude today with three critical and differentiating points: key factors that serve to underscore Campbell’s advantaged position going forward and will fuel our future growth trajectory. Importantly, two of them have very little to do with COVID-19 or the stickiness of new households. The first is our Snacks business, which as I mentioned earlier consists of a unique and differentiated portfolio of brands that represents approximately 50% of the company’s annual revenues. This business was growing before the pandemic, and we expect to sustain or exceed those historical growth rates going forward. Snacks also includes a margin structure which we believe still has significant opportunity for improvement versus the snacking peer group average, even after we deliver our current value capture. We are finalizing our plans to unlock more value and we look forward to sharing more details with you as we move forward. Second, no matter where you stand on the retention of new households gained during the pandemic, it is undisputable that Campbell’s business, particularly our Meals & Beverages division and especially soup, is coming out of this period more advantaged and with renewed relevance. Nearly 13 million new households purchased Campbell’s soup since the initial peak of the pandemic, of which almost a third are millennials, outpacing both key competitors and the category average. We have also…

[Operator Instructions]. And our first question comes from Andrew Lazar from Barclays.

Mark, I first wanted to just touch base a little bit on organic growth in the quarter. You went through some of the factors that limited organic growth maybe relative to your ingoing assumptions. One would assume, obviously, foodservice recovers a bit, of course, as restrictions are lifted and such. But I'm trying to get a better handle on where the company is around supply and capacity. Is that largely behind the company at this point? Or does some of that still linger? And the reason I ask you is I'm trying to get a better handle on the relationship between sort of consumption and shipments as we go through the fiscal third quarter. Do those -- are those more consistent with each other? Is there the opportunity to rebuild inventory such that shipments maybe exceed consumption for a period of time? I'm just trying to get a handle on that, and then I've just got a quick follow-up.

Yes. So a couple of thoughts. First, again, I think as we said in our comments, a bit frustrating, of course, to see the top-line when the underlying fundamentals are as strong as they are. In-market consumption was up 8%. And a really important step forward for us was the shift in share performance, where we had 75% of the portfolio growing share, including some businesses that were really important for us to get back on our front foot, like ready-to-serve soup, for example, and Snyder's of Hanover pretzels. Both of which had been a bit challenged on share, and we wanted to make sure we turned them around. I guess the other good news about the timing and sequence of some of the pressure we experienced, we had all of the inventory in place for the holiday and kind of the key drive period, which is why we did so well during that timeframe in-market. Where it hurt us was a bit in the replenishment of that as we were exiting the quarter, and as you said, driven really by 2 things. The significant step back up in COVID cases was the root cause, but it impacted both our foodservice business, as well as absenteeism specifically in our plants. We were -- in the month of December, we crossed the double-digit line on absenteeism, which was really the highest we had seen, which really did reduce a little bit of our firepower as we had expected to be able to get in front of consumption and ship a bit ahead of it. The good news is, both of them I would describe generally as episodic in nature, and that as we finish the quarter and went into Q3, both of those we're seeing normalize and improve. And remember, in…

Great. And just a very quick one. It might be too early, but in markets where we've seen certain restrictions get lifted, maybe fully lifted in some cases, and getting back to some form of normalcy, I appreciate all the survey work you've done and a sense of where consumers sort of heads are at. Any sort of real-time data that you see in some of these regions or states that have more fully reopened around what maybe retention has looked like in actuality? I realize it's still on the early edge of things.

Yes. It's a little bit too early. But what I can tell you we've done is we've created essentially a bit of a map of the country in evaluating the specificity of different data points in conjunction with reopening. And so us like you are looking for those proof points to validate what is a lot of the hypothesis that we have. And so I would say it's too early to give you any conclusions, but we're set up well to read that as quickly as possible, make any adjustments we need and really begin to put some facts, specific facts behind some of those assumptions we've talked about.

Our next question comes from Ken Goldman from JPMorgan.

So I wanted to pick up a little bit where Andrew just left off. It sounds like most of the work you've done on the stickiness side is still theoretical. And I appreciate that you're doing some really good work in terms of surveying consumers and so forth. But we're in such unique times that I just wonder how much rate we really should put on things like surveys at this point just given that I don't think consumers necessarily know what they're going to do coming out of this. And -- but I would love for -- you ought to be right, all my CEOs to be right, it will be much more fun to cover a space where things are growing and sales are good in the opposite. But is there any -- I guess what I'm getting with this, is there any particular data point that you have that gives you the amount of confidence that you might need to make the kind of confident statements that you're making today about stickiness? And I'm not trying to suspect. I really just want to understand it, Mark.

Yes. Sure. Sure, Ken. No. Look, I understand the question. And certainly, this is not a unique conversation, and it happens pretty frequently these days in our industry. I will say we did a few things. And we have targeted our research in a few ways to try to inform certain thinking that's just simply different than how many people are going to continue to cook or how many people are claiming that they'll continue to use our products. I'd kind of give you 2 areas. One, we've gotten a lot sharper on how we feel using the survey work to really understand how we hold up against competitive choices. Because one of the things that I think will matter a lot here very quickly as we start to lap the initial surge and get into COVID is how do we feel about our comparative position, and therefore, our ability to manage through share positive performance or differentiated performance. And that was an important part of the work that we've been doing and trying to identify where we think we're in stronger positions. And I was pleased. I was really pleased with some of the items that are in more competitive spaces. And setting aside for a moment, whether you're going to continue to use us, did you feel we perform better than some of our competitors, I think is an important insight and a little different than just, are the households going to remain sticky? I think the other thing that we're doing a lot of is looking for places where we could be exposed where there may be dissatisfiers. So instead of just simply focusing our work on trying to build the case or prove the point that people are going to keep using it, we actually kind…

No. I think that's very fair on a qualitative level. I would just hope that as you think about guiding ahead and so forth, maybe it would behoove a lot of companies to not assume as much stickiness as they think will happen and then maybe surprise to the upside. But I will leave it there.

Yes. And one thing I'll just say, Ken, as you leave, I mean that was also part of the reason why I wanted to highlight a few things that are really not related to COVID within our portfolio. I mean, remember, we've got 50% of our business that is a Snacks business that has been growing pretty steadily before and through. And we really expect it to continue to grow afterwards. Not all of our peers have that particular composition. And further to that, again, I know I'm kind of baiting the hook here for conversation on margin around Snacks. But there is, I think, a continued opportunity for value creation. And with the work that we've done on our balance sheet, our ability to invest thoughtfully and in a disciplined way to create value, I think, gives you some reasons to think about the business differently, that doesn't require anything as it relates to stickiness of households. And so I want to -- I know a lot of discussions around household retention, but we've got a couple of really big things in the business that are far less related to that.

Our next question comes from Bryan Spillane from Bank of America.

And I guess I'll take the bait on the hook, right, in terms of margins in Snacks. But maybe, Mark, if you could maybe tie that into also capital allocation, right? Because you've talked about that. And arguably, that's going to be the more important driver once we get past whatever the pandemic is. So I guess 2 related questions. One, does an acquisition that creates more scale in Snacks, is that a pass to higher margins? And then the second, just as it relates to capital allocation and I think what you're implying in terms of M&A, maybe could you think about how Campbell's -- and M&A strategy at Campbell's might line up relative to some of the companies you've been at before, right? Pinnacle was pretty good at it. Obviously, Mondelez was a creation of a lot of M&A. So just trying to get a sense of how you're thinking about that capital allocation.

Yes. Okay. So let me start a little bit with the Snacks question. And again, I really do expect us in the next few months, again, not to put a particular date, but I do imagine as we go into the fall, we're going to be in a good position to have a more robust dialogue with you about kind of this next chapter of the company's strategy, which will include, in my mind, a lot more granularity around some of the things that we're talking about now. But I will say this, on the margins on Snacks, if you look at kind of where we are in our journey right now, we're about 80% of the way through value capture. We're now up and running on SAP, which is a really important step, as many of you know, in these integrations and transitions. And so it's allowing us to continue to build our insights as we look forward. And where that value capture has put us, if you think about the beginning of the journey to where we are now, the gap between our margin and kind of the snacking averages, we've closed about 1/3 of that gap. So there's still about 2/3 of that remaining. And if you look at the reasons why, and you kind of start from manufacturing, all the way to the store, you see a fair amount of inefficiencies even after we complete the value capture, that gives us a lot of confidence that we're going to find opportunities. For example, we've got 1,300 locations holding inventory right now in our supply chain. And yes. No matter how you cut the pie, that is not our most efficient foot forward. And so our ability to go after each of those elements with kind of…

Yes. That makes sense. Thanks, Mark.

Our next question comes from Jason English from Goldman Sachs.

I'm going to take another nibble at that hook from a slightly different angle. I hear you loud and clear, Mark, if we benchmark against some of the bell others in the space, like a Frito or a Mondelez, but that just seems like an unfair comparison. If I look at, say, your 18% to 19% EBITDA margins in Snacks, they look great, especially when I contemplate you're somewhat subscale relative to the big leaders, your profit sharing arrangement with independent distributors. Your portfolio is exceptionally complex. And you've got a decent chunk of [lap] sales that are derived on a pretty low price point, suggesting that it's not really a cost per ounce issue. It's a price per ounce issue for much of that. So how is attacking costs, like where are the opportunities? Because when I look from the outside looking in, I don't really see the opportunity. I see a business that's sort of already been rightsized in terms of margin and one that's probably where it should be. What am I missing? Can you put more teeth on this one, please?

Yes. I mean, I think it's really, Jason, is if you look at the redundancy and the inefficiencies that exist in a network that was built independently and really not through the lens of efficiency. I think the -- as you described, the complexity of our portfolio, there is no question that what is a little unique about us is the opportunity, I'd say, both the scale and strength of operating within 2 aisles of the store. But our portfolio is really not as complex as you may think. The partner brands is something we've been working hard on over the last 2 years. And we've got a little bit of work still ahead of us to make sure that we've got the right partnership model that enables us to eliminate a lot of that complexity while still generating the benefits. So still more work to do there. But I think if you really kind of go from our manufacturing footprint, to our distribution and warehousing footprint, all the way to our route to market, you're going to see opportunities across all 3 of those buckets where we're going to be able to drive greater levels of efficiency than what's there today. And again, the good news here is, it doesn't necessarily require us to get to a Frito-Lay to the highest end of the Snacks margins. But even as we move into closing that gap, there's significant value to be created. And as you think about kind of our historical growth rate of 3%, with a headwind of about 1%, as we've navigated kind of the managing down of the partner brands, I think you could expect that growth rate to at least continue, if not improve, as we go forward. And so you put those pieces together, and I think the contribution of what represents 50% of our company becomes a significant benefit and a tailwind for us that I think can continue to contribute going forward. Now in fairness, Jason, I think you like others are going to want to see a little bit more of that blueprint, and I get that. And that's what we're working on now and certainly would anticipate sharing more granularity with you as we go forward. I kind of raised it now though because I think a lot of the conversation, rightfully so, is about what's coming next, where our company is focused in the future coming out of the pandemic. And I point to this, it's just an area that's not related, kind of to Ken's question earlier, on stickiness of households. This is really about our ability to execute into and to identify those areas within our own existing business model.

Our next question comes from Robert Moskow from Credit Suisse.

I have a different kind of question about Meals & Beverage. There's been capacity constraints for about a year, for understandable reasons. You say a lot of it has to do with labor absenteeism, but also just overall capacity. So I was curious. As you entered this year, in retrospect, is there more that the company could have done to either hire more or take on more co-packing capacity to meet this surge in demand? And did you choose not to? Did you say, we're going to choose not to do that? Maybe it's not the sustainable thing to do. And then the second part of this is, as you get more data on the stickiness, what happens next? Do you then have to take those steps? Do you have to expand soup? Do you have to expand sauce's capacity? There's a lot talking -- a lot of talk here about Snacks. But are the things that you're going to have to do in Meals & Beverage to cope with a higher demand plateau?

Yes. No. It's a very fair question and one that I can tell you, we've spent a fair amount of time asking ourselves. I think let me start with the labor standpoint. I really don't think there's any more we could have done on hiring. I mean we have hired 20%, an additional 20% of our entire workforce over the course of the pandemic. And we did that because we understood that we needed some flexibility as it related to our protocols around quarantining as well as the expanded demand that we were seeing. So when I think about, did we let up there at all or should we have pushed harder? There really was not anything more that I can see that we could have done on the hiring side. They simply ran into -- and if you think about where some of our facilities are, there just was a limit to how many -- how much availability we ultimately had to incrementally hire, but it was certainly not for lack of effort. I can tell you there are career fairs around the country. And I'm happy that we were able to hire 2,000 people. I think that was a -- it came at a good moment. But certainly, would it have been nice to continue to have a little bit of more flexibility? Certainly. In the month of December and January where we saw this renewed surge, it would have been helpful at that moment. But I think the teams have done a very good job at trying to maximize what that potential is. On the capacity side, so what have we been doing or what have we done? I think it's a little different by brand. If you really look under the hood and you say, okay,…

And that does conclude our question-and-answer session for today's conference. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect. Everyone, have a wonderful day.