Good morning. My name is April, and I will be your conference operator today. At this time, I would like to welcome everyone to the Campbell Soup First Quarter Fiscal 2022 Earnings Conference Call. Today's call is being recorded. All participants will be in a listen-only mode, until the formal question-and-answer portion of the call. Thank you. With that, I would like to hand the conference over to your host, Ms. Becca Gardy. Ms. Gardy, you may begin your conference.

Good morning. And welcome to Campbell's first quarter fiscal 2022 earnings conference call. I am Rebecca Gardy, Head of Investor Relations at Campbell Soup Company. Joining me today are Mark Clouse, Campbell's President and Chief Executive Officer; and Mick Beekhuizen, Campbell's Chief Financial Officer. Today's remarks have been pre-recorded. Once we conclude the prepared remarks, we will transition to a live webcast Q&A session. The slide deck and today's earnings press release have been posted to the Investor Relations section on our website, campbellsoupcompany.com. Following the conclusion of the Q&A session, a replay of the webcast will be available at the same location followed by a transcript of the call within 24 hours. 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 three 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 each of these measures to the most directly comparable GAAP measure in the appendix of this presentation. As stated in the release from this quarter onwards, adjusted net earnings will exclude unrealized mark-to-market gains and losses on outstanding undesignated commodity hedges until such time that the related exposure impacts operating results. Accordingly, fiscal 2021 adjusted results and guidance for adjusted EBIT and adjusted EPS growth rates reflect this change. Also beginning this fiscal year, the foodservice and Canadian business formerly included in the snack segment is now managed as part of the Meals & Beverages segment. Segment results have been adjusted retrospectively to reflect this change. For additional information on these updates, please refer to today's Form 8-K. On slide four, you'll see today's agenda. Mark will share his overall thoughts on our first quarter performance as well as in-market performance by division. Mick will discuss the financial results of the quarter in more detail and then review our guidance for the full year fiscal 2022. And with that, I'm pleased to turn the call over to Mark.

Thanks, Rebecca. Good morning. And welcome to our first quarter earnings call for fiscal year 2022. As you saw in our press release, we reported solid performance in the quarter, especially when compared to the significant growth in the prior year and considering the rapidly evolving macro environment in which we currently operate. Organic net sales were down 4% for the quarter, driven by the expected lapping of prior year retailer inventory replenishment, as well as constrained supply in the current quarter. We were, however, up 5% versus fiscal 2020 and consumption was up 2% versus prior year and up 9% versus 2 years ago, signaling strong persistent consumer demand. This dynamic resulted in a six point difference in net sales versus consumption in measured channels, a relationship we do not expect to continue through the remainder of the year. Like many of our competitors and customers, we face supply chain pressures, particularly around labor constraints and transportation capacity, and our net sales results reflect those pressures. I am very proud of how our teams navigated costs related to this volatility. Their strong execution, combined with effective pricing actions across both segments led to adjusted EBIT and adjusted EPS results consistent with our expectations and in line or ahead of 2 years ago. On slide seven, with end market demand remaining strong across both of our segments and the pricing actions we announced at the end of our prior fiscal year now reflected on shelf, we feel confident about the outlook for the full fiscal year. We recently announced additional inflation justified pricing actions to offset continuing increases in ingredient and packaging costs, logistics and labor. This second round of pricing should be effective in January and evident on shelf in the third quarter. This will result in some added…

Thanks, Mark. Good morning, everyone. Turning to slide 17. As Rebecca mentioned at the start of the call, from this quarter onwards, we will exclude from adjusted net earnings, unrealized mark-to-market gains and losses on outstanding undesignated commodity hedges until such time that the related exposure impacts operating results. Our adjusted financial results and guidance reflect this change. For the first quarter, as we left 8% growth in the prior year, organic net sales declined 4% due to the anticipated cycling of year ago retailer inventory recovery and supply pressures. The resulting year-over-year volume decline more than offset the favorable impact of net pricing in the quarter. As Mark highlighted earlier, consumer demand remained strong. In fact, in measured channels it was six points above our total net sales performance. All said, this past quarter, our organic net sales on a comparable basis were 5% higher compared to 2 years ago or the first fiscal quarter of 2020. Adjusted EBIT decreased 15% compared to prior year, which was 1% higher on a 2 year basis despite the significant levels of inflation on ingredients packaging, labor, warehousing and logistics. Our adjusted EBIT margin was 17.4% compared to 19.5% in the prior year and slightly down from fiscal 2020. Adjusted EPS from continuing operations decreased $0.12 or 12% versus prior year to $0.89 per share, which remains well ahead of fiscal 2020. On the next slide, I'll break down our net sales performance for the first quarter. As I mentioned, the impact of lapping the post-COVID search retailer inventory recovery and supply constraints, largely related to industry-wide labor challenges along with select material constraints, held back our ability to meet the continued elevated demand. The operations team continued to execute well in a challenging environment. Organic net sales decreased 4% during the…

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

God morning, everybody.

Hi, Andrew. Good morning.

Thanks for the question. I guess, I wanted to start off a little bit. The quarter came in a little bit differently than I think a bunch of people have modeled. It sounds to me like sales were more broadly in line with your expectations. And maybe consensus didn't sort of fleet take into account the severity of the year ago, the inventory replenishment and such. But it gross margin contraction was certainly less severe than we've modeled. So I'm trying to get a sense whether this was better than your sort of internal expectations? And if so, what drove that? And it sounds to me like your expectation is for year-over-year margin compression to be worse in 2Q than 1Q. I just want to make sure, I'm sort of hearing that correctly and perhaps what are the key drivers there? Thanks so much.

Sure. Yeah. Thanks, Andrew. I'd say generally, the results came in pretty aligned with our expectations. As we had pointed out in the Q4 earnings, we had a pretty significant lap of retail inventory replenishment as we were kind of - if you remember at that time, coming out of what I would describe as kind of the initial surge - first few quarters of surge of COVID. And we had a lot of recovery, especially in our Meals & Beverages business, which in the first quarter a year ago was up 11%. Soup was up 21%. And that's what we were lapping. And so, we generally expected that and it came in fairly consistent. I do think on the supply side, especially as it related to Snacks, there was a little more pressure than we probably expected as labor was a bit more significant. I think the good news is we've taken a lot of corrective actions, especially over the last 30 to 60 days, and we're seeing real progress. So our vacancy rates are down about 30% from where they were a month or so ago, and we expect that to continue to progress as we go into the second quarter and then more completely, I'd say, in the second half. So top-line, pretty close, a little more pressure on supply. On the gross margin side, I feel great about how the team is navigating this moment. It's - as you know, a lot of moving parts as you go into trying to predict what these quarters are going to entail. And I think we've done a very good job executing both on our pricing strategy, as well as our productivity and the performance of the vast majority of our plants reflecting, again, just a terrific job by…

Thanks for that. And then just briefly, I guess, how do you feel like the company is positioned around heading into sort of the core, if you will, or the teeth [ph] of soup season with respect to retailers ability to supply what you think the demand will be the ability to be at your levels of expected levels of promotional activity in the market that you would normally hope to have the kind of pressure in the market at this time of year? Are you at a point where you feel like the soup season can be somewhat more normal in that regard with respect to like a retailer activity and not being at any sort of relative disadvantage, let's say, to competitors in the market for whatever reason?

Yeah. I think a couple of things in that question that are interesting. I think the first thing I would just say is the good news is, although we do have a supply constraints in certain areas, they tend not to be right now in our soup and our core broth businesses, which are obviously very, very important as we go into this the kind of back half of the holiday season and into soup season. So, we're feeling good on supply there. The team has done a really good job in continuing to build capacity. Execution has been very good in those facilities. And so, we're feeling pretty good about our ability to supply into the season. I also feel good about the programming that we have. We've got some good innovation coming in, in a couple of areas. The execution on the marketing side for both our Chunky business, as well as our condensed soup business has been very, very good. I do think, though, kind of on the back end of your question, I do think it will be a competitive environment, as we had expected or anticipated. And as I mentioned earlier, private label is a little bit more prevalent. I'm not worried about it, but it is going to add a little bit of pressure as we've seen them a little bit more broadly speaking, absent for a while, and they'll be back in the mix, and you see a little bit of that in the shares now. And I think ready-to-eat soup is always a pretty competitive segment, and I certainly wouldn't expect that to change right now. But I feel very good about how we're positioned and how we're set up going into the kind of heart of the season. And I do think from a supply standpoint, far more consistent with a normal kind of level playing field, so looking forward to that part of it, for sure.

Thanks so much. Looking forward to next week.

Yeah.

Your next question is from Ken Goldman with JPMorgan.

Hi. Thanks so much.

Hi, Ken.

First question, there's obviously been a strong tailwind over the last couple of years across food at home from heightened Snack benefits. I'm just curious if you can, a, refresh us on how exposed your general sales bases to Snack versus maybe the industry average? And to what extent your guidance or your thought process I guess, factors a potential reversal of this tailwind as a level of benefits fade? And I know, there's a lot of unknowns here. So I'm not looking for quantification, I'm just trying to get a general sense of how you see it.

Yeah, it's interesting. We've talked about this a little bit before. But we are, I think, somewhat a unique portfolio in the sense that we have kind of this almost duality of benefit where economic factors more broadly and certainly snap I'd put into that bucket where we have puts and takes going kind of both ways. So you tend to see what I think a lot of people are referring to or talking about, which is pressure to perhaps trade down as those benefits move away or the just lower discretionary spend in general. Does that impact our Snacking business or some of the other segments we're in. And there is a little bit of that dynamic that I think we've modeled as we look at the balance of the year. But we also do well on the flip side where people have to be a little bit more pragmatic in decision making or they may be trading down from other categories into a category like soup, as an example. And traditionally speaking, one of the last things to always come off the list or some of the comfort items that we have in our snacking bundle. And so, I think although there will be some puts and takes, I feel pretty good about the balance of how our portfolio hold up in that kind of economic dynamic and profile. And as you rightfully said, it's a little bit given the duration of this period, it's a little bit of new territory that we're watching very, very closely and trying to make sure that those expectations are consistent with what we're seeing. But we've put a lot of thought into that and trying to reflect that in our outlook for the balance of the year. But I think, overall, I'd say a fairly balanced outlook.

Got it. Thank you for that. And then a quick clarification. I wanted to ask about the A&C a little bit of a reduction in the first half. You talked about the second half picking up again. Is the message that the annual A&C spend will still be the same and that you'll just move or shift some of the 1H spending into the second half? Or is the message sort of - yeah, things will pick up in the back half, but maybe we won't get all the way back to what we thought for the year. Just trying to get a better understanding there. Thank you.

Yeah. I think I'll give you the Q1 kind of explanation first because I think that's important. And I'll let Mick kind of give you an outlook for the year. But as we navigated through Q1, we anticipated that we were going to have some supply challenges in select areas. And so although you see a decline in the first quarter, it's fairly surgical in nature. It really is against the places where we knew that we were going to be in a position where it was going to be a little bit harder to meet demand. At the same time, what we don't want to do is go below certain threshold levels that are going to put in any way, shape or form a jeopardy the progress that we've made in kind of the first kind of acquiring, but more importantly, the retention of a lot of these incremental households. And so even in Q1 on business, important businesses like Goldfish or Soup, Chunky in particular, if you haven't seen our Chunky ads, I'm not sure you've had any media on, but it's been really effective as you heard in our shares. And we want to make sure that we keep the pressure on there. I do think as supply comes back fully, and as we roll through the balance of the year, you'll see it more as a return to normality. And just to put that in perspective, our marketing and sales in the first quarter was right around 8% of net sales. We would prefer that from an ongoing basis to be in the 9% to 10% range. And I think that's closer to what you'll see as we go forward through the year. But Mick, maybe you can give a little bit of color on that outlook.

Yeah. No, so the only thing that I'd add is that if you look at kind of the phasing throughout the year, of course, from a year-over-year perspective, this quarter is down. There might be a little bit of phasing in the other quarters. But overall, it will be much more in line versus the prior year. I do expect, as a result of market describing the range between 9% to 10%, it will probably be a little bit closer to the lower end of that for the full year.

Great. Thanks so much.

Your next question is from Bryan Spillane with Bank of America.

Hey. Good morning, everyone.

Hi, Bryan.

So first one for me, just quick on CapEx, bringing the capital spending expectation down for the year. Just what's underneath that, and is it - are we going to be shifting more of that, that CapEx, I guess, out to the out years?

Yes, I'll let Mick. Mick will answer that one.

So maybe I'll just comment quickly on that. So first of all, we're obviously still adjusting right to our - to the overall operating environment. And as Mark also described earlier, a big focus on making sure that we can fulfill demand and that we continue to focus on the supply. So as we refine kind of going into this year, our capital outlook, we thought it's more prudent to be closer to the $300 million. There is obviously also a continuous underlying focus of the organization on making sure that we get the right return on capital. And I think the organization has done a great job on continuing to make sure that that's the case. I do expect to your underlying question of shifting some of that shifting into the future. Listen, these are - a lot of these are projects that we believe that help us that help the overall business. So I do expect that some of this is then shifting into out 3 years.

And Bryan, we'll give you a little more color on that in Investor Day as we talk a little bit about things such as the snacks margin road map and what do we see. I think the other thing that I just would say is that we've also - I think in 2021, got a good sense for where our bandwidth needs to be relative to what our capacity for execution is. And as we kind of phase projects appropriately, I think you see a little bit of that reflected in this as well. But it certainly does not reflect any kind of lack of confidence and the ability to invest in the business. We've got projects that we feel really good about going forward. A terrific pipeline, and we'll talk, like I said, more about that as we get into the longer term outlook next week.

Okay. And then thanks for that. And just maybe - just a quick follow-up on the commentary about price increases. In the last earnings call, in the Q&A, you talked about - or the discussion was around level of pricing in your fiscal second half would be in the ballpark of - or the neighborhood of 5% to 6%. And it sounds like now there's some incremental pricing, right? So additional pricing actions, I guess that you're planning now versus maybe what you were expecting back in last earnings call. So I just want to try to get a sense of magnitude, just what we're looking at in the back half of the year would be helpful.

Yeah, Bryan, the answer to that is we - when we kind of quoted that middle single digit or mid single digit pricing. If you remember at that time, we had already gained a fair amount of visibility into inflation that is the inflation we're talking about now. And so we announced the second - the second way of pricing we're talking about now, we announced, I'd say, over a month ago now and have been out talking about it. So we, in essence, contemplated a bit of that is a necessity as we were already looking at the outlook for the balance of the year. So it's not a materially different number as it relates to the back half of the year. Perhaps a few puts and takes in different places. Remember, as I said, too, what's really important as we navigate this is to be quite strategic and how we're working through these pricing actions, making sure that we're mindful of certain thresholds and the second wave that we have coming in January reflects that as well. So I would say there are some puts and takes from perhaps what we initially had in the plan, but generally speaking, overall, we're not materially different than we had expected to be there.

Okay, great. Thank you.

Your next question is from Michael Lavery with Piper Sandler.

Good morning. Thank you.

Good morning, Michael.

Just curious what your thinking is in your guidance relative to any potential impact from vaccine mandates. And they seem to be hitting some walls and so it's certainly not clear, it still come through. But obviously, you've called out labor pressure and costs. Just curious wherever that lands, from the mandate side, how it would compare to what your plans factor in?

Yeah. I mean, we've anticipated kind of operating in a consistent environment to the one that we're operating now. And so that has a certain amount of pressure already factored in as it relates to constraints in labor, but also the protocols and a bit of the continued dynamic of the impact of COVID on our businesses. We did not anticipate a widespread mandates, but we did prepare for it. So at the same time, we've got kind of a variety of different scenarios. I think our guidance reflects kind of more consistent with where we are today, which does tend to look like the environment we're going to be in. Of course, we're hopeful that vaccination rates continue to go up, and we're certainly doing everything we can to provide information and education for our teams. As you can imagine that we have quite the continuum of percent vaccinated depending on the facility and our network. But generally speaking, I think it's well represented in our outlook. And again, I think kind of conservative and steady as you go as you get more information is probably the right way to manage through a little bit of this uncertain moment that we're in.

That's great. That's helpful. Thanks. And just - Ken stole my Snack question, but a follow-up on it for the EBT piece, of course, it's pretty well rolled off already and now sort of a couple of months into that. And it's interesting because it's specifically families with kids that would have been receiving that. And so just curious what, if anything, you feel like you're seeing already in terms of any response to that, and especially if it's maybe more kid-focused brand. Have you seen any impact on anything in the last few weeks that might be related to that?

Yeah. I think from a broad macro view, we continue to see elevated levels of demand. And although we're, in some cases, lapping pretty healthy growth from a year ago. And when you think about certain categories, that's why we continue to kind of look through this lens of 2 year growth rates, they're very healthy across the board. And I think for us, it's more of a function of some of those macro behavioral trends that are perhaps bigger than some of the policy impacted trends that are continuing to elevate demand. We've talked about a lot this idea of the stability of in-home eating even as people are going back to work, a lot of companies, organizations in the hybrid model are still maintaining a portion of their work time at home, which is a huge correlation to our Soup business and our Snack business. In addition to that, even on the cooking side, it's changing. It's evolving a little bit from where it was in the heart of the pandemic to now where much more important in this particular moment is the speed of preparation, we've seen a very distinct move to very quick. How do I get dinner done in 15 minutes? Actually, 18 minutes appears to be the kind of target for most consumers as we've done a lot of research on this. But that also plays quite well into our portfolio as a dynamic that's very, very helpful as you think about our condensed soup businesses like Cream of Mushroom, Cream of Chicken or Prego pasta sauces. I think also elasticity continues to be a lot more favorable than what we've seen historically. And so I think that in addition to those macro trends, are what's keeping an elevated level on demand. I do think, as I said, to Ken's answer, there are some places where you do see some movement. But I think on the kids brands, in particular, brands like Goldfish as an example, are very, very healthy. One of the stronger sustained periods we had if you from my comments earlier, we've continued to do very, very well. And what's really interesting on businesses like that is, if you remember back in the pandemic, we were feeling a lot of pressure on the reduction on away-from-home snacking, so our portion packs are on-the-go packs. What's interesting now is we've kind of held on to the bigger bulk pack demand, but we've also seen a resurgence in those portion packs as kids are going back to school and activities are starting to come back. So I think, there's always a variety of drivers influencing it. But I would say more broadly, the pros are outweighing any of the cons. And so that the net of that all is a generally positive outlook as it relates to sustainment of elevated levels of demand going forward.

Really great color. Thanks for that and looking forward to hearing more next week.

Yeah. Great, we'll see you there.

Your next question is from Robert Moskow with Credit Suisse.

Hi, thanks, Actually, a question for Mick. The inflation guidance that you're giving kind of points to escalating inflation throughout the year. And I think we talked about this last quarter also. But you are seeing some of these commodities leveling off on the food side. So can you give us some kind of like forward look. I don't know, if it's possible, but at what point do you think your inflation will lap and turn closer to low single digit. Or - and then maybe you can just give us a little more color as to why it keeps escalating during the year is because of packaging contracts rolling over? Is it because of labor contracts that are going higher? What are the main drivers?

Yeah, it's a great question. You're absolutely right. So we are projecting high single digit core inflation for the year. That's consistent with what we said previous quarters. So it's not a change compared to what our previous expectation was and is very much in line with what we've been looking at for fiscal 2022 all along. If you look at - to your point, the underlying drivers there, you see about 6% in Q1, high single digits for the full year. So you do have that accelerating pattern throughout the year. Why is that, that's largely driven by the fact that obviously our fiscal year breaks over two calendar years. And we have various contracts that reset in the second half of our fiscal year. So you see particularly in the January time frame, a lot of the ingredients and pack contracts that are being reset. And they obviously reset of a different commodity environment that they previously were [indiscernible] that. And that's what we are experiencing. So as a result, various of these contracts are obviously or at least, call it, a calendar year basis. So we are experiencing that I expect to do out the next calendar year. And maybe the other point to add to that is if you look at our overall coverage, is we're probably currently about 85% covered, which is a little bit higher than typically, but because of the volatility in the current environment, we thought that's prudent.

Yeah. So maybe just two other small points to build on Mick's answer. One is how long do you think it is until we begin to lap and although I would say that's always a little bit tough to predict in the environment we're in right now. But - as you can imagine, some of the contract elements that we're talking about that are on a calendar year, you have the natural kind of carryover into the first half of fiscal '23 for us that would be that same contract. So as you think about relief going forward. And you can imagine, too, that in this kind of volatile environment, we're working really closely to supplier - with suppliers to make sure, if there is a dramatic change that we can reflect that without having to necessarily wait 12 months to kind of revisit a contract. So we've created a lot of that dynamic that should help us be a little bit more nimble, but that's the dynamic that Mick's talking about. But I just would say to counter that, though, although I do - as we pointed out, some pressure in Q2, even though you have that escalating inflation, you also have an escalation of our mitigating actions. And so, as we look at the back half of the year, we actually feel very good about how we line up our position versus inflation, arguably better than we'd necessarily do in Q2 as we're in that kind of transitional moment. So although on the one hand, there will be likely more inflation. I also fully expect us to be in a much better position to mitigate it, and we're feeling very good, and that's a big part of the confidence that we have in the balance of the year and why we're pointing to a more favorable back half.

Okay. Thank you.

Your next question is from Chris Growe with Stifel.

Hi, good morning.

Hey, Chris.

Hi. I just had a quick question to be kind of a follow-up on some of the earlier questions around pricing. In the second half of the year, if you think about pricing and other levers you have, the cost savings, can you offset inflation in that environment based on what you know today? Will the pricing be sufficient to help you achieve that?

I think pricing in conjunction with the other variables, yes, we feel comfortable that we're in a very strong position to be able to cover that and to also be able to carry that forward kind of out of the year into the next fiscal year. So as I said before, I think what you have the benefit of in the second half is kind of all of those tools coming to bear. So even though the backdrop is higher inflation, we've got more of the pieces of the mitigation in place. And so yes, we look at the back half and we feel good about where we are. Also, of course, we're going to start lapping some easier comps that will just give the overall lower base benefit of being able to lap that. But yeah, we're overall feeling good about that, Chris, going into the second half.

Okay. That's helpful. Thank you. And a quick second question, which was can you - if you attempted to quantify how much some of the supply shortages hurt your sales in the quarter? And I guess I'd be curious, related to that, if there is, could you produce to demand in the second quarter? It sounds like you're going to be building inventory, and it sounds like there's a lot of different circumstances by brand. But overall, what's the condition of the supply chain? And are those supply shortages to what degree, they're hurting sales? Thank you.

Yeah. Great. I'm glad you asked that question because it will allow me to give a little bit of color on a bit of the dynamic in Q2 as it relates to share, which I think is important to - I mentioned it in my comments, but I wanted to give you a little bit more flavor on that. So essentially, what I would tell you is in the first quarter, you had a dynamic that we're certainly not unfamiliar with where we were going into the quarter with a fair amount of inventory, demand remained elevated and so you saw a stronger consumption number. Now part of that, again, was the lap of the inventory component. But if you look at our top-line, we were down about 4% versus a year ago with an in-market consumption of 2%. You have a little bit of unmeasured channel elements that are there, but let's more or less talk about six point delta between the two. The way we see this is a little bit more - half to a little bit more than half was related to the inventory lap and then the balance was really supply. So in the places that we had supply pressure, that's really anchored in a couple of categories. And a little bit of the labor issue that we talk about is not just our labor, but some of our suppliers' labor. So you have some material pressure. So if I were to break the businesses apart a little bit and give you a little more detail, our Snacks business inherently is more labor-intensive, just the nature of the manufacturing. So a little bit more of that supply related pressure is on our snack businesses and in particular, several of our Snyder's-Lance businesses. So late July,…

Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. You may now disconnect.