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 Second 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. Rebecca Gardy. Ms. Gardy, you may begin your conference.

Good morning, and welcome to Campbell's second 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 prerecorded. 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 3 of our presentation or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in 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. On Slide 4, you will see today's agenda. Mark will share his overall thoughts on our second 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 second quarter earnings call for fiscal year 2022. Before I turn to the results of the quarter, I want to take a moment to thank all our teams, especially our frontline colleagues for navigating the impact on our operations during another difficult period of the pandemic. We are now at the two-year mark of working within this challenging COVID-19 environment, and I'm very proud of their perseverance, continued performance and dedication. I also want to take a moment to express our concern for the people of Ukraine. Our sympathies and support go out to them during this crisis. As we outlined during the Q1 earnings call and as you saw in our press release, Q2 was challenging as we expected, including industry-wide constraints on labor and materials availability made even tougher by the winter Omicron surge, as well as ongoing commodity and logistics inflation. However, more recently, labor and service levels are improving as COVID cases decline, and we see greater impact from our aggressive hiring and training. Since October, our full-time filled headcount increased by 10 points, and we now see absenteeism and vacancy rates trending back to normal levels. This is translating to more production and the beginning of a return to normal distribution and inventory levels. We do continue to expect inflation to remain persistent, especially as it relates to logistics. And although we have no direct exposure to Ukraine and Russia, we are monitoring any broader economic impact from the current crisis, especially on commodities. As we look forward and including the balance of these factors, combined with the greater impact from pricing actions, easing prior year comparisons and continued strong demand across our portfolio, we remain confident in reiterating our previously communicated full year fiscal 2022 guidance.…

Thanks, Mark, and good morning, everyone. Our second quarter fiscal 2022 results are generally consistent with our expectations, despite industry-wide inflation and supply constraints. As you heard Mark describe earlier, strong demand for our portfolio of brands continued in the second quarter. However, higher-than-expected supply chain volatility resulted in lower service levels. Additionally, as expected accelerating core inflation in the quarter pressured margins. We continue to feel good about our initiatives to mitigate inflation, which include price increases, trade optimization, supply chain productivity improvements and cost savings initiatives. Our cash generation remains strong, with cash flow from operations of $766 million through the first half. Additionally, in line with our commitment to return value to shareholders, year-to-date, we have returned nearly $300 million to shareholders through dividends and share repurchases. Our first half performance and improving second half outlook including inflation mitigation actions, and continued strong consumer demand despite a tight, but improving labor market, give us confidence in reaffirming our full year guidance. Turning to Slide 19, organic net sales declined 2% in the quarter, lapping 5% growth in the prior year. The year-over-year volume decline due to industry-wide labor and supply challenges more than offset the favorable impact of net pricing in the quarter. Consumer demand remained strong, with second quarter dollar consumption in measured channels, three points above our total organic net sales performance. Relative to the second quarter of 2020, organic net sales grew 3%. Adjusted EBIT decreased 17% compared to the prior year quarter, and was 12% lower on a two-year basis, due to significant levels of inflation on ingredients and packaging, transportation, and labor. Remember that, our Wave 2 pricing will not be fully reflected until the third quarter. Adjusted EBIT margin declined by 240 basis points to 14.4%, compared to 16.8% in the…

Thanks, Mick. To conclude, although we fully recognize the volatile nature of the environment we remain in, we continue to deploy more of our time and resources to future plans, growth and supporting the full potential of our business. As we outlined at our recent Investor Day, we believe we have an advantaged portfolio and position going forward, and we are excited that in the second half of this fiscal year will begin to transition from defense to offense after this unprecedented period. And I could not be more confident in our team, brands and Campbell's value creation potential. With that, I'll turn it over to the operator to take your questions. Thank you.

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

Great. Good morning. Thanks very much for the question.

Hi, Andrew.

Hi, there. I guess I'd start with Mark, with more gross margin pressure in fiscal 2Q, now higher forecast for low double-digit inflation for the full year. It would seem that Campbell is leaning on greater SG&A leverage to sort of deliver the year. So would you say this is a fair characterization? And if so, how do you balance lower A&C spend, right, in light of the supply constraints we've talked about to sort of hit guidance with the opportunity maybe to lean in even harder or spend more on consumer outreach to retain as many new households as you can heading into really it's about fiscal 2023 and 2024, and as you said, kind of playing offense, if you will. Thanks so much.

Yes. So the short answer is, Andrew, we actually see the back half where the opportunity really resides to be more in the gross margin space. And there's a couple of reasons why. First, I'll just say from a Q2 standpoint, although a little more pressure on the top line as we went through Omicron in January and saw labor even tougher than what we had expected. From a margin standpoint and profitability standpoint, we were generally in line with what our expectation was. And so as we look into the back half of the year, certainly, we're not expecting inflation to subside. But what we do believe is that with the combination of the full impact of the -- of the second wave of pricing, along with the fact that we're going to be lapping pretty significant declines from a year ago. In fact, they're in the 300 to 400 basis point range as a comparison. And then the recovery that we expect on the supply side, which drives a host of efficiencies, as well as our underlying productivity and cost savings initiatives, we feel like we're in a much better position with many of the variables pointed in the right direction, even though you'll still have inflation is a significant variable. And so underpinning those assumptions is a fairly consistent level of costs as it relates to SG&A in total and our marketing and selling in particular, where we have been a bit below or under a year ago over these last couple of quarters, we expect it to be more in line and more consistent with where ultimately we would want to get. I still think probably a bit of management of that through the third quarter and into the balance of the year. But generally, is a good rule of thumb. We want to be around 10% of net sales. We've been hovering around closer to 8% to 9%. I think you'll see us closer to 9% to 10% as we go through the back half of the year. So our ability to invest behind the recovery of supply, given the room that we -- that we believe will have relative to the pricing as well as the comps gives us a lot of confidence, and the ability to drive a positive back half and stay generally on track with where we're -- where we expected to be at the turn here and this moment that we expected to be in where we begin to transition from lapping a lot tougher comparables, a lot higher starting points to a period where we can return to positive momentum, which is really something that we're excited to get to. But also I think a good way to kind of build momentum is we exit the year.

Got it. Thanks so much.

Your next question is from Ken Goldman with JPMorgan.

Hi, good morning.

Hey, Ken.

Hey. Thank you. I'm curious to what degree your guidance factors, the recent rise in costs for things like transportation, fuel and energy. Are these the main drivers behind your decision to raise your expectation for core inflation? I guess, I'm asking, because you said, you're still monitoring the situation in Ukraine. I wasn't sure if that indicated you were seeing -- note on these items or how do I think about that?

Yeah, no, so there's a couple of things in there that are probably good to talk about. First, let me start with kind of the pre-Ukraine/Russia challenges. And I think what -- as you know, at this point in the year, we're fairly well covered. So we're roughly 95% of our costs, about 90% in particular on commodities. But that still does leave some variability as it relates to logistics and added pressure that we've seen relative to fuel that has been aggravated a bit more as we've gone into this latest conflict, and crisis in the Ukraine. So I think that, where we see those variables are generally contemplated in our numbers. As it relates particularly to Ukraine and Russia, first is, I'd be remiss not to just say again, our hearts go out to the folks that are dealing with this conflict, it's an unbelievable circumstance to be in. But I think from a business standpoint, what I would just say is that from a direct operation or impact, we have no sales, we have no direct sourcing, we have really no specific business. Of course, the question then becomes the macroeconomic impact of the conflict. And as we look at 2022, we've got about 90% of our commodities covered, which leaves us about $150 million in cost that we're still navigating through. And as we look at the variability as it relates to what of that is really residing within things like wheat that could be impacted or certain metals or packaging that could be part of that as you look a little more broadly at costs, and then, of course, on energy and oil, we believe that we've created a space within the plan to contemplate that. And then, of course, as we talk about going forward into 2023 there's a lot of variables there that will come into play, and we'll talk more about that in the future. But I think we have -- again, in the world that we live in today, I would never presume that we can see every variable possible as that certainly prove in the last couple of years to be tough to do. But I think relative to all the inputs we have today, I think we've got a fairly good contemplation of that. And even where we see some potential variability, we've tried to build that into the contingency planning and/or just within the range that we've got relative to the guidance. Mick, anything to add to that?

No, I think, you got it. I think, the -- as we've mentioned in the past, think about kind of ingredients and pack being, give or take, 50% of our overall cost of goods. So then to Mark's earlier point, kind of take the, call it, 95% of debt is currently covered, and then you get close to that $150 million that Mark mentioned. And then on the logistics, transportation, it's obviously a combination of both, availability which drives price, as well as the overall fuel market that we're monitoring very closely, and we got some coverage on that as well. So, generally, of course, with where we're at, we got still half the year to go, but we feel relatively comfortable with where we're at. That being said, the piece that's uncovered, we're obviously monitoring very closely and managing.

Thank you for that. Can I ask you a quick follow-up, Mick? Historically, has Campbell generally bought ahead for the items of can, ingredients and packaging throughout the year, at somewhat consistent levels from quarter-to-quarter? Or, historically, has it tended to lock in a significant amount at the end of the fiscal year with less purchasing at other times? And, I guess, I'm talking everything other than cans, of course, which I think we have a good sense of.

Yes. We tend to have a pretty steady coverage model. So I think our history on this is to try to generate predictability more than it is to necessarily try to win the commodity guessing market. And I think that consistency has been fairly in line as you look at our coverage position. Certainly, there is some variability depending to the exact market we're in. But generally speaking, our quarterly coverage for the year, the rolling forward coverage is pretty consistent.

Thank you.

Yes.

Your next question is from Chris Growe with Stifel.

Hi. Good morning.

Hi, Chris.

Hi. Just a follow-up on the questions around margin. You have, obviously, accelerating pricing coming through, you have inflation accelerating at the same time. I'm just curious about elasticity like one other element of that equation, and it's hard to assess it at this point. It seems like its very low overall for the industry, and it has been for many of your products. Do you do that accelerating through the year as you take more pricing? And just be curious what you're seeing there right now.

Yes. I mean, it's -- so a couple of things that we're watching through and then I'll tell you what we've kind of planned for the balance of the year. But as you point out, early on and certainly through the first wave of pricing, we've not seen a lot in the way of elasticity. Although, I will say that as we have navigated some of these supply challenges, it's a little bit harder to gauge as we've been essentially shipping to what we've been making regardless. So I do think we want to continue to watch that very closely. But as we plan the balance of the year, what we've assumed is that elasticities do go up and that there is some incremental impact from what we would have seen in our first wave of pricing, in our second wave of pricing, although historical levels, we think we'll still be below, given the breadth of inflation that is being experienced across the industry. So, we're not taking necessarily the full level of elasticity, but we are assuming a step-up from what we've experienced. And I think, again, as I've said from the get-go on this, our goal here is obviously to manage appropriately the cost, but also to make sure that we're keeping price gaps and that as we return to full supply and support that we've got the right balancing act as it relates to shares and protecting our equities and our brands as we realize that we've spent a couple of solid years building that. The last thing we want to do is undermine that with unreasonable pricing. And so I think everything that we're doing up to this point generally is consistent and aligned with the marketplace, and we would expect that to elasticity as the year unfolds. And if we're wrong, and it's better than that, then I think that will just create opportunity for us as we go through the balance of the year. But I think a prudent position and one that generally is informed by just kind of, I'd say, at this point, where we are on absolute pricing, which is not insignificant on some of our categories.

Okay. And then just a quick follow-on. You talked about the fourth quarter being a period where you're going to have a better supply situation for the business. Is that the quarter then where you are that a quarter where you likely ship ahead of consumption? And if you -- is there a rough approximation of how much inventory you need to build or like to build into the market to try to have better inventory availability in the store?

Yes. Well, I think the good news is I don't think we'll be waiting fully to fourth quarter to see some of that replenishment. As we pointed out, we were a little lighter in Q2 on topline than we expected. I actually think that we'll see some more recovery of that earlier on in the third quarter. And then really, I do think, though, the fourth quarter is a period where we would expect to be more fully back in business, if you broader range of the full portfolio. I think you'll see TDP levels coming back in the normal ranges. I think you'll see our support both from a marketing and trade standpoint, kind of at a sustainable ongoing level. That's the game plan. And so I think we'll probably be ahead, notwithstanding what exactly demand will look like in Q3. But I think relative to what we expect, probably a bit ahead in Q3 and probably a bit more in Q4.

Okay. Thank you.

Your next question is from Nik Modi with RBC Capital Markets.

Hey good morning guys. This is Philippe [indiscernible] on for Nik. Hey. So, you mentioned strong underlying trends from a consumption base I just wanted to check on your assumptions for household penetration trends in the balance of the year as the economy reopens and we are starting to see restaurant reservation and restaurant trends to improve. I guess, what are you assuming for penetration in the second half of the year?

Yes, I think as now kind of navigated this up and down period, where okay we're kind of into a new normal and then a surge comes back in January and this kind of up and down. As we project out, I think we've got a fairly good base of time now where we can see periods where there were less constraints and what does that mean relative to periods that are more COVID driven or influenced in. So I think our assumptions as we think about the back half of the year, and remember, the added factor of our ability to more fully supply, because our issues, if you will, relative to being able to fully meet demand were present in the back half of last year, especially on certain brands like Late July or a few of the other areas where we've struggled a bit more on labor and had real challenges, kind of, getting to that full capacity that we need. So the combination of those elements together, along with returning support level, we think we're going to hold very well on demand. And even if there is a return to this more balance between away-from-home and in-home, we think the combination of what we're doing, as well as what we expect that baseline to remain at, which although may come down a bit from what we would have experienced in January, we think not necessarily inconsistent with what we might have seen in the summer of last year and some other periods that looked a little bit more consistent to what we expect the back half to be. So I think you're going to have a little bit of normalization there, offset by improved supply and support. And that, I think, in general, is what's leading us to see a better overall top line. And remember too, not unlike the margin conversation, the first half of this year, we were still lapping significant elevated levels when we get to the -- from COVID the original, kind of, COVID period. When you get to the second half of this year, we begin to lap the declines or the reduction that already occurred in the back half of last year. So your comps on both margin and on top line are much better as we're in the back half of the year.

Got it. That makes sense. And then on innovation, you mentioned a strong start to Mega Bites in Goldfish. Just if you can expand on, like, general expectation for innovation this year. And then particularly for Goldfish Mega Bites, are you trying to expand the demographic profile of the brand with innovation, and what are the early trends from a consumer standpoint?

Yeah. So it's a -- so let me answer the question in a little bit of a different way to start it, and then I'll specifically get into it. I think what's really important and what I would imagine that a lot of investors are going to be interested in seeing is what the recovery model looks like as we come back into full supply. And what I like about our Goldfish and our Kettle and Cape Cod on our Snacks business, as well as our Chunky business on our Meals & Beverage, those are all great examples of where we have invested in capacity. We're back fully into supply. And with that came the full level of support. We protected marketing on those businesses, we added innovation, whether it was Mega Bites on Goldfish or Family Size on Goldfish, which was some of the new price pack architecture that we were creating, whether it was some of the new pack sizes on Kettle and Cape Cod, or it was flavor innovation on spicy for Chunky with a full very, very robust marketing campaign. All three of those businesses are great examples of what we expect to see as we come back fully on other brands along the way. And I think that with that comes the opportunity to unlock innovation. And so as we think about the balance of the year, our innovation levels on our snacking business are going to be up significantly from a year ago and where it would have been, talk about it in terms of kind of three-year rolling contribution as a percent of revenue. So last year, we would have been in the 1% to 2% range. This year, we'll add about a full point of contribution from innovation in snacking; Meals & Beverage on a similar level with the combination of what we're doing on our Chunky business, but also some of the innovation that we have on the restage and relaunch of Well Yes!, which is another component of soup that's going very well. And I would encourage you to look at when you look at shares within soup, look at some of those core brands on how well they're doing because I think it is a little bit of us selecting where we're placing the bets right now as we navigate some of these supply challenges. But at the end of the day, I think the idea is that we should see momentum building on innovation. We've got a great start on the brands that are already back in the profile that we want, and we would expect the others to follow as we go through the balance of this year and then into 2023, of course, where we expect to be back kind of fully loaded across the portfolio.

Got it. Thank you, guys. I’ll pass it on.

Your next question is from Peter Galbo, Bank of America.

Hey, Mark, and Mick. Good morning. Thanks for taking the questions.

Hey, Peter.

Good morning.

Mark, I guess I just want to go back to your comments around the puts and takes on some of the ag commodities beyond where you're hedged for this year. And I guess, as I read through kind of what you're saying, it's, hey, we're going to get material improvement or improvement in the gross margin line in the back half of this year, but once some of these ag commodities, hedges roll off or coverage rolls off, maybe you could see that back down in the front half of next year if we -- and some of these other, again, ags kind of stay up here. I wanted to see if I was kind of understanding that comment. And then with that, if that is the case, just your potential to take a third wave of pricing and how you're thinking about that? Thanks.

Yes. No, it's a great question and one that is an area where we're spending a great deal of time right now, which is recognizing kind of covered, uncovered positions as we go into next year. It's a little early to start to talk about 2023 as far as how we see inflation and the puts and takes. Remember, you also have full kind of impact of the rollover of the pricing that we're taking now, as well as some of the added benefits, I think, of a supply chain that's operating in a far more consistent and kind of fully loaded way, which will be very beneficial to us. But I think you're right, and I think that indicates also to us that we are absolutely not ruling out any additional pricing that may need to happen. And I think in the spirit of what we've kind of learned to date, we're looking at that right now, and understanding where and what and the surgical nature of how to digest a little bit of what we're seeing right now. Again, I would just caution there's a lot of volatility in certain commodities as it relates to Ukraine and Russia. I think we need a little bit more stability of time to know what the underlying availability investment pricing looks like. But there's no doubt there's going to be pressure that's associated with that. And so I absolutely would not rule that out. I think, again, as you make each step in pricing, I think the need to be even more strategic, more surgical in nature, really tying it directly to where commodity pressure could reside, I think is areas we're going to continue to explore. And that may mean that even in this -- or in this fiscal year that we've got to look at more pricing in a way to position kind of the back end of this year as well as into next year.

Great. Thanks very much, Mark. That's really helpful. I’ll pass it on.

Okay.

And your next question is from David Palmer with Evercore.

Thanks. Thanks for your comments earlier on shipments versus consumptions. I wanted to maybe get a sense from you about what's going on behind the scenes there, what's helping going into fiscal 2H. Is it your own staffing levels it's freight or co-packers? Any detail would be interesting and helpful.

Yeah. So the overwhelming dominant improvement is in labor. If you remember back in the first quarter, we had anticipated a trajectory of recovery that was really through the second quarter into the back half and what occurred in December and January with Omicron just kind of delayed it. I think what's good news about what we've experienced is that, although that kind of came fast and furiously into the quarter, it also subsided a lot faster than we'd seen prior iterations of pressure. And so it allowed us to get back on track. And as I said a couple of times throughout the quarter, the fact that we had hired as many new folks as we had allowed us, I think, to weather the storm a little bit better and get us in a position in the back half. But just to put it in context, we were running -- if you combine absenteeism and vacancy rates, we were running low double-digit percent of GAAP relative to that. And if you look at where we are now, historically, we tend to be around 3% to 4%, and we're at about 4% right now. And so that has been the single biggest movement, if you will, in improving our production levels relative to meeting demand and meeting expectations. So that's first and foremost. I think the other thing is that, we are really working hard on continuing to add capacity. One of the things that's really interesting is if you look at the last 24 months, and I would say this has been a little slower than I would have liked. But if you look at the last 24 months, we've added almost 8% of capacity to our network. And in particular, you see that manifesting on brands like Goldfish,…

That’s -- that is helpful. And just a small follow-up on that is, if you -- retailer inventory, where would you say that is versus history -- and I think you were alluding to maybe being -- having shipments above consumption in fiscal 4Q. I don't know if I picked that up correctly.

Yes.

Yes. And --

Yes. No, I -- yes, I -- we're low, is what I would say. I mean, obviously, it depends a little bit on the category that you're speaking to, but I would tell you, versus our historical position, in particular, given the pressure that we experienced in January. And again, I will say that we are already seeing some recovery in that as we go forward. But the reality is, I think on many of our businesses, and you see it again like, I think, a great proxy for people to watch the development of our supply and availabilities is through TDPs, which almost to the item, if you will, or to the brand winds up with the share challenges and the percent loss in distribution. And conversely, where you see that beginning to recover is where you see the return to kind of more normal levels of share growth and performance. And so, I think, as you see that recover, come back into full inventory, the combination of those things together are going to be a nice tailwind for us to give you a little bit greater confidence that we're going to be in that positive territory. And I think, as I said before, I think it will take us likely through till Q4 until you're kind of more fully loaded, if you will, across the board. But I do think you're going to see recovery in Q3 and likely opportunity to shift perhaps ahead of consumption even as early as parts of Q3.

Thank you.

We have now reached the allotted time for questions today. This will conclude today's conference call. Thank you for participating. You may now disconnect.