Greetings ladies and gentlemen and welcome to the Campbell Soup Company Third Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Rebecca Gardy, Chief Investor Relations Officer. Please go ahead.

Good morning, and welcome to Campbell's third quarter fiscal 2022 earnings conference call. I am Rebecca Gardy, Head of Investor Relations at Campbell Soup Company. And 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 be making 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 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 third 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 thank you for joining our third quarter earnings call for fiscal 2022. As you read in our press release, we reported strong year-over-year performance. While expected, the performance represents a positive proof point for our continued successful execution in what remains a highly dynamic environment. Over the last several years, we've been navigating substantial headwinds, including the ongoing impact of COVID-19, labor and supply pressures’ significant transformation and a rising level of inflation. The team has done a great job of controlling the controllables. We have improved our execution and strengthened our supply chain by increasing labor and capabilities, while working with our retail partners to deploy inflation driven pricing effectively and thoughtfully. Our results this quarter reflect this work. We delivered accelerated growth in sales driven by continued consumer demand for our brands and significantly improved supply. The underlying health of our portfolio remains strong, though we did experience some expected share pressure due to select remaining supply constraints and private label improvement in certain categories. Also returning to growth were adjusted EBIT and adjusted EPS, reflecting our successful efforts to mitigate inflation and recover on labor and supply. Although we expect the environment to remain challenging, we are confident that we are on a considerably stronger foundation and in a much better position to navigate the volatile macro environment moving forward. Our year-to-date performance and improved execution have led us to raise our previously communicated net sales guidance for the year. We are maintaining our adjusted EBIT and adjusted EPS guidance for fiscal 2022 to reflect the ongoing inflation pressure. Now let's cover some specifics from Q3. Organic net sales were up 9% primarily driven by the impact of our second wave of inflation driven pricing, which is now reflected on shelf across…

Thanks, Mark, and good morning, everyone. We delivered solid growth in the third quarter across net sales, adjusted EBIT and adjusted EPS amidst meaningful macro headwinds. As Mark reviewed, the sustained consumer demand for our portfolio of brands, improved supply chain execution combined with inflation-driven pricing and limited elasticities resulted in strong top line growth. Our productivity improvements and the benefit of continued cost savings initiatives helped mitigate a continued inflationary environment driving growth in both adjusted EBIT and adjusted EPS in the quarter. Q3 adjusted gross margin performance represents a gradual recovery of the year-to-date impact of significant inflation and select supply chain constraints. Also recall that we are lapping a favorable prior year comparison. Our cash generation remains strong with cash flow from operations of $1.1 billion through the first 9 months. Additionally, in line with our commitment to deliver value to shareholders, we have returned over $450 million year-to-date to shareholders through dividends and share repurchases. As I will review in more detail in a moment, we are raising net sales guidance based on our performance year-to-date as well as our expectations for continued strong consumer demand for our brands, limited price elasticities, continued supply recovery and improved service levels. Given the persistent inflationary environment, we are reaffirming our full year guidance on adjusted EBIT and adjusted EPS. Turning to the next slide. Organic net sales increased 9% in the quarter as consumer demand was strong and we experienced limited price elasticities. Third quarter organic net sales performance outpaced consumption in measured channels by 5 points, primarily driven by retailer inventory rebuild. Adjusted EBIT increased 23% compared to prior year quarter due to improved adjusted gross margin performance and lower marketing and selling expenses, partially offset by sales volume declines and lower adjusted other income. Adjusted EBIT…

[Operator Instructions] Your first question comes from the line of Andrew Lazar from Barclays.

I guess, Mark, in light of recent industry chatter regarding consumer behavior shifts and retailer commentary, I thought it might make sense to start with having you address this sort of building investor notion that the pricing window has sort of, all of a sudden, effectively completely closed for the industry, which obviously is an important topic given expectations for more inflation to come in -- going forward in your fiscal '23. And I guess specific to Campbell, you mentioned the third wave of pricing was announced. Does that mean it's sort of locked in with key retail partners at this point? And does this pricing essentially cover what inflation you see in fiscal '23, at least as we stand here today, or might there need to be more still?

So yes, good question, Andrew, not surprising either. But I think the first thing I just would say is, as we mentioned today, we feel very good about the execution on pricing so far through the first 2 waves. And then as we mentioned also today, we announced the third wave back in April. And we did that really, as you might remember, in '21, we tended to lag inflation, especially through the first couple of quarters of the year. And we wanted to make sure that we were a bit more nimble going into '22 and really into '23. And so as we saw the projection and the outlook for inflation, we moved very quickly to get the third wave out there. And we've been working through that with customers for really the better part of the last couple of months. And so we've made a lot of progress on that front. And we feel very good about that as well as feeling good about how that sets us up into exiting '22 into '23. I think we also feel very good about the other levers that we have and the progress we're making to help us manage the inflation. Primarily, I would say, the significant step forward in our supply chain, both from a labor standpoint but also from an execution standpoint. Really nice to see the progress coming through that -- that we've been working hard, and certainly, that was an area of opportunity. But as we start to think about our position going into '23, certainly feels much stronger of a foundation. It feels good to have that wave 3 pricing out there and moving. And I think as you start to ask about future and this idea that there is no room for any more…

Your next question comes from the line of Ken Goldman from JPMorgan.

Guidance for annual sales growth implies – I’d say it's a fairly wide range of outcomes for your top line in the fourth quarter. So 2 questions on this, if I may. First, at the midpoint of that range, I think the implication is that your fourth quarter sales growth will be around 5% year-on-year. So just curious if that's a reasonable starting point to kind of think about modeling the quarter, understanding that much can still change. And then I guess, second, could you perhaps walk us through what some of the key puts and takes might be that would lead to either, I guess, the higher or lower end of that range as you see them today?

Yes. Thanks, Ken. Well, I think first off, I just would say that from a Q3 standpoint, just to give you a little bit of a frame of reference, essentially, the quarter came in very consistent where we expected to be as it related to EPS. I think the composition in the quarter, we were a little stronger on top line and maybe a little more pressure on inflation in the middle of the P&L, but generally came in, in a profile that delivered more or less our expectations. I think as you think about what we've put out there for the balance of the year, it kind of lives into that framework or that perspective. And that's how we're anticipating Q4 to play out. I think you raised a good point, which is, all right, there is a range here. What would be the variables that drive the difference? And a lot of this, we think, really will come down to the ability and the speed at which we're going to continue to replenish the inventories that are in market. Demand and elasticity, we're leaving ourselves a little bit of flexibility there. We also want some room to be able to invest in the business as we continue to move through the quarter. The goal in mind is to try to exit the year with good momentum going into fiscal '23. But I think a lot of the variability that you see in that range will depend on just how quickly we recover in a couple of these areas on that top line. I think this kind of mid-single-digit area for kind of that midpoint for top line is a good place to be.

Your next question comes from the line of Peter Galbo from Bank of America.

Maybe if I can just ask a follow-up to Ken's question. Kind of, Mark, similar to the bottom line, I think there's a pretty wide range of EPS outcomes as well. And I think you mentioned investment and leaving yourselves some room to invest in the business. But anything that would kind of drive the higher or lower end of that EPS range at the bottom? And then maybe, Mick, just thinking about the chart you have on core inflation, I guess as we think about it over the next few quarters, that's obviously going to have a pretty material step-up, it seems like in the fourth quarter. But then, does that rate of change going into the first half of next year kind of start to level off, wherever maybe, mid- high teens, low 20s? Just any color there would be helpful.

Yes. So on the bottom line guidance range, I do think it is linked pretty intrinsically with the top line. So as you move the top line to the higher ends of the range or the lower ends of the range, those tend to coincide pretty directly. So I see that as a little bit more perhaps of where the variability is. I think, again, to reinforce what I said before, I also think that as we've thought about this fourth quarter, we do want to see, as supply comes back in, as our distribution recovers, as we're on a much stronger footing for supply in general, part of this is returning the marketing and the promotion spending to the business so that we're able to continue to drive that strength of equity, especially in face of some of the pricing and elasticities that we're navigating. And so I think giving ourselves a little bit of room there is the smart play right now. And again, the goal in mind is to really try to leave the year in a very positive position as we move into '23. And then Mick, I'll let you answer the second one.

Yes. No. And I think with regard to inflation, you obviously saw the uptick with regard to inflation between the second quarter and the third quarter. And particularly, that's also related to the fact that you have some of our contracts that are reset on a calendar year basis. And we spoke about that obviously in the past. So you see that we expect -- when I look kind of throughout the quarterly progression of inflation, as Mark mentioned earlier, we follow that very closely. And as a result, as Mark also described, one of the decisions that we made is the announcement of the wave 3 pricing, so in order to make sure that we continue to track and help offset as one of the different tools in our toolbox the inflation that we see coming.

Yes. And of course, that would anticipate that outlook into the first half of certainly of '23.

Your next question comes from the line of David Palmer from Evercore.

Just a general question. Maybe you can answer on behalf of the food space is something we're wrestling with that, when we look at consumer panel data, it looks like that the under $60,000 household income consumers drove outsized growth during COVID, seemingly at the expense of private label brands gaining share. And then, of course, fast food restaurants suffered during that time as well from a traffic perspective. And these lower to middle income consumers tended to skew younger as well, which could be good news because that's a lot of trial. I'm wondering if your consumer -- does your consumer data show this as well? And I'm wondering how you're feeling about repeat levels and are these plans to kind of keep these younger and lower-income consumers in the tent in your brands as perhaps mobility increases and private label becomes more available?

Yes. So a lot to unpack there, but a very important question. So what I would start with is just by saying to you that I think and I've said this consistently, and I'll give you a couple of real-time examples, is that our portfolio is very well positioned and resilient as it relates to challenging economic environments, however you might categorize that. And so a lot of times, what we -- the dynamic that we see is -- yes, let's take condensed soup as an example, where we are seeing and expected to see some pressure from private label, you also have significant migration of trading down into the category. So that the overall category growth rates are up pretty significantly. And volumes are holding up very well, even in the face of pricing that can be double digits so far that we've seen. I think what's been new about this or what's been a little bit more unique than maybe what we've seen in the past is where we're experiencing more of the trade down tends to be more in the baby boomer, a little bit older consumer that tends to be a bit more price sensitive. And we're picking up a lot of these new consumers as they are moving into the category. Another great example of that is Chunky. Chunky’s pricing is up mid-teens right now. And what we're learning is, although that seems like a lot of pricing, and it is, but for can of soup, it's still under $3 for a large part of the population trading down into the ready-to-serve soup category becomes a very economic move for them. And that's why on Chunky, we see right now, pricing mid-teens, consumption’s up 14 but units are still up 3%. And our volume was…

Your next question comes from the line of Nik Modi from RBC Capital Markets.

So I just had a quick clarification in terms of the shortage of materials. Can you just provide just more details around that? But my broader question is just on trapped costs. If you think about all the excess costs that you guys have incurred during COVID as a result of retailer penalties and just supply chain issues, can you just give us any context on the magnitude of those costs? And as kind of things normalize, I know this -- it might take some time for this to normalize. But as you think about these costs and the normalization, would that just drop to the bottom line? Or philosophically, would you say, look, we've got to build some capabilities to deal with future shocks like this, so maybe we should reinvest in relocalizing supply chains or diversifying our supplier base, what have you? Any thoughts on that would be helpful. .

Sure, Nik. That's great point. I think the first step for us was really -- let me answer the second one first and then I'll come back to the materials question. But I think the first step for us was to make sure that we had the appropriate labor and staffing to run our plants in their current configuration and current state. And so I think the team did an amazing job in a very difficult labor environment to recover on that front and to significantly improve retention. And it's a full kind of toolbox, full of things that were applied to get that job done. And I do think that's an area where we improved quicker than we had even expected. And that really enabled us to begin to get that service and distribution and start to replenish some inventory very quickly. Now with that in place, as we start to operate on a more steady state for the supply chain, it's now an opportunity to go after a lot of these areas of productivity. And some of it is -- I think it's coming from a couple of different areas. I think one of the areas is certainly looking back and saying, okay, where are the inefficiencies that we may have given up over the last year, and how do we build the right road maps to recover that? In many ways, I see that as the easier, the lower-hanging fruit to go after. And I do think you'll see a meaningful productivity profile as we go into the next year to support that. And then secondarily, I think we have not been standing still on capabilities throughout this whole process. And perhaps some of the challenges we faced were maybe biting off a few too many of…

And your final question comes from the line of Jason English from Goldman Sachs.

Congrats on the progress you're making on loosening up the supply chain. I wanted to talk rather than the supply chain and costs, more on the investment side. The business had found itself in a fair amount of difficulties and problems in fiscal '18, which obviously led to a rebate in fiscal '19 to reinvest. You've kind of -- it looks like on the surface, you've now taken all that incremental investment and pulled it back out of the business. On a trailing 4-quarter basis, your marketing and selling expense is pretty much matching fiscal '18 despite underlying inflation. Mark, how do we get comfortable with this level of spend? What is the right level of spend? And should we be expecting another rebates to restore that and get your market share back in growth?

Yes. Good question, Jason. So let me first talk a little bit about where sit today. So as we think about the spending profile that we're at, so marketing and sales for the quarter was about 8.8%. And as you've heard me say before, I'm a lot more comfortable with that around 10% -- in the 9% to 10% range depending on a couple of variables relative to -- or innovation and other sources of investments. So there is no question that where we are today, we would want to move up from. I don't think it represents any kind of rebates like we would have experienced, because a lot of that was about repositioning, reframing a lot of categories that we were moving away from or shifting to. This is really about, in the broader scheme of things, the difference between that 8.8% and where we want to move to over time. I think what's important to note is the A&C retraction has really been singularly minded on where the supply is. This is not simply a tool to try to hit profitability. It was really designed to reflect where we just don't have -- didn't have the supply to support. And so shaping demand a bit through pulling back on some of that spending. As you think about or as we think about our future plans, we've contemplated that. And so as we see recovery in supply and supply chain, I would expect to see that number begin to move forward. And again, I don't think it has to be any type of big bang. But I think as we move from 8.8% up the ladder a bit, I think we can begin to do that. And you should expect to see that as part of the ongoing plan as we move forward. Of course, I think that will -- again, it will follow very closely as we recover fully in supply. We do have a robust innovation pipeline we talked about today. So we expect to fully support that. So I guess what I would say is, there's no question there's been a step back. I think really, again, related much more to supply than necessarily trying to target it for savings. But as we move forward, I think, in a very thoughtful and kind of pay-as-you-go mindset, we would expect to see that recovering over the next quarters and certainly into '23.

And this concludes our question-and-answer session. I will now turn it back over for some final closing comments.

Thank you so much for joining us today. I think as you saw in our press release earlier, we will be attending the Deutsche Bank conference next week. And if you have any questions, please feel free to reach out to me at Investor Relations. Thank you so much.

This concludes today's conference call. Thank you for your participation. You may now disconnect.