Greetings, ladies and gentlemen, and welcome to the Campbell Soup Company First Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Rebecca Gardy, Chief Investor Relations Officer. You may begin your conference.

Good morning, and welcome to Campbell's first quarter fiscal year 2023 earnings conference call. I'm Rebecca Gardy, Chief Investor Relations Officer at Campbell Soup Company. I am joined today by Mark Clouse, Campbell's President and Chief Executive Officer; and Mick Beekhuizen, Campbell's Chief Financial Officer and President of Meals & Beverages. Today's remarks have been prerecorded. Once we conclude our 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 of 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 perspective on our first quarter results 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 2023. And with that, I am pleased to turn the call over to Mark.

Thanks, Rebecca. Good morning, everyone, and thank you for joining our first quarter fiscal 2023 conference call. I hope you had a happy Thanksgiving and filled up on Green Bean casserole, Pepperidge Farm stuffing and plenty of our delicious snacks and cookies. As you read in our press release this morning, our fiscal year is off to a fast start. Our strong year-over-year performance across all three key metrics reflects the continued strength of our portfolio and our successful efforts to substantially mitigate significant inflation through a combination of pricing and productivity improvements. I am also encouraged that we delivered those results while increasing investments in our brands and ensuring we remain a good value to consumers in this difficult economic time. We also made significant progress on market share versus the fourth quarter, growing or holding share in most of our categories year-over-year. We are very pleased that the combination of stronger supply, accelerating innovation and appropriate investment is translating into strong profitable share growth as we had planned. Overall, Campbell's portfolio continues to demonstrate compelling consumer relevance and is well positioned for the current economic environment. We recognize it's still early in our fiscal year, and the environment does remain challenging. But given the strength of the first quarter performance, the health of our brands and our consistent execution, we've increased our guidance to reflect our current outlook. Mick will provide more details on the drivers shortly. But this quarter's results and the full year outlook demonstrate the significant progress we've made across our brands, supply chain, culture and capabilities. Although there remains more to do on the business as we continue unlocking our full growth potential, this quarter's results represent a positive milestone in our journey. Organic net sales increased 15% to $2.6 billion due to both…

Thanks, Mark, and good morning, everyone. We are pleased by the strong results we delivered in the first quarter with 15% growth across all three key metrics: net sales, adjusted EBIT and adjusted EPS. Top line growth was due to inflation-driven pricing, sustained brand health and improved supply chain execution, partially offset by modest volume declines. First quarter net sales growth of 15% outpaced consumption growth due in part to retailer inventory rebuild as well as the strong recovery in our foodservice business. Strong sales growth, a relatively flat gross profit margin as cost inflation and unfavorable volume and mix were mostly mitigated by pricing and productivity improvements combined with continued support of our brands and expected lower pension income resulted in a 15% increase in adjusted EBIT. On a margin basis, adjusted EBIT was comparable to the prior year at 17.4%. Adjusted EPS increased 15% to $1.02 per share, driven primarily by the increase in adjusted EBIT and partially offset by a higher adjusted effective tax rate. Our cash flow from operations in the first quarter was $227 million, which allowed us to continue to invest in the business while we returned over $150 million to our shareholders through dividends and share repurchases. With Q1 results ahead of expectations and our strong confidence in the health and momentum of our brands and improved supply chain, we feel it's appropriate to raise our guidance. That said, let's first discuss our first quarter results versus prior year in more detail. Net sales in the quarter, both reported and organic, increased 15%, driven by 16 points of inflation-driven pricing, this was partially offset by a one point volume and mix headwind. Promotional spending in the quarter was down 1% in Meals & Beverages and up 1% in snacks and thus, overall comparable…

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

To start off, I guess, last quarter, I think, Mark, you mentioned that you expected sequential improvement in gross margins as the year progressed. Given how much better gross margins came in, in 1Q, I'm trying to get a sense of if that's still the case; and if so, if that would mean your full year gross margins could be better than the flattish outlook that you gave last quarter? So, I'm basically trying to get a sense of just sort of the cadence over the next couple of quarters in terms of the margin profile? And then I've got a quick follow-up.

Yes, that's -- yes. No, I got -- great question, Andrew. I guess maybe let me start with a little bit of what was better in Q1 than perhaps we had expected. I think it really does begin with top line. We were stronger performance on the top line, really driven by two things. I think the first was better in market, lower elasticity than we had expected paired with the marketing effectiveness. I'm always a little bit tough to tease those two things out. But at the end of the day, that in-market performance share recovery was stronger and faster than we had expected. I think the second area is we continue to execute really well on the supply chain. And the recovery in supply was fast enough that it allowed us to accelerate availability both for that inventory that we had planned. But also you saw places like unmeasured channels growing even faster than we had anticipated. In particular, foodservice was very, very strong. And as you drop that down into margin and you say, okay, top line better, how to -- what was different in the margin. As you know, when you get that top line going, there's a lot of positive effects throughout the P&L. And I do think, consistent with that, we saw greater efficiency. And again, I do think the execution across the Company has been very strong as well, whether it was the execution of pricing or Wave 3, whether it was our supply chain. I think, the combination of those elements were all very positive, and it did result in a better top line and a better margin than we had initially expected. I do think as you look out then across the balance of the year, what we would continue to…

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

We've seen some of your competitors in soup and broth be maybe a bit more aggressive with pricing on shelf lately. I'm just curious, is there anything you're seeing that's surprising in terms of competitive levels in these categories? And as we head into 2Q, are you hearing anything or seeing anything that would suggest that as you get more promotional as well, which you mentioned, that maybe your competitors will do the same or step it up even more.

Yes. I would say, first off, just to kind of make sure I appropriately caveat this. Everything that we're doing as it relates to an investment side, especially on the promotional side, would be very responsive to the marketplace, very modest in the sense of it being quite normal and just kind of how supply has recovered. This is not a overly aggressive stance or one that we're trying necessarily to distort a position as it relates to share or market because we don't really need it. I think the -- the reality is that the combination of the marketing, innovation and what we're doing on the brands have been very effective. And again, with my druthers, I'd rather be supporting the equity side. But at the end of the day, it's important that we stay very vigilant on the price gaps. And so everything that we're doing is really about watching where those price gaps are and how we feel about the value proposition. I think what's been really impressive across our portfolio is that although we're watching and seeing consumers change behavior in how they're purchasing and which categories they're migrating into this has been very, very helpful in the sense of getting the relevancy of our brands continuing to remain quite high. And so I think as we look forward, I'm not seeing anything that would suggest that our pricing would be overly aggressive or necessarily conservative. And I think that's the way we want to be, and that's where we want to be balanced. I think you mentioned soup obviously, in places where we're seeing more private label pressure. We want to make sure that we're especially vigilant there in keeping those price gaps reasonable. And I think we're -- right now, we're exactly where we expected to be on the soup business, actually a little bit better as we continue to see just tremendous momentum on our ready-to-serve side with both Chunky and the introduction of Pacific Can ready-to-serve soup has done very, very well. So probably a little bit ahead there, but on the condensed and broth side, very much in line with our expectations.

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

Mark, I was actually kind of hoping to circle back on the guidance a little bit. Are you largely caught up now on the shipment inventory replenishment? Should we kind of expect a shipment relative to consumption to be a lot closer, obviously, versus, I think, the 700 basis point spread that you saw in meals in the first quarter? And then I just have a quick follow-up.

Yes. I think we're pretty caught up. If we think about what we expected, as I said, I think if you remember, we talked a little bit about the unmeasured channels and a little bit of lagging there. I do feel really good. And again, you see that in the 500 basis point delta between our net sales and our consumption that really does reflect some of the -- both the inventory recovery in retail, but also those unmeasured channels recovering. And I think as I look forward, I would expect us to be closer and much more in line between consumption and sales as we go forward.

Got it. That's helpful. And then just back on Andrew's question around the gross margin. I think you said the implied math is that your margins are 20 basis points lower maybe than the flattish from before. A) I just want to make sure that, that was what you said and B) that was a gross margin comment, not an operating margin comment.

?:

To your question, when you look at the 20 basis points of reference, that's really the change versus the previous guidance.

Yes, not versus a year ago.

Yes, not versus a year ago. So you do see -- I mean, as we already described last time around, there was a little bit of that margin pressure year-over-year in the mid-level of our guidance range and you basically have a little bit more of that reflected in the updated guidance.

These are significant numbers, but yes, some pressure.

Your next question comes from the line of Jason English from Goldman Sachs. Your line is open.

A couple of quick questions. First, can you remind us how big foodservice is as a percentage of sales in your Meals & Beverages division and give us a little more color on how robust the growth was this quarter?

Yes, mid -- Jason, I'd say mid-single digits as a percentage of overall net sales for the enterprise.

And it was up about 40.

45% or so.

Yes, 45%.

Significant. And I think if you kind of -- right now, in Q1, it was in and around 6% of the overall enterprise.

Yes. I think one of the things to keep in mind on that number, Jason, is it was one of the harder hit when we were rationalizing supply a year ago. It was perhaps one of the places that felt that the most significantly. So although I would say we are seeing increase in demand. The biggest driver of that recovery is really the recovery of supply.

Got it. That's helpful. In context of that, you said we should expect consumption sales to be tracking reasonably close. With that type of robust growth, shouldn't we actually expect your reported results to be outstripping what we see in measured retail sales data going forward?

Yes, I do think there'll be some delta there. But as it relates to retail in particular, I think those two things will be close. I do think your overall net sales will get a little bit of bump as foodservice and some of the other unmeasured channels recover. However, I don't think you'll see this kind of difference because we -- as we did start to stabilize supply you see kind of a steady recovery. So although I agree with you, some delta, not as significant as this quarter.

Got it. Make sense. And one more, if I can, on inflation. Most companies are seeing the level of year-on-year inflation. If not stabilized, generally begin to moderate, you're going the other way with the acceleration here quarter-on-quarter. What is driving that?

Yes. Mick, why don't you cover that? Yes, three areas really.

So Jason, when you think about our overall inflation for the year, we're seeing a very similar dynamic what you're describing, right? Just it is low teens inflation year-over-year for the full year. However, I mean, basically, that Q1 number was as expected, the 18%. Because as you might recall, when we spoke about kind of our outlook for the full year, we're expecting double-digit inflation in the first half, but then we cut over into the new calendar year and certain contracts reset. And of course, then you start to comp also higher inflation levels from this past year. And then in the second half of the year as a result we expect more in the, call it, high single-digit type of inflation. So it's really, call it, a little bit of first half versus second half story. First half still continued double-digit inflation you saw in Q1. However, then in the second half, you start to see that installation is starting to moderate; however, still inflationary.

Yes. And I think the places where we saw deltas are really in the protein, resin areas and a little bit of this at times like, for example, in steel, we might have expected a little bit faster walked out in prices that may not have materialized at the same level. And so part of what we're reacting to is a little bit of the change in outlook for the cost relative to what we talked about for Wave 4 pricing. And again, it's a very targeted pricing action in particular to certain areas where you may have experienced some of that pressure.

Yes. And the dynamic that Mark is describing between on the one enterprising, but also a little bit additional pressure on that inflation around whether it's steel and protein that's really a second half dynamic.

All really helpful. Congrats on the good start to the year. I'll pass it on.

Thanks.

Your next question comes from the line of Chris Growe from Stifel. Your line is open.

My first question was just in relation to the wave of pricing you've taken. Have you said how much that is? And I thought it I'd be just good to hear how those conversations are going with retailers? As we near the end of this incremental inflation, is there any change in the tenor, if you will, in those discussions with retailers?

Yes. So it is a much more targeted action probably low single digits overall. I would say that as we've navigated through this last couple of years of elevated inflation, the level of transparency and almost the mechanical nature of understanding the validity of pricing actions has become a muscle that has really been built well, I think, on both sides of the table. So, it's really much more about the dialogue of where our costs, what -- how do those reflect what we're suggesting on price. So, I do think we are in a moment now where this is more the tail end and thus then ensuring that everything that we're doing is really clear and transparent, rationalized by the costs that we're dealing with. But I think when that happens, it's relatively constructive and the conversations kind of move forward, I would say, in a very almost mechanical way. I do think that the sensitivity around ensuring that we're doing everything possible to support the brands and the categories we're in, maintaining affordability for consumers in this tough environment. It's certainly top of mind for both us and the retailer as we work together. And so, we're quite conscious of those dynamics and ensuring that we're making the right strategic choices for the business for the long term.

That's great. I'm sure the increase in marketing helps a lot in communicating that to the retailer. So that's great. Just one follow-up with -- one follow-up, which is in -- you're starting to lap some pricing from the prior year. So you have a little bit more pricing coming through sequentially as well. So I just want to get a sense from like the pricing contribution in that pricing versus cost inflation. Is that a similar dynamic in 2Q as it was in 1Q in rough terms?

Yes. So I think it will be closer in Q2. I do think you might see a little bit more promotional spend in Q2 than Q1, again, all within a very reasonable range. It's really then the back half where you start to see the significant impact of a year ago pricing. And incremental contribution from pricing would be significantly lower as we get into Q3 and Q4.

Our next question comes from the line of Michael Lavery from Piper Sandler. Your line is open.

It was -- just about a year ago, you set your 17% margin target for snacks by 2025. But obviously, with just the environment being a little bit more difficult than we might have imagined then and just the margin outlook for this year and what last year looked like. Can you just give us an update of how much that might be on track or what might be needed to get there?

Yes, that's good question. I think that -- let me start with the elements of the strategy of our margin road map on snacks are very much intact. And so the ability for us to see the progress on the initiatives that we had as part of that, whether it was the original completion of the original value capture or the next wave of opportunity that we've seen relative to network route to market are all very much on track and in line. I will also say further to that, that the top line performance continues to be very, very strong. And as we all know, at the end of the day, on snacks, growth is really and has been the top priority for that division from the beginning. But I think the good news is all the things that we expected to be delivering, we're delivering. I think what we can't predict exactly right now is how the environment will evolve over time. There's no question that the combination of both inflation and some of the costs associated in the supply chain relative to COVID and all of the things that that we've been navigating over these last couple of years, how that comes off as we go forward and the environment begins to normalize. We talked in the past, if I were to kind of put a let's call it, a rough framework around it, I think there's probably a couple of hundred basis points of just what I would call environmental overhang that I do expect us to be able to improve by. So when I think about longer term on the business, I still remain very confident that, that margin objective and goal is in place. I think we just need to see how the environment unfolds to put a better qualification on timing. But I think the good news is the elements that we need to see progressing, we are seeing progress.

Okay. That's helpful. And maybe just on sauces, you also touched at the Investor Day on a potential new sauce brand either organically or M&A as part of the path to $1 billion. Is that still part of your thinking? And what -- can you give any latest on how that might unfold?

Yes. I mean we continue to be very bullish on the sauces area. This is a place that, quite frankly, before COVID was growing very well and certainly has continued through the pandemic and even in this moment of economic pressure, we continue to see a very high degree of relevance in that space. And when you look at our portfolio and sauces and you say, okay, where are the opportunity areas or the white spaces? I do continue to believe that there is opportunity at different price points. And I also think that in adjacent segments, there's opportunity as well. And I do think as you see our strategy kind of unfold over time, you'll continue to see us both driving that base business aggressively while adding strategically kind of either small tuck-in acquisitions or some perhaps organic developed new items to complement, not unlike what we're doing with flavor up and the re-launch of sauces, which again, very early in a different model of launching. But at the end of the day, continuing to build out. One thing I'll just mention that's quite interesting in this moment where economic pressure is putting barriers to -- away from home eating a little bit more. What's been very interesting is younger consumers have been one of the bigger sources of migration back into in-home cooking as their confidence and capability through COVID was established or built. You see them returning to that area. And so our opportunity of continuing to kind of arm them with new products or also innovation as it relates to recipe or usage is very much a focus of our strategy, one that's working very well at this moment and one we would expect to continue to do both through innovation as well as the marketing side.

And your final question comes from the line of Robert Moskow from Credit Suisse. Your line is open.

I thought I remember three months ago, Mark, you've given guidance for a 2% headwind from promotional spending for the full year. And this quarter is zero, are you pushing out some of the spending into the future quarters? Or do you think the promo headwind will be less than you originally expected?

I think, Rob, certainly, in Q1, I think the -- as I said, I think the execution and the growth certainly supported a lower rate than that. And I think as you look forward, I've not made a big adjustment to any out-quarter outlook. I think, again, as we navigate through this environment, we're trying to make sure we stay as pragmatic as we can. And as I think about it, what are the things that we're watching very closely, it does revolve around that consumer resilience and the continued overall value proposition. And so I haven't changed much of the outlook for the balance of the year, but I would acknowledge Q1 certainly was better than I might have originally expected.

Okay. Can you help me understand -- like what made it better, do you think? Was it that...

Well, I mean one, the top line was better, and that helps. I think there also as we as you go through, as you might remember, we were in the midst of executing a fairly significant Wave 3 pricing. And I think as you kind of go through that process, you've always got assumptions that as you execute, you may need a little less promotion in one area, maybe a little bit more effective in another area. Competition or price gaps may be a little different than what you anticipated. And so there's always a bit of agility that goes into this. And actually, this is a muscle that I would say historically may not have been as strong as it is today. And so kind of making some of those decisions in real time is very much an important part of the tool bag right now. And so I think that combination of elements really kind of led to what I would say is a better kind of on paper, if you will, lower bps of spending than what we might have anticipated.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.