Greetings, ladies and gentlemen, and welcome to the Campbell Soup Company Third Quarter Fiscal 2024 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. Please go ahead.

Good morning and welcome to Campbell's third quarter fiscal ‘24 earnings conference call. I'm Rebecca Gardy, Chief Investor Relations Officer at Campbell. Joining me today are Mark Clouse, Chief Executive Officer, and Carrie Anderson, 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 the 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 our presentation. Slide 4 outlines today's agenda. Mark will provide insights into our third quarter performance as well as our in-market performance by division. Carrie will then discuss the financial results of the quarter in more detail and outline our guidance for the full fiscal year 2024, which we updated this morning. As a reminder, we completed the acquisition of Sovos Brands on March 12th, and as such, third quarter and third quarter year-to-date financial results include a partial quarter of contribution of Sovos Brands. And with that, I am pleased to turn the call over to Mark.

Thanks, Rebecca. Good morning, everyone, and thank you for joining our third quarter fiscal ‘24 earnings call. As we announced today, we had a solid third quarter with sequential volume improvement, stable organic net sales, double digit year-over-year adjusted EBIT and EPS growth while expanding margins. The integration of the Sovos Brands is off to a fantastic start and has already added significant incremental growth to our company in the third quarter. We feel great about the confirmation of our diligence during the acquisition process and are excited about Sovos' long runway for growth. We are also excited to be working with the many talented Sovos Brands team members who have joined Campbell's. We saw stabilizing in-market performance on our base Meals & Beverage business, but faced some moderate category pressure in the Snacks business. However, we've seen improvement in the latest weeks and remain very confident in the continued consumer demand for snacking and the strength of our portfolio of advantage brands. Additionally, we are pleased with our continued Snacks operating margin progress. We are updating our fiscal ‘24 outlook to reflect the addition of Sovos Brands and the ongoing pace of the consumer recovery. Carrie will provide further details on this guidance a bit later. Turning to Slide 7, organic net sales in the third quarter were comparable to the prior year period. As we expected, volume improved compared to the second quarter. Both adjusted EBIT and adjusted EPS increased by double digits, with the recent acquisition having no material impact to adjusted EPS. In-market consumption was down 2%, but up 6% versus two years ago, as we continue to normalize pricing and volumes. The 2 points of difference in organic net sales versus consumption was primarily driven by strength in unmeasured channels as foodservice and Canada both…

Thanks, Mark, and good morning, everyone. I'll start by sharing some highlights from our third quarter. We have a lot of positives including the better-than-expected contribution of the Sovos Brands business to our performance. Reported net sales were up 6% driven by the partial quarter of sales contribution from Sovos Brands. Organic net sales excluding the impact of acquisitions, divestitures, and currency, were comparable to the prior year and continued to show sequential volume improvement. On a two-year compounded annual growth rate basis, organic net sales grew 2%. Both adjusted EBIT and adjusted earnings per share increased double digits in the quarter with expansion in both adjusted gross margin and adjusted EBIT margin. Adjusted EBIT increased 13%, primarily driven by the contribution of Sovos Brands, as well as higher adjusted earnings in the base business. Adjusted EPS increased 10% to $0.75, with the impact of the acquisition approximately neutral in the quarter, exceeding our initial expectations. Slide 24 shows that organic net sales were stable with nominal impacts from net price realization and volume and mix. We experienced sequential improvement in the third quarter and expect these volume trends to modestly improve in Q4. And during the quarter, Sovos Brands added 7 percentage points to reported net sales growth, which exceeded our expectations. On Slide 25, third quarter adjusted gross profit margin expanded 30 basis points compared to the prior year to 31.2%. The drivers of margin expansion included supply chain productivity, cost savings initiatives, and favorable volume and mix. These contributors more than offset cost inflation and other supply chain costs and the impact of the Sovos acquisition, which has a lower margin profile than the base business. Core inflation in the quarter remains in the low single-digit range, consistent with rates we experienced in the first half, and…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Andrew Lazar from Barclays. Your line is open.

Great, thank you. Good morning, Mark and Carrie.

Hey, Andrew.

Hey there. Mark, maybe to start off, I guess, what gives you the confidence in a full recovery in your fiscal first half of ‘25, while kind of simultaneously taking down your ‘24 organic sales forecast by about 50 basis points? And I guess when you say full recovery, how do you sort of define that? Thank you.

Yeah, that's a good question. So I think one of the things, maybe just set a little bit of context, I think one of the things that has made this predicting consumer recovery a little more challenging than it probably seems that it should be is the non-linear kind of path that it's followed where depending on income level of consumer and category that you're referencing, the pace of impact has been somewhat staggered. And I gave the example this morning, which I think is a big reason for the moderation of inorganic outlook for the balance of the year, which is that the Snacks business in many ways and not inconsistent with history tends to be very resilient. And I think a combination of the role that snacking plays, a little bit of the emotional connection in tough times, all of those elements have kind of made Snacks a bit more resilient. But as we started the third quarter, we began to see what I would describe as kind of a catching up, if you will, of some consumer trade down, a little bit more buying on promotion, things that we had seen on the Meals & Beverage categories almost a year ago. And so as you look at Meals & Beverage, and especially as we watch these next four weeks or the last four weeks, you see kind of a full cycling of that consumer change in behavior on Meals & Beverage, and thus you're seeing Meals & Beverages to a certain degree recover. And when I say recover, it's not a hockey stick of change to positive, but more of a neutral base, then the categories kind of return, I would say, more to a historical run rate. And so in the last four weeks, as an…

Yeah, I appreciate the context. Thanks very much. I'll pass it on.

Your next question comes from a line of Jim Salera from Stephens. Your line is open.

Hi guys, good morning. Thanks for taking our question.

Hey, Jim.

Mark, I wanted to maybe size up the longer term opportunity for Rao's given the strength and the performance that the sauce is seeing. Can you just give us some thoughts around what you think the upside is on the sauce side and then maybe speak to some of the other growth avenues, like frozen pizza, frozen meals, ready-to-serve soup? And as we integrate Rao’s into our models, how we should think about that as a growth engine moving forward?

Yeah, obviously there's a lot of good detail in that question and I will say that I think, excuse me, part of the advantage of doing our Investor Day in September is it will give us a chance to really have that wired pretty tight and arguably be able to give you a little more depth on it. But here's what I'll say so far. I could not be more happy with how the Rao’s integration's going. And really, I have to say it's on almost every variable within how you would assess an acquisition for a company. And again, I'm not entirely surprised. We were very patient and I think a lot of great diligence. But almost to the point, we have validated all of our assumptions, if not identified upside to just about everything that we laid out for you at the time of the announcement. So whether you're looking at the deal economics, right, all of those are more positive today than they were a great job executing the deal, financials really across the board, the health of the business, if you remember, I mentioned this in my comments, but we laid out a list of reasons to believe why growth on Rao’s would continue and really to the item, we're pacing ahead of what we would have expected those to look like. And again, just another really incredible testament to the team, which is another point. I really, again, applaud the work that Todd and team had done in assembling an organization and a group of folks that really know this business and how to drive it. And I could not be more happy about the number of Sovos employees that have joined Campbell's, starting with Risa who is leading our efforts, including our Pacific business…

Yeah, that's great. Appreciate the color. I'll hop back in the queue.

Your next question comes from a line of David Palmer from Evercore ISI. Your line is open.

Thanks. Good morning. Interesting to hear your comments about the low income consumer and the pullback in snacks. It kind of reminds me of what's happening in fast food. In both segments, I would imagine that key players are keen not to lose the upcoming key summer selling season. You talked about that. I just wonder, I guess the question is, what should we expect from price mix from that segment over the next one or two quarters as you probably face that type of environment? Thanks.

Yeah, I think that we've talked about this a little bit before that from a historical perspective well before COVID, the Snacks categories in general tend to be a bit more promotable. I think it's a function, a bit of the impulse nature of the categories and the competitive nature of the categories. I do think what you should expect to see from us is continuing to remain competitive. Now, I do think given our categories and brands, we're not going to win this fight on the longer term by taking price down dramatically or going to promoted levels that are not sustainable. That's not going to be the right playbook for more elevated brands. I think a great example of that is right now in cookies, which is a tough category where we are seeing a fair amount of trading down into private label. The good news is our Pepperidge Farm business is really kind of holding its own, not by dealing the price points, but by continuing to bring added value. And so, kind of in the mindset of, if I'm being a little more thoughtful with my snack dollars, let's make it really count, has been more of the strategy on our more premium cookie business, which is proving to kind of be holding our own in that category, which has been probably one of the more difficult. I think as you get into salty, what we're going to want to do there is make sure that we've got reasonable price gaps, that we are in the key windows and on display at those key moments while continuing to bring a really robust level of innovation and news on our brands. And I think in particular, one of the places we're seeing a lot of competition is in kettle potato chips, which has been an extremely successful segment and continues to be, but we're also seeing a lot more competition there. And so we're going to want to make sure that we get the balance right. So what does that actually mean? I think in the fourth quarter, you'll see a little bit of balance between promo and investment and marketing. The net of it I think will be a pretty healthy investment. Nothing that that is out of the realm of history relative to promotion but certainly we want to stay nimble and make sure that we're as competitive as possible. And so, would you see 100 basis points or so of investment in promo as we think about Q4? I think that's probably a generally good proxy as we kind of navigate these next couple quarters.

No, that's helpful. Thank you. And on Meals & Beverages, just a quick one there. I just -- the pricing down a percent, we were a little surprised to see that. Why did that happen and what's your outlook for pricing in that segment going forward?

Yeah, I think, part of, interestingly enough, as I said earlier, this kind of staggered approach to consumer behavior, I think we're a lot further down the road as it relates to the Meals & Beverages categories, which arguably we're experiencing a little bit of a trade-down pressure and some of the competitive dynamics that we're seeing now in Snacks we were dealing with a year ago. And what we've been doing is really making sure that we've got the right framework in place relative to price gaps. I'll give you a great example of getting that balance right. When you think about our condensed suit business, that's one of the areas where we've tended to really see a lot of competitive pressure, and that's probably where private label has been a bit more relevant as we've looked at trade down and where we've experienced. So over the course of the last six months or so, we've really been fine tuning what that price gap needs to be while continuing to support some innovation and marketing on the business. And in the third quarter, we were able to kind of re-stabilize, if you will, the share position. But the category was still down about 4%. As you go into the latest four weeks and recognizing we are coming into the summer where the magnitude of the numbers are certainly smaller, but you're now seeing even an acceleration or step up, if you will, in the soup business and accelerating both top line, which is now positive on the condensed business, as well as share and units looking better, while private label has taken a bit of a step back in that category. So I think in many ways, that may have been a little bit more muted pricing that was recognized as probably not the right thing to do for the category. This is not a significant deal down. You know that because you're also seeing very material gross margin [Technical Difficulty] at the same time. I know that in the consensus, we're a little lower than what some people had modeled, but please remember that the mix impact of Sovos into that number is diluting that, about 30 basis points in the quarter. If you were to add that, you'd be a lot closer to, I think, where people's expectations were. So generally speaking, I feel very good about the profit trajectory for Meals & Beverage. But I also think we've got that playbook pretty well refined. And you see it in soup as the recovery really continues to build momentum and actually moving into positive territory, both on units and on dollars, which is really important.

That's helpful. Thank you.

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

Hey Mark, Carrie, good morning.

Hi, Peter.

Hey, maybe if I could just pick up on the last point you had there on the trajectory of gross margin. I think kind of the revised guidance implies a meaningful kind of ramp into the fourth quarter both sequentially and year-over-year, relative certainly to where the quarter came in. So maybe you can just unpack kind of what's driving the acceleration or reacceleration on the gross margin line as we get into 4Q and then start starting to think about ’25?

Yeah, why don't I -- I'll give a little bit of broader context. I'll let Carrie do a little bit of the bridge or the do-to, but you're absolutely right. It is important to remember that fourth quarter a year ago, we're cycling a pretty tough quarter from a year ago where we were feeling a lot of the kind of cumulative impact in absorption in some of our facilities given the volume reduction that we'd experienced through that cycle of pricing. If you remember, we talked a lot about this other supply chain cost line, which was a combination of some inflation, but also what I would describe as some of the inefficiency that we were navigating on the business. And so when you take that away and you start to stack on top of it, the productivity that we have at the same time, as well as one of the linchpins to the quarter was the recovery or improvement in the soup trajectory, which gives us an underlying tailwind on mix, which also was depressed in the fourth quarter, along with the Snacks roadmap and all of the other variables that we have attributing, we are expecting a significant step-up in EBIT and in margin. Again, a very healthy gross margin expansion, but where I talked a little bit about the dilution associated with Sovos, you'll see that more to the tune of about 40 basis points on the company. It's about 80 bps or so. Again, not a problem, not inconsistent with what we expect, but generally will depress a little bit of the upside. Still a significant upside even with that, but at the end of the day, a little bit more modest than what might be in a few models, but the net of all of that is you're going to be looking at EBIT growth that is probably in the 30s for percent growth, very, very strong EPS growth, and margin expansion really across the board. So a very good quarter of sustained sequential recovery, which has really been albeit maybe a little bit behind the pace of recovery that we wanted in the total business. The march forward has been very consistent and methodical, and fourth quarter will continue that. I don't know, I may have covered all of it, Carrie. Did I cover it all? I'm sorry.

You did. You covered it perfectly. It is a lot like Q3 in terms of the drivers of that expected expansion.

Yeah, I think with the notable exception that Snacks, as we noted in the Q2, had a very, very good Q3. That's why you see a little bit of pressure in Q3. I would expect to see them return to growth in the fourth quarter.

Got it. Okay. That's super helpful. And then, Mark, maybe just a quick one on Meals & Bevs, I think you called out in the press release, foodservice actually as a source of upside that you would seem to kind of buck the trend relative to what we're hearing from a lot of other folks. So maybe you can just touch on that a bit.

Yeah, I think the big enabler for us on the foodservice kind of divergence, if you will, from many of our peers has been the benefit of the supply chain progress we've had. As a reminder, our foodservice business, which sits in our Meals & Beverage division, is actually made up of both Meals & Beverage and Snacks businesses. And one of the things that we're seeing a lot of growth on right now is the expansion in capacity that we've been adding on snacking and enabling our foodservice teams to be able to sell with confidence against those brands. So that's gone very well. And then I also think, again, interesting when we think about the world of soup and we look for positive signs or positive indicators of stabilization of this category and the role it can play, one of the areas we're seeing an uptick in demand is our frozen soup business in foodservice. So more selling of soup as a menu item has been a pleasant surprise and that I think continues to be those two drivers, our soup business and our Snack business are really the two drivers for why I think you're seeing a little bit of a disconnect, if you will, in the growth of our foodservice business versus what you're seeing more macro trend-wise in that particular industry.

Great. Thanks very much, guys.

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

Yeah, thank you. Good morning everyone.

Hey, Nik.

Just two quick ones for me. Hey, Mark. Just on Snack, it was obviously been something that's been called out as potential tailwind as we kind of rolled through the years. So just wanted to get any perspective from your side on if you're seeing any benefits of that. But the broader question, I guess, is just kind of pricing has been a key theme for this Q&A. Mark, do you worry about price thresholds right now? I mean it seems like just given the amount of inflation, consumers are just feeling the burden. And I just wonder if like we've kind of gone too far. And I know rollbacks are not part of the historical strategy here for the entire CPG industry. But we seem to be in a very anomalous situation right now. So I just would love your thoughts around that.

Yeah. I know that is a significant topic of discussion right now, which is, were we seeing an overpricing on an absolute basis? When I look at the data today, I'm not yet seeing that as a significant concern other than as it relates to the context of where price gaps may be sitting. One data point that hopefully will make everyone feel a little bit better, if you look at the last four weeks through Memorial Day, salty as a broader category was essentially flat and that's not a good thing, right, given the historical growth that we've seen, but relative to what we had been seeing in the third quarter as a more material slowdown in that segment was a little bit better. Now, arguably, that's a fairly promoted period around Memorial Day. And so I think you'll see that drumbeat of promotion fairly consistent. But I'm not yet concluding that any of our, I can't speak to the industry broadly. But from our standpoint, I can't -- I wouldn't yet say that there's a place where we price too far. I do think there are some places where we have to mine the price gap perhaps a little bit better, a little bit tighter, maybe a little bit more frequency, but not necessarily a more dramatic step down in depth. So I think we need to watch that, and this is why I think these next few months through the summer and into the fall will be quite important for us to kind of do a little bit of what we've done on Meals & Beverage, which is settle in where we think the right price architecture looks like, the right promotion strategy, and make sure that we've got that balance right. But I'm not yet seeing a compelling call to action to necessarily lower pricing. But as I said, I do think you'll see a pretty good drumbeat of promotion, not wild price points, but a fairly good drumbeat of promotion in the fourth quarter.

Right. And then just on the Snack perspective?

Yeah, look, I think Snacks, again, I am not -- as we dug into this information more, I look at this and I go, you got a three-year CAGR of 8% if you take the third quarter on a three-year basis. Which, third quarter was our toughest underlying trend. I mean, the latest four weeks looked better, actually. As I said before, when you think about it in that context, a lot of discussion around is there are structural changes in the demand or the role of snacking. I just don't see it. Do I see some normalization and some catching up a little bit of wearing down economically of consumers? I do agree and I think that is the primary driver, but I don't think in my mind I see anything that indicates to me that we don't still have a great runway ahead. Now, what I will say is I do think our portfolio is a bit better position because if you look at where the fight is really happening in snacking with private label and there's no question that private label has made some headway into snacking, but a lot of that is happening in the main -- as you would expect, in the mainstream segments. And so the fact that our portfolio indexes much more to elevated categories, I actually like the setup for the future. Even in a world where private label may play a bit more of a role in Snacks, we tend to be in that elevated level above. And even as I mentioned in the latest four weeks, those segments, you're actually seeing a little bit more recovery. It's early, and I don't want to overcast the Memorial Day performance as a trend line, but I do think it's all encouraging and supports what we have believed, which is that the future of snacking and where the growth is really going to come from is more of these added value segments. And that bodes very well for how our portfolio is set up versus some of our competitors.

Great, thanks. I’ll pass it on.

And we have reached the end of our question-and-answer session. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.