Ladies and gentlemen, thank you for standing by, and welcome to the Campbell Soup Second Quarter 2020 Earnings Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Ken Gosnell, Vice President, Finance Strategy and Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone. Welcome to Campbell's second quarter 2020 earnings call. As usual, we've created slides to accompany our earnings presentation. You'll find these slides posted on our website this morning at investor.campbellsoupcompany.com. This call is open to the media who will participate in a listen-only mode. Turning to slide 3. 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 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 these measures to the most directly comparable GAAP measure, which is included in the appendix of this presentation. On slide 4, you can see what we plan to cover today. With us on the call today are Mark Clouse, Campbell's President and CEO, and Mick Beekhuizen, Chief Financial Officer. Mark will share his thoughts on our performance in the quarter and then Mick will walk through the financial details and our updated guidance for fiscal 2020. With that, let me turn the call over to Mark.

Thanks, Ken. Good morning, everyone. And thanks for joining us on the call. I guess, last quarter, I was a bit premature in saying goodbye to Ken. Looks like he'll be with us one more time. Seriously, though, thank you, Ken, for your contributions to the company and for bridging us to your replacement. As you may have seen, we announced that Rebecca Gardy will be joining Campbell as VP of Investor Relations on March 30. Rebecca and Ken will work together to ensure we have a smooth transition. Our results in the quarter were again in line or above our expectations. And we continued to successfully execute our plans to stabilize the company by investing in the business, optimizing our portfolio, efficiently implementing our operating model, and successful de leveraging of our balance sheet. In fact, in the quarter, we used the net proceeds from the divestitures, along with positive cash flows, to reduce our net debt to 3.5 times adjusted EBITDA. Overall, I am encouraged by our progress and how we are building a track record of improved execution. But I also recognize that we have more to do to deliver sustainable growth and performance across both of our businesses. Turning to slide 6. This quarter, we delivered growth across all key metrics, including organic sales, adjusted gross margin, EBIT and earnings. Looking at our specific results for Q2, organic net sales increased 1%, reflecting continued strength in snacks where organic net sales increased 2%, and improved performance in meals and beverages where organic net sales were comparable to a year ago. Importantly, soup performance improved meaningfully from the first quarter as solid holiday results, along with some timing from Thanksgiving resulted in about a 1% growth rate for Q2. Our end market performance maintained its momentum from…

Thanks, Mark. Before reviewing our results, I want to give you my perspective on the quarter and outlook for the balance of the year. As Mark stated, organic net sales, which excludes the negative impact from the divestiture of the European chips business, increased 1% from the prior year and were in line with our expectations. Net sales for Meals & Beverages were flat for the quarter, which is an improved trend from Q1 as we continued to invest. In Snacks, we continued to focus on the integration of Snyder's Lance, while we delivered top line organic growth of 2%, driven by gains across all nine of our power brands. We are pleased with improving trends of our adjusted gross margin as we benefited primarily from productivity improvements, cost savings, and favorable product mix, partially offset by moderating cost inflation with net price realization essentially neutral as the benefit of pricing actions was offset by trade investments. We continue to make strong progress against our cost savings target of $850 million by the end of fiscal 2022, delivering $45 million of incremental savings in the second quarter, bringing the program-to-date total for continuing operations to $650 million. Taking into account the top line growth, gross margin improvement and delivery on our cost savings programs, combined with continued investment in our brands, our adjusted EBIT increased year-over-year by 4% in the quarter. During the second quarter, we completed our divestiture plans as we closed on the divestiture of the remaining portion of Campbell International in December. Proceeds from the divestitures, along with positive cash flow from the business, have enabled us to reduce net debt levels from continuing operations by approximately $3.3 billion over the past 12 months. Lastly, we are updating our fiscal 2020 adjusted EPS guidance based on favorable…

Thanks, Mick. Before opening up the call for questions, I wanted to review our progress against the milestones we outlined at our Investor Day. As you know, I believe a candid conversation about this is critical for investors to track our progress. So, how did we do in the second quarter? I continue to feel very good about our progress against these key metrics. While we improved on top line, we have more work to do to make this truly sustainable. But, clearly, seeing key elements of our business improving is encouraging and I would say a step forward from Q1. We are slightly ahead of schedule on margins and EBIT, which is very positive as it's creating some flexibility to make sure we optimize the investments we need. Our cost savings programs are tracking to plan and we improved our balance sheet in the quarter by significantly reducing debt with the proceeds from the divestitures, resulting in debt levels at 3.5 times adjusted EBITDA. I'm also excited about our progress around building a winning team and culture, especially as it pertains to our new team members, increased focus, execution and accountability of our teams. The overall business is essentially on track with growing positive indicators of the full potential of this portfolio and clear areas where continued focus is still needed. With that, let's take some questions.

Thanks, Mark. We'll be happy to take questions. Crystal, let's open the lines and take our first question.

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

Good morning, everybody. And all the best going forward, Ken.

Thank you.

Sure. Mark, now that most of the soup season is behind the company, I'd love to get a better perspective maybe on what some of the key learnings you may have garnered that help inform Campbell's direction going forward, I guess, particularly given next soup season is one in which you expect Campbell to take a more substantial leap in terms of reframing the soup category and launching some of the more impactful, let's say, platform innovation. And while it's early, just as a separate one, I want to get a sense of – have you seen any evidence of pantry loading thus far in soup? But really, the more important part of this and why I ask it is, whether you have any research or evidence that shows when product gets back into households that may have moved away from it that there is some stickiness to that and it can ultimately maybe bring new households back into the category, sort of like – more like a trial – a trial sort of process. Thank you.

Yeah. Great. Yeah. Thanks for the question, Andrew. I think a lot of lessons in the season. And having it be my first time through the soup season, I think the general overarching theme or perspective is that – I would say, positive encouragement that when we do support the businesses, whether that is with marketing and advertising, or perhaps even in this year, more importantly, our relationships with our key retailers, that we can move the needle on the business. And I think what's probably most encouraging to me is the focus that we had on the condensed segment. As you know, it's a significant part of our soup business. It also happens to be a highly profitable portion of our soup business. And probably, I would say, arguably the one that perhaps most folks had questions about our ability to drive improvement. And for the quarter to see consumption up 2.5% and up almost a share point as we spent behind advertising, quality improvements, we saw increases in display in the marketplace. And all of that resulted not just in the growth, but also perhaps the most important aspect, which is – to your second question, which was that our household penetration went up. And you think about that as kind of the gift that keeps on giving as we expand the base of consumers and build the relevance of our category and bring new households in, that bodes quite well for us, in seeing that translate to more sustainable growth than just promoting perhaps into a period where you might have people more apt to pantry load on a good deal or a good program or even a reminder. I think even more important than that is that we're starting to see the dynamic of where those…

Great. Thanks very much.

Thank you. Our next question comes from Ken Goldman from JP Morgan. Your line is open.

Hi, thanks. And, Ken, from one Kenny G to another, thanks for all your help over the years and best of luck.

Thank you.

I wanted to ask two questions if I can. First, I wanted to get a little more specificity, if we could, on the comments about the strategic reinvestments, Mark. Could you just maybe focus a little bit or focus us a little bit on sort of which areas you might be reinvesting in, what form of those reinvestments might take? So, that's my first question. I can leave it there and follow-up.

Yeah. I can hit that one, then we'll come to the second one. I think there's three places where I see opportunity to continue to invest. The first area is, as you will see and are probably beginning to see, I think we've talked about this dynamic before where the Snacks business arguably is kind of a year ahead as it relates to innovation than our Meals & Beverages business. And so, what you've got happening in the back half of the year is that kind of first wave of concentrated innovation. So, great products like our veggie line on Goldfish, as well as our potato chip launch on Late July. And so, what I want to make sure we do is adequately support the innovation and perhaps even double down in some areas where we're seeing early success. So, I think the first bucket is really around the Snacks innovation bundles that are launching. The second is, one of the things that was really interesting for us on soup was that the condensed advertising that we started early this year – so we started about a month or two earlier than we normally do, especially around some of the eating varieties like tomato soup and grilled cheese, which is one of the areas where we saw a very, very positive response. So, I'd like to continue to do some learning on extending the seasonality, right? One of our goals is to try to broaden and extend our soup season by doing things that are a little less anchored specifically on cold weather and able to kind of bring usage through. So, whether it's some of the eating SKUs where we are going to add a little bit of advertising or even some of the recipe elements on condensed that we know that behavior goes beyond just the winter months is an opportunity to evaluate the ROIs and see where kind of those barriers are. And then, I think also going into Easter, as I mentioned on broth, although I would call it solid performance in the holiday, there were some clear areas of opportunity. And so, I want to make sure that our price points and the promotion calendars are set up well there and we may do a little bit of tactical investment on promotions as we get a little closer to that holiday. And so, the great news is that the flexibility by getting ahead as it relates to EBIT, stronger gross margin than we had anticipated with a little bit better mix and a little bit faster accumulation of our cost plan as well as a little bit of, I'd call, a dampening of inflation is giving us that flexibility and I think putting us in a really good spot.

That's very helpful. Thank you for that. And then, quickly, you just highlighted at the end of your comments, the third quarter is your most difficult comparison. Can you just elaborate a little bit on the message you're sending with that comment? Are you concerned a little bit that maybe Street EBIT numbers are slightly aggressive? Or was there some other messaging that I didn't pick up on?

Yeah, let me take that. So, when I think about it, we generally obviously don't want to give guidance with regard to individual quarters. However, I thought – as I also said in my prepared remarks, I thought it was important to highlight that we're starting to lap the M&B pricing benefit in the third quarter. And some of the promotional activities that we have continue. And they, we don't start to lap until the fourth quarter. So, as a result, I just wanted to highlight that.

I think the other thing too, Ken, just as you'll note, if you're kind of modeling the balance of the year, as we've said, we're now kind of directing on the cost savings to a little bit of the higher end of the range at $150 million. If you think about the fact that we've got $90 million in the first half, that leaves you about $60 million to go. So, you take the dynamic that Mick just described along with a little bit of a softer contribution, I think what you'll see is a little bit of this kind of ebb through Q3 and into Q4. Again, we feel really good about the underlying fundamentals. There's nothing that's like a looming issue or problem that we're expecting. It really just happens to be the dynamic of the phasing. And I think, again, inclusive of our ability to spend a little bit more into the business, which is great news for us.

Thank you so much.

Thank you. Our next question comes from Bryan Spillane from Bank of America. Your line is open.

Hey, good morning, everyone.

Hey, Brian.

So, I guess, my question is, just going back to the commentary made about household penetration in soup and millennials. I guess my question is, is there a chance – how much cannibalization maybe has there been? If you've got advertising on condensed with a better product [Technical Difficulty] taking from ready-to-serve? So is it household penetration of condensed that's going up and is it all cannibalizing ready-to-serve, especially since you didn't have the same type of messaging, at least for this season on ready-to-serve? So, I guess, my real question underneath this is, how incremental is the improvements you made in condensed than to the overall soup business or has it really just sort of taken some share from ready-to-serve?

Yeah, it's an interesting question. And again, we are watching very closely the dynamics between the different segments as it relates to where is the source of volume coming from. And there's no doubt that there is some interaction between the two, but we act – when we look at our numbers, the ready-to-serve declines are essentially what we expected relative to what we were doing based on the promotional side of the pricing side. And when you look at who we're adding to the condensed side, these are not primarily the same consumers that would be buying chunky. And so, that's good news. Now, are we sourcing from some other condensed or other ready-to-serve players within the category, I do think there is some dynamic there. One of the things that has been very important about how we've repositioned condensed is the strong permission as it relates to quality, whether that's adding more fresh cream or no added preservatives on chicken noodle or the six tomatoes in tomato soup, we really feel like that has been a big enabler, like I said, to kind of create permission in. And so, if you think about where we're sourcing from, it's likely coming from what would be perceived as healthier or options that are a little bit more relevant to that area. So, again, as I think about the portfolio going forward, I still very much like how we set up. I think we've got great brands positioned against particular benefits and occasions as well as consumer cohorts. So, I'm not worried right now about, are we just moving people from one to the other. But even if we did, given the margin advantage of the condensed business, that's not a terrible trade for us to make. But that's not really what we're seeing right now.

Okay, great. Thanks, Mark.

Yeah.

Thank you. Our next question comes from Nik Modi from RBC. Your line is open.

Yeah. Good morning, everyone. Mark, I had two questions. I know you recently hired a chief marketing officer late last year. So, maybe you could just give us some context, background on why Linda is the right person for the overall CMO job. And then, the second question is, some of the research we've done at the consumer level would suggest convenience is really resonating. The convenience message is really resonating with consumers. And perhaps that's why they're coming back to the Campbell's franchise. And I just wanted to kind of get your thoughts on – as you kind of reestablish relationships with retailers, as you play on this convenience theme even more, is there an opportunity to broaden the portfolio strategy not just to be in soup, but to kind of get into more of the convenient meals area in terms of more sauces, more toppers, things like that? Any thoughts around that would be useful.

Yeah, I love the question. The answer, let me start with Linda. As you may have seen – let me just for a second talk broadly about Meals & Beverages. You do see when you look at the Meals & Beverages team now a relatively new set of leaders across our business. And the genesis for that is really a fundamental shift or change in what we're trying to accomplish with Meals & Beverages. We return to a more growth orientation and really are looking at marketing and investment behind the businesses in that division. So, in fairness, if you're trying to just cut costs and to manage for cash, it's some different skill sets, albeit those who still very important to us. But if we're going to drive growth and innovation, we want to make sure we assemble the team that is best positioned to do that. And so, the combination of a Chris Foley coming from our Pepperidge Farm and Snacks business over to lead the division and then Linda who has a rich history – I've known Linda a long time. Did a great job in the Nabisco franchises, has been out working in some of the more entrepreneurial spaces. That skill set, I think, is a very good combination for us as we look at really upping our game as it relates to marketing and innovation. And then, complementing that, we have terrific supply chain leader, R&D leader that really helps kind of round out a lot of the team and also a new leader of sales. And I think, what we're trying to do is bring kind of a whole new look and feel to what our Meals & Beverages business is, and I think that team is doing a wonderful job in early days…

Great. Thank you very much.

Thank you. Our next question comes from Jason English from Goldman Sachs. Your line is open.

Hey, good morning, folks. Thank you for slotting me in. I appreciate it.

Hi, Jason.

Two questions. First, a follow on to this soup discussion. And I'm looking at the penetration data now to it. It's definitely encouraging to see the uptick on your condensed penetration. It looks like it's up around 3% or so, the latest 13 weeks. But what's surprising is that it's coming with a 3.5% drop for the category. So, it looks like consumers are still fleeing the category and all of your penetration growth is coming from a swap out of private label. How much of that trade up into your brand do you think is due to the supply disruptions with one of the major suppliers out there? And what would you expect as we go forward? We know that another one of the suppliers have already started to buy up some of the lines. It looks like that capacity issue should be unlocked before we get into next soup season. How do this year's gains don't become next year's pain points?

Right. Yeah, great question. The first thing I just would say, I'm not – this is always a little bit of a mystery to me, the difference between Nielsen and IRI, but the category numbers for us in the quarter that we see on condensed is down under a percent versus the run rate of being down 3%. So, I would have said we saw a notable – I would have said that we've seen a notable improvement in the underlying category dynamic, although not fully to positive yet.

Is that penetration, Mark, that you're gaining?

No, I'm seeing that…

Because I'm only looking at the penetration, the number of buyers. You kind of anchored us there.

Okay, only on penetration. Yeah, I think on penetration, the sourcing for us is a little bit – like I said, we've seen a combination of what we would call lapsed users and that may be a little bit of a trade up from private label to us. But some of the new households that are truly new consumers, I think, are benefiting us from a kind of sustainability aspect as we go into next year. I think the overall purchase and the category improvement is also a bit of an encouraging number for us. As it relates to private label, I mentioned in my comments, there were some supply issues. They weren't everywhere on private label, but, certainly, it did help us a bit in the quarter. But we also were lapping some other one-time headwinds as it related to storms from a year ago and a little bit of the snap dynamic, especially at the end of the quarter. I think the good news is we're seeing some of those customers make the decision not to come back in with private label, but to just stick with us given the strength of our performance during the holiday. So, that's good news as well. And that along with, I think, the lapping next year of the headwind of the distribution losses that we would hope to greatly mitigate as we go into next year, I think we've got a lot of – there's going to be a lot of puts and takes. But I think the net of it is I feel very good about the underlying health as something that we can build off of next year versus that we just go out and buy some share that we're going to give back next year. So, I think those are the drivers that I'm looking at. And, of course, we're going to have to watch it very closely as we move forward.

Got it. That's helpful. I'll pass it on.

Okay. Thanks, Jason.

Thank you. And in the interest of time, we'll be taking our last question from Chris Growe from Stifel. Your line is open.

Thank you. Good morning. Congrats. Happy retirement, Ken. Just to ask really quickly on the gross margin. I'm just curious, are you seeing there the benefits of – how much of the benefit of the gross margin improvement has been from productivity savings versus a synergy? Is this going to – and understanding of how the synergies are flowing through from the Snyder's Lance integration in relation to what has also been a strong productivity environment for the business as well.

Sure, sure. Why don't I start off with that? Thanks, Chris. Good question. So, if you also look at kind of the bridge that I included in the presentation, you see they're kind of the building blocks for the 150 basis point improvement. And you see kind of two different components in there that have helped our gross margin in addition to the overall mix. One of them is the productivity improvements, which is activities throughout our supply chain in order to continue to help offset some of the inflationary pressures that we see. But then, separately, we're also highlighting the cost savings program. And this is also where you would see the benefit from the integration of the Snyder's Lance business. If you look at it from kind of a total company perspective, you see that we generated year-to-date about $90 million of cost savings. That's that particular program. However, it goes across the P&L. That's $90 million. I'd say about 50/50 of that is within either the costs – or COGS and then the remainder is within the other components of our P&L.

If you think about it, Chris, so if you go back to the kind of gross margin bridge for a second, you've got inflation of 2%, which is about 160 basis point headwind and productivity-based productivity, as Mick said, those are the programs that we're doing kind of on a more annual basis, was about 140 basis points of good. So, the net of inflation and productivity not quite equal, but about a 20 bp headwind. And then, we picked up 90 basis points as it relates to the cost savings. And so, if you think about productivity at 140 basis points and cost savings about 90 basis points, that gives you kind of the relationship that you're looking for.

Yep. And just to be clear, and one final question would just be, basically the synergies within that. I guess I just want to understand, you talk about a successful integration so far of the business. Is it synergies as part of the, I guess, what you call, cost savings? Is that what's helping drive that incremental cost savings number, is my only question?

Yeah. No, no. I got you. Okay. I see what you're saying. Yeah, if you took the split of the $90 million, as Mick said, in the first half, you've got about half and half. So, half is what we call enterprise cost savings. So, those were like supply chain reinvention and network optimization, and the synergies were about $45 million of the $90 million. So, you're about 50/50 for the first half of the year. Is that the question you wanted…?

You got it. Yeah.

Okay.

Yeah, perfect. Thanks so much. Yeah.

Thank you. And that does conclude the question-and-answer session for today's conference. Ladies and gentlemen, thank you for participating in today's call. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.