Campbell Soup Company — Q1 FY2024 10-Q
Reporting period: Three months ended October 29, 2023; comparative period ended October 30, 2022. Fiscal year ends July 28, 2024.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $2.518 billion | $2.575 billion | Down 2% |
| Gross profit | $788 million | $834 million | Down $46 million |
| Gross margin | 31.3% | 32.4% | Down 110 basis points |
| Earnings before interest and taxes | $358 million | $436 million | Down 18% |
| Net earnings attributable to Campbell | $234 million | $297 million | Down 21% |
| Diluted EPS | $0.78 | $0.99 | Down $0.21 |
| Operating cash flow | $174 million | $227 million | Down $53 million |
| Capital expenditures | $143 million | $77 million | Up $66 million |
Gross margin pressure reflected input inflation and other supply-chain costs, unfavorable volume/mix and restructuring-related costs, partly offset by pricing and productivity improvements. Marketing and selling expense rose 10%; interest expense increased to $49 million from $47 million, primarily on higher average interest rates. The effective tax rate was 24.5%, versus 23.8%.
Segments and sales trends
- Meals & Beverages: Sales fell 4% to $1.404 billion; segment operating earnings declined 13% to $287 million. U.S. soup sales fell 5% following an 11% increase in the prior-year quarter.
- Snacks: Sales declined 1% to $1.114 billion, including the effect of the Emerald nuts divestiture; segment operating earnings rose 5% to $161 million. Power-brand sales increased 5%.
- Company sales declined as volume/mix fell 5%, partly offset by 3% net price realization. Sales were up approximately 6% on a two-year CAGR basis.
Liquidity, debt and capital
At October 29, 2023, cash was $91 million, short-term borrowings were $206 million and long-term debt was $4.500 billion. Total debt carrying value was $4.706 billion, compared with $4.689 billion at July 30, 2023. Current liabilities exceeded current assets by $71 million; management said it expects liquidity needs to be met through operating cash flow, borrowings and available facilities. The $1.85 billion revolving credit facility was essentially unused, and the company reported compliance with debt covenants.
Supplier-finance obligations included in accounts payable were $277 million, up from $258 million at fiscal year-end. The company paid $114 million in dividends and repurchased $28 million of shares during the quarter.
Outlook, notable items and risks
- Management expects modest input-cost inflation to continue through the remainder of FY2024, with supply-chain productivity and prior pricing actions expected to largely offset incremental costs. It expects favorable net price realization to contribute less to sales as prior-year price increases are lapped. Management anticipates industry volume trends will improve as inflation moderates.
- FY2024 capital expenditures are expected to be approximately $470 million to $500 million. No full-year sales or EPS guidance is provided in the filing text.
- Cost-saving initiatives are estimated to require $885 million to $905 million of pretax costs, substantially all through 2025, plus approximately $620 million of capital investment. Management expects about $1 billion in annual ongoing savings by the end of 2025; $895 million of program-to-date pretax savings had been generated.
- The proposed $2.7 billion Sovos Brands acquisition, at $23 per share in cash, received an FTC Second Request. Campbell expected closing in calendar 2024, with a target of mid-2024, subject to regulatory review and other conditions. Campbell intends to finance the acquisition with new debt; its $2 billion delayed-draw term loan facility for the transaction was unused at quarter-end.
- Comparability items reduced current-quarter EPS by an aggregate $0.13, including commodity hedge mark-to-market losses, cost-saving initiative costs, accelerated amortization, acquisition costs, cybersecurity costs and Plum-related litigation expense. Prior-year EPS included a pension actuarial loss; the filing reports $0.03 per share of total comparability items in that quarter.
- Other risks include commodity, labor and supply-chain costs; softer consumption and competition; successful delivery of restructuring savings; acquisition approval, financing and integration; litigation and regulatory matters; cybersecurity; and possible impairment of goodwill or intangibles. The company said pending legal matters could result in material charges in a particular period, though it did not believe known matters were likely to materially adversely affect consolidated results or financial condition.
Investor verification priorities
- Track volume/mix, especially U.S. soup, and whether pricing and productivity can offset inflation and supply-chain costs.
- Assess operating cash flow, working capital, supplier-finance balances and the funding impact of planned capital spending and the Sovos acquisition.
- Monitor FTC review and timing, acquisition financing costs, and any changes to the transaction’s expected benefits.
- Compare restructuring costs and capital investment with realized savings and the stated end-2025 savings target.
- Review the persistence of commodity hedge volatility, accelerated amortization, cybersecurity-related costs and Plum litigation expenses.