Campbell Soup Company (CPB) — Form 10-Q
Reporting period: Fiscal third quarter and first nine months ended April 28, 2024; compared with periods ended April 30, 2023. Dollar amounts are in millions except per-share data.
Business context and results
Campbell sells branded food and beverage products through its Meals & Beverages and Snacks segments. The quarter includes Sovos Brands results from its March 12, 2024 acquisition; the comparison also reflects the prior-year sale of the Emerald nuts business.
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $2,369; +6% | $7,343; +1% |
| Gross margin | 30.9%, up from 30.0% | 31.3%, up from 31.0% |
| Earnings before interest and taxes | $248, versus $254 | $923, versus $1,040 |
| Net earnings | $133, versus $160 | $570, versus $689 |
| Diluted EPS | $0.44, versus $0.53 | $1.91, versus $2.29 |
| Operating cash flow | Not presented for the quarter | $897, versus $918 |
Quarterly sales growth was primarily acquisition-driven: Sovos added 7 percentage points to consolidated sales growth and contributed $166 of sales from closing through April 28. Meals & Beverages sales rose 15% to $1,272, while Snacks sales fell 2% to $1,097. Quarterly segment operating earnings rose 26% in Meals & Beverages and declined 7% in Snacks. For the nine months, sales rose 2% in Meals & Beverages and declined 1% in Snacks.
Quarterly gross margin improved mainly on supply-chain productivity and lower cost-savings initiative costs, partly offset by inflation, other supply-chain costs and acquisition-related dilution. Net earnings and EPS fell year over year; management said earnings excluding comparability items improved in the quarter, principally on gross profit, but declined for the nine months, reflecting higher marketing, interest, other and R&D expenses, partly offset by gross-profit improvement.
Liquidity, debt and capital allocation
- At April 28, cash was $107; current assets were $2,139 and current liabilities were $3,457. The company reported negative working capital of $1,318, including debt due within one year.
- Short-term borrowings were $1,427 and long-term debt was $5,752, for total carrying debt of $7,179, compared with $4,689 at July 30, 2023. Interest expense increased to $70 for the quarter from $47 and to $165 for the nine months from $139, primarily due to acquisition financing.
- The company issued $2.5 billion of senior notes in March at fixed rates of 5.20%–5.40%, with maturities from 2026 to 2034. It entered a new, unused $1.85 billion revolving facility maturing in 2029. Management expects to repay or refinance $1.15 billion of notes due March 2025 and said it was complying with debt covenants.
- Nine-month investing cash outflow was $2,987, including $2,617 for the acquisition and $376 of plant-asset purchases. Dividends paid were $334; share repurchases were $46.
Acquisition, outlook and other notable items
- Campbell completed the $2.899 billion Sovos Brands acquisition, adding Rao’s, Michael Angelo’s and noosa brands. The preliminary allocation includes $1.11 billion of goodwill and $1.785 billion of identifiable intangible assets. Sovos contributed a reported $75 loss from acquisition through quarter-end, including transaction and integration costs and acquisition-related interest.
- Management expects input-cost inflation to moderate through the rest of 2024, with productivity and prior pricing actions largely offsetting incremental costs. It noted that pricing will contribute less to 2024 sales after lapping prior-year price increases, and that lower consumption has pressured volumes, although year-over-year volume/mix improved modestly sequentially in each of the prior three quarters.
- Campbell expects approximately $500 of capital expenditures in fiscal 2024. Its continuing cost-savings program has incurred $855 of pre-tax costs to date; identified costs are estimated at $905–$930 through 2025, with approximately $725–$750 expected to be cash expenditures. The company targets about $1 billion in annual ongoing savings by the end of 2025 and reported $940 of program-to-date pre-tax savings.
- A new Snacks route-network initiative may incur up to approximately $115 of expenses through 2029. For Sovos integration, management targets approximately $50 of annual ongoing savings by the end of 2026; detailed expected costs and timing are still being developed.
- Reported quarterly comparability items included $95 of acquisition-related costs, $20 related to cost-savings and optimization initiatives, a $13 commodity-hedge mark-to-market gain, and $6 of accelerated intangible amortization. The filing does not provide a general full-year sales or EPS forecast.
- Two lawsuits filed in March 2024 allege Clean Water Act permit-limit violations at the Napoleon, Ohio wastewater facility. The company is remediating and in settlement discussions; it does not expect resolution costs to materially adversely affect its financial condition, results or cash flows, though outcomes and amounts remain uncertain.
Important facts for investors to verify
- Whether Sovos integration delivers the expected growth and savings, and how acquisition-related costs, amortization and interest affect reported earnings.
- Progress on refinancing or repaying the $1.15 billion due in March 2025, and the effect of elevated debt and interest expense on cash flow and liquidity.
- Whether volume trends, pricing, inflation and supply-chain productivity support margins as management expects.
- Execution, cash costs and timing of the announced cost-savings, capital-investment and Snacks route-network initiatives.
- Developments in the Napoleon wastewater litigation, the preliminary Sovos purchase-price allocation and valuation assumptions for goodwill and intangible assets.