Campbell Soup Company — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended January 29, 2023; comparisons are with the periods ended January 30, 2022. Amounts are in millions except per-share data. Campbell manufactures and markets branded food and beverage products through its Meals & Beverages and Snacks segments.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $2,485 | $2,209 | $5,060 | $4,445 |
| Gross margin | 30.5% | 30.3% | 31.5% | 31.3% |
| Net earnings attributable to Campbell | $232 | $212 | $529 | $473 |
| Diluted EPS | $0.77 | $0.70 | $1.76 | $1.56 |
| Operating cash flow | Not separately stated | Not separately stated | $732 | $766 |
| Capital expenditures | Not separately stated | Not separately stated | $155 | $129 |
Q2 sales rose 12%, driven primarily by net price realization; volume/mix declined 2% overall. Meals & Beverages sales increased 10% and Snacks sales increased 15%. Q2 segment operating earnings rose 19% to $399; reported earnings before interest and taxes were $350, including $9 of restructuring charges. Gross margin improved 20 basis points as pricing and productivity gains were partly offset by inflation, supply-chain costs, and unfavorable volume/mix. Q2 interest expense was $45 and the effective tax rate was 23.9%.
For the first six months, sales increased 14%, while volume/mix declined 1%. Segment operating earnings increased 19% to $883. The effective tax rate was 23.9%, compared with 21.9% in the prior-year period. Operating cash flow declined $34, primarily due to working-capital changes, partly offset by higher cash earnings.
Financial position and liquidity
At January 29, 2023, cash was $158; current assets were $2,087 and current liabilities were $2,699, resulting in negative working capital of $612. Short-term borrowings were $578 and long-term debt was $3,992, for total debt carrying value of $4,570, compared with $4,810 at July 31, 2022. The company reported $732 of operating cash flow and $155 of capital spending for the six-month period. It paid $226 in dividends and repurchased $66 of shares.
A $1.85 billion revolving credit facility, maturing in 2026, was unused except for $1 of standby letters of credit. The company also arranged a delayed-draw term loan facility of up to $500, maturing in 2025, and anticipated using the proceeds to refinance $566 of notes due March 2023. Management said it was in compliance with debt covenants and expected available funding sources to meet foreseeable needs.
Outlook, commentary, risks, and unusual items
- Management expected elevated input-cost inflation to persist throughout 2023 and said mitigation actions would not fully offset incremental costs. Russia-Ukraine-related volatility had affected costs, but the conflict had not materially affected the company’s results or financial condition to date. COVID-19 impacts remained uncertain.
- Fiscal 2023 capital expenditures were expected to be approximately $325. The company estimated 2023 pension and postretirement benefit income, excluding actuarial gains or losses, would be approximately $45 lower, subject to interim remeasurements.
- Identified cost-saving initiatives were estimated to involve $860–$880 of pretax costs through 2025, of which approximately $690–$710 was expected to be cash expenditure. The company expected approximately $600 of related capital expenditures through 2025 and targeted approximately $1 billion of annual ongoing savings by the end of 2025. It had recorded $742 of program costs and invested $441 in related capital expenditures as of January 29, 2023. Estimates and timing for expanded initiatives remained under development.
- Q2 comparability items included $9 of restructuring charges and $5 of implementation costs, partly offset by $6 of pension actuarial gains; undesignated commodity-hedge mark-to-market losses were $4. Together, identified items reduced Q2 earnings by $9, or $0.03 per share. The company also announced plans to consolidate its Snacks offices in Charlotte and Norwalk into its Camden headquarters.
- Key risks include persistent inflation and supply-chain disruption, competition and consumer response to pricing, execution of cost-saving plans, commodity and currency volatility, customer concentration, litigation, product quality and safety, cyber incidents, and possible goodwill or intangible-asset impairment. The company said pending legal matters could result in material charges in a particular period, although it did not expect known matters to materially adversely affect consolidated results or financial condition.
Important facts for investors to verify
- Whether pricing can continue to offset inflation without worsening volume/mix or market share, particularly in Meals & Beverages.
- Progress against the cost program’s remaining estimated costs, capital spending, timing, and targeted savings.
- Execution of the March 2023 debt refinancing and the effect of borrowing costs on liquidity and interest expense.
- Whether operating cash flow recovers from the first-half decline while the company funds capital spending, dividends, and share repurchases.
- Potential exposure from legal matters, customer concentration, and impairment-sensitive trademarks; the filing notes that $434 of certain indefinite-lived trademarks had 10% or less fair-value coverage above carrying value at the 2022 annual impairment test.