CAMPBELL SOUP COMPANY OVERVIEW
This Management's Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements in "Part I - Item 1. Financial Statements," and our Form 10-K for the year endedJuly 31, 2022 , including but not limited to "Part I - Item 1A. Risk Factors" and "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Executive Summary
Unless otherwise stated, the terms "we," "us," "our" and the "company" refer to
We are a manufacturer and marketer of high-quality, branded food and beverage products. We operate in a highly competitive industry and experience competition in all of our categories. Business Trends
We have been actively monitoring the impact of the dynamic macroeconomic
environment, including input cost inflation, the conflict between
We anticipate that 2023 will continue to be a dynamic macroeconomic environment and we expect elevated levels of input cost inflation to persist throughout 2023. We will continue to take actions to mitigate a portion of this inflationary pressure, but we do not expect such benefits will fully offset the incremental costs in 2023. While we as a North American focused company have no direct exposure toRussia andUkraine , we have experienced shortages in materials and increased costs for transportation, energy and raw materials due in part to the negative impact of theRussia -Ukraine conflict on the global economy. To date, the conflict betweenRussia andUkraine has not had any material impact on our business, financial condition or results of operations. There still remains uncertainty around the COVID-19 pandemic. The ultimate impact depends on the severity and duration of the pandemic, including the emergence and spread of new COVID-19 variants and resurgences, the continued availability and effectiveness of vaccines and actions taken by government authorities and other third parties in response to the pandemic. We will continue to evaluate the extent to which the COVID-19 pandemic will impact our business, consolidated results of operations and financial condition. Net periodic pension and postretirement benefit income excluding any actuarial losses or gains is estimated to be approximately$35 million lower in 2023, subject to the impact of interim remeasurements. The decrease in 2023 is due to increases in discount rates used to determine the benefit obligations and a decline in the market value of plan assets.
Summary of Results
This Summary of Results provides significant highlights from the discussion and analysis that follows.
•Net sales increased 15% in the quarter to
•Gross profit, as a percent of sales, was 32.4% in 2023 compared to 32.3% in the prior-year quarter. The increase was primarily due to inflation-driven pricing actions, supply chain productivity improvements, lower promotional spending and lower restructuring-related costs, partially offset by higher cost inflation and other supply chain costs as well as unfavorable volume/mix. •Earnings per share were$.99 in 2023, compared to$.86 a year ago. The current and prior-year quarter included expenses of$.03 per share from items impacting comparability as discussed below.
Net Earnings attributable to
The following items impacted the comparability of net earnings and net earnings per share:
•We implemented several cost savings initiatives in recent years. In the first quarter of 2023, we recorded implementation costs and other related costs of$3 million in Administrative expenses ($.01 per share) related to these initiatives. In the first quarter of 2022, we recorded implementation costs and other related costs of$2 million in Administrative expenses and$2 million in Cost of products sold (aggregate impact of$3 million after tax, or$.01 per share) related to these initiatives. See Note 6 to the Consolidated Financial Statements and "Restructuring Charges and Cost Savings Initiatives" for additional information; 23 -------------------------------------------------------------------------------- •In the first quarter of 2023, we recognized actuarial losses in Other expenses / (income) of$15 million ($11 million after tax, or$.04 per share). In the first quarter of 2022, we recognized actuarial losses in Other expenses / (income) of$6 million ($5 million after tax, or$.02 per share). The actuarial losses related to interim remeasurements of certain pension plans due to lump sum distributions that exceeded or are expected to exceed service and interest costs resulting in settlement accounting for the plans; and •In the first quarter of 2023, we recognized gains in Cost of products sold of$5 million ($4 million after tax, or$.01 per share) associated with unrealized mark-to-market adjustments on outstanding undesignated commodity hedges. In the first quarter of 2022, we recognized losses in Cost of products sold of$3 million ($2 million after tax, or$.01 per share) associated with unrealized mark-to-market adjustments on outstanding undesignated commodity hedges.
The items impacting comparability are summarized below:
Three Months Ended
October 30, 2022 October 31, 2021
Earnings EPS Earnings EPS
(Millions, except per share amounts) Impact Impact Impact Impact
Net earnings attributable to Campbell Soup Company $ 297 $ .99 $ 261 $ .86
Restructuring charges, implementation costs and other
related costs $ (3) $ (.01) $ (3) $ (.01)
Pension actuarial losses (11) (.04) (5) (.02)
Commodity mark-to-market gains (losses) 4 .01 (2) (.01)
Impact of items on Net earnings(1) $ (10) $ (.03) $ (10) $ (.03) __________________________________________
(1)Sum of the individual amounts may not add due to rounding.
Net earnings attributable toCampbell Soup Company were$297 million ($.99 per share) in the current quarter, compared to$261 million ($.86 per share) in the year-ago quarter. After adjusting for items impacting comparability, earnings increased reflecting an improved gross profit, partially offset by higher marketing and selling expenses, a higher effective tax rate and higher other expenses. Earnings per share benefited from a reduction in the weighted average diluted shares outstanding.
FIRST-QUARTER DISCUSSION AND ANALYSIS
Sales
An analysis of net sales by reportable segment follows:
Three Months Ended
(Millions) October 30, 2022 October 31, 2021 % Change
Meals & Beverages $ 1,455 $ 1,266 15
Snacks 1,120 970 15
$ 2,575 $ 2,236 15
An analysis of percent change of net sales by reportable segment follows:
Meals & Beverages(2) Snacks Total
Volume and mix (1)% (2)% (1)%
Price and sales allowances 15 18 16
Decreased / (increased) promotional spending(1) 1 (1) -
Currency (1) - -
15% 15% 15%
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(1)Represents revenue reductions from trade promotion and consumer coupon redemption programs. (2)Sum of the individual amounts does not add due to rounding.
In Meals & Beverages, sales increased 15% primarily due to increases acrossU.S. retail products, includingU.S. soup and Prego pasta sauces, as well as gains in foodservice. Inflation-driven pricing and sales allowances and lower levels of 24 -------------------------------------------------------------------------------- promotional spending were partially offset by volume declines. Sales ofU.S. soup increased 11% due to increases in ready-to-serve soups, condensed soups and broth. In Snacks, sales increased 15% driven by sales of our power brands, which increased 21%. Sales increased due to increases in cookies and crackers, primarily Goldfish crackers, and in salty snacks, primarilySnyder's of Hanover pretzels and Kettle Brand andCape Cod potato chips. Inflation-driven pricing and sales allowances were partly offset by volume declines and increased promotional spending relative to moderated levels in the prior year.
Gross Profit
Gross profit, defined as Net sales less Cost of products sold, increased by$112 million in 2023 from 2022. As a percent of sales, gross profit was 32.4% in 2023 and 32.3% in 2022. The 10 basis-point increase in gross profit margin was due to the following factors: Margin Impact Price and sales allowances 1,130 Productivity improvements 230 Lower level of promotional spending 10 Lower restructuring-related costs 10 Cost inflation, supply chain costs and other factors(1) (1,220) Volume/mix(2) (150) 10
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(1)Includes an estimated positive margin impact of a 30 basis-point benefit from the change in unrealized mark-to-market adjustments on outstanding undesignated commodity hedge and 10 basis points from the benefit of cost savings initiatives, which were more than offset by cost inflation and other factors. (2)Includes the impact of operating leverage.
Marketing and Selling Expenses
Marketing and selling expenses as a percent of sales were 7.8% in 2023 compared to 7.6% in 2022. Marketing and selling expenses increased 18% in 2023 from 2022. The increase was primarily due to higher advertising and consumer promotion expense (approximately 13 points) and higher selling expenses (approximately 9 points), partially offset by increased benefits from cost savings initiatives (approximately 2 points). The increase in advertising and consumer promotion expense was due in part to moderated levels in the prior year from supply constraints.
Administrative Expenses
Administrative expenses as a percent of sales were 6.1% in 2023 compared to 7.0% in 2022. Administrative expenses increased 1% in 2023 from 2022. The increase was primarily due to higher general administrative costs and inflation (approximately 9 points), partially offset by lower expenses related to the settlement of certain legal claims (approximately 8 points).
Other Expenses / (Income)
Other expenses were$18 million in 2023 compared to other income of$1 million in 2022. Other expenses in 2023 included pension actuarial losses of$15 million . Other income in 2022 included pension actuarial losses of$6 million . Excluding these amounts, the remaining change was primarily due to lower net periodic pension and postretirement benefit income in the current year.
Operating Earnings
Segment operating earnings increased 19% in 2023 from 2022.
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--------------------------------------------------------------------------------An analysis of operating earnings by segment follows:
Three Months Ended
October 30,
(Millions) 2022 October 31, 2021 % Change
Meals & Beverages $ 331 $ 280 18
Snacks 153 128 20
484 408 19
Corporate income (expense) (48) (32)
Restructuring charges(1) - -
Earnings before interest and taxes $ 436 $ 376
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(1)See Note 6 to the Consolidated Financial Statements for additional information on restructuring charges.
Operating earnings from Meals & Beverages increased 18%. The increase was primarily due to higher gross profit, partially offset by higher marketing and selling expenses. Gross profit margin increased due to the impact of inflation-driven pricing actions, supply chain productivity improvements and lower levels of promotional spending, partially offset by higher cost inflation and other supply chain costs as well as unfavorable volume/mix. Operating earnings from Snacks increased 20%. The increase was primarily due to higher gross profit and lower administrative expenses, partially offset by higher marketing and selling expenses. Gross profit margin declined due to higher cost inflation and other supply chain costs as well as unfavorable volume/mix and higher levels of promotional spending, partially offset by the impact of inflation-driven pricing actions and supply chain productivity improvements. Corporate expense in 2023 included pension actuarial losses of$15 million , costs of$3 million related to costs savings initiatives and unrealized mark-to-market gains on outstanding undesignated commodity hedges of$5 million . Corporate expense in 2022 included pension actuarial losses of$6 million , costs of$4 million related to cost savings initiatives and unrealized mark-to-market losses on outstanding undesignated commodity hedges of$3 million . Excluding these amounts, the remaining increase was primarily due to lower net periodic pension and postretirement benefit income in the current year.
Interest Expense
Interest expense of
Taxes on Earnings
The effective tax rate was 23.8% in 2023 and 20.7% in 2022. The increase in the effective tax rate was primarily due to the favorable resolution of several tax matters in 2022.
Restructuring Charges and Cost Savings Initiatives
Multi-year Cost Savings Initiatives and Snyder's-Lance Cost Transformation Program and Integration
Continuing Operations
Beginning in fiscal 2015, we implemented initiatives to reduce costs and to streamline our organizational structure.
Over the years, we expanded these initiatives by continuing to optimize our supply chain and manufacturing networks, as well as our information technology infrastructure.
OnMarch 26, 2018 , we completed the acquisition ofSnyder's-Lance . Prior to the acquisition,Snyder's-Lance launched a cost transformation program following a comprehensive review of its operations with the goal of significantly improving its financial performance. We continued to implement this program and identified opportunities for additional cost synergies as we integratedSnyder's-Lance . 26 -------------------------------------------------------------------------------- In 2022, we expanded these initiatives as we continue to pursue cost savings by further optimizing our supply chain and manufacturing network and through effective cost management. Cost estimates for these expanded initiatives, as well as timing for certain activities, are continuing to be developed.
A summary of the pre-tax charges recognized in the Consolidated Statements of Earnings related to these initiatives is as follows:
Three Months Ended
2022 2021 October 30, 2022 Restructuring charges $ - $ - $ 264 Administrative expenses 3 2 362 Cost of products sold - 2 84 Marketing and selling expenses - - 14 Research and development expenses - - 4 Total pre-tax charges $ 3 $ 4 $ 728 Aggregate after-tax impact $ 3 $ 3 Per share impact$ .01 $ .01 A summary of the pre-tax costs associated with these initiatives is as follows: (Millions) Recognized as of October 30, 2022 Severance pay and benefits $ 227 Asset impairment/accelerated depreciation
82
Implementation costs and other related costs 419 Total $ 728
The total estimated pre-tax costs for actions that have been identified are
approximately
We expect the costs for actions that have been identified to date to consist of the following: approximately$230 million in severance pay and benefits; approximately$85 million in asset impairment and accelerated depreciation; and approximately$420 million to$425 million in implementation costs and other related costs. We expect these pre-tax costs to be associated with our segments as follows: Meals & Beverages - approximately 30%; Snacks - approximately 44%; and Corporate - approximately 26%. Of the aggregate$735 million to$740 million of pre-tax costs identified to date, we expect approximately$635 million to$640 million will be cash expenditures. In addition, we expect to invest approximately$450 million in capital expenditures, of which we invested$440 million as ofOctober 30, 2022 . We expect to invest in substantially all of the capital expenditures through 2023. The capital expenditures primarily relate to aU.S. warehouse optimization project, improvement of quality, safety and cost structure across theSnyder's-Lance manufacturing network, implementation of our existing SAP enterprise-resource planning system forSnyder's-Lance , transition of production within our Meals & Beverages manufacturing network, optimization of information technology infrastructure and applications and optimization of theSnyder's-Lance warehouse and distribution network.
We expect to fund the costs through cash flows from operations and short-term borrowings.
We expect the initiatives, once all phases are implemented, to generate annual ongoing savings of approximately$1 billion by the end of 2025. As ofOctober 30, 2022 , we have generated total program-to-date pre-tax savings of$860 million . 27 -------------------------------------------------------------------------------- Segment operating results do not include restructuring charges, implementation costs and other related costs because we evaluate segment performance excluding such charges. A summary of the pre-tax costs associated with segments is as follows: October 30, 2022 (Millions) Three Months Ended Costs Incurred to Date Meals & Beverages $ - $ 225 Snacks - 321 Corporate 3 182 Total$ 3 $ 728
LIQUIDITY AND CAPITAL RESOURCES
We expect foreseeable liquidity and capital resource requirements to be met through anticipated cash flows from operations; long-term borrowings; short-term borrowings, which may include commercial paper; credit facilities; and cash and cash equivalents. We believe that our sources of financing will be adequate to meet our future requirements.
We generated cash flows from operations of
Current assets are less than current liabilities as a result of our level of current maturities of long-term debt and short-term borrowings and our focus to lower core working capital requirements. We had negative working capital of$729 million as ofOctober 30, 2022 , and$923 million as ofJuly 31, 2022 . Total debt maturing within one year was$858 million as ofOctober 30, 2022 , and$814 million as ofJuly 31, 2022 . Capital expenditures were$77 million in 2023 and$69 million in 2022. Capital expenditures are expected to total approximately$325 million in 2023. Capital expenditures in the first three months of 2023 included chip and cracker capacity expansion for our Snacks business and a new manufacturing line for our Meals & Beverages business. In Snacks, we have a direct-store-delivery distribution model that uses independent contractor distributors. In order to maintain and expand this model, we routinely purchase and sell routes. The purchase and sale proceeds of the routes are reflected in investing activities. Dividend payments were$115 million in 2023 and$116 million in 2022. The regular quarterly dividend paid on our capital stock was$.37 per share in both the first quarter of 2023 and 2022. OnSeptember 21, 2022 , the Board of Directors declared a regular quarterly dividend of$.37 per share payable onOctober 31, 2022 to shareholders of record at the close of business onOctober 6, 2022 . OnNovember 30, 2022 , the Board of Directors declared a regular quarterly dividend of$.37 per share payable onJanuary 30, 2023 to shareholders of record at the close of business onJanuary 5, 2023 . InJune 2021 , the Board authorized an anti-dilutive share repurchase program of up to$250 million (June 2021 program) to offset the impact of dilution from shares issued under our stock compensation programs. TheJune 2021 program has no expiration date, but it may be suspended or discontinued at any time. Repurchases under the anti-dilutive program may be made in open-market or privately negotiated transactions. InSeptember 2021 , the Board approved a strategic share repurchase program of up to$500 million (September 2021 program). TheSeptember 2021 program has no expiration date, but it may be suspended or discontinued at any time. Repurchases under theSeptember 2021 program may be made in open-market or privately negotiated transactions. We repurchased 859 thousand shares at a cost of$41 million in 2023 pursuant to ourJune 2021 program. As ofOctober 30, 2022 , approximately$131 million remained available under theJune 2021 program and approximately$375 million remained available under theSeptember 2021 program. See Note 12 to the Consolidated Financial Statements and "Unregistered Sales ofEquity Securities and Use of Proceeds" for additional information. As ofOctober 30, 2022 , we had$858 million of short-term borrowings due within one year,$280 million of which was comprised of commercial paper borrowings. As ofOctober 30, 2022 , we issued$30 million of standby letters of credit. OnSeptember 27, 2021 , we entered into a committed revolving credit facility totaling$1.85 billion scheduled to mature onSeptember 27, 2026 . The facility remained unused atOctober 30, 2022 , except for$1 million of standby letters of credit that we issued under it. The facility contains customary covenants, including a financial covenant with respect to a minimum consolidated interest coverage ratio of consolidated adjusted EBITDA to consolidated interest expense (as each is defined in the credit facility) of not less than 3.25:1.00, measured quarterly, and customary events of default for credit facilities of this type. Loans under this facility will bear interest at the rates specified in the facility, which vary based on the type of loan and certain other customary conditions. The facility supports our commercial paper program and other general corporate purposes. We expect to continue to access the commercial paper markets, bank credit lines and utilize cash flows from operations to support our short-term liquidity requirements. OnNovember 15, 2022 , we entered into a delayed draw term loan credit agreement (the DDTL Credit Agreement) totaling up to$500 million scheduled to mature onNovember 15, 2025 . Loans under the DDTL Credit Agreement will bear interest at 28 -------------------------------------------------------------------------------- the rates specified in the DDTL Credit Agreement, which vary based on the type of loan and certain other conditions. The DDTL Credit Agreement contains customary representations and warranties, affirmative and negative covenants, including a financial covenant with respect to a minimum consolidated interest coverage ratio of consolidated adjusted EBITDA to consolidated interest expense (as each is defined in the DDTL Credit Agreement) of not less than 3.25:1.00, and events of default for credit facilities of this type. We anticipate using any of the proceeds of the loans under the DDTL Credit Agreement to refinance our existing$566 million Notes with a maturity date ofMarch 15, 2023 .
We are in compliance with the covenants contained in our credit facilities and debt securities.
InSeptember 2020 , we filed a registration statement with theSecurities and Exchange Commission that registered an indeterminate amount of debt securities. Under the registration statement, we may issue debt securities from time to time, depending on market conditions.
SIGNIFICANT ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in conformity with accounting principles generally accepted inthe United States . The preparation of these financial statements requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates and assumptions. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year endedJuly 31, 2022 (2022 Annual Report on Form 10-K). The accounting policies we used in preparing these financial statements are substantially consistent with those we applied in our 2022 Annual Report on Form 10-K. Our significant accounting estimates are described in Management's Discussion and Analysis included in the 2022 Annual Report on Form 10K.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements for information on recent accounting pronouncements.
FORWARD LOOKING STATEMENTS This Report contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current expectations regarding our future results of operations, economic performance, financial condition and achievements. These forward-looking statements can be identified by words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "pursue," "strategy," "target," "will" and similar expressions. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts, and may reflect anticipated cost savings or implementation of our strategic plan. These statements reflect our current plans and expectations and are based on information currently available to us. They rely on several assumptions regarding future events and estimates which could be inaccurate and which are inherently subject to risks and uncertainties. We wish to caution the reader that the following important factors and those important factors described in our otherSecurities and Exchange Commission filings, or in our 2022 Annual Report on Form 10-K, could affect our actual results and could cause such results to vary materially from those expressed in any forward-looking statements made by, or on behalf of, us:
•the risks related to the availability of, and cost inflation in, supply chain inputs, including labor, raw materials, commodities, packaging and transportation;
•the impacts of, and associated responses to the COVID-19 pandemic on our business, suppliers, customers, consumers and employees;
•our ability to execute on and realize the expected benefits from our strategy, including growing sales in snacks and growing/maintaining our market share position in soup;
•the impact of strong competitive responses to our efforts to leverage brand power with product innovation, promotional programs and new advertising;
•the risks associated with trade and consumer acceptance of product improvements, shelving initiatives, new products and pricing and promotional strategies;
•our ability to realize projected cost savings and benefits from cost savings initiatives and the integration of recent acquisitions;
•disruptions in or inefficiencies to our supply chain and/or operations;
•risks related to the effectiveness of our hedging activities and our ability to respond to volatility in commodity prices;
•our ability to manage changes to our organizational structure and/or business processes, including selling, distribution, manufacturing and information management systems or processes;
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--------------------------------------------------------------------------------•changes in consumer demand for our products and favorable perception of our brands;
•changing inventory management practices by certain of our key customers;
•a changing customer landscape, with value and e-commerce retailers expanding their market presence, while certain of our key customers maintain significance to our business;
•product quality and safety issues, including recalls and product liabilities;
•the possible disruption to the independent contractor distribution models used by certain of our businesses, including as a result of litigation or regulatory actions affecting their independent contractor classification;
•the uncertainties of litigation and regulatory actions against us;
•the costs, disruption and diversion of management's attention associated with activist investors;
•a disruption, failure or security breach of our or our vendors' information technology systems, including ransomware attacks;
•impairment to goodwill or other intangible assets;
•our ability to protect our intellectual property rights;
•increased liabilities and costs related to our defined benefit pension plans;
•our ability to attract and retain key talent;
•goals and initiatives related to, and the impacts of, climate change, including from weather-related events;
•negative changes and volatility in financial and credit markets, deteriorating economic conditions and other external factors, including changes in laws and regulations; and •unforeseen business disruptions or other impacts due to political instability, civil disobedience, terrorism, armed hostilities (including the ongoing conflict betweenRussia andUkraine ), extreme weather conditions, natural disasters, other pandemics or other calamities. This discussion of uncertainties is by no means exhaustive but is designed to highlight important factors that may impact our outlook. We disclaim any obligation or intent to update forward-looking statements made by us in order to reflect new information, events or circumstances after the date they are made.
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