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Campbell Soup net leverage now below peers

| June 5, 2020

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

CPB posted strong fiscal 3Q20 results this week fueled by pandemic pantry stocking for comfort foods that also deliver on value. Management has continued its commitment to reducing leverage via proceeds from asset sales and cash from operations, and CPB has achieved a net leverage ratio of 3.0x which is below other BBB peers that are in also in debt reduction mode post acquisitions. Notably CPB’s 10/30s curve is the flattest of its peers despite having margins close to General Mills (GIS) and better net leverage; this provides an attractive entry point into CPB 10-year bonds. Assuming the same curve differential, CPB 10-year bonds have at least 8 bp of upside from current levels.

Exhibit 1. BBB Packed Food Comps – LTM Basis

Source: Company report; Amherst Pierpont Securities

Fiscal 3Q20 Overview

The increased demand resulted in double-digit growth in both sales and operating profit. The soup business witnessed impressive growth as soup household penetration was up nearly 10 points in the quarter. CPB posted organic net sales growth of 17% in the quarter which was all fueled by volume/mix growth. Gross margin increased 100 bp year-over-year (to 34.7%) due to favorable product mix, improved operating leverage as well as supply chain improvements and cost reductions.  Additionally, we note that the EBIT margin witnessed 220 bp of growth (to 17.3%), reflecting the improvement in the gross margin and higher sales volumes.  CPB realized total cost savings of $30 million in the quarter and $120 million in the first nine months of fiscal 2020.  To date, $680mm of enterprise cost savings and synergies from the Synder’s-Lance acquisition have been achieved.  Management remains on track to hit its cumulative savings target of $850 million by FYE22.

The Meals & Beverages unit outpaced the Snacks unit in terms of sales growth for the first time in 12 quarters.  Net sales in Meals & Beverages were up 21% in the quarter as growth in soups was up 35% and food purchases for at home consumption more than offset the negative impact from the foodservice business.  Meals & Beverages operating earnings increased 35% primarily due to the volume gains and better gross profit performance.  Snacks saw organic growth sales growth of 12% while operating earnings were up 19%.  The strong Snacks performance reflected increased household penetration of 5.4%, with increases witnessed across all nine power brands. Management noted that seven out of their nine power brands held or grew market share during the quarter.

On Pace to Hit Net Leverage Target

 CPB ended the quarter with net debt of roughly $5.5 billion.  CPB has made significant progress in delevering the balance sheet since the close of the Synder’s-Lance acquisition.  CPB’s net debt balance declined by $2.9bn in the first nine months of fiscal 2020 as the company used non-core asset sale proceeds and cash from operations to repay debt. Since the close of the acquisition in March 2018, we note that CPB has reduced net debt by $4.1 billion.  While the company raised $1 billion through the issuance of 10-year and 30-year bonds in April, $300 million was used to repay borrowings under the revolver. The remaining proceeds are expected to reduce debt further, making the April transaction leverage neutral.  Management noted that it ended the quarter with net leverage of 3.2x (as it excludes EBITDA from operations divested in the quarter), and they remain on pace to hit their stated 3.0x net leverage target by fiscal 2021.

Full Year Guidance Raised

With few companies providing full year guidance at this point, CPB not only provided guidance but raised its targets for the fiscal year based on 3Q performance and its outlook for continued demand for its products.  As such, management is now forecasting organic net sales to be up in the 5.5%-6.5% range, which is up from previous guidance of a decline of 1% to growth of 1%.  Adjusted EBIT is now expected to grow in the 12%-14% range, up from previous indications for 2%-4% growth.  Adjusted EPS was raised from a range of $2.55-$2.60 to $2.87-$2.92.  Fiscal 2020 is a 53-week year (resulting in an additional week) which management believes will have a 2 percentage point contribution to adjusted EBIT and EPS.  The organic net sales guidance excludes this contribution as well as the negative two percentage point impact from the sale of the European chips business.

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