The Long and Short
Campbell Soup: Volume surprises to the upside and margins hold steady
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.
Campbell Soup (CPB) reported results for the first quarter of fiscal 2023 that came in way ahead of consensus estimates. The company posted strong organic sales growth fueled by price increases and better than expected volumes. And management then upped full year guidance. The company also noted it remained on track in its cost reduction program. The strong top line growth coupled with cost savings led to margin preservation for the quarter, a feat when considering that the company saw 18% core inflation in the quarter. CPB is one of the better positioned North American packaged food credits heading into calendar 2023. And there is value in the front end of the curve where CPB trades behind Keurig Dr. Pepper (KDP).
Exhibit 1. North American packaged food spreads (2Y-5Y)
Source: Bloomberg TRACE; APS
Pricing and productivity mitigate inflation
CPB started the fiscal year off strong with 15% growth across organic sales, adjusted EBIT and adjusted EPS. The strong results reflected inflation-driven pricing coupled with improved supply chain execution and productivity improvements, which more than offset a modest volume decline. In fact, volumes were estimated to contract over 4%, similar to peers, but came in over 300bps better than estimates. CPB’s focus on productivity and cost improvements enabled the company to hold the adjusted EBIT margin flat on a year-over-year basis, at 17.4%. CPB also was able to fully offset increased marketing and other expenses with reductions in both administrative costs and R&D (Exhibit 2).
Exhibit 2. CPB 1Q23 Adjusted EBIT Bridge
Source: Company Presentation; APS
Full-year guidance raised
CPB increased full year guidance reflecting its strong results and brand momentum. CPB assumes that core inflation for 2023 will be in the low teens range. Additionally, management is forecasting productivity improvements of roughly 3% and roughly $60 million of cost savings for the year. Given those assumptions, management is now guiding to organic net sales growth of 7% to 9%, up from 4% to 6%. Adjusted EBIT is now expected to increase in the 2.5% to 6.5% range, versus previous expectations of 1% to 5% growth. While the adjusted EPS range was increased by $0.05, to $2.90 to $3.00. Management’s guidance may even be a little conservative as they noted that the increased guidance reflects the current volatile economic environment.
Cost reduction program on track
CPB was able to achieve $10 million in cost savings in the quarter as part of the company’s multi-year cost reduction program. Under the program, CPB plans to deliver $1 billion of savings by the end of fiscal 2025. CPB had originally anticipated savings of $850 million but recently increased its target to $1.0 billion. Program-to-date savings now totals $860 million, which includes Synder’s-Lance integration synergies. Given the aforementioned guidance, CPB should end fiscal 2023 with over $900 million in savings from the program.
CPB’s continued focus on costs was imperative in keeping margins flat year-over-year. This compares very favorably to peers where margins have contracted. Furthermore, the EBITDA growth has kept pace with top line growth and has enabled CPB in keeping leverage at or below their target of 3.0x. As such, CPB witnessed an upgrade to ‘BBB’ with a stable outlook by S&P in September of this year.
No new debt expected this year
While CPB has $566 million of debt maturing in 2023, management has addressed the maturity with a $500 million delayed draw term loan. After the 2023 maturity, CPB has nothing coming due until 2025. Both the term loan and $1.15 billion of debt matures in 2025. Term loans for investment grade companies typically don’t carry pre-payment penalties, so we could see CPB chip away at the term loan over the next three years. Management is committed to its current ratings, therefore CPB should repay debt should it witness any EBITDA disruption to keep leverage at or below the current target.
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