The Long and Short
Another solid quarter for Campbell Soup
Meredith Contente | March 10, 2023
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) once again reported better-than-expected quarterly results with both the top and bottom lines beating consensus estimates. The strong results prompted management to increase full-year guidance for a second time this fiscal year. The company also noted that its cost reduction program remains on track. The strong top line growth coupled with continued cost measures led to some margin growth in the quarter. While CPB witnessed some relief in the core inflation rate on a sequential basis, annualized core inflation was 14% in the quarter.
CPB remains one of the better positioned N.A. Packaged Food & Beverage credits relative to peers. I last highlighted the front-end relationship of CPB relative to Keurig Dr. Pepper (KDP: Baa2/BBB) on December 9, as the former was trading wide to KDP, while the relationship between the two credits was reversed in the back end of the curve. CPB now trades through KDP in the front end of the curve, a reversal that occurred in the latter part of January 2023 after Moody’s revised CPB’s outlook from stable to positive. Given the positive outlook, there is further tightening potential for CPB relative to General Mills (GIS-Baa2/BBB), particularly in the back end of the curve where GIS trades roughly 40 bp through CPB versus between 5 bp to 10 bp in the front end of the curve.
Exhibit 1. CPB vs. GIS Spread Curve
Margins and Leverage Stack up Well Relative to GIS
The company’s strong fiscal second quarter organic sales growth largely came from price increases. While the company saw some volume declines in meals and beverages, the snacks business continued to deliver volume growth. CPB witnessed margin improvement in fiscal second quarter as the EBIT margin expanded 20 bp year-over-year to 14.6% and the EBITDA margin saw 10 bp of growth to 19.2%. Comparatively, GIS ended its fiscal second quarter with an EBITDA margin of 19.5%, representing 30 bp of growth from the year-ago period. GIS had been outperforming CPB on a margin basis by roughly 100 bp, but CPB has closed that gap with their multi-year cost savings program. CPB noted on its earnings call that it has already delivered $870 million in savings from the program and is on track to hit its $1.0 billion target by the end of fiscal 2025.
CPB ended the quarter with total debt of $4.6 billion and total EBITDA of $1.78 billion, translating to leverage of 2.6x. This is down from a high of 5.6x subsequent to the close of the Snyder’s acquisition in early 2018. GIS ended the most recent quarter with total leverage of 3.0x. GIS also saw its leverage increase post the Blue Buffalo acquisition in 2018, as leverage increased to the 4.8x area. While both credits proactively reduced debt post acquisition, CPB has maintained a very conservative approach to shareholder rewards relative to its peer, enabling more debt reduction. Over the last 12 months, CPB returned 70% of free cash flow to shareholders relative to 109% at GIS.
Guidance raised again
Given the better-than-expected quarterly performance, CPB raised its full year guidance yet again. Within CPB’s guidance, the company is assuming a core inflation rate for the year in the low-teens range. That would assume further sequential declines in the back half of the year, an assumption being echoed across the packaged food sector. CPB is hoping to offset some of the expected inflation with productivity improvements, which are being estimated in the 3% to 3.5% range. CPB is now guiding to net organic sales growth of 8.5% to 10%, which is up from previous guidance of 7% to 9%. CPB also increased the low end of its adjusted EBIT growth range by two percentage points and now expects adjusted EBIT to increase in the 4.5% to 6.5% range. Adjusted EPS is now being guided to the $2.95 to $3.00 range, up from previous guidance of $2.90 to $3.00.
Exhibit 2. CPB Updated Guidance
Moody’s outlook to positive
Moody’s revised CPB’s outlook from stable to positive earlier this year reflecting the company’s solid performance since the close of the Snyder’s acquisition. The agency made note of both the achievement of deal synergies and successful deleveraging. CPB essentially transformed its product portfolio having conducted multiple divestitures after the Snyder’s acquisition, shedding slower growth assets in the meals and beverages unit, including its international businesses. While it reduced its geographic diversity, it improved the company’s growth trajectory while providing extra cash that was put towards debt reduction. Moody’s noted that in light of the current economic environment, strong operating performance coupled with the maintenance of its conservative shareholder reward policy could lead to an upgrade. An upgrade by Moody’s to the Baa1 ratings category would be a catalyst for further spread tightening. Moody’s maintains a stable outlook on GIS’ Baa2 rating.