Release Date: June 05, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sequential volume improvement and stable organic net sales.
- Double-digit year-over-year growth in adjusted EBIT and EPS.
- Successful integration of Sovos brands, contributing to significant incremental growth.
- Improvement in soup portfolio share, particularly in condensed, cooking, and broth segments.
- Strong performance in the frozen meals business, with positive momentum and strong velocity increases.
Negative Points
- Moderate category pressure in the snacks business, particularly among lower- and middle-income consumers.
- Organic net sales in the third quarter were comparable to the prior year, indicating limited growth.
- In-market consumption was down 2%, reflecting some challenges in consumer demand.
- Declines in third-party partner brands, contract manufacturing, and bakery within the snacks segment.
- Higher adjusted net interest expense related to higher levels of debt to fund the Sovos acquisition.
Q & A Highlights
Q: What gives you the confidence in a full recovery in your fiscal first half of '25, while simultaneously taking down your '24 organic sales forecast by about 50 basis points? And how do you define full recovery?
A: The nonlinear path of consumer recovery, varying by income level and category, makes predictions challenging. Snacks, typically resilient, showed some consumer trade-down and promotion buying in Q3. Meals and Beverages, impacted earlier, are stabilizing. We expect snacks to cycle through consumer adjustments by the first half of '25, supported by strong execution and innovation.
Q: Can you size up the longer-term opportunity for Rao's given its strong performance? What are the growth avenues like frozen pizza, frozen meals, and ready-to-serve soup?
A: Rao's integration is progressing well, validating our assumptions. We see upside in frozen pizza and other adjacencies like soup and dry pasta. Noosa's performance has been a pleasant surprise. We expect to provide more detailed growth plans at our Investor Day in September.
Q: What should we expect from price mix in the Snacks segment over the next one or two quarters?
A: We aim to remain competitive without dramatically lowering prices. We'll focus on maintaining reasonable price gaps, key promotional windows, and robust innovation. Expect a balanced investment in promotion and marketing, with a potential 100 basis points investment in promo for Q4.
Q: Why did pricing in Meals and Beverages decline by 1%, and what's the outlook for pricing in that segment?
A: Meals and Beverages experienced trade-down pressure and competitive dynamics earlier. We've been fine-tuning price gaps, especially in condensed soup, leading to share stabilization and category growth. We expect continued profit trajectory improvement and positive momentum in soup.
Q: What's driving the expected acceleration in gross margin in Q4 and into fiscal '25?
A: We're cycling a tough Q4 from last year, with improvements in supply chain productivity, mix, and Snacks recovery. We expect significant EBIT and margin expansion, with a healthy gross margin increase, despite some dilution from the Sovos acquisition.
Q: Can you explain the upside in foodservice performance, given the broader industry trends?
A: Our foodservice growth is driven by supply chain improvements and expanded capacity in Snacks. Increased demand for frozen soup in foodservice and strong performance in Snacks have contributed to our positive foodservice results.
Q: Are you concerned about price thresholds and the potential need for rollbacks given consumer burden?
A: We haven't seen a significant concern about overpricing yet. We need to manage price gaps better and maintain a balanced promotion strategy. We don't see a compelling need to lower prices but expect a consistent promotion drumbeat in Q4.
Q: Are you seeing any benefits from SNAP as a potential tailwind for Snacks?
A: We see no structural changes in snacking demand. Our portfolio, indexed to elevated categories, is well-positioned for future growth. Private label competition is more prevalent in mainstream segments, while our elevated brands continue to perform well.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
