Mark A. Clouse
President and Chief Executive Officer at Campbell Soup
Thanks, Rebecca. Good morning, everyone, and thank you for joining our third quarter fiscal '24 earnings call. As we announced today, we had a solid third quarter, with sequential volume improvement, stable organic net sales, double-digit year-over-year adjusted EBIT and EPS growth, while expanding margins. The integration of the Sovos Brands is off to a fantastic start and has already added significant incremental growth to our company in the third quarter. We feel great about the confirmation of our diligence during the acquisition process and are excited about Sovos' long runway for growth. We are also excited to be working with the many talented Sovos Brands team members who have joined Campbell's.
We saw stabilizing in-market performance on our base Meals and Beverage business, but faced some moderate category pressure in the snacks business. However, we've seen improvement in the latest weeks and remain very confident in the continued consumer demand for snacking and the strength of our portfolio of advantaged brands. Additionally, we are pleased with our continued snacks operating margin progress. We are updating our fiscal '24 outlook to reflect the addition of Sovos Brands and the ongoing pace of the consumer recovery. Carrie will provide further details on this guidance a bit later.
Turning to Slide seven, organic net sales in the third quarter were comparable to the prior year period. As we expected, volume improved compared to the second quarter. Both adjusted EBIT and adjusted EPS increased by double digits with the recent acquisition having no material impact to adjusted EPS. In-market consumption was down 2%, but up 6% versus two years ago as we continue to normalize pricing and volumes. The two points of difference in organic net sales versus consumption was primarily driven by strength in unmeasured channels as foodservice in Canada, both had strong quarters.
It is exciting to see the positive impact on the business from adding Sovos Brands. In Q3, on a pro-forma basis, we see a 200 basis point improvement in top-line and volume and mix growth. Looking at the now combined Campbell's, we would rank among the fastest volume-driven growth companies in the food sector over recent periods. As integration progresses, we expect to realize further top-line and bottom line benefits. I look forward to providing more details at our Investor Day in September about how this acquisition when paired with the rest of our iconic portfolio will fuel the next chapter of long-term growth for the company.
On Slide nine, I want to go into more detail about the current consumer environment. Unquestionably, as prices have begun to moderate, consumers are starting to recover. This is substantiated by the first improvements in consumer confidence in a long-time. In addition, we are seeing significant growth in the percentage of the top 50 edible categories that are maintaining or increasing household penetration compared to the same period last year. Most importantly, we are seeing food volume stabilize as pricing normalizes. Yet it is fair to say that the pace of this recovery has varied depending on the specific category and the consumer's income level.
For example, our snacks business, which has been the most resilient to date, is now facing some short-term pressure, especially among lower and middle income consumers. We are seeing some modest improvement in the Snacking segment in the most recent weeks with the expectation of more of a full recovery in the first half of fiscal 2025. Overall, we're staying focused on what we can control with an emphasis on execution, innovation and strong collaboration with our retail partners to remain relevant and win by meeting them both on quality and value, growing and improving share trends along with stabilizing volumes are clearly a positive indication and we expect that to continue going forward.
Moving to our Meals and Beverages division on Slide 10, we achieved comparable organic net sales in the quarter. More importantly, we delivered volume improvement from the second quarter as planned. Organic net sales outpaced consumption, reflecting the strength in unmeasured channels. As mentioned earlier, this was primarily in foodservice in Canada. As we look at Meals and Beverages on a pro-forma combined basis with the addition of Sovos brands, Meals and Beverages net sales grew 5%. Similarly, combined dollar consumption grew 3% for the quarter. This supports the ongoing transformation of our Meals and Beverages business and demonstrates the ability for this key business to be a positive driver of Campbell's growth going forward.
Now let me briefly cover our soup portfolio on Slide 11. We had an improvement in share on soup during the quarter, fueled by improving trends across most key segments. In particular, as consumers continue to focus on stretchable meals, the cooking side of the portfolio benefited in the quarter with notable dollar share gains in condensed cooking and broth. It's important to note that the industry has been experiencing some supply issues more broadly on broth. Given the strength of our supply chain, we've been able to step up production to help meet that need, which has accelerated growth in this normally stable category. Although we expect industry capacity to return over-time, it's adding significant new households for Swanson that we see as a positive indicator for the future. And our ready-to-serve business, although more pressured as a segment, we now have Rao's ready-to-serve soup business under our umbrella, which had strong dollar share gains in the quarter.
Slide 12 illustrates that we have now surpassed one of our main strategic plan goals, which was to build a $1 billion sauce business. With the addition of the ultra distinctive Rao's Italian sauce, has strengthened its leading share position in the total Italian sauce category in terms of both dollars and units, gaining 3.1 points of unit share and 3.1 points of dollar share in the third quarter. Even more encouraging is the household penetration momentum we are seeing for Prego and Rao's with both increasing compared to the prior year.
On Slide 13, we updated the slide we presented in August when we announced the Sovos transaction. As we had suggested at the time, there were many factors that support the potential for additional growth on Rao's. I'm happy to say, almost a year later, we have seen the validation of those assumptions as we continue to progress toward our next $1 billion brand. I'm excited that Rao's is exceeding our expectations regarding household penetration and that we're seeing faster growth among younger consumers. The path ahead will continue to be fueled by household penetration gains and strengthening distribution and assortment. With innovation in adjacent categories as additional growth drivers, the future is bright.
Moving to Frozen on Slide 14, although not a particularly big bet in our growth model, it was encouraging to see the progress in the quarter. Our total frozen meal business maintained positive momentum with strong velocity increases as the team has optimized assortments and distribution and with the continued strong performance from our expanding frozen pizza portfolio, we continue to see strong potential in this business. Overall, we continue to be encouraged by the success of Rao's disciplined and thoughtful brand extensions, and we'll provide a comprehensive update on our plans going forward during our upcoming Investor Day.
I'll wrap-up my remarks on the Meals and Beverages division by discussing noosa on Slide 15. The noosa business has been one of the more positive surprises in the Sovos brands acquisition. It is an excellent product and brand that continues to perform very well. In fact, in the quarter, the noosa spoonable business returned to dollar growth, driven by the success of its eight-ounce yogurt. Additionally, the eight-ounce yogurt has now experienced 14 quarters of consecutive dollar consumption growth. Even though we have decided to explore strategic alternatives for the business, as yogurt is not a strategic category for Campbell's, the business has truly exceeded our expectations. I am grateful to the noosa team for their tremendous focus and commitment. It is a well-run business with a dedicated team and great-tasting unique products.
Turning to our snacks business on Slide 16, organic net sales declined by 1%, slightly better than dollar consumption. On a two-year compounded annual growth rate basis, organic net sales increased 6%, matching dollar consumption growth for the quarter. Our power brands increased net sales by 2% following a 16% increase in the prior year, showing the continued resilience of brands like Goldfish and Late July, which increased net sales by 5% and 26%, respectively. On a two-year compounded annual growth rate basis, our power brands grew net sales and dollar consumption by 9%. Now that our power brands represent two-thirds of our snacks business, this is a great foundation for sustained growth going forward. The strength of the power brands in the quarter was tempered by declines in lower margin partner brands, contract manufacturing and fresh bakery. We look forward to our Investor Day, where we can provide both a clear growth acceleration path for power brands and a clear path to further optimize the remaining parts of our current snacks portfolio.
On Slide 17, I want to provide some context on the slower trends in the snacking categories seen over these past couple of quarters and add some proof points as to why we remain very bullish on the snacking occasion. First, over the past three years snacks categories have been the most resilient across food, essentially reflecting very little, if any, price elasticity. Recently, we have experienced some slowdown as low and middle income consumers have sustained economic pressure for so long, it's finally impacting snacks. However, even with this category moderation, we're still averaging 8% consumption growth over the last three years, which is well above total food and historical snack growth averages.
Second, the slowdown so far has been more modest compared to other edible categories, which is consistent with historical performance and learnings that snacks meet a variety of consumer needs, including emotional support during difficult times, making it more resilient than many other categories.
Finally, we're already seeing improvement as we enter the important summer holiday windows where snacks are the star of the show for backyard barbecues and entertainment. So although I anticipate some continued pressure in the short term, we expect snacks will recover over the next couple of quarters and are confident in our overall expectation for outsized growth in snacking over the longer-term. In fact, a couple of standouts in the third quarter were Late July and Pepperidge Farm Cookies, fueled by innovation and great marketing. We spiced up our Late July portfolio with the addition of Scorchin Sauce and Hawaiian Habanero just-in-time for the summer snacking season. Late July net sales in the quarter increased 26% compared to prior year as the brand displays remarkable momentum supported by our great new product development, brand investment and execution.
On the sweeter side, we continue to drive strong levels of velocity in cookies with new innovations in our Pepperidge Farm Milano cookie portfolio, such as the launch of our London Fog limited time offering. Most importantly, our Pepperidge Farm Cookies portfolio continues to grow buyers across all generations, a positive proof point that as consumers are more selective on how they spend their snacking dollars, our elevated brands are well-positioned to win.
Slide 19 illustrates the continued margin progress in our snacks business. On a two-year compound annual growth rate basis year-to-date, snacks organic net sales grew 7% and operating earnings increased 14%. This growth came with approximately 190 basis points of margin expansion. Key drivers of this margin expansion are initiatives to optimize our network, better execution in our manufacturing facilities and disciplined spending. We expect to reach our 15% operating margin goal for the full year and are on track to reach our longer-term target of 17%.
Before I wrap up, I wanted to address the recent announcement about further optimization of our supply chain. We are making significant investments to continue the transformation of our manufacturing and distribution network to maintain our competitive advantage, while also selectively rationalizing less efficient or redundant areas to lower cost. We are investing approximately $230 million through fiscal 2026 in various facilities to modernize our supply chain, including added capacity and capabilities. These projects will create approximately 210 new roles, especially with new aseptic technology opportunities in Maxton, North Carolina. This is in addition to the previously announced $160 million investment in our Richmond, Utah site to expand Goldfish capacity.
We are also closing our Tualatin as we shift soup and broth production to more advantaged sites, while also simplifying our Jeffersonville, Indiana plant to focus on Late July tortilla chip production and move potato chip production to more scaled locations. The impact of these changes will be the reduction of 415 rolls and be executed over the next two years. We continue to evaluate additional optimization opportunities across the network to build our supply chain of the future. At our upcoming Investor Day, we plan to provide full program details and savings to lay out the next source of fuel for growth and earnings.
In summary, the third quarter was a solid quarter where we advanced in every aspect of the business. We saw stabilizing trends on growth and volumes, compelling earnings with margin improvement and a great start to the integration of Sovos Brands. As we continue to control the controllables in a dynamic environment, I remain confident in our outlook and continue to see this moment as a tremendous time for the company to begin its next chapter of sustained growth. I'm looking forward to laying out that path fully for you at our upcoming Investor Day in September in New York City.
With that, let me turn it over to Carrie.
