Okay, thanks again for being with us for the next installment of TD Cowen’s Sipping and Snacking Summit. I'm Rob Moskow, a senior analyst covering the food industry. With us in this segment are President and CEO of Campbell's Soup Company, Mark Clouse, and EVP and CFO, Carrie Anderson. Since joining Campbell in 2019, Mark and his management team have taken a pragmatic approach to managing canned soup, while investing in and consolidating its big Snack business to generate profitable growth. Additionally, the company recently acquired Sovos Brands, which operates one of the fastest-growing brands in the entire grocery store, and a personal favorite on pasta night in my home, Rao's. Thank you so much for joining us, Mark and Carrie, and good to see you.
Great to see you, Rob. You too.
Thank you. All right, so I'm gonna start with some kind of broader kind of industry questions, and then dive in to Campbell. We have 45 minutes, and for those who are listening, feel free to send questions on the message board, and I'll be sure to get to them. So let's start with consumer behavior. Been very confusing over the past year, especially compared to last year, because consumers are rather suddenly cutting back on their spending in the grocery store. Last year, demand was highly inelastic. And Mark, on the fourth quarter call, you provided some interesting thoughts on how these dynamics impacted your business during the summer, and why you think it'll get better during the soup season. So can you dig more into that-
Yeah
and maybe explain the consumer research you did to kind of come to those conclusions?
Sure, yeah. So, you know, I think always in these moments of seeking to take the complicated and make it simple, this is one of those moments where it's not particularly easy to do that. So we'll do our best to try to put it into a couple different buckets. So, you know, we really talked about three different areas that we saw influencing our business, and to a certain degree, more broadly, influencing the categories that we participated in.
And I think they probably each kind of sit on the continuum of, you know, magnitude of contribution, but also, you know, let's call it intuitive or not intuitive, that may help you kind of get your arms around at least how we're seeing it through our lens or through our perspective. The first one is one that we all know and appreciate, but, you know, arguably, maybe got a little less of the press time or airtime a year ago, that may have diminished the awareness on its kind of sustained impact in that baseline of 2022, that I think we really, you know, probably realized a little bit more as we were really unpacking, the fiscal fourth quarter of 2023, and that was COVID.
You know, really, the dynamic that you saw through the summer were these variant spikes, where we'd get the news of the day, new variant, and if you remember what was going on at that time, we were rolling out substantial pricing, and a lot of the debate or the discussion was on elasticity. Rob, to your point, you know, many of the categories really felt almost inelastic, right? We're taking the pricing, we're still seeing pretty stable volumes. There wasn't really, certainly nothing near the norm of historical levels of elasticity. I think probably in that kind of, let's call it, you know, pot of different variables, I do think COVID played a bigger role than we certainly had called out or anticipated.
But when you went back and looked, especially at categories that traditionally don't perform as well in the summer, like soup, you really saw a pretty dramatic bump each time we ran into one of those. And I guess the good news, bad news story is, as you kind of exit the month of September, that dynamic, we really didn't see much in the winter. It was a more, you know, normalized baseline. I am sure the threat of COVID still played a bit of a role, but I do think it was one of those things that created perhaps a bit more conviction or confidence to the lack of elasticity that might have had a more distinct and different variable or driver than just pricing alone.
and so I think that's, you know, that's a part of the story, and arguably for us, in the summer, and especially in the fourth quarter, as we started to tease apart contribution, it was a pretty big chunk of what we saw or were experiencing. And I, I think, you know, we're happy that as we get into October and beyond, you know, that we don't see as profound as a driver. I think the second area is the one we all know, right, which is pricing. And, and as we cycle that pricing, what we're all waiting for a little bit is the, is the effect of the volume kind of replacing that, and I think as time goes on, we will see that.
But I do think, both for us, the COVID component that I just talked about, and then the third area, which is really the consumer behavior space, has probably slowed that recovery a bit more than we would've hoped or necessarily expected. But I do think that as you imagine that curve on pricing, there is a start and a finish to that, and as we get into the back half of the year, and at a minimum, are lapping some of the consumer dynamics I'll talk about in just a second. I think the confidence that you hear from us in improvement, right? And we're not talking hockey stick, but a stabilization and then, you know, some positive contribution from volume mix as we get into the back half, we continue to feel very good about.
And that, you know, plus probably brings us to the third area, and maybe the most interesting, which is some of the consumer behavior evolution that we're seeing. And I, you know, think for a while now, we've certainly seen value playing a role, but honestly, as you looked at the categories, the resiliency in some of the categories were not behaving the way that you normally do in economic pressure, where you see a lot of trading down. Although we do see that in a couple categories, that wasn't like a broad narrative, and that was a little bit of a, you know, head scratcher, I think, for many of us that have been through these, you know, cycles in the past.
As we dug into it deeper, what we actually saw happening is that there was almost a prioritization that consumers were doing. We saw that the basket size were getting smaller, but instead of trading down on the, you know, let's say, buying the same items, but cheaper items, what we actually were seeing was a distortion toward the more relevant categories for the moment. So those things that were more seasonally relevant, we saw a higher index to the ones that were less. And of course, soup in the summer, where it's always a lower ranking, we saw that dropping even a little bit lower.
And then, you know, conversely, that paired with still some of the value, whether it's consumers moving to what we would call more stretchable meals or kind of more servings per dollar, if you will, as they were picking, you know, categories or migrating from maybe single serve to more, you know, kind of, let's call it simple meals, that allowed you to feed more members of the family for the same dollars. So as far as what's the basis of that, you know, really not a complicated analysis. It really started with understanding household penetration changes year over year. So where were we seeing less households buying categories, and how did that vary depending on the category you were in?
You know, one of the things we noticed was snacking was holding up extremely well, and we were kind of like, "That seems a little odd, that it's not at least experiencing the same pressure as some of the other categories." And that's when we kind of started to see this bifurcation between categories like Snacking, which are, no matter what the season of the year, number 1 or number 2, is the highest household penetration for consumers, and this variance versus kind of lower ranks. So soup, in the summer, is the 34th ranked category by household penetration. Why we feel that the trends will likely improve in this dynamic is that moves to number 10 when we get into the winter.
And so, you know, as we move through into October, and then certainly holidays in November and into the winter, we would expect the prioritization of soup to kind of improve. Now, at the same time, we're already benefiting from the fact that categories like Pasta Sauce or Cooking and Condensed, where that stretchable meal or value concept were doing very well. And although I don't think we're seeing as much broad-scale trade down as one might have expected, we are seeing it in some places like broth, where they tend to be a bit more commoditized segments, and so that pressure is a little bit more pronounced there. And so that kind of gives you the landscape as we see it.
I mean, I think it's fair to say that anybody that's telling you they know the day and the week that it's gonna – that things are gonna change or improve is probably certainly overplaying what I would see as being a little bit of still how this sequence of events unfold. But what I will say is, as you get to the back half of the year, many of these things that I'm describing are already in the base. So even if you were to see consumers continuing to behave in a similar way as today, you'd still have that as a comparable that's a lot easier to cycle than what we'll experience in the next couple quarters. And that's why you see our plan for the year being a little bit of this phasing through.
As I've described before, a bit of difference between the high end of our guidance and the low end of our guidance is a little bit of how this transition occurs. So I think we're being appropriately pragmatic, but with a fair degree of conviction that we will see improving trends as time goes on. So, Rob, I don't know if that helps kind of give you a little more depth into it, but that's really kind of how we saw, you know, the dynamics unfolding.
Yeah, I think, I think you hit on, on every, every point. I would like to know, you know, you, you, you kind of gave us your, your kind of your 70/30 rule on the soup portfolio. And, and a lot of people who've followed this category for a long time, including me, have been, you know, a little disappointed that, you know, there, there hasn't been more growth and, and also that, you know, Campbell's market shares have also declined over time. And, and can you talk a little bit more about the segmentation analysis you did in your portfolio?
Yeah.
How did you, when you went to the trade with your merchandising plans for this soup season, how did it influence your-
Yeah
your merchandising strategy?
Yeah, so, you know, great, great, great, great question, and, and I, I appreciate the fact that, you know, anytime you start to, you know, recarve up a category, there's always a, a healthy dose of skepticism. Are we, you know, trying to use math to our advantage? But, you know, what, what I'll tell you is, trying to understand a little bit of the disconnect in, in perspective, but also just helping people better understand the category. I mean, I think one of the things that jumped out at me in the fourth quarter as an example, was when we pulled broth out of the, the soup, category, our shares were relatively stable. And if you look at that portion of the category over time, we've pretty steadily grown share.
When you add broth into it, it kind of distorts the view of the business because broth has been a category, and again, this is not necessarily a good thing, bad thing, but just truth, that the category of broth has been growing at a disproportionate rate to soup. So fourth quarter was a perfect example of this kind of, you know, let's call it, you know, complexity of the dynamics, where you had more of a category dilemma on soup and really more of a share challenge on broth. When you put them together in a quarter, you draw the conclusion that you have both, you know, everything has both problems.
What we were trying to do was to really provide a perspective that says, "Okay, you know, 70% of our portfolio, which is really our condensed icons, our cooking Condensed, Chunky, Homes tyle, Pacific, that core part of our business, the first point to take away is that is 70% of our soup category." That business, over the last three years, has been extremely healthy. Its ability to grow, certainly we're facing some category dynamics right now, due to the drivers I talked about initially, but that category as a whole has been very, very healthy. If you go back and you plot it versus, you know, where we started this journey from, it is significantly ahead of where we were.
The complete transformation of Chunky, both from a pricing strategy as well as a consumer dynamic, how we've protected Condensed, the fueling of the growth of Pacific, we feel very, very good about it. Now, having said that, that 30% of the business is not insignificant, and what that represents is the flankers on our Condensed business, where I think Healthy Request, think kids brands, think flavor number, you know, 15 or 20. And some of our flankers on RTS and our Swanson Broth business, and as we look at those, there's probably going to be a different answer for each of them.
I do feel like first on Swanson, which is where we are experiencing almost entire share pressure we're seeing right now, the first point I would make is that that is a business that, in fact, over the last three years, we gained a lot of share. For whatever reason, private label was a little bit slower back to the party there, and we did accumulate some share, but nonetheless, even on a three-year horizon, we're still, not to the extent we're seeing right now, but we are still down on share. And that really is a category where we've got to make sure our blocking and tackling and kind of tactical elements are right. You know, price gap's right, good promotion, display.
In particular, during the holidays, one of the things we're feeling good about as we go into Thanksgiving and Christmas is a year ago, you know, private label was kind of the new shiny object for a lot of retailers, and so they chose to go key week and really try to drive traffic with private label, and it really didn't work. And so, the good news is, Swanson, you know, that is the time of year where consumers are not as willing, perhaps, to compromise with lower prices. It gives us a chance to kind of get back into that key week, which is so important for us. But that one's gonna be a little bit more of a strategy around ensuring value is right, make sure that we've got the right execution behind it.
It's not where the growth is really going to come from, but I don't expect it to be a leaky bucket into the future either. I think on the flankers, both for Condensed and for ready to serve, I think it's gonna be a combination of reframing some of those to be more clear on their value drive, while also probably rationalize some of it. I think there are some, you know, flanker number 40 or 50 on the list. I think we've got enough innovation and enough of a storyline on that 70%, that we can create the story for retailers to redeploy the real estate on shelf to make room for the space that we have.
And so, you know, as you imagine a future dynamic, I would expect that 30% to shrink a bit more, stabilize, and then use that 70% to continue to grow. And so, you know, more to come on that. I think as we move forward, we'll try to give investors a better, you know, let's call it, you know, set of breadcrumbs to follow to see that strategy fully evolve. But it is, if you look at all categories in Nielsen and IRI, IRI, I would tell you, there is no category that has a more disparate number of items that are used in different occasions, different price points, that are sharing into one total soup category than that. So look, I think what I'm trying to do is just make sure that the strategy we're actually executing is more obvious and more trackable for investors.
Okay. You know, I hate to keep poking on the weaker parts of the portfolio.
That's all right.
You know-
That's okay.
You know, V8 has been. I'm sorry. I hope you weren't groaning there. Has...
No, I was breathing.
Okay, good. You know, it's been challenged and, you know, for years and years, I think investors would sometimes question whether beverage belongs in-
Yeah
the Campbell portfolio, and especially now that you've made a big acquisition in a category where, in pasta sauce, where and even in frozen meals, where it looks like you have some real
Runway. Yeah
strong tailwinds and runway. What do you think the future is for V8?
Yeah.
Why does it belong, or what are the pros and cons?
Right. Well, I think, you know, V8 is one of those that I would tell you, it, it's a pretty unique animal in the world of beverage. And that, you know, one of the reasons why, you know, this will probably seem fairly obvious, but, one of the reasons that it fits is because it has a very, very common ingredient base, to a large part of our portfolio, especially as it relates to V8 Red, which is the vegetable juice. And again, you know, not unlike a little bit of the story we just went through, V8 is a little bit of a story that is told through the different subsegments of the category.
If you look at kind of in a continuum of good to challenge, you know, years and years ago, we launched V8 Splash, which was designed to be kind of a marginally better-for-you version of a kid's juice. And I think over time, really, the point of difference or the separation for Splash has become far less, and so we've got to really decide whether or not Splash, you know, we're going to do that, and we can have it stand on its own two feet or not. But when I look at the balance, which is the V8 Red, I'm not sure that's going to be a growth engine, but I do think it is, it has consistently been a fairly stable business.
It does drive a lot of synergy and benefits from the fact that our access to tomatoes, our ability to process really serves that business quite well. And then you have V8 Energy, which has been extremely successful. And, you know, so the goal in mind here is really let's drive V8 Energy. I think you're gonna see, even in this year, continued expansion of that platform, both from a distribution and geographic footprint. V8 Red, we're gonna continue to do really what we have been doing, which is kind of, you know, the the OG of plant-based beverages, as we affectionately refer to it as.
But use it in this context of really being this opportunity to bring for those that are focused on more plant-based diets or looking for servings of vegetables, it is still arguably one of the most effective ways of bringing that into your diet. And then Splash, I think not unlike the flanker discussion we just had on soup, we need to once and for all kind of figure out what that strategy is gonna look like and where that goes going forward. As far as the long-term view of its relevancy in the category, I think for now, it's certainly not creating a distraction or a problem for us. I do agree with your point of view that says, all right, as you get, you know, bigger with core items, does that, you know, provide a little less emphasis?
I think we run it in a pretty efficient but focused way, and so I don't see it as a necessarily a problem, but I think we do have some work to do on it. You know, part of what I just was having this conversation a couple of weeks ago with some investors is, you know, I mean, truth be told, during COVID and, you know, kind of through the last couple of years, some of these category or portfolio dynamics where we've got to kind of roll up our sleeves and get a few of these things better positioned for the future.
J ust really didn't make the hierarchy a priority in a world where we were dealing with a lot of other variables that we felt were bigger priorities for the business. And that, honestly, that triage of items I still think were the right priorities to focus on. But now that we're in a world where we're feeling a little bit more normality in the environment, this is a great moment for us to kind of complete the mission on a few of these categories that still have some work to do.
But I don't see any of them as being, you know, dramatic undertows to the business, but more opportunity to reshape so that, you know, you could imagine a world, Rob, where we're sitting in the back half, and let's assume for the moment that we've got the consumer landscape right, we execute the acquisition of Sovos, we could be in an ideal position to be able to come back to investors with a vision of this transformed meals and beverage portfolio that is erases all this kind of residual concern of, Can I grow? Can this contribute? Can this be a positive energy in the business? While filling in a few more of the blanks on Snacks, which has terrific momentum on top and bottom.
And I think, really for the first time, position Campbell's as truly a more differentiated, growth-driven storyline and maybe, you know, shake off a little bit, of the legacy of this kind of, you know, questions that we've needed to answer. So I, I'm excited about coming into that window where we can tell this kind of next chapter with really tangible, pieces of evidence and, distinct actions that I'm hoping will be a real catalyst for the, for the company and the stock, for, you know, on that sake as well.
... Well, Sovos certainly adds a lot to the story, and I'm gonna get to that.
Yep
... in a short time. Let me ask a different question, though, and then we'll also get into Snacks. But, you know, one of the debates I hear in the space is that, I guess, doubts that the industry has really changed four years after the pandemic, that, you know, there hasn't been any real difference in competitive advantages or how these big food companies have evolved or how consumers have changed. And I wanna know if you could highlight maybe some of the key capabilities that your company-
Yep
has developed, especially in the past four years. How you've capitalized on technological advancements, and marketing, and, and, selling, digitization of the supply chain, kind of feeding you with what I wanna hear, but maybe you could talk a little bit about that.
Yeah, well, I mean, you know, normally, I'm pretty diplomatic in my digestion of the challenge, but honestly, this one, I would tell you, I just think is dead wrong. I mean, I think the amount of transformation that has occurred over these last four years is probably one of the most profound step changes, certainly at Campbell's, but I think for many parts of our industry that we've probably experienced over the last 20 or 30 years.
I mean, it really, I think, you know, out of necessity for us, right, which is, I think, was a gift, as I felt like we were a little further behind the pack, if you will, when we walked into the pandemic. And that was probably a good catalyst for us not to be able to kind of relax and wait for the, you know, the world to calm down, 'cause you did end up waiting 4 years if you took that strategy. But I think there's a lot of meaningful changes.
You know, for us, I'll use Campbell's as the example, but our supply chain is completely transformed from where it was, and whether that is the technology or the integration of the supply chain into the commercial operations, with everything from forecasting to how we're laying out the network for the future, how we operate in our manufacturing facilities, how we motivate, develop, and train the folks that are on the line and get them prepared for this next generation of work has been profound. And I think for us, it's been one of the things that really has given us, where I would've said a liability, I actually think because we had to chase that faster, it gave us some distinct advantages.
You know, we're cycling through kind of that recovery, and yeah, maybe there's getting it back to a normal level, you'll see it more. But I think in the back half of the year, as you watch our cost structure, our margin agenda, and you see those pieces coming to fruition, already some on Snacking, but even on meals and beverages across the board, I just feel great about it. I also think, I mean, we've integrated now Snyder's-Lance specifically. Our portfolio has been completely transformed. I mean, set aside Sovos for a minute, you know, we've kind of offloaded the majority of the businesses that we felt were not core to us, even with the latest sale of Emerald Nuts.
We've, we really have just kind of completely embraced this concept of one geography, two divisions, and 13 categories, and, and I think focus is, is just incredibly powerful in this moment because it allows us to better amass, you know, our resources, capital, human, you name it, against that. And, you know, you go back four years, five years, we were a little bit all over the map, as you know, and I think that's been a, a big mission, for us as well. I think on the marketing side, you know, again, it's interesting. You know, COVID, as tragic, as that period was, it forced you to, to learn a few things. You know, I look at two brands in our portfolio that are just completely different today than they were four years ago.
You know, one's Goldfish and the other one's Chunky Soup, right? You had a Goldfish business that was really a kids' brand, and when moms stopped taking kids to soccer practice, all of a sudden we were like: Uh-oh, you know, it's in the house, but not... How do we get this thing stimulated and driving? And the team just did an amazing job using what I would call more disruptive technology on marketing to really age up the target, you know, and, and really smart innovation like Frank's RedHot or Old Bay, Dunkin', all great tools for us, but really changed completely the trajectory of that brand, and we did that really through these last four years.
You know, I'd like to think we would have done that anyway, but the catalyst of being in that moment put real pressure on us to think differently. Chunky's a little bit of the opposite, which was, you know, this thing was being, you know, footballed, if you will, $0.99, 10 for $10. You know, it was low price, viewed as cheap food, and we completely reframed it with a younger audience to be protein-driven, affordable, quick and great tasting. You know, we're Chunky Soup of all things, you know, on Madden football and gaming as a platform. You know, I was a little skeptical, but honestly, just really hit it out of the park. So I do think-...
The difference between where some of our brands are today and their relevance and readiness as we kind of come out of this long tunnel, I would tell you, I feel great about, you know, where we are. And look, I think you can see that in the fact that now, you know, we used to all kind of tout this 50-60% of our marketing in more contemporary digital and social. We're well over 80% now that's in vehicles that are really designed to be very surgical in nature, high ROI and efficiency. We learned a lot about e-commerce and how to convert marketing into purchase, you know, skills that we really didn't have necessarily a long time ago. And I guess I just would finish the consumer story with, for us, right?
We have another generation of consumers that know how to cook, and I don't know if that would've happened had they not been, you know, backed into the kitchen and had to kind of survive and learn their way forward. But regardless of that fact, we've got a platform now where you see businesses like our condensed cooking soups with a younger, you know, millennial household where the growth has come from, that's continuing even in this tough environment to grow share, is to me pretty powerful. And, you know, look, I think I feel great about the leaders we've put in place and how we're positioned. So I would say I really feel like this is a different company today. And, you know, look, step back for a second.
You know, all the growth at the time was happening in small, disruptive brands. 5, 6 years ago, a lot of the news or innovation was coming out of these smaller kind of platforms. I just don't think... I think we've retooled. I think you see more innovation coming from the companies now, as we needed to, right? We needed to react and, and, and needed to pivot.
And I always said, "Look, it's not an easy overnight turn," but I think these several years have allowed us to get ourselves better postured for the future. So, I mean, I can't speak on behalf of every company, but I would certainly say from our vantage point, I feel like we're in a really different and better position today than we were. Doesn't make it any easier, by the way, but as far as where we are, I think, you know, well ahead of where we were.
Maybe my follow-up to that, actually for Carrie, too, is, you know, in prior years, when companies realized they needed to reinvest for growth, it came with a backward step in profitability and margins 'cause you had to pay for it, and Campbell went through many, many phases of that over the years. But this one seems a little different, and it seems like there's reinvestment and profit growth at the same time. What is that a function of just better tools and more refined marketing capabilities? Is it just because there's a lot of productivity? Maybe for both of you on that.
Yeah, I'll start.
Sure.
Yeah, and then Mark can add in. But I would say the good news is that you're starting to see some of the normalization of the macro environment, right? So the trends on inflation are going in the right direction. By no means are we in a deflationary environment yet, but at least we're seeing that those headwinds moderate more. So that's going to allow for some of that margin expansion then to happen. As we talked about for our guidance, some modest levels of margin expansion and growth, earnings growth is what we expect for fiscal 2024. Good news is that you see that in the Snacks business.
So Snacks business saw 14.4% operating margins, 130 basis points improvement from fiscal 2022 in our fiscal 2023 results for Snacks. And there, I think, you know, we're seeing that benefit of some of those great productivity improvements. But I think a lot of it is just getting to a much more healthier macro environment as our supply chain, as Mark indicated, has now moved to a strength. And we start to lean in more into some of our productivity initiatives, and they start to get to the bottom, to the bottom line, right? So for Snacks particular, we've talked about a margin growth, a margin roadmap, that ultimately continues to see progression there. We talked about fiscal 2024 margins for Snacks being north of 15%.
We feel really good about that, again, in light of the fact that we're seeing some of those macro tailwinds or headwinds subside and allows that, that productivity to get to the bottom line. In addition, for Snacks in particular, we're working on a lot of unique network optimization opportunities, particularly in our warehouses and our hubs and our depots, optimizing those, working on our portfolio mix within Snacks. Mark mentioned the Emerald divestiture is one piece of that, but we're also making concerted efforts around where we can grow our own brands and tapering off lower-margin contract manufacturing and partner brands. We're gonna be taking advantage of that as well. Mark, anything else you want to add there?
Yeah, I mean, look, I, this, you know, I, I don't want this to sound like a, a, you know, a disparagement of other people's strategies, but I will say one of the things that we've been very disciplined on throughout is, you know, when we were feeling pressure on margin, we resisted the temptation to cut all the marketing and equity spend. And, you know, I've been there, done that, and inevitably, the reason that dynamic, Rob, you're describing has happened historically is because, yeah, it feels great to be touting big margin enhancements for a quarter or two, and then you're like, "Well, I've got to add it back." And so I think what we've tried to do throughout is kind of use our, our guardrails of kind of 9%-10% of net sales for marketing and selling.
try to keep ourselves within that envelope. We may move a little bit, you know, from one to the other, depending on the dynamic, but we did not let that be a temptation that we took. And so therefore, as we start to see the recovery that Carrie just described, you're not gonna have that traditional offset of, well, we gotta put all the money back into promotion, into equity, because we had taken it all out when we were feeling a little pressure. And as, you know, you bridge, like, even last quarter, you know, 100 basis points of the margin, you know, hit was really equity investment.
I was, quite frankly, happy to do that because I feel like this is the moment where we do not wanna back off as we, as we kind of come out of this cloud or this, you know, turbulent time. You know, I want our core equities to be strong and, and really be able to be better positioned, if you will, to take it on. And look, you know, I, I don't think that is the same playbook that was used by everybody in the industry, and I think if they- if you, if you, you know, needed or, or felt you needed to cut that, it's fine coming back.
Okay. Got it. Can you delve a little bit more, Carrie or Mark, into the building blocks to get to, I think, 17% margins in Snacks over time? You mentioned network optimization being a big part of it, warehouses, hubs, and depots. I personally always get a little bit confused as to how many warehouses, hubs, and depots do you have? What are you trying to do with them?
Thousands of them.
How many... I'm trying to get my head around thousands.
Yeah.
I don't quite get it, so maybe a little more framework around that.
Yeah, look, I think Carrie and I can kind of tackle this together, but let me give you a little bit of a view of how the business operates today that might help you kind of have a foundation then that we can make a transition off of. So today, as you know, we've got plants that were Snyder's-Lance plants, we have plants that were Pepperidge Farm plants, and that's kind of where we began the journey, right? So you had, you know, I think in total, 16, 14 or 16 different plants or different manufacturing platforms that we were operating around the country. And then we had three or have three DSD networks. So you have a Fresh Bakery, a Snyder's-Lance, and a Pepperidge Farm.
Each of those DSD networks had their own, depots and hubs, and essentially, a depot and a hub are both warehouses. They're just different-sized warehouses. And so what happens is you start to consolidate, volume for each of our three networks, and then the last stop is a hub, or a depot, where that's a truck pulls up to a depot and loads up their truck, takes off to the store. And so if you imagine, like, that's probably, you know, 900+ of those around the country, I think. You know, and then in different geographies, you know, they get a little more spread out, but there's three of the same thing almost everywhere you are.
You own, you own all those depots, is that right?
That's almost all of them. Yeah, so our strategy, right, so, you know, I'll just do kind of DSD manufacturing, and then I'll let Carrie talk a little bit about other variables in that bridge. But essentially, what the first step was was to create some synergy starting upstream, right? So the way you wanna do it is start to create consolidation as close to the plant as possible, and then begin to roll that all the way through, all the way to the truck, right? Is the goal in mind. And I would tell you, what we've done is we've begun to consolidate manufacturing, so we now have plants that are producing both Snyder's and Pepperidge on the same footprint. Charlotte's a great example of kind of our first mega plant. That enabled us to close Columbus, Georgia.
Our ability to begin to shrink that manufacturing footprint is one of the first, you know, kind of, productivity areas that we had. The next thing we did was consolidate mixing centers. So these are where it's coming out and then going off to depots and hubs from. We've now consolidated those, so both Snyder's-Lance and Pepperidge Farm are running through those. Fresh Bakery's a little different 'cause you don't have time. That really goes right to the depot. So everything we've done so far generally has been around salty and cookie, cracker. Bakery's really just been kind of self-contained. Now, when we get to the hubs and the depots, those are what we're going after now.
And so the idea is to consolidate those and begin to create, savings, by taking down two of your three, consolidated into one, and invest in technology and capability, 'cause I'd argue-
Mm
... you know, many of these are still like guys with a clipboard walking through. So to automate it, to move them faster, to get them through, all the way through. The next step, right, and that's really what you're seeing, beginning to see now, right? That savings is what the kind of next chapter is, if you will, of productivity. And then the final one that I get asked a lot about is DSD. And we will talk more. We now know what we're going to do there, and we'll talk more about that in the next Investor Day, which will probably be March-ish timeframe.
But what I'd tell you in two seconds—kind of a two-second version of this is, we have a large part of the country, primarily the East Coast, where the size of the businesses are so big, there's no need to consolidate, right? There's more than enough scale to drive both trucks around, go to salty, go to cookie cracker. Then there's a big chunk in the middle of the country, and as you go west, where we've been using partner brands and other scale builders to try to support two DSDs. Those, we've been piloting and testing opportunities to bring them together, 'cause arguably, one thing that's kind of unique is we'd be one of the few with DSD going to both salty and cookie and cracker in the store.
I will say that those have gone extremely well, probably better than we had expected, and that, that's gonna open up a interesting opportunity to think about, then, how do we take that information and go? Now, we'll always probably still have a few places, Pacific Northwest, some other parts of the country, where there may be a little bit more to learn to figure out the most efficient. But we do those first two steps, right? We get the hubs and the depot consolidated, and we figure out how to deal with this kind of mid to west of the country. I mean, that's, those are, those are big step changes. And, and the good news is these are, these are not like, you know, multi-billion dollar.
Like, you know, I know a lot of concern about, are we gonna take it all captive and bring it back in and go to Mondelez's model or Frito-Lay's model? No, I think an independent distributor model can work. We just had to figure out how to best configure it. So that's really it. I don't... I, you know, maybe took more of the time, Carrie, for you. But, but, but there's a lot to believe and a lot of wood to chop there to get to that 17.
That's great, and I'm gonna slip in one last question on Sovos, 'cause I got it from the crowd here. Can you outline what your target IRR is for the Sovos acquisition and the cost of capital that you assumed?
Yeah, so you know, we'll talk a little more once we obviously get past closing, but you know, we have pretty hard and fast rules for accretion and IRR. We want double-digit IRRs on anything we're investing, so you can safely assume we're well into that range. And as we've said, accretive in year two. Those are two big hurdle rates that we have to get over for us to feel good about any M&A we do, and you're just not gonna see us reach or overpay for something that we don't see the return. Doesn't mean we won't pay a high multiple, but the economics of it, we want. Well, Carrie, why don't you talk a little bit about cost of capital?
Yeah, I mean, cost, I mean, it certainly, as we think about IRR, again, it is definitely above our, our cost of capital here, and I, I think, again, as we think about the what we used in the financial model, I think we were conservative in assuming what the cost of debt would look like there. So as Mark indicated, it's met our, our hurdles for IRR, it's met our hurdles, exceeding our cost of capital and, and, and accretive by year two.
Mm-hmm, and we did. So if you look at the environment today, it's not like, you know, because of how we made the assumptions, we knew there was volatility in the market, so we were fairly conservative. So where we are today, we still feel very good about the model and the economics that were put in place. You know, we'll-
Mm-hmm
... obviously, be taking action to make sure that we can hedge and appropriately, you know, put those protections around it. But, you know, I think wisely planned it with a little bit of volatility in the world.
Great. Okay, well, I'm gonna stop us there, and thank you both again for joining us today, and everyone's got other meetings to go to. So Mark, Carrie, thanks again, and look forward to talking to you again soon.
Yep.
Thanks, guys.
Yeah, thanks, Rob. Congratulations on your new gig, man, by the way.
Oh, thanks. It's great on the other side.
All right, we'll see you later.
See you. All right, bye.