Campbell Soup Company

Good morning, and welcome to Campbell's third quarter 2020 earnings presentation. I'm Rebecca Gardy, and I'm excited to join Campbell as the new vice president of industrial relations. I look forward to getting to know you all in the coming months. As in prior quarters, we've created slides to accompany our earnings discussion. In addition to this earnings presentation, we will host an analyst Q&A only session at 830 Eastern on the morning of June 3rd. A replay of this webcast and a transcript of this earnings presentation, as well as of the Q&A session, will be available on the Investor Relations section of CampbellSoupCompany.com. As part of our remarks this morning, we will make forward-looking statements which reflect our current expectations. These statements rely on assumptions and estimates which could be inaccurate and are subject to risk. Please refer to slide 3 or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in forward-looking statements. Because we use non-GAAP measures to describe our business performance, we have provided a reconciliation of these measures to the most directly comparable GAAP measures, which is included in the appendix of this presentation, and will be posted to the IR section of our website as part of the transcript of today's call. On slide four, you can see our agenda. You'll hear from Mark Klaus, Campbell's president and CEO, and Mick Bakehausen, chief financial officer. Mark will share his thoughts on our performance in the quarter, and Mick will then walk through the financial details and our updated guidance for fiscal 2020. And with that, Let me turn it over to Mark.

Thanks, Rebecca. We're excited to have you as part of our team. For those of you who may not know, Rebecca joined the company in late March and has been working closely with Ken Gosnell and the entire finance team on the transition. She brings a broad range of experience in finance and marketing, including nearly a decade in investor relations with companies such as Popeyes and Nike. and I'm confident that she will be a tremendous asset to the company and a fantastic resource for the investment community. Welcome. I want to start by saying thank you to the entire Campbell organization, especially our supply chain and frontline teams, who have done a remarkable job in taking care of one another and ensuring that we keep our supply chain running as effectively as possible in this challenging and critical moment. The results we will discuss would not be possible without their inspiring efforts and the support of their families over the last several months. I also want to thank our customers for their partnership and collaboration, and our suppliers who have supported us in what is an unprecedented operating environment. As a company, we have chosen to simplify our mission in response to this moment and focus on the areas that matter most. This has helped ensure the entire organization is aligned behind three key priorities. First, take care of our people. This is our most important responsibility. Next, produce and distribute our products as safely and as quickly as possible for our customers, consumers, and communities across North America. And finally, anticipate and plan for the future. We have dedicated resources focused on meeting the evolving consumer and retail trends, as well as procurement and manufacturing plans for a variety of demand scenarios. This simplified approach has served us extremely well. Our teams are executing well and delivering on this mission. Our plants have been running 24-7 to meet the unprecedented demand from our customers and consumers. This performance was and continues to be remarkable. It represents a tremendous effort across the business, from our sales teams working with customers to our supply chain implementing safety and hygiene protocols for the new operating environment. The real heroes in the company are those frontline teams at our plants, in our warehouses and distribution centers, and in-store sales ensuring our food gets onto the shelves. Although we do still see supply challenges, we are moving quickly to add targeted capacity, and we are working closely with customers to improve service levels and fully meet the demand we are experiencing. In recognition of this performance and the commitment shown by these frontline teams, we introduced temporary compensation to more than 11,000 of our frontline employees in manufacturing, warehousing, and in-store sales, to reward their enormous contributions to the country and the company. Early on, we also made the decision to commit to focus our community support in the locations where our people live and work. I am proud to share that we have contributed over $5 million in financial support and food to Campbell hometowns across North America. Now, turning to our results in the quarter. The impact of the virus has been profound and has affected so many lives. Our thoughts and prayers are with all those families impacted. We are fortunate to be in a position to support the needs of our consumers, and this is translated into a quarter well above what we expected or had originally planned. We experienced broad-based demand across our portfolio as consumers sought food that delivered quality, value, and comfort. all attributes that match our brands very well. Consistent with our strategic plan, the steps we had already taken to focus the portfolio, deleverage our balance sheet, sharpen our operating model, invest in our core brands, and strengthen our accountability and execution gave us a great foundation and strengthened our ability to meet these unprecedented demands on the business. This quarter, we delivered growth across all key metrics. with double-digit increases in organic sales, adjusted EBIT, and adjusted EPS. Organic net sales increased 17%, with strong performance across both of our segments, led by U.S. retail soup, which increased 35%. Not surprisingly, our in-market performance also surged across both divisions. In measured channels, our total company in-market consumption increased 29%, with double-digit consumption increases across most of the portfolio. In addition, our brands grew or held share in nine of our 13 stated priority categories. In-market results did exceed our net sales as the initial pantry loading exceeded shipment capacity and retail inventories were somewhat depleted. That situation is improving but has not fully recovered. The more recent slowdown of in-market results is much more a function of our current lower inventory levels than a material slowdown in demand. As capacity catches up with demand, we expect this will normalize in the fourth quarter or early in fiscal 2021. We continue to advance other key business metrics and strategic plan initiatives, including 100 basis point adjusted gross margin expansion, supported by productivity improvements and cost savings. We generated $30 million of cost savings in the quarter, which reflect initiatives from our multi-year enterprise program and synergies from our snacks integration. With the strong increase in net sales, adjusted EBIT increased 31%, even with a significant uptick in marketing investments across both divisions. And adjusted EPS increased 57% to $0.83 per share. We have attracted new consumers to our brands during the COVID-19 demand surge, giving us access to millions of buyers who had not purchased our brands in the prior 52 weeks. As you might imagine, many of the households are younger and represent significant incremental growth for our brands. We are now mobilizing behind retaining these new consumers as we look ahead. To that end, although demand has exceeded capacity, we continue to increase marketing investments across both divisions with a focus on helpful recipes and snack ideas. Building upon the tone and utility of our existing campaigns, our creative teams demonstrated agility with new digital and TV campaigns, including our crowded table anthem advertising that celebrated the role our brands play in comforting people together during this period of separation. This ad has resonated very well with consumers and, in particular, has accelerated the rejuvenation of the Campbell's brand. We will continue to invest in the fourth quarter as we work to retain these new households. As you saw in our press release, we significantly raised our guidance for the year based on our exceptional performance in the third quarter and our current outlook for continued demand for our products. Nick will review our expectations in more detail in a few minutes. I would caution that there is still a great deal of volatility, and many factors could influence our performance going forward, including the duration of the pandemic, further supply chain pressure, changes in consumer behavior, and macroeconomic conditions. However, we want to be as transparent as possible, so we're providing you our best perspective on the outlook for the business, given what we are seeing today. As we look ahead, we anticipate that some of the changes we have seen will be more episodic, while others will be more structural and lasting. In fact, we see four clear consumer and retail trends that we believe will continue to shape the landscape for the immediate future. First, what we call quick scratch cooking. Simple ingredients assembled for a great tasting meal will continue. We expect this will be sustained due to a slow return to away-from-home occasions, growing cooking skills, and a continued desire for low-cost meal solutions. Next, we expect consumer online activities, both in terms of home delivery and click-and-collect, to accelerate. We believe the platforms and the convenience they provide will result in continued usage going forward. Third, we are also planning for the shelf to evolve in traditional retail environments that reflect these changing consumer trends. The relevance of certain center of store categories like soup will likely increase and require more in-store inventory, with perhaps a more limited assortment to optimize shelf sets for in-store and online click-and-collect demand. Finally, value will continue to play an important role as we anticipate the impact COVID will have on the economy. While we expect the economy to recover, it may take time. Ensuring we have affordable products that support consumers through some tougher times ahead will also be critical. All four of these trends line up very well with our portfolio and position us well for the immediate future. With that, let's turn to a more detailed discussion of our two segments. We'll start with meals and beverages. The meals and beverages segment contains many trusted and fabric-of-the-nation brands that consumers have been seeking out or returning to over the last several months based on the quality, convenience, and value they offer. Consumers also have gravitated to these brands because of the comfort they bring. Think of tomato soup paired with grilled cheese or family spaghetti night with prego pasta sauce. or the fun of sharing SpaghettiOs with your kids. All of them have seen significant consumption gains during the crisis. For the third quarter, organic net sales increased 21%, and operating profit was up 35%. The sales gains were broad-based with increases in U.S. soup, sauces, beverages, and Canada. And market consumption advanced 39% in the quarter. And though fueled by the COVID surge, the underlying business had been performing well. We are fortunate we already had a clear growth strategy and had returned our focus and resources to these businesses before the crisis began. Our food service business was negatively impacted by reduced demand as consumers sheltered in place and avoided restaurants. Although a headwind, it is important to remember the food service only represents approximately 5% of our total revenue, and our teams have moved quickly to maintain support in remaining critical areas like health care facilities and school lunch pickup programs while repurposing capacity to higher retail demand areas. Marketing expense increased 26% versus prior year, with A&C up 29%. as we continued to connect with consumers in ways that would help them enjoy great meals and beverages while at home. As you would expect, the majority of our increased investment was focused on soup, including Pacific. Let's go deeper on soup. You've heard me speak about our full commitment to our soup strategy for the past year and the potential relevancy of our portfolio in the category. The foundational work we had put in place over the last year was always an important step in our long-term plan to reignite soup, and it has proven to be even more so in the context of the current moment. The quality improvements we made on our Icon SKUs, tomato, chicken noodle, cream of mushroom, and cream of chicken, have served us extremely well in this environment. Consumer response to these quality improvements has been very positive and well-timed. supporting the increased household penetration and high repeat rates in new households. Total U.S. soup net sales grew 35% with double-digit sales gains on condensed, ready-to-serve, and broth, including Pacific. These products brought a variety of benefits to consumers' homes in this time, and we expect much of that relevance to continue as we move past the crisis. We did see pressure on share, which although never a good thing, we believe reflects challenges in availability rather than conscious consumer switching. Within market consumption surges as high as 140%, we significantly depleted inventory in the initial stages of the pandemic. This was not a surprise as we worked to make as much food as we possibly could and distribute it as quickly as possible. We also believe our share results, particularly in the ready-to-serve segment, are not fully reflected in syndicated data as we have strong distribution in key non-measured channels where growth was significant. Like everyone, we were and are operating in conditions unlike any we have ever experienced, and we didn't get everything perfect in regard to product availability. We worked hard to balance the demand across all customers and channels. We've learned a lot along the way. We have already implemented necessary course corrections and saw improvements as the quarter progressed. Overall, though, we are extremely pleased with our performance in the quarter, particularly the significant gains in household penetration as our volume per buyers was up materially. Campbell Soup's household penetration increased nearly 10 percentage points versus the same quarter last year. We gained millions of households across all generations, with the largest gain being the millennial cohort. It was also an important quarter for our Pacific food brands, as it, too, significantly increased its household penetration. With the scale and resources of Campbell behind it, the timing was right to accelerate the growth of this important brand and introduce it to many new consumers. Perhaps most exciting is the repeat rates we are seeing for these new households and the positive engagement with consumers we are experiencing in social and digital platforms. We continued our investment in marketing to drive the relevance of our soup brands with a 57% increase in A&C in the quarter. We made the decision to keep our advertising on the air as much of our existing creative was appropriate for the moment. Our increased advertising was directed toward efforts across condensed, ready-to-serve, and broth as we provided our consumers with ideas and inspiration for quick-scratch cooking with a range of classic meals and new creative ideas. While there was an initial pantry load in the quarter, we did see strong consumer pull-through driven by increased usage and new eating patterns. Now more than ever, consumers are looking for quick, easy meals, and soup clearly plays a vital role. In addition, there's no category better suited for at-home lunch than soup. These advertising spots have been very effective for us and have driven strong base velocity lifts while on air, while also increasing brand perception and relevance. Something we've discussed previously is our concerted effort to improve customer relationships. Overall, we are in a good place with our retail partners, and in fact, I believe we have further improved our relationships as a result of the constant communication and collaboration throughout this crisis. It has been a process of planning, learning, and replanning to ensure we are meeting all our customers' needs to the best of our ability in this dynamic environment. In other parts of the division, we saw similar results. In particular, the growth of our Prego pasta sauce brand accelerated dramatically, with consumption up more than 50% versus prior year. Importantly, this quarter marked an entire year of Prego holding the number one share in Italian sauce. In addition to Prego, other parts of our meals and sauces portfolio saw strong growth, including pace and supporting players such as SpaghettiOs, as consumers turned to these familiar shelf-stable favorites for comfort, quality, convenience, and value. The V8 portfolio also continues to be a positive performer for us coming out of the quarter. Our sizable Canadian business also performed well, driven by similar consumer behavior as in the U.S. Of note, the largest share gains in soup in Canada came from our Pacific Foods brand. All in all, a truly remarkable performance in this environment and a material step forward in our strategy of building relevance and expanding our consumer base across the portfolio. Let's next look at the other half of the company with a discussion of our snacks segment. This was another strong quarter for the division with organic net sales increasing 12% and operating profit up 19%. Similar to our meals and beverage division, snacks experienced increased demand and we continued to invest in our brands. The division delivered 19% consumption growth in Q3 in measured channels. with all nine power brands growing consumption double digits. Also similar to our meals and beverage division, snacks in market demand exceeded immediately available capacity, especially on brands like Goldfish and our bakery business with a more limited inventory. Consistent with meals and beverage, we are catching up on inventory and expect to be in a stronger position going into the next couple of months. Our in-market performance was balanced across the portfolio, with increases coming from new brands like Late July leading with 38% growth, and classic brands like Milano, which grew at 28%. The strong growth in premium snacks, such as Late July, Milano, and even Pretzel Factory, underscore consumers' desire for comfort and small indulgences during this time of uncertainty. Our snacking brands gained 5.4 percentage points of household penetration during the quarter, with increases across all nine of our power brands. In the last four weeks, we've seen new households return to repurchase our snacks, a positive sign of the relevancy of our brands and an early indicator of our ability to retain these new consumers. We're now focused on making those new households stick and are looking at several levers to do this, including continuing to connect through compelling communication, ensuring continued availability, and providing the variety and formats that meet their needs today and into the future. Marketing expense in snacks increased 11% in the quarter, and we intend to double down on our marketing investment in the fourth quarter to retain these new consumers. We will turn marketing on for all of our power brands with new campaigns for late July and Goldfish. This quarter, seven of our nine power brands grew or held share. We grew more than one point across five of the power brands with the strongest growth coming from late July at 2.5 points and Lance at 1.9 points. We saw small losses on Goldfish down 0.7 points and Snyder's of Hanover down down 0.5 points despite strong consumption growth of 11% and 21% respectively. Even as some of the earlier COVID demand slows, with this rapid expansion of our brands, we are well positioned for the future, where we expect snacks will continue to be a primary driver of growth in the industry. I'm also pleased with the performance we're seeing on some of our new innovations that I discussed previously, specifically veggie goldfish, Snyder's of Hanover pretzel rounds, and twisted sticks, as well as our late July organic potato chips. While we had slower distribution builds than we had planned due to COVID-19, we are seeing early positive signs on repeat as we continue to build awareness. We have also developed new and creative ways to keep advancing new product launches. In fact, we just launched two new bakery items just in time for Memorial Day, farmhouse honey wheat bread and the extension of our successful farmhouse butter breads into buns. Let's finish our discussion of snacks with a review of progress against integration and value capture. The headline here is that we remain very much on plan to deliver the value capture synergies that we initially outlined as part of the acquisition of Snyder's Lance. The team did a great job adjusting elements of the integration plan in response to COVID-19, and I continue to be very pleased with the consistent progress of the integration of the business and teams. In Q3, we completed the actions we spoke of last quarter to improve the effectiveness of the snacks organization. The result was a more streamlined and effective structure. Looking ahead, I expect value capture to continue in the fourth quarter with ongoing savings from our procurement and organizational effectiveness efforts. Our snacks business, which represents about half of our annual sales, continued to perform well and fulfill its portfolio role. With that, let me turn it over to Mick for a deeper dive on our financial results and segment performance.

Thanks, Mark. Clearly, our operating performance for the third quarter was significantly impacted by the surge in demand for our products stemming from the COVID-19 pandemic. I'll now share my perspective on the quarter and outlook for the balance of the year. As Mark stated, organic net sales increased 17% from the prior year. Organic net sales for meals and beverages increased 21% for the quarter, driven by gains across a majority of our retail brands, with our U.S. soups and Prego pasta sauces growing in excess of 30% year-over-year. In snacks, organic net sales increased 12%, driven by double-digit growth in eight of our nine power brands. Our adjusted gross margin benefited primarily from favorable product mix and operating leverage, as well as supply chain productivity improvements and cost savings initiatives, offset partially by moderating cost inflation and other supply chain costs, including mark-to-market losses on outstanding commodity hedges and incremental costs incurred related to COVID-19. We continue to make strong progress against our cost savings target of $850 million by the end of fiscal 2022, delivering $30 million of incremental savings in the third quarter, bringing the program-to-date total for continuing operations to $618 million. Top-line growth, growth margin improvement, and delivery on our cost savings programs, combined with continued investment in our brands, resulted in year-over-year adjusted EBIT growth of 31% in the quarter. Year-over-year adjusted EPS growth was 57%, reflecting our adjusted EBIT performance as well as the benefit of lower net interest expense as a result of our deleveraging efforts. Lastly, we are raising our fiscal 2020 guidance for net sales adjusted EBIT and adjusted EPS as a result of our strong third quarter performance and outlook. As Mark cautioned, we continue to operate in an uncertain environment. And although the effect of the COVID-19 pandemic on our sales, adjusted EBIT and adjusted EPS cannot be predicted with certainty, this revised outlook reflects our current expectation of trends through the balance of the fiscal year. I'll now review our results in more detail. For the third quarter, reported net sales increased 15%. Organic net sales, which excludes the impact of the divested European chips business, increased 17% to approximately $2.2 billion, driven by volume growth in both meals and beverages and snacks, reflecting increased demand for at-home food consumption in March and April. Adjusted EBIT increased 31% to $386 million as higher sales volumes and an improved adjusted gross margin were offset partially by increased marketing investment. Adjusted EPF from continuing operations increased by 57% or 30 cents to 83 cents per share reflecting an increase in adjusted EBIT and lower net interest expense. For the first nine months, net sales increased 4%, while organic net sales increased 5%, driven by growth in both meals and beverages and snacks. Adjusted EBIT increased 13% to $1.1 billion, reflecting higher sales volume, an improved growth margin, and higher adjusted other income, offset partially by increased marketing investment. Adjusted EPS from continuing operations increased by 24%, or 45 cents, to $2.34 per share, reflecting the increase in adjusted EBIT and lower adjusted net interest expense. Breaking down our net sales performance for the quarter, organic net sales were up 17%, This performance was driven by the 17-point gain in volume with growth across the majority of our retail brands, offset partially by declines in our food service business. The divestiture of the European chips business negatively impacted net sales in the quarter by two points, and the impact from currency translation in the quarter was neutral. All in, our reported net sales were up 15% from the prior year. Our adjusted growth margin increased by 100 basis points in the quarter to 34.7%. Favorable product mix, which drove 120 basis points improvement in our adjusted gross margin, was largely driven by the increased contribution from our soup business within our meals and beverages segment and a favorable mix within our snacks portfolio. Additionally, in order to optimize our supply chain output, we prioritized certain SKUs within both divisions. Separately, we are estimating 110 basis point gross margin improvements from better operating leverage within our supply chain network as we significantly increased our overall production. Net pricing was minimal and resulted in a 10 basis point decrease. Cost inflation and other factors had a negative impact of 300 basis points. Approximately one-third of the impact is attributable to cost inflation as overall input prices on a rate basis increased approximately 1.5%. Another third of the impact is related to mark-to-market losses on outstanding commodity hedges, primarily related to diesel. Lastly, the remaining balance of the impact is primarily related to to increase supply chain costs due to COVID-19, such as increased labor and sanitation costs. The negative impact from cost inflation and other factors was offset partially by our ongoing supply chain productivity program, which contributed 130 basis points. This program includes, among others, initiatives around logistics optimization, ingredient sourcing, and plant asset utilization. And our call savings program, which is incremental to our ongoing supply chain productivity program, added 50 basis points to our gross margin expansion. This program includes the benefits of various initiatives, such as last year's closure of our manufacturing facility in Toronto, Ontario, and benefits from the ongoing integration of Schneid's plants. All in, our adjusted gross margin for the quarter was 34.7%. We are pleased with these gross margin results as we continue to achieve improvement in performance. Moving on to other operating items. Adjusted marketing and selling expenses increased 12% in the quarter to $239 million. This increase was driven primarily by our planned increased investment in advertising, and consumer promotion expenses, which is up 19% versus a year ago. These investments primarily reflect higher levels of support behind soup, as well as investments in our snacks power brands. Adjusted administrative expenses increased 4% to $144 million, primarily reflecting higher incentive compensation accruals, as well as higher general administration costs and investments in information technology, offset partially by the benefits from cost savings initiatives and lower benefits costs. Going to the next slide, we have continued to successfully deliver against our multi-year enterprise cost savings program. This quarter, we achieved $30 million in savings, inclusive of Snidestland synergies. To date, that brings our savings for the overall program to $680 million. We expect incremental cost savings of approximately $150 million for the full year and continue to track to our cumulative savings target of $850 million by the end of fiscal 22. To help tie all this together, we're providing an adjusted EBIT bridge to highlight the key drivers of performance this quarter. As discussed, adjusted EBIT grew by 31%. This was largely driven by the increase in demand for our products, with sales volume gains contributing $96 million of EBIT growth. The overall adjusted gross margin expansion of 100 basis points contributed $22 million of EBIT growth, which was more than offset by higher adjusted marketing and selling expenses of $26 million, reflecting our investments in ANC. And the remaining impact of all other items consisting of adjusted administrative expenses, R&D and other income in aggregate was nominal. Our adjusted EBIT margin increased year over year by 210 basis points to 17.2%. The following chart breaks down our adjusted EPS change between our operating performance and below the line items. Adjusted EPS increased 30 cents from 53 cents in the prior year quarter to 83 cents per share. Adjusted EBIT had a positive 24 cents impact on EPS. Net interest expense declined year over year by $34 million, delivering a nine cent positive impact to EPS. As we have used proceeds from completed vestiges and our strong cash flow to reduce debt. And lastly, our adjusted effective tax rate of 23.6% was higher than the prior year rate of 21.5%, leading to a two cent negative impact to EPS, completing the bridge to 83 cents per share. Now turning to each of our segments. In meals and beverages, organic net sales increased 21% to $1.2 billion, reflecting growth across our U.S. retail business, including soups, Prego pasta sauces, V8 beverages, Campbell's pasta, Pace Mexican sauces, and Swanson canned poultry, as well as growth in Canada, offset partially by declines in food service. Volumes within our retail business grew primarily due to increased food purchases for at-home consumption, offset partially by a decline within our food service business driven by stay-at-home mandates and other COVID-19-related restrictions. Net sales of U.S. soups increased 35% compared to the prior year, with growth in condensed soups, ready-to-serve soups, and broth. Operating earnings for meals and beverages increased 35% to $275 million. The increase was driven primarily by sales volume growth and an improved gross margin, offset partly by increased marketing investments. The gross margin increase was driven by improved operating leverage and favorable product mix, as well as the benefits of supply chain productivity improvements and cost savings initiatives. offset partially by cost inflation and higher other supply chain costs, which includes COVID-19 related costs. Within snacks, organic net sales increased 12% to $1 billion, driven primarily by volume growth, reflecting elevated demand of food purchases for at-home consumption. These sales results reflect growth in fresh bakery products, goldfish crackers, and Pepperidge Farm Cookies, as well as Kettle Brand and Cape Cod Potato Chips, Pop Secret Popcorn, Snyder's of Hanover Pretzels, Land Sandwich Crackers, Legilize Snacks, and Snack Factory Pretzel Crisps. Operating earnings for snacks increased 19% to $154 million. The increase was primarily due to sales volume growth and an improved growth margin, offset partially by increased marketing investment and higher selling expenses. The gross margin increase was impacted by favorable product mix and improved operating leverage, as well as the benefits of supply chain productivity improvements and cost savings initiatives offset partially by cost inflation and higher other supply chain costs, which includes COVID-19 related costs. Cash from operations through the first nine months of fiscal 2020 decreased year-over-year by $23 million to $1.13 billion, primarily driven by changes in working capital. Principally accrued liabilities offset partially by increased cash earnings. Cash from investing activities increased by $2.5 billion to $2.32 billion, driven by the net proceeds from our divested businesses. The cash outlay for capital expenditures was $220 million, $54 million lower than the prior year, primarily reflecting delays in certain projects impacted by the current operating environment. We are now forecasting CapEx of approximately $300 million for fiscal 2020. Cash outflows for financing activities were $2.38 billion compared to $941 million a year ago. The year-over-year incremental cash outflow reflects the use of divestiture proceeds to pay down some of our debt. Dividends paid in the amount of $320 million were comparable to the prior year, reflecting our current quarterly dividend of 35 cents per share. As we updated you last quarter, we had made significant progress to de-lever our balance sheet, ending net debt of $5.5 billion as of the third quarter declined by approximately $2.9 billion in the first nine months of fiscal 2020, as proceeds from completed divestitures along with positive cash flow generated by the business were used to reduce our debt. In April, we raised $1 billion through the issuance of $10 billion and 30-year bonds. In early May, we repaid the $300 million, which was outstanding on our revolver, and while we currently have an increased cash balance, we plan to utilize these proceeds to reduce a portion of our outstanding debt. We are comfortable with our overall liquidity position in light of the increased cash balance combined with the highly cash-generative nature of our business. Our leverage ratio, which represents net debt to a trading 12-month adjusted EBITDA from continuing operations, is now at 3.2 times. Now I'll review our updated guidance for continuing operations for fiscal 2020. As a result of our performance in the third quarter, which was significantly impacted by the increase in demand of our products amidst the COVID-19 pandemic, and our current outlook for continuous demand for our products, we are raising our fiscal 2020 outlook for net sales, adjusted EBIT, and adjusted EPS. As previously mentioned, although there exists a great deal of uncertainty surrounding the effect and duration of the COVID-19 pandemic, this revised outlook reflects our current expectation of trends through the balance of the fiscal year. We now expect reported and organic net sales growth of 5.5% to 6.5%, adjusted EBIT growth of 12% to 14%, and adjusted EPS growth of 25% to 27%, or $2.87 to $2.92 per share. And as a reminder, fiscal 2020 is a 53-week year resulting in an additional week. which we believe to have about a two percentage point impact across net sales, adjusted EBIT and adjusted EPS. And for clarity, our outlook for organic sales excludes the negative two point impact from the sale of the European chips business, as well as a two point contribution from the 53rd week. Overall, we had strong financial results during the quarter while operating in a challenging environment. I'm particularly impressed by all the hard work from my colleagues within the supply chain and how quickly everyone within Campbell's has adjusted to the current working environment. I will now turn it back over to Mark.

Thank you, Mick. This is a unique moment for Campbell and the entire food industry. How will this crisis impact consumer behavior in terms of the food they eat, where they eat it, and how they shop for it? What changes are episodic and what changes are structural? These are questions that we are focused on addressing as we work our way through the fourth quarter and plan for the upcoming fiscal year, including anticipating the various scenarios and ensuring our supply is ready and in place to meet that demand. I'd like to leave you with four clear thoughts on the business. One, we are executing very well while remaining safe, and we expect to continue to do so. Two, the actions we have taken over the last year to focus the portfolio and organization, reduce debt, and return resources to core brands was critical for our preparedness to react to this crisis. Three, this environment does not require a change in strategy for the company. In fact, it has materially advanced our strategy, of building relevance in our classic core brands while accelerating growth in our differentiated snack brands. Finally, we expect the primary consumer and retail trends discussed earlier to continue going forward. Consumers seeking comfort food while still wanting wholesome food from brands they can trust, quick scratch home cooking, an increased focus on value, and the acceleration of online shopping and marketing. As I said earlier, all of these trends are very much aligned with our portfolio and capabilities. I am confident that we are prepared to make the most of a tough situation and ensure that Campbell is well positioned in this new world. Thank you for your time this morning. And this concludes our prepared remarks. Our live Q&A call will begin at 8.30 a.m. Eastern this morning.

Ladies and gentlemen, thank you for standing by. and welcome to the Campbell Soup Q3 2020 Earnings Q&A session. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star and then one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star and then zero. I would now like to hand the conference over to your speaker today, Ms. Rebecca Gardy, Vice President and Vets of Relations. Ma'am, you can begin.

Thank you, Operator. I hope everyone has had the chance this morning to read our press release and listen to our prerecorded management presentation, both of which are available on the investor relations section of CampbellSoupCompany.com. In addition, we have posted the transcript of the prerecorded presentation. After the conclusion of today's live Q&A session, we will post the transcript and an audio replay of this call. Please note that during today's Q&A session, we may make forward-looking statements which reflect our current expectations about our business plans, our 2020 guidance, and the potential impact of the COVID-19 pandemic on our business. These statements rely on assumptions and estimates which could be inaccurate and are subject to risk. We will also refer to certain non-GAAP measures. Please refer to today's earnings release available on the investor section of our website, CampbellSleepCompany.com, for a list of factors that could cause our actual results to vary materially from those anticipated in forward-looking statements and for reconciliations of non-GAAP measures to their most directly comparable GAAP measures. Joining me today are Mark Klaus, Campbell's President and CEO, and Mick Gaithausen, Chief Financial Officer. We kindly ask that you limit yourself to two questions. And now with that, I'll turn it over to the operator for the first question. Operator?

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star followed by the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And our first question comes from Andrew Lazar from Barclays. Your line is open.

Good morning, everybody. Hi, Andrew. Hi there. I'd love to start off by picking up on some of your comments from today's slides and transcript around household penetration and repeat rates. I think you described soup repeat rates as exciting, especially for new households. And some of the work we've done suggests repeat rates for some of these new trialers is running ahead of the rates maybe shown by this group at this time a year ago. So understanding we're not yet by any means in a normalized environment with many still sticking close to home, I'd really like to hear your thoughts sort of on this, what you find exciting about it specifically, and maybe while early, what this all implies to you about, you know, the potential stickiness of some new consumer purchases, particularly in light of, you know, all the investment Campbell's making, obviously, to perpetuate this trend.

Yeah. No, it's a great question. And I think let me just start by, you know, maybe providing a little bit of context on how we have seen the cycles of demand through this period. And third quarter I would describe as containing really two very distinct phases of this. I think the first phase, I would describe more as a psychological phase where the Not unlike you might see in a weather-related pantry load, although in this case it would be the equivalent of a blizzard in every city in the country, it becomes about bringing things into the home that you know are shelf-stable, that are capable of sustaining time and being available when you need it. And like I said, that becomes a little bit more of a response. And that was the early phase, certainly, that we saw. And in those periods, it was dramatic demand. I mean, there were times where we would see segments like Ready to Eat Soup with demand increases of 140%. which obviously significantly changes what the capacity in the manufacturing plant. The team did an amazing job, I believe, through that phase in ensuring that we could prioritize getting product into the marketplace, into retailers, and ultimately into communities. And we made a fairly conscious decision not to constrain that in any way and ensure that we could push forward. as much out as we could. You know, certainly that depleted inventories, and we'll talk about that in a moment, I'm sure. But I think that was really the distinct first phase. The second phase, though, that we've seen, and perhaps the one that for me, when I describe it as exciting, is it is giving us an opportunity to really bring consumers into our brands through behavioral activities. demand. And what I mean by that is changes in things that they are actually doing within their life, whether that is the result of being sheltered in place, whether that is the need to build quick scratch cooking as an example, as a new skill set. And the role that our products play within those behaviors has really generated, I believe, the sustainment of demand and more importantly, the repeat. And I think as we watch both the combination of the sustainment of that demand along with what we're seeing from consumer response and satisfaction with products that they may not have tried in the past, we're feeling very good about that response. And I think the positive momentum that has been built on the businesses, you know, to say the least, we are fortunate that I think we had done all the work we did before this started to and really establishing improved quality, a lot of good marketing and resources around informing and helping with usage of recipes, and also returning a lot of support to our business, including Ramping Up Pacific. All of this helped us then. as this behavioral phase move forward. I think as you then look forward from that, and I'd say there's probably a third phase coming here, which is a bit more of the, let's call it at least the immediate new normal, I think we're encouraged for a couple different reasons. One is I think some of the behaviors and consumer trends that we've seen, I really do feel are going to have stickiness and continue as we go forward. So I think as consumers are building skill sets in things like quick scratch cooking and another area within quick scratch I would call simple lunches where our products play an incredibly important role. And so however you see the economy opening back up, I think there will be a slower migration to away from home. I think there will maintain a level of remote working where lunches, maybe virtual schooling in some cases, where our products will continue to be highly relevant and that that behavior, I think, will continue. I also think that as we come through this and whatever continuum of economic growth environment you might expect, I do think there is going to be strain. And I think value will play an important role for consumers going forward. And our products, historically speaking, have been highly relevant in those moments of recession or economic pressure. Now, I think there are other trends that we've got to move on to really ensure that we're making the most of this opportunity, and that's the shift in the things like online behavior for shopping, for media consumption, for buying, and, of course, whether it's click and collect or home delivery, we are on that case working really hard because we do believe that will be a trend that will continue going forward. And then I also briefly talked about the shelf in traditional retail. So the other work that we need to be doing right now is to really understand that optimal assortment and making sure that inventory remains kind of balanced with where demand is going to come from, that we're selective and thoughtful about what that assortment looks like while making room for innovation that we still believe is going to be important. So as I look to the future, although I can't tell you how the demand will hold up, I do think those trends will be consistent and those will be positive for us. And even if they do slow a bit, I do think we are going to be in a position through the balance of the fourth quarter and even into the beginning of the year where just simply the replenishment of our inventory levels and shelf are going to be a positive tailwind as we work through the year. You know, I think a little bit perhaps a broader answer, but that gives you kind of the view of the cycle that we've been through and why we think that there is still momentum ahead. And, of course, we're going to have to remain nimble because I do think it's difficult to predict with any certainty exactly what it will look like. But I think those are all very positive indicators. Great. Really helpful. I'll leave it there.

Thanks so much. Okay. Thanks, Andrew.

Thank you. Our next question comes from Ken Goldman from J.P. Morgan. Your line is open.

Hi, thank you, and good morning, everybody. I wanted to ask about the decision to push hard on marketing at a time when demand exceeded your production capacity. I really do appreciate, you know, the unique opportunity you have to keep all of these new consumers, to lean in on your retention efforts, and I do very much appreciate the value in that. But I also imagine there's a risk of overheating demand, which can lead to some out-of-stock disappointments, so to speak. So just curious how you thought about that balance during the quarter and also how it informs your, I guess, implied fourth quarter guidance as well.

Yeah. Absolutely, it is a balancing act. I do think, though – What is really the name of the game for us right now if we think about the ability to take what is such a unique opportunity? And if you think about the strategy of the company, especially on brands like Soup, Essentially, our strategy was to try to build relevance, attract our last users, and open the door to younger households coming into the franchise. And as we said in our remarks, that's exactly what has occurred in this current moment. And so I do – I don't want to overdramatize the moment, but in thinking about – kind of a once in certainly a long period of time opportunity, we wanna make sure that we solidify the relationship with these consumers and households. Now, I do think that is different than incenting purchase only. So you may not see the same level of promotional support that we've had historically, but I do think where we're talking about usage, and differentiation of our product, how we're thinking about building equity, how we're communicating with consumers in different and relevant ways based on which cohort it is we're working with, whether it is kind of the textbook comfort food that's associated with many of our products or or whether it's a fantastic recipe idea targeting a younger household on different media and digital formats that explain how to make risotto with tomato soup, which has been one of the really, you know, interestingly very, very high demand recipe we've seen. And I think the goal here is to not – miss that opportunity to drive the equity and connection while not necessarily just spending into selling more product. And, you know, part of this equation also is not us in isolation. We're in a moment of probably the greatest level of collaboration I've certainly seen in our industry in a long time with our retail partners. So what we want to do is work together. We obviously don't want to be pushing things that are going to create frustration or disappointment in their consumers, their consumers and our consumers. But I do think there is a way to kind of thread this needle a bit and try to, you know, do everything we can to retain while also, you know, not over-aggravating the situation. So I don't know, Ken, if that gives you context, but that is really how we're thinking about it.

No, it does, and I appreciate the challenge. We're in uncharted waters here. I guess for my follow-up, speaking of uncharted waters, as we think about you know, your implied fourth quarter guidance. When you're drawing up an outlook in this kind of environment, one we've never seen before, I'm just curious, do you naturally leave yourself a bit more willow room on the downsides, on the upside, you know, sort of a just-in-case factor? I know you said that the implied range does reflect your best estimate at the moment, and as it should, right? But I just want to understand kind of what's assumed behind the scenes, maybe to get to the low and high ends of the range, if I could.

Yeah. You know, I think, Ken, what we try to do is – and, of course, this is kind of some new muscle groups that we're all building where you've got such materiality of variables that can change the outlook. But our feeling was let's take a set of assumptions that we feel are best informed by what we're seeing today and what we believe the future will hold. And then let's create some sensitivities around those for different circumstances. And those sensitivities then kind of frame up, if you will, you know, low side, high side that we use to try to predict it. And in this particular case, because we're essentially with two months left of a three-month quarter to finish the year, I did feel a greater sense of obligation to try to give a better view of that world while recognizing that there are some things that are tough to predict. So I don't think we, and to answer your question a little more directly, I don't think we ever want to try to put ourselves in a position where we don't have flexibility to react to certain variables that we can't see. So we're always going to try to manage it in that way. But I will tell you, there are scenarios where the guidance would not look conservative, and there are certainly scenarios where it possibly could be. But I think, you know, what we're trying to do is kind of give you our best effort. Understood. Thank you so much.

Thank you. Our next question comes from Brian from Bank of America. Your line is open.

Thank you. Hey, good morning, everyone. Hi, Brian. So two questions for me. The first one, Mark, in the prepared remarks you talked a bit about, and I guess the future of the resale and landscape, just the potential for shelf sets to change and maybe limited assortments. So could you talk a little bit about how that might affect new product development, especially in soups going forward? I think, you know, the expectation on our end was that moving into fiscal 21, we would see maybe more new products, you know, more innovation versus renovation. So if the shelf sets are going to change, how does that really change the way you will approach new product development? And then I have a follow-up.

Yeah. You know, I think it's early innings in really trying to process the data and the projection of where we're going as it relates to the shelf. But I do believe that what we're going to want to do is make sure, and this would be true in many categories that are building or that have grown relevance, we want to really understand how to utilize that space in the most effective way. And that's inclusive of supporting retailers as many are dealing with the realities of their shelf being both a reflection of what the retail shopping experience looks like, while also the online click and collect environment as it, in essence, becomes a bit of the warehouse, if you will, for that approach to shopping. We have tackled a pretty extensive and very detailed work to try to put our best foot forward in collaboration with customers to try to really identify where that goes. Now, the good news is our knowledge and our understanding of the innovation platforms that we're planning were very much a part of that. And I think that as we look at the future forward, what you're more likely to see is not necessarily us not moving forward with innovation, although, in fairness, there will be perhaps some platforms that come a little later than others just because of some delay as you think about, you know, implant trials and so forth as you go through innovation. this unique environment we've been in, although, you know, we're certainly getting that back online and moving forward. But I think that will be part of that assessment. So I don't expect it to stop us from bringing what we believe to be relevant, especially as we're talking about some of these new consumers, where we know things like convenience and sipping and some of the flavor changes The better for you platforms that we've talked about in the past as being at the heart of where that innovation is going to come from, I think very much remains relevant and will be part of it. But we may have to answer the question of do we need item number 30 or 40 in some of the tails of our businesses. If you look at our ready-to-eat portfolio, I've talked about this before, and actually if you look at our share loss portfolio, in the third quarter, which I'm sure someone will get to that in a bit. But the reality is that a large portion of that is in that tail of ready to serve. So these are some items that we've made the decision perhaps in the short term to rationalize, and we need to really think about longer term what the right answer is. And then I'm going to give you a little bit of a tongue-in-cheek answer here, Brian, but the other thing is You know, we've got a couple what is performing and behaving like new products in our core. Now, I'm going to stop short of calling condensed soup a new product launch, but that is the way we're trying to behave. You know, we're thinking about now, you know, in a world where households are using this for the first time, how do we really support it? as if we're in this kind of year or two of new product launches, and let's not jump so quickly to the new item if we think there's real opportunity to continue to build the relevance and the repeat rate in these new households on products that may have been old but is new to them, and I think that's a big part of our strategy too.

I think tomato soup and risotto is probably new to a lot of people on this call. Yeah. Don't knock it until you try it, Brian, all right? I'm going to do it. Hey, and just one follow-up, Mark, just maybe just follow us up a little bit on Ken Goldman's question, but I think he talked about refilling or retailer inventory. I think one question we get quite a bit is just have we built a lot of pantry inventory, right? So if you could just give us Maybe a quick check on where pantry inventories were maybe before all this started and then where you think they stand today relative to just sell through and how that affects revenue going forward.

Yeah. And we have a pretty decent mechanism for surveying that to get a bit more of a quantitative view of it. And the numbers that we're seeing are very healthy levels. And in fact – In some areas, we may be given the time of year, we are a little bit heavier on inventory levels in the pantry on things like soup, but also given the underlying consumption and demand, if you were to equalize, let's call it days of supply or weeks of supply in the pantry, in most cases, it's going to be below where it's been historically. We do not believe that we're in a situation where at some point the line is going to be snapped and we're going to be deloading pantries. That's just not what the numbers are supporting. So I think we're in pretty good shape there. And, again, I think we'll probably talk at some point about a little bit of a slowdown. in recent weeks that we've seen in consumption and demand. And part of it is us racing to try to rebuild some inventory. A lot of people have asked, as we've talked about internally, well, how do you know that's happened? What's the evidence that there is an outrunning of demand to supply? And I think you see it in really in two ways. The most obvious is the shipment and the orders that we're getting. So, you know, as you watch the third quarter roll forward, we really had, you know, from essentially March to April, we've really not had any variation in the order demand. As we – you know, let me just take a second to explain this. So in the beginning – We were hit in many ways the hardest with demand and we did a really good job. I mean, I'm incredibly proud of the supply chain. And even though we're talking about constraints, remember this is a supply chain that was supporting businesses that had been relatively flat and declining for the better part of the last decade. Now we're reacting to 40, 50% increases. You know, building that muscle group has taken a little bit of time, but I really am incredibly impressed and proud of the team and what they've done. But that initial surge, we did very well. You know, you see it in our share, you see it in the consumption. But as we went through that really first phase, we depleted a lot of inventory, And we've now been in the process of recovering. So, you know, part of what we know is that that shipment request has not gone down at all. It's really been more about us working with customers to get it right. The second area and where you can see it is in TDPs. So if you want a more external, you know, quantification process, of where that impact is, you can look at the trending of TDP declines from the beginning of the crisis to where we are now. And essentially what you'll see is, and what that does is it reflects what's not on shelf. And so 3% to 4% decline in TDPs during the surge has now gone to double digits. We are starting to see that recover. As we said, I expect through the fourth quarter, and in some cases it may be as late as the with that inventory in place. And so that's a little bit of the way you can tell from a quantification standpoint. So not really your question more on retail inventory versus pantry, but I think in both circumstances, you know, we've got a bit of a vacuum here that we're going to need to fill with supply over the months ahead. Thanks, Mark.

Thank you. Our next question comes from Nick Modi from RBC Capital Markets. Your line is open.

Thanks. Good morning, everyone. Mark, I was hoping you can just comment on just given the current state of affairs, how you think about, you know, the cost structure longer term. I mean, is there an opportunity here to reshape just given how some of the work processes have changed? Maybe you have found some incremental opportunities. And then just thinking about some of the upside that you've seen Is there an opportunity to accelerate initiatives that maybe you have planned, you know, a year or two years out that you feel like you can maybe pull forward now? So any thoughts around that would be really helpful.

Yeah, you know, and you see it in our numbers and the operating leverage that we're experiencing. You know, maybe I'll let, in a second, Mick, highlight a couple of the areas where we're seeing that leverage come through. You know, there's no question that that a more optimized or full supply chain is going to be more efficient. At the same time, you know, we don't want to be in extended periods of time where we're not able to supply to meet demand. So I think what we're trying to do is – and what we also don't want to end up in is a situation where we're – spending and investing in capital ahead of confirmation of the sustainment of some of the demands. So these are all the variables that we juggle to try to put together our best foot forward. So some areas are simple. So us accelerating and, for example, ensuring that even through this period of remote working, we find a way to safely move as fast forward as we can on goldfish and where we're adding a new line in our Willard, Ohio facility and we've really worked through the crisis to keep that initiative moving, that one's an easy decision to make. As it relates to areas like soup, what we've done is we have gone through first, and as we've talked in the past about optimizing assortment, but I do think there are some particular areas where we want more flexibility, even if it's in anticipation over the next year year or so, God forbid we have another bounce back of the virus, we need to be in a position where we've got a little bit more flexibility. And so what we're looking for there are appropriate investments to give us that flexibility without necessarily putting substantial infrastructure in that we may or may not need over time. And we're going to kind of Think of that as more of a pay-as-you-go model, right? So we're kind of investing as we move forward to try to meet those needs. As it relates to other initiatives or growth opportunities, I think we are trying to jump forward as quickly as possible. As you think about, again, our strategy, in essence, what we've seen in this crisis is not a need for us to shift strategy anymore. It's just pushed us forward. And if you think about all the things we've done as a company. You know, whether it's focusing the company by really locking down into one geography and two divisions and returning focus to our core businesses where we believe that there was relevance and that we could build and expand the user base of these businesses like soup, pasta sauces, and paste on the Mexican side. What this has essentially done is pushed us down that path faster. So we need to be also as nimble as possible, and this is a little bit back to Ken's question on, you know, how are you balancing the investments in the fourth quarter. We are trying to move some of those initiatives forward and move as quickly as we can to make sure that we've got all of the further quality improvements done, that we're ramping up some of the new packaging formats, that we're doing the things that we had planned. We're just doing it at a quicker pace as we're a little bit or significantly further down the road than we might have expected at this point.

Thank you.

Super helpful. Thank you. Our next question comes from Jason English from Goldman Sachs. Your line is open.

Hey, good morning, folks, and welcome to your first call. You really timed your entrance well. Congrats on a good quarter. So a couple of quick questions for you. First, and all kind of building off of other topics you've already touched on, Mark, you've mentioned a few times the need to replenish some inventory out there. If we assume that maybe there's like a week of inventory catch-up, that's pretty much going to get you to the midpoint of your organic sales guide for the fourth quarter. And clearly, we've seen a lot of residual consumption strength so far in Maine, and you're talking – you're giving us plenty of reasons to believe that some of that is going to stick as we move forward. So, I guess question one is, why shouldn't the fourth quarter, in terms of organic sales strength, in context of potential inventory catch-up, look a lot like the third quarter – What are some of the assumptions underpinning your outlook there?

Yeah. Jason, so the most significant one is just the pace at which we imagine and see that recovery occurring. Now, in all fairness, I think what we're – you know, seeing or what we expect to occur is one of two things, right? Either demand through the summer remains at a substantially escalated level, and if that happens, we are going to be chasing a bit that inventory through the balance of the fourth quarter and probably really into the first quarter of next year. If that demand slows or moderates in the summer, then we will take advantage of that window to replenish inventory as you described. I don't think we can support both at the same time, if that makes sense. So I think... we kind of see the calibration of this a little bit on understanding where the capacity in the supply chain sits. And I do think we will certainly make up ground as we go, because I also do think there will be some relative slowdown in demand as we go into the heart of the summer on certain categories, albeit I would still see it elevated versus where we would have been say a year ago. But I think it's going to be the combination of those two things together that is what we're trying to calibrate to the assumptions. And of course, at the same time, we continue to work and are seeing improvements all the time. in our capacity and output. And, you know, again, a little bit of this is just trying to be pragmatic or thoughtful about how we set expectations as we have confirmed or know certain things.

Does that make sense? Okay. It kind of does, but I guess I'm just looking at monthly consumption now and comparing it to peak consumption during the key season. And while you're up big year on year, you're not as big as you are monthly in key seasons. So I guess I had an impression that your capacity would be able to keep up with the type of demand that we're now seeing. It sounds like that's the wrong impression. And I don't want to burn that as my follow-up question. My follow-up question is related to cost because – and this is probably a question better suited for you. There is some concern that given the strength that you're delivering this year, that you may not be able to deliver – earnings, the earnings are going to have to reset from this elevator level next year. However, there's clearly a lot of expenses that are rolling through your P&L right now, I just stack up the mark to market stack up the COVID related charging costs, stack up the elevator corporate, I get the $60 million of one time expenses really quick or non recurring expenses really quick just this quarter. Is that sort of the right math? Is that what we should expect in the fourth quarter? And is it reasonable to believe that most of that is likely to fall away into next year?

Yeah, so I don't really want to go into kind of what next year is going to look like, but if I kind of come back to Q3, which is a good question, and kind of peeling that back, you're right, we obviously have, you know, the impact of the mark to market, right, which we also highlighted in the prepared remarks in the gross margin and the impact that it had there. Give or take about 100 basis points of the 300 basis points of inflation and other, And then the other piece, which obviously a big chunk of it is within our cost of goods, and as I mentioned, you know, with regard to the gross margin, the COVID-19 incremental costs are obviously captured there, but they're also, you know, capturing other parts of the P&L. I'd say if you look at the third quarter that comes from a total dollars perspective, just purely kind of incremental COVID-19 expenses, you get to about mid-20s, about $25 million. Obviously, that was only for in, it only impacted Q3 for about half a quarter. So maybe that gives you a little bit of, you know, incremental perspective.

That does. Thank you very much.

Thank you. Our next question comes from Chris Crowley from Stifel. Your line is open.

Hi, good morning. Hi, Chris. Hi. I had a question for you, if I could, first, on e-commerce. We've seen a significant development there of that channel. And I just want to understand how you think you're keeping pace relative to the category development in e-commerce and then how your margins are performing in that business. an area you've invested in over the last several years? Are your margins up near where they are in a product sold to the store, for example?

Yeah. Well, let me start by saying, as we know, what I would call more online shopping, order, delivery to click and collect, there's quite a bit of difference between those various channels. I would tell you on the click and collect side, I think we have done a fairly good job of keeping pace in working directly with our retail partners. And as you can imagine, one of the challenges that is – easier to manage on click and collect is inventory and assortment. I think on the more direct e-commerce side, we have, I think, done equitably in those channels to similar companies and businesses, but I think there is opportunity there. I think there's opportunity as we think about how we manage the route to market there, how we make sure that our in-stock levels improve. Clearly, you know, that being a challenge more universally in the last quarter, but I think even before that, you know, really getting the formula right for our e-commerce customers is extremely important. And then as you think about our business, you know, where our businesses tend to be a bit more staples is, we do well, I think when you're talking about impulse purchases, that's an area where we really are trying to work hard to learn a bit about how do you create that impulse environment in an online world. And that is not as simple as just being available or being at the top of the page. You've got to create a little bit more of a unique dynamic. So one of the other areas that we're investing in in the third quarter and into the fourth quarter is really out there trying to test and learn in that space because we do expect that as consumers become more comfortable utilizing these tools, and this is also inclusive of areas like Instacart where you've got a third party essentially as the intermediary between traditional retail and the consumer, but a lot of engagement with the interface on how consumers are ordering or shopping. So, you know, there's a lot of places where right now we want to be experimenting a bit more to try to understand some of these dynamics to make us, you know, more effective. And I think the great news is there are a lot of resources and the universe is whether it is our traditional retailers working online or more dedicated companies in that space, there is a real openness and willingness to partner, and I think that's always been something that's been a bit more challenging is to access data, but we're finding it to be a more open dialogue and partnership, and that's really going to help us figure it out. As it relates to margins, you know, the question, I think, There is no doubt that no matter how efficient it may be, the cost structure in supporting some of these models is creating areas where we have to try to figure out how to mitigate that. the fee you pay a third-party shopper, whether it is the additional labor that a traditional retailer has, or whether it's just the infrastructure cost of managing a supply chain that may not be organic to the company that's doing it, I think we have to work together to try to figure out what that looks like. And it may be more limited assortment. It may be different pack sizes. It may be a variety of different ways that we want to look at working together, but we do recognize that that is a reality that's coming, and we need to figure out how to do that so it's not a material drain. Now, we've looked at the kind of immediate projections, and although I would say I do expect it to be a bit of a headwind, I don't see it as a significant barrier to us continuing to progress on our financial commitments.

Okay, yeah, thank you for all that color. Just a quick one for you, if I could. You talked about some market share losses in soup. I think a lot of that related to inventory and product availability. And then you also mentioned Goldfish, for example, as well. Is that just competitors were able to get more product on the shelf? Have you lost some of these consumers to other categories as they shipped around for meals or snacks? I'm just curious there from a high level.

Yeah, it's a really good question, and it's a little bit of a different – So if you look at soup, for example, no one wants to see share declines ever, and certainly we've made a lot of progress this year on that front coming into the third quarter. I do think there are two areas that you're seeing that are impacting that number. The first is that there is no question that supply has been a challenge, and that's been more – of a share pressure of late than it was necessarily throughout the whole quarter. And again, when you think about a world of a contained set of supply on the shelf, You know, when we are not able to fully meet demand, it does open the door to other businesses or other brands that may be left on the shelf or available that has filled in a little bit. And if you watch our cycle, as I said, coming out of that unprecedented push in the beginning where we did pretty well and held up well, we've certainly seen that way. Now, the good news is I think in more recent years, we're beginning to see that cycle back. And I think over time we're going to get back to a better place. The other thing that's happened within soup is there's been a greater migration into the ready-to-serve segment of soup, which actually has more competition. So just as a perspective here, On the condensed side, we have an 85% share. On the ready-to-serve side, we have a 44% share. So just inherently as a larger percentage of consumers are spread out in that ready-to-serve area, it's impacted our overall share. What I am encouraged by is in the third quarter, our chunky business was actually up on share within ready-to-serve, which of course is our focus, while the kind of all other area of ready-to-serve was down about seven-tenths of a share point. So I think where we want to be focused, you know, that looks a little better, but there's no – you know, that dynamic's occurring. And then I think the third area on share within soup that's important to continue to mention, I think even coming out of Q2, the one area we talked about is we've got more work to do on differentiating our broth business. Okay. And that's the other area where you would have seen some share erosion in that segment, especially to a private label where, again, I think we've got to continue to work harder on establishing what the points of difference really are for Swanson. Although I did feel great about the resurgence of Pacific. And we know that's a big part of that equation is getting the supply back up on Pacific where we've done quite well. And there you see pretty significant movement in share. On the goldfish side, it is more of a circumstance where we came into the virus not necessarily on a high level of inventory. And with that initial demand, it's been very dramatic. And aggravating it a bit more has been the shift where we normally have a better balance between, you know, portion packs that are more on the go and larger bulk sizes that are used more at home. And as you might imagine, in this environment, the demand has really shifted to the bulk side. So we've made that pivot, and we're addressing it, but not necessarily at the rate that we've seen. And then once that supply challenge was in place on Goldfish, it did require us to do some reductions in promotions collaboratively with customers, which put some further pressure on the business. I'm not concerned. Because really the share loss you're seeing on goldfish is to other crackers that are really not substitutes for goldfish. It's just we share goldfish against the broader cracker category. I think, you know, our ability to... recover that and continue to move goldfish forward, I feel good about. We've just got to catch up. And I think, again, we will do that over the course of the fourth quarter. You'll even start to see some promotional activity coming back in June. And I think by the time we're through the summer, we're going to be in good shape.

Thank you.

Thank you. Our next question comes from Robert Moscow from Credit Suisse. Your line is open.

Hi, thank you. And Mark and Rebecca, I really like this new format. Thank you for making the change. Great. In your prepared remarks, Mark, I thought what was very positive is when you said that soup is going to be a much more relevant category going into this fall than normal. Can you talk a little bit about how your retailers are viewing it And maybe you just get back to, I guess, the inherent tension of coming to the retailer with advice to have reduced variety, I guess, rationalize some of the SKUs, but also indicate that it will be a stronger demand season than normal. Are retailers concerned that they lose a sale if you reduce the variety? And I have a quick follow-up.

Yeah. You know, honestly, it is truly a collaboration in discussion. And, you know, part of this is I think everybody is certainly reacting a little bit to the here and now and wanting to make sure. that as we go into the next soup season, that we're able to do our best job in supplying demand. And so what we've also said, though, is, and there's, you know, no doubt that, you know, some of the skew wrap that we did, you know, although it accomplished the goal of increasing perhaps capacity in the short term, it is not the right answer longer term with what consumers are looking for, especially if you imagine these households working through the variety needs of what cooking looks like and the desire to have greater numbers of options in place. So it really is a balancing act. I by no means expect us not to come back with a fair number of the SKUs that we have that we rationalized in the short term that we think have long-term merits. And I think the customers with us are working to try to figure out what that balance is. And part of it is us being able to provide some confidence and conviction to them on what our ability is to supply during a greater, what we anticipate to be a greater demand season. So I think, Rob, Again, where I view this being most effective is if we get the facings and the shelf inventory right together. for the SKUs that are really gonna be in high demand, and we know that. And then the appropriate level of assortment to get the variety that consumers are looking for. And perhaps that may not just mean us giving up some space, but it may be that there's not as much need for some of the redundancy that may be on the shelf. And so in the end, we want to be able to get that balance right. So I think it's going to be a little bit of a give and take there. But I think so far it's a pretty, you know, I guess consensus perspective between retailers and kind of what we're thinking. Okay, thanks.

My follow-up is, you know, if you do the math between the retail consumption growth that you had in the Nielsen data versus your shipments, It comes out to about $250 million or 3% for the year. Are you quantifying it the same way, the inventory burn that occurred? And if so, are you assuming that it spills up gradually in terms of your shipments in the next few quarters? It's a big number.

Yeah. Well, I think, you know, sadly, you know, part of that number is relative to some of the share declines we've seen where our lack of availability enabled other brands or businesses perhaps to consume some of that demand that was there over time. But our inventory levels – and remember, this is – to a certain degree, it's kind of a continued pressure to refill inventory. So I don't think mathematically I would say it's quite that big, but I do think, you know, certainly in the quarter we were about 10 points lower than what, you know, from a comparison to consumption and shipments. And I think there is a good chunk of that that will be inventory. But the way I would approach it, Rob, is kind of thinking about, okay, most of the retail universe is going to be looking for anywhere from two to four weeks of supply. And that's probably the way mathematically we're more thinking about what that number ultimately is. And then to answer kind of the second part of the question, I think it comes a little bit back to what we were talking about before with Jason on okay, where does demand remain versus what our full capacity is on how long does it take us to get back to kind of fully loaded and in place. And so I think that, you know, my sense is that we will see great progress in Q4, but we may, you know, it may take us a little bit of time in some categories to get all the way back to bright in Q1. Okay. Thank you.

Thank you. And we'll take our final question from Michael Lavery from Piper Sandler. Your line is open.

Good morning. Thank you. Hi, Michael. When you talk about the trends that you're seeing in consumer and retail, you characterize that, I think, as in the immediate future. Just curious if you could give a little sense of what kind of time horizon you see and maybe specifically just getting – some early thoughts on the second half of calendar 20 and into fiscal 21. Obviously not fiscal 21 guidance, but just some sense of how you're thinking about it and what shapes you're planning there.

Yeah, you know, I think, Michael, I tended to qualify it as immediate because I do think there's still a lot left to prove, although very encouraging information. to see the stickiness, if you will, of the household penetration and the repeat. I think we need to kind of get into that third cycle that I described to really understand kind of where we'll be ongoing. Now, I do think, though, it's safe to say that we would certainly expect, as we kind of go into next winter season, And as we watch the behaviors, we do think those behaviors will continue to be highly relevant. And, you know, there's a series, I think, of indicators that we're watching closely to try to get a sense of you know, how much of this really is sustainable beyond, you know, kind of the next six to 12 months. But I do think that there are going to be some lasting impacts out of this. And I think a lot of it will depend, too, on our ability to really convert on these windows of opportunity to establish that relevancy in a sustainable way. And I think You know, that has a lot to do with our ability to drive that usage and relevancy while also bringing the right innovation to continue to build out that category and try to really truly return it back to a position of playing a relevant role in a variety of different consumers' lives.

Just a little bit related, can you touch on some of your thinking on seasonality? We've obviously normally seen that in soup in particular. And this year, you know, we've all been locked in during some of the best weather possible. And yet soup certainly has surged. And part of what I'm curious is if that continues in this summer on a smaller base, should we be mindful of, a potentially bigger uptick, obviously, again, depending on your capacity and those constraints. But has seasonality changed? How do we think about that?

Well, I think there's two things that we've said all along we thought could be a little bit of an expansion of the seasonality of soup. And that was the movement into a bigger role within cooking, which, of course, does change through the summer months. But that need, that ingredient demand, and that role we could play, we always felt like there was a bigger opportunity there that might expand deeper into the year than just what we would consider the traditional cooking. soup season. I think the other area that we've experienced a lot of growth in behavior is the role that soup can play in lunches. And I do think the ability for that to be a little less seasonal is possible. And so although I do expect the demand to dampen a bit in the summer, I do think we'll remain in an elevated level. And so I think those are all areas of opportunity that we're going to continue to work on to try to solidify those behaviors. And I think if we're effective at doing that, we do have the potential to expand the season. But again, these are all things right now. that we're still kind of in those early moments and trying to learn from. And I guess just going back to your starting point, that is why I tended to categorize it as immediate. But we'll continue to provide those mile markers as we go to try to help everybody understand you know, how we see this going forward. And I certainly would expect as we see you for the end of the fiscal year and we start talking about 21, we'll have a more robust perspective on that as we look forward.

Okay, great. Thanks a lot.

Thank you. And that does conclude our question and answer session for today's conference. Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a wonderful day.