Campbell Soup Company

Good morning and welcome to Campbell's fourth quarter and full year fiscal 2020 earnings presentation. I'm Rebecca Gardy, Vice President of Investor Relations. As usual, we've created slides to accompany our earnings presentation. You will find these slides posted on our website this morning at investor.campbellsoupcompany.com. In addition to this earnings presentation, we will host an analyst Q&A only session later this morning at 8.30 a.m. Eastern. A replay of the webcast and a transcript of this earnings presentation, as well as of the Q&A session, will also be available on the website at investor.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 will 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 on the year, and Mick will then walk through the financial details and share our outlook for the first quarter of fiscal 2021. And with that, let me turn it over to Mark. Mark?

Thanks, Rebecca. As we continue to navigate the COVID-19 crisis, we hope all of you listening today and your families are staying safe and healthy. Our thoughts remain with all those impacted during these challenging times. Our most important responsibility is to take care of our people, ensuring their health, safety, and well-being continues to be our highest priority. We also remain focused and committed to helping the communities where our people live and work. Our support, both financially and in food donations, to Campbell's hometowns across North America now stands at $6 million since the onset of the pandemic. Before I review our financial results, I must once again express my deepest gratitude, pride, and appreciation for the extraordinary performance across Campbell, starting with our frontline teams. We have been operating in this challenging environment for six months, and our teams continue to exhibit determination, commitment, and resilience. They have adapted to heightened safety protocols to get our products to customers and consumers across North America, and they have been there for one another and for their communities. I am also sincerely thankful for our sales team and the close partnerships with our customers during these uncertain times. I truly believe the level of collaboration and transparency that has been displayed during this difficult and complicated period will create an environment for continuing to build and grow our businesses together well into the future. Finally, I'd like to thank our headquarters team for demonstrating such tremendous commitment and passion in supporting the business and our teams in the field. I'm so proud of how they have adapted to not only a virtual work environment, but also the way in which they have found new and more efficient ways to work. Now, let's turn to our performance. Campbell's simplified focus strategy and commitment to improving our execution served us very well as we faced the unprecedented challenges of the pandemic. Our fiscal year was separated into two distinct halves. We began the year focused on strengthening our portfolio of powerhouse brands. We completed our planned divestitures while we substantially reduced our outstanding debt. We kicked off our win-and-soup turnaround plans, and we drove a new operating model to optimize growth and profitability. Our business was progressing on a steady positive trajectory in the first half with solid performances across both divisions. Within meals and beverages, both soup volume and dollar share grew for two consecutive quarters, and we delivered continued growth in snacks in the first half of the year. And then March ushered in challenges few could have fully anticipated. But I am incredibly proud of the agility and commitment of our teams in adapting to the uncertainty brought on by COVID-19. Our operational and commercial teams have positively responded to the extraordinary demand caused by the pandemic, driven by a major shift in consumer behavior toward eating at home with a resurgence of cooking simple meals and increased snacking occasions. The impact of these consumer changes was evident in the results that were reported in the third quarter and again in the fourth quarter results we're reporting today. In the fourth quarter, we delivered growth in all key metrics – with double-digit increases in organic sales, adjusted EBIT, and adjusted EPS. Organic net sales increased 12%, resulting from strong performance across both of our segments. As a reminder, the organic net sales growth excludes the 8-point positive impact from the additional week in the quarter and a 2-point negative impact from the sale of our European chips business. As it did last quarter, our in-market performance grew across both the meals and beverages and snacks divisions. In measured channels, our total company in-market consumption increased 22%, with double-digit consumption increases across most of the portfolio. Comparing relevant apples-to-apples consumption and net sales numbers, consumption growth was about two points above net sales, reflecting isolated softness in unmeasured channels and select inventory depletion on snacks, partially mitigated by some inventory recovery in meals and beverages, especially on soup. Share results were mixed in certain categories as we navigated some previously discussed supply challenges to keep up with demand. We expect to continue navigating this situation through the first quarter of fiscal 2021, but also see opportunity for further inventory replenishment throughout the first half as retailers are working hard to ensure shelves and inventories are fully replenished. We feel confident that as we move into the critical soup season, we will be well positioned to support consumer demand and our retailers' needs and have a more positive share outlook. In the quarter, we also advanced on other key business metrics and strategic plan initiatives, including 190 basis point adjusted gross margin expansion. And we generated $45 million of enterprise cost savings in the quarter, which reflects initiatives from our multi-year enterprise program and synergies from our SNACS integration. With the strong increase in net sales and improved gross margin, adjusted EBIT increased 22%, despite a significant uptick in the rate of marketing investments and COVID-19-related expenses across both divisions in the fourth quarter. These results helped to drive adjusted EPS up 50% to 63 cents per share. As discussed last quarter, we are very focused on household penetration as we make every effort to retain the new households and younger consumers who have purchased our brands through the pandemic. We remain very encouraged by the retention of these new consumers and are pleased with our decision to continue to invest to strengthen our brand equity and increase relevance, even where we may have supply challenges. In fact, we increased household penetration across most key brands. Total household penetration remained up four points for the company versus a year ago in the quarter, with strong sustained repeat of 71% in these new households. Those increases have been driven in part by the sustained consumer behaviors we discussed in the third quarter, including more at-home meals and quick-scratch cooking, online shopping, the evolution of the retail shelf, and the continued consumer focus on value given the challenging economic environment. In our best view of the future, regardless of duration of the COVID-19 environment, we expect to retain a sizable portion of these households driven by these sustained behaviors, even as the environment normalizes over time. The net of all of this is that we expect to be in a much more advantaged position coming out of the pandemic than going in, which was already improving based on the progress we had been making against our strategic plan. Currently, the impact and duration of the COVID-19 pandemic remains uncertain, and it is therefore difficult to predict the full-year outlook for fiscal 2021. That said, we are committed to being as transparent as possible for investors. We are providing context for our thinking on full-year fiscal 2021 and more specific guidance for the first quarter of fiscal 2021 based on that context. However, even in the first quarter, there are many variables that make this difficult, with both risks and opportunities. And I do want to be clear that it is not our intention to move to quarterly guidance. Rather, it represents our desire to provide as much visibility as possible. Each quarter, we will assess what we think is appropriate. Mick will cover this in detail in a moment. With that, let's turn to a more detailed discussion of our two segments. There are very few businesses that were as in-demand and positively impacted by COVID-19 than our Meals and Beverages Division. The strong fourth quarter results have fundamentally changed the trajectory of the business and have created a unique moment to further accelerate our strategy of returning relevance and growth to these iconic brands. In the fourth quarter, organic net sales increased 19% and operating profit was up 24%. These sales gains continued to be broad-based, primarily reflecting gains in our U.S. soups, beverages, preggo, pasta, and Canada. Our food service business, which only represents approximately 5% of our total full-year company sales, continued to face challenges with sales declining in the quarter based on consumer trends previously discussed. In-market dollar consumption grew 24% in the quarter, with strong double-digit consumption growth across all core brands. Excluding the benefit of the additional week, our in-market consumption was up approximately 15%. This sustained demand, along with gradual inventory recovery, did continue to put pressure on our supply chain, resulting in some share erosion. We did see some inventory catch-up later in the quarter, as we added back SKUs that we had temporarily cut to maximize capacity and and improved inventory levels in soup, where we did ship ahead of consumption as planned. Marketing expense increased 115% versus prior year, and A&C more than doubled on a dollar basis as we continued to lean into the opportunity to attract and retain new households. Although off a smaller historical-based spending level, more than half of the increased investment was focused on soup. including Pacific Foods, which grew 45% in market, including an approximate 11-point benefit from the additional week, as we have now fully turned around this important business. Over the entirety of fiscal 2020, the soup category grew more units than any other edible category, and our wet soup growth was double that of total edibles. This is a long way from 2019. On this slide, you can see the total soup sales growth was remarkable, up 52%, which includes an 11-point benefit of the additional week in the quarter, driven primarily by the 30% increase in consumption impacted by the continued changes in consumer behaviors from COVID-19, as well as retailers replenishing some inventory levels. We drove substantial sales gains on condensed, ready-to-serve, and broth, including Pacific. Consumers have gravitated to our trusted brands because of the quality, value, comfort, and versatility that our products deliver. While our share performance was down in the quarter, it was driven by broth, which did not keep pace with its category, primarily due to availability. Broth is an important area that we are continuing to focus on by adding more additional co-manufacturing, as well as increasing capital investment to unlock further total soup production. We are also extremely pleased with our significant gains in household penetration, while volume per buyers remained elevated even in the summer. Soup household penetration increased over 5 percentage points versus the same quarter last year. We gained 6.4 million households across all generations, with continued gains among the millennial cohort. Notably, these gains were most pronounced across our condensed icon soup business, which was where we really increased investments around cooking, new usage ideas, and more summer recipes. We leveraged the momentum we garnered in the third quarter and disproportionately invested in marketing messages with new relevant ideas that would be especially appealing to younger consumers. This has also contributed to strong repeat and product is moving through pantries even as we navigated through the summer months, setting up opportunity for stronger replenishment as we head into the upcoming soup season. As we discussed previously, innovation plays an important role in our plans. And although we may be a bit behind our soup aisle of the future vision given the COVID-19 impact on retail, We are certainly on track to step up innovation on soup in fiscal 2021 to further accelerate relevance and continue to position our soup business for sustained growth. I want to acknowledge and commend the team who, despite the challenging operating environment in fiscal 2020, did not take their foot off the gas on our innovation across our soup portfolio. For fiscal 2021, we are focused on three major areas for innovation – First, strengthening our Better For You offerings. Next, expanding our convenience platforms. And finally, beginning to broaden our kids' specific options. This reflects the significant uptick in need for simple in-home kids' lunches. Better For You begins with the relaunch of our WellYes brand. This platform was first introduced in January 2017. We've added to the platform with a range of highly relevant and successful sipping soups, including two new flavors this past fiscal year. We will now focus on the base business by further improving the quality and taste of the food, completing a full packaging and marketing transformation and shifting to more affordable pricing. We expect this will provide a far more attractive Better For You option and a much stronger competitive position to capture category growth and younger consumers. Also within the Better For You broth category, we are expanding our Swanson broth sipping line with two new flavored varieties, Chinese Spice and Moroccan. Sipping represents an incremental occasion for broth and is expanding the Swanson equity. We expect this line to attract younger consumers, particularly millennials and Gen Xers, who value the ease and convenience of the sipping cup. For our Pacific Foods brands, we will introduce three condensed soup varieties in a can, all of which are organic and gluten-free. As the trend of quick-scratch cooking continues to grow, these offerings will fit perfectly for consumers who want to save time and add organic and nutritious ingredients to their meals. Our now two-year effort to improve the health and wellness of our core condensed business and adding significant new products has gone a long way in breaking down the historical barrier of health and relevance concerns for canned soup. We are also optimistic about the national launch of our Slow Kettle Toppers line with five flavors. We've tested this line at a national retailer and have found that it is bringing a new and younger consumer into the soup aisle. This rounds out a compelling convenience section that we see as a new destination that will be created in our soup aisle of the future. Finally, within our core condensed and SpaghettiOs portfolio, we are seeing growth on our kids' platforms with a higher number of in-home lunches. We have a new SKU launching this soup season, a tomato ABC variety, that combines the popularity of our iconic tomato variety with the fun of alphabet pasta. We continue to drive relevance with our kids' soup line by featuring familiar faces, such as the always popular Disney princesses, along with one of Nickelodeon's hottest TV shows in Paw Patrol. In addition, we are launching more permissible varieties of SpaghettiOs, like new chicken meatballs and added veggies. As we look ahead, we will continue to invest to bring new news in terms of products and flavors to our kids' platform. As we head into fiscal 2021, It is a good moment to check our progress against our win-in-soup strategy. We feel great about that progress. Although the environment has changed dramatically, we also have been dynamic and nimble in our approach. The turnaround of the business and expansion of households attracting younger consumers and improvements in Pacific foods are all well ahead of pace. While share is behind where we expected, we consider this capacity-driven and fully expect that to turn around in fiscal 2021. Our innovation, marketing, supply chain, and investments are all on track, while shelf and packaging is a bit behind as we have prioritized supply and keeping shelves full in the COVID-19 environment. We expect to increase our focus in this area in fiscal 2021. To stick with our full swing analogy, I'd say that we are well down the fairway. Admittedly, while we benefited from some tailwinds off the tee, we have made the most of this moment with strong investment and continued focus on innovation. And we are feeling great as we set up for our second shot in fiscal 2021. In other parts of the division, we saw similar results continue into the fourth quarter. Prego maintained its number one share in the Italian sauce category for the 15th straight month as we saw gains in household penetration in the quarter. Both Prego and Pace saw double-digit consumption gains. However, both also experienced pressure on share given supply challenges as we're trying to meet demand and recover retail inventory levels. V8 and Canada also performed well in the quarter. V8 experienced double-digit consumption growth with gains in both multi-serve and single-serve products. Our Canadian business continued to perform well this quarter, and its results mirrored similar behavior to the U.S. All in all, great performance, and I'm very proud how our team materially advanced the execution of our strategic plan. Let's next look at our snack segment. This was another strong quarter for the division, as net sales increased 11%. Excluding the additional week and the sale of the European ships business, organic net sales increased 7%. Operating profit was flat versus previous year, with higher sales being offset by COVID-19 costs and sustained increase in marketing investment. We see this margin dynamic as short-term in nature as we navigate higher COVID-related costs. As the year progresses, we expect to remain on our planned path of margin expansion into fiscal 2021, consistent with the trends that we saw in full-year margin expansion in fiscal 2020. In-market performance was elevated across the portfolio as our brands are well aligned to meet consumer needs and current retail trends. The division delivered 21% consumption growth in the fourth quarter in measured channels, and growth across all nine of our power brands. Excluding the additional week, our in-market growth was 13%. The strongest performers included Milano, late July, and our farmhouse brand. This quarter, six of our nine power brands grew or held share. We grew by more than one point across three of the power brands, with the strongest growth coming from Lance at 3.7 points and late July at 1.3 points. However, we did see some limited share challenges also in snacks due principally to supply constraints. On the snacks business, our net sales number lagged consumption, primarily due to lower growth in our non-measured channels, specifically in convenience store and vending, as well as some retail inventory reduction. We have already taken action. For example, as previously discussed on Goldfish, we have added nearly 20% more capacity to our supply as we head into back to school. We also have additional supply coming online for our Cape Cod and Kettle brands in the first half of fiscal 2021. We are also very focused on household penetration for our snacking brands, with increases across eight of our nine power brands in the fourth quarter. We significantly increased our marketing investment in snacks in the quarter to fuel these efforts, with a year-over-year increase of 38% as we doubled down to retain new consumers and support our power brands. Our investment reflects a combination of live TV, online, and streaming video, along with key media sponsorships. I'm also very proud of our snacks team for continuing to drive innovation, which is so critical in the snacking category. We launched all our planned innovation for fiscal 2020 and are on track to deliver fiscal 2021 innovation with no delays, even as we continue to operate within the constraints of COVID-19. I'm pleased with the performance we're seeing on some of the innovation that I discussed previously, such as Snyder's of Hanover pretzel rounds and twisted sticks, as well as our late July organic potato chips. These products are demonstrating positive signs on repeat and steady velocity growth. In addition, in the fourth quarter, we launched a new line of farmhouse breads called breakfast breads. These soft, thick-cut slices of bread, rich with whole grains and fruits, come in three varieties – and are ideal for stay-at-home or on-the-go breakfasts. They were developed pre-COVID-19, but were scaled up using the same teletasting capability we mentioned last quarter. Next quarter, I look forward to sharing our exciting plans for fiscal 2021 snacks innovation, which will roll out in the second quarter. Let's finish our discussion on snacks with a review of our progress against integration and value capture. We continue to remain on plan to deliver the value capture synergies that we initially outlined as part of our acquisition of Snyder's Lance. The team continues to do an outstanding 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 despite the outsized impact on costs associated with the pandemic. In conclusion, I'm confident in our plan to continue to unlock the growth potential of this unique and differentiated portfolio. The business, which represents about half of our annual sales, continued to perform well and fulfill its portfolio role of sustained growth. As we navigate this unprecedented period of remarkable growth, I hear one question rather consistently. Are these the best days we can expect from Campbell? My short answer is no. Although we clearly have some unique one-time drivers in the second half of fiscal 2020 that created fairly historic growth numbers, the collective progress we have made strategically, the unique investments that have been enabled, and the lasting consumer trends we are experiencing, I believe places us in a highly advantaged position as we emerge from this pandemic period, whenever that may be. First, strategically, we added millions of new households. And even if the retention of those new consumers is modest, it will still fuel substantial incremental growth to our originally planned trajectory. In particular, it has added significant confidence around perhaps our biggest strategic question, which has been our ability to stabilize and build relevance around our soup business. Second, we have also been able to maximize cash flow and investment during this period, adding significant incremental cash and profit to help reduce debt, build our brands, and improve efficiency. Even as we expect profit and cash flow to normalize over time, the incremental benefit of this period has been significant. In addition, I think this operating environment is creating opportunities to evaluate future efficiency as we learn from these last six months. Finally, as we anticipate the return to normality, we do not believe this will undo the experience, capabilities, and preferences consumers have developed, like a resurgence of quick-scratch cooking and expanded snacking, both spaces where our brands play such a critical role. While there still is much to prove and the environment remains extremely volatile, our more focused North American business, a brand portfolio in highly relevant categories, our relentless pursuit of executional excellence, and now with the acceleration of our strategic plans, we are very well positioned for the future. With that, let me turn it over to Mick for a deeper dive in our financial results and segment performance. Thanks, Mark.

As Mark shared, our fourth quarter results were significantly impacted by the COVID-19 pandemic. Our net sales increased as demands remained elevated throughout the quarter, and we continued to invest in our brands. At the same time, we were able to more than offset incremental COVID-19-related costs, resulting in growth margin expansion and strong EBIT and EPS growth. Finally, we generated significant operating cash flow and divested the proceeds in fiscal 2020, enabling us to reduce our leverage and achieve our original target of three times adjusted EBITDA a year earlier than originally anticipated, while we continued to invest in the business and maintain our dividend. For the fourth quarter, we delivered total top-line organic growth of 12% compared to the prior year. Organic net sales for meals and beverages increased 19% for the quarter, driven by double-digit gains across a majority of our retail brands. In snacks, we delivered organic net sales growth of 7%, driven by gains in eight of our nine power brands. and our fresh bakery products. We are pleased with our adjusted growth margin improvement, stemming primarily from the benefits of supply chain productivity improvements and cost-saving initiatives, mark-to-market gains on outstanding commodity hedges, improved operating leverage, and favorable product mix, offset partially by higher supply chain costs related to COVID-19 and moderate cost inflation. The combination of strong top line growth and gross margin improvement combined with continued investment in our brands resulted in 22% adjusted EBIT growth in a quarter. Year-over-year adjusted EPS growth was 50% for the quarter, reflecting our strong adjusted EBIT performance and the benefit of lower net interest expense as a result of successful deleveraging. Looking at the full year, I'm pleased with the financial results for fiscal 2020. We grew the top line 7%, which, combined with gross margin expansion, resulted in adjusted EBIT growth of 14%, and adjusted EPS growth of 28% while we continued to invest in the business. I'll now review our fourth quarter results in more detail, provide a perspective regarding fiscal 2021 and guidance for the first quarter. For the fourth quarter, reported net sales increased 18%. Organic net sales, which exclude the impact from the additional week in the quarter, and the impact of the sale of the European chips business increased 12% driven by volume growth in both meals and beverages and snacks, reflecting increased demand for a broad portfolio of products. Adjusted EBIT increased 22% to $307 million as higher sales volumes, including the benefit of the additional week, and improved adjusted gross margin performance were partially offset by increased marketing investment and higher administrative expenses. Adjusted EPS from continuing operations increased by 50% or 21 cents to 63 cents per share, reflecting an increase in adjusted EBIT as well as lower net interest expense and a lower adjusted effective tax rate. For the full year, net sales increased 7%. Organic sales, which exclude the additional week and a quarter, and the impact from the sale of the European chips business also increased 7% from the prior year, driven by gains in both meals and beverages and snacks. Adjusted EBIT increased 14% to $1.45 billion, reflecting higher sales volume including the benefit of the additional week, improved gross margin performance, offset partially by increased marketing investment. Adjusted EPS from continuing operations increased by 28%, or 65 cents, to $2.95 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 12%. This performance was driven by the 12-point gain in volume with growth across most of our retail brands, offset partially by declines in our food service business. The additional week in the quarter added 8 points, and the divestiture of the European chips business negatively impacted net sales in the quarter by 2 points. The impact from currency translation in the quarter was neutral. All in, our reported net sales were up 18% from the prior year. Our adjusted gross margin increased by 190 basis points in the quarter to 35.6%. Favorable product mix, which drove a 70 basis point improvement in our adjusted gross margin, was largely driven by the increased contribution from our soup products within our meals and beverages segment. Additionally, in order to optimize our supply chain output, we continued to prioritize production of certain SKUs within both divisions. Separately, we're estimating an 80 basis point gross margin improvement from better operating leverage within our supply chain network as we significantly increased our overall production. Net pricing was neutral in the quarter. Inflation and other factors had a negative impact of 210 basis points due to increased supply chain costs driven by COVID-19, such as increased labor and sanitation costs and cost inflation. as overall input prices on a rate basis increased approximately 1.5%, partially offset by mark-to-market gains on outstanding commodity hedges. The negative impact from the incremental COVID-related expenses and inflation was offset partially by our ongoing supply chain productivity program, which contributed 160 basis points. This program includes, among others, initiatives around logistics optimization and ingredient sourcing. And our cost savings program, which is incremental to our ongoing supply chain productivity program, added 90 basis points to our gross margin expansion. This program includes benefits of various initiatives, such as last year's closure of our manufacturing facility in Toronto, Ontario, and benefits from the ongoing integration of Snyder's Lens. All in, our adjusted gross margin for the quarter was 35.6%. 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 37% in the quarter to $265 million. This increase was basically driven by our planned increased investment in advertising and consumer promotion, or ANC expenses, which is up 101% versus a year ago. In meals and beverages, the investment reflected greater emphasis on our iconic soup varieties to drive usage, inspire meal solutions, and build brand awareness, particularly amongst younger households. Recall that the fourth quarter is typically the lowest in terms of sales and related marketing spend. And accordingly, the significant increase this quarter was relative to a smaller base in the prior year. In snacks, our increased investment in our power brands this quarter followed the typical seasonal cadence, albeit elevated, as we sought to retain new households and support our power brands in the strong current demand environment. Adjusted administrative expenses increased $30 million, or 22%, to $169 million, with approximately half of the increase driven by the estimated impact of the additional week and a quarter on general administrative costs. The balance of the increase reflects increases in charitable contributions, higher incentive compensation accruals, and higher benefit costs, offset partially by the benefits from cost savings initiatives. Going to the next slide, as I mentioned earlier, we have continued to successfully deliver against our multi-year enterprise cost savings program. This quarter, we achieved $45 million in savings. inclusive of Snyder's land synergies. Full year fiscal 2020 savings were $165 million, which was ahead of our expectations. To date, that brings our savings for the overall program to $725 million. We continue to track to our cumulative savings target of $850 million by the end of fiscal 2022. To help tie this all together, we are providing an adjusted EBIT bridge to highlight the key drivers of performance this quarter. As discussed, adjusted EBITs grew by 22%. This was largely driven by the increase in demand for our products, with sales volume gains contributing $111 million of EBIT growth. The overall adjusted gross margin expansion of 190 basis points contributed $40 million of EBIT growth, which was more than offset by higher adjusted marketing and selling expenses of $71 million, reflecting our planned investments in ANC, and higher adjusted administrative expenses of $30 million. The impact from adjusted other income was nominal. Our adjusted EBIT margin increased year over year by 40 basis points, to 14.6%. The following chart breaks down our adjusted EPS growth between our operating performance and below the line items. Adjusted EPS increased 21 cents from 42 cents in the prior year quarter to 63 cents per share. Adjusted EBIT had a positive 14 cent impact on EPS. Net interest expense declined year over year by $24 million, delivering a six cent positive impact to EPS, as we have used proceeds from completed divestitures and our strong cash flow to reduce debt. And lastly, our adjusted effective tax rate of 22.3% led to a positive three cent impact to EPS, completing the bridge to 63 cents per share. The effect of the additional week in fiscal 2020 was approximately $0.04 per share. Now turning to each of our segments. In meals and beverages, organic net sales increased 19% in the fourth quarter, reflecting growth across our U.S. retail business, including soups, V8 beverages, Prego pasta sauces, Campbell's pasta, as well as growth in Canada. offset partially by declines in food service. Volumes within our retail business grew principally due to increased food purchases for at-home consumption, offset partially by a decline in our food service business as a result of shifts in consumer behavior and continued COVID-19-related restrictions. Compared to prior year, net sales of U.S. soups increased 52%, including an 11-point benefit from the additional week with growth in condensed soups, ready-to-serve soups, and broth. Operating earnings for meals and beverages increased 24% to $184 million. The increase was primarily driven by sales volume growth, including the benefit of the additional week and an improved gross margin, offset partially by increased marketing investments and higher administrative expenses. The gross margin increase was driven by the benefit of supply chain productivity improvements and cost-saving initiatives, as well as improved operating leverage and favorable mix, partially offset by higher supply chain costs related to COVID-19 and cost inflation. For the full year, meals and beverages delivered organic net sales growth of 8%, driven by gains in the U.S. retail business, including double-digit gains in U.S. soups, including Pacific, gains in Prego pasta sauces and V8 beverages, as well as gains in Canada, partially offset by declines in food service. Segment operating earnings increased 10% driven by sales volume growth, including the benefit of the additional week, and an improved growth margin, partially offset by the increased marketing support and higher administrative expenses. Within snacks, organic net sales increased 7% in the fourth quarter, driven primarily by volume growth reflecting elevated demand of food purchases for at-home consumption as well as strong base velocity growth. These sales results reflect growth in fresh bakery products, average farm cookies, late July snacks, goldfish crackers, and Snyder of Hanover pretzels, as well as Kettle Brand and KitKat potato chips. Operating earnings for snacks were comparable to the prior year at $136 million. Sales volume gains, including the benefits of the additional week, were offset by increased marketing investments and lower gross margin performance. Gross margin performance declined in the quarter as the benefits of cost savings initiatives and supply chain productivity improvements, as well as favorable product mix and improved operating leverage, were more than offset by higher supply chain costs related to COVID-19 and cost inflation. For the full year, organic net sales growth on snacks was 6%, driven by gains in goldfish crackers, Prepperidge farm cookies, and fresh bakery products, as well as Kettle Brand and Kid Cod potato chips, late July snacks, and Snyder's of Hanover pretzels. Segment operating earnings increased 6%, driven by sales volume growth, including the benefit of the additional week, and improved gross margin performance on the full year. partially offset by increased marketing investment. I'll now turn to our cash flow, liquidity, and capital allocation priorities. Cash flow from operations through 2020 was $1.4 billion, comparable to the prior year, as changes in working capital were basically offset by higher cash earnings and lower other cash payments. Cash from investing activities increased by $2.1 billion, driven by the net proceeds from our divested businesses. The cash outlay for capital expenditures was $299 million, $85 million lower than the prior year and in line with our previously communicated full-year expectation, although slightly lower than anticipated at the beginning of the year. primarily reflecting delays in certain projects impacting by the current operating environment. Cash outflows for financing activities were $3 billion, compared to $1.6 billion a year ago. The year-over-year incremental cash outflow reflects the use of divestiture proceeds to pay down debt. Dividends paid in the amount of $426 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 deliver our balance sheet, ending that debt of $5.3 billion as of the fourth quarter declined by approximately $3.1 billion in fiscal 2020 as proceeds from completed debt vestiges, along with positive cash flow generated by the business, were used to reduce our debt. A leverage ratio which represents net debt to a trading 12-month adjusted EBITDA from continuing operations is now at three times. Notably, we were able to achieve this targeted leverage ratio 12 months earlier than anticipated. We ended the year with cash and cash equivalents of $859 million, aided in part by the $1 billion bond issuance completed in the third quarter. Our capital priorities remain unchanged as we will continue to strategically invest for growth in our business, including expanding capacity, such as we did with Goldfish recently at our Willets plant in Ohio, while maintaining our quarterly dividend. And while we will continue to reduce our debt, we may now also selectively start to explore strategic token acquisitions within our categories. As we look to fiscal 2021, the continuing effect of COVID-19 creates a volatile operating environment, making it difficult to provide a full year outlook at this time with sufficient certainty. However, I will provide some context as to how we view fiscal 2021 and how that view informs our first quarter fiscal 2021 guidance. First off, While we operate in an uncertain environment, we will continue to focus on strong execution, which includes the continued investment and support of our brands, execution within the supply chain to meet the demand, and a continued focus on cost savings. More specifically, based on what we know now, we expect cost inflation within our supply chain to largely be offset by the continued productivity savings across the network. Additionally, we will continue to focus on our overall cost savings program, which includes enterprise and value capture related cost savings initiatives. From demand perspective, based on the current environment, we expect demand to remain elevated during the first half. Although moderating from Q4 fiscal 2020, given a continued but decelerating tailwind from COVID-19 and the fact that many COVID-19 impacted products like soup have larger comparable basis as we head into the fall and winter. Although we're making steady progress, the continued pressure to fully meet demand and full inventory replenishment within our supply chain will likely moderate the full upside in the first half. We also expect continued COVID-19 related costs, but at a moderated level compared to the fourth quarter as we improve efficiency and more effectively plan the business. Moving on to the second half of fiscal 2021 and assuming a transition to a more normal environment, we will be lapping the significant pantry load and one-time effect that COVID-19 had on our business in the second half of fiscal 2020. We are making every effort to mitigate that impact by retaining new households, sustaining consumer behaviors, and new product innovation. Nonetheless, we do expect net sales to decline given the significant one-time nature of last year's growth. In the back half of fiscal 2021, as we left this past year's COVID-19 related costs, we expect to have opportunity. Although, we expect those gains are not likely to fully offset the impact from volume declines. Finally, a couple of specific items for fiscal 2021. As previously mentioned, we expect continued progress on our cost savings program and expect to deliver an incremental $75 to $85 million in fiscal 2021. keeping us on track to deliver $850 million by fiscal 2022. Additionally, we expect net interest expense of $215 to $220 million, which is lower compared to fiscal 2020, given the lower debt levels. Additionally, we expect an adjusted effective tax rate of approximately 24%, largely in line with fiscal 2020. As I previously mentioned regarding our capital priorities, we expect to continue to invest in the business, targeting capital expenditures of approximately $350 million, as we continue to support cost savings initiatives and position the company for future growth. While we do not intend to provide quarterly guidance going forward, we are providing the following first quarter fiscal 2021 guidance in the spirit of transparency. In the short term, some of the key variables we've focused on include current trends in demand, such as consumer behavior during the back-to-school period, and the ability of our supply chain to continue to service elevated order levels. Within the context I just outlined, for the first quarter fiscal 2021, we expect year-over-year growth in net sales of 5% to 7%. Growth in adjusted EBIT of 6% to 9%. And adjusted EPS growth of 13% to 18%. Or 88 cents to 92 cents per share. In closing, our fourth quarter results were a strong finish to an exceptional year. I'm proud of the focused execution by the teams throughout the organization amidst such uncertain and trying times. Overall, we ended the year with strong momentum on our strategic plan. I will now turn it back over to Mark.

Thank you, Mick. As we just reviewed, fiscal 2020 was a year like no other in recent memory and an exceptional year of performance for Campbell. And we've already jumped right in to fiscal 2021. I thought a good discipline from last year was to provide our key proof points or milestones that help frame our priorities for fiscal 2021 and help keep everyone aligned to what is working and what is not. Key metrics to measure our progress going forward include retention of new households, returning to positive soup shares, sustained progress on snacks, and better contribution from innovation are all key areas of focus on our growth agenda. This growth will be supported by continued value capture and snacks margin, closely managing COVID-19 costs and key capital initiatives. Still most important, we will be continuing to prioritize the safety and well-being of our people. and investing to expand our capabilities to meet the evolving consumer and retail environment. Thank you for your time this morning. Rebecca, over to you.

Thanks, Mark. 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 Q4 and fiscal 2020 Campbell Street Company live Q&A session, At this time, all participants' lines are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. To ask a question during the session, you will need to press star and then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star and then 0. I would now like to hand the conference over to Rebecca Gardy, Vice President, Investor Relations. Now, you may 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 a 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 first quarter 2021 guidance, and the 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, CampbellSoupCompany.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 the most directly comparable GAAP measures. Joining me today are Mark Klaus, Campbell's President and CEO, and Mick Bakehausen, Chief Financial Officer. We kindly ask that you limit yourself to one question. And with that, I'll now turn it over to the operator for the first question. Operator?

Thank you. And our first question will come from Andrew Lazar from Barclays. Your line is open.

Morning, everyone. Thanks for the question. Hey, Andrew. You know, Mark, I know that fiscal 21 was sort of initially, as the way you laid it out in the multi-year plan, thought to be a pretty big year in terms of reframing the soup category for Campbell through innovation and other means. And I'm trying to get a sense of what's maybe changed or what needs to change around the strategy for this soup journey, if anything. given recent trends, because if you think about it, you know, Campbell has picked up so many new households and users that I'm thinking the focus maybe now shifts more from, you know, retaining or, you know, to retaining users rather than maybe solely gaining new ones. I'm just trying to get a sense of how that, if at all, changes the sort of the approach and the journey around soup.

Yeah, no, great, great question. I think, you know, the, The good news is that a lot of the strategic framework of what we had set out to accomplish on soup initially was laid out in such a way where the primary goal or the objective was to improve relevance of the category and begin to add or recover households that had lost. As you point out, I think the best way to describe where we are right now is that we've you know, through the pandemic, been able to jump forward on that strategic journey. And if you go back and kind of think about what did we set out to do in 20, it was really to, you know, strengthen the base, improve quality, make some material investments in the business to begin to reestablish or rebuild the that relevancy, and then begin to build back the innovation funnel. If you kind of think about what we then accomplished in 20, really across the board, we well went beyond what our expectations are. So as we go into 21, although I do think it is more about retaining those households, a lot of the strategies and the things that we had planned to do are things that we will continue to do, I think, just with a higher degree of probability of success and a better set of insights on what's compelling consumers and what's been working or not working. So I think there's been a lot of discussion or debate about you know, when you kind of come through all this, how do you feel about where you are in the strategic journey on soup? And that was why, to some degree, I tried to, you know, cover in the remarks that, you know, this to me on soup is a little bit less about peaks and valleys as we think about how to manage through this short term, but really that steady progress that enables us to come out of this tunnel in a position where soup is a steady contributor to the business. Because if you go back to the thesis of the company, if you're able to accomplish that in conjunction with what we believe we can do on snacking and even the balance of the meals and beverage business, it really does position us in a very advantageous way. So as we get into 21, I think one of the things I'll just leave you with is A lot of, I guess, powder is still dry in the strategy when it comes to innovation, shelving, many of the things that we had planned in 21. And so I think, as I said in my comments, I'm building confidence because you still have those elements to layer on top of what kind of the shorter-term boost has been. And I'm sure we'll get into a little bit more of the consumer trends, but, you know, we've done a lot of work on this behavior of increased cooking and quick-stress cooking in particular. And we've built now a series of insights that give us a lot more confidence that this is going to sustain beyond just the pandemic period. And I'm sure that will come up a little bit later and we can talk more about it. But I think the net of it is, A lot of the same activities, it's just we're further down the road than we expected. We keep staying that course. I think if anything, this is building a lot more confidence in our ability to make super study contributor. Thanks so much for that perspective.

Thank you. Our next question comes from Ken Goldman from JPMorgan. Your line is open.

Hi, good morning and thank you. Mark, you said that the operating environment is creating opportunities, I think, to evaluate future efficiencies as you learn from COVID. Can you maybe elaborate on what that means, how big the opportunity might be? I know it's hard to know for sure right now, but, you know, a lot of your peers have discussed this in sort of, you know, rough terms, maybe some travel costs can be reduced. I'm just trying to get a sense from you of what you're seeing and the size of that if possible.

Yeah. So, you know, you're right. It's hard to quantify. I think the way I would describe it is it's creating drill sites for us for future productivity. And that's, I think, you know, quite helpful because we've been able to create this kind of you know, I'd say real-world case studies and laboratory to test a few things. I think there's three primary areas, though, that we see as future opportunity. I think the first is in optimizing the portfolio, right? So where are we overskewed, underskewed? Where are we really getting incrementality? From certain extensions of our portfolio, you know, how do we really think about optimizing the effectiveness of our offerings to really match where consumers' needs are and to create room for what we think is going to be meaningful innovation while setting up a more efficient overall approach to the portfolio. I think the second area is, as we've seen kind of full utilization across our entire supply chain and route to market, I think it's enabled us to understand some places, you know, almost out of necessity in the short term that we've done, that we think in the longer term our ability to create certain consolidations, how to think about perhaps hubs to supply in a more efficient way, especially if you think about our snacks business where you've got a little bit more complicated route to market. I think we've been able to find, even if it's in the face of some higher costs than this year, but it's pointed out places where if we can improve that architecture structure, I see opportunity to save money. And then the third where I think a lot of people spend time talking is how do you learn from this virtual work environment ways to operate companies more efficiently? Do you need as much travel? Do you need quite the infrastructure that you might have? Can you figure out a way to take what has been working very effectively for the company and use that as a little bit of a blueprint? I do very much still believe that. that the concept of team environment is important for businesses like ours. A lot of the innovation and creativity is done through cross-functional collaboration. And although we've done a great job with that virtually, and although I think it can enable and unlock some potential efficiency and savings going forward, I think at the heart of the company, I still believe that there is real value in folks being able to sit face-to-face and across the table to work on things. But I think the good news is all three of those were beginning to mine as opportunities going forward, and I think that's going to help strengthen our pipeline of savings, especially as we're coming to the end of our enterprise savings program. As we've talked about, we're wrapping up. you know, here the, you know, the value capture from the Schneider's Lance integration. And so it's just great to see some new ideas that are beginning to populate that pipeline. So, you know, good thing coming out of a tough situation.

Thanks so much.

Yep. Thank you. Our next question comes from Nick Monty from RBC Capital Market. Your line is open.

Yeah, good morning, everyone. So, Mark, hey, Mark, I just wanted to revisit the discussion on these new households. So, you know, it's going to obviously be an important part of how your growth curve looks over the next couple of quarters and the next couple of years. So can you just talk about the composition of these new households and how they might differ from kind of what you were seeing pre-COVID? And so I'll just give an example. Some of the data we've reviewed would suggest new prego consumers are younger singles, spend higher online than the average, skewed to vegan and vegetarians. and tend to dine out two to five times a week. So I'm just curious if this is consistent with what you've been observing in your data.

Yeah, it's very consistent. So we would see... Essentially, in the households we've added, just shy of 50% of those new households are coming from younger consumers. That's a combination of different size households, you know, can be a little bit older millennials who are now just beginning young families, you know, working, you know, with a little bit of a different budget perhaps than they did when they were younger, as well as much smaller households. And I think You know, as we think about this going forward, those become, as you would imagine, a very, very high priority for us. And, you know, one of the great things about Q4, and I know, you know, even coming out of Q3, I had a lot of questions about, okay, you know, even as you're navigating some of the supply pressure, you continue to invest at a very high level. And I think that was incredibly valuable for us in the fourth quarter, and it really proved some – some terrific learnings and results. One of the things that I think harder to see in the numbers in Q4, but if you take e-commerce as an example where we know there's a higher index to where these particular younger consumers are shopping and gaining information, 86% of our spending on our meals and beverage business in the fourth quarter was on digital to support this through a combination of retailers, platforms, as well as a whole range of different tactics to really try to understand what works and what doesn't. So as we go into this year, we're gonna be more effective. But what we found is we can have a big impact with that population. Our e-commerce business was up over 100% in the fourth quarter. It now represents for us as a company, it essentially doubled in 2020. It's kind of low single digits. Now it's up into the mid-single digits. And, again, as you think about our ability to demonstrate growth there, which, you know, again, doesn't really show up as much in your measured channels, It creates a really great platform for us to connect to consumers in a very specific way to influence them. And I think one of the things that I'll just mention, too, with this particular target that's giving us a lot of confidence beyond just the online success that we had is this dynamic around cooking and quick-scratch cooking. You know, I think for a lot of people, and myself included, I wanted to try to understand a little better behaviorally what's going on so we can better predict what's going to happen after the pandemic. And, you know, does that give us a higher likelihood of keeping those consumers in the franchise, right? I think that's the big question. And we found a couple very specific things that I think are giving us a lot of confidence. The first is that, you know, the initial read-through of what was going on in this cooking was a lot of consumers trying to recreate favorite meals, comfort food, you know, feeling out of necessity having to cook, but staying pretty close to home. I think what we've seen as time goes on and as confidence is building, you know, think about cooking, you know, three meals a day, seven days a week for a couple months. The amount of confidence these consumers have now in their ability to cook has really broadened their ability to add significant creativity, which is allowing them to reach into dishes and food that is far more, I think, sustainable longer term, right? Where for me it might be, you know, 15-minute chicken and rice. For these consumers, it's, you know, Tuscan chicken and mushroom on rice cauliflower, using still our ingredients, but doing it for a meal that feels far more consistent with where they're going. And the other exciting thing is that we all knew that there would be a pivot eventually back to healthier recipes. Again, a little more comfort-oriented initially, a little more healthier now, and our products are staying right in there. You know, with the combination of what we offer with Pacific, The recognition that a lot of the quality improvements and some of those historical barriers to the can that we really have been working on to overcome, I think we're seeing great indication that we're moving through it. And then the final one is value. And I think What we're realizing and what consumers are realizing is that that value equation on this quick scratch cooking is quite powerful. So you roll that all together, you know, our ability to impact consumers online as well as the strengthening conviction to cooking, quick scratch cooking moving forward, gives me a lot more confidence, and I think you heard that in my comments earlier, on our ability to retain these households, and in particular, retaining these households on soup. which I think is going to be a very important milestone or indicator or proof point as we go forward on whether we're able to sustain more of this starting in the back half, but certainly going forward. Helpful thing? Super helpful.

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

Hey, good morning, folks.

Hey, Jason.

Thank you for spotting me in. Two reasonably straightforward questions. First, in the press release, you mentioned some gains on commodity hedges. You explained to effectively account for the majority of corporate cost decrease, which implies like $37 million. But in the presentation, you say we only partially offset the commodity inflation, which suggests less than $15 million. So first question, what is the magnitude of that? Second question, I'm going to just bundle these together. Net pricing. It was surprising to see that your trade spend is still up year on year in promos and that drag on sales. It's surprising in context what's happening in the promotional environment overall. So two parts to that question. One, where's the money going? Two, as we think forward, we're hearing from pretty much every company that they're expecting promotions to kind of come back into the market and become more elevated going forward. Do you expect that to happen as well? And given that it's already a net negative, would you expect that net drag to increase as we go forward? Thank you.

Okay. Why don't I take the first one, Jason? So with regard to your first question to clarify the market gains on commodity hedges, it's in and around $20 million.

Got it. Thank you.

Yeah. On the promotional side, What we're seeing promotionally as pricing, I mean, we have framed it a little bit as a relatively neutral position in the quarter. I think our net pricing as a contributor within our gross margin bridge was essentially flat. There's a couple things that are underlying that. We are seeing, especially in categories where there is more pressure on supply, some pullback in promotion. I think one of the things we're trying to wrestle with a little bit through all this is, okay, If I promote the business with retailers, I may drive a growth rate of 10% or 15%. I can supply maybe 5% or 6% growth, and then if I don't promote, I only grow two. So we're trying to figure out how to calibrate the right kind of promotion and support to get to the best position possible. I do expect as we go through 21, that's going to moderate and return to more normality. I think it will be a little choppier. in the first quarter, but as we start to get into soup season and beyond, I think you'll see a much more consistent promotional calendar and schedule as we advance. I think in the near term, what you are seeing, though, is in the absence of some of those, and as we shift mix to things where we may have more supply and better position, I think you're seeing us continue to promote And again, I think we're working very collaboratively with the retailers to try to make sure, too, that if you're – I mentioned this last time – if you're a high-low retailer versus an EDLP retailer and you're pulling back on promotions, it does create a little bit more of a disadvantage in certain customers, and we're trying to work hard to make sure that we're – equitable in our approach and that we're supporting customers to navigate through that in the best way possible. So there's a little bit of mix that may be elevating as well. I think, you know, from my perspective, though, I think, you know, how I would have depicted it is relatively neutral with a trajectory to increase as we go into 21. Mick, anything to add on the, you know, kind of the financial bridge side of it?

I agree with that. I think that's pricing in the end. I mean, as you also see in one of our bridges in the materials was actually net neutral.

Got it. Thank you very much.

Thank you. Our next question comes from Chris Early from People. The line is open.

Hi. Good morning.

Hi.

I had a question for you. I heard about some supply chain challenges in certain parts of your business and At the same time, an ability to ship out of consumption in some other areas. I'm thinking like in soup. So I want to get a better sense, if I could, about your production capabilities, especially the areas in which you're investing to improve your supply chain. And then just to get a sense around retail inventories, you know, whether there's still some areas you have to build up or, you know, kind of where you stand on retail inventories overall.

Yeah, great. Great question. So let me kind of chunk that into the three pieces you kind of asked. First, as far as the supply chain capability and our execution, you know, I feel great about how the team has shown up. You know, a lot – of discussion in the Q3 earnings call, and as we kind of guided to Q4, the real improvement or the uptick in what we guided to where we landed was improvement in capacity as it related to soup, which enabled us to replenish inventory at a higher level, which was our goal. Not fully complete yet. I think you'll continue to see that going forward. But just on the basis of when I talk about supply chain challenges and These are not executional challenges. This is not us performing. This is not, you know, COVID-related impact. This is simply the sustained level of demand in certain businesses where we may have a little less flexibility to be able to, you know, kind of move to that higher level. So first off, that's kind of the starting point. I think what you're seeing in this quarter is some variation between businesses, right? If we were in Q3, we were talking a little bit about the depletion of inventory on soup. I think the great news in Q4 is we were able to replenish in many areas. One of the dynamics that's happening is you'll see throughout Q1 is the return of the vast majority of the SKUs that we had removed. There will be some that we choose not to come back with that we think are just good business decisions, but that pipeline still remains. And I would still expect to see an ability to ship ahead of consumption as it relates to soup as we go through the first quarter. And, again, you know, our guidance implies a certain limitation there. We're going to continue to work on improving that capacity as we go forward to hopefully, you know, more broaden that ability and ensure. But at the end, we feel good that we'll be there by the time we get to soup season. I think what you saw on the other side of the equation was some pressure on businesses across snacks. In particular, I think the two that right now are probably our areas of biggest focus is our potato chip businesses, our Kettle and Cape Cod. You know, the good news is we've got a great plan in place, which is really your third point on adding capacity. But there's certainly been pressure there. We've also seen some pressure on supplying land supplies. our sandwich cracker business. And on goldfish, I think we're in great shape on supply. We've opened the new line at Willard. A little bit of what we're navigating on goldfish is trying to figure out, again, that mix as we go through back to school on whether it's bulk or individual packs. And we continue to see demand remaining very, very high on the bulk side. But I think generally speaking, we feel good about that. So there are a little bit of Improvements on one, opportunities on other. But as we come through the end of the first quarter, we really expect to be back across the board. And we are making major investments in many of the areas where we have great confidence in the sustainability of the demand going forward. So places like Goldfish. Places like Milano, places like Kettle Chips, places like Broth on our business, all of those are getting investments, and we need them, but they're, I think, going to be helping us in a pretty significant way as we get into the future. into the second quarter. So, you know, again, I think that's a little bit of the nature of the guidance in Q1. And, again, we would hope that we can create, you know, further upside there that could be opportunity. But for where we are right now, again, we're trying to be as pragmatic as we can be.

That was a very good call. Thank you.

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

Hi, thanks. Two quick ones. The sales guidance for 1Q, do you expect in total to shift to consumption in 1Q, or does that include, you know, some degree of shifting above consumption in that range? Secondarily, I think you quantified last quarter exactly how much inventory you needed to reload. I think the number was like $200 million yesterday. maybe you can give us an update on that. And last thing, there was a lot of margin compression in snacks. I think you attributed it to the ANC investment in the quarter. But you also talk about COVID costs really hitting snacks harder. So why is there margin compression in snacks related to COVID? But in soup, the margins are actually going higher. Is it just different businesses in terms of how the COVID costs run through them?

Yeah, so let me first talk a little bit about inventory again and what we expect in Q1. So you have a couple things that are going on in Q1 that I think are important for people to try to calibrate on. And I know you're coming out of a quarter where your organic growth is 12%. seeing a guy to five to seven may feel to some a little bit like, okay, well, that's not, you know, why aren't we just running at the rate going forward? I think there's a couple of variables in there and then I'll answer and then on the tail end, I'll catch your inventory piece. First thing is that we do expect demand, consumption demand to be elevated, especially on the meals and beverage side. But one thing that is worth noting is it's a significantly bigger base in the first quarter. So, although I do think growth will be there, I just think the absolute numbers are going to be a little bit moderated from where we are. Right now, what we have planned is to continue to recover some inventory on the meals and beverage side. But to be honest, we're pushing the team hard to try to create room to – recover even more. I would say from a total inventory recovery position across the company, we're probably about halfway done. So I still think further ahead on soup, not as far ahead on some of the other businesses. So I would still expect there to be over the course of Q1. Some may even bleed a little bit into Q2, but I'm still expecting about half of that, Rob, to come back over the first half, primarily Q1, but over the first half of the year. And again, a lot of this is going to boil down to how much capacity we're able to generate. So certainly we hope we're going to push above that. Snacks is a little bit different, right? I think snacks, what we're seeing is a, although elevated level of demand in some areas, a more return to normality in others, which, by the way, I still believe is going to be healthy growth and, you know, continuing to make great progress. But, you know, for example, we're in the midst right now of back to school. And it's been very interesting to watch the first couple weeks of that where you see, on the one hand, a significant increase in our demand for soup, for quick lunches, as well as bulk. on our snack business, but we definitely see a reduction in some of the more traditional back-to-school portion packs. So I think as we navigate that, we're trying to calibrate to the right numbers. I will just say, as I said in my comment, You know, I think it's a complicated time to give people a tremendous sense of precision in the numbers, but I think the general drivers we feel very good about, it's now our ability to match the magnitude. So still a lot of inventory to go. I think healthy demand underlying it, and we would expect that to continue through the first half. And so that's kind of how we've initially set up these numbers in the first quarter. Oh, yeah. Yeah, yeah. COVID costs, maybe just a little bit why it stacks is different than... Yeah, sure.

Okay. So let me give you a little bit of context around the COVID costs. We had about $25 million of COVID costs in Q3. If you look at Q4, because Q3 was obviously only half impacted by COVID, Q4, we had a full quarter. The overall costs were double that, give or take about $50 million.

If you look at...

the distribution between the two divisions you see that about two-thirds of that hits snacks which is really really driven by the nature of the manufacturing footprint of the snacks division i.e we have many more facilities obviously there then the other piece so on the one hand you had more coveted costs in snacks than we had in meals and beverages And the other piece that I saw kind of looking through the quarter, we had increased operating leverage disproportionately within the M&B business, driven by obviously much more volume than what we saw on the snack side.

So hopefully that gives you a little bit of a sense of the dynamic there.

Yeah, and just to grab a little more color as you go then into the first quarter and into 2021, You know, we essentially are modeling those COVID costs to be 50% or closer to Q3, I think.

Yeah, more in line with that. I agree with that, yeah.

Right, right, right. Okay, thank you.

Thank you. And we'll take our last question from John Baumgartner from Wells Fargo. Your line is open. Good morning. Thanks for the question.

Hey, John. Mark, you know, I just wanted to build on Jason's question in that the Snyder's Lance brands, I mean, those tended to overpromote relative to their categories in the past. And, you know, given the continued reductions in promo we're seeing in conjunction with, I guess, limited moderation and base volume growth into Q1, I guess I'm curious, A, how do you feel about the ability to use an environment to sort of wean consumers off at higher promo, especially if you're getting higher ROI on the marketing dollars, and then, B, how To what extent do you see the environment offering opportunities to maybe accelerate any sort of increase in the share of your own brands as opposed to the allied or partner brands? Thank you.

Yeah. Well, you know, as I said a couple times before, I think what's unique about our snacks business is the differentiated position that we're in, in the sense that we tend to play in a little more added value segments within larger categories. And I think that – that does position us to be in a position where we should be less dependent on merchandising and promotion. I think the reality is, though, on something, for example, like Snyder's Hanover and the pretzel business, it's a very competitive segment, as it is in kettle chips right now as well. So I think, you know, one of the things we learned last year, if you remember, turning back the clock, actually all the way back to 19, You know, our ability to get to the right price points on promotion, just given the nature of snacking, the right level of frequency, will always be an important underpinning to execution in snacks. But I think that if you pair that then with where we've really been building added value as it relates to the equity of the businesses, as we've turned campaigns forward, back on, especially on the siters' businesses, we've been able to see continued progress. Let me point to late July as a great example, first national campaign that we've ever turned on or had on on the business. We turned that on in the fourth quarter. That business grew 30% on a 52-week basis and share gains of over a point. and a fairly contested tortilla chip segment. But because of the premium positioning relative to late July, great communication, we could do that in a way where we were able to achieve that without necessarily having to drop down into the price points that more mainstream players have. So that's the balancing act we're trying to walk. And I think if we get that formula right, as we have on brands like Milano and Farmhouse and on Pepperidge Farm. Even Goldfish, although that one's, you know, again, you've got a very habitual program calendar for Goldfish that when we see, when that deviates, that does put pressure on the business. But as we get back into normality on that as we roll through the year, you know, I think most of these businesses were going to be able to do trade in a more efficient way than perhaps history But we've still got to have enough there that we remain competitive on display and making sure that we recognize what's happening around us competitively.

Thanks, Mark. Much appreciated.

Thank you. And that does conclude our question and answer session for today's conference. And I'd like to turn the conference back over to Mark Klaus for any closing remarks.

Yeah, thanks, everybody, for joining. I hope you're appreciating the new format. I think we will kind of stick with this where we try to publish. Our comments earlier and give people a chance to kind of digest and read through and then you know focus our time together You know in Q&A when when we're on the call. I know there's a lot to digest in this I know it's a tricky time to you know, we've certainly tried to build as much conviction and I guess credibility and being as transparent as we can to give the information as we get it and get perspective. Of course, that always creates a little bit of a dynamic that we need to make sure that we're updating it as we go, and we will. I think as we navigate this year, we'll try to make sure that as we see things change or as capacity or demand moves will be as upfront as possible. I don't know that that translates, and I don't think it will, to quarterly guidance each time, but we'll certainly try to keep everybody as informed as we can be. And I just would close with something that I talked about in my comments, which is If you take a step back and you take stock of where the company is right now and you say, okay, where a year ago, where were we expecting to be and how do we feel about navigating this kind of moment in time? I have to say that across the board strategically, I see tremendous benefit that we've been able to extract from a tough moment. And I think that that is going to set us up very well for the future. And if I think about, again, not perhaps the peaks and the valleys of the near term, But the longer-term view of what the thesis of the company is, I have just built significantly more confidence. And I think as you see our two-year stacked numbers together, I think that's going to provide further evidence of our progress. against where we originally set out. And I think in particular, what we've talked about on soup and the conviction around soup to be not only what we needed it to be, which was a stable player, but with the potential for it to be a more steady contributor, along with great progress on our snacks business, again, I think gives us the benefit of being a very focused portfolio, a very straightforward strategy, and now with a great deal more proof points of our ability to sustain performance going forward. So hopefully that helps give you a little bit of perspective. I know we mixed a bit of Investor Day stuff along with earnings into today, but I thought it was a good moment to try to talk a little bit about where we are in that strategic journey because I know it's top of mind for many of your investors. So I appreciate everybody's time and questions. I know we'll talk to many later today, and we'll try to make sure you've got everything that you need to put the results in context and the guidance going forward. Thank you.

Ladies and gentlemen, this concludes today's conference call.