Campbell Soup Company (CPB) — Q4 2020 Earnings Call Transcript

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 4, you can see our agenda. You will hear from Mark Clouse, Campbell’s President and CEO; and Mick Beekhuizen, 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. 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 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 front-line 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, focused 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 in 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 & 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 we 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 & 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 2 points above net sales, reflecting isolated softness in unmeasured channels and select inventory depletion on Snacks, partially mitigated by some inventory recovery in Meals & 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 a 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 Snacks 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 $0.63 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 4 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 the 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'd 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 the 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 that our Meals & 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, Prego, and Pasta in Canada. Our foodservice business, which only represents approximately 5% of our total full year company sales, continues 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 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 base 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 that 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 buyer 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 kid-specific options. This reflects the significant uptick in need for simple in-home kids' lunches. Better-for-you begins with the re-launch of our Well Yes! 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 GenXers who value the ease and convenience of the sipping cup. For our Pacific Foods brand, 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 maintains its number one share in the Italian sauce category for the 15th straight month, as we saw gains and 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 of how our team materially advanced the execution of our strategic plan. Let's next look at our Snacks segment. This was another strong quarter for the division as net sales increased by 11%. Excluding the additional week and the sale of the European chips business, organic net sales increased 7%. Operating profit was flat versus the previous year with higher sales being offset by COVID-19 costs and sustained increases 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 and 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 breakfast. They were developed pre-COVID-19 but were scaled up using the same tele-tasting 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 of 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 am confident in our plan to continue to unlock the growth potential of this unique and differentiated portfolio. The business, which represents about half 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 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 on 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 demand 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 gross margin expansion and strong EBIT and EPS growth. Finally, we generated significant operating cash flow and divestiture proceeds in fiscal 2020, enabling us to reduce our leverage and achieve our original target of 3 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 topline organic growth of 12% compared to the prior year. Organic net sales for Meals & 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 8 of our 9 power brands and our fresh bakery products. We are pleased with our adjusted gross margin improvement stemming primarily from the benefits of supply chain productivity improvements and cost savings 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 the 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 & Beverages and Snacks reflecting increased demand for our 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 $0.21, to $0.63 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 in the 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 & 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 partly by increased marketing investment. Adjusted EPS from continuing operations increased by 28%, or $0.65, 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 foodservice 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 & Beverages segment. Additionally, in order to optimize our supply chain output, we continued to prioritize production of certain SKUs within both divisions. Separately, we are 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 partly 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. All in, our adjusted gross margin for the quarter was 35.6%. We are pleased with these gross margin results as we continued 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 A&C expenses, which is up 101% versus a year ago. In Meals & 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 soup 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 in the quarter on general administrative costs. The balance of the increase reflects increases in charitable contributions, higher incentive compensation accruals, and higher benefit costs, offset partly 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-Lance 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 EBIT 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 A&C, 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 $0.21, from $0.42 in the prior year quarter to $0.63 per share. Adjusted EBIT had a positive $0.14 impact on EPS. Net interest expense declined year-over-year by $24 million, delivering a $0.06 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 $0.03 impact to EPS, completing the bridge to $0.63 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 & 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 partly by declines in foodservice. Volumes within our retail business grew principally due to increased food purchases for at-home consumption, offset partly by a decline in our foodservice 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 & 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 partly by increased marketing investments and higher administrative expenses. The gross margin increase was driven by the benefit of supply chain productivity improvements and cost savings 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 & 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 foodservice. Segment operating earnings increased 10% driven by sales volume growth, including the benefit of the additional week, and an improved gross 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 for food purchases for at-home consumption as well as strong base velocity growth. These sales results reflect growth in fresh bakery products, Pepperidge Farm cookies, Late July snacks, Goldfish crackers, and Snyder’s of Hanover pretzels, as well as Kettle Brand and Cape Cod 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, Pepperidge Farm cookies and fresh bakery products, as well as Kettle Brand and Cape 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 impacted 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 $0.35 per share. As we updated you last quarter, we had made significant progress to de-lever our balance sheet. Ending net debt of $5.3 billion as of the fourth quarter declined by approximately $3.1 billion in fiscal 2020 as proceeds from completed divestitures, along with positive cash flow generated by the business, were used to reduce our debt. Our leverage ratio, which represents net debt to a trailing twelve month adjusted EBITDA from continuing operations is now at 3 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 Willard 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 tuck-in 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 a 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 bases as we head into the fall and winter. Although we are 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 lap this past year’s COVID-19-related costs, we expect to have opportunities, 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're 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 $0.88 to $0.92 per share. In closing, our fourth quarter results were a strong finish to an exceptional year. I am 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 have already jumped right into 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. And finally, this growth will be supported by continued value capture and Snacks margin, closely managing COVID-19 costs, and key capital initiatives. 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.

Thank you, operator. I hope everyone has had the chance this morning to read our press release and listen to our pre-recorded management presentation, both of which are available on the Investor Relations section of campbellsoupcompany.com. In addition, we have posted a transcript of the pre-recorded 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 Investors 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 their most directly comparable GAAP measures. Joining me today are Mark Clouse, Campbell's President and CEO; and Mick Beekhuizen, Chief Financial Officer. We kindly ask that you limit yourself to one question. And now with that, I'll turn it over to the operator for the first question.

Thanks for the question. Mark, I understand that fiscal '21 was initially seen as a strong year for reshaping the Soup category for Campbell through innovation and other strategies. I'm curious to know what may have changed or what might need to change regarding the strategy for the Soup journey, especially considering recent trends. It appears that Campbell has gained many new households and users, so I wonder if the focus should now shift more towards retaining users instead of just acquiring new ones. How do you see this affecting the overall approach and journey for Soup?

Yes, that's an excellent question. The good news is that we had a solid strategic framework for Soup, with the main goal being to enhance the category's relevance and recover households that had been lost. Throughout the pandemic, we made significant progress on that journey. Reflecting on our objectives for 2020, we aimed to strengthen our foundation, improve quality, invest in the business, and rebuild relevance while enhancing our innovation pipeline. In 2020, we exceeded our expectations in many areas. As we enter 2021, our focus is more on retaining those households, but we will continue executing our planned strategies with a greater likelihood of success, backed by better insights into consumer preferences and what works. There has been considerable dialogue about our strategic journey with Soup. I'm emphasizing that it's less about dramatic fluctuations in the short term and more about steady progress, ensuring Soup remains a reliable contributor to our business. The company's overall thesis indicates that achieving this, along with our plans for snacking and the broader Meals & Beverage sector, positions us favorably. As we head into 2021, I want to highlight that we still have ample opportunities within our strategy, particularly regarding innovation and shelving, which we have set for 2021. I'm feeling increasingly confident because we have these foundational elements in place, complementing the temporary boosts we’ve experienced. We’ve also gained insights into the trend of increased cooking and quick-scratch cooking, which we believe will persist beyond the pandemic. I expect this topic to come up later for further discussion. Ultimately, we are continuing with the same activities, just further along in our journey than we initially anticipated, and I believe this is fostering greater confidence in making Soup a consistent contributor.

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 a lot of your peers have discussed this in sort of 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?

Yes, you're correct. It's challenging to measure. I would describe it as establishing drill sites for our future productivity. This is beneficial because we've been able to develop real-world case studies and a laboratory environment to test various strategies. There are three main areas we consider future opportunities. First, optimizing the portfolio is essential. We need to assess whether we are over or underexposed in certain areas, identify where we gain added value from specific extensions of our portfolio, and ensure our offerings effectively meet consumer needs while also paving the way for meaningful innovation through a more efficient overall portfolio strategy. Second, we've experienced full utilization across our supply chain and marketing routes. This has prompted us to understand, out of necessity in the short term, where we can create consolidations and potentially use hubs for more efficient supply, especially in our Snacks business due to its more complicated route to market. Despite facing some higher costs this year, we've identified areas where improving our structural architecture presents opportunities for savings. Third, many discussions are focused on learning from the virtual work environment to operate companies more efficiently. We need to consider if less travel is necessary and if such extensive infrastructure is still required. We are looking to take what has worked well virtually and use it as a blueprint moving forward. I still believe that a team environment is crucial for businesses like ours, where much innovation and creativity arise from cross-functional collaboration. While we've successfully managed this virtually, I think there's significant value in personal face-to-face interactions. The good news is that we are now beginning to explore these three areas as opportunities for the future, which will enhance our savings pipeline, especially as we conclude our enterprise savings program and wrap up the value capture from the Snyder’s-Lance integration. It’s encouraging to see new ideas emerging from a challenging situation.

Hey, Mark. I just wanted to revisit the discussion on these new households. So, it's going to obviously be important part of how your growth curve looks over the next couple of quarters and in 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 just give an example, from the data we've reviewed, which suggests new Prego consumers are younger singles, spend higher online than the average due 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?

Yes, it's very consistent. Nearly 50% of the new households we've added are from younger consumers, which includes a mix of different household sizes. This includes older Millennials who are starting families and may have different budgets than before, alongside smaller households. Looking ahead, this demographic is a high priority for us. In the fourth quarter, despite navigating supply pressures, we maintained significant investments, which proved to be invaluable and provided us with great insights and results. For example, in e-commerce, an area where young consumers are increasingly shopping for information, 86% of our Meals & Beverage marketing spending in Q4 was focused on digital platforms. We utilized various retailer platforms and tactics to understand the effectiveness of our approach. As the year progresses, we aim to be even more effective in reaching this audience. Our e-commerce business more than doubled in Q4 and has grown from low single digits to mid single digits in its contribution to total company sales. This growth might not be evident in traditional channels, but it allows us to connect with consumers on a more personal level. We've also gained confidence in our strategies related to cooking and quick-scratch meals. Initially, many consumers sought to replicate comfort food and cook out of necessity. Over time, as they gained confidence in their cooking skills, they became more creative with their meals. While I might opt for something simple, they are making more elaborate dishes that align with their aspirations. We anticipated a shift back toward healthier recipes, and we’re seeing that, paired with our product offerings, particularly from Pacific, which has improved in quality. We are overcoming several past challenges. Additionally, consumers are recognizing the strong value proposition in quick-scratch cooking. When combined, our ability to influence consumers online, along with a strong trend toward creative cooking, gives me added confidence. This was reflected in my earlier comments regarding our capacity to retain these households, especially in the Soup category, which is a crucial indicator for our future growth.

I have two straightforward questions. First, in the press release, you mentioned gains from commodity hedges, which you noted account for the majority of the corporate cost decrease, approximately $37 million. However, in the presentation, you stated that this only partially offsets the commodity inflation, indicating it is less than $15 million. So, what is the actual magnitude of that? For the second question, regarding net pricing, I was surprised to see that your trade spend continues to rise year-on-year, along with promotions being a net drag on sales, especially considering the overall trend in promotions. So, my questions are: where is the money going? Additionally, as we look ahead, many companies are expecting an increase in promotions returning to the market. Do you anticipate this as well, and given that the current effect is already negative, should we expect that net drag to increase moving forward? Thank you.

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

Yes. In terms of promotions, we are observing that pricing has remained relatively stable this quarter. Our net pricing, as a contributor to our gross margin, was essentially unchanged. There are a few factors influencing this. Particularly in categories facing supply pressure, we are experiencing a reduction in promotions. One challenge we are facing is balancing promotions: if we promote aggressively, we could achieve a growth rate of 10% to 15%, but our supply can only handle around 5% or 6%. Without promotions, growth would only reach about 2%. We are working to calibrate our promotional efforts to optimize our position. I expect that as we progress through the year, this will moderate and return to a more normal state, although the first quarter may remain a bit inconsistent. As we move into the Soup season and beyond, I anticipate a more stable promotional calendar. In the short term, we are continuing to promote actively, especially as we adjust our offerings to better align with supply conditions. We are also collaborating closely with retailers to ensure fairness in our approach, particularly between high-low and EDLP retailers, as pulling back on promotions can disadvantage some customers. From my perspective, I see our current position as neutral, with an increasing trend as we approach the next year. Mick, do you have anything to add regarding the financial aspects?

I have a question for you. I've heard about some supply chain challenges in certain parts of your business, as well as difficulties in shipping some orders, particularly in Soup. I would like to understand your production capabilities better, especially in the areas where you're investing to enhance your supply chain. Additionally, I'd like to know about your retail inventory situation and whether there are still areas where inventory has built up or your overall status on retail inventories.

Great question. Let me break that down into three parts. First, I feel confident about our supply chain capabilities and how our team has performed. During the Q3 earnings call, we discussed improvements in capacity related to Soup, which allowed us to replenish inventory to a higher level, achieving our goal. While we’re not completely finished yet, we expect to continue seeing progress. When I mention supply chain challenges, I'm not referring to execution issues or impacts from COVID; rather, it's about sustained demand in certain areas where we have limited flexibility to ramp up. In Q4, the good news is that we were able to replenish inventory in many areas despite some variations between businesses. For instance, in Q3, we talked about lower soup inventory, but now we're seeing improvement. As we go into Q1, most of the SKUs that were removed will return, although some may not come back for strategic reasons. I'm optimistic about our ability to ship more than we consume in the Soup category as we enter the first quarter. Our plans include working on improving capacity to expand this ability. On the other hand, we’ve faced challenges in our Snacks business, especially with our potato chips brands, Kettle and Cape Cod, which we are focused on. We've also experienced some supply issues with our sandwich cracker line, Lance, but our Goldfish supply is solid, bolstered by a new production line at Willard. We are adjusting strategies for Goldfish as we approach back-to-school, balancing bulk versus individual packs while demand for bulk remains high. Overall, we’re feeling positive about these developments. We anticipate being back on track by the end of Q1 and are making significant investments in areas where we have confidence in sustaining demand, such as Goldfish, Milano, Kettle chips, and broth. These investments are crucial for our progress into the second quarter. We are being realistic in our guidance for Q1 and hope to create opportunities for further growth as we move forward.

Two quick ones. The sales guidance for 1Q, do you expect in total to ship to consumption in 1Q or does that include some degree of shipping above consumption in that range? And secondarily, I think you quantified last quarter exactly how much inventory you needed to reload. I think the number was up $200 million. Maybe you can give us an update on that. And last thing, there was a lot of margin compression on Snacks, I think attributed to the A&C investment in quarter. But you also talked 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 went through them?

Yes. Let me start by discussing inventory and our expectations for the first quarter. There are a few important factors to consider. I understand that after reporting a 12% organic growth last quarter, a guidance of 5% to 7% might seem disappointing to some. However, there are several variables at play. We expect consumer demand, particularly in the Meals & Beverage category, to remain high, but it’s important to recognize that we're working from a much larger base in the first quarter. While I anticipate growth, I believe the absolute figures may be somewhat tempered compared to our current levels. Our goal is to continue recovering inventory in the Meals & Beverage sector, and we’re pushing our team to find even more capacity for recovery. Overall, we are about halfway through our total inventory recovery across the company. I expect progress in the Soup category, though other segments may lag behind. I anticipate that around half of the inventory recovery will occur during the first half of the year, mainly in the first quarter, but it could extend into the second quarter as well. The extent of recovery will depend on our capacity to generate more output. In Snacks, we see a mix of elevated demand in some areas and a return to normalcy in others, which I believe will support healthy growth. Currently, we're navigating back-to-school season, where we observe increased demand for quick lunch items and bulk snacks, but a decline in more traditional back-to-school packs. This dual situation makes it challenging to provide precise numbers. However, we feel optimistic about the primary growth drivers, though aligning them with the expected outcomes is crucial. We still have a significant amount of inventory to recover, and we project steady demand through the first half of the year. This sets the framework for our initial expectations for the first quarter.

Yes, sure. Let me provide some context regarding the COVID costs. We incurred approximately $25 million in COVID-related expenses during Q3. In Q4, since Q3 was only partially affected by COVID, the total costs rose to around $50 million, which is roughly double. When we look at the distribution between the two divisions, about two-thirds of these costs were attributed to Snacks, primarily due to the larger number of facilities in that division. Consequently, Snacks experienced higher COVID costs compared to Meals & Beverages. Additionally, we saw increased operating leverage in the M&B business, which was driven by significantly higher volumes compared to what we observed in Snacks. Hopefully, this clarifies the dynamics at play.

Yes. And just to add a little more color. As you go then into the first quarter and into '21, we essentially are modeling those COVID costs to be 50% or closer to Q3 I think.

Mark, I just wanted to build on Jason's question in that, the Snyder's-Lance brands, those tended to over-promote relative to the categories in the past and given the continued reductions in promo we're seeing in conjunction with I guess limited moderation in 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, to what extent you see the environment offering opportunities to maybe accelerate any sort of increase in the share of your own brands as opposed to the aisle adder partner brands? Thank you.

I believe our Snacks business stands out due to our unique position, allowing us to focus on more premium segments within larger categories. This should reduce our reliance on merchandising and promotions. However, segments like Snyder’s and Hanover in pretzels, as well as Kettle chips, remain highly competitive. Reflecting on previous years, especially back to 2019, we learned that achieving the right price points for promotions is essential due to the nature of snacking, and maintaining an appropriate frequency is key for our success in Snacks. Coupled with our emphasis on building brand equity, we have seen positive results as we resumed campaigns, particularly with Snyder’s. For example, our first national campaign for Late July launched in the fourth quarter resulted in a 30% growth on a 52-week basis and over a point in market share in a competitive tortilla chips market. Thanks to our premium positioning and effective communication, we achieved this without needing to lower prices to match mainstream competitors. We strive to find the right balance, and as we apply this approach to brands like Milano, Farmhouse, Pepperidge Farm, and even Goldfish, we're optimistic that most of our businesses will trade more efficiently moving forward. However, we must ensure we remain competitive in terms of display and stay aware of competitive dynamics in the market.

Thank you all for joining. I hope you are enjoying the new format. We plan to continue publishing our comments earlier to give you a chance to absorb the information before we focus our time on questions during the call. I understand there is a lot to process, especially during this challenging time. We have aimed to establish credibility and transparency by sharing information as it comes and providing perspective. This approach may create a dynamic that requires us to update our insights regularly, and we will continue to do so. As we navigate this year, we will strive to keep you informed about any changes in capacity or demand. Although I can't promise that this will always lead to precise quarterly guidance, we are dedicated to keeping everyone as well-informed as possible. If we take a step back to assess where the company is now compared to a year ago, I believe we have extracted significant benefits from these challenging circumstances, positioning us favorably for the future. While focusing on the long-term vision of the company's strategy, my confidence has grown considerably. Our two-year stack numbers should further reflect our progress toward our original goals. Specifically, our focus on Soup has not only stabilized it but has also positioned it as an increasingly steady contributor alongside our successful Snacks business. This concentrated portfolio and clear strategy now come with a greater number of proof points showing our capability to maintain performance going forward. I hope this adds perspective. We integrated some insights from Investor Day along with our earnings discussion today, as it felt timely to address our strategic journey, which I know is important to many investors. Thank you for your time and questions. We look forward to speaking with many of you later today and ensuring you have everything you need to contextualize our results and guidance moving forward. Thank you.