Campbell Soup Company (CPB) — Q2 2021 Earnings Call Transcript

Good morning, and welcome to Campbell's second quarter fiscal 2021 earnings presentation. I'm Rebecca Gardy, Vice President of Investor Relations. Following the completion of this call, a copy of this presentation and a replay of the webcast will be available at investor.campbellsoupcompany.com. A transcript of this earnings conference call will be available within 24 hours at investor.campbellsoupcompany.com. On our call today, 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, we have provided a reconciliation of these measures to the most directly comparable GAAP measure, which is included in the appendix of this presentation. On Slide 4, you will see our agenda. With us on the call today are Mark Clouse, Campbell's President and CEO; and our Chief Financial Officer, Mick Beekhuizen. Mark will share his overall thoughts on our second quarter performance and in-market performance by division. Mick will discuss the financial results of the quarter in more detail and review our guidance for the full year fiscal 2021. Mark will come back to share his perspective on our outlook beyond the pandemic, and we will close the call with an analyst Q&A. With that, please let me turn the call over to Mark.

Thanks, Rebecca. Good morning, everyone, and thank you for joining us today. Before I turn to the results of the quarter, I want to take a moment to thank all of our teams again, especially our frontline colleagues. We have now passed the 1-year mark of working within this challenging COVID-19 environment, and I'm very proud of their continued performance and dedication. Campbell delivered strong second quarter results, with growth in all 3 key financial metrics. Organic net sales increased 5%, with continued demand across both divisions, fueled by accelerating in-market results, including positive share progress across most of the portfolio and a strong holiday period. Net sales were tempered by continued foodservice weakness following a resurgence of COVID-19 cases in December, which led to greater away-from-home restrictions, as well as some supply constraints given these cases led to increased absenteeism in our plants during the month. The foodservice weakness and supply constraints each created about a 1 point headwind in the quarter versus our expectations. The labor situation has since improved significantly, and we continued to make steady progress on supply going into the second half of the year. We reacted quickly to these headwinds, appropriately shifting spending to reflect this pressure. But where supply was available, we executed our planned increased investment in advertising and consumer promotion on our core brands. Taking everything into account, we had 8% adjusted EBIT growth and 17% adjusted EPS growth, leading to a very good quarter. By segment, Meals & Beverages posted 6% net sales growth, punctuated by a very successful soup season and the continued strong performance of brands like V8 and Prego. This was partially mitigated by declines in foodservice. The Snacks business delivered another solid quarter, with sales growth of 4%, largely driven by our power brands in salty snacks, including Kettle Brand potato chips, Late July snacks, Cape Cod potato chips, as well as Pepperidge Farm Farmhouse bakery products. Most notably, we achieved the primary objective we outlined in our Q1 earnings call to return to share growth. Nearly 75% of our portfolio held or increased share in the second quarter versus the prior year. This included meaningful share improvement in key focus areas like ready-to-serve soup, Prego and Snyder's of Hanover pretzels, with continued momentum on condensed soup, V8, our Salty Snacks portfolio and Goldfish. There were a few exceptions such as Swanson broth, where we knew we'd be challenged on supply. We feel very good about how we are addressing the challenges on broth by expanding overall capacity and growing Pacific Foods, which was the fastest-growing broth brand in measured channels in the second quarter. E-commerce continued to be an important growth channel for us, with in-market dollar consumption increasing 89% over the prior year. With the click-and-collect fulfillment model representing slightly more than 1/3 of our e-commerce retail sales, we are sharply focused on partnering with our customers to deliver value to our consumers, including bundling products for easy meal prep and inspiring creative snacking options. Turning to Slide 7. Within the Meals & Beverages division, we had another strong quarter, with consumption growth of 9%, principally due to volume gains. We delivered on our objective of share growth and saw positive in-market consumption growth in almost all categories, led by condensed soups, Prego, V8 beverages, ready-to-serve soup and Pacific Foods soups and broth. We continued to execute our plans and feel great about our progress against our win in soup strategy, led by a great start to soup season and a strong holiday period. In fact, U.S. soup sales grew 10%, with strength across all categories. This was fueled by more than 1/3 of the end market consumption growth coming from new buyers. The number of retained soup buyers in this quarter is the highest since the pandemic started almost a year ago. Our condensed soups were once again the highlight of the quarter, with double-digit net sales growth and continued share gains, especially among millennials. With a 0.7 share increase, condensed had its eighth consecutive quarter of share gains, an amazing run that started well before the pandemic. This performance was driven by our quality improvements, strong advertising and the retention of new households. Additionally, during the important holiday season, the number of buyers of condensed cooking soups grew double-digits, and we continued to grow household penetration this quarter versus the prior year. Year-to-date, our condensed soups have the highest household retention rate within the entire Meals & Beverage division. Within ready-to-serve, share improved this quarter, driven by strong base velocity growth in Chunky and improved availability. Chunky had an exceptional quarter, with double-digit net sales gains and in-market consumption growth, outpacing competition and increasing share nearly 2 points, with growth among all cohorts, including millennials. Pacific Foods is now the fastest-growing wet soup brand on a dollar share basis, outperforming its competitors on many fronts by delivering on-trend innovation and impactful advertising. This important growth engine continues to perform above our expectations. In the second quarter, Pacific soup and broth outperformed the category posting dollar consumption growth of 25%, the fifth consecutive quarter of share gains driven by brand strength and a meaningful increase in household penetration. We are thrilled with the performance of Pacific Foods and are equally excited about our robust innovation pipeline that includes new canned offerings as well as additional plant-based products. As I mentioned earlier, Swanson broth struggled on share, as we expected. We continued to recover on supply throughout the quarter, and we are making steady progress through a combination of expanding internal capacity and bringing on additional co-manufacturing. In the most recent period, we are seeing both share and supply levels improve, a trend we expect to continue through the balance of the year. Beyond soup, a standout in the Meals & Beverages portfolio was Prego which maintained its #1 share position in the Italian sauce category for the 21st consecutive month and has widened the gap against competitors. Prego sales growth came primarily from the gain of an additional 4 million new households across all demographic cohorts. Our V8 beverages also performed very well this quarter, delivering its 4th straight quarter of both share and household gains. Notably in Q2, these gains were across all sub-brands of the business, and we saw new households coming into the V8 portfolio driven by both V8 Original and V8 + Energy. Overall, Meals & Beverages delivered a strong quarter, as it continued to drive relevance with its brands to a younger consumer base and delivered share gains in many of its key categories. Let’s turn to the Snacks segment, which represents about half of our total annual revenue. Our performance was again fueled by our power brands which grew dollar consumption by 8% over the previous year. Within the power brands, our salty snacks brands grew dollar consumption by double digits and realized share growth. This was in part due to the implementation of our capacity expansion projects, as well as increased advertising and consumer investments to support our media campaigns and innovation, including Snyder’s of Hanover Pretzel Rounds and Twisted Sticks. On the Snyder’s of Hanover brand, the combination of successful innovation, fundamental execution, and brand activation led to share growth, double-digit dollar consumption and nearly 5 million new households, turning around what had been a challenging share period. Our Pepperidge Farm Farmhouse products also delivered exceptional results across bakery and cookies, growing dollar consumption by 41% and household penetration by 1.5 points. On Goldfish, we improved our performance according to the plan we outlined last quarter, returning to growth in net sales and improved dollar consumption. We adapted marketing content during the holidays with digital partnerships focused on new ways for the consumer to enjoy Goldfish, such as movie night snack mixes, or classic lunch combinations with Campbell’s Tomato Soup, all leading to positive engagement metrics and increased purchase intent. Additionally, we are launching new flavors within Flavor-Blasted Goldfish, which continued to grow consumption by double digits. As you’ll see on Slide 9, this is only the beginning of what is arguably our strongest slate of innovation yet, which includes Twisted Pretzel Sticks and Better-for-You options like Late July Veggie Tortilla Chips. We are very excited about the breadth of our Snacks pipeline in the second half of the fiscal year, which will complement what we have on deck later this year for Meals & Beverages. Overall, we feel very good about our Snacks performance, and the steady growth it delivered as we provide consumers with elevated snacking experiences through our unique and differentiated portfolio of power brands. We also made significant steps on value capture, including the recent transition to SAP to streamline and improve capabilities. Looking ahead, we believe we have additional runway to improve Snacks profitability with further network optimization opportunities, and we remain confident in our long-term strategy and our ability to deliver additional cost savings. With the strong results in the second quarter, and our overall first half performance, we are confident in the outlook for the full year. With that, let me turn it over to Mick to discuss our second quarter and first half financial results.

Thanks Mark. Good morning everyone. Turning to Slide 11, as Mark just shared, we once again delivered strong results, with another quarter of sales growth driven by continued elevated consumer demand, as well as growth in adjusted EBIT and adjusted EPS. Our topline growth of 5% reflected healthy in-market consumption of approximately 8% in the quarter, tempered by declines in foodservice and some COVID-19-related supply challenges that Mark discussed. Adjusted EBIT increased 8% as higher sales volumes were only partially offset by higher adjusted administrative expenses. Adjusted EPS from continuing operations increased by 17% to $0.84 per share, reflecting an increase in adjusted EBIT as well as lower adjusted net interest expense. Year-to-date, our organic net sales, which exclude the impact from the sale of the European chips business, increased 7% driven by strong in-market consumption growth in both Meals & Beverages and Snacks. Adjusted EBIT increased 13% reflecting higher sales volume, improved adjusted gross margin performance, and higher adjusted other income, offset partially by increased adjusted administrative expenses. Year-to-date our adjusted EBIT margin increased year-over-year by 110 basis points to 18.5%. Adjusted EPS from continuing operations increased 23% to $1.86 per share, reflecting the increase in adjusted EBIT and lower adjusted net interest expense. I’ll review in the next couple of slides our second quarter results in more detail and provide guidance for the full fiscal year 2021. Breaking down our net sales performance for the quarter, reported and organic net sales increased 5% from the prior year. This performance was largely driven by a 4-point gain in volume across the majority of our retail brands, partially offset by declines in foodservice and in partner brands within the Snyder’s-Lance portfolio. Additionally, we took a strategic approach to dialing back promotional spending in both segments where we faced supply constraints, and those actions, net of price and sales allowances, contributed 1-point to net sales growth. Our adjusted gross margin decreased by 10-basis points in the quarter to 34.3%. While product mix was slightly negative in the quarter, we are estimating a 50-basis point gross margin improvement from better operating leverage within our supply chain network as we increased our overall production. Net pricing drove a 90-basis point improvement, due to lower levels of promotional spending in the quarter. Inflation and other factors had a negative impact of 330-basis points. A little over half of the increase was driven by cost inflation, as overall input prices on a rate basis increased approximately 3%, which we expect to continue to be a headwind for the rest of the fiscal year. The remainder was driven by increases in other operational costs and continued COVID-19 related costs. Inflation in the quarter was partially offset by our ongoing supply chain productivity program, which contributed a 140-basis point improvement, and included initiatives, among others, within procurement and logistics optimization. Our cost savings program, which is incremental to our ongoing supply chain productivity program, added 50-basis points to our gross margin. Moving on to other operating items. Adjusted marketing and selling expenses decreased $3 million or 1% in the quarter. This decrease was driven primarily by the benefits of cost savings initiatives and lower marketing overhead costs, largely offset by an 8% increased investment in advertising and consumer marketing. These investments primarily reflect higher levels of media spend to support our salty snack brands including new product launches, as well as our soup business, as we continue to drive usage through new recipes, inspire meal solutions, and support our innovation. Adjusted administrative expenses increased $17 million or 13%, driven primarily by higher benefit-related costs and higher general administrative costs, partially offset by the benefits from our cost savings initiatives. Overall, our adjusted marketing and selling expenses represented 10.2% of net sales during the quarter, a 70-basis point decrease compared to last year. Adjusted administrative expenses represented 6.7% of net sales during the quarter, a 50-basis point increase compared to last year. Moving to the next slide, we have continued to successfully deliver against our multi-year enterprise cost savings initiatives. This quarter, we achieved just over $20 million in incremental year-over-year savings. We expect an additional $40 million to $50 million evenly spread over the balance of fiscal 2021 on track to deliver $75 million to $85 million of cost savings for the fiscal year with the majority of the savings from the Snyder’s-Lance integration. We remain on track to deliver 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 on slide 16 to highlight the key drivers of performance this quarter. As discussed, adjusted EBIT grew by 8%. This was driven by the increase in demand for our products with sales gains contributing $40 million of EBIT growth, which was partially offset by the previously described adjusted gross margin decline. In addition, the increase in adjusted administrative expenses was only partially offset by lower adjusted marketing and selling expenses, lower adjusted R&D expenses, and higher adjusted other income. Our adjusted EBIT margin increased year-over-year by 40 basis points to 17.2%. The following chart breaks down our adjusted EPS growth between our operating performance and below the line items. Adjusted EPS increased $0.12 from $0.72 in the prior-year quarter to $0.84 per share. Adjusted EBIT had a positive $0.07 impact on adjusted EPS. Adjusted net interest expense declined year-over-year by $17 million delivering a $0.04 positive impact to adjusted EPS, as we have used proceeds from completed divestitures in fiscal 2020 and our strong cash flow to reduce debt. The impact from the adjusted tax rate was nominal, completing the bridge to $0.84 per share. In Meals & Beverages, net sales increased 6% to $1.3 billion, primarily reflecting strong volume growth driven by in-market consumption for many of our U.S. retail products, including gains in U.S. soups, V8 beverages, Prego pasta sauces, and Campbell’s pasta, partially offset by declines in foodservice driven by COVID-19 related restrictions. Net sales of U.S. soup, including Pacific Foods, increased 10% compared to the prior year primarily due to volume gains in condensed soups and ready-to-serve soups. Across the division, we moderated promotional activity in part due to supply constraints, particularly on broth. Operating earnings for Meals & Beverages increased 7% to $258 million. The increase was primarily driven by sales volume growth, offset partially by a lower gross margin and higher administrative expenses. Within Snacks, net sales increased 4% driven by volume gains fueled by the majority of our power brands and lower levels of promotional spending on supply constrained brands. The sales gains were driven by our salty snacks brands within the power brand portfolio namely Kettle Brand potato chips, Late July snacks, Cape Cod potato chips, and Pop Secret popcorn, as well as our fresh bakery products, including Pepperidge Farm Farmhouse products. Partly offsetting sales gains were declines in partner brands within the Snyder’s-Lance portfolio, as well as declines in Lance sandwich crackers resulting from supply constraints in the quarter. Operating earnings for Snacks increased 6% driven by sales volume gains and lower selling expenses, partly offset by higher marketing investment, administrative expenses, and a lower gross margin. I’ll now turn to our cash flow and liquidity. Fiscal year to date cash flow from operations decreased from $663 million in the prior year to $611 million, as changes in working capital were only partially offset by higher cash earnings. Although we continue to make progress on working capital, we are lapping significant benefits in accounts payable in the prior year. Our year-to-date cash for investing activities was largely reflective of the cash outlay for capital expenditures of $132 million, which was $35 million lower than the prior year, primarily driven by discontinued operations. Our year-to-date cash outflows for financing activities were $405 million reflecting cash outlays due to dividends paid of $215 million, which were comparable to the prior year, reflecting our quarterly dividend of $0.35 per share. In December, we announced an increase in the quarterly dividend to $0.37 per share or an increase of 6%, which from a cash flow perspective, will be reflected in the third quarter. Additionally, we reduced our debt by $176 million. We ended the quarter with cash and cash equivalents of $946 million. We expect to utilize the majority of this cash during the second half of the fiscal year for repayment of upcoming debt maturities of $721 million and $200 million in March and May, respectively. As covered in our press release, based on our strong first-half performance we are providing guidance for the full year fiscal 2021. We expect net sales for Fiscal 2021 to decline 3.5% to 2.5%. Excluding the impact from the 53rd week in fiscal 2020 and the impact of the European chips divestiture, we expect organic net sales to decline 1.5% to 0.5%. We expect adjusted EBIT of minus 1% to plus 1%, as we will lap the initial COVID-19 demand surge in the second half of our fiscal year combined with headwinds from increased promotional activity, partially offset by lower year-over-year COVID-19 related expenses and last year’s one-time marketing investments. We continue to expect net interest expense of $215 million to $220 million, and an adjusted effective tax rate of approximately 24%. As a result, we expect adjusted EPS of $3.03 to $3.11 per share representing year-over-year growth of 3% to 5%. The EPS impact of the 53rd week in fiscal 2020 was estimated to be $0.04 per share. With respect to our guidance, let me add that we expect the third quarter to be somewhat more challenged from a net sales and EBIT perspective than Q4, as the previously mentioned COVID-19 related demand surge was more pronounced in the third quarter of fiscal 2020 while the benefit from COVID-19 related costs and one-time marketing investments will disproportionately benefit our fourth quarter comparison. Additionally, we expect our third quarter to be impacted by some isolated supply challenges as we navigate the recent winter storms. In particular, we experienced about two weeks of disruption at our Paris, Texas plant, which produces Pace and Prego. We expect improving momentum as we go forward. Regarding capital expenditures, in light of the current operating environment with limited access to our factories, we now expect to spend 10% below the $350 million we had previously indicated for the full year, largely driven by the impact from COVID-19 on the operating environment. Before I turn it back to Mark for some additional commentary, let me close by expressing how proud I am of the continued strong execution by our teams throughout the company. We delivered another strong quarter, with a return to positive share growth in the majority of our portfolio, and growth in all three key financial metrics, despite all the challenges of COVID-19.

Thanks, Mick. Before we conclude, I want to share my perspective on the key factors underpinning our confidence in our outlook beyond the pandemic. By now, I know you have heard a great deal about the stickiness of all new households gained throughout the pandemic from essentially all of our peers, with a wide range of data and facts supporting that thesis. We very much agree, and we see similar trends in our own research and data. I’d like to conclude today with three critical and differentiating points: key factors that serve to underscore Campbell’s advantaged position going forward and will fuel our future growth trajectory. Importantly, two of them have very little to do with COVID-19 or the stickiness of new households. The first is our Snacks business, which as I mentioned earlier consists of a unique and differentiated portfolio of brands that represents approximately 50% of the company’s annual revenues. This business was growing before the pandemic, and we expect to sustain or exceed those historical growth rates going forward. Snacks also includes a margin structure which we believe still has significant opportunity for improvement versus the snacking peer group average, even after we deliver our current value capture. We are finalizing our plans to unlock more value and we look forward to sharing more details with you as we move forward. Second, no matter where you stand on the retention of new households gained during the pandemic, it is indisputable that Campbell’s business, particularly our Meals & Beverages division and especially soup, is coming out of this period more advantaged and with renewed relevance. Nearly 13 million new households purchased Campbell’s soup since the initial peak of the pandemic, of which almost a third are millennials, outpacing both key competitors and the category average. We have also seen macro behaviors like quick scratch cooking take root and our research indicates more than 30% of consumers are cooking more with soup since the start of the pandemic. Additionally, we believe increased at-home lunches will endure as many people are expected to work-from-home more often post-pandemic. Beyond the role that our Meals & Beverages offerings play in the lunch occasion, snack foods accompany nearly 30% of all lunches, which bodes well for our entire portfolio. We've conducted extensive consumer research in an effort to determine sentiment, model consumer behavior exiting the pandemic, and sharpen our plans to ensure the sustainability of our recent gains. The consumers who we’ve surveyed had an overall high level of satisfaction with Campbell’s products in our Meals & Beverages and Snacks portfolio. In fact, about four out of five new users surveyed said they were very or extremely satisfied with our brands. As a result of this high satisfaction, those surveyed told us they will continue to count on our brands going forward, turning to us for things like cooking solutions and quick lunches and meals. This gives us every reason to believe consumers will continue to purchase our brands well after the pandemic. Even more importantly, 70% of the consumers surveyed told us our brands better met their needs than competitive products. These same consumers also told us the taste and convenience of our brands were the top drivers of overall satisfaction. We feel this sets us up well for continued share progress going forward. The research also has provided us with actionable insights into our opportunities to strengthen the retention of our consumers. These include areas such as adding more convenient packaging options and sizes across our portfolio, developing new and inspiring recipes, and satisfying consumers’ need for permissible, and more intense snacks by providing a variety of flavors and healthier ingredients. This specificity will focus our plans and innovation to target the areas with the highest probabilities of retaining these new consumers, particularly younger consumers for our brands. For the third and final differentiating point that underscores our strong position going forward, we look to the strength of our balance sheet. Given the cash generative nature of our business and our reduced leverage, which is now below 3 times, we are well positioned to generate significant cash flow well above our ongoing commitment to base capital investments and dividends in the next three years. This can, and will, be a source of opportunity that can be invested in high ROI initiatives or other actions to drive value creation. So, to wrap it up, our mission is clear. Number one, sustain or accelerate our historical Snacks growth while improving margins. Number two, solidify our Meals & Beverages business as a steady and stable contributor behind recent transformational consumer trends and trial. And number three, deploy what will be significant capital to fuel this growth and create differentiated value. We look forward to sharing more in the months ahead about this next chapter as Campbell moves from turnaround to sustainable growth. And with that, operator, let’s open it up for questions.

Mark, I wanted to discuss the organic growth for the quarter. You mentioned some factors that impacted organic growth compared to your ongoing expectations. It's reasonable to think that foodservice will see some recovery as restrictions are lifted. However, I'm looking to understand better the current state of supply and capacity. Is that mostly resolved at this point, or are there still challenges? This is important for me as I'm trying to analyze the relationship between consumption and shipments as we move into the fiscal third quarter. Are these more aligned now? Is there a chance to build inventory so that shipments might outpace consumption for a while? I'm trying to gain clarity on this, and I have a brief follow-up question.

Yes, I have a few thoughts. It’s a bit frustrating to see the top-line results when the underlying fundamentals are so strong. In-market consumption increased by 8%, and we made significant progress in share performance, with 75% of our portfolio gaining share. This includes some crucial businesses that we needed to revitalize, like ready-to-serve soup and Snyder's of Hanover pretzels, both of which had faced share challenges that we wanted to address. One positive aspect of the timing of the pressures we faced is that we had all the inventory prepared for the holiday period, which is why we performed well during that time. However, we did face difficulties with replenishing inventory as we exited the quarter, primarily due to the rise in COVID cases affecting both our foodservice operations and plant absenteeism. In December, absenteeism reached double digits, the highest we’ve recorded, which limited our ability to meet consumption needs on time. The good news is that both factors seem to be episodic, and as we moved into Q3, we are seeing improvements. Notably, we had shipped about 12 points behind consumption in Q3 last year. Despite the challenges, including the temporary closure of our plant in Paris, Texas, which produces Pace and Prego, we anticipate a positive trend in shipments compared to consumption, although with some fluctuations as we enter Q3. Looking ahead to the second half of the year, we are confident we will return to a strong position. Additionally, the SKUs we had swapped out during the pandemic are all back up and running. Currently, we are observing about a 6% decline in TDPs, which we expect to stabilize at around 3% moving forward. The discrepancy is due to some items still being in the pipeline, but we anticipate everything will be back in place as we progress through the year. It’s a longer explanation, but it’s an important aspect to consider. We see potential to catch up and regain inventory momentum.

Great. And just a very quick one. It might be too early, but in markets where we've seen certain restrictions get lifted, maybe fully lifted in some cases, and getting back to some form of normalcy, I appreciate all the survey work you've done and a sense of where consumers sort of heads are at. Any sort of real-time data that you see in some of these regions or states that have more fully reopened around what maybe retention has looked like in actuality? I realize it's still on the early edge of things.

Yes. It's a little bit too early. But what I can tell you we've done is we've created essentially a bit of a map of the country in evaluating the specificity of different data points in conjunction with reopening. And so us like you are looking for those proof points to validate what is a lot of the hypothesis that we have. And so I would say it's too early to give you any conclusions, but we're set up well to read that as quickly as possible, make any adjustments we need and really begin to put some facts, specific facts behind some of those assumptions we've talked about.

I wanted to follow up on what Andrew just mentioned. It seems that much of your work regarding stickiness is still in the theoretical stage. I appreciate the good efforts in surveying consumers, but given the unique circumstances we are in, I'm not sure how much trust we can place in surveys at this point, as consumers may not be certain about their future behaviors. I would prefer for all my CEOs to be correct, as it would be much more enjoyable to cover a growing market with strong sales. However, is there any specific data point you have that instills the confidence needed to make the bold statements you are making today about stickiness? I am genuinely seeking to understand, Mark.

Yes, I understand the question, and this is a common conversation in our industry. We have focused our research in specific ways to gain insights on how consumer behavior may differ in terms of cooking and product usage. We have sharpened our understanding through survey work to assess our position against competitors. As we move past the initial surge related to COVID, it's important for us to evaluate our comparative standing and our ability to maintain or grow our market share. I am pleased with our performance in competitive areas. Beyond just considering whether customers will continue to use our products, it's crucial to understand if we are perceived as performing better than our competitors. Additionally, we are actively identifying potential areas of dissatisfaction. Instead of solely trying to validate continued usage, we are exploring reasons why consumers might not continue using our products and what improvements we can make. This insight is rapidly informing our innovation and marketing strategies. I acknowledge that until we have concrete data to back this up, it remains theoretical, but I believe our Meals & Beverage and Soup business will be in a better position than before. While quantifying this is vital, I am confident that the initiatives we implemented will positively impact our business.

No. I think that's very fair on a qualitative level. I would just hope that as you think about guiding ahead and so forth, maybe it would behoove a lot of companies to not assume as much stickiness as they think will happen and then maybe surprise to the upside. But I will leave it there.

Yes. Ken, as you depart, I wanted to emphasize a few aspects of our portfolio that are not connected to COVID. We have 50% of our business in Snacks, which has been steadily growing before and during the pandemic, and we anticipate it will continue to grow afterwards. Not all of our competitors share that same structure. Additionally, I believe there remains a strong opportunity for value creation, and thanks to our efforts on our balance sheet, we are in a position to invest thoughtfully and in a disciplined manner to enhance value. This gives us reasons to consider the business from a different perspective, independent of household stickiness. While there is much discussion about household retention, we have significant elements in our business that are largely unaffected by this.

I'll jump into the discussion about margins in Snacks. Mark, could you also connect that to capital allocation since you've previously mentioned it? This aspect will likely become even more crucial once we move past the pandemic. So, I have two related questions. First, does acquiring a company that adds scale to Snacks lead to higher margins? Second, regarding capital allocation and your thoughts on M&A, how does Campbell's M&A strategy compare to your experiences at previous companies? Pinnacle had a solid approach, and Mondelez was heavily shaped by acquisitions. I'm looking to understand your perspective on capital allocation.

Yes. Okay. So let me start a little bit with the Snacks question. And again, I really do expect us in the next few months, again, not to put a particular date, but I do imagine as we go into the fall, we're going to be in a good position to have a more robust dialogue with you about kind of this next chapter of the company's strategy, which will include, in my mind, a lot more granularity around some of the things that we're talking about now. But I will say this, on the margins on Snacks, if you look at kind of where we are in our journey right now, we're about 80% of the way through value capture. We're now up and running on SAP, which is a really important step, as many of you know, in these integrations and transitions. And so it's allowing us to continue to build our insights as we look forward. And where that value capture has put us, if you think about the beginning of the journey to where we are now, the gap between our margin and kind of the snacking averages, we've closed about 1/3 of that gap. So there's still about 2/3 of that remaining. And if you look at the reasons why, and you kind of start from manufacturing, all the way to the store, you see a fair amount of inefficiencies even after we complete the value capture, that gives us a lot of confidence that we're going to find opportunities. For example, we've got 1,300 locations holding inventory right now in our supply chain. And yes. No matter how you cut the pie, that is not our most efficient foot forward. And so our ability to go after each of those elements with kind of a next wave of plans gives me a lot of confidence that we can reduce that gap further. And again, quantifying that and giving you a little more clarity on the building blocks, we will do that, but not today. So we're working on it and more to come. But I think there's a lot of reasons to believe. And if you pair that with what the growth rate of this company is and what we continue to see as improved opportunities, as we move from integration orientation really to growth and focus on innovation, we feel very good about it. And so if you think about some of that work, there may be some investment opportunities that are there. So as we think about capital priorities, kind of pivoting now to your second question. First of all, our capital priorities as a company remain the same. We invest in the company. We pay our dividend. We continue. At this point, we've really done a good job of managing down debt. So we're quite happy with that progress. And then we're looking in a very disciplined way. I mean you mentioned some prior historical places that I've been that I think have had very good decision matrix, very good discipline. Our focus continues to be things that we believe are highly aligned or nearing adjacencies to our core strengths. And I think there is a role that M&A can play. But it's in conjunction with also evaluating where we can invest in the company and generate high returns. I think the important thing to note is that we will apply that discipline, but we're going to be applying it to an availability of capital that, as you say, I think, is going to be a very, very important indicator of value. And especially as you think competitively across places to go, I'm feeling very good about our flexibility and capability to generate a significant amount of value in that space. Does that make sense, Bryan?

Yes. That makes sense. Thanks, Mark.

I'm going to take another nibble at that hook from a slightly different angle. I hear you loud and clear, Mark, if we benchmark against some of the bell others in the space, like a Frito or a Mondelez, but that just seems like an unfair comparison. If I look at, say, your 18% to 19% EBITDA margins in Snacks, they look great, especially when I contemplate you're somewhat subscale relative to the big leaders, your profit sharing arrangement with independent distributors. Your portfolio is exceptionally complex. And you've got a decent chunk of sales that are derived on a pretty low price point, suggesting that it's not really a cost per ounce issue. It's a price per ounce issue for much of that. So how is attacking costs, like where are the opportunities? Because when I look from the outside looking in, I don't really see the opportunity. I see a business that's sort of already been rightsized in terms of margin and one that's probably where it should be. What am I missing? Can you put more teeth on this one, please?

Yes. I think if you consider the redundancies and inefficiencies in a network that was established independently without a focus on efficiency, you'll see the unique opportunities we have in operating within two aisles of the store. Our portfolio isn't as complex as it may seem. We've been developing our partner brands over the last two years, and there's still some work to be done to establish the right partnership model that simplifies operations while ensuring benefits. There are opportunities to enhance efficiency in our manufacturing, distribution, and route-to-market processes. Importantly, we don't need to reach the highest margins in snacks, but closing the gap will create significant value. Given our historical growth rate of 3% and a headwind of about 1% while managing our partner brands, I expect that growth rate to persist or even improve moving forward. This contribution, which represents 50% of our company, will play a key role in our future success. I understand you're looking for a clearer blueprint, and that's what we're currently developing. I raised this point now because much of the conversation is about our future direction post-pandemic, focusing on our ability to execute and identify opportunities within our existing business model.

I have a question regarding Meals & Beverage. There have been capacity constraints for about a year due to understandable reasons. You've mentioned that much of this relates to labor absenteeism and overall capacity. Looking back as you entered this year, could the company have done more to hire additional staff or take on more co-packing capacity to meet the surge in demand? Did you decide not to pursue these options, believing they might not be sustainable? Additionally, as you gather more data on customer loyalty, what steps do you plan to take? Will you need to expand capacity for soup or sauces? While there has been significant discussion about Snacks, are there necessary actions to be taken in Meals & Beverage to address a sustained higher demand?

Yes, it's a valid question that we've reflected on. Starting from a labor perspective, I believe we've done everything possible regarding hiring. We've increased our workforce by 20% during the pandemic to gain some flexibility with our protocols and to meet the rising demand. Regarding whether we should have pushed harder in hiring, I truly don't see anything more we could have done. There were limitations based on the locations of our facilities, but we made significant efforts, including holding career fairs nationwide, and we successfully hired 2,000 people. It would have been beneficial to have more flexibility during the surge we experienced in December and January, but our teams worked diligently to maximize our potential during that time. As for capacity, our approach varies by brand. The main pressure on capacity has been in broth, and we've committed to investing in that area, which is currently in progress. Installing new capital has taken a bit longer during the pandemic than it typically would in normal times, but we are dedicated to this commitment and the benefits it will bring when fully operational, including enhancing our co-manufacturing network for better adaptability. Regarding Meals & Beverages, we experience seasonal peaks and valleys, and we're establishing a network to improve flexibility to respond to different demand levels. I feel confident about the investments we've made to ensure our business can handle various scenarios. We've faced pressure to reintegrate some SKUs that are crucial for regaining market share, and we are now in a solid position with those. Overall, I have a positive outlook for the future, taking into account the dynamics we've navigated.