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 Marl.

Mark?.

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 an 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. This program includes the benefits of various initiatives such as last year's closure of our manufacturing facility in Toronto, Ontario and benefits from the ongoing integration of Snyder's-Lance.

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 COVID19 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 of 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 opportunity, although we expect those gains are not likely to fully offset the impact from volume declines. Finally, a couple of specific items for fiscal 2021.

As previously mentioned, we expect continued progress on our cost savings program and expect to deliver an incremental $75 to $85 million in fiscal 2021, keeping us on track to deliver $850 million by fiscal 2022. Additionally, we expect net interest expense of $215 to $220 million, which is lower compared to fiscal 2020 given the lower debt levels.

Additionally, we expect an adjusted effective tax rate of approximately 24%, largely in-line with fiscal 2020.

As I previously mentioned regarding our capital priorities, we expect to continue to invest in the business targeting capital expenditures of approximately $350 million as we continue to support cost savings initiatives and position the company for future growth.

While we do not intend to provide quarterly guidance going forward, we are providing the following first quarter fiscal 2021 guidance in the spirit of transparency.

In the short-term some of the key variables we'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. .

Ladies and gentlemen, thank you for standing by and welcome to the Q4 and fiscal 2020 Campbell Soup Company live Q&A session. At this time, all participants’ lines are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

[Operator Instructions] I would now like to hand the conference over to Rebecca Gardy, Vice President, Investor Relations. Ma’am you may begin. .

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 now turn it over to the operator for the first question.

Operator?.

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

Thanks for the question. Mark, I know that fiscal ‘21 was sort of initially as the way you laid it out in the multi-year plan, thought to be a pretty good year in terms of reframing the Soup category for Campbell through innovation and other means.

And I'm trying to get a sense of what's maybe changed or what needs to change around the strategy for this Soup journey, if anything, given recent trends, because if you think about it, Campbell has picked up so many new households and users that I'm thinking the focus maybe now shifts more from retaining -- or to retaining users rather than maybe slowly gaining new ones.

I'm trying to get a sense of how that, if at all, changes the sort of the approach and the journey around Soup?.

Yes, no, great question. I think, the good news is that a lot of the strategic framework of what we had set out to accomplish on Soup initially was laid out in such a way where the primary goal or the objective was to improve relevance of the category and begin to add or recover households that had lost.

As you point out, I think the best way to describe where we are right now is that we've, through the pandemic, been able to jump forward on that strategic journey.

And if you go back and kind of think about what did we set out to do in '20, it was really to strengthen the base, improve quality, make some material investments in the business to begin to re-establish or rebuild that relevancy, and then begin to build back the innovation funnel.

If you kind of think about what we then accomplished in ‘20, really across the board, we well went beyond what our expectations are.

So as we go into '21, although I do think it is more about retaining those households, a lot of the strategies and the things that we had planned to do are things that we will continue to do I think just with a higher degree of probability of success and a better set of insights on what's compelling consumers and what's been working or not working.

So, a lot of -- I think there's been a lot of discussion or debate about when you kind of come through all this, how do you feel about where you are in the strategic journey on Soup, and that is why to some degree I tried to cover in the remarks that this to me on Soup is a little bit less about peaks and valleys as we think about how to manage through the short-term, but really that steady progress that enables us to come out of this tunnel in a position where Soup is a steady contributor to the business.

Because if you go back to the thesis of the company, if you're able to accomplish that in conjunction with what we believe we can do on snacking and even the balance of the Meals & Beverage business, it really does position us in a very advantaged way.

So, as we get into '21, I think the -- one of the things I'll just leave you with is a lot of, I guess powder is still dry in the strategy when it comes to innovation, shelving, many of the things that we have planned in '21.

And so, I guess -- I think as I said in my comments, I'm building confidence because you still have those elements, the layer on top of what kind of the shorter-term boost has been.

And I'm sure we'll get into a little bit more of the consumer trends, but we've done a lot of work on this behavior of increased cooking and quick-scratch cooking, in particular. And we’ve built now a series of insights that give us a lot more confidence that this is going to sustain beyond just the pandemic period.

And I'm sure that'll come up a little bit later, and we can talk more about it. But I think the net of it is, a lot of the same activities is just we're further down the road than we expected. We keep staying that course. I think if anything, this is building a lot more confidence in our ability to make Soup a steady contributor..

Our next question comes from Ken Goldman from JP Morgan. Your line is open..

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. Sure, you're right. It's hard to quantify. I think the way I would describe it is, it's creating drill sites for us for future productivity. And that's I think quite helpful because we've been able to create this kind of, I'd say real world case studies and laboratory to test a few things.

I think there's three primary areas though that we see as future opportunity.

I think the first is in optimizing the portfolio, right? So where -- are we over-skewed, under-skewed, where are we really getting incrementality from certain extensions of our portfolio, how do we really think about optimizing the effectiveness of our offerings to really match what consumers’ needs are and to create room for what we think is going to be meaningful innovation, while setting up a more efficient overall approach to the portfolio.

I think the second area is, as we've seen kind of full utilization across our entire supply chain and route to market, I think it's enabled us to understand some places almost out of necessity in the short term that we've done that we think in the longer term our ability to create certain consolidations, how to think about perhaps hubs to supply in a more efficient way, especially as you think about our Snacks business, where you've got a little bit more complicated route to market.

I think we've been able to find even if it's in the face of some higher costs in this year, but as pointed out places where if we can improve that architecture structure, I see opportunity to save money.

And then the third, where I think a lot of people spend time talking is how do you learn from this virtual work environment, ways to operate companies more efficiency -- efficiently.

Do you need as much travel? Do you need quite the infrastructure that you might have? Can you figure out a way to take what has been working very effectively for the company, and use that as a little bit of a blueprint? I do very much still believe that the concept of team environment is important for businesses like ours.

A lot of the innovation creativity is done through cross-functional collaboration.

And although we've done a great job with that virtually, and although I think it can enable and unlock some potential efficiency and savings going forward, I think at the heart of the company I still believe that there's real value in folks being able to sit face-to-face and across the table to work on things.

But I think the good news is all three of those, we’re beginning to mind as opportunities going forward. And I think that's going to help strengthen our pipeline of savings, especially as we're coming to the end of our enterprise savings program, as we talked about, we're wrapping up here the value capture from the Snyder’s-Lance integration.

And so it's just great to see some new ideas that are beginning to populate that pipeline. So, good things coming out of a tough situation. .

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

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. So we would see, essentially in the households we've added just shy of 50% of those new households are coming from younger consumers.

That’s combination of different size households, can be a little bit older Millennials who are now just beginning, young families working with a little bit of a different budget perhaps than they did when they were younger, as well as much smaller households.

And I think, as we think about this going forward, those become as you would imagine a very, very high priority for us. And one of the great things about Q4 and I know even coming out of Q3, I had a lot of questions about, okay, even as you're navigating some of the supply pressure, you continue to invest at a very high level.

And I think that was incredibly valuable for us in the fourth quarter. And it really prove some terrific learnings and results. One of the things that I think harder to see in the numbers in Q4.

But if you take e-commerce as an example where we know there's a higher index to where these particular younger consumers are shopping and gaining information, 86% of our spending on our Meals & Beverage business in the fourth quarter was on digital to support this through a combination of retailers platforms, as well as a whole range of different tactics to really try to understand what works and what doesn't.

So as we go into this year, we're going to be more effective. But what we found is we can have a big impact with that population. Our e-commerce business was up over 100% in the fourth quarter. It now represents for us as a company, it essentially doubled in 2020, it’s kind of low-single-digits. Now it's up into the mid-single-digits.

And again, as you think about our ability to demonstrate growth there, which again doesn't really show up as much in your measured channels, it creates a really great platform for us to connect to consumers in a very specific way to influence them.

And I think one of the things that I'll just mention too with this particular target that's giving us a lot of confidence beyond just the online success that we had is this dynamic around cooking and quick-scratch cooking.

And I think for a lot of people, myself included, I wanted to try to understand a little better behaviorally what's going on, so we can better predict what's going to happen after the pandemic and does that give us a higher likelihood of keeping those consumers in the franchise, right? I think that's the big question.

And we found a couple of very specific things that I think are giving us a lot of confidence. The first is that, the initial read through of what was going on in this cooking was a lot of consumers trying to recreate favorite meals, comfort food, feeling out of necessity having to cook, but staying pretty close to home.

I think what we've seen as time goes on, and as confidence is building, think about cooking three meals a day, seven days a week for a couple of months, the amount of confidence these consumers have now in their ability to cook has really broadened their ability to add significant creativity, which is allowing them to reach into dishes and food that is far more I think sustainable longer term, right, where for me it might be 15-minute chicken and rice.

For these consumers it is Tuscan chicken and mushroom on rice, cauliflower, using still our ingredients but doing it for a meal that feels far more consistent with where they're going. And the other exciting thing is that we all knew that there would be a pivot eventually back to healthier recipes.

Again, a little more comfort oriented initially, a little more healthier now. And our products are staying right in there, with the combination of what we offer with Pacific, the recognition that a lot of the quality improvements and some of those historical barriers to the can that we really have been working on to overcome.

I think we're seeing great indication that we're moving through it. And then the final one is value. And I think what we're realizing and what consumers are realizing is that, that value equation on this quick-scratch cooking is quite powerful.

So, you roll that all together, our ability to impact consumers online, as well as strengthening conviction to cooking -- quick-scratch cooking moving forward gives me a lot more confidence. And I think you heard that in my comments earlier on our ability to retain these households.

And in particular, retaining these households on Soup which I think is going to be a very important milestone or indicator, a proof point as we go forward on whether we're able to sustain more of this in the -- starting in the back half, but certainly going forward..

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

Two reasonably straightforward questions. First, in the press release, you mentioned some gains on commodity hedges. You explained to effectively account the majority of corporate costs decrease, which implies like $37 million. But in the presentation, you say it only partially offset the commodity inflation, which suggests less than $15 million.

So, first question, what is the magnitude of that? Second question -- I'm going to just bundle these together, net pricing. It was surprising to see that your trade spend is still up year-on-year and promos and net drag on sales. I think it's surprising in context of what's happening with the promotional line overall. So, two parts to that question.

One, where's money going? Two, as we think forward, we're hearing from pretty much every company that they're expecting promotions to kind of come back into the market and become more elevated going forward.

Do you expect that to happen as well? And given that it's already negative, would you expect that net drag to increase as we go 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. .

Got it. Thank you..

Yes. On the promotional, what we're seeing promotionally is, is pricing. I mean we have framed it a little bit as a relatively neutral position in the quarter. I think our net pricing as a contributor within our gross margin bridge was essentially flat. There's a couple of things that are underlying that.

We are seeing in -- especially in categories where there is more pressure on supply, some pullback in promotion. I think one of the things we're trying to wrestle with a little bit through all this is okay, I promote the -- if I promote the business with retailers, I may drive a growth rate of 10% or 15%. I can supply maybe 5% or 6% growth.

And if I don't promote, I only grow 2%, right? So we're trying to figure out how to calibrate the right kind of promotion and support to get to the best position possible. I do expect as we go through ‘21, that's going to moderate and return to more normality. I think it'll be a little choppier in the first quarter.

But as we start to get into Soup season and beyond, I think you'll see a much more consistent promotional calendar and schedule as we advance.

I think in the near term, what we are seeing though is in the absence of some of those and as we shift, mix the things where we may have more the supply and better position, I think you're seeing us continue to promote fairly aggressively.

And again, I think we're working very collaboratively with the retailers to try to make sure too that if you're a -- I mentioned this last time, if you're a high-low retailer versus an EDLP retailer, and you're pulling back on promotions, it does create a little bit more of a disadvantage in certain customers.

And we're trying to work hard to make sure that we're equitable in our approach and that we're supporting customers navigate through that in the best way possible. So there's a little bit of mix that may be elevating as well.

I think from my perspective though, I think how I would have depicted it is relatively neutral with a trajectory to increase as we go into ‘21.

Mick, anything to add kind of the financial bridge side of it?.

No, I agree with that. I think that's pricing -- I mean that you also see in one of our bridges in the materials, it was actually net neutral. .

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

I just -- I had a question for you. I heard about some supply chain challenges in certain parts of your business, and at the same time, inability to ship out of consumption, some of the orders I think like in Soup.

So I want to get a better sense if I could about your production capabilities, especially the areas in which you're investing to improve your supply chain.

And then just to get a sense around retail inventory or were there still some areas that they build-up or they -- kind of where you stand on retail inventories overall?.

Great question. So, let me kind of chunk that into the three pieces you kind of asked. First, as far as the supply chain capability and our execution, I feel great about how the team has shown up.

A lot of discussion in the Q3 earnings call and as we kind of guided to Q4, the real improvement or the uptake in what we guided to, to where we landed, was improvement in capacity as it related to Soup, which enabled us to replenish inventory at a higher level, which was our goal. Not fully complete yet.

I think you'll continue to see that going forward. But just on the basis of -- when I talk about supply chain challenges, these are not executional challenges. This is not us performing. This is not COVID-related impact.

This is simply the sustained level of demand in certain businesses, where we may have a little less flexibility to be able to kind of move to that higher level. So first off, that's kind of the starting point.

I think what you're seeing in this quarter is some variation between businesses, right? If we were in Q3, we were talking a little bit about the depletion of inventory on Soup. I think the great news in Q4 is, we were able to replenish in many areas.

One of the dynamics that's happening as you'll see throughout Q1 is the return of the vast majority of the SKUs that we had removed. That there will be some that we choose not to come back with that we think are just good business decisions. But that pipeline still remains.

And I would still expect to see our ability to ship ahead of consumption as it relates to Soup as we go through the first quarter. And again, our guidance implies a certain limitation there. We're going to continue to work on improving that capacity as we go forward to hopefully more broaden that ability and ensure.

But at the end, we feel good that we'll be there by the time we get to Soup season. I think what you saw on the other side of the equation was some pressure on businesses across Snacks. In particular, I think the two that right now are probably our areas of biggest focus is our potato chips businesses, our Kettle and Cape Cod.

The good news is, we've got a great plan in place, which is really your third point on adding capacity. But there's certainly been pressure there. We've also seen some pressure on supplying Lance, our sandwich cracker business. And on Goldfish, I think we're in great shape on supply. We've opened a new line at Willard.

A little bit of what we're navigating on Goldfish to try to figure out again that mix as we go through back-to-school, on whether it's bulk or individual packs, and we continue to see demand remaining very, very high on the bulk side. But I think generally speaking, we feel good about that.

So, there are a little bit of improvements on one, opportunities on other. But as we come through the end of the first quarter, we really expect to be back across the board. And we are making major investments in many of the areas where we have great confidence in the sustainability of the demand going forward.

So, places like Goldfish, places like Milano, places like Kettle chips, places like broth on our business, all of those are getting investments, and we need them. But they're I think going to be helping us in a pretty significant ways to get into the second quarter. So, again, I think that's a little bit of the nature of the guidance in Q1.

And again, we would hope that we can create further upside there that, that could be opportunity. But to where we are right now, again, we're trying to be as pragmatic as we can be..

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

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. So, let me first talk a little bit about inventory, again, and what we expect in Q1. So we have a couple of things that are going on in Q1 that I think are important for people try to calibrate on.

And I know you're coming out of a quarter where your organic growth is 12%, seeing a guide of 5% to 7% may feel to some a little bit like, okay, well, that's not -- why aren't we just running at the rate going forward. I think there's a couple of variables in there and then I'll -- and then on the tail end I'll catch your inventory piece.

The first thing is that we do expect demand -- consumption demand to be elevated, especially on the Meals & Beverage side. But one thing that is worth noting is it's a significantly bigger base in the first quarter. So although I do think growth will be there, I just think the absolute numbers are going to be a little bit moderated from where we are.

Right now what we have planned is to continue to recover some inventory on the Meals & Beverage side. But to be honest, we're pushing the team hard to try to create room to recover even more. I would say from a total inventory recovery position across the company, we're probably about half way done.

So I still think further ahead on Soup, not as far ahead on some of the other businesses, so I would still expect there to be over the course of Q1, some may even bleed a little bit into Q2. But I'm still expecting about half of that, Rob, to come back over the first half, primarily Q1 but over the first half of the year.

And again, a lot of this is going to boil down to how much capacity we're able to generate. So certainly we hope we're going to push above that.

Snacks is a little bit different, right? I think Snacks, what we're seeing is a -- although elevated level of demand in some areas, a more return to normality in others, which by the way I still believe is going to be healthy growth and continuing to make great progress. But for example, we're in the midst right now of back-to-school.

And it's been very interesting to watch the first couple of weeks of that, where you see on the one hand a significant increase in our demand for Soup, for quick lunches, as well as bulk on our Snack business. But we definitely see a reduction in some of the more traditional back-to-school portion pack.

So, I think as we navigate that, we're trying to calibrate to the right numbers. I will just say, as I said in my comment, I think it's a complicated time to give people a tremendous sense of precision in the numbers. But I think the general drivers we feel very good about it’s now our ability to match the magnitude. So still a lot of inventory to go.

I think healthy demand underlying it, and we would expect that to continue through the first half. And so, that's kind of how we've initially set up these numbers in the first quarter.

Yes, on COVID cost, Mick maybe just a little bit why Snacks is different than Meals & Beverages?.

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

If you look at the distribution between the two divisions, you see that about two-thirds of that is Snacks, which is really driven by the nature of the manufacturing footprint of the Snacks division i.e. we have many more facilities obviously there.

Then the other piece -- so on the one end you had more COVID costs in Snacks than we had in Meals & Beverages. And the other piece that kind of looking through the quarter, we had increased operating leverage disproportionately within the M&B business driven by obviously much more volume than what we saw on the Snacks side.

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

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. .

Yes, basically more in line with it. I agree with that, yes..

Thank you. And we will take our last question from John Baumgartner from Wells Fargo. Your line is open..

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.

.

Yes. Well, as I've said a couple of times before, I think what's unique about our Snacks business is the differentiated position that we're in, in the sense that we tend to play in a little more added value segments within larger categories.

And I think that, that does position us to be in a position where we should be less dependent on merchandising and promotion. I think the reality is though on something, for example, like Snyder’s, Hanover in the pretzel business, it's a very competitive segment as it is in Kettle chips right now as well.

So, I think, one of the things we've learned last year, if you remember turning back the clock, actually all the way back to '19, our ability to get to the right price points on promotion just given the nature of snacking, the right level of frequency will always be an important underpinning to execution in Snacks.

But I think that if you pair that then with where we’ve really been building added value as it relates to the equity of the businesses, as we've turned campaigns back on, especially on the Snyder’s businesses, we've been able to see continued progress.

Let me point to late July as a great example, first national campaign that we've ever turned on or had on the business. We turned that on in the fourth quarter. That business grew 30% on a 52-week basis and share gains of over 1 point and a fairly contested tortilla chips segment.

But because of the premium positioning, relative to which lies great communication, we could do that in a way where we were able to achieve that without necessarily having to drop down into the price points that more mainstream players have.

So, that's the balancing act we're trying to walk and I think if we get that formula right as we have on brands, like Milano and Farmhouse and on Pepperidge Farm, even Goldfish, although that one is -- again, you've got a very habitual program calendar for Goldfish that when we see -- when that deviates, that does put pressure on the business.

But as we get back into normality on that, as we roll through the year, I think most of these businesses we're going to be able to do trade in a more efficient way than perhaps history. But we still got to have enough there that we remain competitive on display. And making sure that we recognize what's happening around us competitively. .

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

Yes. Thanks, everybody, for joining. I hope you're appreciating the new format. I think we will kind of stick with this where we try to publish our comments earlier and give people a chance to kind of digest and read through and then focus our time together in Q&A when we're on the call. I know there's a lot to digest in this.

I know it's a tricky time too. We've certainly tried to build as much conviction and I guess credibility in being as transparent as we can to give the information as we get it and give perspective. Of course, that always creates a little bit of a dynamic that we need to make sure that we're updating it as we go. And we will.

I think as we navigate this year, we'll try to make sure that as we see things change or as capacity or demand moves, we'll be as upfront as possible. I don't know that, that translates and I don't think it will to quarterly guidance each time. But we're certainly trying to keep everybody as informed as we can be.

And I just would close with something that I talked about in my comments, which is, if you take a step back and you take stock of where the company is right now, and you say, okay, where -- a year ago, where were we expecting to be and how do we feel about navigating this kind of moment in time? I have to say that across the board strategically I see tremendous benefit that we've been able to extract from a tough moment.

And I think that, that is going to set us up very well for the future. And if I think about, again, not perhaps the peaks and the valleys of the near term, but the longer term view of what the thesis of the company is, I have just built significantly more confidence.

And I think as you see our two year stack numbers together, I think that's going to provide further evidence of our progress against where we originally set out.

And I think in particular, what we’ve talked about on Soup and the conviction around Soup to be not only what we needed it to be, which was a stable player, but with the potential for it to be a more steady contributor along with great progress on our Snacks business.

Again, I think gives us the benefit of being a very focused portfolio, a very straightforward strategy, and now with a great deal, more proof points of our ability to sustain performance going forward. So hopefully that helps give you a little bit of perspective.

I know we mixed a bit of Investor Day stuff, along with earnings into today, but I thought it was a good moment to try to talk a little bit about where we are on that strategic journey because I know it's top of mind for many of you investors. So appreciate everybody's time and questions.

I know we'll talk to many later today and we'll try to make sure you've got everything that you need to put the results in context and the guidance going forward. Thank you..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect. Everyone, have a wonderful day..