Good day, ladies and gentlemen, and welcome to the Campbell Soup Fourth Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the call over to your host, Ken Gosnell. Please go ahead.

Thank you, Stephanie. Good morning, everyone. Welcome to the Fourth Quarter Earnings Call for Campbell Soup's Fiscal 2016. With me on the call are Denise Morrison, President and CEO and Anthony DiSilvestro, CFO. As usual, we've created slides to accompany our earnings presentation. You will find the slides posted on our website this morning at investor.campbellsoupcompany.com. This call is open to the media who participate in listen-only mode. 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 two 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. Now I'd like to remind you about items impacting comparability. As we said in this morning's news release, the current quarter results reflect a non-cash impairment charge, pension and post-retirement mark-to-market losses and charges related to cost-savings initiatives. The prior year quarter included pension and post-retirement mark-to-market losses and charges related to the implementation of the new organizational structure and cost-savings initiatives. The adjusted results exclude the impact of these items impacting comparability and our comparisons of the full year 2016 with 2015, will exclude these and previously announced items. 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 our appendix. Lastly, please mark your calendars for our planned fiscal 2017's earnings dates. We plan to release earnings on November 22, 2016, February 17, 2017, May 19, 2017 and August 31, 2017. With that, let me turn the call over to Denise.

Thank you, Ken. Good morning, everyone and welcome to our fourth quarter earnings call. Today, I'll offer my perspective on our performance with a focus on how each of our divisions are performing against their portfolio roles. We finished the year in line with our guidance and with strong profit performance. However, our results this quarter certainly did not meet my expectations. I am particularly unhappy with the short-term executional issues that have led to the poor performance in Campbell Fresh, both for the quarter and for the year. I'll spend the majority of my time this morning addressing this topic. While sales for the year, including Garden Fresh Gourmet, were up 5%, organic sales declined 4% in C-Fresh. In the fourth quarter, organic sales were down 12%, driven by declines in both CPG and Farms. This performance is unacceptable. I expect far more from the Campbell Fresh business. It's clear that we have several immediate challenges in Campbell Fresh, and we are addressing them. I'll get to that in a moment. But first, I want to step back and look at the big picture. As a reminder, fiscal 2016 is the first year of operation of Campbell Fresh. This division, which accounts for approximately $1 billion in revenue or about 13% of our total sales, combines Bolthouse Farms, the Garden Fresh Gourmet acquisition and our refrigerated soup business. Strategically, C-Fresh positions Campbell to benefit from the growing health and well-being trend as well as the growing demand for better-for-you foods in the Packaged Fresh category. Its portfolio role is to deliver full-force growth, driven by the CPG business and to contribute to the acceleration of Campbell's overall sales trajectory. While disappointed in our execution, I remain confident in our C-Fresh strategy. We have strong popular brands that are on…

Thanks, Denise, and good morning. Before getting into the details, I want to provide my perspective on our results and guidance. As Denise stated, we are disappointed with the performance of our C-Fresh division in the fourth quarter, which was the key driver of a 1% decline in organic sales for the company, reflecting the recall of Bolthouse Farms protein drink and declines in carrot. At the EBIT line, the negative impact of the C-Fresh performance was offset by lower incentive compensation accrual relative to our expectations. In the fourth quarter, our adjusted tax rate was negatively impacted by a $13 million correction for deferred taxes. The correction had a negative impact on EPS of $0.04 per share. And as a result, our full year tax rate finished above our previous expectations. Moving on to the full year. While adjusted EPS of $2.94 was within our guidance range, we finished at the lower end due to the tax correction. We're pleased with our gross margin performance, which, on an adjusted basis, increased by 170 basis points, in line with the expectations, driven by significantly improved supply chain performance, cost savings and net price realization. We continue to make very good progress against our three-year cost-savings target of $300 million, delivering about $130 million of incremental savings in fiscal 2016, bringing the program to-date total to $215 million. As part of our annual review of intangible assets, we recorded a non-cash impairment charge of $0.41 per share in our GAAP results on our Bolthouse Farms carrot and carrot ingredient business, reflecting reduced expectations for future cash flows. I'm very pleased with our strong cash flow performance as cash from operations exceeded $1.4 billion, and our board has approved a 12% increase in the quarterly dividend. Looking ahead to fiscal 2017, although…

Thanks, Anthony. We will now start our Q&A session. Since we have limited time and fairness to the other callers, please ask only one question at a time. Okay, Stephanie.

[Operator Instructions] Our first question comes from Ken Goldman with JPMorgan.

I wanted to get a bit of a better understanding of the carrots business longer-term from here. I do understand, Denise, that there were some execution issues. I think that indicates that, perhaps, a lot of the problem is fixable. You also talked about carrot yield, which suggest that's fixable, too. On the other hand, you just took a big write-down, and I would look at that as maybe an indication that the business is never going to be as strong as it once was, or at least in management's mind. So I really just wanted to get a better sense of maybe how to balance those 2 data points, I guess, as we think about, not just 2017, but beyond for the carrot business.

Yes. I think that, as we indicated, the carrot business is right now going through a short-term issue. And fortunately, it is a short-term crop, and the crop we're harvesting now is much better. So we believe we will be back in business at pretty normal levels by about the second half of the year. We've got a lot of to do there. I mean, we've got customer issues to address, and we are actively doing that. Going forward, I think, as we look at the business, based on the growth rates in sales and earnings that we saw when we bought the business, we believe that the growth rates are going to be about flat to up slightly. And that's a -- that is a little bit more conservative than when we first bought the business.

Yes, if I could just add to that. As part of our annual testing of intangible assets, which we perform in the fourth quarter, we do a detailed discounted cash flow analysis. And as we performed that on the carrot and carrot ingredient reporting unit, we certainly reflected the current year performance and our expectations for future cash flows. And while we expect the performance to improve over time, it's not to the levels previously anticipated and consequently led to the impairment charge.

Okay. That makes sense. Can I just ask a quick follow-up? Denise, you mentioned, and maybe I heard you wrong that you wanted to get C-Fresh into other areas. And I think you mentioned dairy. I always thought the goal was maybe to get into dairy alternatives, not necessarily dairy itself. I'm just curious if there was a change at all in your thinking there.

Yes. Ken, that actually is related to what we talked about in Investor Day with -- our -- in our long-term innovation group working on the new pea protein beverage, so it's plant-based beverages, but they would be situated in the dairy part of the perimeter of the store.

Our next question comes from Bryan Spillane with Bank of America.

Just a follow-up on Campbell Fresh. I guess, as we look at Bolthouse going into 2017, just 2 points, I guess, I'd like to get some clarification on. First, in terms of the profitability there for this year, I guess, it sounds like it will be somewhat impaired or below what a normal run rate would be as you sort of rebuild your production capacity and you get rebuild the customer base in carrot. I just want to make sure that that's one of the things that will hold it back this year, maybe relative to what we should expect in '18 and '19, is just simply there is a little bit of rebuilding that has to go on. And then as a follow-up to that, just -- does the sort of adjustments you're making in production runs and run times sounds like maybe even considering new production lines, does that at all slow the pace of new product innovations like the pea protein drinks? And just trying to understand if whether there is sort of a step back before you can step forward as you get the supply chain straightened up.

Bryan, the first part of that question, Denise mentioned 2 factors that'll impact at least our first half performance in 2017. One is the supply constraints on protein drinks, given the production, the run times, 24 hours versus 72. And the other thing is given some loss of customers on carrots; it'll take a little bit of time to reacquire that business. And so as we look at C-Fresh for the full year, we expect top line growth, low single digit. Typically, we would look for high single digit, so obviously, that's impacting our 2017 outlook. And as far as innovation, I don't think the issue on this particular line has an impact on our innovation agenda.

It does not. I would say, though, in the first half, the team will be very focused on the fundamentals, so the new product innovations will most likely go to market in the second half.

Our next question comes from David Driscoll with Citi.

I wanted to ask a little bit about the cost savings and the reinvestment strategy. So kind of back at the beginning, I think, Denise, the plan was to take about half of the big cost savings that were coming in and reinvest it back in the business. But then you had to spend like wonderful event of the cost savings tumbled in faster, larger, all these good things have happened in the year, but it brought up the question as to when would all these reinvestment occur? So if we're still looking for something like a $150 million of reinvestment, will most of that occur in fiscal '17? Or can you give us some guidance on how the reinvestment plan lays out?

I think that's right, Dave. So when we first announced the cost saving program, we're targeting $200 million in savings, and we talked about half of that going back for reinvestment. I think as the savings level went up, as when we kind of help the reinvestment amount, so I don't think we're -- we'd estimate that. I think I'd estimate less than half is not going back in the business. We're not going to give a specific dollar amount in terms of reinvestment in 2017, but it is significant, and it is in a number of areas. We're going to support new product launches, things like Prego's Farmers' market, Well Yes soup, Plum infant formula, the Bolthouse spring innovations, Tim Tam's expansion in the U.S., Goldfish made with organic wheat. So we have a number of product launches going on. We're also going to invest in new capabilities around things like digital and e-commerce. We're going to make investments in our Real Food initiative, so these are things like improving our can liners, continuing the removal of BPA, improving the product and more clean label, those types of ingredients which tend to be more expensive. We're going to invest in longer term innovation, things like our Acre investment fund, and also Denise mentioned, long-term innovation in Packaged Fresh. We're also going to invest and add resources to expand our sales and distribution in China through our Kelsen business. So we have quite a list of areas we're looking to reinvest and in the P&L, we have a significant allocation of fund.

And David, our profit is strong. Our challenge is top line growth. So these investments are really vital to long-term health of the sales line of the company.

So it sounds like it's fair to say that a big portion of the investment is happening now but will also happen in F'18 and beyond. I think that's what you're trying to tell me. Is that right, guys?

Well, certainly, F'17. I'm not commenting on F'18 at this point, but...

All right. One clarification and apologies for this, but I got to ask this. The pacing of the quarterly earnings so -- there was amazing growth in Q1 and Q2. You didn't really say this in your prepared comments, Anthony, but will you actually be at or above the year-ago 1Q and 2Q numbers? I mean is there any chance that these are below those year ago numbers just because of how tremendous the Q1 and Q2 were last year?

Well, we did said the majority of growth will come in the second half. And as you point out, there's 2 reasons for that. We are lapping a relatively low marketing Q1, Q2, and we have these lingering issues on C-Fresh. So that will tend to suppress our first half performance, but we'll see it come back in the second half.

Yes. We have a much stronger marketing investment in the first half, particularly in the Americas Simple Meals and Beverage with 4 really big campaigns.

Our next question comes from Jason English with Goldman Sachs.

I've got 2 quick questions. First, I'm not really sure what you meant when you answered Dave Driscoll question in terms of cadence. So I'll ask a little more directly. Do you expect earnings to be down year-on-year in the first half the year?

We're not going to give specific guidance, but I would say, we expect relatively weaker performance in the first half and stronger performance in the second half.

Okay. I had to try. My second question relates to promotional spend. Early last year, you guys kind of went into the year, you talked about some opportunities to rationalize expense. There were glimmers of hope to the first half of the year as that promotional line in the Americas Simple Meals and Beverage division actually went positive, given that back in the back half of the year. So can you kind of update us on how you're thinking about your promotional posture, your promotional spend? And what caused the set back as we progress through the year?

I guess we'll look at it a little bit different than that. We are very focused on improving our gross margin performance and expanding margin. Within that, we looked at net price realization, productivity improvements to exceed inflation. On the net price realization, we feel really good about what we've been able to accomplish in 2016. In fact, 40 basis points of our 170 basis point gross margin improvement is driven by net price realization. And within that, and I guess a little distorted on the sales variance, but we've made meaningful reductions in trade spend in soup given the promotional pricing we've taken on RTS. And although it's impacted volumes, it has contributed significantly to margin expansion. Now we're up a little bit in the fourth quarter. It's a non-seasonal quarter for us. Most of our dollar increase in trade in the fourth quarter relates to our Arnott's business in Australia, kind of lapping a period of supply constraints, so we had to pull back on our promotional activity, so we're wrapping that. But as I look at the whole year, we accomplished what we set out to do in our plan and have made meaningful progress, especially in soup, which is very critical to our agenda going forward.

Let me build on that, that we also, as part of the setup of our Integrated Global Services have made investments in our revenue management and advanced analytics. And we're continuing to look for ways to manage the depth and frequency of our trade programs to maximize profitable volume. We have to take into consideration competitive activity and customer programs and consumer response, but this is definitely a point of focus for us.

Our next question comes from Robert Moskow with Crédit Suisse.

This is actually Robert Connor on for Rob Moskow. So we just had a question. So it looks like some of these smaller organic brands are more vulnerable to weather disruptions and kind of like the stability of the product on the shelf is shorter. It seems like WhiteWave with their Earthbound Farms brand and supply chain issues, and obviously, you guys are having issues kind of with the Bolthouse brand supply chain. So did it raise any concerns in your mind about kind of putting most of your growth in the fresh part, which has kind of more volatile supply chain and lower margins?

It all starts with the consumer, and the consumer trends are very strong in terms of health and well-being, and particularly in fresh food. Some of these issues are part and parcel to running a fresh food business. But in our case, these were execution issues, and we can do better there. So we're really confident in the strategy to pursue fresh food in addition to the strong core brands that we have.

Our next question comes from Matthew Grainger with Morgan Stanley.

Anthony, I just wanted to ask a little bit more about the inflation outlook and apologies if I missed this earlier. But did you mention what inflation was here in the fourth quarter? The gross margin headwind in the step up quite a bit versus what we've seen year-to-date. So I'm not sure how material the other portion of that was related to Bolthouse issues. And if you could give us any color on kind of the shape of the inflation curve, as we kind of move forward sequentially?

Sure. I think the best way to explain our gross margin performance was it was down 90 basis points in the fourth quarter is to parse out the impact of the C-Fresh division. So the C-Fresh division in aggregate had a 70 basis point impact out of the 90 basis point, so basically most of our gross margin decline is attributable to the 2 issues inside of C-Fresh, the recall, which was 50 basis points, and the decline on carrots, which has a -- an impact on the margin as well. And looking at the rest of it, inflation was not that great in the fourth quarter as we talked in the bridge. The higher promotional expense was the key swing relative to prior quarters. But most of the decline, as we said, attributable to the C-Fresh performance.

Okay, that helps. Thanks. And just one other quick clarification from a guidance standpoint. Incentive, obviously, you've delivered an 11% underlying EPS growth this year, but there was, I guess, perhaps, an accrual correction on incentive comp here in the fourth quarter, which resulted in a year-on-year decline there. As we've kind of think ahead to 2017, does incentive comp end up being a headwind or a tailwind? Are you kind of essentially at a low normal run rate at this point?

Yes, so we had some ups and downs obviously in 2016. We ended up with a $0.02 headwind in '16 versus '15. And looking forward, our short-term incentives are close to target. The long-term incentive will go up a little bit. All in, we had about a $0.02 negative impact in 2017.

Our next question comes from John Baumgartner with Wells Fargo.

Denise, I'd like to ask about M&A. In addition to the chassis, you feel that you have with the carrot basis, it also seems you have a fairly nice chassis with your distribution model at Pepperidge. So how do you assess the ability for M&A to maybe accelerate growth more broadly in U.S. snacking? Maybe even outside of C-Fresh. And how much more could you be doing at Pepperidge to leverage your route to market there?

Yes. I wanted to clarify that. We look at -- we do look at M&A more broadly than just Campbell Fresh. And each one of our divisions has mapped out specific targets that they're interested in, that are a good strategic fit for their businesses. And so we are highly interested in other consumer behaviors like health and well-being, like snacking, like simple meals that we can pursue not only from an organic growth standpoint but also from an M&A standpoint.

And you feel like your route to market with the DSD at Pepperidge allows you to kind of go and do that and accelerate growth with kind of a bolt-on?

I'm sorry. I didn't understand the question.

Do you feel though your route to market at Pepperidge through kind of the DSD network would allow you to kind of buy a smaller additional brands, just more on health and wellness space and really kind of accelerate?

Yes, absolutely. I mean, Plum Organics is a great example of a smaller brand that we bought. We were able to integrate that into the Americas Simple Meals and Beverage business and capitalize on things like their sales force and supply chain.

Our next question comes from David Palmer with RBC Capital Markets.

A question on a couple areas that I know you'd like to improve and that was ready-to-serve soup and Chunky in particular and then also V8. Your new marketing campaign for Chunky, it looked promising and your comparisons will be on your side. Realistically speaking, do you think that that's the business that has the best chance for improvement among the areas that you cited that you think will improve in fiscal '17? And then perhaps, you can dimensionalize what you think would be a successful step and the right direction, could get you back to flat for that business in ready-to-serve, for instance?

Yes. We definitely have some bright spots in soups this year. We basically stabilized condensed and broth is up for the year. But the issue we've had has been RTS soup. And as you indicate, with brand Chunky, we are -- we have the price realization behind us. We have improved Chunky marketing going into 2017. We had a label execution issue in first and second quarter last year that we are cycling. And then we can't control the weather, but that was definitely an impact in 2016. So we believe that the Chunky brand will have improved performance in 2017. In addition, we are launching Well Yes midyear, which is a great tasting, clean-label ready-to-serve soup that we believe will have disruption in the soup aisle and capture the hearts and minds of consumers. The other thing we have going for us in soup is Slow Kettle and organic soups continue to do very well. And we just came out with new stackable cans in our RTS soup, which has been received really, really well from the retailers for merchandising purposes. So we've got a lot more going for us this year than last year, and we expect soup to grow modestly.

Our final question comes from Mario Contreras with Deutsche Bank.

So actually just following up on that previous -- the question, I think there was also a question on V8. So I just wanted to add onto that. So that's been an area of investment. You mentioned some further investment in terms of marketing and advertising, but sales continue to be a headwind there. So can you just talk about the results that you're seeing from some of those investments. So we had an inflection point where that's starting to improve?

Yes, and thanks for that reminder. We continue to be challenged in our shelf-stable beverages, particularly on our products that contain sugar, so V8 V-Fusion, for example. And this year we actually did have some declines on our V8 Red. Our new Veggie Blends, which we supported with some good marketing support, continue to grow. And our V8 +Energy is growing really nicely. What we have done is, we've developed a brand-new campaign, but also we've increased our support around our V8 Red juice. So instead of just promoting the new parts of the business, we're going back to better balancing our marketing against the core V8 Red as well as the new Veggie Blends and the V8 +Energy. And we believe that, that is a much better formula for success. We don't expect beverages to grow next year, but we do expect improved performance.

Okay. And just a clarification, I think going back to the -- to your Analyst Day, you mentioned something about shifting some consumers from V-Fusion to Veggie Blends. Should we read into that, that you're looking for V-Fusion to eventually maybe not be eliminated, but just become much less significant? Or I guess what did you mean by that specifically?

We have -- we do have top-selling varieties in the V-Fusion line such as strawberry banana or pomegranate blueberry and some others, and we'll continue to include them in the V8 line. But we -- the consumer will take us to the flavors that they like and will repeat. So that's basically how we're planning it.

And that concludes the Q&A session. I will now turn the call back over to management for further remarks.

Thanks, Stephanie. Thanks, everyone for joining our fourth quarter earnings call and webcast. A full replay will be available about 2 hours after our call concludes by going online or calling 1 (703) 925-2533. The access code is 1673833. You have until September 15, 2016, at midnight, at which point we move our earnings call strictly to the website. Just click on recent Webcasts and Presentations. If you have further questions, please call me, Ken Gosnell, (856) 342-6081. If you are a reporter with questions, please call Carla Burigatto, Director of External Communications at (856) 342-3737. That concludes today's program. Thanks, everyone.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect. And everyone, have a great day.