Good day, ladies and gentlemen and welcome to the Campbell Soup Third Quarter 2017 Earnings Call. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to Ken Gosnell, Vice President of Investor Relations. Please go ahead.

Thank you, Candice. Good morning, everyone. Welcome to the third quarter earnings call for Campbell Soup’s fiscal 2017. With me here in New Jersey are Denise Morrison, President and CEO and Anthony DiSilvestro, CFO. As usual, we have 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 risks. Please refer to Slide 2 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 our appendix. One additional item before we begin our discussion of the quarter, I would like to cordially invite our sell-side analysts and institutional investors to our annual Investor Day at Campbell’s World Headquarters. RSVPs are required. All others are invited to join by webcast. This year’s event will be held in the afternoon of Wednesday, July 19. We will include updates on our plans and key initiatives for the three operating divisions. We will also have time for interacting with our management teams, so I hope everyone can make it. With that, let me turn it over to Denise.

Thank you, Ken. Good morning, everyone and welcome to our third quarter earnings call. Today, I’ll share my perspective on our performance this quarter and outline our expectations for the remainder of the fiscal year. First, some context on the macroeconomic environment. Overall macroeconomic trends in the U.S. improved slightly in the quarter. Consumer confidence edged up and unemployment declined modestly. However, in the first quarter of the calendar year, consumer spending only grew 0.3%, its lowest level of growth since 2009. Consumers entered 2017 facing a variety of interrelated pressures and complexities from economic shifts, delayed tax refunds and general uncertainty. Many consumers continued to struggle financially, especially lower income and younger shoppers. Additionally, the retailer environment continues to be very aggressive, with e-commerce and value players applying increased pressure on grocery and mass channels and we do not anticipate this trend to abate anytime soon. Food companies certainly felt the pinch. It was a challenging quarter across the industry as top line growth remains scarce, especially in center-store categories. Consumers continue to migrate to fresher and healthier foods found on the perimeter of food stores. Like the majority of our peers, early in the calendar year, we experienced significantly lower consumption across almost all of our categories. At Campbell, we felt it most acutely in February. While trends improved as the quarter progressed, growth in March and April was insufficient to offset the earlier weakness. In the context of this unfavorable operating environment, we delivered competitive results in the third quarter. Although our top line was below our expectations, we grew or maintained market share in 11 measured categories, representing 75% of our U.S. retail dollar sales. Looking at Campbell’s results. Organic sales declined 1%, adjusted EBIT declined 2%, and adjusted earnings per share declined 9% to $0.59…

Thanks Denise and good morning. Before reviewing our results, I wanted to give you my perspective on the quarter. In the context of top line challenges that impacted much of the industry early in the first calendar quarter, I feel good about our sales performance. And as Denise mentioned, we grew or maintained share in 11 measured categories, representing 75% of our U.S. retail dollar sales. Sales for the quarter were below our expectations as declines early in the period were only partly offset by growth later in the quarter. Notably, Global Biscuits and Snacks had a strong quarter, achieving sales and double digit earnings growth. While adjusted gross margin declined 40 basis points in the quarter that includes an 80 basis points negative impact from wrapping mark to market gains on open commodity hedges. Our promotional rate also had a negative impact on margin, exacerbated by weaker than expected volume performance. We continue to make progress on our cost savings initiatives, generating another $20 million of savings in the quarter, slightly better than expected. And we have now delivered $295 million program to-date. Adjusted EPS declined 9%. But as you will see, most of that is being driven by volatility in our tax rate. With one quarter to go, we are revising guidance with sales coming down slightly to reflect our third quarter performance, while we tighten our earnings ranges, raising the low end by 1 point, as we remain confident in our ability to deliver our full year expectations for adjusted EBIT and adjusted EPS. Now I will review our results in more detail. For the third quarter, as reported net sales declined by 1% to $1.853 billion driven by a 1% decline in organic net sales, organic net sales declined in Americas Simple Meals and Beverages and…

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

[Operator Instructions] And our first question comes from Andrew Lazar of Barclays. Your line is now open.

Good morning, everybody.

Hi, Andrew.

Hi. Some of the companies in the packaged food space more recently have kind of been starting to walk away from some of their multiyear margin targets. I think seeing the need to maybe spend back more to stabilize the top line and maybe get a better balance of top line and margins back. And certainly, what we have seen from Campbell recently is a bit weaker sales like a lot of the industry, but of course much better cost saves and margin. So I guess I am wondering if, heading into ‘18, is there maybe a need maybe to spend back even more than the one half of the incremental cost saves that you had previously said you would, I guess, spend back through fiscal ‘20? Really, I guess I am asking, is ‘18 broadly speaking do you think it needs to be a bigger reinvestment year as it will likely end up being for some of your peer companies?

I think that the gross margin expansion that we have achieved has been done with a lot of analytic rigor and has gone after things that really are not hurting the business. And we definitely have kept our investment in advertising consumer and trade around that 24% level and that really hasn’t changed although the mix changes by brand depending upon the competitive situation that it’s in. With the $300 million, we have been able to save through our effective cost savings program, we have reinvested a significant portion of that back into the business and intend to do so as we go forward in pursuit of the $150 million that we will save. When you peel it back, our top line really needs to benefit from the return to growth of Campbell Fresh, which we expect next year and also continued progress to stabilize our V8 beverage business. Our Global Biscuits and Snacks business has momentum. Condensed is pretty stable. RTS grew nicely and we are under some pressure in broth. So we know what we have to do to get to that growth rate.

Yes, thank you.

Thank you. And our next question comes from Bryan Spillane of Bank of America. Your line is now open.

Hi, good morning everyone.

Hello, Bryan.

I guess a question on C-Fresh. Year-to-date, they are basically breakeven in terms of profits. And I guess now you have got the new production coming on beginning in the fourth quarter and some other things you have done to sort of increase efficiency. Anthony, can you just talk about kind of how long it takes to get back to the 5% or 6% EBIT margins you were before and kind of what the potential is above and beyond that, now that you have sort of retooled that business? I guess, essentially just trying to understand kind of the trajectory to get back to sort of a higher level of profitability.

Right, okay. So first of all, in the farms business, we believe that we are getting to stability on that business with significant improvements in quality and customer service. And then in the beverage business, by the end of the fourth quarter, we should be in a situation where we can produce enough product to satisfy shelf stock and also promotion merchandising demands from customers. Today, we are selling what we make and we can only fulfill shelf stock although that capacity is getting better with the line that we just put into our own plant and then the co-packer will get us back to where we can actually supply. We have plans to start to amp up on the beverage business early in fiscal 2018. And we expect, with the right marketing and promotion program with customers, we will continue to see that business growth. And we are planning on growth for that business next year. From the profit side, we have invested seriously this year in quality, but yet, we do expect margin expansion from this business for a couple of reasons. First of all, as we have delved into the supply chain, we have been able to realize that we have got opportunities for productivity. And quite frankly, it’s a significant portion of the $150 million cost savings program that we have talked about before. And secondly, we expect margin expansion just from the fact that we will be growing the CPG higher margin business at a faster rate than the lower margin carrot business. So we should have some margin expansion due to mix shifts. So that’s how we are looking at it at this point. And of course, we will keep you posted along the way.

Yes. I will just add to that, Bryan. I would say that our long-term margin target for C-Fresh is getting it to 10% and that’s going to take a few years. And I think we will make meaningful progress in 2018 against this. We have identified opportunities in procurement. We have identified opportunities in terms of integrating supply chain and we have identified longer term back office consolidation opportunities as well. So we have a pretty robust plan. We think we can get these margins back in the near-term and look to make progress next year on it.

Okay. Thank you.

Thank you. And our next question comes from Ken Goldman of JPMorgan. Your line is now open.

Hi, good morning. I am just curious on the cookies side of things, there is obviously one of your biggest competitors is making some pretty interesting changes there, I am just curious – two parts to this question I guess, in the near-term, are you seeing any particularly aggressive pricing activity, promotional activity from any competitors out there in events of this change. And then secondly, I am just curious strategically how you would think about what you might want to do at the company to sort of take advantage of some of the transitions that are happening and I know it’s a little early to say exactly what will happen, but I am just trying to get a little sense of what management’s view and outlook is on the situation?

Yes. I mean the environment in biscuit continues to be competitive, just like the rest of the environment, but we are very pleased with the performance of our Pepperidge Farm and our Arnott’s business. I think the competitive situation you are talking about is in the United States. The program that we are running in the biscuit business is we are advertising our brands like Goldfish and Milano. We have increased innovation in all of our brands and with new innovation in Pepperidge Farm farmhouse cookies, which we are excited about. These cookies are clean label simple ingredients and thinner, crispy. They just provide a different experience. We have also upgraded our classic cookie line to respond to the fact that the market has moved in terms of quality and we need to maintain that edge. And then finally, we have a lot of confidence in our direct store delivery network in terms of their ability to merchandise and work the shelf in store. And we think that combination is serving us well and our business results are proving that out.

Yes. I would just add with respect to the DSD situation, obviously we are very aware of what’s happening. We are watching it. And we are developing specific plans of our own to take advantage of that situation.

Thanks so much.

Thank you. And our next question comes from Chris Growe of Stifel. Your line is now open.

Hi, good morning.

Hi Chris.

Hi. I had just a quick, I guess kind of higher level question to ask for Denise and this quarter, you got a bit more promotional, it seem like there were some certain areas of the business where you got more promotional, at the same time, private label has got a little bit more price competitive and retailers seem to be getting a bit more aggressive with private label we saw for example with broth division, I just want to get a sense of the promotional, I guess landscape generally, how you see that kind of trending in the fourth quarter and then the degree which private label is becoming a bigger threat in some of these categories?

Yes. Let me start first with the retailer landscape, which is really competitive and we have got value players and e-commerce putting pressure on more conventional retail grocery and mass channels. And in that environment, the amp-up of promotion and also the push on private label continues to be pretty robust. What we have actually done in terms of our promotional spend is we have spent on broth for the holiday this quarter and we experienced some lower lift. We have increased our support – our promotion support on V8 +Energy because that brand is really gaining a lot of momentum. And the rest of our promotional spending has been on Global Biscuits and Snacks and particularly in Asia Pacific biscuits, we have a strong promotional program there. And then finally, we did hold our in-season soup prices longer than prior year. And in an EDLP environment, that actually hits the promotion line. But I assure you that we are continuing to manage the depth and frequency of our promotional program while we remain competitive and we have to do that. And we will continue to make marketing investments accordingly.

Okay. It seems private label gets more aggressive, obviously in broth that was the case, is it becoming a theme now across…?

And looking at our categories, most of them have – private label has been pretty much as it always has been, but we did experience an up-tick in soup and in particularly in the broth area.

Okay. Thank you for the time.

Thank you. And our next question comes from Matthew Grainger of Morgan Stanley. Your line is now open.

Hi, good morning. Thanks Denise. I just wanted to follow-up, I guess on the same topic, as you are seeing this increased pressure from e-commerce and some of the discounters continuing to build momentum, I know these two things aren’t separate and distinct sort of investing in your products as opposed to your distribution platforms, but how does that impact your resource allocation as you think about how to direct investments between offerings and sort of internal resources that could facilitate a stronger presence in those channels and trying to accelerate that shift as opposed to putting near-term resources towards more traditional things innovation, merchandising, etcetera, that can help support your traditional retail partners and your categories, help support kind of return to growth in your categories in those channels?

Yes. Well, suffice it to say that we have always run a multi-channel business and so this isn’t the first time that the retail landscape has morphed, although I have to say that I personally have called the shift to digital and e-commerce a seismic shift. So we are definitely making longer term plans to address that. But in the current term, e-commerce is about 4% of food sales and we are setting up resources to address that, but I can assure you that we still have very strong resources against our traditional partners.

Okay. Thanks Denise. I appreciate it.

Thank you. And our next question comes from Jason English of Goldman Sachs. Your line is now open.

Good morning guys.

Hi Jason.

Thank you for sliding me in. Two questions, first Anthony, a quick housekeeping item for you, just to get a little more comfort with the optics of the implied 20% EBIT growth in the fourth quarter, can you – could you quantify how big the size of the Bolthouse recall expense is going to be?

Yes. I will just go back to what we said last year. Last year, gross margin was down 90 basis points and we said 70 basis points of that was Bolthouse Farms and 50 basis points was the recall more narrowly defined.

Got it, that’s helpful. And then high order question for you Denise, you mentioned mix shift in terms of the AC&T spend that you have had against the business, I think we look industry wide, we have seen a pretty similar mix shift, the traditional pull day spend behind the A&C that rolls to SG&A has been shrinking industry wide for quite a few years now, more and more has moved into trade. And at the same time, volumes have become pretty challenged, private labels making more inroads. You are now seeing the deflationary impact kind of roll through your P&L and pressure margins as well. And you are not alone on that. But it all begs the question of is this the right move, the right shift or has the industry perhaps gone too far? Should we be pivoting back and putting more back into the traditional pull-based marketing, if you could weigh in with your high order or high level thoughts on that? Appreciate it.

Yes. I mean, it’s a great question and we really have to look at the marketing mix by brand and what the brands’ objective is and how they are targeting, because under the A), there has also been a lot of movement away from classic TV and print and into digital, which creates a whole different kind of marketing, content development and a lot of efficiencies there. And we are still all getting better at how we measure effectiveness. But I also think in the, A), with the cost savings programs we have been running, we have been doing lots of deep dives into what’s working media, what’s not working media and how do we make sure we are moving more of our dollars to work harder for us. So, that’s the high level answer on A. Of course, we are watching some of the shift to T, where we have got a very robust revenue management analytics group that supports our marketing and our sales force. They are looking at net price realization, because it’s not only list price. It’s also EDLP. It’s also promoted price points. And so those vary by brand, but they are all tucked into the T part of ACT. And then finally, we are also seeing a bit of an uptick in shopper marketing and that’s involved in that T as well. So, again, I think it’s really hard to give you a one-size-fits-all answer, but this is a hypercompetitive marketplace and you have got to be agile in terms of how you run the business to make sure that we are remaining competitive. And we are proud of the fact that despite the difficult environment we have been able to maintain our market share across 75% of our business.

Thanks a lot. I will pass it on.

Thank you. And our next question comes from Alexia Howard of Bernstein. Your line is now open.

Hi, Alexia.

Hi, Alexia.

Alexia, your line is now open. Please check your mute button. And our next question comes from David Driscoll of Citi. Your line is now open.

Hello, David.

Thank you and good morning. I had just a quick follow-up on the quarter and then a question about C-Fresh. So if the quarter turned out worse than you expected, I just don’t think I am clear on why you are raising the bottom end of your EPS guidance. I know it’s just a small change, but it just wasn’t clear to me what got better that made you wanted to raise that bottom end. If you could start there and then I had a quick one on C-Fresh.

Yes. I think the quick answer to that is we weren’t near the low end of those earnings ranges before the quarter. So we are just with one quarter to go, we thought it was prudent to tighten them up a bit. And again, we were already above the low end before.

Okay, that’s fine. And then on C-Fresh, was the revenue guidance reduction in significant part related to underperformance of C-Fresh revenues in the quarter? And if that’s true, can you just talk a little bit more about your confidence in why this business can get back on track? I mean, have you lost shelf space for the CPG beverages? What’s the consumer impression of the brand given the difficulties that it had? I feel like the quarter didn’t come out as you had hoped and I am just concerned that, that has implications on C-Fresh going forward?

I will take the first part. The revenue guidance reduction does not stem from changes in C-Fresh. It’s related to the performance of our shelf stable businesses in the U.S.

And I will take the second part. David, recall that we put a new leadership team into C-Fresh earlier this year and their mandate was to conduct a deep dive strategic review of the business. And we even retained help to do that so that we make sure that we had a real objective look and we were not talking to ourselves. And so this team did an exhaustive review of the categories, the opportunities, the potential for the business as we have got our capacity back up. We looked at both the CPG businesses. We have really looked at the beverage business and then we also looked at the farms business. And they came back confirming the potential of the business to deliver growth in excess of our long-term targets and at multiples of center-store categories. So we will be running that play. That is a 3-year strategic plan that they created and that will go into the next year’s operating plan. So we really took this opportunity in a tough situation to go all the way back to go and say, what did we assume when we bought this business and are those assumptions still valid, and how do you see the potential of this business. And quite frankly, with the consumers’ shifts to fresh, we think that going forward we are going to be in good position to capitalize on that shift.

That’s helpful. Thank you. I will pass it along.

Thank you. And our next question comes from Rob Dickerson of Deutsche Bank. Your line is now open.

Thank you very much. Hello. I just had a bit of a general question on Pepperidge Farm in the U.S. and the distribution model that you use there [indiscernible], it seems like Pepperidge obviously is one of your stronger brands and continues to do well innovation, given I understand the category has always remained competitive, but if you kind of view that distribution model for the time being at least as the competitive advantage, then why haven’t you and why wouldn’t you consider placing more products on those routes to essentially push more into smaller stores and faster growing channels, etcetera, rather than just constrain it under current brands? Thanks.

Yes. You look – we run three different kinds of supply chain here. We run a warehouse supply chain. We run a fresh supply chain. And then in Pepperidge Farm, as you indicate, we run an independent distribution system through DSD. These distributors are entrepreneurs and they have built a great business. In the snacks business, you do see a portion of the business in warehouse snacks, but you also see a large portion of the snacks business, whether it be sweet, savory or salty in DSD. So we still believe in the model for this category and the operations part of it calls for a very focused category distribution. That’s where you can get the maximum effectiveness and efficiency. In fact, we have two separate DSD networks, one for bakery and one for snacks, because of that reason. And we do believe that DSD also helps with the quality of the product and making sure that we are working the shelves every day.

I would just add that in terms of the latter part of your question, we don’t feel that we are constrained by just Pepperidge Farm products. We do think we have the velocity and the volume to push into the smaller stores and push into the growing channels. We continually look at the system. Sometimes, we split routes to make them smaller to enable that kind of enhanced distribution. But again, we don’t think we are constraining our growth.

Okay, great. And then just quickly, fresh bakery, you have called out some, I think increased competitive pressure, just simple drivers as to what’s going on there? Thanks.

The fresh bakery, we have been under pressure with Swirl bread and sandwich bread. We have now increased the quality and reformulated our Swirl bread and we are out with new sandwich bread offerings. So we believe we have responded to that. And our buns and roll business seem – continues to be really robust and we will be continuing to push that one. So bakery was down slightly.

Okay, great. Thanks so much.

Thank you. And our next question comes from Jonathan Feeney of Consumer Edge. Your line is now open.

Good morning. Thanks very much. When I look at this Q4 margin at the midpoint, midpoint to midpoint it’s like 17.8%, which would be the record by as far as I know, forever, for the last 10 years. And typically there is a seasonality in this business that makes this one of the lower margin quarter. So on the things I don’t think it doesn’t seem like at least over the past few years that much has changed in terms of the seasonality of margins. So are the things you are doing here in the fourth quarter indicative of structural progress in margin going forward? And if you could comment about how that breaks down? Thank you.

Yes. Jonathan, I would say no, is the short answer. I think what happens as you get into our fourth quarter, which is relatively small. So any changes that we make, has kind of exacerbated at the margin. But as we look at it and look, we have always expected a robust fourth quarter and there are several key drivers. One is the significant expansion in gross margin. We are lapping a 90 basis point decline last year, most of which was driven by Bolthouse. We will benefit from incremental cost savings coming through our supply chain as well as our ongoing productivity program which has been performing really, really well. As Denise mentioned, we are cycling a very high level of marketing investment. And I think it went up about 150 basis points last year. We will return to more kind of normal levels. And lastly, our GBS business had a really strong third quarter. We anticipate it will have another strong quarter in the fourth. So, if you look at all those factors together, we are pretty confident in our guidance.

So just to follow-up on that, Anthony, everything but the GBS – those are like relative changes year-over-year, but I completely get that it’s a big move year-over-year. But in the absolute, all of those things are things that would presumably persist into fiscal ‘18. So global baking and snacking, we don’t know what the trends are going to be going into fiscal ‘18. So, it’s probably like it sounds like a lot of this is structural progress productivity in the business and maybe partially held back by C-Fresh productivity.

Yes, I think just a good way to look at it. If you go back to last year, I mean, our fourth quarter was very weak and we had a great year in terms of generating cost savings. So I think our fourth quarter last year didn’t really reflect many of the things that we have been working on and those are going to come through this year.

Thank you.

Thank you. And our next question comes from John Baumgartner of Wells Fargo. Your line is now open.

Hi, good morning. Thanks for the question. Denise, I would like to come back to C-Fresh for a minute and specifically on the carrot side. I think it was about 2 years ago where there was a bit of optimism that you would be able to enhance some of the growth in margins by moving more into snacking and convenience. I think one of the products you were testing was called shakedowns. But more recently, we haven’t really heard a lot about that push. So I am curious, with this new management team coming in, will those opportunities still exist and kind of how you are thinking about those options?

Yes. Just to specifically answer your question in shakedowns, we actually have shakedowns in a couple of the school systems in the country. We have moved those more out of retail and into working with schools to give kids healthier snacks. In terms of the new management team coming in, their first and foremost objective is now that we have got our quality and our customer service back is to make sure that we are shoring up our business with customers and making sure customers are happy. In addition to that, we will innovate some things in carrots. For example, one of the things they have are rainbow carrots where we have been able to grow different colored carrots. So, we are working with those in a few retailers. But I think suffice it to say that most of the innovation will happen in the CPG business. That’s where we really are pushing innovation, but we will do enough in carrots to make sure that we are keeping that business stable to modestly growing.

And then just as a follow-up. In that CPG business, especially on the beverages side, it feels as though that shelf space is becoming a lot more competitive with a lot of new entries in there. Can you just speak a little bit to the competitive dynamics that you are seeing in the refrigerated shelf?

I am not sure I understood your question. What business were you talking about?

On the refrigerated beverages side, just seeing a lot of new brands popping up in the category?

Yes. I think the refrigerated beverage business is very competitive and we have seen – the advent of ultra-premium juice, the fermented juices coming or fermented beverages coming in, but we do believe we have a great product and we have a range of across super premium and premium juice. We have been again strapped, because we haven’t had the supply and the capacity to meet that increased demand. So next year, we will be running a full play.

Good. Thanks for your time.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Mr. Gosnell for any closing remarks.

Thanks everyone for joining.

Thank you.

Thanks everyone for joining our third quarter earnings call and webcast. A full replay will be available about 2 hours after the call by going online or calling 1404-537-3406. The access code is 6692640. You have until June 2, 2017 at midnight, at which point it will move strictly to the website. If you have further questions, please call to me, Ken Gosnell at 856-342-6081. If you are a reporter with questions, please call Carla Burigatto, Director of External Communications at 856-342-3737. And that’s it for today. Thanks, everyone.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.