Campbell Soup Company (CPB) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Campbell Soup First Quarter 2015 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 call is being recorded. I would now like to introduce to your host for today's conference, Jennifer Driscoll, Vice President, Investor Relations. Please go ahead.

Thanks, Kate. Good morning, everyone. Welcome to the first quarter earnings call for Campbell Soup's fiscal 2015. With me here in New Jersey today are Denise Morrison, President and CEO; Anthony DiSilvestro, our Chief Financial Officer; and Anna Choi, Senior Manager of Investor Relations. We will start with a few housekeeping items. Then, Denise, will offer her perspective on the quarter and progress with our F'15 objectives. Anthony will discuss our financial results for the quarter before elaborating on our expectations for fiscal 2015. After that, we will take your questions. As usual, we have created slides that accompany our presentation. You will find the slides posted on our website this morning at investor.campbellsoupcompany.com. Our call is open to the media who are participating in listen-only mode. You probably noticed this morning that we reformatted our earnings release in an effort to enhance readability. We made the changes based on feedback from you, our investors and analysts. We hope you will agree that the new earnings format as well as the enhancements we made to our earnings call will make it easier for you to understand the business and to find the key points. Thanks for those of you who offered input and let us know if you have feedback on our changes. 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 4, to our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in our forward-looking statements. While in the current quarter, we had no new items affecting comparability, our comparisons of fiscal 2015 with fiscal 2014, will exclude previously announced items. Because we use non-GAAP measures we provided in our appendix, a reconciliation of these measures to the most directly comparable GAAP measure. With that, let me turn the call over to Denise Morrison.

Thank you, Jennifer. Good morning, everyone. Today, I am going to share my perspective on our first quarter 2015 performance. I will review the key drivers of our results, including our positive organic sales performance across most of our core and acquired businesses. Then I will discuss the challenges we are facing and the actions we are taking. Our challenges include our gross margin performance and the impact of currency headwinds, which Anthony will review in greater detail in his presentation. As a reminder, we said on September 8th, that we don't expect our growth in fiscal 2015 to be evenly distributed across quarters. As a result, we believe that evaluating our business performance on a first-half basis, rather than a quarterly basis, will be more meaningful. Let us start by examining the key growth drivers in our core business in the quarter. I was pleased that we drove top and bottom-line growth in U.S. Simple Meals, with higher sales in our U.S. soup portfolio. Our U.S. soup performance benefitted from a stronger seasonal sell-in and the timing of our quarter end relative to the Thanksgiving holiday. As we stated, one of our strategic priorities is to expand our presence in the faster growing premium soup, which represents roughly 10% of the wet soup category. We made good progress as we launched new Slow Kettle varieties in the quarter to drive the brand's double-digit sales growth. Many of our retail customers have created a dedicated shelf space for our premium soups, where we have gained additional linear fee. The next step in our plan is to expand further with the launch of six varieties of Campbell's organic soup in easier to open cartons this January. Another key driver in U.S. Simple Meals was our strong performance in sauces, including Prego, Pace and Campbell's dinner sauces as we introduce new products and leverage merchandising. We expanded our dinner sauces platform beyond Skillet and Slow Cooker pouches, with the launch of Oven Sauces in the quarter, which has quickly achieved 52% ACV. Overall, Campbell dinner sauces now have over 80% ACV, with dedicated sections that are becoming a consumer destination. Within Global Baking and Snacking, a significant improvement in our core business was our performance in Australian biscuits. We are moving in the right direction to stabilize the business in Australia, where we drove our net sales and earnings. Our tame [ph] growth consumption and share in total biscuits by strengthening planning and execution with our retail partners increasing marketing and promotion behind core brands and driving innovation, including new Tim Tam varieties in light and crispy Arnott’s Shapes. I was also pleased with the continued strong growth in our Indonesia business, which expanded beyond sweet biscuits into savory crackers, with the introduction of Arnott’s Shapes. Now, let's look at the performance of the trio of growth engines that we acquired in the last two years, Bolthouse Farms, Plum Organics and Kelsen. Strategically, we acquired these businesses to expand in the faster growing spaces and respond to the seismic shifts in the consumer landscape, including the focus on health and well-being and the growth of the middle class in developing markets. Together, these businesses contributed one point of organic sales growth to our company in the quarter. We were encouraged by Bolthouse Farms' strong top-line growth. We continue to expand distribution in packaged fresh super premium beverages and fresh salad dressings. Bolthouse Farms has strengthened its number one share position in premium beverages over the last year, while simplifying and streamlining its beverage portfolio, increasing space for higher velocity offerings and reducing out of stocks. During the quarter, we also launched Bolthouse Farms Kids, the brands first line of healthy beverages and Veggie Snackers for children. We are merchandising Bolthouse Farms Kids with a dedicated shelf set in the fresh produce section to further expand our position in the fast-growing perimeter. Our goal is to become a branded leader in the $18.6 billion packaged fresh category. Plum Organics delivered double-digit sales growth after facing challenges a year ago, as the number one brand in the organic segment of the U.S. baby food market Plum continue to expand distribution and drive innovation in simple meals and snacks. We are continuing to integrate Plum to leverage Campbell's Kettle and amp up its expansion while maintaining its entrepreneurial spirit. Kelsen, which we acquired early in last year's first quarter to expand our global snacks business, delivered higher sales as it continued to meet our expectations. We are focused on expanding distribution in key cities in China. The second quarter historically marks the peak season for Kelsen sales and earnings as an authentic Danish butter cookies are often exchanged by friends and families in China and gifts for holidays and festive occasions, including Chinese New Year's. Now, let us take a look at some of our challenges and how we are addressing them. I am going to focus my remarks on two businesses that underperformed Pepperidge Farm and U.S. Beverages, but before I get to those, Let me say that our gross margin performance in the quarter did not meet our expectations. Some of the pressure came from higher than anticipated commodity inflation and some came from unexpected costs in our supply chain, including manufacturing and transportation costs. Anthony will describe these issues in greater detail in a few moments. We are taking action to manage costs aggressively and working all the levers to mitigate the unexpected pressure on gross margin. Turning to the businesses, Pepperidge Farms' performance in the quarter was mixed. I was pleased with our growth in cookies driven by Milano and crispy Pepperidge Farm varieties. We also drove strong results in fresh bakery, which continue to outperform the market with consumption and share gains. Fresh bakery benefited from our focus on seasonal offerings and quality improvements. Our main challenge in this business is to restore growth in crackers. It is important to examine the total cracker category. For the past two years, dollar consumption growth trends have slowed in the category and were flat to declining in the quarter. We see several crucial drivers in this category deceleration. First, we are seeing a shift in consumer snacking preferences. About of half of cracker consumers are buying crackers and other snacks less frequently. When they do, they are shifting in some cases to snacks that are better for you or in the opposite end of the spectrum, more indulgent snacks. Second, approximately three quarters of the losses in the total category has been in sandwich crackers, where we don't compete. Third, total advertising in the category has declined more than 20% in the last year, impacting velocities as price and distribution held. Finally, there has been a decline in the number of new products introduced in the category, resulting in less excitement from innovation in the cracker isle. In this environment, some major brands have continued to outpace the category. One of those brands is Goldfish, which has consistently outperformed the category over the last three years. In the first quarter, despite growing consumption and share and outperforming the category Goldfish sales declined, due in part to cycling the distribution build of the launch of Goldfish Puffs. We are not satisfied with this performance given the brand's steady track record of growth over many years. We continue to expect Goldfish sales to be up for the year behind strong holiday programs, increased advertising and consumer promotion and improved in-store merchandising. Going forward, we are increasing advertising by about 20% with a quarter of our spend in digital media. Our plans include increased innovation, including new flavors of Goldfish and Goldfish Puffs. Turning now to U.S. Beverages, although we grew operating earnings, sales in V8 V-Fusion and V8 vegetable juice declined as shelf stable category remained under pressure. Our plans to revitalize our V8 platform are underway. The next step is the January launch of V8 veggie blends. We are optimistic about this launch as we plan to tap into the juicing trends by offering nutritious affordable juicing that is convenient for the consumer. Separately, in the quarter, we extended the V8 brand to a new category, with the launch of V8 protein shakes and bars to expand into adult on-the-go nutrition, a multibillion-dollar category. This is another example of our focus on driving breakthrough innovation to expand in the faster growing spaces. Looking ahead, although we face more challenging comparisons, we are confident about our plans for the year which include driving continued growth in U.S. Simple Meals, continuing our turnaround in Australian biscuits, which moved in the right direction in the first quarter, restoring growth in Goldfish crackers and improving Pepperidge Farms' top-line performance, revitalizing V8 to bring news to the shelf-stable juice category and delivering strong performance in Bolthouse Farms, Plum Organics and Kelsen. Across our portfolio, we are responding to the consumer shift to health and well-being with new, on-trend products, ranging from Campbell's organic soups and V8 veggie blends in the center of the store to Bolthouse Farms Kids in the fresh parameter and V8 protein shakes and bars in health and beauty aisle. Finally, we are taking action to mitigate gross margin pressure in the remainder of the year. To sum up, we delivered organic sales growth across most our core and acquired businesses in the first quarter, with stronger performance is in U.S. Simple Meals and Global Baking and Snacking. We have more work ahead and challenges to overcome this year, but we remain focused on our strategy to strengthen our core business and expand in the faster growing spaces to reshape our portfolio for a more profitable growth trajectory. I look forward to answering your questions in a few minutes. Now, let me turn the call over to Anthony for a detailed review of our financial performance.

Good morning. Thanks, Denise. Before getting into the details, I wanted to give some perspective on our result and guidance. As Denise said, we are encouraged with our top-line performance as we start the fiscal year. However, this top-line performance is dampened by gross margin pressure from higher than anticipated cost inflation and supply chain related costs. The other item I want to call out is currency. Due to the recent and significant strength of the U.S. dollar against most major foreign currencies, we are seeing a negative impact that we did not forecast. Based on this headwind and volatility from currency translation, we have reduced the low end of our guidance ranges. Importantly, our currency neutral expectations have not changed. Now, I will review our results. First quarter net sales increased 4% to $2,255 million organic net sales increased by 5%, with volume and organic sales gains in four of our five reportable segments. Sales in the quarter benefited from movements in retailer inventory levels from a stronger seasonal sell-in and the later timing of our quarter relative to the Thanksgiving holiday. In aggregate, the movements in retailer inventory represent about half of our organic sales gains in the quarter. We are encouraged by the sales performance in Australia and from the performance of our recent acquisitions Bolthouse Farms, Plum and Kelsen contributed one point of total company organic growth in the quarter. Adjusted EBIT increased 9%, reflecting the higher sales, the benefit of lapping the prior year Plum recall and lower administrative and marketing expenses, which are partly offset by the decline in our gross margin percentage. Adjusted earnings per share increased 12% to $0.74. Decomposing our sales performance, favorable volume mix was the main driver of the increase, primarily in the U.S. Simple Meal and Global Banking and Snacking segment. Overall, increased promotional spending was negatively impacted to sales by one point. While our promotional rate was stable in our largest segment, U.S. Simple Meals, the increase was driven by higher rate of spending in the Global Banking and Snacking segment. Currency also negatively impacted sales by one point as our two primary foreign currencies, the Australian dollar and Canadian dollar, both weakened against the U.S. dollar. We are disappointed with our gross margin performance, which did not meet our expectations. The bridge on this chart highlights the factors impacting our performance. First, cost inflation and other factors had a negative impact of 340 basis points. Most of this was cost inflation, which as a rate increased by almost 4%. Recent and unanticipated increases in dairy, beef and aluminum have added to the overall inflation impact. Also, with pressure on carrier capacity, we are seeing much higher freight cost. For the full fiscal year, we now anticipate cost inflation at the high-end of our 3% to 4% range. In our North American supply chain, we experienced higher than expected manufacturing and freight costs from significant volume demand early in the quarter. As a result, we ran production more weekend, increased the use of co-packers and incurred higher freight costs in the spot market. Promotional spending negatively impacted gross margin by 70 basis points, primarily impacted by higher spending in the Baking and Snacking segment. While volumes increased this segment, trade had a negative impact on margins. Moving to the right, as we wrap both, the Plum recall and the one-time purchase accounting impact on the Kelsen acquisition, these represent a 90-basis point gain. Lastly, we continue to drive meaningful productivity gains in our supply chain, which contributed 140-basis point of improvement. Looking ahead, reflecting our revised inflation outlook and first quarter performance, we now expect our gross margin percentage of the full year to decline 50 to 100 basis points, due largely to the residual cost inflation and cost to maintain our customer service levels as we recover from the early spike in demand. Longer term, our investments soup common platform and broad capacity will increase our flexibility to respond to volatility in demand. Importantly, we will manage the balance of the P&L to mitigate the negative impact, including our overhead and supply chain costs and our marketing programs and also evaluate price realization opportunities. Marketing and selling expenses decreased 5%. As you may recall, we increased advertising in the prior year quarter to support new product launches and Bolthouse Farms. Marketing reductions in the current quarter reflect lower advertising spending in U.S. Simple Meals, primarily advertising production costs and a shift in advertising in U.S. Beverages to the back half of the year to support the launch of our new V-8 veggie blend platform. Administrative expenses were down 9%, driven by lower long-term incentive compensation costs and cost savings related to prior year restructuring initiatives. Given that our annual cycle for long-term incentive compensation is at the end of the first quarter, we had favorability through this quarter and as we have discussed previously, expect a significant headwind for the balance of the year. For additional perspective on our performance this chart breaks down or EPS growth between our operating performance and below the line items. As you can see, we grew adjusted EPS by $0.08 per share, $0.07 of which is attributable to the growth in EBIT. Net interest expense declined $5 million versus a year ago as we reduced our debt level using the proceeds of the European Simple Meals divestiture and this contributed a penny to EPS growth in the quarter. Our tax rate remained relatively flat, declining 40 basis points to 31.8%. We resumed repurchases under our strategic share repurchase program in a quarter, repurchasing $50 million under this program. However, given the timing, there was no impact on EPS growth in the quarter. While currency had a point impact on sales, it did not impact EPS in the quarter. For the full year, and based on current exchange rates, we estimate currency will have a $0.03 per share negative impact. As this was not anticipated, we have adjusted the lower end of our guidance range to reflect the impact. Now, turning to our segment results. Sales growth in U.S. Simple Meals was 8%, driven by strong volume gains. U.S. soup sales increased 6%, benefiting from movements in retailer inventory levels, due to a strong seasonal selling and the later timing of our quarter end relative to the Thanksgiving holiday. Sales of other simple meals increased 14%; driven by growth in Plum, Prego benefiting from white sauces and in our dinner sauce platform, which now includes Oven Sauces. Operating earnings for U.S. Simple Meals increased 15%, with eight points of the growth due to cycling the Plum recall in the prior year. In Global Baking and Snacking, we achieved a 3% organic sales growth, driven by the improved performance of Arnott’s. We are pleased with our consumption and share gains in the Australian biscuit category given our previous challenges while Indonesia delivered another quarter of double-digit sales gains. Within Pepperidge Farm, fresh bakery and cookie sales grew. Goldfish crackers had share gains, but sales decline. Sales of frozen products were also soft. Operating earnings for Global Baking and Snacking increased 15%, of which 10 points was due to wrapping the negative impact of purchase accounting on the Kelsen acquisition in the prior year. In Bolthouse and Foodservice segment, growth continued to be driven by sales gains in Bolthouse premium beverages and salad dressings. The decline in operating earnings was primarily driven by a lower gross margin percentage, with cost inflation across the segment. International Simple Meals and Beverages grew organic sales by 5%. Strong sales gains in Canada were driven by innovation and higher levels of promotional activity. Declines in operating earnings reflect the impact of increased marketing support. U.S. Beverage sales fell 3% and declined in the immediate consumption channel as we continue to implement our new route to market. Across the portfolio, sales declined in V8 V-Fusion and V8 vegetable juice more than offset gains in V8 Splash. Operating earnings improved as we shift the timing of our marketing programs to the back half to support the launch of the veggie blends platform. Within U.S. soup, the 6% sales growth was driven by gains in condensed and Swanson broth. Condensed eating and cooking varieties rose. Swanson broth continues to perform well in the marketplace led by aseptic broth, which benefited from earlier holiday shipments. Sales of ready-to- serve soup were comparable to the prior year as declines in volume were partly offset by lower promotional spending as activity was shifted to the second quarter of this year. While our soup sales increased 6%, consumer takeaway in measured channels for the comparable 13-week period, ending November 2nd, declined by 2%. Here is a look at U.S. wet soup category performance and our share results as measured by IRI. For the 52-week period ending November 2nd, 2014, the category as a whole declined 0.5%. Our sales in measured channels declined 1.6% with weakness in condensed and ready-to-serve soups partly offset by strength in broth. Campbell had a 59% market share, a decrease of 70 basis points. All other branded players collectively had a share of 28%, with gains driven by smaller players. Private label also grew share, finishing at 13%. We had strong cash flow performance as cash from operations increased from $38 million to $188 million, reflecting lower working capital requirements, lower pension contributions and reduced payments related to hedging activities. Capital expenditures increased slightly to $62 million. We continue to expect capital expenditures of about $400 million for the year as we increase capacity to support growth in our faster growing businesses. We paid dividend totaling $101 million, reflecting our current quarterly dividend rate of $0.312 per share. In aggregate, we repurchase 73 million of shares in the quarter, 50 million of which were under our strategic share repurchase program. The balance of the repurchases were made to our offset dilution from equity-based compensation. Based in our current investment plans, we anticipate making strategic share repurchases at this pace on average for the balance of the year. Net debt declined almost $700 million to $3.8 billion, including the proceeds from the European simple meals divestiture. Approximately 22% of our sales are denominated in currencies other than the US dollar, with the Australian dollars and Canadian dollar making up the majority of our non-U.S. sales. Since September, both of these currencies have declined in value relative to the U.S. dollar, and while not a material impact to our first quarter, if the current rates hold for the balance of the year, we will see a more meaningful impact. At current exchange rates, we estimated to negatively impact our full year performance by one percentage point of sales, EBIT and EPS, and is the reason we are adjusting down the lower end of our guidance ranges as illustrated on the next chart. As we announced early this morning, we have adjusted our fiscal 2015 guidance as show. Our currency-neutral expectations have not changed for sales and earnings. While we now anticipate some pressure on our gross margin percentage, we have plans in place to mitigate the impact. We now expect sales growth of zero to plus-2%, adjusted EBIT from minus 1% to plus 2% and adjusted EPS from minus 1% to plus 2% or $2.42 to $2.50 per share. As we said previously, we anticipated stronger first quarter performance. Because we are cycling a more robust second quarter last year, we expect the first half as more consistent with our full year guidance. Thank you. Now, I will turn it back to Jennifer.

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

[Operator Instructions] Our first question comes from the line of Alexia Howard with Sanford Bernstein. Your line is open.

Good morning, everyone.

Hi, Alexia.

Good morning.

Denise, you mentioned once or twice the fast growing parameter of the store. From what you have seen, the retail is expanding for its space at the moment and what does this mean to the shelf space in the center of the store. Obviously it is great for Bolthouse. It might be more difficult in the ambient product. Thank you.

Thank you, Alexia. You know, we have seen over the past several years a expansion and build-out of the perimeter of stores. Within the produce section however, the additional space that we are getting for the Bolthouse Kids launch is largely a reconfiguration of existing space, so pulling from other things in produce and carving out a section for Bolthouse Kids and that has been largely the way the premium beverage and the salad dressing sections have been expanded as well. I think it is more yes perimeter space continues to expand and then within and the produce section there has been a larger dedication of space CPG items.

I would add to that, I mean, if you look at the center of store and our in our soup business, I mean, given the level of innovation we are bringing to the market with the premium expansion and soon the organic soup launch, we are expecting to gain shelf space in our soup category.

Thank you very much. I will pass it on.

Our next question comes from the line of David Driscoll with Citi. Your line is open.

Thank you and good morning.

Hi, David.

Good morning.

I wanted to just pull a little bit more on this gross margin issue. I mean, this looks to be a fairly significant issue. I think Anthony, you said now down 50 basis points to down 100 basis points for the full year, and previously the expectation, correct me if I am wrong, but it was up modestly was the prior expectations. Is that correct?

I think we said it is expected to be stable, so versus stable, yes we are down, now looking to be down 50 to 100 basis points and to just dimensionalize that, you know, we did not anticipate the recent increases in diary and aluminum and also what freight costs are doing and that is the majority of that 50-basis point to 100-basis point decline. The other piece of it is higher than anticipated supply chain cost related to that early spike in demand that we had to deal with.

May I say that - I always thought that you had a pretty good visibility on the protein side because of your relationships with your suppliers, you know, these things didn't kind of just suddenly come up and I thought the entire purpose of that was that gaining pricing in soup during soup season is like all, but impossible. Maybe, you know, is my recollection of history correct in kind of why is it different this time?

Yes. I think, we have a pretty broad array of input cost. Certainly on proteins, it is a significant part of it and we do have good relationships always with our suppliers but the markets have been extremely volatile and I don't think we are the only ones that are seeing this type of activity. There has been issue on the supply side related to the drought. There has been issues on the demand side related to foreign buyers and this just created a lot of volatility that frankly we didn't anticipate.

The way you offset this is by, number one, it is going to be lowering marketing spending. Then number two lower overhead spending. Do I have that in the right order?

I would switch the order of that and I would also add that we are evaluating price realization opportunities and also pushing on our supply-chain to, one, fix the problem and, two, contribute to those cost savings.

Super. Thank you. I will pass it along.

Our next question comes from the line of Chris Growe with Stifel. Your line is open.

Hi. Good morning.

Hi, Chris.

Hi. I just had a quick question for you if I could. If you look at this quarter, you are getting - you seem to be increasing contributions from the sauces business within U.S. Simple Meals, in particular as well as the premiums, so I wondered if you could give a little color around how those two products benefited the sales for that division in the quarter? Maybe related to that, ready to serve is a little weaker than I had thought against the relatively easy comp, premium soups - ready to serve [ph] clearing and understand why that was more weaker than I thought?

Okay. First of all, we have had for the past several years a very good run with our base sauce businesses, particularly in the Prego line. Recall, part of our innovation plan was the successful launch of Prego white sauces, which has done incredibly well. We have increased our advertising against the brand. We are also advertising to Hispanics, which has been very productive for, so we are very pleased with the innovation and the brand building that has gone on in our base sauce business and pace also a very good quarter, One of the things that is also impacting our sauce business is the building of the dinner sauce platform. Although it started small with one initiative in Skillet, as we built from Skillet to Slow Cooker and now introduced Oven, as we have gained an additional section in the store to house these sauces and create a consumer destination, we really believe that that has added seriously to our sauce performance. Of course, this is a very good margin business for us as well.

Okay. The only thing I would add to that is Plum is reported inside simple meals and it had a significant increase in sales in part due to wrapping the recall and in part due to expanded distribution.

Within ready to serve, presumably premium soups grew, that was a contributor to growth. Was there one element of ready to serve that was weak, whether that would be Chunky or Homestyle or?

Yes. There was a very good reason for that. Our ready to serve business was relatively flat and that comes mostly from promotional timing moved to the second quarter out of the first quarter relative to last year.

Okay. Thank you.

Our next question comes from line of Ken Goldman with JPMorgan. Your line is open.

Good morning, everyone.

Hi, Ken.

Hi, Ken.

Denise, you have spoken in the recent past I think about course correcting your deals a little bit deal bags, right? Going deeper in terms of discount, but maybe a little bit less broadly, I am just curious if it is still the plan, because as we look Nielsen data, we are seeing deeper levels of price discounting. You are doing what you said, but we are not really seeing a change in the percent lift from promotions, so I am just curious how you think about that, I guess breadth versus depth decision going forward here?

We do expect our total marketing to be in the range of 24% to 25% of total lift sales. Within that the mix will be different by category and we do recognize as we are very diligent about going back and looking at the productivity of our trade spending and we recognize that some of the spending last year, particularly in Pepperidge Farm and soup did not achieve the anticipated lifts. Predominantly, it came from increasing the frequency of promotion, so we do expect our overall trade rate trends to improve in the second half as we have course corrected in this area.

Great. Thank you.

Our next question comes from the line of Robert Moskow with Crédit Suisse. Your line is open.

Hi. Thank you.

Hi, Rob.

Good morning. I guess, I was wondering about this unexpected spike in demand. If we look at the sales in the quarter, they didn't come in that different from what we had modeled and I don't think it came in that different from what you had modeled, so is this a specific customer making a last-minute decision that you felt like you had to react to? Then secondly gross margin being down 130 bips despite volume being up, Anthony, was there any kind of overhead absorption benefit from all this volume. If not, you know, why not?

Yes. Let me start with the last part of that question. No. There wasn't absorption benefit, because we still expect to make the same full-year production, so it is just moving fixed cost with those cases between the quarters on an rate per case basis nothing really changed. In terms of the volume spike, what you don't see when you look at the quarter is the monthly variations and we had very strong volume demands early in the quarter, so August-September and it is not a particular customer that has to do with just our overall programming and the timing of which customers place orders. In order to meet the customer service requirements, you know, we had to run some more overtime, we had to run some more weekends and obviously that cost us a bit more and we also had to get into the freight market on a spot basis, so that is obviously a little more expensive, so it is going to take us a little while here to catch up with that requirement, but we would foresee improvements when we get to the second half of the year.

Okay. Was it on the specific line of products or not. It's mostly in our soup and sauce business in the U.S.

Okay. Thank you very much.

Our next question comes from the line of Eric Katzman with Deutsche Bank. Your line is open.

Hi. Good morning. Happy holidays to you and your family.

Same to you, Eric.

Good morning.

I guess, I want to follow-up on Rob's question, because I think it goes to the point. I mean, what kind of - I mean, obviously we do the timing of Thanksgiving, and you kind of have said that the shipments were well ahead of consumption, so the first part is, what are we looking for from sales in the second quarter given how much there - it seems like there was over-shipment versus consumption.

Yes. I think, that is a good point. We, as you know, benefitted from the retailer inventory movement in our last year first quarter relative to this year's first quarter. When you look at where we ended this quarter, it is within the kind of the historical ranges, but we are a bit higher than where we were last year, so it is hard to predict exactly when that will come out, but it could put some be a little bit of a headwind for us on second quarter top-line. As we have also said, we did expect no stronger first quarter and relatively softer second quarter, and to finish the half with results more in line with our full year guidance, so this is not in unexpected, but again the thing that we did not expect was within the first quarter, the acceleration to the earlier month or two.

Yes. We actually had a stronger sell-in against back-to-school, and as predicted had our holiday shipments, some of our holiday shipments shipped in October, and in the soup business at least about 75% of our consumption actually occurs in the second and the third quarters.

Okay. Then, Anthony, I don't understand your answers to Rob's question about the volume lift and the absorptions. Are you saying that regardless of quarterly volume, you basically spread the fixed cost over the entire year, kind of like just on some kind of basis as opposed to kind of counting it more specifically within the quarter.

It actually goes with the volume, so you figure out on a fixed cost per case and you recognize those fixed costs as you sell them, so it is not straight line. It moves with the volume.

Great, so with the volume so strong in arguably the highest margin products that you have, I guess you just must have paid extraordinary cost on the freight market and I would assume Pepperidge Farm and Goldfish is a very high margin product, was that also an offset, because otherwise my guess is most investors are saying that this would have been a much bigger margin quarter.

I think, you referenced the mix benefit and we do see and you saw it on the gross margin bridge that I reviewed, so we are seeing that mix benefit. As I said, on a fixed cost per case basis, we don't necessarily see that, but we do see it in the mix line, so I think there was 30-basis point or 40-basis point of mix benefit given the performance is stoop in some of our higher margin business relative to the balance. That being said, you know, the inflation impact on dairy, beef and aluminum and freight, is about half of that gross margin miss you know and the other half is the supply chain related costs, which you know are not insignificant and did hurt our gross margin performance in the first quarter.

All right, I will respect the time. I will pass it on and will follow-up on this, Thanks.

It was 40 basis points of mix benefit.

Our next question comes from line of David Palmer with RBC Capital Markets. Your line is open.

Hello, David.

Good morning. A big picture question about Campbell improving towards its long-term algorithm, I am imagining this year that Plum will have V8. Those are going to be areas of improvement this year and perhaps you can comment on that. Thinking longer term one issue and I think Chris was hinting at this on his question, Campbell has been improving somewhat in the meal helpers, the sauces, the cooking soups, essentially helping the Millennials and others prepare meals and participating in that importantly in a higher margin way for Campbell, Over time it is certainly believable that there could be a tipping point when these platforms again higher margin platforms for Campbell could start to sort of carry the P&L to contributor revenue in a way that is not one where you are fighting the gross margins of the products that you are growing with. Can you comment on that perhaps when you could see a tipping point like that? Thanks.

First of all, I don't think I could have articulated the strategy any clearer than you did, so thank you for that. I think that as opposed to tipping point, I think we are starting to see the impact of some mix exchange as these particular faster growing businesses come into the portfolio and are now captured in our organic sales. I liken it to what we did with aseptic broth. Once upon a time broth was a canned business and over time we introduced the aseptic cartons and cans gradually declined, the aseptic cartons of broth increased at a very significant margins, so we were pretty excited about that. I think it is these other businesses that will come into the portfolio and mix accordingly, but that said we are still putting a very concerted effort on our core businesses to strengthen them as well.

I guess the big question, the million-dollar question is whether these sauces and helpers, essentially, and some sometimes it is hard for us to teas that out of your general soup numbers, because some of these are cooking soups. When those will, again, carry that that line item in a margin-accretive way, I guess, that would be for us to just wait and watch.

Yes. I mean, I think that is right. One of the things we do know is that these types of products are attracting more affluent and younger consumer into our franchise and we are very encouraged by that.

Thank you.

[Operator Instructions] Our next question comes from the line of Matthew Grainger with Morgan Stanley. Your line is open.

Hi. Good morning, everyone.

Hello, Matt.

Just to drill down on one of these newer business lines, I was surprised to see profitability down pretty sharply in the Bolthouse and Foodservice segment and granted one quarter, but you are obviously generating strong top-line growth on Bolthouse. Foodservice seems to be in a more stable position, so is the margin contraction here during the quarter a function of the timing of investments in new products or should we think about there perhaps being Bolthouse-specific cost pressures that could persist over the course of the year or are there other factors that play just here during the quarter?

Matt, there was a couple of things. Within Bolthouse, the CPG business, so beverages and sour dressings grew both top-line and bottom-line and within Bolthouse that has been carrots, so there has been some significant inflation in there. It is partly due to the drought, so we have had higher water extraction costs and higher land cost. We also had a higher freight cost. We were growing up in Washington state in trucking down to California and since the first quarter that production has moved to central California, so that should help a bit. The other impact is on the Foodservice business, so not in Bolthouse, significant cost inflation in the Foodservice products and also some investment we are making to expand our retail fresh business, so it is a combination of those things.

Okay, so it is fair to say it may not be the same magnitude, but some of these things directionally could continue to pressure operating profit for the next few quarters?

I would expect things to get better.

Yes. We expect improvement.

Okay. All right. Thank you, everyone.

Our next question comes from the line of Bryan Spillane with Bank of America. Your line is open.

Hey, good morning, everybody. Happy Thanksgiving.

Thank you.

Hi, Bryan, same to you.

You know, I just wanted to ask a question about M&A. Denise, we are now a couple of years into this current strategy and you have been very articulate and clear about where the M&A targets are, but at the same time there is two things that probably shifted more in the last three years. One has been the trend towards or the size of the impact on health and wellness has become, I guess, more pronounced and larger in the U.S. Then also, international, especially developing and emerging markets, at least right now have slowed and I think there is a lot of mixed opinions in terms of when it turns and how it turns and where it turns. Can you just talk a little bit about how you have looked at those dynamics changing, and if at all it begins to have you kind of refocus or adjust at all, your lens for where you are looking to do acquisitions?

Yes. We said previously that some acquisition may be required to further diversify our portfolio and we still believe that to be the case. That said, we have also said and still are very tight with this, we have a very disciplined approach to how we evaluate acquisitions and the strategic fit of acquisitions into our program here. That said, we do have the financial flexibility to make a meaningful acquisition if we can find one that is a good fit and gives us the returns that we would expect to create value over time, so we still are active in this space, but we are being very disciplined about our approach to it.

Has there been any change in focus areas or areas we are looking? Just because the global economy has slowed, things are slower in developing emerging markets and there seems to be an increased certainly appetite in the investment community, but also just broadly if health and wellness related products and categories, because you expand, has that all changed the areas where you are looking or is it still the same basket theme proportions in terms of where you were looking?

Yes. Well, if you think about the acquisitions that we have made, Plum, Organics and Bolthouse Farms in packaged fresh have both been, we believe, are very, very solid plays in health and wellness and the Kelsen business was a good add for us for international expansion, particularly with 40% of its sales in China and Hong Kong. We will continue to look or target similar to those kind of acquisitions.

Then just one last one related to this, just in terms of investment, so rather than M&A is there any more broad thoughts to just changing, thinking investments organically in your own business to adjust towards simple ingredients are more health and wellness above and beyond what you have already done, so something you might maybe change production processes or change ingredients. Is that all part of sort of what you are looking at in terms of your investment dollars? Thank you.

Yes. I think, if you really look at the platforms for growth, in addition to what we just discussed, we have got a concerted effort on breakthrough innovation and one of platforms in breakthrough innovation is health and well being, because we have got V8 veggie blends coming, V8 protein bars and shakes. We have got advances in innovation and Bolthouse Farms and Plum and we have the new Campbell organic soups coming to market, so we are very active in innovation, in health and wellbeing space. Packaged fresh, we just talked about and then also increasing our availability, we have got an enormous opportunity in other channels outside of grocery, particularly in an immediate consumption channels, so we are in the process of building out that network, we have put a sales team in place and we still have a lot more work to do there, but that is a great expansion space for us.

All right. Thank you very much.

You are welcome.

Our next question comes from the line of Akshay Jagdale with KeyBanc. Your line is open.

Good morning. Thanks for taking the question and Happy Thanksgiving.

Hi, Akshay.

Same to you. Good morning.

Good morning. My question is on freight cost. Can you talk a little more broadly about freight cost? A lot of companies have been mentioning that in the food space as being a headwind. Is seems like a general industry trend that sort of snuck up on us. Is that the case? What is your read on that? Is it sort of a transitory issue? Perhaps how long might that last?

Yes. I think, it really stems from the carrier capacity situation and there is just significantly more demand than there is availability especially on the spot market, so it hit us two ways this quarter. One, is just a general increase in freight rates. The other, because of our volume demand, we had to exit the spot market and a higher proportion than we have done in the past. You know what we are doing about it is, you we are trying to get more committed carrier capacity in our highest volume freight lanes and that will protect us from coming to the spot market. You may have to pay a little bit more, but it gives us some protection and our supply chain group is in the process of doing it right now, so it will be a negative impact but it should moderate as we go through the year here.

Thank you. I will pass on.

Our last question please?

Our final question comes from the line of Alexia Howard with Sanford Bernstein. Your line is open. Alexia, your line might be muted.

Thank you for the follow-up question. Can I just ask about the shift into digital on both, the advertising and promotional front? A number of companies have been saying that promotional spending particularly has been getting less effective of late. I am just wondering how quickly you are shifting into digital on both, advertising and promotion, and how you can be confident that is giving you, I guess, better effectiveness as you make that shift? Thank you.

Yes. We have been experiencing and encouraging the same shaft into digital. We are up to about 20% of our spending and digital. What happens is it is the production cost of digital are less, but you need to produce more content, so there is a bit of an offset there. Yes, you could see non working come down, because of the price of producing in digital, but then again it is a different kind of production and making sure that content is fresh and works on multiple screens sizes, but we do believe that the shift will continue. This is the way to connect with the next generation of consumers. We still do have a significant portion of our spend in T.V., because of our large baby boomer population that still watches TV as their major media.

Thank you very much. I will pass it on.