Good day, ladies and gentlemen, and welcome to the Campbell Soup First 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 will now turn the call over to your host, Ken Gosnell, Vice President, Finance Strategy, Investor Relations at Campbell Soup. Please go ahead.

Thank you, Stephanie. Good morning, everyone. Welcome to the first quarter earnings call for Campbell Soup's fiscal 2016. With me here in New Jersey are Denise Morrison, President and CEO; Anthony DiSilvestro, CFO; and Blake MacMinn, Senior Manager of Investor Relations. As usual, we've created slides to accompany our earnings presentations. You will find the slides posted on our website this morning at investor.campbellsoupcompany.com. The call is open to the media who'll participate in a 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. As we said in this morning's news release, in fiscal 2016, the company incurred mark-to-market losses associated with interim remeasurement of certain U.S. pension plans. The impact on EPS was $0.26 per share. The company also incurred restructuring charges, implementation cost and other related costs associated with the new organizational structure and cost savings initiatives. The impact on EPS was $0.07 per share. Our comparisons of fiscal 2016 with fiscal 2015 will exclude these items for comparability. 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. With that, let me turn the call over to Denise.

Thank you, Ken. Good morning, everyone, and welcome to our first quarter earnings call. Today I'll share my perspective on the overall operating environment, the changes we've implemented at Campbell, and our first quarter business performance. The seismic shifts that we've outlined in previous meetings continue to impact the food industry, which remains under pressure from new, global economic realities, major demographic shifts, changing consumer preferences for food with an emphasis on health and well-being, and the continued growth of digital marketing and e-commerce channels. Looking at the operating environment, conditions remain challenging. In the United States, the economic situation is mixed. Unemployment continues to improve, but consumers remain very cautious. We're continuing to see Americans save more and spend less amid the uncertain economic climate. Outside the U.S., we're seeing macro-economic challenges in other markets where we have significant operations, including Canada, China and Indonesia. Generating growth in this environment has been and remains difficult. As a result, the industry continues to respond with consolidation, spin-offs, aggressive cost cutting programs, and other measures to improve operational efficiency. Meanwhile, food retailers continue to respond by reconfiguring existing stores with a focus on the perimeter by launching new, smaller formats and by investing heavily in e-commerce capabilities. Several years ago, we recognized the early signs of many of the trends that the industry is currently facing and we started taking steps designed to best enable Campbell to navigate the changing landscape. While we've made progress through fiscal 2015, our actions haven't been sufficient. That's why last year we put a bolder plan in place to reshape Campbell. We began fiscal 2016 after successfully implementing significant changes to align our enterprise structure with our strategy. We formed three new divisions with clearer portfolio roles. We began implementing a three-year, $250 million cost…

Thanks, Denise, and good morning. Before reviewing our results and updated guidance, I wanted to give you my perspective on the quarter and outlook for the balance of the year. As Denise mentioned, organic sales were in line with our expectations after lapping a solid year-ago quarter. We made good progress on gross margin, which increased 260 basis points on an adjusted basis, benefiting from net price realization and supply chain performance while cost inflation moderated. I'm very pleased with the progress we're making against our cost reduction initiatives, delivering $30 million of savings in the first quarter, ahead of our expectations, and as I'll share later, allowing us to raise our 2016 savings target. Our improved outlook for cost inflation and additional cost savings will enable us to both fund investments in longer term innovation and raise our full year guidance for adjusted EBIT and adjusted EPS. And since we last updated you, we are experiencing an additional 1 point of headwind from currency translation across the P&L as the U.S. dollar continues to strengthen. Lastly, as we indicated on our fourth quarter call, we have changed our reporting segments to align with our three new divisions and changed our method of accounting for pension and post-retirement benefits, both of which I will cover in my comments. I'll begin with the benefit accounting change and then discuss our results and updated guidance. To provide greater transparency into our financial results, we are changing our method of accounting for pension and post-retirement benefits. Previously, actuarial gains and losses were deferred and amortized into earnings over several years. In our case, we have been amortizing significant actuarial losses which arose over time, primarily from declining interest rates. Under the new mark-to-market method, which has been applied to all prior periods, actuarial…

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

Thank you. [Operator instructions] Our first question comes from Eric Katzman with Deutsche Bank. Your line is open.

Hi. Good morning, everybody.

Hi, Eric.

Hi, Eric.

Happy holidays to all of you.

Thank you. You, too.

I guess with the respect for the one question, I guess, Denise and Anthony, what struck me this quarter most was how high the margins are in this simple meals area with the cost savings program versus kind of how low the margins are in the Campbell Fresh division, with obviously most of the growth expected to come in the latter. I mean, is that kind of low - the single digit kind of margin what we should assume is reasonable long term for the Fresh division? And is it - on a long-term basis, is it going to be how you balance the two to get to the consolidated goals? I'll pass it on. Thanks.

Yeah, I think the one thing to point out within Campbell Fresh is you need to parse apart the components of that business. So, half the business is the CPG side, which is the beverages and salad dressing, the other half is the Farms business, which includes the carrot business and the ingredient export business. The margin structure within Campbell Fresh is very diverse. So the CPG businesses carry a much higher margin than the carrots and natural ingredients business. And in fact, that's where all the growth is. So even within the quarter, we see gross margin expansion within Campbell Fresh because of the higher growth on the higher margin beverages and salad dressings. So just think about the algorithm, you need to think about not just the Campbell Fresh margin but the faster growing CPG margin within that. The other thing that happens to Campbell Fresh because of the Bolthouse acquisition, it carries a pretty high load of depreciation and amortization. The EBITDA margin is about twp. times the operating margin you see on the chart. So that's another thing to keep in mind. But we think the algorithm works.

Thank you.

Our next question comes from Matthew Grainger with Morgan Stanley. Your line is open.

Hi, good morning. Thanks for the question. Denise, you've talked a lot in recent quarters about the benchmark, historically, of 24%, 25% of sales in advertising, consumer, and trade. And it seems - I know some of this is phasing just through the year, but it does seem like you're pulling back and rationalizing where you see unproductive spending across the board on all of these areas of the P&L. So, I guess, are we any closer at this point to where you might see an opportunity to shift that benchmark down slightly, or is that still the right way to think about the degree of marketing reinvestment you need in the business to drive the top line goals?

Yeah. I mean we still believe that ACT at about 24% of sales is a competitive rate. This quarter we actually spent ACT at 23% of sales. There's a number of things going on there. First of all, in the U.S. soup business, we shifted our advertising back to later in the year and started the new campaign in October versus prior years. So you're seeing the results of that. In addition, we're shifting our spend overall to about 40% of our spend in digital, and that is creating a different dynamic between working and non-working media. And with our cost savings efforts, we're trying to be as responsible and efficient as possible in the area of non-working media. And when you shift to digital, you're spending a lot of time and expense on content, but TV is just a different dynamic. And then within trade, we have been increasing trade on a couple businesses, in Biscuits and Campbell Fresh, and we actually took pricing in our soup business. So, we'll be working our merchandising and promotion programs with more acceleration in the second quarter and the third quarter.

Okay. Thanks, Denise. I guess I'll stop there.

Our next question comes from David Driscoll with Citigroup. Your line is open.

Thank you and good morning, everybody.

Hi, David.

Good morning, David.

I'd say I'd like to wish happy holidays to you all as well. Wanted to just ask kind of one question on soup, and apologies, Ken, just a couple of minor points here. Just overall, the ready-to-serve performance, certainly quite weak. I know you hate talking about weather, but does it matter at all about kind of the temperatures that we saw in the quarter? Would that give us any explanation here? And then the second part of this question on soup is, is the performance here kind of indicative of maybe - maybe not this negative on some pieces of it, but just that you're going to really manage this soup business for cash, and this is really almost the philosophies of zero-based budgeting kind of coming through where we're going to get some really nice answers on the profit line but maybe the sales line is just fundamentally going to see some weakness as you rationalize unprofitable promotions, et cetera? So those two pieces, if you will.

Okay. I'll take that one. First of all, the soup business declined 2% after wrapping 6% increases in the year-ago comps. And what we believe drove that - and that was as expected, by the way - was the pricing increases that we took, which predominantly affected the RTS business; the fact that promotions have been shifted to later in the year; and the fact that advertising started later in October. The consumption was down in line with our expectations. I would say to you that RTS is a bit worse, condensed a bit better and broth was pretty flat. But the category was down 4%. Although I'm not a weather person, I do think that that was a factor, but I believe that all these other dynamics going on were equal factors to that one. And then, of course, our Fresh-Brewed Soup is not captured in our consumption, that's in dry soup. Inventories were comparable. We saw a little bit of a difference in broth because we carried some extra inventory into the year as we transitioned to a new screw cap on the aseptic broth. We still expect soup to grow modestly, and that is basically how we're looking at it.

Okay. Thanks for the comments.

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

Hi. Thank you.

Hey, Rob.

Hi, Rob.

Hi. Obviously, the gross margin performance was a lot higher than what anyone had expected. The guidances for 100 basis points for the year, though, I think you're up 300 basis points versus year ago already. So, why not higher, Anthony? Is it a function of the promo spending that's going to start increasing in second quarter, or is it a function of, by fourth quarter, I think you start lapping some of the supply chain improvements? Why not higher?

Yeah, I guess there's a couple of comments, and I'm sure you guys will do the math. But following a 260 basis point improvement in the first quarter, driven by primarily net price realization and our productivity gains, getting to a full point on the year would imply, for the last three quarters, about 40 basis points of expansion. And there's a couple of points I would make. I said in my comments that cost inflation was 1% in the quarter. We expect that to be closer to 2% by the time we finish the year. And that includes this negative currency impact on the input cost of some of our international businesses, primarily the Canadian business and the Australian business. So that headwind is out there. You made a comment about some of the marketing timing, the favorability in the first quarter, that'll come back in the last three quarters. The second quarter comp is not too difficult, but it will start to lap some of the gross margin gains we had last year in the back half. So, all those things taken together would dampen that growth in the year-to-go period.

Okay. Thank you very much.

Yeah.

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

Hey, good morning, folks.

Good morning, Jason.

Thank you for squeezing me in. I wanted to come back to some of the trade budget optimization questions and some of the comments you made. As we look at the data, TBO seems to be a very big opportunity for you in soup and some of your other simple meals categories, yet it's been a source of leakage for you for a number of years. And I heard a reference to maybe a little bit less trade this quarter on soup, but I also thought I heard reference to actually increasing those fresh funds to mitigate some of the price increases you had going forward. So, A, is that right, that you are going to ramp more trade to deal back some of the price increases? B, do you concur with the broader observation that there seems to be a big opportunity to pull some of these inefficient dollars out? And then, C, what's the obstacle? What's the hang-up for getting this going in the right direction for you?

I believe that we have an opportunity as a company to get a better return on our trade dollars invested. And I'd like to think of it that way. We, as part of our restructure within our Integrated Global Services, are building our revenue management capabilities, not only in the Americas business, but across all three. And we have different dynamics - competitive dynamics that we're dealing with. I think the second goal is we are getting better net price realization. That has come from not only list price increases, but also working with promoted pricing. These are still early days and we want to make sure that the consumer responds to them well, they've been accepted by customers. And we're trying to find win-win solutions for ourselves and our customers with our trade programs. So, that's basically where we are right now, and we will definitely keep a close eye on it.

Thank you. Good luck.

Your next question comes from Jonathan Feeney with Athlos Research. Your line is open.

Hey, Denise. Thanks very much for the question. I wanted to ask a little bit bigger picture question in light of -your comments today, obviously, some strong gross margin here, and I think a lot of the questions were sort of grasping at how much revenue management versus growth is your focus as a company? And, specifically, your comment today that you want to set Campbell apart, I think you said, from other food companies, and strengthen your growth trajectory, I think you said. What metrics do you want to set Campbell apart on? I mean what should we be judging you on over the next - on what metric did you mean that Campbell would be set apart? Is it gross margin improvement? Is it operating income, segment income? What would you say to that?

I mean, we've been on a mission to generate better profitable sales growth and also, at the same time, unlock the potential of our purpose and set a new standard for transparency in the industry, which we believe will help us in achieving that trajectory of profitable net sales growth. That hasn't really changed, but it has been refined in the fact that we now have assigned the portfolio roles to the divisions, and we believe that in composite, it better diversifies our portfolio to gain that. I think we've guided with our long-term targets as to what we believe we can achieve in the next several years, and we're still working our way into those. We believe that organic growth will be an important part of this. But also, we continue to look and be very disciplined about making strategic acquisitions.

So, I guess - so it's pretty much just a long-term guidance you're talking about, that sort of commentary just maybe setting Campbell apart from the other food companies doesn't relate directly to the sort of financial metrics, maybe the transparency you're providing or other things?

I'm not sure [indiscernible].

Well, I guess what I'm saying, Denise, is, the long-term guidance you have is pretty similar to what a lot of other companies have. And I hear you have some - I see you have some strong results today, and I think you've been very - some interesting things going on in the portfolio, and I guess I'm trying to see if there's something new afoot here, or just maybe a new level of steps behind what you've talked about for some time.

No, I think our strategy's been pretty consistent. I mean we're establishing a real beachhead in fresh food, bringing Campbell's suite of capabilities to that faster growing part of the food business. We are being really transparent about our products with our new website, whatsinmyfood.com. We are talking to consumers about what's in our food, and the ingredients we use, and how it's made. And these are just steps that really distinguish us and are very true to activating our purpose with the consumer. And from all our research, whether it be with millennials or even baby boomers now, consumers are going to purchase the products from companies that align with their values. And we believe we have a very strong statement out there.

I see what you're saying. Thanks very much. It's very helpful. Happy holidays.

Thank you. You too.

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

Hi. Good morning.

Hi, Chris.

Hi, Chris.

Hi, and happy holidays as well to you. Just had a quick question for you here. I want to understand in the soup business, so inventory levels were in line with the prior year, if I heard you correctly there, Anthony. Does that mean that they are up a little bit from where they were at the end of Q4? I'm just trying to get a sense of where they stand today and how to expect that to move going forward. And then when I look within the performances of condensed, ready-to-serve and broth, condensed is the one that seems to stand out a bit versus what like the measured channel data indicated. So, is that the one where - was there a little inventory increase in condensed in the quarter, is also part of the question.

So, to the first part of the question. We always build retail inventories in the first quarter. So we always come into the quarter relatively low. We're getting into the season and we always build. The question then becomes, did you build more than you did the year-ago period? The answer to that, in aggregate, is no. The retailer inventories on a case basis, we came into the quarter and ended the quarter about the same. And then if you look underneath that by subcategory, I would say that condensed and RTS got a little bit of benefit, and broth saw a little bit of a negative in terms of impact of shifts within the portfolio. But I think where we ended the quarter is kind of a normal place for us relative to the seasonal build we typically see in the business.

Just another build on what Anthony said, our sales on broth in the quarter were down 9% and we were cycling comps of plus 17% a year ago. And our consumption in the quarter was flat. So that also was a factor to evaluate the performance.

So in the context of your promotional spending plans, usually your promotional spending is working down, as I think it did this quarter, a bit, you tend to see inventories come out of the system. Is that what you'd expect for the year then, or can you go that far to speak to that?

Yeah. By the time we cycled the full year and we get to the end of the fourth quarter, it's typically our low point in the cycle. So all of this stuff that happens as we build into the season, come out of the season, generally works its way out by the time we get to the end of the fourth quarter.

Okay. That's very helpful. Thank you.

Sure.

Our next question comes from Alexia Howard with Bernstein. Your line is open.

Good morning, everyone.

Good morning.

Hi, Alexia.

Hi. So can I ask about some other parts of the business, specifically V8, cookies and then SpaghettiOs, which I know is fairly small. But in each of those, it's a similar pattern to what we're seeing in soup. You seem to be trading off market share in exchange for better EBIT and better price realization. Should we expect those trends to continue or are you scrambling to try to turn it around? I'm just trying to get an idea of the strategy there. And then just some comments on SpaghettiOs, it looks as though even before the recall, the sales were really coming down quite heavily. Is that something you're kind of pulling away from? Thank you.

Let me tackle beverages first. The category continues to remain challenged, although we have seen some signs of improvement. Our consumption and share were down slightly in quarter one. We have a couple puts and a couple takes. V8 Splash and V8 + Energy continue to perform well and we're very encouraged by our V8 Veggie Blends launch. And we've had a bit of decline on our V8 red juice, and I think that's due to consumers trying some different types of vegetable juice now in the Veggie Blend line. And our V8 V-Fusion business continues to be a challenge. And we've had a couple quarters of good growth in immediate consumption and we had some trade timing issues in the quarter, so that was down about 1%, but our equivalent volume in that channel was up 8%. So we continue to be encouraged about the new network we've set up there. We know that's an opportunity for us. And finally, we launched our Veggies For All campaign and we really like what that's doing for the brand in terms of the equity. So we're still very committed to the V8 program. We think it's a timely, on-trend brand for the health conscious consumer that offers a lower calorie option and less sugar option in this world of juice. Cookies, we saw - no pun intended - we saw a softness on our cookies, predominantly in the classic line. However, we did have a really, really good quarter on Goldfish crackers, up 10%. So, we still have some more work to do on cookies. And SpaghettiOs...

Yeah, I can do that.

Yeah, go ahead.

The premise of the question I would disagree with a little bit. I mean the price realization on soup is relatively unique to soup. We haven't done a lot of price realization on V8, cookies or SpaghettiOs. SpaghettiOs sales are relatively flat in the quarter. V8's down, it's primarily a V8 V-Fusion issue, and as Denise mentioned, Chunk cookies are a particular issue within the Pepperidge Farm portfolio that we're addressing, but we haven't made a strategic decision in those businesses to go for price realization and better EBIT in exchange for market share.

Okay, thank you very much. I'll pass it on.

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

Hi, David.

Thanks and Happy Thanksgiving.

You too.

Happy Thanksgiving.

Just to follow up there on your crackers business and, particularly, you mentioned Goldfish being strong. That's been a tough category for a lot of companies, the healthy snacking area. What's, perhaps, going right there for you? And how confident are you that you can keep that going? And then, on cookies, that's become tougher for a variety of players there, and seems like sweet snacks in general has been tough. What is the plan for that segment? Thanks.

Yeah. We definitely have been very focused on keeping our Goldfish programming strong. I think that that business is hitting on all cylinders with good advertising, a good promotional program, and the right proposition for millennial parents and their children. So, we continue to be pretty excited about our Goldfish business. And I think that mothers still feel like that is a very positive snacking for their children. I think we have more work to do on cookies, and we're working on that as we speak. We do have new leadership right now in the Pepperidge Farm business, and that team is really coming together and focusing on the next wave of innovation of ideas. And I'm not sure there's anything more to add to that.

Okay. Thank you.

Our next question comes from Priya Ohri-Gupta, with Barclays. Your line is open.

Thank you for taking the question. Was hoping you would talk a little bit about your view on the current rate environment. Specifically, you had $1.5 billion in short-term borrowings. Do you expect to continue rolling in this market or refinance it?

Yeah. So, as I mentioned, we did term out some of the debt portfolio in the recent past, taking advantage of relatively low fixed rates. We have a sizable backstop credit facility against a commercial paper program, and we're fairly comparable with the level of CP we have in the marketplace today. I mean, clearly, with what's happening in the credit markets, we continue to look at that and evaluate alternatives, whether to term out some of that CP, or whether to use the derivative market to convert some of the that floating exposure to fixed, but that's kind of an ongoing thing that we continue to assess here.

Thank you very much.

You're welcome.

And I'm showing no further questions. I will now turn the call back over to management for closing remarks.

All right, thank you, Stephanie. From all of us at Campbell, Happy Thanksgiving, everyone. Thanks for joining our call. A full replay will be available about two hours after our call concludes, by going online or calling 1-703-925-2533. The access code is 1665411. You have until December 8 at midnight, at which point all of our earnings calls will be strictly on the website, under News & Events. If you have any further questions, please call 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. This concludes today's program. Thank you.