Good day, ladies and gentlemen, and welcome to the Campbell Soup Second Quarter 2017 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 be given at that time. [Operator Instructions] And as a reminder, today’s conference call is being recorded. I would now like to turn the conference over to Ken Gosnell, Vice President, Finance, Strategy and Investor Relations. Please go ahead.

Thank you, Candice. Good morning, everyone. Welcome to the second quarter earnings call for Campbell Soup’s fiscal 2018. With me here in New Jersey are Denise Morrison, President and CEO; and Anthony DiSilvestro, CFO. As usual, we’ve created slides to accompany our earnings presentation. You will find the slides posted on our website this morning at investor.campbellsoupcompany.com. This call is open to the media who participate in 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 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. And one final item before we begin our discussion of the quarter. I would like to cordially invite our interested shareholders, investors, members of the media and consumer to listen to and view our investor presentation at CAGNY which will be video webcast live on Wednesday, February 21 at 11 a.m. eastern time. A replay of the video and copies of the materials will also be available afterwards on our Web site. If you are attending the event, there will be a Campbell sponsored lunch immediately after our presentation. With that, let me turn it over to Denise.

Thank you, Ken. Good morning, everyone and welcome to our second quarter conference call. Today we will discuss our results in the quarter and our updated outlook for the remainder of the fiscal year. I will also detail the actions we are taking to improve our execution and performance in the second half of this year while advancing the long-term transformation of Campbell in response to changing consumer and retailer dynamics. This was a difficult quarter for the company. Our performance was below our expectations. Organic sales declined 2% driven primarily by ongoing disappointing results in U.S. soup and Campbell Fresh. Adjusted EBIT decreased 4%. I will provide a brief overview now and additional details when I share my perspective on our segment performance in a moment. Soup sales declined 7% in the quarter, modestly below what we expected. The issue with the key customer which we last discussed with you in November, continued to negatively impact our U.S. soup sales this quarter. I am encouraged that we are engaging in ongoing discussions with this key customer and making progress. The anticipated improvements in Campbell Fresh's performance did not materialize as we expected with sales declining 1%. While we are making progress in addressing several execution issues, we face new challenges in the quarter with headwinds in the super premium juice segment. Additionally, the carrot yield issue we discussed last quarter extended into the second quarter. The decline in adjusted EBIT reflected the performance of U.S. soup, cost of carrot increases in C Fresh and significantly higher transportation and logistics cost which are impacting all of our U.S. businesses. While we initially expected transportation cost to moderate throughout the year, the challenges have proved more persistent than originally anticipated and we now expect it to continue to impact the business…

Thanks, Denise, and good morning. Before getting into the details, I wanted to give you my perspective on the quarter and revised 2018 guidance. Our challenge in the quarter was our gross margin performance as the percentage declined by about 2 points compared to last year. Gross margin performance was pressured by cost inflation, primarily butter prices as well as higher transportation and logistics cost which did not moderate as expected and higher carrot and manufacturing cost in Campbell Fresh. Reflecting this performance and lower expectations going forward for C Fresh, we recorded a non-cash impairment charge on the carrot and carrot ingredient business. On the positive side, we continue to make progress on our multiyear cost savings programs. We generated $20 million of savings in the quarter, bringing the program to date total to $365 million. We now expect to deliver $75 million to $85 million in 2018. Based on our success to date, and additional opportunities identified, we had increased our 2020 target to $500 million, a $50 million increase. We are benefitting from the recently enacted U.S. tax reform legislation. The lower ongoing tax rate is benefiting Q2 EPS by $0.12 and adding $0.25 to the full year adjusted EPS forecast as we lower our expected adjusted effective tax rate to approximately 26%. We are updating our full year guidance to reflect lower expectations for gross margin performance on the base business. The addition of Pacific Foods to the portfolio and the impact of U.S. tax reforms. Now I will review our results in more detail. For the second quarter, net sales on as reported basis were comparable to the prior year at $2,180 million. Excluding a one point benefit from the acquisition of specific foods and a one point benefit from currency translation, organic net sales…

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

[Operator Instructions] And our first question comes from Bryan Spillane from Bank of America. Your line is now open.

So I guess bigger question. You have got the tax savings which you are going to reinvest a portion of even in the 2019. While at the same time, you know there is -- you are going through some cost savings. Can you kind of talk about sort of the incremental need to invest now? How much of that is driven by like the commodity inflation? How much of it is being driven by just how rapidly things are changing, I guess, in the retail environment but it's a pretty material step up in investment and I am trying to understand sort of what's changed to drive that investment. And maybe second, if you can give a little bit of comment on expected return. At what time frame could we expect that that incremental investment will begin to kind of result in an acceleration in sales and earnings?

Yes. So I will take a crack at that. You know as we look at our business and we are right in the middle of our planning process now for next fiscal year and I think we have mentioned before the areas that we need to reinvest in along the lines of building capability in digital and ecommerce, supporting our brands and launching new products. Investing in longer term innovation, things like Habit, and some other ventures that we have underway. And as we go through that and see the [indiscernible] of the tax reform coming, we really do see an opportunity to accelerate those investment to position the company for long term growth. We are still working through some of the details on that and we will have more to say I think when we get to our 2019 guidance. But we will talk about this next week. We really see 2019 as a transition year for us. We need to do a couple of things. We need to stabilize U.S. soup, we need to turn around our Campbell Fresh business, we need to make these investments to drive long-term growth, we need to add Pacific Foods and integrate Snyder's Lance into the portfolio and I think as you look beyond 2019. Our confidence level in achieving our long-term targets of 1% to 3% sales, 4% to 6% EBIT and 5% to 7% EPS are very high and I think that’s where you will start to see those returns.

Thank you. And our next question comes from Andrew Lazar of Barclays. Your line is now open.

Denise, I know you are clearly limited in what you can say on sort of the soup situation as you mentioned. But maybe perhaps you can comment a little bit on sort of what is behind the expectation for a moderation in soup declines in the fiscal second half. I guess what I am getting at is, you had mentioned progress and I am wondering if it can be I guess beneficial to all parties. I think Anthony has said maybe a more normal promotional posture. So just trying to get a sense of, what changes you can speak to and if it can be sort of what's called a mutual beneficial arrangement.

Well, as you know in the first half and particularly in this quarter, we did have U.S. soup sales declines and if you look at our consumption, it was minus 3%, our sales were down 7%. The consumption in the rest of the market was positive and so the rest of the market, the soup programs actually were very well received. As we go into the second half, given the positive conversations we have had, we expect a much more normal promotion schedule in the second half of the year and therefore our soup declines to moderate in the second half, and that’s pretty much all I can say about it.

Thank you. And our next question comes from David Driscoll of Citi Research. Your line is now open.

I literally have probably ten questions but I will keep to your rule and just ask one. Andrew got the soup one which is a great one but C Fresh, is profit recovery tied to sales growth? And then just explaining that a little further, what I am trying to get at is should we see profit recovery from these depressed levels even if sales are constant. And then related to C Fresh but on the sales line specifically, what is the second half expectation. It sounds like you are telling us that there should be a sizable boost with all the new product activity but I would really like to calibrate expectations while this segment has been hard for us to forecast.

Yes. That’s about five questions but let take a crack at that. You know what we have going on in the second half of the year is we have much more robust innovation in beverages coupled with our supply constraints behind us and a normal promotional schedule. It's the first time that we have had all three legs of the stool going for us and that’s why we are optimistic that we can make significant gains in the beverage business in the back half of the year. And the rest of our CPG business in Campbell Fresh is positive growth. So getting beverages back to growth and continuing that momentum in the other parts of the business. And that’s the higher margin part of the business is an important idea. In carrots, carrots and carrot ingredients actually grew. However, because of the yield issue we had due to the adverse weather, it cost us more. And therefore affected our profitability. Given that we have very robust plans in the supply chain and with improved productivity to make margin improvements in this business. And we are very very focused on executing those. So the growth of the top line in the CPG business coupled with the improvement of margins from the supply chain and productivity program, should give us a much more profitable growth algorithm on this business.

So just to add to that. The margin recovery is not sales dependent and we would expect to see top line growth and positive EBIT in Campbell Fresh in the second half of the year.

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

I am just curious, now that there has been a write-down taken, what about lessons that you learned from the Bolthouse acquisition and is there anything that you can take, either positively or negatively but hopefully constructively, and apply to the Snyder's Lance deal that’s obviously ahead. Or is it really just sort of a unique situation to Bolthouse where things didn’t go quite as well as you thought when you first bought the business. At least that’s how we look at them on the outside.

Yes. And that’s a very constructive question, and there have been lessons learned from the acquisitions, particularly that one. First of all, what we learned was that its' really an imperative to integrate supply train and quality earlier. And in fact right out of the gate Campbell's has a very high standard as you know and with what we went through in the Bolthouse Farms situation, we believe that that’s an imperative and we are doing that with Pacific as we speak and we will do that with Snyder's Lance after we close. I think second of all, the carrot business was much more volatile than what we expected. This is fresh food and there is no roof over the factory of a carrot field and so are getting much better at recognizing what are the early warnings in that business. But that proved to be more volatile. There won't be any necessarily lessons learnt from that because the Snyder's Lance acquisition and the Pacific acquisition are in categories that we have a lot more experience in. And then I think the third lesson is make sure you get the right people in the right place early. And so we are applying that philosophy going forward.

Okay. That’s very helpful. Just a quick follow-up. Obviously Snyder's Lance has its own DSD. Pepperidge has its own DSD. You talked about integrating the supply chain right out of the gate. It doesn’t require necessarily, how should I say this delicately, shutting down routes. That’s not delicate but I tried. I am just trying to figure out because there is some speculation out there that you will have to shut down or consolidate somewhere else. That could be a little bit of an impediment to some of the goals that you have in that integration.

I can take that one. I would say we have no plans to integrate the actual DSD systems. These are independent distributors, so we will leave that at that. I think where we really see significant opportunity is we have overlapping warehouse systems, we have overlapping depots. And even before you get to the DSD guy, there is significant opportunity to extract cost synergies and that will be our focus in the near term.

Thank you. And our next question comes from Rob Moskow of Credit Suisse. Your line is now open.

I wanted to ask a broader question about beverages and Campbell's. Challenges and what you consider your competitive advantages in beverages. I mean my perception is, a category like soup but the changes are more incremental and just relatively speaking. So Campbell can always compete. But beverages I just find that this competitive environment is changing all the time. You mentioned today that retailers are resetting the shelves away from sugar-enhanced items and refrigerated. You had continued challenges in V8. Can you just comment a little bit about what you see your competitive advantage are in beverage and whether why did beverage belong with a food company and maybe not with another beverage company.

Sure. I think it's really obvious when you look at consumer trends that there have been fundamental changes in consumer's preferences in the beverage category. Our competitive advantage in V8 is that we are vegetable based. And in our hundred percent vegetable juice and in our V8 + Energy, which is powered by green tea, we actually have performed pretty well. It's where we have had the combination of fruit and vegetable which is higher in sugar that we have been affected. And in the super premium segment of the Fresh business, we have now realized there is the same shift going on and that’s why we have been very proactive in anticipating that shift and are able to launch a pretty extensive line of great tasting, reduced sugar with functional benefit beverages. And we have got more in the pipeline where that came from. So I feel really good that we are on top of the consumer trends, it is happening not only in juice but it's happening throughout beverage world. And the beverage business is profitable for us and we consider it a good part of our portfolio.

Thank you. And our next question comes from David Palmer of RBC Capital Markets. Your line is now open.

Just wanted to ask a question on soup and want to get away from the one customer thing. Sometimes I feel like that keeps us from talking about the brand the category fundamentals. But if you just include all of your customers in this answer, are there opportunities for improvement in your perspective in your U.S. soup pricing and promotion strategy and perhaps things that you think about that will help the consistency of this business which will already be a smaller part of the business after Snyder's Lance.

Yes. We spend a lot of time with our revenue management and working with our customers on the right pricing and promotion plans. In fact, we go into that, our joint business planning, now through June with our key customers to work through that. We have to pay attention to the market place changes and this category is price elastic, so that’s an important thing to pay attention to. And there is some different dynamics depending upon whether you are working with condensed soup, RTS or broth. But all of that is taken into consideration as we plan our next season.

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

I just had a question for you in relation to cost inflation and how you are addressing that from this point forward, particularly around freight and obviously the things like butter. You had mentioned in some cases some price increases. Let me be a little surgical. So is it relying on cost savings, productivity, or is it pricing and maybe perhaps lower promotional spending to accommodate cost inflation is my question.

Yes. I would say we look at the latter. We look at it holistically and I would say that over time we expect our productivity improvement and price realization to more than offset cost inflation. Now obviously that can vary depending on the time period and we are seeing some pretty high cost inflation right now. I mentioned 3.5% cost inflation rate in the quarter. Significantly higher product prices and that’s primarily hitting our Kelsen business and the second quarter is their largest quarter of the year. So it is having a differential impact in the quarter. Kelsen has taken some pricing to recover part but not all and we will look for productivity improvements to help there as well. On the transportation and logistics side, this is volatile situation. Obviously, the rate increases are lasting longer than we expected. We don’t know if this is a long-term phenomena yet but if it is, we would look to over time recover that through price realization as well. But we will have to watch that one a bit closer.

Is this a year then, Anthony, where your pricing and your productivity combined, maybe it's more in the short term, cannot overcome the cost inflation, and therefore is that part of what that gross margin drag you estimate.

Yes. So we see about a point of gross margin decline now. And I would say probably about 60 basis points of that is the base business for the very reason you said that we are not going to be able to cover cost inflation and these other supply chain issues that we are experiencing particularly around Campbell Fresh. And the other, say 40 basis points, is the Pacific Foods acquisition. We bought it in December so it's kind of an offseason for them. And then when you add purchase accounting, so we have got this one time step up on inventory, we have got incremental depreciation and amortization. That’s making the Pacific Foods dilutive to gross margin in fiscal '18 but as we look ahead to 2019, we would expect Pacific to be modestly accretive at the EPS line. So we have got a couple of things this year that I would consider hopefully more one time in nature.

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

I apologize in advance but I want to come back to soup with two questions. First, I am not sure what it means that the back half of the year will be kind of normal promotional environment because you are kind of out of soup season. So there is not a whole lot of promotional environment in the back half of the year. Is it fair to interpret that as meaning when you go into the front half of next year, it's going to look more normal.

There actually is quite a bit of promotional activity through the third quarter. I would say it starts to wane in the fourth quarter. And, yes, we are anticipating that our promotional schedule will be more normal in the back half and in the first half of next year.

That’s helpful. And then my follow on. The situation is really fascinating. At the core it kind of looks like it's just been a big margin transfer with you taking some pain in the form of volume deleverage and then taking some gain in the form of the price increases you mentioned at retail that aren't your own. Do you think that that margin transfer is permanent and what is the risk that other retailers look to push for similar margin transfer.

I mean the only way I can answer that is that, again, we go through joint business planning with all of our customers and we work through what our pricing and programs are going to be for the upcoming season. This is annual in addition to shelving and merchandising. And you know that practice hasn’t changed.

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

Just I want to stick with soup and the investments there. There has been a lot of change in the simple meals category over the past few years whether it's been improved ingredients, frozen, traction from prepared, now there is meal delivery. So I guess in light of the increased competition or I guess even fragmentation now. Is it still reasonable to think that soup is kind of mid-20% margin business going forward. Why shouldn’t we expect to see large reinvestments whether it's directly into pricing or even in the integrated marketing spend, just given the evolution.

Yes. I mean there is no question about the fact there is different kinds of competition that are coming into the marketplace and we have anticipated that competition. I mean Well Yes! Is a perfect example of where we co-created a brand with a consumer who is desiring a great taste in clean label, recognizable ingredient soup and we were able to put that out in the market and that brand is done very very well. I could also go to Slow Kettle, which fulfills the need for convenience [hearty] [ph] or a little bit more premium dinner soup. So I think that dynamic hasn’t changed. If you listen to the consumer, there is still ways to satisfy that consumer as their preferences evolve in this category and [indiscernible] margins.

So it sounds as if the mix is still a lever you feel that you can pull going forward though.

Yes. Absolutely.

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

Look forward to seeing you in Florida. Is there anything to read into closing the Snyder's Lance deal in the next few weeks. I think your initial press release had said some time in calendar Q2. Is there anything to read into that and related to that, Anthony your comment, I think it was the Ken's question that there are no intention to integrate the two independent business owner networks, I thought was fascinating. And maybe if you could, you delve into a little bit more to the extent you can, some of your follow up commentary on the kinds of synergies and kinds of integration you are going to hope to achieve in that supply chain. You mentioned different warehouses and what not. But if you are not putting those two things together, how exactly does putting those warehouse systems together work.

Sure. I guess our expectation at the moment is that the Snyder's Lance deal were closed towards the end of the calendar first quarter. The only major hurdle left is shareholder approval of the Snyder's Lance shareowners. All the rest, all the more significant hurdles have been crossed so hopefully that will happen at that time. And we will talk more about this next week but we continue to see significant cost synergy opportunity between our Pepperidge Farm business and Snyder's Lance. So $170 million of cost synergies and they run through a number of areas, but just commenting on the distribution side. Pepperidge Farm has a national warehouse system and a national depot system from hundreds of depots throughout the country. Snyder's Lance has exactly the same thing and this is even before the product gets to the independent distributor. So we see significant cost synergy opportunity in the distribution side of the business. We also see opportunity in procurement. We see supply chain opportunities. We see opportunities in number of other areas. So we remain highly confident that we can get to the synergy target that we have talked about with you before.

Thank you. And our next question comes from Michael Lavery of Piper Jaffray. Your line is now open.

Just back on soup, you talk about the strength the private labels had and its share gains. Can you talk about some of what's driving that? Is it primarily shelf space in distribution games, is it an innovation push from the private label. Is it just pricing driven. What are some of the factors there?

Well, the way we are looking at it is private label grew share slightly in condensed and RTS, it grew share slightly, but is still below average and relatively small. Where private label has been more impactful has been in the broth business and what we have done is recognize that we have a differentiated product with Swanson and need to talk more about our product differentiation and continue to differentiate that product. In addition, the acquisition of Pacific Foods gives us a highly differentiated organic and functional broth product that we believe will set us up to satisfy different consumer needs.

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, Candice. Thank you for joining our second quarter earnings call and webcast. A full replay will be available about two hours after our call concludes by going online or calling 1-404-537-3406. The access code is 6692659. You have until March 2nd midnight at which point we move our earnings call strictly to the Web site at investor.campbellsoupcompany.com, under news and events. If you have further questions, please call me at 856-342-6081. If you are a reporter with questions, please call Tom Hushen at 856-342-5227. Thanks, everyone.

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