Good day, ladies and gentlemen, and welcome to the Campbell Soup Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Ken Gosnell, Vice President, Finance Strategy and Investor Relations. Sir, you may begin.

Thank you, Crystal. Good morning, everyone. Welcome to the third quarter earnings call for Campbell Soup's fiscal 2018. With me here in New Jersey are Keith McLoughlin, interim 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'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 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. With that, let me turn the call over to Keith.

Thank you, Ken, and good morning, everyone. My name is Keith McLoughlin, the new interim CEO of Campbell Soup company and a board member since 2016. Thank you for joining our third quarter conference call today. As you have seen from this morning's press release, we announced that Denise Morrison has chosen to retire after 15 years with the company, having served the last 7 years as President and CEO. I'd like to start by thanking Denise for her leadership and dedication to Campbell. Denise repositioned our portfolio toward the faster-growing snacking and health and well-being categories with important acquisitions like Snyder's-Lance and Pacific Foods. It has indeed been a pleasure working with her as a board member over the last few years. On behalf of the Board of Directors and the entire management team, we thank Denise and wish her all the very best. Let me just start out by describing how we'll handle the call today. I'll make a few brief opening comments, and then our Chief Financial Officer, Anthony DiSilvestro, will review in detail the financial results, the updated guidance, and he will answer your questions. After the Q&A, I'll make some closing remarks, and we'll end the call on time by 9:30. Let me start by describing my role. As interim CEO, my mandate from the board is clear: one, to lead the company, along with the Campbell's leadership team, until the board appoints the new chief; and two, to get the performance back on track for the company by conducting a thorough review of our strategic and operating plans, the composition of our entire portfolio and the associated allocation of our resources, capital cost and people. All this work will be under the advisement and supervision of the board. We, of course, will conduct this…

Thanks, Keith, and good morning. I'd first like to welcome Keith to his new role. I've known Keith since he joined the Campbell board in 2016, and I look forward to working with him. Before getting into the details, I wanted to give you my perspective on the quarter and revised 2018 guidance. In the quarter, we successfully completed the acquisition of Snyder's-Lance. This is our largest acquisition ever, and it will meaningfully shift our portfolio towards the faster-growing snacking categories. On a pro forma basis, snacking will become almost 1/2 of our portfolio of sales. The consumer takeaway performance on the core Snyder's-Lance brands looks good, and the teams are working well together. We remain confident in our ability to deliver the targeted $295 million in cost savings and synergies. The work performed since the acquisition closed has confirmed our initial synergy assumptions, and we are making good progress putting in place detailed plans to deliver cost synergies. While our organic sales were stable in a difficult environment, our challenge in the quarter was clearly our adjusted gross margin performance, as the percentage declined by about 4 points compared to last year, including a 1 point negative mix impact from our recent acquisitions. Gross margin performance was driven by higher-than-expected cost inflation, primarily higher transportation and logistic costs, higher supply chain costs in Campbell Fresh and increased promotional spending in U.S. Soup and Pepperidge Farms. As a result of the disappointing Campbell Fresh performance, we revised the long-term forecast for that business, and we recorded a $619 million pretax noncash impairment charge in our GAAP results. We are all disappointed with the results of C-Fresh, and we acknowledge that they are unacceptable. We continue to make progress on our multi-year cost-savings program. We generated $25 million of savings in…

Thanks, Anthony. We will now start our Q&A session with Anthony. [Operator Instructions]. Okay, Crystal.

[Operator Instructions]. And our first question comes from Bryan Spillane from Bank of America.

I just wanted to ask -- just a clarification and then a question. Anthony, in the comment you made about margins being down in 2019, is that both the base business so before the acquisition and then the dilutive impact of the acquisition? Or is it -- just want to make sure that we're understanding that -- whether it's the base will be down and then the acquisition is also dilutive to margins.

Yes. It's actually both, Bryan. The comments primarily relate to what we're seeing on the base business and the impact of cost inflation that we foresee continuing. And also, in the first year, when we add Snyder's-Lance to the portfolio, the mix impact will also have a negative impact on margin.

Okay. And then just a question on as you're going through strategic review, as we're thinking about the debt that you've just taken on to acquire Lance, is there anything in the terms of your those debt -- in the terms of the debt that you've taken on that provides any limitations to whatever you may contemplate doing in terms of the portfolio? I'm just trying to understand how much flexibility you may or may not have given the debt you've just taken on.

Yes. There's only one small piece of the average financing that has a covenant in it, but we're well below that. And anything we do, I don't think that will be an issue whatsoever.

And our next question comes from Andrew Lazar from Barclays.

My question is going to be about pricing. And if you expect any incremental pricing to help, I guess, cover some of the inflation headwinds in fiscal '19. And I asked that partly because of just some of the concerns around the industry's ability to get that in this environment and then also more specifically, because of the comment you made around Lance. And I think the increased trade rate because of some pricing that I think you said did not materialize. So perhaps you can roll that up into your anticipation around incremental pricing, particularly in light of also the promotional spending in soup that transpired as you kind of got back into promotional activity with a key customer.

Sure. I mean, I guess the problem starts with the forecast that we're seeing for an acceleration in cost inflation and part of that due to the impact of upcoming tariff. So we see pretty significant increases on steel and aluminum and other parts of the commodity basket, things like wheat, resins. Corrugated is another area where we see some increases. So that's obviously going to put some pressure on the margin. And obviously, the question is what is the impact of potential pricing to help to offset that. I don't have a lot of details for you today on that. What I will say, and as you know, it's a very challenging environment out there today. It's a competitive retailer market, and we're all mindful of that. That being said, it would certainly be our intention that, over time, productivity and pricing will offset cost inflation. The challenge is the timing. The other thing that we do and working on is the impact of our cost-savings program to help offset some of that. So as we've done in the past, we do have the 3% annual cost-productivity program coming out of the supply chain. We're also making progress against our targeted $500 million of cost savings by 2020. Our recent decision to close our Toronto manufacturing operations is a good example and relocating most of that production to our U.S. thermal plants. So we're doing all we can to offset the inflationary impact. But as we rack it all up, we do see pressure on the margins going into 2019.

And our next question comes from Ken Goldman from JPMorgan.

Two from me, if I may. I'm curious about, Keith, the board's search for the next CEO, how that process begins for you as a board really, even goes what the portfolio will look like, what are the challenges involved with that and also really, which qualities you're looking for in the next CEO. I know you talked about some things that are nonnegotiable, such as ethics and so forth. But any color you can give in terms of the kind of person that would be right for the company at this time? And then I guess my second question is on the dividend, and I'm just curious what the board's thoughts are on maintaining that with or without the strategic review.

Ken, I'm going to take that. Given this is Keith's first day, he's not going to participate in the Q&A session. But with respect to the dividend, 2 things I can say. We have a well-articulated priority for the uses of cash. It starts with reinvesting in our business and capital expenditures. Second is the dividend. And third, in the current environment, is to reduce leverage by paying down the debt. We have a robust and significant cash flow, which we fully expect we will continue to maintain a competitive dividend level and to have that dividend increase over time with earnings. So I think the management team as well as the board certainly supports the continued payment of a competitive dividend, and we see nothing that we're looking at that would change that at all.

And our next question comes from David Palmer from RBC Capital Markets.

Keith mentioned a need to rebase earnings further in fiscal 2019, and you added some comments about freight cost and trade rate. And obviously, this talks to the push and pull of cost versus pricing power. But I think long term, there's still that question in -- of the company's ability to meaningfully drive a profitable growth. And so in what areas do you envision Campbell perhaps spending more or executing differently to really promote a more balanced profitable growth? And does -- is there spending in fiscal '19 going towards that and not just essentially rebasing in light of your pricing net of commodities?

Yes. I mean, it's a bit premature, again, into too much detail around 2019. But you kind of hinted that the exact idea of the review and what's going to come out of it is a clear articulation of those things we need to do to reposition the company to drive long-term and profitable growth. And as I think about it, we have some great examples within our portfolio. And I think it exemplifies what a branded food company needs to do to deliver. And that's having a product quality that's superior to competition; continuing to innovate in the marketplace; appropriately managing the price gaps, the competition and private label; supporting those brands with compelling advertising and at a competitive level. I think when we do that, it's a win-win-win. It's a win for our consumers, our customers and for us. And I would say a brand like Prego is a good example where we've been able to do that and grow consumption and share. On the other hand, our broth business is a category we haven't done that, and private label has gained some share. So I think if we undertake the review, we're going to look at the portfolio. We're going to look at what got us into this situation and what do we need to change the long-term trajectory of sales and earnings. Because we believe we can do it, and we're optimistic that there is a positive long-term financial performance that will come out of that.

And our next question comes from David Driscoll from Citi.

So I wanted to -- I have two questions. I'd like to just start off and say, is it fair to say that the bulk of the problems today are C-Fresh-related as it was by far the largest negative variance versus our expectations? And you tick off so many factors, guys, I feel like sometimes it's -- the importance of the different ones is not that clear to people listening to the call. So just number one, can you confirm that my comment, that C-Fresh was the biggest negative variance, is accurate? And then critically here, why are the supply chain fixes not working? Campbell has put an amazing amount of effort and time into getting the supply chain right at C-Fresh. And it just feels like we just keep hearing problems. What's wrong with the supply chain at C-Fresh?

Yes. So the first part, just to give the overall context and dimensionalize the C-Fresh issue. So if I go back to where we started the year in terms of our gross margin expectations and where we are now, so we're a couple of points below where we started. Half of that is the situation at Campbell Fresh. And I mean, certainly we face significant challenges there, and the return to profitability has proven certainly more challenging than we anticipated. And I think the situation which we need to analyze further in the fourth quarter, it goes beyond supply chain. We're seeing low crop yields on carrots. We're seeing lower manufacturing yields. We're seeing higher cost inflation in things like transportation and logistics. We've had to go to co-packers, and those are more expensive. The one thing that's actually mitigating some of these issues is the benefit of the productivity program that our supply chain has brought to bear. But unfortunately, it hasn't done enough to offset the other issue. So we're going to take a step back. We're going to do a deeper dive in the fourth quarter and look at the drivers of that performance and figure out what do we do going forward with respect to the Campbell Fresh business.

And then just one follow-up, Anthony. The factors -- could you be more clear about the factors in '19? I know you're not giving guidance. But I don't like when we get just a couple of negatives, and we don't get enough to understand what you're trying to tell us here on F '19. You have tax benefits that come in, in the first portion of '19. So it's not all negative that there's just no positives here. There was expectations of a lot of cost savings that are supposed to come in, but I'm -- I feel like the tone is so negative on F '19 that we're not getting any balance on it. Is that intentional because these margin declines are so significant?

No, no. It's trying to be transparent in terms of what we see on the horizon. And given what we know now, we'd rather tell you now than tell you later. The issue is primarily one of cost inflation. And we're seeing and expecting an acceleration on the rate of inflation across a number of ingredient and packaging items. For example, we expect double-digit increases on steel and aluminum. A lot of that driven -- or all of it driven by the impact of anticipated tariffs. We're also expecting higher inflation on wheat and vegetables and resins and corrugated. So this is a meaningfully -- meaningful shift in the inflation outlook. Yes, we are going to continue to drive savings to help mitigate that, our 3% productivity program. Our cost-savings initiative continues to deliver. But they're just not sufficient to offset some of these headwinds. So we wanted to be transparent on that today and share with you kind of what we know at this point in time. We clearly have more work to do on this. We're in the midst of rolling up our operating plans and actions for next year. The strategic review we're going to take in the fourth quarter will also inform what actions we take in 2019. But again, we just wanted to share with you what we see on the horizon.

And our next question comes from Jason English from Goldman Sachs.

I guess there's a 0lot of areas we can go. I'll come to soup real quick. You've resolved the issues with the key customer. Is there any reason to believe one way or the other that any other customers are pushing for concessions to sustain this support there?

Yes. So back to the first point. We have made some progress on U.S. Soup. You can see we're down 1% in the quarter versus minus 8% in the first half. Again, we made some progress. We are, as we speak, undertaking our joint business plans with our key customers for next fiscal year and so that will help inform kind of the outlook for next year. I forgot the second part of your question, Jason.

I'm really -- my core question is whether or not you have to make concessions to other retailers.

Look, it's a competitive environment. And if you look at the markets we operate in, whether it's Australia or Canada or increasingly so, in the U.S., there is clearly tension, and we need to continue to manage through that. And the way I think we do that is to do the things that make branded foods companies successful around their products and their marketing and their brand support and their availability. So we'll continue to do that and work through these joint business plans with our customers. So there's not really much more I can say on that one.

Okay. And I want to come back real quick, my last question, I guess, to Ken Goldman's question on cash flow, use of cash, dividend, et cetera. I was surprised to see you financed Lance with so much short-dated debt. And I know you talked about your robust cash flow, but it doesn't look like it's -- and I think you would agree, it's not robust enough to service the debt maturity over the next 3 years. What levers do you have to pull to navigate through that? Or should we be expecting you to be rolling that debt and refinancing on the forward, likely into a higher-rate environment?

Yes. I think what we'll do is, as I said before, in terms of our priorities for the use of cash, once we fund our CapEx program, which obviously we're managing very carefully, pay the dividend, the balance will go to reduce debt. And so some of that obviously will get repaid and the balance that we clearly expect to refinance, and we'll have to see what the rate environment is at that time. But I think in the near term, I think we're well positioned in terms of our capital structure and the maturity schedule.

And our next question comes from Robert Moskow from Credit Suisse.

Anthony, can you give us a little more color as to what has gone off plan on Snyder's-Lance? You mentioned that they were trying to execute a price-realization strategy. What's been causing that to go awry? And secondly, can you talk a little bit about the reaction of, I guess, the Snyder's-Lance independent distribution network to this merger? What steps has been -- have been done to bring them into the fold within Campbell? What's been communicated to them to make sure that execution stays on track?

Yes. So let me try to address some of those areas. I probably won't be able to address all of them. But in terms of where we are with Snyder's-Lance, I would say, first and foremost, we're very optimistic about what we've seen. We've owned the business now for kind of 8 weeks, and I would say that we're even more confident now in our ability to deliver the $295 million of cost and synergy savings. And as we look longer term, we're certainly on track to deliver the acquisition economics and the 2021 accretion goal. So I just want to make sure we talk about this in the right context. So -- but we have uncovered a couple of things, right? One is the higher-than-expected trade rate, and it reflects -- and I don't want to get into too much detail here, some decisions taken by the former management team. I think what's important, and in our Pepperidge Farm business, we have a very disciplined approach, process and system to managing trade spend, and we are going to implement that in Snyder's-Lance. So that will help us immensely manage the situation. The second thing that's impacting us, and we're all seeing it is the impact of the higher transportation and logistics cost, which, quite frankly, did not moderate as we have expected. And the last situation, which we're working through, is some challenges related to relocating some Emerald nut production from California to Charlotte. The restart-up of that equipment has proven more challenging than the former management team thought and more challenging than we initially thought. So we're working through those 3 issues. We have action plans in place to do that. We believe they're short-term and addressable and remain very optimistic in the long-term outlook for the Snyder's opportunity. With respect to the DSD network, I mean all I can really say on that one is we now have 3 DSD systems, 2 for Pepperidge, 1 for bakery, 1 for snacks and now 1 for Snyder's-Lance, and we will continue to operate those 3 systems independently. That being said, there are significant opportunity to capture synergy in the distribution network, both at the warehouse level and at the depot level.

And our next question comes from John Baumgartner from Wells Fargo.

Anthony, I wanted to dig into the cash expectations for Lance. I mean, it seems the company had really been lacking in terms of automation and robotics in the plants. At the same time, the SKU complexity would seemingly suggest kind of a nice -- an opportunity for working capital improvement. So on balance, between working capital needs, incremental CapEx, synergies being back half-weighted in your guidance, how do you think about Lance's contribution to free cash over the next 1 to 2 years?

Yes. I think a couple of things there happened. And as we look at the business and some of you have looked at, obviously, at the consumer takeaway, it actually has been negatively impacted by the SKU rationalization efforts that the former management team started and that also we support. I think there's a long tail in the portfolio, and we're doing our best to clean that up a little bit. As our supply chain people have gone through those plans, we see significant opportunities to improve the effectiveness of the operations, potential network optimization opportunities given the overlap between our plant infrastructure and their plant infrastructure. And when we put together our deal model, we did anticipate some investments early on to correct those and to improve the long-term performance of the manufacturing network. So we will continue to execute those plans. We're very confident, as I said before, in the long-term ability for this business to generate positive cash flow. But it does require some investments both on the CapEx lines to take care of some quality situations that we see, to improve some efficiency and some costs related to getting at some of the synergy opportunity. Again, all those were factored in our acquisition economics, and we're confident certainly in our ability to fund those.

And that does conclude our question-and-answer session for today's conference. I would now like to turn the conference back over to Mr. Gosnell for any closing remarks.

Thanks, Crystal. Keith is going to make a few closing comments.

Okay. Thanks, Ken. Actually, I just wanted to comment briefly on the question of the board and succession. Of course, the board is working on that. They're thinking about that. But candidly, right now, we're focused on the work we described, the strategy and the portfolio review and honestly, riding the ship. That's what we're focused on right now. As one question I noted, part of that work will be input to the board on the candidate qualifications and potential. So it's a little bit hard to know precisely what we need in that role until we complete the review, although you kind of note 90-10 what the candidate needs to look like. I would say we have talented candidates inside the company, and we will continue to focus on the mission that we have at hand and getting things back on track. Lastly, I'd just like to acknowledge, as many of you have pointed out, we're facing some tough market conditions and also some poor operating performance just straight ahead. We have some hard and urgent work in front of us, and we'll face that head on. However, we start from a foundation of strength that's been built over almost 150 years, with products and brands, market positions, margins and cash flow that would be the envy of many, many companies. So we'll do that. This company has a deep keel, being built over all that time and with that kind of cash and balance sheet strength, and we'll come out of this stronger. I'm confident in that. Lastly, I'd just say, of course, I'm going to be out, listening and talking to customers and suppliers and shareholders, and I very much look forward to meeting many, if not all, of you in the process. Thank you for your time and interest today, and have a nice weekend. And let me turn it back over to Ken to close the meeting.

Thanks, Keith. We thank you for joining our third quarter earnings call and webcast. A full replay will be available about two hours after the call concludes by going online or calling 1-404-537-3406. The access code is 649-8114. You will have until June 1, 2018, at which point we move the earnings call strictly to the website, investor.campbellsoupcompany.com, under News and Events, just click on the Recent Webcasts and Presentations. 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. That concludes today's call. Thanks, everybody.

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