Campbell Soup Q3'16 Earnings Conference Call: Full Transcript

Operator:

Good day ladies and gentlemen and welcome to the Campbell Soup Company CPB Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions for follow at that time. If anyone should require operator assistance, please press star then zero on your touch tone telephone. As a reminder today's conference call is being recorded. 

I would now like to turn the conference over to Mr. Ken Gosnell, Vice President of Investor Relations. Please go ahead, sir.

Ken Gosnell:Vice President of Investor Relations:

Thank you, Candice. Good morning, everyone. Welcome to the third quarter earnings call for Campbell Soup's fiscal 2016. With me here in New Jersey are Denise Morrison, President and Chief Executive Officer; Anthony P. DiSilvestro, CFO; and Blake MacMinn, Senior Manager of Investor Relations. 

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 risks. 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. 

Because we use non-GAAP measures, we have provided a reconciliation of these measures to the most directly comparable GAAP measure which is included in our appendix.

One final item, before we can have a discussion of the quarter, I would like to cordially invite our sell-side analysts and institutional investors to our Annual Investor Day at Campbell's World Headquarters. RSVPs are required. All others are invited to join by webcast. This year's event will be held the afternoon of Wednesday, July 28. 

We will include updates on our plans and key initiatives for the three operating divisions. We will have also time for interacting with our Management Team. More details to follow on this. 

With that, let me turn it over to Denise.

Denise Morrison:President and Chief Executive Officer:

Thank you, Ken. Good morning everyone and welcome to our third quarter earnings call. Today, I will share my perspective on our performance in the quarter and year-to-date. 

As many of you are aware, the consumer environment continues to be challenging in many of the markets where we have operations. In the US, consumer spending remains cautious. Shoppers are making more frequent trips than a year-ago but they are purchasing less per trip. As a result, consumer takeaway of total food and beverage and softened compared to both short and longer term comparisons. 

This has exerted top-line pressure on both retailers and manufacturers. In other parts of the world, economic conditions remain volatile. In the third quarter, our organic sales declined 2% which was below our expectations. 

Key factors that led to this decline include softer than expected soup category performance, weakness in V8 beverages and product shortages in our Bolthouse Farms carrot business. 

I continue to be pleased with our adjusted gross margin expansion driven by supply chain productivity programs despite the negative impact of the weather on our Bolthouse Farms carrot business. Both our sales and the costs of carrots were adversely impacted by the poor of growing conditions in California. Cold rain weather from mid-December through mid-March reduced carrot yields across the industry. The decreased crop yield had a significant impact on our gross margin performance in the quarter. 

Both Anthony and I will discuss this later in the call. Third quarter adjusted EBIT decline was better than we expected, reflecting improved gross margin performance. The decline in adjusted EBIT was due to higher levels of planned spending including the increased marketing investments as well as higher incentive compensation costs and investments in long-term innovation. We expected that our adjusted EBIT performance would taper in the second half as we realize the benefits of our cost savings earlier, cycled improved gross margin from a year-ago, and implemented our plans to increase marketing investment in the second half. 

Now, let me share my view on our segment performance for the quarter. Let's start with our largest division, Americas Simple Meals and Beverages. As a reminder we are managing this division from moderate growth consistent with the categories in which we operate and for margin expansion. 

Organic sales declined by 2% in the quarter predominantly driven by the US soup and V8 Beverages. Our ready-to-serve Soup business was challenged by a number of the same factors we discussed last quarter; the mild winter weather which affected the entire category, the volume impact of our pricing actions, and marketing execution on the Chunky brand. We will really speak about these issues and have plans to address those things within our control for the next soup season, namely; we intend to do a better job of driving demand particularly for Chunky ready-to-serve soups. We'll have a more robust marketing plan that fully leverages our NFL sponsorship. 

We also recognize that we need to bring more excitement to the category and we have new on-trend product innovations planned for fiscal 2017. We'll discuss these plans in greater detail at our Investor Day in July. 

There were several great spots within soup and Simple Meals. Sales of Swanson broths, Slow Kettle, and Campbell's organic soup to all grew. Also Campbell's condensed soup gained share. Beyond soup, Prego continues to perform well driven by strong merchandising and growth in white sauces. 

We will began shipping Prego Farmers Market, our new premium Italian sauce, with a clean label. Additionally, we drove double-digit sales gains in Plum. 

V8 Beverages continue to struggle with sales declines in V8 Red, V-Fusion, and V8 Splash. There was however some good news particularly in the performance of V8 Veggie Blends and V8 +Energy. In the short-term, we have taken steps to address the performance of V8 Red and have increased both TV and digital advertising specific to the V8 Red brand. 

In the past, we've had success with advertising that reminds consumers of the benefits of V8. We are also building on the successful launch of V8 Veggie Blends with new varieties and expanding our V8 +Energy carbonated beverages into the grocery channel. We have recognized that these short-term actions are not the complete solution. That said, V8 is a great brand and we believe we have a solid platform to build upon going forward. 

We are in the process of finalizing our strategy and we'll discuss our longer terms plans to get this business back on track at Investor Day. 

Overall, we feel good about how the Americas division is performing against its portfolio roll year-to-date, especially its continued margin expansion. Clearly we have some work to do in several key categories to generate demand for our products. We get it and we are on it. 

Turning to Global Biscuits and Snacks; this division unifies our Pepperidge Farm, Arnott's and Kelsen businesses and its portfolio role is to manage growth while improving margins in both developed and developing markets. Pepperidge Farm delivered modest sales growth while we experienced some challenges in our Australia and China businesses. The two main drivers of the sales decline were Kelson in China and Arnott's Sweet Biscuits in Australia. 

First, China; despite strong merchandise and support and our improved marketing efforts heading into Chinese New Year, sales were below expectations. 

We experienced short-term distribution challenges and faced strong competitive activity. 

Let me explain. At the beginning of the fiscal year, we made changes to our business model adding sales people and changing distributors. This new go-to-market model is designed to improve execution while enabling us to increase distribution into multiple cities in China overtime. However, our new distribution system does not have the same reaches in the past. 

In spite of the challenges we face, Kelsen consumer takeaway and share increased in our priority markets. Going forward, we will need to supplement and expand our distributor network to increase our geographic reach. We are confident that we'll get there and continue to believe in the long-term prospects for Kelsen in this important market. 

In Asia-Pacific, excluding currency, sales of Arnott's Biscuits were comparable to the prior year with growth in Indonesia offset by declines in Australia and New Zealand. In Australia, we faced competitive pressure in the sweet biscuit category and experienced lower consumer takeaway on special varieties of Arnott's Tim Tam biscuits, which had a negative impact on sales. On the plus side, our savoury biscuit business performed well and we are encouraged by the launch of our new and improved Arnott's Shapes Crackers. What's more, our developing markets in Southeast Asia performed well excluding the. 

Impact of currency, we grew sales in both Indonesia and Malaysia double-digits. As expected, the economic situation in Indonesia started to improve in the quarter. 

Turning to North America; Pepperidge Farm cookies and crackers continued to perform well driven mainly by Goldfish Crackers. Sales declined slightly in our fresh bakery business, as we faced increased competition in the quarter. 

Moving on to Campbell Fresh; C Fresh is anchored by Bolthouse Farms and also includes garden Fresh Gourmet and our Refrigerated Soup business. This division's portfolio role is to accelerate sales growth and expand into new packet fresh categories. The CPG portion of this business is the fast forward growth engine of the division. Reported segment sales increased 6% in the quarter. 

Excluding the impact of the Garden Fresh Gourmet acquisition, sales declined 4%. 

In the quarter, Bolthouse Farms was a Tale of Two Cities. Solid performance in our CPG premium juice and salad dressing business was more than offset by significant declines in our Farm business which consists of carrots and carrot ingredients. As I mentioned earlier, the carrot supply across the industry was negatively impacted by the adverse weather in California. This led to product shortages and product allocation to customers as we were unable to meet market demand. 

As a result, our carrots sales were down double-digits in the quarter. 

This weather pattern is irregular. As we looked back, the Bolthouse Farms carrot business experienced similar weather conditions in the winter of 2010 to 2011. Since then, we've significantly diversified our winter crop into multiple growing regions in California, Arizona, and Georgia. Today we are much better equipped to respond and have reduced our recovery time. 

We are currently back in full supply with customers and don't anticipate any material sales impacts going forward as we are now in the prime growing season in California.

Turning to the CPG side of Bolthouse Farms; we are pleased with the 8% sales growth we delivered in the quarter. As expected, this growth was driven by distribution gains and our spring innovation. We added 14 new items across ultra and super-premium beverages as well as salad dressings which increased double-digits. We are also pleased with the performance of 1915 by Bolthouse Farms, our ultra- premium cold-pressed organic juice line. 

We achieved 50% ACB in less than 12 months enabled by our investment in expanded capacity. Due to the success of our spring innovation sell-in, we're well positioned for the fourth quarter as we look ahead to fiscal 2017. 

A quick word on our Garden Fresh Gourmet acquisition; from an integration standpoint, we continue to make progress on bringing the business into the Bolthouse Farms operations platform and we've expanded fresh sales to distribution. We remain very optimistic about the potential of this brand.

Before wrapping up, I'd like to share my thoughts on our year-to-date performance. Year-to-date, organic sales are down slightly, 1%, in what continues to be a very challenging consumer environment. We are clear-eyed about the factors impacting our top line and the actions we need to take to address them. We can and we must do better on driving profitable net sales growth. 

Looking ahead to the fourth quarter and next fiscal year, we expect to grow organic sales. 

Our year-to-date adjusted EBIT increase of plus 15% reflects our improved gross margin performance and the benefits of our $300 million of cost savings initiatives including our move to zero-base budgeting. As we focus on finishing the fiscal year, I feel good about the progress we are making, how we've performed year-to-date and our outlook for the full year. This is reflective in our update... (Audio Gap) 

We continue to remain focused on strengthening our core business and expanding into faster growing spaces as we unleash the power of our purpose, 'Real Food That Matters for Life's Moments'. Overall we are now better positioned to execute our strategies, invest in the areas of our business that hold the greatest profitable growth potential, and increase shareholder value. We are proud of the progress we have made but we know we have more to do. 

Now, I'll turn the call over to our Chief Financial Officer, Anthony DiSilvestro. 

Anthony DiSilvestro:Senior Vice President and Chief Financial Officer:

Thanks Denise and good morning. Before getting into the details, I wanted to give you my perspective on the third quarter. Organic sales in the quarter were below our expectations reflecting softness in US soup, V8 beverages, and the weather related crop yield issue which negatively impacted our carrot sales and earnings. We continue to make progress on adjusted gross margin. 

It improved by 40 basis points, better than expected, benefiting from our supply chain performance and moderating cost inflation despite the weather related yield issue on carrots. The carrot issue negatively impact sales by approximately $14 million and our adjusted gross margin by approximately 50 basis points or $0.02 per share. We continue to make good progress on our cost savings initiative which delivered approximately $30 million of savings in the third quarter with these savings impacting multiple P&L lines, bringing the year-to-date total to $110 million. Program-to-date, we are now at $195 million in cost savings.

With one quarter to go, we are updating our guidance. We are holding the sales range, narrowing the adjusted EBIT range, and raising the adjusted EPS range, to reflect our current outlook for adjusted EBIT and a lower adjusted tax rate.

Now, I'll take you through the detailed results and guidance. For the third quarter, net sales on and as reported basis declined 2% to $1.87 billion. Excluding currency and the impact of the Garden Fresh Gourmet acquisition, organic net sales also declined 2% driven by lower volume. Net price realization was comparable to the prior year with higher sell-in prices offset by increased trade promotions.

Adjusted EBIT decreased 5% to $312 million reflecting higher advertising in consumer promotion expenses, higher administrative expenses, and lower volume, partly offset by a higher gross margin percentage. Adjusted EPS decreased 2% to $0.65. 

For the nine-month period, net sales on an as reported basis were down 2% while organic sales decreased 1% compared to the prior year. Adjusted EBIT of $1.214 billion and adjusted EPS of $2.48, both increased by 15%. Year-to-date earnings growth is being driven by our improved gross margin performance and benefits from our cost savings initiatives. 

Breaking down our sales performance for the quarter; reported net sales and organic sales both declined 2% as the one point negative impact of currency translation was offset by the one point benefit from the acquisition of Garden Fresh Gourmet. Within organic sales, volume and mix subtracted two points which was primarily driven by the declines in V8 Beverages and soup within the Americas Simple Meals and Beverages segment as well as the lost carrot sales in Campbell Fresh. 

Higher selling prices contributed one point to sales growth while higher promotional spending subtracted one point. Our adjusted gross margin percentage increased by 40 basis points to 37%, Exceeding our expectation on overall supply chain performance despite the weather-related carrot issue. Cost inflation and other factors had a negative margin impact of 1.6 points, driven primarily by cost inflation which has a rate increased by approximately 1% and the increasing carrot cost previously discussed. 

In aggregate, our net price realization reduced adjusted gross margin by 20 basis points as higher promotional spending in the quarter to support US Soup, Global Biscuits and Snacks, and Bolthouse Farms Beverages was mostly offset by list pricing actions previously taken across several businesses. Mix was slightly favorable adding 10 basis points.

Lastly, our supply chain productivity programs which are incremental to our three-year cost savings program, contributed 210 basis points of margin improvement in the quarter. 

Adjusted marketing and selling expenses increased 5% in the quarter primarily due to higher advertising and consumer promotion expense. Advertising and consumer promotion expense increased 8% in the quarter driven primarily by increases in Pepperidge Farm and V8 beverages. 

Adjusted administrative expenses increased 4% primarily due to the higher incentive compensation cost, inflation, increased cost to support long-term innovation, and the acquisition of Garden Fresh Gourmet partially offset by the benefits from cost savings initiatives. 

For additional perspective on our performance, this chart breaks down our EPS changes between our operating performance and below the line items. As you can see, adjusted EPS decreased $0.01 compared with the prior year from $0.66 to $0.65 per share. On a currency neutral basis, declines in adjusted EBIT had a $0.03 negative impact on EPS. The impact in share repurchases under our strategic share repurchase program, reduced our share count slightly while had no impact on EPS for the quarter and net interest expense was comparable to prior year level. 

Our adjusted tax rate for the quarter was 28.5%, down 3.1 points versus the prior year primarily due to the lower than expected taxes on foreign earnings probably offset by the geographic mix of our earnings with a higher proportionate income in the US. The lower tax rates benefited EPS by $0.03. Currency had a $0.01 negative impact on EPS in the quarter completing the bridge to $0.65 per share. 

Now, turning to our segment results; in Americas Simple Meals and Beverages, organic sales decreased 2% to $999 million driven by declines in soup and V8 Beverages partially offset by gains in Prego pasta sauces and Plum products. 

Operating earnings 1% reflecting a higher gross margin percentage driven by productivity improvement, partially offset by lower volumes and increased advertising expenses. In total US soup sales declined 5% driven by category declines which as Denise mentioned, were primarily impacted by warmer weather compared to the year-ago quarter, the impact from our pricing action and marketing execution issues on Chunky. Although our pricing actions had a negative impact on volumes, they have contributed to improved profitability. Within US soup, RCS declined 30% and condensed declined 4% partially offset by 10% gains in Swanson broths. 

Estimated changes in retailer inventory levels did not meaningful impact sales in the quarter. As we previously stated, we will not be providing this subcategory sales performance beyond this fiscal year. 

Here if you'll look at US veg soup category performance and our shares results as measured by IRI. For the 52-week period ending May 1, 2016, the category as a whole declined 2.4%, our sales in major channels declined 3.5% with weakness in ready-to-serve and condensed soups probably offset by strength in broth. Campbell had a 59% market share a decline of 70 basis points. Private label grew share by 20 basis points finishing at 13%, all other branded players collectively had a share of 29%, up 50 basis points reflecting share gains by smaller brands. in Global Biscuits and Snacks, organic sales decreased 1% with declines in Kelsen, partially offset by gains in a Pepperidge Farm and Goldfish Crackers, and soups and beverages in Australia. 

Excluding the negative impact of currency translation, sales from Arnott's biscuits were comparable to the prior year with gains in Indonesia offset by declines in sweet biscuit varieties in Australia. Our operating earnings decreased 8% primarily driven by higher incentive compensation costs and the negative impact of currency translation. 

In the Campbell's Fresh segment, organic sales decreased 4% with declines in carrot partially offset by gains in Bolthouse Farms Premium refrigerated beverages and salad dressings. Not included in organic results is our recent acquisition, Garden Fresh Gourmet, which contributed 10 points of sales growth to this segment. Operating earnings declined 28% driven by the higher carrot cost. Excluding the negative impact from the carrot issue and the acquisition, operating earnings for C-Fresh in the quarter would have increased significantly compared to the prior year. 

Despite the negative impact in the quarter, year-to-date operating margins in C-Fresh have increased by one percentage points. 

We had strong cash flow performance for the first nine months. Cash from operations increased by $212 million to $1.183 billion driven by higher cash earnings and lower working capital requirements especially in the area of inventory. Capital expenditures decreased $17 million to $225 million. We continue to forecast CapEx of approximately $350 million for fiscal 2016. We paid dividends totaling $294 million reflecting our current quarterly dividend range of 31.2 cents per share. 

In aggregate, we repurchased $118 million of shares in the first nine months, $75 million of which we are under our strategic share repurchase program. The balance of the repurchases, were made to offset dilution from equity based compensation. 

Net debt declined by approximately $250 million as positive net cash-flow generated by the business more than offset the impact of the $232 million acquisition of Garden Fresh Gourmet in the fourth quarter of 2015. 

Now I'll review our 2016 outlooks. Our sales guidance remains unchanged at minus 1% to 0% including a one point benefit from the acquisition of Garden Fresh Gourmet and a two point negative impact of currency translation. 

We are narrowing the range for adjusted EBIT which we now expect to grow 11% to 13%. The year-over-year growth reflects the benefit of improved gross margin performance and the benefits from our cost savings initiatives. We expect adjusted gross margin for the year to expand by approximate 175 basis points to 200 basis points. We are increasing the adjusted EPS growth range to 11% to 13% or $2.93 to $3 per share, in line with EBIT growth. 

Reflecting lower taxes on foreign earnings, we now expect the full year adjusted tax rate to be approximately 32%. Against our cost savings program and consistent with our prior forecast, we expect to deliver incremental savings in the range of $120 million to $140 million in 2016. Our 2018 annual savings target remains unchanged at $300 million. 

That concludes my remarks and now I'd turn it back to Candice for the Q&A.

Ken Gosnell:

Thanks Anthony. We will now start our Q&A session. Since we have limited time and to the callers, please ask only question at a time. Okay Candice.

Question & Answer

Operator:

Thank you. Ladies and gentlemen on the phone lines, if you'd like to ask a question at this time please press star followed by the number one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue you may press the pound key. And our first question comes from the line of David Driscoll of Citi. 

Your line is now open.

David Driscoll:Citi:

Great. Thank you and good morning, everyone. 

Anthony DiSilvestro:

Hi David.

Denise Morrison:

Hi David.

David Driscoll:

I just wanted to ask a question about the cost savings program and you know I think the original expectation was to take half of the savings from the program and reinvest back in the business and I heard you guys saying it a number of times that the savings is just kind of coming in faster than you originally anticipated. So may be you are not at pacing or putting the full house in. So is it right to think kind of going forward that it is that the bulk of the '17 savings should get reinvested back into the business Denise and this would number one give you this yield to reinvigorate the topline and the number two will just kind of marry up to that big picture comment about 50% reinvestment, is that, or could you just comment on that.

Denise Morrison:

Yeah. Yes. See the cost savings program is giving us the financial flexibility to reinvest back in the business to jump start topline growth. We have been very choice full about this investments and they are predominantly going after new product launches such as you started to see in the third quarter our C-Fresh innovation new shapes in Australia, Pregos farmers market and we're introducing a Plum organic baby formula and we will continue to support those new products into next year and announce more at our Investor Day. 

A lot of the money is going to make sure that we have support of our key brands in line with the portfolio roles in each division. 

One thing that is new is we are channeling some of this of these dollars into longer-term innovation so that we make sure we have a robust pipeline in a state of readiness and then finally, we are reinvesting it to build capabilities in things that we see coming into the industry such as digital and advanced analytics. So our intention is definitely to reinvest some of this money to drive top-line growth. 

David Driscoll:

And just one follow-up, did the piecing of the cost savings changed at all Anthony? Is it still, is your forecast for the year still the same?

Anthony DiSilvestro:

Yes. So in the last quarter we talked about $120 million to $140 million incremental for that for this year. We are at about $110 million year-to-date so got a little bit to go but we are certainly well ahead of our initial expectation both in the total amount and the timing and I think about get to the essence of your earlier question with the target going up to $300 million and significant amount of savings still to be achieved in fiscal '17 and '18 we will work and continue to target our long-term targets in terms of sales, EBIT, and EPS growth in fiscal '17.

David Driscoll:

Thank you very much. 

Operator:

Thank you and our next question comes from Andrew Lazar of Barclays. 

Andrew Lazar:Barclays:

Good morning, everybody 

Denise Morrison:

Good morning Andrew. 

Anthony DiSilvestro:

Good morning.

Andrew Lazar:

Hi. I think the gross margin guidance for the year was I think up 175 basis points as of last quarter and Anthony said now 175 to 200 for the year. I just trying to get a sense of what the key sort of changed there was I know volume in the quarter wasn't necessarily where you wanted it so I am trying to get a sense of what's driving that upside. Thank you. 

Anthony DiSilvestro:

Sure. It is primarily coming out of supply chain which continues to operate extremely well. Look across the number of metrics there in all of our plant efficiencies are of the plants are running more effectively than they did last year and we continue to see significant savings in the area of transportation and warehousing and just to give you a couple of KPIs, our inner plant shipments are down versus a year-ago. They amount of times we reach into the spot market for freight purchases is basically at zero compared to a significant amount last year. 

Our truck weights are up this year versus last year, miles traveled are down versus year-ago and all of these things are just yielding really good results coming out of the supply chain and continued to exceed our expectations. 

Andrew Lazar:

Thank you. 

Operator:

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

Denise Morrison:

Good morning, Bryan.

Evan Chang:Bank of America Merrill Lynch:

Good morning. It's actually Evan on for Bryan. Just following on David's question, just about reinvesting back. I guess I am still struggling here. 

So promotional spending was up in the quarter, marketing was up in the quarter, organic sales were down. I guess if you started out your prepared comments talking about the challenging operating environment. So, I guess just to on sure how just the planned reinvestment is going to drive the top-line and I guess starting in 4Q, so if you can just, I guess within the context of the operating environment, I guess question's why should we expect sales to return and how I guess starting as earlier as the fourth quarter.

Denise Morrison:

It seems like its an equation but it isn't because the places where we experienced the sales decline were not necessarily the places where we invested the A&C and the tea. So let me explain. 

I talked about the sales decline being due the three factors. One being predominantly RTF soup, the second being V8 beverages, and the third the fortunate situation we had in carrots with the shortage of organic carrots. The investment that we made was on different things. So we invested A&C, advertising and consumer, in our Global Biscuits and Snacks business against Shapes in Australia which worked, Tim Tams in Australia which didn't work, and our cookies and bakery business and Goldfish and Pepperidge Farm which did work. 

We invested advertising and consumer in V8 but we focused it on the Veggie Blends and that worked. We realized that we had put more emphasis going forward on V8 Red and we are course correcting there. We also spent predominantly promotion spending on our Campbell Fresh new product launches and that is going incredibly well and then finally we spent money against Prego and Simple Meals which also had a very good quarter. So we do believe in the investment of A&C in this business and with trade spending, it was up against the Arnott's business that I just talked about Goldfish and C-Fresh new products. 

On a year-to-date basis, trade spending is down 5% and about 0.3 points versus a year-ago on a rate basis. 

Anthony DiSilvestro:

To just to add to that I mean there were a couple of issues that we believe are temporal in the quarter and a bit unusual one is certainly the impact of that carrot yield this year which impacted our sales by almost a point negatively and also the category declines in soup as Denise mentioned earlier impacted by the warmer weather. Exclude those two item, sales would have been flat compared to a year ago. So we think a couple of things happening in this quarter are not going to repeat themselves.

Evan Chang:

Okay no that's helpful so it sounds like some of the things for most grander categories specific in as you thinking about the challenging operating environment particularly in the US, are you seeing just broader levels of promotional activity. Do you expect that going forward or again its just really where you are spending is really more categories specific behind some of these brands.

Denise Morrison:

We are in a situation in the industry particularly in center store categories where growth is hard won and its very competitive and we expect that to continue.

Evan Chang:

Thank you.

Operator:

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

Rob Moskow:Credit Suisse:

Hi. Thank you very much. 

Denise Morrison:

Hi Rob.

Anthony DiSilvestro:

Hi Rob.

Rob Moskow:

One question is on the fourth quarter implied guidance. Its a very wide range Anthony wanted to know why so wide? What are the factors that could go either way? Second are you giving fiscal '17 and '18 guidance today? I thought I heard you say that you expect to be on your long term algorithm maybe I misunderstood. Thanks.

Anthony DiSilvestro:

Yes so just to clarify that, I said we aspire to achieve our long term target in fiscal '17. We will give a more specific guidance when we get to our fourth quarter call. In terms of the implied range, it does obviously have $0.07 delta in the fourth quarter. I think for perspective and we have had been a challenge forecasting year. 

As you know it's taking the guidance up a couple of times already. We have just gone through massive change here at the company, probably the largest transformational change in the company's history in terms of reorganizing in to three divisions, addressing spends and layers and voluntary headcount reduction, involuntary headcount reduction, the adoption of zero-base budgeting and changing many of the policies we have at the company, changing our operating model and performing an integrated global services function, and given the amount of change, it's just been really difficult or more difficult usual of the forecast. So we are just giving ourselves a little bit a latitude here in the fourth quarter in terms of where we are going to come out. 

Some of the variability will likely be in gross margin, that 25 basis point range can take it from the top of the EPS range for the bottom, cost savings could be a little bit variables. We feel pretty confident we'll see some organic growth at the top-line. 

Evan Chang:

Thank you.

Operator:

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

Chris Growe:Stifel Nicolaus:

Hi. Good morning. I just wanted to ask a question in relation to the market share declines in soup. But I know we have talked about soup generally and you've talked about soup generally and some of the challenges particularly in ready-to-serve but condensed was down as well and that's the part that I was surprised by and I guess in relation to that, I just trying to understand when you think about the incremental marketing and for example this quarter and promotional study and as you look ahead, is it designed to trying and narrow that market share gap in soup, is that something you are trying to work against here in the short run and we could see some improvement in early next two seasons?

Denise Morrison:

Yes you know as I look at it, for the quarter condensed was down but on a year-to-date basis, condensed was actually up in share. 

Broth was up 10% for the quarter and pretty flat by gaining consumption and gaining share. Our issue really is RTS and I look at myself in the mirror and this one is. It was bad execution on Chunky. I mean we had lack of compelling advertising, we didn't leverage our partnership well with the NFL, we had a label issue in the first quarter with cost of sales and the good news is these are all execution issues within our control and we are actively addressing them. 

So I believe that if we keep supporting this core business and we get our act together on Chunky, we will be in pretty good shape going forward. 

Anthony DiSilvestro:

Just add to that, one other things we did in RTS is we made a pretty significant move on our promoted price points which we hadn't done in over a decade and we felt that it was really important for the category and for our possibilities to make that move. We knew it would have a negative impact online we are seeing that come through and we knew it would have a negative impact on our share performance and again we are seeing that comes through as well. 

Chris Growe:

Thank you...

Denise Morrison:

I think also you'll to start to see more of a steady stream of innovation in the core soup category.

Chris Growe:

Okay. And just on that point Anthony in terms of the raising corona price points, is that something you can sustain or is competition not allowing for that in ready-to-serve?

Anthony DiSilvestro:

We intend to sustain that.

Chris Growe:

Okay. Thank you.

Operator:

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

Ken Goldman:JP Morgan:

Hi. 

Denise Morrison:

Hello Ken.

Anthony DiSilvestro:

Hey Ken.

Ken Goldman:

Hey good morning everyone. Anthony you said that excluding I guess the carrot and weather generated soup issues, sales would have been flat this quarter. I get it, it makes sense. But it still implies like a sort of a two-year stack number of minus 1%. 

So I guess when I am looking at your fourth quarter guidance, are you looking for, just to confirm and if you said this earlier I apologized but just to confirm, are you looking for seems to me like at least positive two percentage roughly on an organic basis, against what will be kind of a positive comp. So I am just curious; A, is my math right on that and B, just to go back on some of the questions that people have asked already, doesn't that sort of imply a little bit of a sequential improvement in sort of run rate organic growth exploiting some of the other that you talked about? 

Anthony DiSilvestro:

Sure let me give the a little more detail on the facts. So before I get to the organic just building up to the sales in the fourth quarter. So year-to-date currency has been minus 2 points in the fourth quarter. Its gonna be more modest likely a minus one. 

The other thing is the impact of Garden Fresh Gourmet in our fourth quarter which is seasonally low, it will probably have closer to a two point positive impact and a one point positive impact. So net-net that's a positive one and if we can give plus one an organic that gets it to a plus two. So that's what we're thinking about. So doesn't have to be a two organic just have to be a one, to get it to the bottom end of that range. 

Denise Morrison:

And we have the benefit of some new products that we just started shipping in the quarter. 

Ken Goldman:

Thats very helpful. Thank you guys. 

Anthony DiSilvestro:

Sure. 

Operator:

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

Jason English:Goldman Sachs:

Hey. Good morning folks.

Anthony DiSilvestro:

Hi. 

Denise Morrison:

Hi Jason. 

Jason English:

real quick clarification question, Denise I think you said trade expense down about 5% year-to-date but when you look at the promotional lines, in terms of sales drivers. Its neutral year-to-date. So what else is driving the offset to trade spend reductions.

Anthony DiSilvestro:

I think in dollar term, trade spend is fairly comparable to prior year and I think on a rate basis, when we look at our rate, relatively flat on a total company on a rate basis.

Jason English:

Okay. A little deeper in there I know you guys set up a revenue management team early this year. Its obvious still early innings but there is no objective coming in to the able to find some opportunities more efficiencies there. In reverse what's been sort of a long-term trend of promotions being a drag on sales, where do we stand you sort to have progress our of the gates, we've kind of some of that progress and have you found some of your efforts on that front to be futile or as we think forward, is there still opportunity and can we expect this year start to bear fruit as we go into next year.

Denise Morrison:

Yes. We look at trade as part of net price realization and to that end with our creation of the integrated global services, we have beefed up our revenue management group and are working on advancing our analytics to be able to do a couple of things. First of all make sure that we are optimizing our pricing, second make sure that we are maximizing the return on our trade investment as we continue to work through programs on our brands with customers. If we do see opportunities to be more effective and efficient, we will do so. 

I am as much for working with the numerator as the denominator.

Anthony DiSilvestro:

Let me just add to that, we are seeing benefits from our revenue management initiative. It led to the pricing actions we took on last year, it led to the changes in promoted price points, this led to the pricing on Prego, it led to some of the pricing in some of the other businesses around the world, and will continue to focused on it going forward. 

Just one more comment in terms of the quarter. A lot of what you have seen in the quarter is a result of pricing. A lot of the cost savings came in the first half and we had re-paid some of the marking out of the first half and into the second half. So I think, probably appropriate to judge us on our year-to-date results which we feel little good about.

Jason English:

Makes sense. Thanks a lot. I'll pass it on.

Operator:

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

John Baumgartner:Wells Fargo:

Good morning. Thanks for the question. Denise, I'd like to ask about promo spend in baking and snacking. It's been a segment where you have reduced promo during the first half of the year and it looks as though you reversed course this quarter. 

How much of this is really just a comparison issue against the pacing of last year versus may be relative to the deeper change of course going forward?

Denise Morrison:

I think that promotion spend is really important in the baking and snacking area in the United States, we have been really focused on couple of brands one being Goldfish which has performed very well in the other being Melano. I do think that there is, the occasions that's worked throughout the year but promotion is an important part of the mix for that particular business for impulse sales.

John Baumgartner:

Okay and then just in terms of the volume prospects there and you were lapping some pretty hard comps earlier this year, how do you think about the base Pepperidge business going to fiscal '17 on the competitor front as well?

Denise Morrison:

I'm not sure I understand the question. Could you clarify?

John Baumgartner:

Yeah. In terms of the volume prospects for the segment going forward, I think you would lap some pretty hard comps in the first half of this year depressed volumes but as you get into easier comps back half of this year, new innovation rolling out in Goldfish, how are you feeling about the volume prospects in the business as you move into fiscal '17?

Denise Morrison:

Are your talking specifically about baking and snacking.

John Baumgartner:

Yes. 

Anthony DiSilvestro:

Yeah. Pepperidge Farm.

Denise Morrison:

Yeah. Pepperidge Farm. I think that you'll get a glimpse of our plans in July but it's shaping up to be a pretty strong plan and will continue to work on Goldfish and also on the cookie business as well.

John Baumgartner:

Yes. Thank you.

Operator:

Thank you and our next question comes from the Michael Lavery at CLSA. Your line is now open.

Michael Lavery:CLS

Good morning.

Denise Morrison:

Hey Michael.

Anthony DiSilvestro:

Good morning.

Michael Lavery:

Just was hoping to get a little more color on the topline and some of your outlook there. You mentioned just in general the cautious consumer spending and soft trends but can you dissect that a little bit because certainly there is categories and companies that have very strong top-line growth and there is minimum wage increases and low-end wages that are in an upswing and so is that more big food or center-store specific or do you think that's a micro-issue and then related to that on pricing, obviously Wal-Mart had very strong numbers driven by price investments and really their funding a good bit of that but are you seeing a push back on pricing from the trade and are you able to get pricing through or how do you see the outlook there?

Denise Morrison:

Yes what we are seeing, we are seeing in terms of our performance in the market place. The shelf-stable businesses, we are tracking them. The shelf-stable businesses are pretty mixed with more robust sales growth in the Simple Meals area and then there are a number of categories who are below the average. And so refrigerated is doing a lot better so that the Fresh business and frozen more categories are down than up. 

And so we have done and announced this and like I said there is more frequent trips being made versus year-ago but shoppers are buying less overall units and that seems to be across all of the categories. And so we are noticing that the heavier we don't really talk about specific customers but I think in general we have been able to execute our pricing in the market place.

Michael Lavery:

Well and I didn't expect color on Wal-Mart in particular but just push back on the trade and in general you are seeing that pricing outlook environment looks constant?

Denise Morrison:

Its just been such a long time since we have increased prices on our products we were able to establish them in the market place and we are still promoting the products and working with the customer on their plans.

Michael Lavery:

And when you say across categories, are you referring to get to read through things like channel shifting saving to Amazon or other non-traditional channels. 

Denise Morrison:

Yeah we track up about 38 categories in Simple Meals and across the center-store refrigerated and also in frozen so that we can get an idea for the cadence of the industry and how we're performing within that cadence. 

Michael Lavery:

That's in grocery?

Denise Morrison:

Yes we will get positively move out. 

Michael Lavery:

Okay thanks a lot. 

Anthony DiSilvestro:

Thanks Michael. 

Operator:

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

Alexia Howard:Sanford Bernstein:

Good morning everyone. 

Anthony DiSilvestro:

Good morning Alexia. 

Alexia Howard:

I guess, the first question the it seems to me that there are some small brands that are doing quite well it seems at the moment if I think about imagine obviously from the much smaller base or even in the refrigerated section scenarios. How is that informing your innovation pipeline? How is that effecting your relationship with the retailer where you mentioned analytics a couple of times improving. Is there a sense that the retailers might tell you to toning down the traffic in favor of and the analytucal algorithms to set the shelf space now that the brands do seem to be here at the grocers. 

Denise Morrison:

It is absolutely true I think it's absolutely true in a lot of categories of smaller challenger brands or growing faster off of a smaller base. And in the soup category, there are a couple that are growing faster again but they are much smaller. We also have some smaller parts of the soup business that are growing faster. So for example Slow Kettle is up 9% in the quarter and is up 50% year-to-date in consumption and also Campbell Organic as up 41% in the quarter and then a relatively new brand to the category. 

Those will be two examples and there is a couple others as well and our refrigerated soup continues to perform as expected up 2%. So we are seeing it and we believe that we need to participate in that. 

Alexia Howard:

And then on the category catch and roll?

Denise Morrison:

I am sorry. I didn't understand. 

Alexia Howard:

The traditional category captain roll that you've obviously played in soup. More analysis of the standard data particularly by the retailers I mean. May be the retailers are less dependent on you how's that playing out.

Denise Morrison:

I mean I we have just about 59% market share in the soup category. We believe that we have to plan all segments and we are doing so and we are working with retailers on the bus way to manage the whole category. So that has not changed.

Alexia Howard:

Okay. Thank you very much I will pass it on.

Operator:

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

Matt Grainger:Morgan Stanley:

Hi. Good morning, everybody. Denise I just wanted to ask about the M&A landscape I know this comes up a lot. But you've always talked about being open to acquisitions but approaching it just generally with strategic and financial discipline. 

So I guess with that as the starting point, can you just give us an update on the scale of opportunities that you are thinking about whether the focus is more on bolt-ons and higher growth adjacencies or whether you'd be open to larger more transformational things that allow you to more aggressively use the balance sheet now that you've delivered a bit?

Anthony DiSilvestro:

Yes Matt. I mean as we have said before we have a very disciplined approach to M&A and I think we do obviously it needs to be strategically compelling, it has to be financially attractive and I'd say you know we're open to both the idea of smaller bolt-on acquisitions that build upon our platform for example in Campbell Fresh or to expand geographically in biscuits and snacks. The overall this is relatively short. We continued to work it and develop relationship with companies around the world and in the US. 

On the other hand we do have financial flexibility to do something a bit larger. So I think it depends more on the attractiveness of the opportunity first and foremost on the strategic and a financial perspective and again open to varying sizes.

Matt Grainger:

Okay and then are there any constraints that we should keep in mind just in terms of leverage or willingness to use equity?

Anthony DiSilvestro:

We don't have a specific limit in mind. I think the acquisition is a good example where we took the debt-to-EBITDA up between little over 3.5 times and paid that down pretty quick. So again we have quite a bit of financial flexibility.

Matt Grainger:

Okay.

Anthony DiSilvestro:

And we'd use it for the right opportunity.

Matt Grainger:

Thank you, Anthony.

Anthony DiSilvestro:

Sure.

Operator:

Thank you and our next question comes from Jonathan Feeney of Athlos Research.

Jonathan Feeney:Athlos Research

Thanks very much. I just had a question on the interplay between pricing and volume in Americas Simple Meals. Over the past two years, it looks like pricing is up about 2.5 points while volume's down about 7.5 on or just for this third quarter past two years and I am wondering I know costs are down now in that time I understand you've done a great job holding share in those categories on mainly talking soup here but what role do you think higher pricing across that categories have in sort of hurting the volumes in soup and I know you maybe had some weather but on a two-year basis that's not really been the case, of weather this year and going forward now that costs are rising a little bit more is that going to change your philosophy in thinking about how your balance price and volume in Americas Simple Meals. Thanks very much.

Anthony DiSilvestro:

I say on the cost side you said they're rising a little bit more. We are seeing moderating cost inflation at least in the back half of this year and probably into next year and that takes a little bit of pressure off the pricing algorithm and our objective is to spend gross margins through a combination of net pricing and productivity in excess up the cost inflation. So as cost inflation moderates, that gives us a little more flexibility. There is no question that if you look back over the last couple of years we have moved up some of our net pricing both list and promoted in an effort to improve the profitability of the soup business and in fact we have done that quite successfully and that does have a short term impact on volume. 

Longer term we like to think that in the broad basket of things that will drive consumer demand things like product quality and innovation and robust marketing are all part of that algorithm to drive volume growth over long term.

Jonathan Feeney:

Okay just to clarify that you are saying costs are up over the past two years in Americas Simple Meal?

Anthony DiSilvestro:

Looking backwards or looking forward?

Jonathan Feeney:

No, looking backward, versus 2014, your fiscal '14. You are looking right now. You are saying costs input costs are up over that period of time for you.

Anthony DiSilvestro:

Yes.

Jonathan Feeney:

Okay. I'll follow up offline about that. Thank you.

Anthony DiSilvestro:

Sure.

Operator:

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

Ken Gosnell:

Thanks Candice. Thank you everyone for joining our third quarter earnings call webcast. A full replay will be available about two hours after the call concludes by going online or calling 1-703-925-2533. The access code is 167-06-08. 

You have until June 3, at midnight at which point we move our earnings call strictly to the website, investor.campbellsoupcompany.com under news and events.

If any further question please call me, Ken Gosnell, 856-342-6081. If you are a reportee with questions please call Carla Burigatto, Director of External Communications, at 856-342-3737. This concludes today's program. Thank you.

Operator:

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