Q2 2017 Real-Time Call Brief

Highlights

Organic sales declined 2% with the most prominent declines in Campbell Fresh and V8 shelf-stable beverages.

Our adjusted gross margin increased 70 basis points, all of which was achieved by Americas Simple Meals and Beverages.

As we announced this morning, we now expect to achieve our cost savings target a year ahead of schedule. Based on the success of the program to-date and the identification of additional savings opportunities, we're raising our cost savings target from $300 million by the end of fiscal 2018 to $450 million by the end of fiscal 2020.

Looking at the first half, organic sales declined 1%, adjusted EBIT was comparable to a year-ago and adjusted earnings per share increased 5%.

The expectation of improved sales performance in the second half of the year, we reaffirmed our full year guidance this morning.

Last June, we voluntarily recalled our protein plus beverages for quality reasons. At that time we had a 47% market share of the protein segment and protein plus was one of our strongest performing SKUs.

I continue to be pleased with the Americas gross margin expansion, driven by the performance of our supply chain team.

Once again, the division delivered strong operating earnings growth of plus 8%.

Our US soup business grew in the quarter. I'm especially pleased with our ready-to-serve brands. Sales increased double-digits in ready-to-serve.

Sales results were below our expectations, primarily due to C-Fresh as the recovery on beverages and carrot is taking longer than previously anticipated, with the additional impact of heavy rains in the quarter, which had a 40 basis point negative impact on adjusted gross margins.

We reported non-cash impairment charges totaling $0.58 per share in our GAAP results related to our Campbell Fresh segment.

Despite the negative impact from C-Fresh, I'm pleased with our overall adjusted gross margin performance, which was up 70 basis points.

We are increasing our cost savings estimate for 2017 to $85 million, which will put us at our targeted $300 million by the end of fiscal 2017, a year earlier than anticipated.

Based on the overall success of the program and the identification of additional savings opportunities, we are increasing our cost savings target to $450 million by the end of fiscal 2020.

While adjusted EPS increased to $0.91 in the quarter, we recognize that the increase is due to a decline in our adjusted tax rate.

We're also wrapping a very strong second quarter last year in which adjusted EPS increased 23%.

For the second quarter, net sales on an as reported basis declined by 1% to $2.171 billion.

Excluding the favorable impact of currency translation, organic net sales declined 2%, driven by lower volume and higher promotional spending.

Adjusted EBIT declined 1% to $417 million, reflecting the impact of lower sales and higher marketing and selling expenses, partly offset by a higher adjusted gross margin percentage.

Benefiting from a lower tax rate, adjusted EPS increased 5% or $0.04 to $0.91 per share.

For the first half, as reported and organic net sales, both declined by 1% compared to the prior year.

Adjusted EBIT was comparable to prior year and adjusted EPS of $1.92 was up 5%.

Breaking down our sales performance for the quarter, organic sales declined 2%, driven by one point decline from volume and mix, driven primarily by Campbell Fresh, and a one point decline from higher promotional spending.

Although it rounds to zero on the chart, we did have a slightly positive impact from currency translation, principally the Australian dollar, bringing the change in our as reported sales to minus 1%.

Our adjusted gross margin increased 70 basis points in the quarter.

First, cost inflation and other factors had a negative impact of 80 basis points.

On a rate basis, cost inflation was about 1%, and in Campbell Fresh, increased costs reflects the impact of heavy rains on carrot yields, lower beverage operating efficiencies, and the overall impact of lower volumes.

Increased promotional spending had a negative impact of 60 basis points, reflecting the drivers I previously discussed.

List price increases had a slightly positive impact of 10 basis points, driven primarily by list price actions taken by our retail business in Canada.

Mix was slightly favorable, adding 20 basis points, reflecting the sales decline in our lower margin C-Fresh segment.

Our supply chain productivity programs, which are incremental to our cost savings program, contributed 180 basis points of margin improvement in the quarter.

All-in, our gross margin percentage increased 70 basis points to 38%.

Adjusted marketing and selling expenses increased 5% in the quarter, primarily due to higher advertising and consumer promotion expenses as we reinvest in our brands.

Adjusted administrative expenses declined 3%, reflecting lower incentive compensation compared to the year ago quarter, partly offset by higher benefit related costs, and investment in long-term innovation.

Adjusted EPS increased $0.04 from $0.87 in the prior year quarter to $0.91 per share in the current quarter.

On a currency-neutral basis, decreases in adjusted EBIT had a $0.02 impact on EPS.

Share repurchases lowered our share count adding a penny benefit.

Our adjusted tax rate for the quarter decreased by 3.8 points to 27.8%, contributing $0.05 to EPS growth.

We benefited from a favorable timing impact related to the impairment charge. This will reverse in the second half and bring us to our forecasted full year adjusted tax rate, which remains at approximately 32%.

Currency translation also had no impact on EPS, completing the bridge to $0.91 per share.

Now turning to our segment results, in Americas Simple Meals and Beverages, organic sales fell 1% to $1.231 billion as declines in V8 Beverages were mostly offset by gains in Soup, Prego pasta sauces and Plum products.

Sales of US soups increased 1%, reflecting double-digit gains in ready-to-serve soups, driven by growth in Chunky and launch of Well Yes!, mostly offset by declines in broth and condensed soups.

Operating earnings increased 8% driven by a higher gross margin percentage, which benefited from supply chain productivity improvement, partially offset by increased advertising and consumer promotional expenses.

Here is a look at US Wet Soup category performance and our share results as measured by IRI. For the 52 weeks period ending January 29, 2017, the category as a whole declined 1.2%. Our sales in measured channels declined 1%.

Campbell had a 58.8% market share for the 52-weeks period, with a share gain of 10 basis points.

Private Label grew share by 70 basis points, finishing at 13.5%.

All other branded players collectively had a share of about 28%, declining 80 basis points.

In Global Biscuits and Snacks, organic sales decreased 1%, driven by declines in Kelsen in the US, and Arnott's biscuits, partly offset by gains in Pepperidge Farm.

Operating earnings declined 4% to $135 million, reflecting a lower gross margin percentage as higher promotional spending and supply chain costs were partly offset by productivity improvements.

In the Campbell's Fresh segment, organic sales declined 8%, driven by lower sales of carrots, Bolthouse Farms' beverages and Garden Fresh Gourmet, partly offset by gains in refrigerated soups.

Operating earnings declined by $24 million to a loss of $3 million, reflecting higher carrot and beverage production costs, as well as from lower sales volumes.

Based on current performance and lower forecasted sales and earnings growth, we recognized non-cash impairment charges of $0.45 per share on the carrot and ingredients business, and $0.13 per share on Garden Fresh Gourmet.

Cash flow from operations was $667 million compared to $754 million generated in the first half of last year.

Capital expenditures declined $34 million to $119 million.

We have lowered our CapEx forecast by $25 million to approximately $325 million for fiscal 2017.

We paid dividends totaling $207 million, reflecting our increased quarterly dividend rate of $0.35 per share.

In aggregate, we repurchased $234 million of shares, $200 million of which were under our strategic share repurchase program, as we've increased our level of share repurchases.

Net debt declined by $357 million compared to year-ago levels as cash from operations over the last four quarters was well in excess of capital expenditures, dividends and share repurchases.

We are very pleased with progress made on our cost savings program. With our new forecast for incremental savings of $85 million in 2017, we now expect to reach our $300 million target by the end of this fiscal year.

While our current initiatives would generate in excess of $300 million in savings, we believe there are additional areas of opportunity which in aggregate will get us to our new target of $450 million.

We expect sales to grow by 0% to 1%; adjusted EBIT to grow by 1% to 4%; and adjusted EPS to grow by 2% to 5%.

On our cost savings program, we now project full year savings of approximately $85 million compared to our prior forecast of $50 million.

Additional cost savings and lower than expected cost inflations, about 1.5% compared to the prior forecast of about 2% are offsetting incremental investments in marketing and the softness in Campbell Fresh.

We expect our adjusted gross margin percentage to end the year at about 38%, almost a point better than last year.

Our EPS guidance reflects an effective tax rate of approximately 32%, which is unchanged and the favorable impact of anticipated share repurchases over the course of the year.