Campbell Soup Company (CPB) — Q4 2016 Earnings Call Transcript

Thank you, Stephanie. Good morning, everyone. Welcome to the Fourth Quarter Earnings Call for Campbell Soup's Fiscal 2016. With me on the call 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.campellsoupcompany.com. This call is open to the media who participate in listen-only mode. Today, we will make forward-looking statements which reflect our current expectations. These statements rely on assumptions and estimates which could be inaccurate and are subject to risk. Please refer to slide two or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in forward-looking statements. Now I'd like to remind you about items impacting comparability. As we said in this morning's news release, the current quarter results reflect a non-cash impairment charge, pension and post-retirement mark-to-market losses and charges related to cost-savings initiatives. The prior year quarter included pension and post-retirement mark-to-market losses and charges related to the implementation of the new organizational structure and cost-savings initiatives. The adjusted results exclude the impact of these items impacting comparability and our comparisons of the full year 2016 with 2015 will exclude these and previously announced items. 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. Lastly, please mark your calendars for our planned fiscal 2017 earnings dates. We plan to release earnings on November 22, 2016, February 17, 2017, May 19, 2017, and August 31, 2017. With that, let me turn the call over to Denise.

Thank you, Ken. Good morning, everyone, and welcome to our fourth quarter earnings call. Today, I'll offer my perspective on our performance with a focus on how each of our divisions are performing against their portfolio roles. We finished the year in line with our guidance and with strong profit performance. However, our results this quarter certainly did not meet my expectations. I am particularly unhappy with the short-term executional issues that have led to the poor performance in Campbell Fresh, both for the quarter and for the year. I'll spend the majority of my time this morning addressing this topic. While sales for the year, including Garden Fresh Gourmet, were up 5%, organic sales declined 4% in C-Fresh. In the fourth quarter, organic sales were down 12%, driven by declines in both CPG and Farms. This performance is unacceptable. I expect far more from the Campbell Fresh business. It's clear that we have several immediate challenges in Campbell Fresh, and we are addressing them. I'll get to that in a moment. But first, I want to step back and look at the big picture. As a reminder, fiscal 2016 is the first year of operation of Campbell Fresh. This division, which accounts for approximately $1 billion in revenue or about 13% of our total sales, combines Bolthouse Farms, the Garden Fresh Gourmet acquisition, and our refrigerated soup business. Strategically, C-Fresh positions Campbell to benefit from the growing health and well-being trend as well as the growing demand for better-for-you foods in the Packaged Fresh category. Its portfolio role is to deliver full-force growth, driven by the CPG business and to contribute to the acceleration of Campbell's overall sales trajectory. While disappointed in our execution, I remain confident in our C-Fresh strategy. We have strong popular brands that are on trend with the changing nature of consumers' eating habits. We're well positioned in the produce and deli section of stores with an eye on expansion into other categories such as dairy. We have a robust innovation pipeline, and we're enhancing our approach to long-term innovation. Strategy was not the issue. Our problem was execution. I'm going to spend some time on what didn't work, and importantly, the actions we're taking to ensure the business performs to its potential. So, what went wrong? There were two issues that were the primary drivers of the C-Fresh result in the quarter. The Bolthouse Farms Protein PLUS recall and the poor performance of our carrot business. Let's start with our CPG business and the Bolthouse Farms recall and related production outage. As previously announced on June 22, we voluntarily recalled 3.8 million bottles of Bolthouse Farms' Protein PLUS beverages due to possible spoilage. The Protein PLUS lineup accounts for approximately 15% of the Bolthouse Farms' beverage business. In addition, the same manufacturing lines are used to produce our café drinks, which account for another 10% of the beverage business. Our examination into the recall identified our manufacturing equipment and process as the primary cause of the spoilage. We have corrected these problems, rigorously tested the product, and started shipping again. However, production has not returned to the pre-recall levels due to new operating procedures that we've put in place, including an enhanced test and release protocol to ensure the product meets our high quality standards. Prior to the recall, a typical production run for these products would have been 72 hours. Today, our production run is 24 hours. Unfortunately, the shorter run significantly reduced our capacity. We are examining various ways to increase capacity, including commissioning other production lines, but we currently anticipate these will take time to implement and expect that supply will be impacted through the end of the calendar year 2016. Now, turning to Farms. Let's take a look at our second issue, our carrot business. In July, at our Investor Day, we discussed some weather-related problems and a customer issue in our carrot business. As we review these issues further, we learned the problems were rooted in several decisions that had compounded one another and therefore were broader than we understood at the time. Specifically, there were some planting, harvesting, and commercial decisions made earlier in the calendar year that exacerbated the weather problems. This led our farm's operation to harvest carrots prematurely in an attempt to meet customer demand. Ultimately, this resulted in a spring crop that yielded smaller carrots, which led to customer dissatisfaction and an additional loss of business. The size of the carrots we're harvesting now is vastly improved, and we're actively addressing service issues with customers. However, it will take us time to regain the lost business. As a result, we now expect fiscal 2017 carrot sales to be comparable to fiscal 2016, rather than benefiting from a recovery from last year's issues. A final point of context. Carrots are a relatively low-margin business. However, it serves as the chassis for our higher-margin value-added CPG business. Carrots provide the scale for the refrigerated logistics system that we leverage for distribution and merchandising. So what actions have we taken so far to correct these issues? Over the last several weeks, we made major organizational changes under Jeff Dunn, the President of Campbell Fresh. Several senior managers are no longer with the company, including the President of Bolthouse Farms. Additionally, we created a new structure to foster more agility and collaboration across the division. Previously, we had two operating units, Bolthouse Farms functioned as a distinct unit and Garden Fresh Gourmet was combined with Fresh Soup. Now we have three operating units reporting directly to Jeff. CPG, which integrates Bolthouse Farms beverages and salad dressings with Garden Fresh Gourmet salsa, hummus, and chips, along with fresh soups. Farms, which consists of carrots and carrot ingredients, and the long-term innovation unit we discussed at Investor Day in July. In addition to the three operating units, we have created a more integrated structure both at the divisional level and with Campbell. In particular, we have strengthened the integration and oversight of the Campbell Fresh supply chain. We have also bolstered the Campbell Fresh leadership team by adding more senior finance, human resources, and sales executives. This new team is a combination of seasoned and accomplished Campbell and Bolthouse Farms leaders and experienced executives recruited from food start-ups and major industry players. I believe that this newly structured team will lead this business back to the growth profile mandated by its portfolio role. In the first half of fiscal 2017, the new management team will take steps to stabilize the business. First, we expect to improve our execution. Second, we plan to continue to increase capacity as we rebound from the Protein PLUS recall and related production outage. And third, we'll stabilize the carrot business through improved quality and customer service. Our plans call for C-Fresh sales to be down slightly in the first half and return to growth consistent with its portfolio role in the second half. Putting it all together, we expect sales growth to be in the low-single digits for fiscal '17, and we will keep you updated on developments as we go. While disappointed in the near-term performance of C-Fresh, I remain confident in the strategy we are pursuing, the Packaged Fresh platform we're building, and the growth potential of this business. Now, let me shift gears to the progress we've made in other areas during fiscal 2016. As I said earlier, when I look at the year as a whole for the company, our profit performance was strong. This was driven by our Americas Simple Meals and Beverages and Global Biscuits and Snacks divisions. We delivered double-digit adjusted earnings growth with solid operating performance, including expanded gross margin, significantly improved supply chain performance, and better-than-expected cost savings. We also advanced our real food and transparency agenda, establishing Campbell as a leader in this area. However, we continue to face challenges on the top line. We recognize that we need to grow sales, and it remains a top priority. Our Americas Simple Meals and Beverages and Global Biscuits and Snacks divisions have performed largely in line with their portfolio roles. First, Americas Simple Meals and Beverages. Things are moving in the right direction here, and I feel good about what we've achieved this year. We made important strides in fiscal 2016. The team drove significant gross margin expansion through a combination of net price realization and major improvements in our supply chain. This resulted in a 13% increase in operating profit. Our Simple Meals brands delivered sales growth behind Prego and Pace, and Plum delivered double-digit sales gains through increased distribution and innovation. And we advanced our Real Food agenda, changing many of our recipes, including clean label products and embracing transparency. While we've accomplished much in the Americas divisions, sales remained inconsistent. Organic sales declined 1% for the year. Many of our brands are performing in line with the categories in which we compete. However, portions of the portfolio are underperforming their categories, in particular beverages and ready-to-serve soup. We're taking steps to address this and expect improved performance in these areas and modest growth in the division in fiscal '17. Looking ahead, the Americas division will continue to concentrate on getting more from our core brands with a focus on driving sales through investments in fewer bigger innovations and improved marketing while increasing margins. We have plans in place to drive continued margin expansion through supply chain efficiencies. In fiscal 2017, we expect our soup business to grow behind continued growth of broth and better performance from our ready-to-serve soup portfolio. As we outlined at Investor Day, our plans call for improved execution around the Chunky brand and the midyear launch of the new Well Yes clean label soup line. We also anticipate better performance from V8 beverages, driven by the continued success of Veggie Blends and V8 +Energy as well as a renewed focus on tried-and-true marketing that reengages our loyal V8 Red consumers. To connect with our consumers, build brand relevance, and drive demand, we're investing in four integrated marketing campaigns in the Americas, including a new NFL team Chunky campaign featuring six popular players. For the year, our Global Biscuits and Snacks division made progress in performing against its portfolio role. Organic sales increased 1%, and operating earnings were up 10%. Pepperidge Farm delivered strong performance, and our Asia Pacific team drove solid sales results in a highly competitive and concentrated trading environment. The emphasis on growing our icon brands Goldfish, Tim Tam, and Milano, as well as revenue management initiatives and improved supply chain performance, drove our results. Looking ahead, we remain focused on delivering the division's role of expanding in both developed and developing markets while improving margins. In the United States, we have higher levels of investment to drive sustained Goldfish growth, continued momentum for Milano, expanded Tim Tam distribution, and increased innovation in our fresh bakery business. In Australia, we're focused on strengthening our Arnott's brand through integrated marketing and relevant consumer-driven innovation. In developing markets, we expect continued growth in Malaysia and improved performance in China and Indonesia. Looking forward to 2017, I have a pragmatic outlook. Our plan calls for modest growth, driven by reinvesting some of our cost savings back into the business. We're confident in the C-Fresh platform, and we're acting with urgency to address our execution to get the beverage and carrot business back on track while continuing to drive sales on salad dressing, Garden Fresh Gourmet salsa, hummus, and fresh soup. We expect Americas Simple Meals and Beverages and Global Biscuits and Snacks to continue to live into their portfolio roles. We remain focused on delivering our three-year cost-savings target, and we are looking for more opportunities to drive effectiveness and efficiency. We'll be reinvesting a portion of our cost savings in focused innovation and improved marketing on our core business, and we're creating an ownership mindset across the organization through our zero-based budgeting efforts. These are reflected in our annual guidance, which Anthony will take you through in a few minutes. Clearly, we have some challenges ahead of us, but we know what's working and what's not. And we're taking action to improve our sales performance in every division. I remain confident in the strategic imperatives that we're pursuing and that they provide a compelling path to increase shareholder value. Reflecting confidence in our growth prospects and the strong profit performance this year, our Board of Directors declared a 12% increase in our quarterly dividend. Thank you. I look forward to answering your questions in a few minutes. Now, let me turn the call over to our Chief Financial Officer, Anthony DiSilvestro.

Thank you, Denise, and good morning. Before I delve into the specifics, I want to share my thoughts on our results and guidance. As Denise mentioned, we are disappointed with the C-Fresh division's performance in the fourth quarter, which was the main factor behind a 1% decline in organic sales for the company. This decline reflects the recall of Bolthouse Farms protein drink and decreasing sales in carrots. At the EBIT level, the negative effect from the C-Fresh division was offset by lower incentive compensation accruals compared to our expectations. In the fourth quarter, our adjusted tax rate was adversely affected by a $13 million correction for deferred taxes, leading to a $0.04 per share negative impact on EPS, resulting in our full-year tax rate finishing higher than anticipated. For the full year, although our adjusted EPS of $2.94 was within our guidance range, we ended at the lower end due to this tax correction. We are satisfied with our gross margin performance, which, on an adjusted basis, grew by 170 basis points as expected, driven by significantly enhanced supply chain performance, cost savings, and net pricing effectiveness. We continue to make great strides toward our three-year cost-savings goal of $300 million, having realized around $130 million in incremental savings in fiscal 2016, bringing the cumulative total to $215 million. Additionally, as part of our annual intangible asset review, we recognized a non-cash impairment charge of $0.41 per share on our GAAP results concerning the Bolthouse Farms carrot and carrot ingredient business, which reflects lowered expectations for future cash flows. I am pleased with our strong cash flow, which exceeded $1.4 billion, and our board has approved a 12% increase in the quarterly dividend. Looking ahead to fiscal 2017, although we are below our long-term targets, we plan to improve our sales performance compared to 2016 and invest in key brands, new product launches, long-term innovation, and capabilities in areas such as digital and e-commerce. Now, let's take a closer look at our results. In the fourth quarter, net sales, as reported, were $1.687 billion, the same as the prior year. Excluding currency translation impacts and the positive effect of the Garden Fresh Gourmet acquisition, organic net sales decreased by 1%, mainly due to the C-Fresh declines, partially offset by increases in Global Biscuits and Snacks. The Bolthouse Farms recall and resultant production issues accounted for approximately a 1 percentage point decline in total company sales. Adjusted EBIT decreased by 2% to $253 million, as higher advertising and consumer promotion expenses, alongside a lower gross margin percentage, were partially mitigated by reduced administrative expenses due to lower incentive compensation accruals. Adjusted EPS fell by 6% or $0.03 to $0.46, which incorporates a $0.03 per share negative effect from the Bolthouse Farms recall and a $0.04 per share negative effect from the tax correction. For the full year, both reported and organic net sales were down 1% compared to the previous year. Adjusted EBIT was $1.467 billion, and adjusted EPS was $2.94, each up 11%, driven by improved gross margin performance and benefits from our cost-saving initiatives. Within our quarterly sales performance, total net sales were steady compared to the prior year; however, organic sales fell by 1% due to a 2-point negative impact from increased promotional spending that was partially countered by a 1-point gain from volume and mix. Volume growth came from Arnott's biscuits, Pepperidge Farm Goldfish crackers, and Prego pasta sauces, aided by the introduction of the new Prego Farmers' Market line, although this was partially offset by declines in C-Fresh due to the Bolthouse Farms protein drinks recall and reduced carrot volumes. Increased promotional spending across our three segments reflected higher expenses in Arnott's as we were comparing against a uniquely low quarter impacted by product availability, increased spending in Bolthouse Farms to stay competitive, and more support for Prego and Taste. Except for C-Fresh, higher promotional spending enhanced volume gains. Additionally, a 1-point negative impact from currency translation was balanced by a 1-point advantage from the Garden Fresh Gourmet acquisition. Our gross margin dropped by 90 basis points in the quarter to 36.1%. The decline was driven by cost inflation and other challenges, which negatively impacted margins by 270 basis points, primarily stemming from a roughly 1.5% inflation rate, the recall and production outages of Bolthouse Farms protein drinks, and higher carrot costs from unfavorable yields. The increased promotional spending led to an additional 110 basis points hit on gross margin, although this was somewhat balanced by list pricing gains of 20 basis points from earlier pricing strategies in Global Biscuits and Snacks. There was also a slight positive mix contributing another 20 basis points. Moreover, our supply chain productivity programs, distinct from our three-year cost-savings plan, added a significant 250 basis points of margin improvement in the quarter. If we analyze it differently, the subpar performance of the Campbell Fresh segment was responsible for 70 basis points of the overall 90 basis point decline, including 50 basis points from the protein drink recall. Adjusted marketing and selling expenses rose this quarter mainly due to higher advertising costs in Pepperidge Farm for Goldfish crackers and fresh bakery, alongside increased support for Prego pasta sauces. Adjusted administrative costs fell by 19%, largely attributable to reduced incentive compensation expenses, which accounted for about two-thirds of the decline, alongside benefits from our cost-saving measures. To provide more context on our performance, this chart illustrates the change in our EPS between operating performance and line items below it. The adjusted EPS fell from $0.49 in the prior year to $0.46 per share this quarter. On a currency-neutral basis, declines in adjusted EBIT negatively affected EPS by $0.01. Our adjusted tax rate for the quarter increased by 2.3 points to 36.4%, and this increase reduced EPS by $0.02, even though the deferred tax correction's effect was somewhat offset by geographic mix benefits. The impact of share repurchases reduced our share count slightly, but due to rounding, this had no effect on EPS for the quarter. Interest expenses were comparable to the previous year, increasing by $1 million with no EPS effect, as the influence of higher average interest rates was mainly offset by lower debt levels. Currency translation also had no impact, leading us to an EPS of $0.46. Now, shifting to our segment results: In Americas Simple Meals and Beverages, organic sales remained level with the prior year at $842 million, thanks to double-digit growth in Prego pasta sauces from the Farmers' Market launch and Plum products, countered by declines in V8 beverages and ready-to-serve soup. Operating earnings grew by 4%, indicating a higher gross margin percentage due to productivity improvements, though offset by rising marketing expenses for Prego and V8. U.S. soup category sales overall declined by 2%; condensed soup saw a 1% drop while ready-to-serve soup decreased by 6%, although there was a 7% increase in Swanson broth. Changes in retailer inventory levels had little effect on soup sales for the quarter. As mentioned earlier, while we will go over key soup performance drivers, this marks the last quarter we will provide detailed subcategory sales information. Here’s a snapshot of our U.S. wet soup category performance and market share results from IRI. For the 52-week period ending July 31, 2016, the category overall dropped by 2.7%, while our sales in measured channels saw a 3.8% decline mainly due to ready-to-serve weakness offset by broth strength. Campbell held a 59% market share during this period, down by 70 basis points, while private label gained 10 basis points to hit 13%, and other branded players rose collectively to 29%, with a 60 basis point increase reflecting smaller brand gains. In Global Biscuits and Snacks, organic sales rose by 2%, led by double-digit growth in Pepperidge Farm’s Goldfish crackers from increased advertising and Arnott’s biscuits in Australia and New Zealand due to heightened promotional activity. Operating earnings climbed by 5% to $81 million due to lower administrative expenses slightly offsetting a reduced gross margin percentage. Within gross margin, the effects of cost inflation and boosted promotional spending were somewhat balanced by productivity advancements. In Campbell Fresh, organic sales fell by 12% due to decreased sales of Bolthouse Farms premium refrigerated beverages linked to the protein drinks recall. Sales of the CPG beverages and salad dressings were down by 10%, alongside a decline in carrot sales attributed to quality concerns that harmed customer satisfaction and resulted in lost business. These declines were partially countered by increases in fresh soup. Operating earnings experienced a significant drop of $13 million or 62%, landing at $8 million because of the adverse effects of the voluntary recall on Bolthouse Farms protein drink and related production outages, coupled with increased carrot costs and reduced sales of carrots and carrot ingredients, although lower administrative expenses offered some offset. Just a note that Garden Fresh Gourmet was acquired on June 29, 2015, and we have now completed the integration of its operating results into our organic sales. We achieved remarkable cash flow performance in fiscal 2016. Cash from operations rose by $281 million to a record $1.463 billion, driven by significantly higher cash earnings and reduced working capital needs due to lower inventory levels. Capital expenditures saw a decrease of $39 million to $341 million. We distributed $390 million in dividends, aligned with our quarterly dividend rate of $0.312 per share. This morning, we announced a 12% increase in quarterly dividends to $0.35 per share. Over the year, we repurchased $143 million of shares, with $100 million stemming from our strategic share repurchase program. The remainder was used to offset dilution from equity-based compensation. Our net debt fell by $592 million, as cash from operations significantly surpassed capital expenditures, dividends, and share repurchases. Now, I will outline our outlook for 2017. The company anticipates sales growth of 0% to 1%, with adjusted EBIT growing by 1% to 4%, and adjusted EPS increasing by 2% to 5%, translating to $3.00 to $3.09 per share. This guidance assumes that the impact of currency translation will be minimal based on current exchange rates. While this forecast doesn't meet our long-term sales growth target of 1% to 3%, we expect sales to improve compared to 2016 as we address underperforming segments. We anticipate further EBIT margin expansion in 2017, although growth in adjusted EBIT will fall slightly short of our long-term goals, as we will invest in key brands, new product launches, innovation efforts, and capabilities in digital and e-commerce to enhance our long-term growth profile. Our growth expectations for adjusted EPS exceed those for EBIT due to planned share repurchases and a slightly lower tax rate, although these will be partially offset by a slight rise in interest expenses due to expected increases in short-term rates. While we do not provide quarterly guidance, I can say that we expect most of our top and bottom line growth to occur in the second half of the year, as we work through current challenges in C-Fresh and taper off lower marketing support during the first half of fiscal 2016. Regarding some key assumptions shaping our guidance, while inflation on core ingredients and packaging has eased, we predict product cost inflation of around 2%, accounting for rising wage and ongoing benefit costs and a delayed negative effect from the stronger U.S. dollar on the input costs of our international operations due to our foreign currency hedge timings. As we have shown in the past, we anticipate ongoing supply chain productivity improvements, aside from our zero-based budgeting initiative, amounting to about 3% of product costs. We expect our gross margin percentage to see slight improvement, with productivity gains outpacing inflation. Our estimated effective tax rate will be around 32%, slightly lower than the adjusted 2016 rate of 32.6%. While we’re not in a position to disclose a specific figure, we plan to notably increase share repurchases, barring needs for other expenses like M&A. Our EPS guidance reflects the positive effects of these expected repurchases throughout the year on our average shares outstanding. We are projecting capital expenditures of about $350 million, consistent with 2016 levels and aligned with historical spending patterns. Under our cost-savings initiative, we expect to deliver an additional $50 million in fiscal 2017 and are on track to meet our $300 million target by 2018. That wraps up my remarks, and I will now hand it back to Ken for the Q&A session.

I wanted to get a bit of a better understanding of the carrots business longer-term from here. I do understand, Denise, that there were some execution issues. I think that indicates that perhaps a lot of the problem is fixable. You also talked about carrot yield, which suggests that's fixable too. On the other hand, you just took a big write-down, and I would look at that as maybe an indication that the business is never going to be as strong as it once was, or at least in management's mind. So I really just wanted to get a better sense of maybe how to balance those two data points, I guess, as we think about, not just 2017, but beyond for the carrot business.

Yes. I think that, as we indicated, the carrot business is right now going through a short-term issue. And fortunately, it is a short-term crop, and the crop we're harvesting now is much better. So we believe we will be back in business at pretty normal levels by about the second half of the year. We've got a lot to do there. I mean, we've got customer issues to address, and we are actively doing that. Going forward, I think, as we look at the business, based on the growth rates in sales and earnings that we saw when we bought the business, we believe that the growth rates are going to be about flat to up slightly. And that is a little bit more conservative than when we first bought the business.

Yes, if I could just add to that. As part of our annual testing of intangible assets, which we perform in the fourth quarter, we do a detailed discounted cash flow analysis. And as we performed that on the carrot and carrot ingredient reporting unit, we certainly reflected the current year performance and our expectations for future cash flows. And while we expect the performance to improve over time, it's not to the levels previously anticipated and consequently led to the impairment charge.

Okay. That makes sense. Can I just ask a quick follow-up? Denise, you mentioned, and maybe I heard you wrong that you wanted to get C-Fresh into other areas. And I think you mentioned dairy. I always thought the goal was maybe to get into dairy alternatives, not necessarily dairy itself. I'm just curious if there was a change at all in your thinking there.

Yes, Ken, that relates to what we discussed during Investor Day about our long-term innovation group developing a new pea protein beverage. These are plant-based drinks, but they will be located in the dairy section of the store.

I wanted to follow up on Campbell Fresh. As we consider Bolthouse heading into 2017, I have a couple of points for clarification. First, it seems that profitability this year will be somewhat affected or lower than the typical rate due to the need to rebuild production capacity and the customer base for carrots. I just want to confirm that this rebuilding process will hinder performance this year compared to what we might expect in 2018 and 2019. Additionally, regarding the adjustments being made to production runs and schedules, even potentially exploring new production lines, does this impact the speed at which new product innovations, such as the pea protein drinks, can be introduced? I'm trying to grasp whether there will be a slowdown before we can move forward as you work on enhancing the supply chain.

Bryan, the first part of that question, Denise mentioned two factors that'll impact at least our first half performance in 2017. One is the supply constraints on protein drinks, given the production, the run times, 24 hours versus 72. And the other thing is given some loss of customers on carrots; it'll take a little bit of time to reacquire that business. And so as we look at C-Fresh for the full year, we expect top line growth, low single digits. Typically, we would look for high single digits, so obviously, that's impacting our 2017 outlook. And as far as innovation, I don't think the issue on this particular line has an impact on our innovation agenda.

It does not. I would say, though, in the first half, the team will be very focused on the fundamentals, so the new product innovations will most likely go to market in the second half.

I wanted to ask a little bit about the cost savings and the reinvestment strategy. So kind of back at the beginning, I think, Denise, the plan was to take about half of the big cost savings that were coming in and reinvest it back in the business. But then you had to spend like wonderful event of the cost savings tumbled in faster, larger, all these good things have happened in the year, but it brought up the question as to when would all these reinvestment occur? So if we're still looking for something like a $150 million of reinvestment, will most of that occur in fiscal '17? Or can you give us some guidance on how the reinvestment plan lays out?

I agree, Dave. When we initially introduced the cost-saving program, our goal was to achieve $200 million in savings, with the expectation that half of that would be reinvested back into the business. As the savings increased, we adjusted our reinvestment expectations accordingly. I estimate that less than half of it will not be reinvested in the business. While I won’t specify an exact dollar amount for reinvestment in 2017, it will be substantial and cover various areas. We will support new product launches such as Prego's Farmers' Market, Well Yes soup, Plum infant formula, Bolthouse spring innovations, Tim Tam's U.S. expansion, and Goldfish made with organic wheat. We also plan to invest in new capabilities in digital and e-commerce, as well as enhance our Real Food initiative, which includes improving can liners, continuing the removal of BPA, and developing cleaner label ingredients that are often costlier. Additionally, we will focus on long-term innovation through initiatives like our Acre investment fund and expanding our resources to boost sales and distribution in China via our Kelsen business. Overall, we have several areas in which we intend to reinvest, and a significant portion of funding has been allocated in the P&L.

And David, our profit is strong. Our challenge is top line growth. So these investments are really vital to long-term health of the sales line of the company.

So it sounds like it's fair to say that a big portion of the investment is happening now but will also happen in F'18 and beyond. I think that's what you're trying to tell me. Is that right, guys?

Well, certainly, F'17. I'm not commenting on F'18 at this point, but...

I have a clarification to ask. The quarterly earnings showed remarkable growth in Q1 and Q2. However, Anthony, you didn’t mention this in your prepared remarks. Will you be at or above the numbers from a year ago in Q1 and Q2? Is there any possibility that these figures might fall below last year’s due to the impressive results in Q1 and Q2 last year?

Well, we did say the majority of growth will come in the second half. And as you point out, there are 2 reasons for that. We are lapping a relatively low marketing Q1, Q2, and we have these lingering issues on C-Fresh. So that will tend to suppress our first half performance, but we'll see it come back in the second half.

Yes. We have a much stronger marketing investment in the first half, particularly in the Americas Simple Meals and Beverage with 4 really big campaigns.

I've got 2 quick questions. First, I'm not really sure what you meant when you answered Dave Driscoll's question in terms of cadence. So I'll ask a little more directly. Do you expect earnings to be down year-on-year in the first half of the year?

We're not going to give specific guidance, but I would say we expect relatively weaker performance in the first half and stronger performance in the second half.

Okay. I had to try. My second question relates to promotional spend. Early last year, you guys kind of went into the year, you talked about some opportunities to rationalize expense. There were glimmers of hope to the first half of the year as that promotional line in the Americas Simple Meals and Beverage division actually went positive, given that back in the back half of the year. So can you kind of update us on how you're thinking about your promotional posture, your promotional spend? And what caused the setback as we progress through the year?

I guess we'll look at it a little bit different than that. We are very focused on improving our gross margin performance and expanding margin. Within that, we looked at net price realization, productivity improvements to exceed inflation. On the net price realization, we feel really good about what we've been able to accomplish in 2016. In fact, 40 basis points of our 170 basis point gross margin improvement is driven by net price realization. And within that, and I guess a little distorted on the sales variance, but we've made meaningful reductions in trade spend in soup given the promotional pricing we've taken on RTS. And although it's impacted volumes, it has contributed significantly to margin expansion. Now we're up a little bit in the fourth quarter. It's a non-seasonal quarter for us. Most of our dollar increase in trade in the fourth quarter relates to our Arnott's business in Australia, kind of lapping a period of supply constraints, so we had to pull back on our promotional activity, so we're wrapping that. But as I look at the whole year, we accomplished what we set out to do in our plan and have made meaningful progress, especially in soup, which is very critical to our agenda going forward.

Let me build on that, that we also, as part of the setup of our Integrated Global Services have made investments in our revenue management and advanced analytics. And we're continuing to look for ways to manage the depth and frequency of our trade programs to maximize profitable volume. We have to take into consideration competitive activity and customer programs and consumer response, but this is definitely a point of focus for us.

This is actually Robert Connor on for Rob Moskow. So we just had a question. So it looks like some of these smaller organic brands are more vulnerable to weather disruptions and kind of like the stability of the product on the shelf is shorter. It seems like WhiteWave with their Earthbound Farms brand and supply chain issues, and obviously, you guys are having issues kind of with the Bolthouse brand supply chain. So did it raise any concerns in your mind about kind of putting most of your growth in the fresh part, which has kind of more volatile supply chain and lower margins?

It all starts with the consumer, and the consumer trends are very strong in terms of health and well-being, and particularly in fresh food. Some of these issues are part and parcel to running a fresh food business. But in our case, these were execution issues, and we can do better there. So we're really confident in the strategy to pursue fresh food in addition to the strong core brands that we have.

Anthony, I just wanted to ask a little bit more about the inflation outlook and apologies if I missed this earlier. But did you mention what inflation was here in the fourth quarter? The gross margin headwind in the step up quite a bit versus what we've seen year-to-date. So I'm not sure how material the other portion of that was related to Bolthouse issues. And if you could give us any color on kind of the shape of the inflation curve as we kind of move forward sequentially?

Sure. I think the best way to explain our gross margin performance was it was down 90 basis points in the fourth quarter is to parse out the impact of the C-Fresh division. So the C-Fresh division in aggregate had a 70 basis point impact out of the 90 basis point, so basically most of our gross margin decline is attributable to the 2 issues inside of C-Fresh, the recall, which was 50 basis points, and the decline on carrots, which has an impact on the margin as well. And looking at the rest of it, inflation was not that great in the fourth quarter as we talked in the bridge. The higher promotional expense was the key swing relative to prior quarters. But most of the decline, as we said, attributable to the C-Fresh performance.

Okay, that helps. Thanks. And just one other quick clarification from a guidance standpoint. Incentive, obviously, you've delivered an 11% underlying EPS growth this year, but there was, I guess, perhaps, an accrual correction on incentive comp here in the fourth quarter, which resulted in a year-on-year decline there. As we've kind of think ahead to 2017, does incentive comp end up being a headwind or a tailwind? Are you kind of essentially at a low normal run rate at this point?

Yes, so we had some ups and downs obviously in 2016. We ended up with a $0.02 headwind in '16 versus '15. And looking forward, our short-term incentives are close to target. The long-term incentive will go up a little bit. All in, we had about a $0.02 negative impact in 2017.

Denise, I'd like to ask about M&A. In addition to the chassis, you feel that you have with the carrot basis, it also seems you have a fairly nice chassis with your distribution model at Pepperidge. So how do you assess the ability for M&A to maybe accelerate growth more broadly in U.S. snacking? Maybe even outside of C-Fresh. And how much more could you be doing at Pepperidge to leverage your route to market there?

Yes. I wanted to clarify that we look at M&A more broadly than just Campbell Fresh. Each of our divisions has identified specific targets that are a good strategic fit for their businesses. We are very interested in other consumer trends such as health and well-being, snacking, and simple meals that we can pursue not only through organic growth but also through M&A.

And you feel like your route to market with the DSD at Pepperidge allows you to kind of go and do that and accelerate growth with kind of a bolt-on?

Yes, absolutely. I mean, Plum Organics is a great example of a smaller brand that we bought. We were able to integrate that into the Americas Simple Meals and Beverage business and capitalize on things like their sales force and supply chain.

A question on a couple areas that I know you'd like to improve and that was ready-to-serve soup and Chunky in particular, and then also V8. Your new marketing campaign for Chunky, it looked promising and your comparisons will be on your side. Realistically speaking, do you think that that's the business that has the best chance for improvement among the areas that you cited that you think will improve in fiscal '17? And then perhaps, you can dimensionalize what you think would be a successful step and the right direction, could get you back to flat for that business in ready-to-serve, for instance?

We have identified some positive trends in our soup category this year. Our condensed soups have stabilized, and broth sales have increased. However, we've faced challenges with ready-to-serve (RTS) soups, specifically the Chunky brand. Fortunately, we have completed our price adjustments and enhanced our marketing efforts for Chunky as we move into 2017. We encountered a labeling issue in the first and second quarters of last year that we are now past. Additionally, weather conditions negatively affected our performance in 2016, but we are optimistic about the improvements in the Chunky brand for 2017. We are also introducing Well Yes midyear, a delicious, clean-label ready-to-serve soup that we believe will stand out in the soup aisle and resonate with consumers. Furthermore, our Slow Kettle and organic soups are performing well, and we have recently launched new stackable cans for our RTS soup, which have been very well received by retailers. Overall, we have more positive momentum this year compared to last year, and we anticipate modest growth in our soup sales.

I want to follow up on the previous question regarding V8. I wanted to add that this has been an area of investment for us. While you mentioned additional marketing and advertising spend, sales are still facing challenges. Can you discuss the results from these investments and whether we are starting to see improvements?

Yes, and thanks for that reminder. We continue to be challenged in our shelf-stable beverages, particularly on our products that contain sugar, so V8 V-Fusion, for example. And this year we actually did have some declines on our V8 Red. Our new Veggie Blends, which we supported with some good marketing support, continue to grow. And our V8 +Energy is growing really nicely. What we have done is we've developed a brand-new campaign, but also we've increased our support around our V8 Red juice. So instead of just promoting the new parts of the business, we're going back to better balancing our marketing against the core V8 Red as well as the new Veggie Blends and the V8 +Energy. And we believe that that is a much better formula for success. We don't expect beverages to grow next year, but we do expect improved performance.

Okay. Just to clarify, during your Analyst Day, you mentioned shifting some consumers from V-Fusion to Veggie Blends. Should we interpret that as an indication that V-Fusion might not be eliminated but could become significantly less important? What specifically did you mean by that?

We have top-selling varieties in the V-Fusion line such as strawberry banana and pomegranate blueberry, among others, and we will continue to include them in the V8 line. However, the consumer will guide us towards the flavors they prefer and will purchase repeatedly. That’s essentially how we are planning it.

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

I wanted to get a bit of a better understanding of the carrots business longer-term from here. I do understand, Denise, that there were some execution issues.

Thanks, everyone for joining our fourth quarter earnings call and webcast. A full replay will be available about 2 hours after our call concludes by going online or calling 1 (703) 925-2533. The access code is 1673833. You have until September 15, 2016, at midnight, at which point we move our earnings call strictly to the website. Just click on recent Webcasts and Presentations. If you have further questions, please call me, Ken Gosnell, (856) 342-6081. If you are a reporter with questions, please call Carla Burigatto, Director of External Communications at (856) 342-3737. That concludes today's program. Thanks, everyone.