CPB
#Thank you, <UNK>
Good morning, everyone, and welcome to our second quarter earnings call
Today I'll share my perspective on our performance in the quarter and provide my view on our progress across each of our three divisions
<UNK> will follow with a detailed financial review
Let's be real
I am not satisfied with our overall sales performance in the quarter
Organic sales declined 2%, with the most prominent declines in Campbell Fresh and V8 shelf-stable beverages
Additionally, in the Campbell Fresh segment, we recorded non-cash impairment charges related to the carrot and carrot ingredient and Garden Fresh Gourmet reporting units
<UNK> will walk you through additional details during his comments
There were some bright spots in the quarter, such as growth in U.S
soup, simple meals, Pepperidge Farm snacks, and fresh soup
Our adjusted gross margin increased 70 basis points, all of which was achieved by Americas Simple Meals and Beverages
Another positive result was the over-delivery of our cost-savings initiatives
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%
With the expectation of improved sales performance in the second half of the year, we reaffirmed our full-year guidance this morning
Now let me offer my perspective on the performance of each of our three divisions in the quarter
Let's start with the Campbell Fresh division
The CPG segment of C-Fresh includes Bolthouse Farms beverages and salad dressings, Garden Fresh Gourmet salsa, hummus, dips and chips and fresh soups
The Farms portion of the portfolio includes carrots and carrot ingredients
The division's performance was below our expectations this quarter
C-Fresh is an important strategic business for Campbell, and we remain confident in the growth potential of the packaged fresh category, as consumer preferences continue to shift towards fresher and healthier foods
In fact, nearly 80% of consumers, including younger ones, are trying to eat more fresh foods
These consumers not only believe that fresh foods are cleaner, healthier and less processed, but that they also taste better
We acquired two packaged fresh businesses: Bolthouse Farms and Garden Fresh Gourmet with brands that resonate with consumers as a way to develop a long-term growth platform in packaged fresh CPG
The perimeter categories in which we compete are still growing significantly faster than the traditional center-store
While category growth rates have slowed somewhat, we still believe we can build a profitable growth business, leveraging these brands, capabilities, and our scale
However, our performance over the last year in fresh has been disappointing
The reasons vary by business, which I'll explain in more detail in a minute
We've made a number of changes to address this
Most notably, we replaced the leadership team and appointed a long-time Campbell executive Ed Carolan as the President of C-Fresh in November
I'm confident in this new seasoned leadership team, which includes Campbell executives, some newcomers to the company, and key members of the Bolthouse Farms team who possess CPG and agriculture experience as well as insight into both the operations and the entrepreneurial culture of the organization
It's taking longer than we originally expected to regain carrot customers following last year's quality and customer service issues and to rebuild capacity following the Protein PLUS beverage recall
As a result, we no longer expect C-Fresh to grow this fiscal year
Over the last quarter, our new team has conducted an extensive strategic review to assess the potential of this business going forward
This has helped us update our expectations about future growth based on the fresh categories in which we compete and is leading to a sharpened strategy
As a result of this work and our current-year performance, we've lowered our expectations for both long-term sales and earnings
We've learned some tough lessons over the last several quarters and we're applying them
As a first step, we started to integrate the supply chain to reengineer the fresh operating model
We're building a stronger foundation under the Campbell Fresh business, leveraging Campbell's scale and expertise, realizing synergies, and building capacity and capabilities in order to return it to profitable growth
Let me now take each piece of the business individually and explain
Let's start with farms and specifically the carrot business
After experiencing quality issues last year due to execution and poor weather conditions in California, we've restored our carrot quality
We've demonstrated this improved quality to customers and are working hard to earn back the lost business over time
Our previous assumptions were too aggressive and regaining share is turning out to be more difficult than planned
In the current quarter, our carrot business faced additional challenges, again related to the weather
In California, rainfall in December and January was significantly higher than normal
This hampered our ability to harvest fields and lowered our yields on the carrots we did harvest
This negatively impacted both sales and earnings in the quarter
Now let's turn to beverages
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
The good news is that consumers are seeking out protein products and our Protein PLUS consumer is a loyal shopper
As previously discussed, we implemented enhanced processes to improve the quality standards, resulting in fabulous product quality, albeit at reduced run times
Since then, we've steadily improved but have not returned to pre-recall production levels
We've added an additional beverage line in our Bakersfield plant that we expect to be fully operational in April
As we discussed last quarter, we're seeking additional ways to increase capacity
We've had challenges in finding co-packers that meet our quality standards, but we've recently qualified a co-packer and expect to be significantly expanding our capacity by the summer
We're able to fulfill shelf-stock and service levels back to the high 90s
In addition, we're seeing increases in velocity each period as we regain distribution
While we're selling everything we make, we have insufficient capacity to fulfill merchandising demand across the full range of our beverages
Our plan is to re-launch Protein PLUS merchandising in the fourth quarter of fiscal 2017 when we expect to have sufficient supply
Due to our continued capacity constraints, we don't expect our beverage business to return to growth until the fourth quarter
Meanwhile, we remain focused on driving innovation across the Bolthouse Farms CPG range, including dressings, spreads, and super-premium and ultra-premium beverages
We recently extended our salad dressing line with a range of four new organic varieties
We also launched a test of Bolthouse Farms MAIO, a new line of refrigerated yogurt-based spreads made with clean ingredients and fewer calories than mayonnaise
Later this year, we plan to expand our line of 1915 by Bolthouse Farms organic, cold-pressed juice and launched Bolthouse Farms Plant Protein Milk, a higher protein alternative to almond milk
Customer response to this new product has been very positive
Now, turning to Garden Fresh Gourmet
As a reminder, the business has four product groups: salsa, which is over half of the business; hummus, dips and chips; and fresh soup
The business offers a combination of branded and private-label products
The traits that made Garden Fresh Gourmet an attractive acquisition target, a small authentic brand with a compelling story have also presented some obstacles
When we acquired it in June 2015, Garden Fresh Gourmet was a small operation with approximately $100 million in revenue and very little infrastructure
The integration into the Bolthouse Farms fresh platform proved to be challenging
The truth is, we expected more, faster in multiple areas of this business, including financial systems, information technology, and supply chain integration, as well as increased marketplace distribution
Let me explain the issues we've encountered and what we're doing to fix them
Garden Fresh Gourmet branded salsa is growing strongly in consumption, and we've regained a major customer beginning January 2017. Private-label salsa is below expectations due to lost distribution with two customers
We've recently regained one of these customers and active negotiations are underway with the second
Throughout its short history, Garden Fresh Gourmet salsa was largely a Midwestern brand
Our plan called for the rapid distribution expansion of branded salsa beyond the Midwest
However, it became apparent that we did not have the differentiated recipes and taste profiles that would be accepted by consumers in other parts of the country
We now have the recipes to pursue expanded distribution
In January, we launched branded Garden Fresh Gourmet salsa in new packaging with new regional recipes
We're focused on key distribution and velocity-building initiatives
For example, in January, we gained national distribution for new branded organic salsa with a major customer
Today, our ACV distribution of Garden Fresh branded salsa is only 37%, so we have a lot of runway to match the 70% ACV levels of our other C-Fresh CPG brands
We're optimistic that we can get there with delicious high-quality ingredients, product and packaging innovation, improved marketing and sales support, and expansion into organic and regional flavors
I do want to take a moment to highlight a positive result in the division
We've made significant gains in our fresh soup business, which continues to grow at high single-digits, driven by both private label and branded soup
We recently introduced a new Garden Fresh Gourmet soup, which has been well received by customers and initial velocity is encouraging
We're also testing Souplicity, a new artisanal cold-pressed soup
We continue to expect to grow the Garden Fresh Gourmet business profitably, but it will take longer than we originally planned
Overall, we've learned several important lessons from these two packaged fresh acquisitions and we're applying them going forward
First, establishing a leadership team with diverse skills and experience early on is critical
Our new team combines the talents and capabilities of Campbell and Bolthouse leaders
They're actively integrating C-Fresh into Campbell and taking advantage of our full suite of resources
We're now blending the best of small while also benefiting from the best of big
Second, fresh food is more perishable and, therefore, more fragile
At Campbell, we're obsessed with safety and quality
We put safety above all else because if we don't, nothing else matters
Meeting Campbell's quality standards in C-Fresh required significant investment and the right resources
Third, there's no roof over the carrot fields
We've experienced everything from severe drought to record rainfall
This business has been much more volatile than expected
We've set up more diversified growing regions, but we have more to do to strengthen our agricultural operations
Fourth, the fresh supply chain presents an opportunity for productivity improvement and optimization
We believe we can and will drive margin improvement in these businesses over time
Finally, we have both the ability and the desire to build strong brands and drive growth in response to increasing consumer demand for fresh foods
To recap, we're facing some challenges in C-Fresh beyond what we originally realized
Our new leadership team is making progress in addressing them
To be clear, we remain committed to the packaged fresh category and to M&A in the fresh space as we build this growth platform
Now let's turn to Global Biscuits and Snacks
As a reminder, this division includes our Pepperidge Farm, Arnott's, and Kelsen businesses
The organic sales decline in the division was mainly a result of the performance of Kelsen and our decision to forego some less-profitable business for the large U.S
Additionally, the depreciation of the Chinese RMB negatively impacted our sales in China
Stepping back and looking at the underlying trends in Kelsen, China, we feel good about our execution during the important Chinese New Year period
As we've discussed previously, we've been working to expand our distribution capabilities in China, and we've been adding new sub-distributors to extend our reach
Our sell-in for Chinese New Year went according to plan and promotion displays were consistently strong across all store formats
We're still awaiting consumer takeaway
Turning to the U.S
, Pepperidge Farm delivered modest sales growth behind the continued strong performance of Goldfish crackers as well as cookies, especially the Milano brand
Goldfish growth benefited from channel gains, leveraging multiple pack sizes and innovative new products
Goldfish made with organic wheat is also attracting new millennial families to the brand
However, our fresh bakery sales declined as a result of intensified competitive activity, especially in the sandwich bread category
As a reminder, we're cycling double-digit operating earnings growth this quarter, and we expect a strong back half as this division delivers both sales and margin growth
Looking ahead, we're focused on driving continued growth in Goldfish and increasing innovation in cookies, especially the upcoming launch of our new farmhouse line in April
These cookies leverage Pepperidge Farm's baking heritage and deliver against our Real Food Philosophy with great taste and simple ingredients
We'll also continue to build the national rollout of Tim Tam biscuits in the U.S
following its recent launch in January
Rounding out the portfolio is our largest division, Americas Simple Meals and Beverages
I'm encouraged by the sales gains in soup and simple meals
However, this was offset by the lackluster performance of V8 shelf-stable beverages
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 U.S
soup business grew in the quarter
I'm especially pleased with our ready-to-serve brands
Sales increased double-digits in ready-to-serve
Chunky continued to lead the way behind our improved execution and strong integrated marketing that fully leveraged our NFL sponsorship
We're also delighted with the launch of our new Well Yes! clean label soup, which hit shelves in December
Retailer acceptance has been exceptional, with ACV already around 75% and most customers taking all nine varieties
We activated our marketing plans in January and the initial consumer response has been positive
It's early days, but we feel good about our overall execution and how we got out of the starting blocks with this brand
Sales declines in our broth business were as a result of increased competitive activity, mainly from private label offerings
As discussed last quarter, we had strong holiday merchandising plans for our broth business, and we were pleased with the execution of that program
However, we did not achieve the consumer takeaway that we expected as a result of an extremely competitive holiday period
In the short term, we will be sharpening our promotional activity and marketing message to drive improved performance in the back half of the year while we continue to develop longer-term plans to improve our competitiveness and differentiation in this important category
Looking ahead on U.S
soup, we have robust marketing plans in the third quarter and we continue to expect to deliver modest growth in soup this fiscal year
The shelf-stable beverage category remained sluggish and our portfolio continues to be challenged
As I previously stated, V8 will not grow this year
Let me reframe the conversation to provide a little more context
In the quarter, consumption grew in two-thirds of our business: V8 100% Vegetable Juice, Veggie Blends and our V8 + ENERGY franchise
All of them are on trend and leverage our heritage in vegetable nutrition
Importantly, we continue to see improved consumption trends in V8 100% Vegetable Juice, following our increased marketing support
The remaining one-third of the portfolio consisting of V8 V-Fusion and V8 Splash is declining, partly due to category-wide consumer concerns about sugar
Despite the overall sales declines, the business continues to focus on productivity initiatives, which are contributing to the overall gross margin expansion in the division
Big picture, the Americas Simple Meals and Beverage division continues to be on track to deliver modest sales growth and margin expansion
In closing, I want to stress again that I am not satisfied with our overall sales results this quarter
I own it, and we have plans in place to improve our performance in the second half, deliver our cost savings, invest back in our business, and deliver our full-year guidance
It's really important to keep sight of the long-term progress we've made in transforming this company in a difficult operating environment: our continued gross margin expansion, how we strengthened our core business while expanding into faster-growing spaces, the investments we're making in real food as a result of our purpose, how we've diversified our portfolio with innovation and acquisitions, and a leaner more agile and more cost-effective company we've become as a result of our successful cost-savings initiative, I look forward to seeing many of you next week at CAGNY where we will focus on Campbell's long-term strategic growth platforms
Now let me turn the call over to our Chief Financial Officer, <UNK> <UNK>
Yeah
I'll take that one
Thanks, <UNK>
We're very pleased with the performance of Pepperidge Farm
We've had, particularly in the snacks business, some really good growth
And our distribution system – DSD distribution system is different, in that it is a network of independent contractors, so that's really how we've assessed it
I mean, we're continuing to run our play
We're very happy with the introduction of Well Yes! There were great retail support, 75% ACV distribution, displays everywhere, but we won't get a read on the consumer takeaway really until this quarter
Hi, <UNK>
Hey, <UNK>
<UNK>, it is a key question
And when I talk about getting the best of small and the best of big, I'm really serious about what we have done is really delineated those parts of the business that really need to be separate and differentiated for the consumer and the customer, and that's all of the marketing and the R&D and insights
And we have this model that we've used very successfully with our Plum organic baby food business by keeping those parts of the business separate that maintains that entrepreneurial culture
However, being able to leverage the scale of Campbell's, particularly in areas of the supply chain and in operations where we have resources that can be used to make them much more effective and efficient and even more important achieve scale, because these are typically smaller companies that need the chassis to increase scale in the marketplace
So we've done this very successfully with Plum and Kelsen
We have not done it with the Campbell Fresh business
And so, the situation that we found ourselves in in the last year, we've been able to insert Campbell executives on the leadership team working in conjunction with Bolthouse Farms executives to maintain that best of small and best of big
So we're really optimistic and we're finding some really great opportunities to put a stronger foundation under the business
See you next week
Hi, <UNK>
<UNK> <UNK> - Credit Suisse Securities (USA) LLC Hi
Yeah
I think the activity definitely varies by category
And what we've seen in the fresh bakery business is competition in the area of sandwich bread and Swirl bread
We've recently reformulated our Swirl bread and we're out there now with a much-improved product
So that was a very specific situation
In fresh bakery business, our buns and rolls business continues to rock, so we believe we're all over the issue there
And then in broth, it was really more of a proliferation of private label during the holiday and that produced more price competition and we have responded with increased marketing and actual trade spending to hold our own in that category
So those were two very specific things that we faced
<UNK> <UNK> - Credit Suisse Securities (USA) LLC Can I ask a follow-up to <UNK> <UNK>'s question actually? I think what he was kind of getting at is have you ever considered a model where you go to direct-to-customer shipments through warehouses rather than DSD, not so much using – whether you use independent routes
Is that a big savings or is it even possible in Pepperidge Farm?
Yeah
We've been pleased with the DSD system
The independent contractors, what they bring to the business in terms of selling and merchandising and delivery, it's a quality product
It's perishable, so breakage could be an issue
I think when you consider all of it, we're pleased with our DSD system
<UNK> <UNK> - Credit Suisse Securities (USA) LLC Okay
Thank you
We're very focused on our soup business
We're particularly pleased with the performance of ready-to-serve soup, whether that be Chunky or the introduction of new Well Yes! I think you need to ask the other guy
Hi <UNK>
The strategic review that the new team undertook looked at, once again, the potential for this business, and we verified the consumer trends toward fresh and health and well-being, the fact that these categories are still growing significantly faster than center-store categories, particularly in the categories that we compete in
So we feel really good about this space strategically
We've had some execution issues this year and some weather issues in the agricultural part
That's been unfortunate, but that does not sway us from our long-term strategic vision to really build a fresh food platform for Campbell's
And I think the role of the carrots in the business is the authenticity
It's on trend with consumers' desire for fresh produce
Carrots have had a tough go with drought and with heavy rains and some execution issues in the last year, but I do think that that's an important part
It's also the distribution system and scale in produce for us that makes us more important to the retailer
So I know I'm very committed to the business and we expect big things from it going forward
I think, over time, we have an opportunity to build two very strong brands here with Bolthouse Farms and Garden Fresh Gourmet
We're continuing to invest in digital marketing, as you point out, some new packaging and definitely new product innovation
So we will continue to support these businesses in the marketplace
Hi, <UNK>
Well, as you can see from the quarter, we're continuing to invest in marketing and brand building
And <UNK> pointed out that as we navigate through our cost-savings initiative, which we just increased, we will be spending back on our businesses to continue to build these brands
We still need to drive sustainable profitable sales growth and I fundamentally believe that's going to come from investing in the brands and engaging with the consumer
So we will continue on that track
Thank you
