Ken Gosnell - VP Finance Strategy & IR Denise Morrison - President and CEO Anthony DiSilvestro - CFO

Ken Goldman - JPMorgan Bryan Spillane - Bank of America David Driscoll - Citi Jason English - Goldman Sachs Robert Connor - Crédit Suisse Matthew Grainger - Morgan Stanley John Baumgartner - Wells Fargo David Palmer - RBC Capital Markets Mario Contreras - Deutsche Bank

Good day, ladies and gentlemen, and welcome to the Campbell Soup Fourth Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the call over to your host, Ken Gosnell. Please go ahead.

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.campbellsoupcompany.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's 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 were 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 and 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 logistic 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 organization 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 consist 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-tested 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.

Thanks, Denise, and good morning. Before getting into the details, I want to provide my perspective on our results and guidance. As Denise stated, we are disappointed with the performance of our C-Fresh division in the fourth quarter, which was the key driver of a 1% decline in organic sales for the company, reflecting the recall of Bolthouse Farms protein drink and declines in carrot. At the EBIT line, the negative impact of the C-Fresh performance was offset by lower incentive compensation accrual relative to our expectations. In the fourth quarter, our adjusted tax rate was negatively impacted by a $13 million correction for deferred taxes. The correction had a negative impact on EPS of $0.04 per share. And as a result, our full year tax rate finished above our previous expectations. Moving on to the full year. While adjusted EPS of $2.94 was within our guidance range, we finished at the lower end due to the tax correction. We're pleased with our gross margin performance, which, on an adjusted basis, increased by 170 basis points, in line with the expectations, driven by significantly improved supply chain performance, cost savings and net price realization. We continue to make very good progress against our three-year cost-savings target of $300 million, delivering about $130 million of incremental savings in fiscal 2016, bringing the program to-date total to $215 million. As part of our annual review of intangible assets, we recorded a non-cash impairment charge of $0.41 per share in our GAAP results on our Bolthouse Farms carrot and carrot ingredient business, reflecting reduced expectations for future cash flows. I'm very pleased with our strong cash flow performance as cash from operations exceeded $1.4 billion, and our board has approved a 12% increase in the quarterly dividend. Looking ahead to fiscal 2017, although below our long-term target, we plan to improve our sales performance compared to 2016 and make investments in the business to support key brand, launch new products, drive long-term innovation and build capabilities in areas like digital and e-commerce. Now, I'll review our detail -- sorry, our results in more detail. For the fourth quarter, net sales on an as-reported basis of $1.687 billion were comparable to the prior year. Excluding the negative impact of currency translation and the favorable impact of the Garden Fresh Gourmet acquisition, organic net sales declined 1%, driven by declines in Campbell Fresh, partly offset by gains in Global Biscuits and Snacks. The negative impact from the Bolthouse Farms recall and related production outage was approximately 1 percentage point on total company sales. Adjusted EBIT declined 2% to $253 million as higher advertising and consumer promotion expenses and a lower gross margin percentage were partly offset by lower administrative expenses, reflecting lower incentive compensation accruals. Adjusted EPS decreased 6% or $0.03 to $0.46. This EPS decline includes a $0.03 per share negative impact from the Bolthouse Farms recall and related production outage, consistent with our expectation, as well as a $0.04 per share negative impact from the tax correction. For the full year, as reported and organic net sales both decreased 1% compared to the prior year. Adjusted EBIT of $1.467 billion and adjusted EPS of $2.94 both increased by 11%. Earnings growth is being driven by our improved gross margin performance and a benefit from our cost-savings initiatives. Breaking down our sales performance for the quarter. Net sales was comparable to prior year. Organic sales declined 1% as a 2-point negative impact from higher promotional spending was partly offset by a 1-point gain from volume and mix. Gains in volume were driven by growth in Arnott’s biscuits, Pepperidge Farm Goldfish crackers and Prego pasta sauces, which benefited from the launch of the new Prego Farmers' Market product line, partly offset by declines in C-Fresh due to the Bolthouse Farms’ protein drinks recall and volume decline in carrot. Increased promotional spending across our three segments includes higher spending in Arnott's, as we're lapping in an unusually low quarter, which was impacted by product availability, higher spending in Bolthouse Farms to remain competitive and support the launch of 1915 and higher spending on Prego and Taste. With the exception of C-Fresh, increased promotional spending drove gains in volume. Completing the bridge, a 1-point negative impact from currency translation was offset by the 1-point benefit from the acquisition of Garden Fresh Gourmet. Our gross margin declined 90 basis points in the quarter to 36.1%. Looking at the drivers of this decline, cost inflation and other factors had a negative impact of 270 basis points, driven primarily by cost inflation, which, on a rate basis, increased by about 1.5%, the recall and related production outages of Bolthouse Farms protein drinks and higher carrot cost from unfavorable crop yields. Reflecting the increased promotional spending on the businesses I mentioned in the sales discussion, the higher promotional rate had a negative impact of 110 basis points on gross margin. This was partly offset by list pricing gains of 20 basis points from previous pricing actions in Global Biscuits and Snacks. Mix was slightly favorable, also adding 20 basis points. Lastly, our supply chain productivity programs, which are incremental to our three-year cost-savings program, contributed 250 basis points of margin improvement in the quarter. Looking at this another way, not on the chart, the weak performance of the Campbell Fresh segment accounted for 70 basis points of the total decline of 90 basis points, including the protein drink recall, which accounted for 50 basis points. Adjusted marketing and selling expenses increased [ph] 14% in the quarter, primarily due to higher advertising expenses in Pepperidge Farm to support Goldfish crackers and the fresh bakery business and increased support of Prego pasta sauces. Adjusted administrative expenses decreased 19%, primarily due to lower incentive compensation cost, which account for about two-thirds of the decline, as well as the benefit from our cost-savings initiatives. For additional perspective on our performance, this chart breaks down our EPS change between our operating performance and below the line items. Adjusted EPS decreased $0.03 from $0.49 in the prior year to $0.46 per share in the current quarter. On a currency-neutral basis, declines in adjusted EBIT had a negative impact on EPS of $0.01. Our adjusted tax rate for the quarter increased by 2.3 points to 36.4%. The increase in the tax rate reduced the EPS by $0.02, as the impact of the deferred tax correction was partly offset by the benefit of geographic mix. The impact from share repurchases under our strategic share repurchase program reduced our share count slightly, but due to rounding, shows no benefit on EPS in the quarter. Interest was fairly comparable to prior year, up $1 million, with no impact on EPS as the impact of higher average interest rates on the debt portfolio was mostly offset by lower debt level. Currency translation also had no impact, completing the bridge to $0.46 per share. Now turning to our segment results. In Americas Simple Meals and Beverages, organic sales were comparable to prior year at $842 million, driven by double-digit gains in Prego pasta sauces, including the benefit of the launch of Prego Farmers' Market and also by double-digit gains in Plum products, offset by declines in V8 beverages and ready-to-serve soup. Operating earnings increased 4%, reflecting a higher gross margin percentage driven by productivity improvement, partly offset by increased marketing expenses, as we've increased support behind Prego and V8 beverages. Within U.S. soup, which declined 2% in aggregate, condensed declined 1% and RTS declined 6%. These declines were partly offset by a 7% gain in Swanson broth. Estimated changes in retailer inventory levels did not meaningfully impact soup sales in the quarter. As we previously stated, while we will discuss the key drivers of soup performance as we do with our other businesses, this is the last quarter we will provide detailed subcategory sales performance. Here is a look at U.S. wet soup category performance and our share results as measured by IRI. For the 52-week period ending July 31, 2016, the category as a whole declined by 2.7%. Our sales in measured channels declined 3.8%, primarily driven by weakness in ready-to-serve, partly offset by strength in broth. Campbell had a 59% market share for the 52-week period, declining 70 basis points. Private label grew share by 10 basis points, finishing at 13%. All other branded players collectively had a share of 29%, up 60 basis points, reflecting share gains by smaller brands. In Global Biscuits and Snacks, organic sales increased 2% with double-digit gains in Pepperidge Farm's Goldfish crackers, supported by increased advertising and growth in Arnott’s biscuits in Australia and New Zealand, driven by increased promotional activity. Operating earnings increased 5% to $81 million, as lower administrative costs were partly offset by a lower gross margin percentage. Within gross margin, the impact of cost inflation and increased promotional spending was partly offset by productivity improvement. In the Campbell Fresh segment, organic sales decreased 12%, reflecting declines in Bolthouse Farms premium refrigerated beverages due to the recall of protein drinks. Sales of the CPG beverages and salad dressings businesses declined 10% in the quarter. Sales of carrots also declined as we experienced quality issues in the fourth quarter which led to customer dissatisfaction and the loss of business. These declines were partly offset by gains in fresh soup. Operating earnings declined by $13 million or 62% to $8 million, primarily driven by the adverse impact of the voluntary recall on Bolthouse Farms protein drink and related production outages as well as higher carrot cost and lower sales of carrots and carrot ingredient, partly offset by lower administrative expenses. Just a reminder, the Garden Fresh Gourmet was acquired on June 29, 2015, and we have now wrapped the acquisition date. As a result, there is 1 month of operating results from Garden Fresh Gourmet now included in organic sales. We had very strong cash flow performance in fiscal 2016. Cash from operations increased by $281 million to a record $1,463,000,000, driven by significantly higher cash earnings and lower working capital requirement, reflecting reductions in inventory level. Capital expenditures declined $39 million to $341 million. We paid dividends totaling $390 million, reflecting our current quarterly dividend rate of $0.312 per share. And as announced this morning, we will be increasing our quarterly dividend by 12% to $0.35 per share. In aggregate, we repurchased $143 million of shares in fiscal 2016, $100 million of which were under our strategic share repurchase program. The balance of the repurchases were made to offset dilution from equity-based compensation. Net debt declined by $592 million, as cash from operations was well in excess of capital expenditures, dividend and share repurchases. Now I'll review our 2017 outlook. The company expects sales to grow by 0% to 1%, adjusted EBIT to grow by 1% to 4% and adjusted EPS to grow by 2% to 5% or $3.00 to $3.09 per share. This guidance assumes, based on current exchange rates, that the impact from currency translation will be nominal. While not to the level of our long-term sales growth target of 1% to 3%, sales performance is expected to improve relative to 2016, as we address those businesses which have underperformed. While we expect to achieve further EBIT margin expansion in 2017, growth in adjusted EBIT is slightly below our long-term target, as we will be making investments in our business to support key brands, in new product launches, in long-term innovation and to build capabilities in areas like digital and e-commerce. These investments are designed to improve our growth profile over the long term. Our range for growth in adjusted EPS is ahead of EBIT, as we plan to increase share repurchases and benefit from a slightly lower tax rate, partly offset by slightly higher interest expense, given our expectation of rising short-term interest rates. While we don't give quarterly guidance, I will say that we expect the majority of our top and bottom line growth to come in the second half, as we work through the issues we're currently experiencing in C-Fresh and as we wrap lower levels of marketing support in the first half of fiscal 2016. Turning to some of the key assumptions underlying our guidance, while inflation on core ingredients and packaging has moderated, we expect inflation and cost of products sold of approximately 2%, including higher wage and ongoing benefit cost and a lagging negative impact of the stronger U.S. dollar on the input cost of our international businesses, given the timing of our foreign currency hedges. As we've successfully delivered in the past, we expect ongoing supply chain productivity gains, excluding our ZBB initiative of approximately 3% of cost of products sold. We expect our gross margin percentage to improve slightly with productivity gains exceeding inflation. The effective tax rate is estimated to be approximately 32%, slightly below the 2016 adjusted rate of 32.6%. While we are not prepared to provide a specific amount, we currently plan to significantly increase share repurchases, unless needed for other uses including M&A. Our EPS guidance reflects the favorable impact of these anticipated repurchases over the course of the year on our average shares outstanding. We are forecasting capital expenditures of approximately $350 million comparable to fiscal 2016 levels and in line with our historical spending level. And under our cost-savings program, we expect to deliver incremental savings of $50 million in fiscal 2017 and are on track to achieve our $300 million goal by 2018. That concludes my remarks, and now I'll turn it back to Ken for the Q&A.

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.

[Operator Instructions] Our first question comes from Ken Goldman with JPMorgan.

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 suggest 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 2 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 of 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's a -- 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 actually is related to what we talked about in Investor Day with -- our -- in our long-term innovation group working on the new pea protein beverage, so it's plant-based beverages, but they would be situated in the dairy part of the perimeter of the store.

Our next question comes from Bryan Spillane with Bank of America.

Just a follow-up on Campbell Fresh. I guess, as we look at Bolthouse going into 2017, just 2 points, I guess, I'd like to get some clarification on. First, in terms of the profitability there for this year, I guess, it sounds like it will be somewhat impaired or below what a normal run rate would be as you sort of rebuild your production capacity and you get rebuild the customer base in carrot. I just want to make sure that that's one of the things that will hold it back this year, maybe relative to what we should expect in '18 and '19, is just simply there is a little bit of rebuilding that has to go on. And then as a follow-up to that, just -- does the sort of adjustments you're making in production runs and run times sounds like maybe even considering new production lines, does that at all slow the pace of new product innovations like the pea protein drinks? And just trying to understand if whether there is sort of a step back before you can step forward as you get the supply chain straightened up.

Bryan, the first part of that question, Denise mentioned 2 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 digit. Typically, we would look for high single digit, 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.

Our next question comes from David Driscoll with Citi.

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 think that's right, Dave. So when we first announced the cost saving program, we're targeting $200 million in savings, and we talked about half of that going back for reinvestment. I think as the savings level went up, as when we kind of help the reinvestment amount, so I don't think we're -- we'd estimate that. I think I'd estimate less than half is not going back in the business. We're not going to give a specific dollar amount in terms of reinvestment in 2017, but it is significant, and it is in a number of areas. We're going to support new product launches, things like Prego's Farmers' market, Well Yes soup, Plum infant formula, the Bolthouse spring innovations, Tim Tam's expansion in the U.S., Goldfish made with organic wheat. So we have a number of product launches going on. We're also going to invest in new capabilities around things like digital and e-commerce. We're going to make investments in our Real Food initiative, so these are things like improving our can liners, continuing the removal of BPA, improving the product and more clean label, those types of ingredients which tend to be more expensive. We're going to invest in longer term innovation, things like our Acre investment fund, and also Denise mentioned, long-term innovation in Packaged Fresh. We're also going to invest and add resources to expand our sales and distribution in China through our Kelsen business. So we have quite a list of areas we're looking to reinvest and in the P&L, we have a significant allocation of fund.

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...

All right. One clarification and apologies for this, but I got to ask this. The pacing of the quarterly earnings so -- there was amazing growth in Q1 and Q2. You didn't really say this in your prepared comments, Anthony, but will you actually be at or above the year-ago 1Q and 2Q numbers? I mean is there any chance that these are below those year ago numbers just because of how tremendous the Q1 and Q2 were last year?

Well, we did said the majority of growth will come in the second half. And as you point out, there's 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.

Our next question comes from Jason English with Goldman Sachs.

I've got 2 quick questions. First, I'm not really sure what you meant when you answered Dave Driscoll 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 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 set back 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.

Our next question comes from Robert Moskow with Crédit Suisse.

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.

Our next question comes from Matthew Grainger with Morgan Stanley.

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 a -- 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.

Our next question comes from John Baumgartner with Wells Fargo.

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 -- we do look at M&A more broadly than just Campbell Fresh. And each one of our divisions has mapped out specific targets that they're interested in, that are a good strategic fit for their businesses. And so we are highly interested in other consumer behaviors like health and well-being, like snacking, like simple meals that we can pursue not only from an organic growth standpoint but also from an M&A standpoint.

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?

I'm sorry. I didn't understand the question.

Do you feel though your route to market at Pepperidge through kind of the DSD network would allow you to kind of buy a smaller additional brands, just more on health and wellness space and really kind of accelerate?

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.

Our next question comes from David Palmer with RBC Capital Markets.

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?

Yes. We definitely have some bright spots in soups this year. We basically stabilized condensed and broth is up for the year. But the issue we've had has been RTS soup. And as you indicate, with brand Chunky, we are -- we have the price realization behind us. We have improved Chunky marketing going into 2017. We had a label execution issue in first and second quarter last year that we are cycling. And then we can't control the weather, but that was definitely an impact in 2016. So we believe that the Chunky brand will have improved performance in 2017. In addition, we are launching Well Yes midyear, which is a great tasting, clean-label ready-to-serve soup that we believe will have disruption in the soup aisle and capture the hearts and minds of consumers. The other thing we have going for us in soup is Slow Kettle and organic soups continue to do very well. And we just came out with new stackable cans in our RTS soup, which has been received really, really well from the retailers for merchandising purposes. So we've got a lot more going for us this year than last year, and we expect soup to grow modestly.

Our final question comes from Mario Contreras with Deutsche Bank.

So actually just following up on that previous -- the question, I think there was also a question on V8. So I just wanted to add onto that. So that's been an area of investment. You mentioned some further investment in terms of marketing and advertising, but sales continue to be a headwind there. So can you just talk about the results that you're seeing from some of those investments. So we had an inflection point where that's starting to improve?

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. And just a clarification, I think going back to the -- to your Analyst Day, you mentioned something about shifting some consumers from V-Fusion to Veggie Blends. Should we read into that, that you're looking for V-Fusion to eventually maybe not be eliminated, but just become much less significant? Or I guess what did you mean by that specifically?

We have -- we do have top-selling varieties in the V-Fusion line such as strawberry banana or pomegranate blueberry and some others, and we'll continue to include them in the V8 line. But we -- the consumer will take us to the flavors that they like and will repeat. So that's basically how we're planning it.

And that concludes the Q&A session. I will now turn the call back over to management for further remarks.

Thanks, Stephanie. 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.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect. And everyone, have a great day.