Day, ladies and gentlemen, and welcome to the Campbell Soup Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call may be recorded.
I would
now like to introduce your host for today's conference, Mr. Ken Gosnell, Vice President, Strategy And Investor Relations. Sir, you may begin.
Thank you, Crystal. Good morning, everyone. Welcome to the 3rd quarter call for Campbell Soup's fiscal 2018. With me here in New Jersey are Keith McLaughlin, Interim CEO and Anthony Silvestro, 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 a listen only mode. Today, we will make forward looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk.
Please refer to Slide 2 or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in forward looking statements. Because we use non GAAP measures, we have provided a reconciliation of these measures to the most directly comparable GAAP measure, which is included in our appendix, With that, let me turn the
the new interim CEO of Campbell Soup Company and a board member since 2016. Thank you for joining our third quarter conference call today. As you have seen from this morning's press release, we announced that Denise Morrison has chosen to retire after 15 years with the company, having served the last 7 years as President and CEO. I'd like to start by thanking Denise for her leadership and dedication to Campbell. Denise repositioned our portfolio toward a faster growing snacking and health and well-being categories with important acquisitions like Snyder's Lance, and Pacific Foods.
It has indeed been a pleasure working with her as a board member over the last few years. On behalf of the Board of Directors, and the entire management team, we thank Denise and wish her all the very best. Let me just start out by describing how we'll handle the call today. I'll make a few brief opening comments and then our Chief Financial Officer, Anthony DiSilvestro will review in detailed financial results, the updated guidance, and he will answer your questions. After the Q And A, I'll make some closing remarks.
And win the call on time by 9:30. Let me start by describing my role. As interim CEO, my mandate from the board is clear: 1, to lead the company, along with the Campbell's leadership team, until the board appoints the new chief and 2, to get the performance back on track for the company by conducting a thorough review of our strategic and operating plans, the composition of our entire portfolio, and the associated allocation of our resources, capital costs and people, All of this work will be under the advisement and supervision of the board. We, of course, will conduct this work with rigor, objectivity, and urgency. As disclosed in our earnings release this morning, we delivered results that were below expectations.
Hours and yours. Our company has clearly faced challenges. Some of those are external factors that are impacting the entire industry, and others stem from our execution. As a board member and interim CEO, these results are unsatisfactory and disappointing to us as well as our shareholders. I've been on the Board of Directors for almost 3 years now and know Campbell well.
It's a great company with talented employees and a portfolio of leading brands across multiple categories. Brands such as Pepperidge Farm, Campbell, Swanson, Arnott's V Eight Prego Pays Plum and Kelson are tremendous assets for this corporation. The recent addition of the Snyder's Lance portfolio of brands and Pacific Foods both of which are strongly supported will enhance our growth potential as we expand into the faster growing snacking categories and enhance our health and well-being offerings of Souq and broth. This company has and will continue to have a strong commitment to all of its stakeholders. Including consumers, customers, employees and shareholders.
We remain committed to bringing high quality differentiated products to the market at the right price and supporting our brands with compelling marketing and broad availability. These commitments will not change. Additionally, Our values around operating with integrity and ethics, treating all people with dignity and respect, and operating with safety and sustainability remains steadfast. What must change and will change is our execution and our financial performance. Our mandate is to create long term value for our shareholders.
We intend to take appropriate and decisive actions to ensure that Campbell is positioned to compete and win in the marketplace. That means we must take a fresh look at our strategies, our operations and our portfolio and to do so with urgency. Toward that end, beginning today, we will undertake a thorough and critical review of all aspects of our strategic and operating plans including the composition of our entire Everything is on the table. And we intend to share While we are unable to share a detailed plan today, we do anticipate that the combination of persistent headwinds The issues we're facing and the possibility of stepped up investment spending will make fiscal 2019 a challenging year. Looking ahead, I'm confident that this company has a bright future.
We have powerful and relevant brands enviable products and market positions, strong cash flow, and committed and talented people. On the leadership of our newly appointed Chief Operating Officer, Luca Mignini, our Global Biscuits and Snacks business, has delivered consistent top and bottom line growth. As we successfully integrate Snyder's Lance and capture the synergies, build a large and differentiated snacking business and improve the performance of the balance of the portfolio, we will deliver consistent profitable growth which will create value for our shareholders. However, we will not be
and we're not in a
position to speculate on any aspect of it. I look forward to sharing our plan with you on our fourth quarter call on August 30. And now I'll turn over to Anthony, who will review the results and then be available to take your questions. Anthony?
Thanks Keith and good morning. I'd first like to welcome Keith to his new role. I've known Keith since he joined the Campbell Board in 2016 and I look forward to working with him. Before getting into the details, I wanted to give you my perspective In the quarter, we successfully completed the acquisition of Snyder's Lance. This is our largest acquisition ever and it will meaningfully shift our portfolio snacking will become almost 1 half of our portfolio sales.
The consumer takeaway performance on the core Snyder's Lance brands looks good and the teams are working savings and synergies. The work performed since the acquisition closed has confirmed our initial synergy assumptions. And we are While our organic sales were stable in a difficult environment, as the percentage declined by about 4 points compared to last year, including a 1 point negative mix impact from our recent acquisitions. Gross margin performance was driven by higher than primarily higher transportation and logistics costs, higher supply chain costs in Campbell Fresh and increased promotional spending in U. S.
Soup, and Pepperidge Farm. As a result of the disappointing Campbell Fresh performance, we revised the long term forecast for that business. And we recorded a $619,000,000 pretax noncash impairment charge in our GAAP results. We are all disappointed with We continued to make progress on our multi year cost savings program. We generated $25,000,000 of savings in the quarter, bringing the program to date total to $390,000,000.
Our success in realizing these savings gives us further confidence in expectations for gross margin performance with the 2 primary drivers being the performance of Campbell Fresh and the inflationary impact of higher transportation and logistics costs. We're also including the impact of the Snyder's Lance acquisition in the guidance, which as we expected is diluted to adjusted EPS in the 4 months of ownership in fiscal 2018. While we are very confident in our ability to deliver targeted cost synergies and the overall acquisition economics we have uncovered some short term issues, which I'll discuss. At the end of my presentation, I will comment on our plan to address the company's financial and operating challenges, our portfolio of businesses and projected financial performance. Now I'll review our third quarter results in more detail.
For the 3rd quarter, net sales on an as reported basis increased 15% to $2,125,000,000. Excluding a 14 point benefit from the acquisitions of Snyder's Lance and Pacific Foods, and a one point benefit from currency translation. Organic net sales were comparable to the prior year. As gains in global biscuits and snacks and Campbell Fresh were offset by declines in America's Simple Meals And Beverages. Adjusted EBIT in the quarter increased 1 of the Snyder's Lance And Pacific Foods acquisitions, adjusted EBIT declined 6%, primarily due to lower gross margin performance, partly offset by lower adjusted administrative expenses and lower adjusted Adjusted EPS increased 19 percent or $0.11 to $0.70 per share, reflecting a favorable tax timing and Pacific Foods acquisitions.
Through the 1st 3 quarters ending April, as reported net sales increased 4%, and organic net sales declined by 1% compared to the prior year. Adjusted EBIT decreased 7% to 1.127000000 Excluding the impact of the recent acquisitions, adjusted EBIT decreased and adjusted EPS of $2.62 was up 4%. Breaking down our sales performance for the quarter. Organic net sales were comparable to last year as volume gains were offset by increased promotional spending. Overall, promotional spending rates increased in America's Simple Meals And Beverages, driven by U.
S. Soup, and in global biscuits and snacks, reflecting increased spending behind coalfish crackers. There was a positive impact on currency translation of 1%. Principally the Australian and Canadian dollars. The recent addition of Snyder's Lance And Pacific Foods to the portfolio added 14 percentage points, bringing our as reported sales increase versus the prior year to 15%.
Our adjusted gross margin percentage decreased 3 ninety basis points in the quarter falling short of our expectations. From a combination of declines in the base business and the mix impact of acquisitions. First, cost inflation and other factors had a negative negative impact of 3.20 basis points. Over two thirds of that was cost inflation, which on a rate basis increased 4.5%, reflecting higher prices on dairy, meats, steel cans and aluminum, as well as the decline was driven by higher supply chain These negative drivers were probably offset by benefits from our cost savings initiatives. With gross margins below the Campbell average, the addition of Snyder's lands and Pacific Foods to the portfolio decreased gross margin by 1.1 point We fully expect that the margins of these businesses The higher promotional spending in America's simple meals and beverages and global biscuits and snacks that I previously mentioned had a negative impact of 60 basis points.
Mix had a slightly negative impact of 30 basis points. Lastly, our supply chain productivity program, which is incremental to our cost savings program, contributed 130 basis points of margin improvement. All in, our adjusted gross margin percentage decreased 3.90 basis points to 32%. Adjusted marketing and selling expenses increased 8% in the quarter, primarily due to the impact of recent acquisitions partly offset by the benefits from our cost savings initiatives. Adjusted administrative expenses decreased 6% to $127,000,000, primarily due to lower incentive compensation and benefit costs, partly offset by the impact of recent acquisitions.
For additional perspective on our performance, this chart breaks down our adjusted EPS change between our operating performance and below from $0.59 in the prior year quarter to $0.70 per share in the current quarter. On a currency neutral basis, adjusted EBIT had a $0.01 impact on EPS as the benefit from the recent acquisitions was partly offset by EBIT decline on the base business. Adjusted net interest expense increased by $32,000,000, a $0.07 negative impact to EPS driven by an increase in the debt level funding our recent acquisitions and reflecting the impact of higher interest rates. Our adjusted EPS results are benefiting by $0.17 from a lower adjusted effective tax rate Our adjusted effective tax rate in the quarter declined by about 20 percentage points to 15.3 percent driven by the favorable timing of which we expect will reverse in a lower share count added a $0.01 benefit to EPS. And lastly, currency translation had no impact on EPS, completing the bridge to $0.70 per share.
Although not shown on the chart, the Snyder's Lance And Pacific Foods acquisitions in aggregate had a negative EPS impact of In Americas Simple Meals And Beverages, organic sales declined 2%, driven primarily by declines in V Eight Beverages, Plumb organics, and U. S. Soup. Excluding the benefit of the acquisition of Pacific Foods, sales of U. S.
Soup declined 1% driven by declines in condensed soups, partly offset by gains in broth and ready to serve soups. As expected, we are seeing improved sales performance in U. S. Soup relative to the first half. Segment operating earnings declined 3% in the quarter to $217,000,000.
The decrease was primarily driven by a lower gross margin percentage partly offset by lower administrative expenses and lower marketing and selling expenses. Segment gross margin performance continued to be impacted by higher transportation and logistics costs, and from the negative mix Here's a look at U. S. Wet suit category performance and our share results as measured by IRI. Our results are shown on a pro form a basis, including the recently acquired Pacific Foods business.
For the 52 week period ending April 29, 2018, the category continued to show growth increasing 130 basis points. However, our sales and measured channels declined 1.9%. We had a 59.5 percent market share for the 52 week period, down two points from a year ago. Our consumption and share decline are attributable to our performance with the key customer which we've previously discussed. Private label grew share by 100 and 40 basis points, primarily reflecting gains in broth finishing at 15.3%.
All other branded players collectively had a share of 25.2% increasing 60 basis points. In Global Biscuits and snacks, Sales were $862,000,000 in the quarter, including $207,000,000 from Snyder's land. Excluding the benefit of the acquisition and favorable currency translation, organic sales increased 1% driven by gains in Peppa's Farm Snacks reflecting continued growth in Goldfish Crackers as well as in cookies, driven by gains in farmhouse and Milano. Segment operating earnings increased 23 percent to $123,000,000, primarily driven by the benefit of the Snyder's Lance acquisition. Excluding the impact of the acquisition, segment earnings In the Campbell Fresh segment, organic sales increased 1 percent to $251,000,000, driven primarily by gains in refrigerated soup.
Sales of Bolthouse Farms refrigerated beverages were comparable to the prior year. This segment had an operating loss of $19,000,000 in the quarter compared to earnings of $1,000,000 in the prior year. Reflecting lower manufacturing efficiencies and reduced carrot crop yields, as well as cost inflation, including significantly higher transportation and logistics costs. The earnings performance of Campbell Fresh is significantly below our expectations as our gross margin has been impacted by the factors I listed. As a result of the performance of Bolthouse Farms CPG, and the anticipated loss of private label refrigerated soup contract with certain customers, we performed interim impairment assessment on the Bolthouse Farms CPG business and the Delhi reporting unit, which includes our fresh soup and garden fresh gourmet businesses.
In our GAAP results and within corporate, we recorded pre tax non cash impairment charges totaling 619,000,000 or $1.65 per share, reflecting our reduced expectations for current and future earnings and cash flows. On a company wide basis, cash from operations increased slightly to $1,024,000,000 compared to $1,011,000,000 in 20.17 as higher cash earnings benefiting from U. S. Tax reform were partly offset by a slight increase in working capital requirements. Capital expenditures were $251,000,000 higher than the prior year, reflecting investments to support our cost savings initiatives.
We paid dividends totaling $321,000,000 compared to $314,000,000 in 2017, reflecting the 12 In aggregate, we repurchased $86,000,000 of shares on a year to date basis, $75,000,000 of which were under our strategic share repurchase program. The balance of the repurchases were made to offset dilution from equity based compensation. With the acquisition of Snyder's Lance, we have suspended our share repurchases and did not make any share repurchases in the 3rd quarter. Net debt of 9,600,000,000 is up from 3,100,000,000 a year ago, reflecting the impact of the 6,100,000,000 acquisition of Snyder's Lance and the $700,000,000 acquisition of Pacific Foods, partly offset by positive cash flow from the base business. As we've stated before, Our priority is to de lever the balance sheet following the Snyder's Lance acquisition.
Now I'll review our revised 2018 guidance. As shown, we have isolated changes on our base business from the impact of now we're raising the low end of the sales range, which is now 0% to plus 1%. The acquisition of Snyder's Lance at 9 to 10 points of sale, bringing the new range for our sales guidance to plus 10% to plus 11% compared to 2017. Due to lower expectations for gross margin performance, which I'll discuss in a moment, We now expect adjusted EBIT in aggregate which relative to our previous guidance reflects a 4 point reduction on the base business, partly offset by a 3 point contribution from the Snyder's Lance acquisition. We now expect adjusted EPS to decline by minus 6% to minus 5% implying a range of $2.85 to $2.90.
This includes a forecasted decline on the base of minus 3 percent to minus from the Snyder's Lance acquisition for the 4 months of ownership in 2018. The Snyder's Lance estimate includes the ongoing impact of purchase accounting and the incremental interest expense associated with funding Given the changes to our outlook, Our expectations for cost inflation for the year on a rate basis has increased to approximately 4%, reflecting unanticipated increases and transportation and logistics costs. We continue to expect to generate ongoing supply chain productivity gains Excluding the benefit of our cost savings program, of approximately 3% of cost of products sold. And against our cost savings program, We expect to deliver $75,000,000 to We now expect our adjusted gross margin percentage to decline by approximately 3 percentage points with one point attributable to the mix impact of our recent acquisitions and about two points from declines on the base business. The decline in the base business is attributable to 3 drivers: the underperformance of Campbell Fresh represents about half the decline, with a balance split between the higher than expected transportation and logistic costs and slightly higher promotional spending.
Below the line, our adjusted interest expense is now expected to increase We now expect our adjusted tax rate which has benefited from U. S. Tax reform to be in the range of 26% to 27% in 2018, slightly higher than our prior forecast. The rate forecast also implies a reversal of the Q3 timing benefit in fourth quarter. This guidance assumes that the impact of currency translation will be slightly positive.
We are now forecasting capital expenditures of approximately $440,000,000, which is an increase from the previous outlook reflecting spending for the 4 month period on Snyder's Lance. Lastly, I will update you on our 2019 outlook for Snyder's Lance. We've owned the business for about 8 weeks and we remain very optimistic about the long term potential of the Snyder's Lance business. Our initial work has confirmed the cost and synergy opportunity and our long term financial expectations for this business including the 2021 EPS accretion have not changed. That being said, there are several issues we have uncovered, which will impact fiscal 2019.
These include a higher than expected trade rate as the company's plans for price realization did not materialize. The impact of higher freight and transportation costs that were all experiencing and from higher than anticipated costs associated with While we believe these issues are to our 2019 adjusted earnings per share. As I said before, Before wrapping up, I have As Keith stated, we are not satisfied with our performance and with our expectations for 2018. We know that things we are facing both execution related and external challenges. Developing action plans to address them and doing so with a heightened sense of urgency.
In addition, we are going to undertake a strategic review of the businesses and brands within our portfolio. On our Q4 earnings call, We intend to share a On that call, we will also provide Given what we know about accelerating cost inflation, in part due to the anticipated impact of import tariffs, and a continuing headwind on transportation and logistics costs, we expect our margins will be down in fiscal 2019. We are being tough minded and realistic about where we are today and what needs to be done to improve the business. That said we remain very optimistic about Campbell's long term potential. We believe there is a clear path to improve financial performance as we strengthen our and address our challenges in Campbell Fresh.
And at our Investor Day on October 3, We will share more details of our business unit plans for fiscal 2019, as well as our longer term plans for 2020 and beyond. We look forward to communicating in more depth in Keith and I want to acknowledge that you are likely to have questions about the strategic review we are undertaking. Similarly, we are sure that you are aware that it is not in our best interest to engage in speculative what if questions or hypothetical scenarios. So please note that we chose our words carefully this morning, and we will not have much to add on this topic until we get back to you on August 30. With that, I'll turn it
Okay, Crystal.
Thank And our first question comes from Brian Spillane from Bank of America. Your line is open.
Just wanted to ask just a clarification and then a question. Anthony, in the comment you made about margins being down in 2019, is that both the base business, so before the acquisition and then the dilutive impact of the acquisition? Or is it just want to make sure that we're understanding that whether it's the base will be down and then the acquisition has also diluted the margins.
It's actually both, Ron, the comments primarily relate to what we're seeing on the base business and the impact of cost inflation that we foresee continuing. And also in the 1st year, when we add It's not as late as the portfolio. The mix impact will also have a negative impact on margin.
Okay. Thank you. And then just a question on as you're going through strategic review, as we're thinking about the debt that you've just taken on to acquire Lance. Is there anything in the terms of those debt in terms in terms of the debt that you've taken on that provides any limitations to whatever you may contemplate doing in terms of the portfolio? Just trying to understand how much flexibility you may or may not have given the debt you just taken on?
Yes, there's only one small piece the acquisition financing, that has a covenant in it, but we're well below that. And anything we do, I don't think that will be an issue whatsoever.
Okay, great. Thank you.
Thank you. And our next question comes from Andrew Lazar from Barclays. Your line is open.
Thank you. Good morning everybody.
Hi, Andrew.
Hi. My question is going to be about pricing. And if you expect any incremental pricing to help, I guess, cover some of the inflation headwinds in fiscal 2019? And I asked that partly because of just, some of the concerns around the industry's ability to get that in this environment. And then also more specifically because of the comment you made around Lance.
And I think the increased trade rate because of some pricing that I think you said did not material wise. So perhaps you can roll that up into your anticipation around incremental pricing, particularly in light of also the promotional spending in soup that transpired as you kind of got back into promotional activity with a key customer? Thank you.
Sure. I mean, I guess, the problem start with the forecast that we're seeing for an acceleration in cost inflation and part of that due to the impact of upcoming tariffs. So we see pretty significant increases on steel and aluminum and other parts of the commodity basket, things like wheat, resins corrugated is another area. We see some increases. So that's obviously going to put some pressure on the margin.
And obviously, the question is, what is the impact of potential pricing to help to offset that? I don't have a lot of details for you today. And that what I will say, and as you know, it's a very challenging environment out there today, It's a competitive retailer market, and we're all mindful of that. That being said, we'd certainly be our intention that over time, productivity and pricing will offset cost inflation. The challenge is the timing.
The other thing that we do and working on is the impact of our cost savings program to help off set some of that. So as we've done in the past, we do have the 3% annual cost productivity program coming out of the supply chain. We're also making progress against our targeted $500,000,000 of cost savings by 2020. Our recent decision to close our Toronto manufacturing operation is a good example. And relocating most of that production to our U.
S. Thermal plant. So we're doing all we can to offset the inflationary impact But as we rack it all up, we do see some pressure on the margins going into 2019.
Thank you. And our next question comes from Ken Goldman from JP Morgan. Your line is open.
Hi, thank you. 2 from me, if I may. I'm curious about, Keith the board's search for the next CEO. How that process begins for you as a board, really even knows what the portfolio will look like. What are the challenges involved with that?
And also really which qualities you're looking for in CEO. I know you talked about some things that are nonnegotiable such as ethics and so forth, but any color you can give in terms of the kind of person that would be right for the company at this time. And I guess my second question is on the dividend. And I'm just curious what the board's thoughts are
on maintaining that.
With or without the strategic review. So thank you for that.
Ken, I'm going to take that Given this is Keith, 1st day, he's not going to participate in the Q and A session. But with respect to the dividend, there's a few things I can't say. We have a well articulated priority for the uses of cash. It starts with reinvesting in our business and capital expenditures. 2nd, it is the dividend and 3rd, in the current environment is to reduce leverage by paying down the debt.
We have a robust and significant cash flow, which we fully expect, we'll continue to maintain a competitive dividend level and to have that dividend increase over time with earnings. So I think the management team as well as the board certainly supports the continued payment of a competitive dividend and we see nothing that we're looking at that would change that at all.
Thank you. And our next question comes from David Palmer from RBC Capital Markets. Your line is open.
Thanks. Good morning. Keith mentioned a need to rebase earnings further in fiscal 2019 and you added some comments about freight costs and trade rate And obviously, this talks to the push and pull of costs versus pricing power, but I think long term, there's still that question of the company's ability to meaningfully drive a profitable growth. And so in what areas do you envision Campbell perhaps spending more executing differently to really promote a more balanced profitable growth? And does is there spending in fiscal 2019 going towards that and not just essentially rebasing, in light of your pricing net of commodities?
Thanks.
Yes, I mean, it's a bit premature to get into too much detail around 2019. But you kind of hinted at the exact idea of the review and what's going to come out of it is a clear articulation of those things we need to do to reposition the company to drive long term and profitable growth. And as I think about it, we have some great examples within our portfolio. And I think it exemplifies what a branded food company needs to do to deliver. And that having a product quality that's superior to competition continuing to innovate in the marketplace, appropriately managing the price gaps to competition and private label, supporting those brands with compelling advertising and at a competitive level.
I think when we do that, it's a win win win. It's a win for our consumers, our customers and for us. And I would say a brand like Prego is a good example where we've been able to do that and grow consumption and share. On the other hand, our broad business is a category. We haven't done that, and private label has gained some share.
So I think as we undertake the review, we're going to look at the portfolio. We're going to look at what got us into this situation and what do we need you to change the direct the long term trajectory of sales and earnings because we believe we can do it and we're optimistic that there is a positive long term financial performance that will come out of that.
Thank you.
Thank you. And our next question comes from David Driscoll from Citi.
Great. Thank you, and good morning.
Hi, Dave.
So I wanted to I had two questions. I'd like just to start off and say, is it fair to say that the bulk of the problems today are C Fresh related as it was by far the largest negative variance versus our expectations. If you kick off so many factors, guys, I feel like sometimes it's the importance of the different ones is not that clear. To people listening to the call. So this number 1, can you confirm that my comment that C Fresh was the biggest negative variance is accurate.
And then critically here, why are the supply chain fixes not working? Campbell's has put an amazing amount of effort and time into getting the supply chain right at C Fresh. And it just feels like we just keep hearing problems. What's wrong with the supply chain at C Fresh? Thank you.
Yes. So the first part, just to give the overall context and dimensionalize the C Fresh issue. So go back to where we started the year in terms of our gross margin expectations and where we are now. So we're a couple of points below where we started. Half of that is the situation at Campbell Fresh.
And I mean, certainly, we faced significant challenges there and the return to profitability has proven certainly more challenging than we anticipated. And I think the situation, which we need to analyze further in the fourth quarter, it goes beyond supply chain. We're seeing low crop yields on carats. We're seeing lower manufacturing yields. We're seeing higher cost inflation and things like transportation and logistics.
We've had to go to co packers and those are more expensive. The one thing that's actually mitigating some of these issues is the benefit of the productivity program that our supply chain has brought to bear. But unfortunately, it hasn't done enough to offset the other issue. So we're going to take a step back. We're going to do a deeper dive in the fourth quarter and look at the drivers of that performance.
And figure out what do we do going forward with respect to the Campbell Fresh business?
And then just one follow-up, Anthony. The factors, can you be more clear about the factors in 2019? I know you're not giving guidance, but I don't like when we get just gives us a couple of negatives and we don't get enough to understand what you're trying to tell us here on F 'nineteen. You have tax benefits that come in the 1st portion of 2019. So it's not all negative that there's just no positives here.
There was expectations of a lot of cost savings that are supposed to come in. But I'm I feel like the tone is so negative on F 2019 that we're not we're not getting any balance on it. Is that intentional because these margin declines are so significant?
No. It's trying to be transparent in terms of what we see on the horizon. And given what we know now, we'd rather tell you now than tell you later. The issue is primarily one of cost inflation. And we're seeing and expecting an acceleration on the rate of inflation across a number of ingredient and packaging items.
For example, we would expect double digit increases on steel and aluminum. A lot of that driven or all of it driven by the impact of anticipated tariffs. We're also expecting higher inflation on wheat and vegetables and resins in corrugated. So this is a meaningful meaningful shifts in the inflation outlook. Yes, we are going to continue to drive savings to help mitigate that.
Our 3% productivity program. Our cost savings initiative continues to deliver but they're just not sufficient to offset some of these headwinds. So we wanted to be transparent on that today and share with you kind of what we know at this point in time. We clearly have more work to do on this We're in the midst of rolling up our operating plans and actions for next year. The strategic review we're going to take in the fourth quarter we'll also inform what actions we take in 2019.
But again, we just wanted to share with you what we see on the horizon.
Appreciate the comments. I'll pass it along.
Thank you. And our next question comes from Jason English from Goldman Sachs. Your line is open.
Hey, good morning folks. Thank you for the question. I guess there's a lot of areas that could go. I'll come to soup real quick. You've resolved the issues with a key customer.
Is there any reason to believe one way or the other that any other customers are pushing for concessions to sustain the support there?
Yes. So back to the first point. We have made some progress on U. S. Soup.
You can see we're down 1% in the quarter versus minus 8% in the first half. Again, we've made some progress. We are, as we speak, undertaking our joint business plan, with our key customers for next fiscal year. And so that'll help inform kind of the outlook for next year. Forgot the second part of your question, Jason.
I'm really my core question is whether or not you have to make concessions to other retailers.
Look, it's a competitive environment. I mean, if you look at the markets we operate in, whether it's Australia or Canada or increasingly so in the U. S, there is clearly no tension and we need to continue to manage through that. And the way I think we do that is to do the things that make branded food company successful around their product and their marketing and their brand support, and their availability. So we'll continue to do that and, work through these joint business plans with our customers.
So there's not really much more I can say on that one.
Okay. I want to come back real quick. My last question, I guess to Ken Goldman's question on cash flow, use of cash, dividend, etcetera. I was surprised to see you financed Lance with so much short data debt. And I know you talk about your robust cash flow, but it doesn't look like it's and I think you would agree.
It's not robust enough to service the debt maturity over the next 3 years. What levers do you have pull to navigate through that or should we be expecting you to be rolling that debt and refinancing on the forward likely into a higher rate environment?
Yes, I think what we'll do is, as I said before, in terms of our priorities for the use of cash, Once we fund our CapEx program, which obviously we're managing very carefully pay the dividend the balance will go to reduce debt. And so some of it obviously will get repaid. And the balance that we clearly expect to refinance and we'll have to see what the rate environment is at that time. But I think in the near term, I think we're well positioned in terms of our capital structure and the maturity schedule.
Thank you. And our next question comes from Robert Mosco from Credit Suisse. Your line is open.
Anthony, can you give us a little more color as to what has gone off plan on Snyder's Lance. You mentioned that they were trying to execute a price realization strategy. What's been causing that to go awry? And secondly, can you talk a little bit about the reaction of, I guess, the Snyder's Lance independent distribution network to to this merger, what steps have been done to bring them into the fold within Campbell? What's been communicated to them?
To make sure that execution stays on track?
Yes. So let me try to address some of those areas, I probably won't be able to address all of them. But in terms of where we are with Snyder's Lance, I would say, 1st and foremost, we're very optimistic about what we've seen. We've owned the business now for 8 weeks. And I would say that we're even more confident now in our ability to deliver the $295,000,000 of costs and synergy savings.
And as we look longer term, we're certainly on track to deliver the acquisition economics in the 2021 accretion goal. So I just want to make sure we talk about this in the right context, but we have uncovered a couple of things, right? One is the higher than expected trade rate. And it reflects, and I don't want to get into too much detail here. Some decisions taken by the former management team.
I think what's important and in our Pepperidge Farm business, we have a very disciplined approach process and system to managing trade spend. And we are going to implement that in Snyder's Lance. So that will help us immensely manage the situation. The second thing that's impacting us And we're all seeing this is the impact of the higher transportation and logistics costs, which quite frankly did not moderate as we had expected. And the last situation, which we're working through is some challenges related to relocating some Emerald's nut production from California to Charlotte.
The restart up of that equipment has proven more challenging than the former management team thought and more challenging than we initially thought. So we're working through those 3 issues. We have action plans in place to do that. We believe they're short term and addressable and remain very optimistic in the long term outlook for the Snyder's opportunity, which respect to the DSC network, I mean, all I can really say on that one is, we now have 3 DSC systems, 2 for Pepperidge, 1 for bakery, 1 for snack, and now one for Snyder's Lance. And we will continue to operate those 3 systems independently.
That being said, there's significant opportunity to capture synergy in the distribution network both at the warehouse level and at the depot level. All right. Thank you. Sure.
Thank you. And our next question comes from John Baumgar from Wells Fargo.
Anthony, wanted to dig into the cash expectations for lands. I mean, it seems the company had really been lacking in terms of automation and robotics in the plans. At the same time, the SKU complexity would seemingly suggest kind of a nice opportunity for working capital improvement. So on balance between working capital needs, incremental CapEx synergies being back half weighted in your guidance, do you think about Lance's contribution to free cash over the next 1 to 2 years?
Yes, I think a couple of things that are happening. And And as we look at the business and some of you have looked at, obviously, as a consumer takeaway, it actually had been negatively impacted by the SKU rationalization efforts that the former management team started and that also we support. I think there's a long tail in that portfolio and we're doing we're doing our best to clean that up a little bit. As our supply chain people have gone through those plans, we see significant opportunity to improve the effectiveness of the authorization operations, potential network optimization opportunities given the overlap between our plant infrastructure and their plant infrastructure. And when we put together our deal model, we did anticipate some investments early on to correct those and to improve the long term performance of the manufacturing network.
So continue to execute those plans. We're very confident, as I said before, in the long term ability for this business to generate positive cash flow. But it does require some investments both on the CapEx line to take care of some quality situations that we see to improve some efficiency and some costs related to getting at some of the synergy opportunity. And again, all those were factored in our acquisition economics and we're confident certainly in our ability to fund those.
Thank you. And that does conclude our question and answer session for today's conference. I would now like to turn the conference back over to Mr. Gosnell for any closing remarks.
Thanks, Crystal. Keith is going
to make a few closing comments. Okay. Thanks, Ken. Actually, I just wanted to comment briefly on the question of the board and succession. Of course, the board's working on that.
They're thinking about that. But candidly, right now, we're focused on the work we described, the strategy and the portfolio review and honestly riding the ship. I mean, that's what focused on right now. As one questioner noted, part of that work will be input to the board on the candidate qualifications and potential. So it's a little bit hard to know precisely what we need in that role until we complete the review although you kind of know ninety-ten what the candidate needs to look like.
I would say we have talented candidates inside the company. And we will continue to focus on the mission that we have at hand and getting things back on track. Lastly, I'd just like to acknowledge, as many of you have pointed out, we're facing some tough market conditions and also some poor operating performance. Straight ahead. We have some hard and urgent work in front of us, and we'll face that head on.
However, we start from a foundation of strength that's been built over almost 150 years. With products and brands, market positions, margins and cash flow, that would be the envy of many, many companies. So we'll do that. This company has a deep keel being built over all that time and with that kind of cash and balance sheet strength. And we'll come out of this stronger.
I'm confident in that. Lastly, I'd just say, of course, I'm going to be out. Listening and talking to customers and suppliers and shareholders. And I very much look forward to meeting many, if not all of you in the process. Thank you for your time and interest today.
And have a nice weekend. And let me turn it back over to Ken to close a meeting.
Thanks Keith. We thank you for joining our 2nd quarter earnings call and webcast. A full replay will be available about 2 hours after the call concludes by going online or calling 140045373406. The access code is 649-8114. You will have until June 1, 2018, at which point, we will move the earnings call strictly to the website, investor.
Campbellsoupcompany.com under news and events. Just click on the recent webcast and presentations. If you have further questions, please call me at 856-342-6081. If you are reported with questions, please call Tom Hushin, at 856-342-5227. That concludes today's call.
Thanks, everybody.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.