Good day, ladies and gentlemen, and welcome to the Campbell Soup Second Quarter 2017 Earnings Call. At this time, all participants are in a listen only mode. And as a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Ken Goss Mell, Vice President, Finance Strategy And Investor Relations. Please go ahead.
Thank you, Candice. Good morning, everyone. Welcome to the 2nd quarter earnings call for Campbell Soup's fiscal 2018. With me here in New Jersey 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. Kimblesucompany.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 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.
And one final item before we begin our discussion of the quarter, I'd like to cordially invite our interested shareholders, investors, members of the media and consumers to listen to and view our investor presentation at CAGNY, which will be video webcast live on Wednesday, February 21st at 11 am Eastern for Book Raton. A replay of the video and copies of the materials will also be available afterward on our website. If you are attending the event, there will be a Campbell Spa luncheon immediately after our presentation. With that, let me turn it over to Denise.
Thank you, Ken. Good morning, everyone, and welcome to our 2nd quarter conference call. Today, we'll discuss our results in the quarter and half of this year, while advancing the long term transformation of Campbell in response to changing consumer and retailer dynamics. This was a difficult quarter for driven primarily by ongoing disappointing results in U. S.
Soup and Campbell Fresh. Adjusted EBIT decreased 4%. I'll provide a Soup sales declined 7% in the quarter, modestly below what we expected. The issue with the key I'm encouraged that we're The anticipated improvements in Campbell Fresh's performance did not materialize as we expected with sales declining 1%. While we're making progress in addressing several execution issues, we faced new challenges in the quarter with headwinds in the Super Premium Juice segment.
Additionally, the carrot yield issue we discussed last quarter extended into the 2nd quarter. The decline in adjusted EBIT reflected the performance of U. S. Soup, cost of carrot increases in C Fresh and significantly higher transportation and logistics costs, which are impacting all of our US businesses. While we initially expected transportation costs to moderate throughout the year, and we now expect updated our fiscal 2018 guidance, reflecting our outlook for the remainder of the fiscal year.
The completion of the Pacific Foods acquisition and the impact of to invest in innovation, Anthony will take you through the details of our updated guidance in a few minutes. Finally I want to touch on the status of our multi year cost savings program. That have enabled us to increase our savings target from $450,000,000 to $500,000,000 by the end of fiscal 2020. Now, let's Sales and operating earnings both declined in the quarter. The decline in the top line was driven primarily by the performance of U.
S. Soup and V Eight beverages. U. S. Soup sales declined 7%, an improvement from the first quarter of the fiscal year, but still slightly below our expectations for this quarter.
Nearly all of the decline was details about specific expect sales declines in soup to moderate in the second half. In the balance of the marketplace, we delivered better performance in soup as our program was well received continued to perform well. We're pleased to have completed and we're moving quickly to integrate the finance, supply chain and quality functions. Pacific complements our portfolio by adding a differentiated brand with organic and functional attributes in soup, broth and plant based beverages that appeal to consumers seeking health and well-being benefits. Turning to beverages, our VA portfolio remained challenged and sales of V Eight declined in the quarter.
The shelf stable beverage category continues to face headwinds. Despite the overall sales decline, we continue to see positive consumption trends in V Eight plus energy. We're focused on reinvigorating the brand with innovation that connects our vegetable nutrition equities with the functional benefits consumers are seeking, focusing on our profitable VA original and V Eight plus energy lines. Now let's turn to Campbell Fresh. In the quarter, sales declined 1% and we recorded a loss of $11,000,000.
This performance was below our expectations. As I mentioned at the outset, The C Fresh team has made progress in overcoming several of its operational challenges. Namely, we've improved beverage and carrot quality, addressed capacity constraints in beverages and returned the CPG business to competitive promotional levels. However, our progress was slowed higher current costs due to the yield issues we discussed last year. Let's start with beverages.
The headwinds in the Super Premium Juice segment are multifaceted. We believe the primary drivers are concerns about sugar, and consumers migrating to functional beverages that deliver benefits such as protein, gut health, energy and hydration. Several customers recently reset their premium juice category, reducing space in the super premium segment. Because of these resets and our previous supply constraints, Bolthouse Farms, shelf space, which hurt beverage sales in the quarter. To address this, we're launching Our upcoming beverage innovation suite is designed to address the sugar issue and evolve our beverage portfolio to be in step with consumer preferences.
We believe it will begin to rejuvenate the Super Premium segment by introducing functional benefits at an affordable price point as well as expand our footprint compared to just 3 a year ago. Notably, we just started shipping the new Bolthouse Farms B line, which consists of 8 varieties. B Strong and B balance delivers great taste, functional benefits and reduced sugar. Beast Strong is a protein drink with 70% less sugar than other leading brands, and be balanced smoothies contains 50% less sugar than other brands. The B line has been well received by customers as it meets the consumer preferences for reduced sugar and functional benefits.
Additionally, we're building on the by expanding our plant based offerings We expect our spring beverage innovations will drive improved performance in the 2nd Now, an update on farms. While sales of carrot and carrot ingredients increased 3% in the quarter, the were negatively impacted by adverse weather, We came off allocation in December as planned, but the lingering effects of this issue drove higher current costs and impacted profit in the second quarter. In the back half, In support of our beverage innovation, we'll launch new marketing and promotional campaigns to improve CPG performance. We also remain focused on executing our quality strategy in carrots and delivering supply chain productivity improvements. At the and we remain confident in the growth potential of the package fresh category.
We're focused on improving our execution and returning C Fresh to profitable growth. Finally, our Global Biscuits And Snacks division, This division continues to deliver consistent performance was primarily driven by In Pepperidge Farm, I'm pleased with the top line performance of snacks where both crackers and cookies contributed to gains and grew share in the quarter. Our cracker portfolio outpaced the category behind continued strong performance from the Goldfish brand. And in our cookie portfolio, the farmhouse line, which delivers great taste with simple recognizable ingredients, continued to perform well. Outside the U.
S, Kelson delivered solid sales performance in China. I'm encouraged with the progress we've made in becoming a more consumer focused operation and improving our logistics, supply chain and the management of our expanded distribution network. This quarter, we had a strong leading up to the holiday which is being celebrated today. The division's operating earnings were impacted by rising inflation particularly significantly higher prices for butter, which were addressing through pricing actions and supply chain productivity improvements. Overall, I feel good about our performance in Global Biscuits And Snacks, and I'm confident that this team will continue to drive our core business while integrating Snyder's Lance into Campbell.
We now expect to complete the Snyder's Lance transaction by the end of the first calendar quarter. In closing, this was a difficult quarter and I'm not satisfied with our performance. We're continuing to take actions to improve our execution We've made progress with our We have plans in place to combat the headwinds in the super premium beverage category segment and expand our presence in the ultra premium segment of the market. We expect our robust beverage innovation and marketing We're driving continued momentum in global biscuits and snacks with strong performance in Pepperidge Farm. We're moving quickly to integrate Pacific Foods into Campbell.
We're successfully executing our cost savings program and have identified new savings opportunities. And we're making the necessary investments to drive growth, including accelerating our e commerce efforts with increased levels of activity, investing in long term destructive innovation. Despite challenges in the quarter, we've made significant progress toward our long term strategy In particular, the pending Snyder's Lance acquisition will be the largest acquisition in our history. Snacking is a category we know extremely well and the acquisition complements Pepperidge Farm, which has been one of our best long term performing businesses. We're confident that the Snyder's Lance acquisition will deliver significant shareholder value.
Campbell will look altogether different once we complete this transaction. The addition of Snyder's Lance will have a transformational impact on Campbell adding $2,200,000,000 in annual net sales. As a result, snacking will represent approximately 46% of our total company net sales. We're acting with urgency to transform Campbell. I'm confident that the steps we're taking will I look forward to answering But first, let me turn the call over to our Chief Financial Officer, Anthony DiSilvestro.
Thanks, Denise, and good morning. Before getting into the details, I wanted to give you my perspective on the quarter and revised 2018 guidance. Our challenge in the quarter was our gross margin performance as Gross margin performance was pressured by cost inflation, primarily butter prices as well as higher transportation and logistic costs which did not moderate as expected and higher carrot and manufacturing costs in Campbell Fresh. Reflecting this performance and lower On the positive side, we continue to make progress on our multi year cost savings program. We generated 20,000,000 of savings in the quarter, bringing the program to date total to 365,000,000 We now expect to deliver $75,000,000 and additional opportunities identified.
We have increased our 2020 target to $500,000,000 a $50,000,000 increase. We are benefiting from the recently enacted U. S. Tax reform legislation. The lower ongoing $5 to the full year adjusted EPS forecast as we lower our expected adjusted effective effective tax rate to approximately 26%.
We are updating our full year guidance to reflect lower expectations for gross margin performance on the base business, the addition of Pacific Foods to the portfolio and the impact of U. S. Tax reform. Now I'll review our results in more details. For the second quarter, net sales on an as reported basis were comparable to the prior year, at $2,180,100,000.
Excluding a 1 point benefit from the acquisition of Pacific Foods and a one point benefit from currency translation, Organic net sales declined 2%, driven primarily by lower volumes in America's Simple Meals And Beverages. Adjusted EBIT in the quarter declined 4 percent to $402,000,000, reflecting a lower adjusted gross margin percentage partly offset by an increase in adjusted reflecting a lower adjusted effective tax rate attributable to tax reform, adjusted EPS increased 10% or 0 point 0 $9 to $1 per share. For the first half, as reported net sales declined 1% and organic net sales declined by 2% compared to the prior year. And adjusted EPS was 1 Breaking down our sales performance for the quarter, organic net sales declined 2% driven by lower volume reflecting declines in America Simple Meals And Beverages, driven primarily by U. S.
Soup and V. A. Beverages. Overall, promotional spending rates were comparable to principally the Australian and Canadian dollar. There was also a 1% increase as a result of the recent Pacific Foods acquisition, which closed in December, bringing our as reported sales to year ago level.
Our adjusted gross margin percentage decreased 220 basis points in the quarter. First, Cost cost inflation and other factors had a negative impact of 3.30 basis points. The majority of this was cost inflation, which on a rate basis meats, steel cans and aluminum. The remainder was driven by higher transportation and logistics costs, costs associated with our real food initiative and higher caret and manufacturing costs in Campbell Fresh. These negative drivers were partly offset by benefits from our cost savings initiatives.
Mix had a negative impact of 60 basis points, primarily due to the impact of the Pacific Foods acquisition, including the purchase accounting impact and negative mix from the sales decline in U. S. Soup. Pricing had a positive impact of 20 basis points, driven by pricing on our Kelson business as we partly recover significant cost increases on butter. Promotional spending also had a positive impact of 20 basis points in the quarter.
Primarily reflecting reductions of inefficient promotional spending on the Arnott's business. 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 220 basis points to 35.2%. Marketing and selling expenses declined 5% in the quarter reflecting lower advertising and consumer promotion expenses and the benefits from our cost savings initiatives, partly offset by investments in e Commerce. The majority of the reduction in advertising and consumer promotion spending reflects the timing shift on Kelson from the second quarter into 3rd quarter to support the later timing of the Chinese New Year.
Adjusted administrative expenses decreased 1% to 139,000,000. For additional perspective on our performance this chart breaks down our adjusted EPS change between our operating performance and below to $1 per share in the current quarter. On a currency neutral basis, the decline in adjusted EBIT had a negative $0.04 impact on EPS, primarily driven by our gross margin performance, partly offset by an increase in Net interest expense was up $4,000,000, a $0.01 negative impact to EPS, reflecting higher rates and an increase in ongoing benefit of US tax reform. Our adjusted effective tax rate in the quarter, including a year to date true up declined by about 9 percentage points increased EPS by $0.11, including a $0.12 per share impact from US tax reform. Benefiting from share repurchases, the lower share count added a $0.02 benefit to EPS.
And lastly, although currency translation was slightly favorable, It had no impact on EPS completing the bridge to $1 per share. Now turning to our segment results. In America's Simple Meals And Beverages, organic sales declined 4%, driven primarily by declines in U. S. Soup and V.
Eight beverages, partly offset by gains in our retail business in Canada. Excluding the benefit of the acquisition of Pacific Foods, Sales of U. S. Soup declined 7%, driven by declines in ready to serve and condensed soups. Broad sales were comparable to a year ago.
As previously discussed, US soup sales were negatively impacted by reduced support levels with a key customer. As Denise mentioned, we are making progress and expect improved sales trends in the back half. Dollar consumption of soup and measured channels declined by 3%. The difference between consumer takeaway and our sales is primarily due to higher retail shelf prices. Changes in retailer inventory levels did not meaningfully impact our soup sales performance in the quarter.
Segment operating earnings decreased 9% in the quarter to $282,000,000 The decrease was primarily driven by a lower gross margin percentage and lower sales volumes, partly offset by lower marketing and selling expenses. Segment gross margin performance was impacted by higher transportation and logistic costs as well as negative mix related to the acquisition of Pacific Foods and lower organic soup sale. Here's a look at U. S. Wet soup category performance and our share results as measured by IRI.
For the 52 week period ending January 28, 2018, The category as a whole increased 80 basis points. Our sales and measured channels declined 1.2%. Including Pacific, on a pro form a basis, we had a 60% market share for the 52 week period, down 120 basis points from the year ago period. Private label grew share by 130 basis points, primarily reflecting gains in broth finishing at 14.9%. All other branded players collectively had a share of 25.1% decreasing 10 basis points.
In Global Biscuits And Snacks, organic sales increased 3% driven by gains in Pepperidge Farm Snacks, reflecting continued momentum in Goldfish Crackers and double digit gains in cookies and also from gains on Kelson cookies in China in advance of the Chinese New Year. Excluding the favorable impact of currency translation, sales of R And S Biscuits were comparable to the prior year. Segment operating earnings increased 1% to $139,000,000. Excluding the favorable impact of currency translation, operating earnings were comparable to the prior year, with lower advertising and consumer promotion expenses, offset by lower gross margin percentage, reflecting higher levels of cost inflation particularly on buffer. In the Campbell Fresh segment, organic sales declined 1% to 250 $7,000,000, driven primarily by sales decline in Bolthouse Farms refrigerated beverages.
Segment operating earnings in the quarter declined from a loss of $3,000,000 to a loss of $11,000,000, reflecting a lower gross margin percentage driven by higher supply chain costs as well as higher Within this segment, the performance of the carrot and carrot ingredient business was below our expectations. We have lowered our future projections for the carrot business and in our reported results recorded a non cash impairment charge to reduce the carrying value of goodwill. Cash from operations declined slightly to $660,000,000 compared to $667,000,000 in 20 17. As higher hedging related payment were mostly offset by improved working capital performance. Capital expenditures were 132,000,000 dollars, $13,000,000 higher than the prior year.
We paid dividends totaling $216,000,000 compared to $207,000,000 in 2017, reflecting the 12% increase in the quarterly dividend rate announced in September of fiscal 2017. 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 repurchases were made to offset dilution from equity based compensation With the pending acquisition of Snyder's Lance, we have now suspended our share repurchases. Net debt of $3,700,000,000 is up from $3,200,000,000 a year ago as the impact of the Pacific Foods acquisition debt was partly offset by positive cash flow on the base business. Now I'll review our revised 2018 guidance.
As shown, we have isolated changes in our base business from the impact of the Pacific Foods acquisition and tax reform. We now expect sales to change by minus 1% to +1 percent. This includes a one point benefit from the Pacific Foods acquisition that was completed in December 2017. The sales outlook on the base business remains unchanged from our previous guidance. Primarily due to lower expectations to decline by minus 7% to minus 5%, including a 1 point negative impact from Pacific Foods.
As previously disclosed, we expect that the Pacific Foods acquisition will negatively impact EPS by $0.05 in fiscal 2018. We also expect the ongoing rate of approximately $0.25 in fiscal 2018, reflecting an adjusted tax rate of approximately 26%. All in, we now expect adjusted EPS to increase by 2% to 4%. As we'll discuss next week at CAGNY, We expect to in fiscal 2019. In our next earnings call, we will update our guidance to include the impact of the Snyder's Lance acquisition on the balance of our We've seen an uptick in cost inflation and now forecast an inflation rate of approximately 3%.
In addition, our supply chain costs are being impacted by higher transportation and logistic costs and increased care and manufacturing costs in Seacrest. We continue to expect 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 now expect to deliver $75,000,000 to $85,000,000 of cost savings, most of which will impact costs. With higher than anticipated cost inflation, and other supply chain costs as well as our expectation for more normal suit promotional spending in the back half and the acquisition of Pacific Foods, partly offset by increased cost savings We expect our expected to increase to a range of $135,000,000 to $140,000,000, reflecting higher interest rates and increased debt to fund the acquisition of Pacific Foods. Reflecting the benefit of tax reform, we expect the adjusted effective tax rate to be approximately 26%.
And because of the acquisition of Pacific Foods and the pending acquisition of Snyder's Lance, share repurchases after completing $86,000,000 year to date, are now on hold. This guidance assumes Lastly, we are forecasting capital expenditures of approximately 425,000,000, which is an increase from the previous outlook reflecting recently initiated projects under our cost savings program and spending for Pacific Foods. That concludes my remarks. Now I'll turn it back to Ken for the Q And A.
Thanks, Anthony. We will now start our Q and A session Since we have limited time out of fairness to the other callers, please ask only one question at a time.
Our first question comes from Andrew Lazar I'm sorry, our next question comes from Brian Skorney with Bank of America. Your line is now open.
Hi, good morning, everyone.
Good morning. Good morning.
Hi. So I guess bigger question, you've got the tax savings, which are, you're going to reinvest a portion of, even in the 2019, while at the same time, there's you're going through some cost savings. Can you kind of talk about sort of is the incremental need to invest now? How much of that is driven by like the commodity inflation, how much of it is being driven by just how rapidly things are changing, I guess, in the retail environment, but it's a pretty material step up investment. I'm just trying to understand sort of what's changed to drive that investment.
And maybe the second, if you can give a little bit of comment on expected the return. At what timeframe would we expect that that incremental investment will begin to kind of result in an acceleration in sales and earnings?
Yes. So I'll take a crack at that. As we look at our business and we're right in the middle of planning process now and along the lines of building capability in digital and e commerce, supporting our brands and launching new products investing in longer term innovation, things like Habit and some other ventures that we have underway. And as we go through that and see the benefit of tax reform coming, we really do see an opportunity to accelerate those investments and to position the company for long term growth. We're still working through some of the details on that and we'll have more to say.
I think when we get to our 2019 guidance, but we'll talk about this next week. We really see 2019 as a transition year for us, we need to do a couple of things. We need to stabilize U. S. Soup.
We need to turn around our Campbell Fresh business. We need to make these investments to drive long term growth. We need to add Pacific Foods and integrate Snyder's Lance into the portfolio. And I think as you look beyond 2019, our confidence level in achieving our long term targets of 1% to 3% sales, 4% to 6% EBIT and 5% to 7% EPS are very high And I think that's where you'll start to see those returns.
Our next question comes from Andrew Lazaro Barclays. Your line is now open.
Denise, I know you're clearly limited in what you can say on sort of the soup situation as you mentioned, but maybe perhaps you can comment a little bit on sort of what is behind the expectation for a moderation in soup declines in the fiscal second half? I guess what we're getting at is you'd mentioned progress. And I'm wondering if it can be, I guess, beneficial to all parties. I think Anthony had said maybe a more normal promotional posture. So just trying to get a sense of, what changes you can speak to and if it can be sort of, let's call it a mutual beneficial arrangement?
Yes. Well, as you know, in the first half, in particularly in this quarter, we did have U. S. Soup sales declines. And if you look at our consumption, it was minus 3%.
Our sales were down 7%. The consumption in the rest of the market was positive. And, and so the rest of the market, the soup programs actually were very well received. As we go into the 2nd half, given the positive conversations we've had, we expect a much more normal, promotion schedule in the second half of the year. And therefore, our our soup declines to moderate in the second half.
And that's pretty much all I can say about it.
Thank you. And our next question comes from David Driscoll of Citi Research. Your line is now open.
Hi, David. Great. Thank you, and good morning. I literally have probably 10 questions, but I'll keep to your rule and just ask one
Andrew got the Andrew got
the soup 1, which is a great one. But C Fresh, is profit recovery tied to sales growth And then just explaining that a little further, what I'm trying to get at is shouldn't we see profit recovery from these depressed levels even if sales are constant? And then related to C Fresh, but on the sales line specifically, what is the 2nd half expectation it sounds like you're telling us that there should be a sizable boost with all the new product activity, but I'd really like to calibrate expectations well this segment been hard for us to forecast?
What we have going on in the second half of the year is we have much more robust innovation in beverages coupled with our supply constraints behind us and a normal promotional schedule. It's the first time that we've had all three legs of the stool going for us. And that's why we're optimistic that we can make significant gains in the beverage business in the back half of the year. And the rest of our CPG business in Campbell Fresh's positive growth. So getting beverages back to growth and continuing that momentum in the other parts of the business And that's the higher margin part of the business is an important idea.
In carats, Carrots and carrot ingredients actually grew. However, because of the yield issue we had due to the adverse weather, it cost us more and therefore affected our profitability. Given that, we have very robust plans in the supply chain and with improved productivity to make margin improvements in this business. And we are very, very focused on executing those. So the growth of the top line in the CPG business coupled with the improvement of margins from the supply chain and productivity programs should give us a much more profitable growth algorithm on this business.
So just to add to that, the margin recovery is not sales dependent and we would expect to see top line growth and positive EBIT in Campbell Fresh in the second half of the year.
Thank you for the comments. I'll pass it along.
Thank you. And our next question comes from Ken Goldman of JP Morgan. Your line is now open.
Hi, Ken. Hi,
thank you. Hey, guys.
Hi, Ken.
Denise, I'm just curious, now that there's been a write down taken, what are the lessons that you learned from the Bolthouse acquisition? And is there anything that you can take either positively or negatively, but hopefully constructively and apply to the Snyder's Lance deal that's obviously ahead? Or is it really just sort of a unique situation to Bolthouse where things didn't go quite as well as you thought when you first the business. At least that's how we look at them on the outside.
Yes. And that's a very constructive question. And there have been lessons learned from the acquisitions, particularly that one. First of all, what we learned was that It's really an imperative to integrate supply train and quality earlier. In fact, right out of the gate, Campbells has a very high standard, as you know, and, and with what we went through in the Bolthouse Farms situation, We believe that that's an imperative and we are doing that with Pacific as we speak.
And we'll we will do that with Snyder Lance after we close. I think second of all, the carrot business was much more volatile than what we expected. This is fresh food and there's no roof over the factory of a carrot field. And so, we're getting much better at at recognizing what are the early warnings in that business. And so, but that proved to be more volatile.
There won't be any necessarily lessons learned from that because the Snyder's Lance acquisition and the Pacific acquisition are in categories that we have a lot more experience in. And then I think the 3rd lesson is make sure you get the right people in the right place early. And so we're applying that philosophy going forward.
Okay. That's very helpful. Just a quick follow-up. Obviously Snyder's Lance has its own DSD. Pepperidge has its own DSD.
You talked about integrating the supply chain right out of the gate. It doesn't require necessarily, how should I say this delicately, shutting down routes? That's not delicate, but I'll try to try And I'm just trying to figure out because there's a there's some speculation out there that you will have to shut down or consolidate somewhere else and that that could be a little bit of an impediment to to some of the goals that you have in that integration?
Yes, I can take that one. I would say we have no plans to integrate the actual DSD systems. These are independent distributors. So we'll leave that at that. I think where we really see significant opportunity is we have overlapping warehouse systems.
We have overlapping depots And even before you get to the DSD guide, there is significant opportunity to extract cost synergies and that'll be our focus in the near term. Great.
Thank you.
Thank you. And our next question comes from Rob Moskow of Credit Suisse. Your line is now open.
Hello, Rob. Hi, good morning. Hey, I just
wanted to ask broader, a broader question about Beverages and Campbell's challenges and what you consider your competitive advantages and beverages. I mean, my perception is a category like soup, but it the changes are more incremental. And just relatively speaking, so Campbell can always compete. But beverages, I just find that this competitive environment is changing all the time. You mentioned today that retailers are restating the shelves away from sugar enhanced items in refrigerated.
You've had continued challenges in VA can you just comment a little bit about what you see your competitive advantages are in beverage and whether why does beverage belong with a food company and maybe with another beverage company.
Sure. I think it's really obvious when you look at consumer trends that there have been fundamental changes in consumer's preferences in the beverage category. Our competitive advantage in VA is that we are vegetable based. And in our 100 percent vegetable juice, and in our VA plus energy, which is, which is powered by, green tea, we actually have performed pretty well. It's where we've had the combination of a fruit and vegetable, which is higher in sugar, that we've been affected.
And in the super premium segment of the fresh business, we have now realized there is the same shift going on. And that's why we've been very proactive in anticipating that shift and are able to launch a pretty extensive line of great tasting reduce sugar with functional benefit beverages. And we've got more in the pipeline where that came from. So I feel really good that we're on top of the consumer trends. It is happening not only in Juice, but it's happening throughout.
Beverage world. And the beverage business is profitable for us and we consider it a good part of our portfolio.
Okay. Thank you.
Thank you. And our next question comes from David Palmer of RBC Capital Markets. Your line is now open.
Hi, David. Thanks and good morning. Just wanted to ask a question on soup and want to get away from the one customer thing, sometimes I feel like that keeps us from talking about the brand and the category fundamentals. But if you if you just include all of your customers in this answer, are there opportunities for improvement in your perspective in your U. S.
Soup pricing and promotion strategy and perhaps things that you think about that will help the consistency of this business going forward, which will already be a smaller part of the business after Snyder's Lance?
Spent a lot of time with our revenue management and working with our customers on the right pricing and promotion plans. In fact, we go into that. Our joint business planning now through June with our key customers to work through that. We have to pay attention to the marketplace changes and these this category is, price elastic. So that's an important thing to pay attention to.
And there were some different dynamics depending upon whether you're working with condensed soup or RTS or broth. But all of that is taken into consideration as we plan our next season.
Thank you. And our next question comes from Chris Growe of Stifel.
Hi. I just had a question for you in relation to cost inflation and how you're addressing that from this point forward, particularly around freight and obviously things like butter. You mentioned in some cases, some price increases. It sounds like that's maybe a little more surgical. So is it relying on cost savings and productivity or pricing and maybe perhaps lower promotional spending to accommodate cost inflation?
We look at the ladder, we look at it holistically. And I would say that over time, we expect our productivity improvement and price realization to more than offset cost inflation. Now obviously that can vary depending on the time period. And we're seeing some pretty high cost inflation right now. I mentioned 3.5 percent cost inflation rate in the quarter, significantly higher butter prices.
And that's primarily hitting our Kelson business and the 2nd quarter is their largest quarter of the year. So it is having a differential impact in the quarter. Kelson has taken some pricing to recover part, but not all. And we'll look for productivity improvements to help there as well. On the transportation and logistics side, this is a volatile situation.
Obviously, the rate increases are lasting longer than we expected. We don't know if this is a long term phenomenon yet, but if it is, We would look to over time recover that through price realization as well, but we'll have to watch that one a bit closer.
Is this a year then, Anthony, where your pricing and your productivity combined, maybe it's more in a short term, cannot overcome the inflation and that therefore, is that part of what the gross margin drag you estimate?
Yes. So we see about a point of gross margin decline now. I would say probably about 60 basis points of that is the base business for the very reason you said that we're not going to be able to cover cost inflation. And these other, supply chain issues that we're experiencing, particularly around Campbell Fresh And the other, say, 40 basis points is the Pacific Foods acquisition. We bought it in December.
So it's kind of off season for them. And then when you add purchase accounting, so we've got this one time step up on inventory. We've got incremental depreciation and amortization. That's making the Pacific Foods dilutive to gross margin in fiscal 2018. But as we look ahead 2019, we would expect the Civic to be, modestly accretive at the EPS line.
So we've got a couple of things this year that I would consider hopefully more one time in nature.
Okay. Thank you for that color and we'll see you next week.
Thank you. And our next question comes from Jason English of Goldman Sachs.
Hi, there. Thank you so much for letting me ask a question. I apologize in advance, but I want to come back to Sue. With 2 questions. First, I'm not sure what it means that the back half of the year will be kind of normal promotional promotional environment because you're kind of out of soup season.
So there's not a whole lot of promotional environment in the back half of the year. Is it fair to interpret that as meaning when you go into the front half of next year, it's going to look more normal?
There actually, is quite a bit of promotional activity through the third quarter. I would say it starts to wane in the 4th quarter. And yes, we're anticipating that our promotional schedule will be more normal in the back half and in the first half of next year.
That's helpful. And then my follow on, the situation is really, really fascinating. At the core, it kind of looks like it's just been a big margin transfer, with you taking some pain in the form of volume deleverage and then taking some gain in the form of the price increases you mentioned at retail that aren't your own. Do you think that, that margin transfer is permanent And what is the risk that, that other retailers look to push for similar margin transfer?
I mean, the only way I can answer that is that again, we go through joint business planning with all of our customers and we work through what our pricing and programs are going to be for the upcoming season. This is annual in addition to shelving and merchandising and that practice hasn't changed.
Thank you. And our next question comes from John Baumgartner of Wells Fargo. Your line is now open.
Good morning. Thanks for the question. Did you just wanted to stick with soup and the investments there? I mean, there's been a lot of change in the Simple Meals category over the past few years, whether it's been improved ingredients and frozen, traction from prepared. Now there's meal delivery.
So I guess in light of the increased competition or I guess even fragmentation now, it still reasonable to think that soup is kind of a mid-twenty percent margin business going forward? Why shouldn't we expect to see larger reinvestments, whether it's directly into pricing? Or even in the integrated marketing spend, just given the evolution?
Yes. I mean, there's no question about the fact that there's different kinds of competition that are coming into the marketplace. And we've anticipated that competition. I mean, well, yes, is a perfect example of where we co created a brand with the consumer that was who was desiring a great tasting clean label, recognizable ingredient soup, and we were able to put that out in the market. And that brand has done very, very well.
I could also go to slow kettle, which fulfills the need for convenient, hardier, a little bit more premium dinner soup. And So I think that dynamic hasn't changed. If you listen to the consumer, there are still ways to satisfy that consumer as their preference is evolved, in this category. And does that add a good margin?
So it sounds as though mix is still a lever you can you feel you can pull going forward then?
Yes, absolutely.
Great.
Thank you.
Thank you. And our next question comes from Jonathan Feeney of Consumer Edge. Your line is now open.
Hi, Jonathan. Hey, good morning.
Hey, good morning. How are you? Thanks very much. And I look forward to seeing you in Florida. Is there anything to read into this closing this Snyder's Lance deal in the next few weeks?
I guess, I think your initial press release had said sometime in calendar too. Is there anything to read into that? And related to that, Anthony, your comment, I think it was to Ken's question that there are no intention to integrate the 2 independent business owner networks. I thought was fascinating. And maybe if you could you delve into
a little bit more to the
extent you can, some of your follow-up commentary on the kinds of synergies and times of integration you're going to hope to achieve in that supply chain. You mentioned different warehouses and whatnot. If you're not putting those two things together, how exactly does putting those warehouse systems together work?
Sure. I guess, our expectation at the moment is that the Snyder's Lance deal will close towards the end of the calendar first quarter. The only major hurdle left is shareholder approval of the Snyder's Lance share owners, all the rest of the more significant hurdles have been crossed. So hopefully that'll happen at that time. And we'll talk more about this next week, but we continue to see significant cost synergy opportunity between our Pepperidge Farm business and Snyder's Lance, $170,000,000 of cost synergies and they run through a number of areas.
So, but just commenting on the distribution side, Peppich Farm has a national warehouse system and a national depot system, 100 of depots throughout the country. Snyder's Lance has exactly the same thing. And this is even before the product gets to the independent. Distributor. So we see significant cost synergy opportunity in the distribution side of the business.
We also see opportunity in procurement. We see supply chain opportunities. We see area opportunities and number of other areas. So we remain highly confident that we can get to the synergy target that we've talked about with you before.
Thank you. And our next question comes from Michael Lavery of Piper Jaffray. Your line is now open.
Thank you. Just back on soup, you talked about the strength that private labels had and it's share gains. Can you talk about some of what's driving that? Is it primarily shelf space and distribution gains? Is it an innovation push from private label?
Is it just pricing driven? What are some of the factors there?
Yes. Well, the way we're looking at it is, private label grew share slightly, but in condensed in RTS, it grew share slightly, but it's still below average and relatively small. Where private label has been more impactful, has been in the broth business. And what we have done is, is recognized that we have a differentiated product with differentiated that product. In addition, the acquisition of Pacific Foods gives us a highly differentiated organic and functional broth product that we believe will set us up, to satisfy different consumer needs.
Thank you. And that concludes our question and answer session for today. I'd like to turn the conference back over to Mr. Kosnell for any closing remarks.
Thanks, Kenneth. Thank you for joining our 2nd quarter earnings call and webcast. A full replay will be available about 2 hours after our call concludes by going online calling 1 4045373406. The access code is 6692659. You have until March 2nd at midnight, which point we move our earnings call strictly to the website at investor.
Kimblesoccompany.com under news and events. If you have further questions, please call me at 856-342-6081. If you are reported with questions, please call Tom Hussian, at 856-342-5227. Thanks, everyone.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.