Good day, ladies and gentlemen, and welcome to the Campbell Soup First Quarter Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen only As a reminder, today's conference call is being recorded. Would now like to turn the conference over to Ken Gosnell, Vice President, Finance Strategy And Investor Relations. Please go ahead.
Thank you, Candice. Good morning, everyone. Welcome to the 1st quarter earnings call for Campbell Soup's fiscal 2018. With me here in New Jersey are Denise Morrison, President and CEO and Anthony D'Silvestro, CFO. As usual, we've created slides to accompany our earnings presentation.
You will find the slides posted on your 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 2 or our SEC filings for a list of factors that could cause our actual results to vary materially ciliation of these measures to the most directly comparable GAAP measure, which is included in our appendix. In the first quarter of fiscal 2018, the company adopted new accounting guidance that changes the presentation of net periodic pension cost and net periodic post retirement benefit costs. Certain amounts in the prior year were reclassified to conform to the current year presentation. The reclassifications did not impact EBIT. Also beginning in fiscal 2018, the business in Latin America has managed as part of the Global Biscuits and snacks segment rather than the Americas Simple Meals And Beverages segment as in prior years.
Prior period segment results have been adjusted retrospectively to reflect this change. An 8 K will be filed on December 8, along with our 10 Q, which will recast historical quarterly and annual financial information reflecting both of these changes. With that,
to our first quarter call. Today, we'll discuss our results in the quarter, our updated outlook for the remainder of fiscal 2018, and the actions we're taking to improve When we last spoke in September, we outlined our expectations for challenging first half. However, the first quarter was weaker than we expected, particularly for our U. S. Soup business, In the quarter, our organic sales declined 2%, driven primarily by declines in U S soup.
Adjusted EBIT declined 14%. There were several factors that contributed to this performance. First, in September, we discussed how a key customer's different promotional approach to the soup category would negatively impact our U. S. Soup business in fiscal 2018.
This had a larger impact on sales than originally anticipated, primarily due to The dialogue with this key customer remains open and I'm very optimistic that we will reach a positive resolution. 2nd, Unfavorable weather negatively impacted carrot crop yields and led to supply constraints and higher than expected costs. As a result, we placed And finally, the hurricane recovery efforts in Florida and Texas resulted in higher than expected supply chain costs due to the surge in demand for transportation and logistics will be impacted by this in the near term, but the cost impact will moderate over time. As a result of the factors that impacted gross margin, and our commitment to maintain investments For fiscal 2018 our outlook for sales remains unchanged. We continue to expect net sales to be in the range of minus 2 to flat for the year.
However, we have lowered our earnings outlook reflecting our gross margin performance to change by minus 4% to minus 2%, previously minus 1% to plus 1%. And adjusted EPS to change by minus 3% to minus 1%, previously flat to plus 2%. The operating environment remains challenging for the many reasons we've cited over the past year but we continue to believe that it's imperative to invest back in our business to differentiate our brands to drive innovation, particularly in health and well-being and snacking to accelerate our e commerce capabilities and to diversify our portfolio. That's why we remain committed to reinvest a portion of our ongoing cost savings into the areas that hold the and in the pursuit of new growth opportunities including support for our product innovations, our real food efforts building our e commerce unit as well as funding longer term innovation efforts. 1st, We're supporting our new product innovations such as well yes soup and chunky mac soups.
Pepperidge Farm Farmhouse Cookies and Bolthouse Farms plant protein milk, a dairy alternative with 10 grams of protein. 2nd, In real food, we completed the transition out of BPA and our can linings in the United States and Canada and continue to convert our soups to chicken with no antibiotics. 3rd, our newly formed e commerce unit in North America has been very active. While small, our e commerce sales increased significantly in the quarter. We launched several meal kits through our strategic partnership with Chefs'.
We also made progress on enhancing our distribution capabilities in partnership with DHL, opening a facility in Fort Worth and breaking ground on another in Ohio. This will help meet the growing In the health and well-being space, we continue to fund Habit, a personalized nutrition startup. Happen is an example of how we're investing in new models of innovation. Over time, we expect multiple business models to emerge. Following the natural launch of its nutrition test kits in August, the Habit team is expanding rapidly and adding top talent.
And we also continued our venture capital activities as the single limited partner in Acre Venture Partners. However, these efforts are not enough. While we're moving in the right direction and positioning the company for long term success, Our Q1 results are a clear indication that we have more to do to complete our strategic transition including more innovation focused on health and well-being and snacking, gaining a larger share of e commerce revenue and a greater presence in growth channels, increased expansion in developing markets, and continued focus on external development. Speaking of external development, as you know, on September 27, we delayed the closing of our acquisition of Pacific Foods of Oregon, pending their resolution of some recently filed litigation unrelated to Campbell. While the timing is not yet definite, we have by the end of 2017.
Let's start with America's Simple Meals And Beverages where sales and operating earnings both declined. The decline in the top line was driven primarily by U. S. Soup and V Eight beverages. U.
S. Soup sales declined 10%. As I stated earlier, a lower seasonal inventory build versus year ago at a key customer accounted for 7 points of the decline, and two points were due to reduced consumer takeaway. There's positive performance in the balance of the marketplace, where our soup program has been well received and consumer takeaway is up slightly. We have strong business plans with our key customers, We're driving trial of our new products, while yes, chunky snacks and swanson soup kits, and we continue to support our brands with competitive levels of advertising and consumer promotion.
While we're experiencing private label competition in our broth business, private label market share in soup is below average for center store food categories and up slightly. We constantly innovate and test our products to ensure they meet or exceed consumer taste preferences. We believe that innovation and brand differentiation are critically important in the soup category, which is why we're continuing to invest in our brands. The show stable beverage category remained challenged and sales of V Eight products declined. Despite this decline, we're seeing positive consumption trends on V Eight vegetable juice and V Eight plus energy.
We're pleased with the sales gains of our Simple Meal products, driven by Prego as well as sales growth in Canada and food service. Looking ahead, we expect the operating environment to remain We've started to shift our suit marketing spending from equity building campaigns to a sharper focus on product attributes that differentiate Campbell Brands. We're increasing in store presence with stronger messaging, and we're aggressively ramping up our e commerce plans. Now shifting to our global biscuits and snacks division. Overall, I feel good about our performance in global biscuits and snacks to start the year.
This division delivered growth on both the top and bottom lines. Sales gains were primarily driven by the continued solid performance of Pepperidge Farm. This sales growth was fueled by our snacks business, with a 12 punch from crackers and cookies. Our Goldfish crackers continued to outperform the category in a meaningful way. In fact, Goldfish became the increasing ounces into houses approach.
This is all about providing wholesome delicious snacks that can be enjoyed The second driver of our sales growth was and the rejuvenated Pepperidge Farm Chunkcookie line. The Farmhouse launch is one of Pepperidge Farm's best product introductions in over a decade. With strong trial and repeat. Made with simple ingredients, this thin crispy cookie is the type of snack consumers are seeking and has been incremental to the category. We employed a similar approach with our Pepperidge Farm chunk cookies.
We improved our recipes using larger chocolate chunks and cage free eggs, while also updating and simplifying our packaging. It's satisfying to see our real food philosophy resonating with consumers in our cookie portfolio. Outside the U. S, Asia Pacific sales were mixed. Sales declines in Australia were partly offset by gains in Indonesia.
We faced increased competitive activity in Australia's chocolate biscuits, but delivered solid results in savory crackers behind the reintroduction of original shaped crackers where we gain share. Now let's turn to Campbell Fresh. We're encouraged that our CPG products grew for the 2nd consecutive quarter behind Garden Fresh Gourmet and Bolthouse Farms salad dressing. Sales of Bolthouse Farms Beverages were comparable to a year ago. We're now back to normal beverage capacity.
Our new co packer was fully operational midway through the quarter and our service levels steadily improved helping us instill confidence with customers. Late in the quarter and expect that trend with the continued rollout of Bolthouse Farms plant protein milk, new garden fresh gourmet fresh soup and salsa products in the first half, and a range of both house addresses and purchases back half. Turning to farms, Sales of carrots declined in the quarter. Our carrot crops were negatively impacted by adverse weather. Due to these low yields, We placed customers on allocation in the quarter.
Learning our lesson from a similar experience in 2016, the new Campbell Fresh team did not compromise the quality of carrots we delivered to customers. As stated earlier, we expect that we'll be off allocation by December. We continue to expect Campbell Fresh to return to profitable growth this fiscal year. While I'm not satisfied with our results this quarter, I'm also not deterred Despite challenges within U. S.
Soup, V Eight and carrots, other parts of the business are growing. The Global Biscuits And Snacks division remained a bright spot especially Pepperidge Farm. Simple Meals, Canada, and Foodservice performed well, and the Campbell Fresh turnaround is progressing. We're taking the appropriate steps to address our immediate issues and remain focused on the actions that will position Campbell for long term growth. We will continue to invest drive innovation, particularly in health and well-being and snacking, build our e commerce organization and pursue smart external development.
Thank you. And now I'll turn the call over to our Chief Financial Officer, Anthony D'Silvestro.
Thanks, Denise, and good morning. Before getting into the details, I wanted to give you my perspective Our first quarter results were below our expectations, largely for 3 reasons. 1st, While we anticipated that US soup sales would be negatively impacted by reduced support levels with a key customer, the sales decline in the quarter was more than anticipated, primarily due to a lower seasonal inventory build with this same customer. Which accounted for 7 points of the soup sales decline. Given the seasonality of our soup business, quarterly fluctuations in retailer inventory levels are mostly timing related.
2nd, as a result of untapable weather, We experienced lower crop yields on carrots, which had a negative impact on our gross margin performance. And third, also impacting our gross margin We experienced higher transportation and logistic costs, reflecting the impact of industry wide carrier capacity issues. On a positive note, we continue to make progress against our cost savings target of $450,000,000 by the end of fiscal 2020, delivering another $20,000,000 of savings in the quarter. This brings the program to And as Denise highlighted, we will continue to reinvest a portion of the savings back into the business to drive growth over the long term. As you've seen in the release, we are revising our full year guidance.
While we are not changing our range for sales, we are lowering the ranges for adjusted EBIT and adjusted EPS by 3 percentage points, which equates to about $45,000,000 in EBIT. This change primarily reflects the impact of carrier shortages on our transportation and logistics costs and the unanticipated impact of For the first quarter, as reported and organic sales declined by 2%. The decline in organic sales was driven by lower sales in America's Simple Meals and Beverages, partly offset by growth in Global Fiscuits and Snacks. Adjusted EBIT decreased 14% to 4 $17,000,000, reflecting a lower adjusted gross margin, lower sales and higher administrative expenses partly offset by lower marketing and selling expense, reflecting a reduction in the tax rate and a lower share count, adjusted EPS decreased 8 percent or 0 point 0 $8 to 0.92 per share. Breaking down our sales performance for the quarter.
Organic net sales declined 2%, all driven by lower volume. Volume declined in America Simple Meals And Beverages, reflecting declines in U. S. Soup and V. A.
Beverages, partly offset by gains in Prego pasta sauces. Volumes also declined in Campbell Fresh, which was entirely attributable to the declining of Carrot, a direct result of placing customers on allocation as Denise mentioned earlier. This was partly offset by volume gains in global biscuits and snacks, reflecting continued momentum on Goldfish Crackers and Patrick's Farm cookies. Overall promotional spending rates were comparable to the prior year. And although it rounds to 0 on the chart, we did have a slightly positive impact from currency translation, principally the Canadian and Australian dollar, bringing the change in our as reported sales to minus 2%.
Our adjusted gross margin percentage decreased 210 basis points in the quarter. First, cost inflation and other factors had a negative impact of 250 basis points. Almost two thirds of this was cost inflation, which on a rate basis, increased about 2.5%, reflecting higher prices on meat steel cans, aluminum and dairy. The remaining third was driven by several factors. As I mentioned, we had higher carat costs and higher transportation and logistics costs.
In addition, we incurred losses on open commodity hedges as compared to gains in the prior year quarter. And we had higher costs associated with investment in our real food initiative. These negative drivers were probably offset by benefits from our cost savings initiatives, Mix had a negative impact of 80 basis points, primarily due to the impact of lower U. S. Soup sales.
Pricing and promotional spending had little to no impact on the quarter. 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 two ten basis points to 36.5 percent. Marketing and selling expenses declined 5% in the quarter, reflecting lower advertising and consumer promotion expenses, and benefits from our cost savings initiatives. Adjusted administrative expenses increased 17% primarily due to higher information technology costs, expenses related to the pending acquisition of Pacific Foods inflation and investments and long term innovation. Looking ahead, we do not expect this rate of increase in administrative expenses for the balance of This chart breaks down our adjusted EPS change between our operating performance and below the line items.
Adjusted EPS decreased $0.08 from $1 in the prior year quarter to $0.92 per share in the current quarter. On a currency neutral basis, the decline in adjusted EBIT had a negative $0.16 impact on EPS 2 thirds of which was driven by our gross margin performance. Net interest expense was up $2,000,000, reflecting higher rates and had no impact on EPS. Currency translation from both a stronger Canadian and Australian dollar added a penny EPS benefit. Using excess cash flow to repurchase shares, reduced our share count, adding a $0.03 EPS benefit.
Our adjusted tax rate in the quarter declined by about The lower adjusted tax rate in the current quarter was driven by a favorable settlement of certain US state tax matters. The lower tax rate increased adjusted EPS by $0.05 completing the bridge to $0.92 per share. Now turning to our segment results. In America Simple Meals And Beverages, organic sales declined 5%. Driven primarily by declines in U.
S. Soup and V. Eight beverages, partly offset by gains in simple meals, driven by Craggle pasta sauces, and excluding the federal impact of currency translation, gains in our retail business in Canada and our North America food service business. Sales of U. S.
Soups decreased 9%, driven primarily by declines in condensed and broad. The lower sales reflects a 7 point decrease due to a lower seasonal build of retailer inventory. Consumer takeaway measured channels declined by 2% in the quarter. Both the inventory driven decline and reduction in consumer takeaway would reflect our performance with a key customer we've referenced. Operating earnings decreased 14% in the quarter to $328,000,000.
The decrease was primarily driven by lower sales volume and a lower gross margin percentage, partly offset by lower marketing and selling expenses. Segment gross margin performance was impacted by higher transportation Here's a look at U. S. Wet suit category performance and our sales results as measured by IRI. For the 52 week period ending October 29, 2017, the category as a whole increased 10 basis points.
Our sales and measured channels declined 40 basis points. We had a 58.5% market share for the 52 week period with a share loss of 30 basis points. Private label grew share by 130 basis points, primarily reflecting gains in broth, finishing at 14.3%. All other branded players collectively had a share of 27.2% declining 100 basis points. In Global Biscuits And Snacks, organic sales increased 2% driven by continued gains in Goldfish Crackers, which benefited from promotional activity and new items and gains in Pepperidge Farm cookies benefiting from the launch of farmhouse cookies as well as growth of Milano and chunk cookies.
Excluding the favorable impact of currency translation, biscuit sales in the Asia Pacific region were down slightly as lower sales in Arnott's Australia were probably offset by growth in Indonesia. Operating earnings increased 4% to $120,000,000, primarily driven by higher sales volume. In the Campbell Fresh segment, organic sales comparable to the prior year at $234,000,000 as sales gains of carrot ingredients, garden fresh gourmet, and Bolthouse farm salad dressings were offset by declines in carrots. Sales of both house farm beverages were comparable to the prior year. With our new beverage co packer now up and running, we expect to have sufficient product supply to support our promotional program going forward.
As a result of the crop yield issue, carat sales were on allocation for part of the quarter, resulting in the sales decline. This segment generated a $6,000,000 operating loss for the quarter as compared to a $1,000,000 up to $1,000,000 of earnings a year ago. Year over year decline was primarily driven by the Cash from operations was $188,000,000 compared to $221,000,000 in 2017. The decline reflects higher payments on hedging activities and higher seasonal working capital requirements, partly offset by higher cash earning. For the full year, Capital expenditures were $58,000,000, $10,000,000 higher than the prior year.
We paid dividends totaling $111,000,000 compared to $100,000,000 in 2017. The increase reflects our 12% increase in the quarterly dividend to $0.35 per share as announced in September of fiscal 2017. In aggregate, we repurchased $86,000,000 of shares program. The balance of the repurchases were made to offset dilution from equity based compensation. Net debt of $3,300,000,000 was comparable to last year.
Now I'll review our revised 2018 outlook. As I said earlier, we continue to expect sales to change by minus 2% to 0% Consistent with our previous guidance, we expect sales declines in America, simple meals and beverages, driven primarily by U. S. Soup, will be partly offset by growth in Global Biscuits and Snacks and in Campbell Fresh. We now expect our adjusted gross margin percentage to be comparable to last and the cost impact of lower carat yields, reflecting the reduced expectation on gross margin we now expect adjusted EBIT to decline by minus 4% to minus 2% and adjusted EPS to decline by minus 3% to minus 1%.
Both earnings ranges are 3 percentage points below our previous expectations. We continue to expect to deliver $60,000,000 to $70,000,000 of currency translation will be nominal and that the adjusted tax rate is expected to be approximately 32%. Given the seasonality of our business and the timing of these unforeseen cost issues, we expect to see significantly weaker performance in the second quarter followed by improvements in the
Thanks, Anthony. We will now start our Q and A session. Okay, Candice.
And our first question comes from Ken Goldman of JP Morgan. Your line is now open.
One of the questions I get on Campbell, Denise, is what is the board's thought on the carrot business at this point? Because obviously, the car business, I think, has underperformed expectations, it's fair to say. And at this point, it's volatile and unpredictable And from an investor perspective, that leads to uncertainty, which leads to lower multiple. So I'm just curious how committed the board is to sort of keeping the carrot business itself, as opposed to the rest of the worldhouse, which obviously still has some upside from a packaged food perspective.
Yes. There's no question, Ken, that we have experienced volatility in the Carrick business due primarily to weather issues in California, dealing with extremes in rain and heat, which has affected the crop Well, we can't control the weather, we can control what we do about it. And I believe that we did the right thing. This time around by putting customers on allocation, not harvesting early and keeping the quality of our tariffs. Understand that the role of carrots in this business is it's the scale of distribution for the CPG products.
And one of the reasons why we acquired the business was to grow the CPG portion, and recognize that the carrots are the chassis for distribution at, best pricing. So, we'll continue to take this into consideration going forward. We'd like to get to the point of stability in carrots and growth in CPG, and that's our strategy.
Okay. And then my follow-up, thank you for that. My follow-up is, Denise, you talked about getting a little bit optimistic or maybe you are optimistic about conversations with the key customer that the promotion has maybe been lost temporarily with. Can you give us a little more color on where that optimism comes from and when the earliest it might be that you might get that promotion back in some form?
Well, I can't talk about any specifics. I can say that the dialogue remains open and it's very positive.
Okay. Thank you.
Thank you. And our next question comes from Matthew Granger of Morgan Stanley. Your line is now open.
Hi, Matt. Hi, good morning. Thanks for the question, Denise. I wanted to ask another follow-up on the the soup issue, most of your competitors have characterized this specific circumstance in soup with this one retailer. As a very isolated case.
And I think what we're hearing from others is that there's just a need for greater levels of innovation and that's going to be sufficient to protect relationships with key retailers provide value for all stakeholders and avoid having others run into similar situation. So I guess, do you agree with that characterization of Sou being an isolated pressure point in the industry? And if that's true, what could you have done differently or do you need to do differently to avoid this going forward? Is to the extent that this perhaps is an issue that's disproportionately affecting the condensed business. Is there a need to try and bring some type of innovation to that area?
The business that's been a little bit more static from a product standpoint in recent years?
Yes. I'll answer that question from a couple perspectives. First of all, in the rest of the market, the soup program has been very strong. New products have been well received, a new well yes is at 83% ACV distribution. We're supporting the brand's, new chunky max is, had hit the market now with 40% more protein and protein is really on trend.
So we're pretty pleased with the performance in the rest of the market with consumption up slightly. So that's and we believe we'll continue to see that momentum into the 2nd quarter. The other, the other fact is that our other businesses in this key retailer are incredibly robust. So I would say that I do agree that the soup situation is isolated.
Okay. And I know it's going to be difficult to comment on this and you might just defer, but given Obviously, you ran the numbers and didn't want to meet their demands on this particular category or in the soup category. And you're seeing solid consumption or modest growth in other customers in the category. Given that dynamic, I mean, do you have a sense of how they view the return profile of of their approach to the soup category this year given that they're losing a fair amount of share in a relatively high margin category. And what the implications of that might be for the likelihood of seeing similar situations going forward?
You're right. I'll defer.
All right. I had to try. Thanks.
Thank
you. And our next question comes from Andrew Lazar, Barclays. Your line is now open.
Good morning, everybody.
Hi, Andrew.
Hi. Just one last one on that particular issue, when you talk about the dialogue being positive and open, would this be something that potentially could impact positively this fiscal year or are we at a point where plans are in place such that and you've done things with obviously other retailers that seem to be to be effective. Is it really more of an FY 2019 scenario? Or is there some way to salvage some of this year? And then And then, Anthony, on, I think at the last call, you mentioned that this promotional issue would probably be about a 1% top line drag for the full year for the company as a whole.
Is that still around where you think we are or has the first quarter led that to be somewhat different now? Thank you.
I'll take the first part, Andrew. We we said this in September, but we expect that the first half on soup will be weaker than year ago, and we expect in the second half.
On your other question, yes, we did say that the soup performance would have about a point impact on total company. I would say still rounds to 1, but probably a little bit higher.
Okay. And then the last thing would just be, I think you mentioned obviously a big part of what we saw in the fiscal first quarter was the lower year over year inventory build. In fiscal 2Q, was there also an inventory build seasonally last year that we wouldn't this time around as we go into the 2Q?
Yes. The seasonal goes through the 2nd quarter. Mean, it's kind of hard to say. Obviously, we didn't build as much in Q1, but given where we sit today, and given our outlook for consumption, it's hard to say you know, what's going to happen relative to inventory movements going forward. But I would expect them to be significantly, you know, more muted than the Q1 impact.
Got it. Okay. Thanks everybody. Have a nice holiday.
Okay. Thank you. You too.
Thank you. And our next question comes from Robert Moskow of Credit Suisse. Your line is now open.
Hi. Yes, I wanted to
make sure that I understood that comment to Anthony. So you're saying that Is there still de loading that you expect in 2nd quarter? In other words, that your shipments will trail soup consumption in second quarter as well? And also, is that just at this one retailer or is that across multiple retailers that you're seeing the, the de loading?
So be careful with the term, the de loading. Yes, the impact is all one customer. And basically, you have a curve that builds kind of steeply in Q1 and less steeply in Q2. And certainly the seasonal build through Q1 was significantly below last year. Now that curve starts to, you know, kind of come down a little bit or increase at a slower rate in the 2nd quarter.
And it's really difficult to predict, shipments vis a vis consumption, but I would expect to have a, you know, a much more tighter delta between shipments and consumption in the second quarter than the first. Okay.
I think I get it. And one of your slides you showed that private label soup has expanded market share by over 100 basis points. Has this retailer really push private label as a substitute for your brand in the category? Or is that private label gain happening across multiple retailers?
I don't think private label is a new phenomenon. Private label is pretty prevalent. And what we have seen is more of a push on private label in the broth business in the market at large. Actually our, the share that private label has of condensed soup and RTS soup is significantly below the average in center store categories and only up slightly, but broth has definitely been impacted.
And how would you expect that to impact the Pacific Foods business? I think Pacific is largely broth, isn't it?
The Pacific Foods brand is highly differentiated, being organic and natural So we believe that will be a good add to
Thank you. And our next question comes from Brian Spillane of Bank of America.
Just wanted to follow-up on gross margins. I just, and unless you want to make sure I heard this right, Are we expecting that gross margins will be under worse pressure or more pressure in 2Q versus 1Q? And then sort of get better in the second half? And I guess just to follow-up on that is, are you doing what are the remedial actions gross margins? Are you raising prices or pulling through more productivity?
Just trying to understand sort of what will get the gross margins to improve as we go through the year?
Yes, I think the first part of that question is understanding what happened in the first quarter. I mean, we're down a couple of 100 basis points, primarily due to 3 things. 2 of which are going to stay stay on the year and 1 of which is going to turn the higher transportation and logistic costs certainly had a negative impact on Q1. That's going to impact the year. The second is the carrot, cost issue related to yield that impacted the first quarter and will also stick on the year.
The third and this one is primarily timing, was soup down 9% in the first quarter. There's a pretty significant significant negative mix impact from that. And most of that should turn. So as we look at the full year now, we would say we expect gross margin to be about flat. And I think the way to decompose that is to think about our productivity savings.
So we're targeting 3% of costs And that was just about offset cost inflation as well as some of the investments we're making in real food. Denise mentioned what those were. And then the other 2 components, you know, we had previously expected and still expect to deliver cost savings of $60,000,000 to $70,000,000, most of which will impact costs And and to a a large extent, that's largely offset now by these unanticipated cost issues, both transportation and logistics, as well as the carrot yield. Now in terms of phasing, given the seasonality of the suit business, certainly the consumption, expectation will have a more significant impact on Q2. The timing of those 2 cost issues, transportation, and logistics, and carrots more impactful on Q2.
And then we'd expect to see improvements in the back half.
Okay. So, but 2Q isn't more pressure than 1Q. I guess once you also had a pretty difficult growth market compared to last year?
No, but relative to the second half, yes, but not relative
to Okay. All right. Great. Thank you. Have a happy Thanksgiving, everyone.
You too.
Thank you. And our next question comes from Steve Strycula of UBS. Your line is now open.
Hi, good morning. Just a follow-up on Brian's question. So this implies that gross margin in the back half of the year going to be up about 150 basis points or greater. Just want to make sure I'm thinking about that correctly. And then I've got a follow-up.
Yes, we would expect them to be up in the second half for sure.
Okay, great. That's helpful. And then, Denise, you comment a little bit about the overall category right now? Are you seeing any shrinkage in total points of distribution at retail or frost the US channel place right now, or are you just seeing a little bit of rotation between a little bit of private label and branded mix here and there? Thanks.
Just for clarification, because we're in the snacks category and many fresh categories, are you referring to the soup category?
Yes, specifically. But while you're at it, if you want to comment on snacking, given what we're seeing with Kellogg's DSD transition, that'd be helpful too. Thanks.
Okay. Let me start there. In our Pepperidge Farm business, we've seen a lot of robust consumption particularly on Goldfish and cookies, as I stated before, we continue to increase our our shelf space merchandising. So they're really doing a great job. In Campbell Fresh, again, the CPG part of the business has returned to growth up a couple points, for the 2nd consecutive quarter.
And, and, you know, we didn't start promoting beverages until October. So we will now return to a normal promotion schedule in quarter 2, and we have a huge innovation suite coming to market in quarter 3. So we believe that the CPG part of Campbell Fresh will have momentum. In the soup category and the rest of the market, we continue to see robust plans. We do audit shelves every year, but we have not gotten the results of that.
We'll let you know when we do. And so, we're just running our play.
Okay. Thank you.
Thank you. And our next question comes from Chris Groley of Stifel. Your line is now open.
Thank you. Good morning. Just a question for you to follow-up on an earlier question in relation to the change in promotional program at this key customer, if you were to, affect some sort of plan now or soon given the seasonality of this business, could it be in place by the end of the soup season? Could you be back from promoting, you know, relatively quickly if something got worked out there?
Yeah, I'm not going to comment on the specifics of a customer program.
Okay. Even the timing of which you could affect the promotion?
Yes, I mean, all I'm willing to say is that we are in open discussion and, positive about it.
Okay, got you. And then if I could just ask a quick question on the margin recovery in the C Fresh division, you're to promoting more heavily. I think you mentioned that, Anthony, and you do have some easy comps. And I know care costs will be an ongoing issue, but it would seem like that doesn't usually get to profit generating operating profit. Does that happen as quickly as Q2 or is there an upfront investment that may come slow that rebuild and profitability exhibition?
Yes, a couple of things. I would say, if we didn't have this yield issue in Q1, the Campbell Freshs division would have generated a profit. So yes, it can turn around, you know, pretty, pretty quickly. Will have a little bit of a lingering impact of the carrot yield issue into the 2nd quarter. You know, Denise mentioned, we're on allocation.
That should be behind us by the, you know, by December. So, you know, we would expect to see, you know, profitability pretty quick in in in Campbell Fresh. And as we said before, on a full year basis, we would expect to deliver both top and bottom line growth.
Chris, in addition, we have very robust supply chain productivity program since we've integrated the supply chain into Campbell's and put put them on our productivity program. We have a very good line of sight to some significant cost savings, which will enhance the profitability of the business.
Okay. Well, thank you for the time and happy Thanksgiving.
And our next question comes from David Palmer of RBC Capital Markets.
Just a follow-up question just broadly on soup and what is there any auditing that you've done about how you've gotten here with the retailer issues in soup and particularly with regard to price gap to private label and the push behind private label, you know, one one theory is that the price gaps have widened over recent years. And I, I think a natural concern was that this these these issues wouldn't just be local to one retailer in the future that we would see broader private label, pushes by other retailers. So any comments on that would be would be helpful. Thank you.
We do very robust analytics on our price and thresholds of the brands versus private label. So we have a good indication of what that looks like both from the regular retail pricing and also the merchandising pricing with the frequency that we merchandize. So, that's under constant why And that's not different. We've been doing that forever. So, I would just say that, that in the in the broth business, what we have done to address private label.
And that's where we have experienced the competition is we've We've changed our advertising, messaging more to how swanson is differentiated versus private label, starting with the fact that the first ingredient in swanson is chicken stock, whereas the first ingredient in most private labels is water. And so we're calling attention to some of the attributes that distinguish the Swanson brand from private label. And, And then of course, the pending acquisition of Pacific, as I mentioned, we're pretty enthusiastic about what differentiation that brand brings to the line. In RTS and condensed private label is a factor, but it's very it's really under average and we have not seen we haven't seen an increase. I mean, it's been up slightly.
So but we continue to watch it and we'll make sure we continue to be competitive.
That's helpful. Thank you.
Thank you. And our next question comes from David Driscoll of Research. Your line is now open.
Great. Thank you, and good morning.
Hi, David.
Hi. So apologies for some more two questions. They could come in, soup inventory, Anthony, could you just talk about why this doesn't impact guidance? I think you called out the the carrot issue and the and the supply chain, the freight issue, as the big changes to the guidance, But I'm not 100% clear why the super inventory issues in Q1 don't also impact the guidance. And the simple question would be if this big retailer is not ordering product, you know, why doesn't this have some kind of impact on upcoming sales?
So I'll start with the end of that question. I think it's likely that the lower inventory we'll build will have an indicator cater of near term consumption. So I think we would expect to see some, you know, consumption decline. And then the other question, yes, both the carrot issue, and the and the freight issue are both unanticipated and impacting the year. But I think the way to think about retailer inventories, they start our fiscal year at relatively low levels.
They go through a significant increase in Q1 Q2 and then come back down in the back half. So it really is volatility amongst the quarters as opposed to an impact for us on our fiscal year, given our fiscal year is about when those inventories are at their lowest point. So that one is more about timing, which is why I didn't talk about it in terms of our full year guidance.
And then related to that, just Soup typically is down 2% and this isn't, and Soup does not really a factor in the guidance change. Is it fair to say that your full year expectations for the soup season is down about 2%.
I don't want to give you a specific number, but probably a little south of that.
Last thing for me, it's just on freight. Can you just talk about how this plays out over time? I'm a little confused about the factors here. We've got a hurricane truck availability issue that should improve. That feels like it's going to be good as time progresses.
But I believe there's some new rules coming that are negative So this freight issue, is is the cost, is this gonna get better, or is it gonna get worse as time progresses?
Yeah. This one is hard hard to say. I mean, obviously, you know, we we've experienced, you know, the impact of the hurricanes and shortages and, you know, it just pushed us out, you know, into the spot market. And when that happens, it certainly drives up costs. We've had to do some more interplant, and some experience some more warehousing costs as we've tried to rebalance you know, kind of the network to, you know, get get around, some of that.
It it is our expectations for this impact to moderate, you know, as we go through the rest of our, you know, fiscal year. But it's, you know, it's taken a while And as we sit here today, you know, if you look at any kind of capacity report, it's still well above where it's been over the last 6 or 7 years. So I can't tell you exactly when that's going to moderate, but we're assuming that's going to take a little while.
Appreciate the comments. Happy Thanksgiving.
Thank you.
Thank you. And our next question comes from Jason English of Goldman Sachs. Your line is now open.
Hey, good morning, folks. Hi, Denise. Hi, Denise. Anthony.
Thank you guys for taking the question. I'm going to cram two questions in, if I may. First, in terms of top line drivers, can you help us understand why you're not seeing any sort of promo pricemix benefit as you suffer so many, so much volume loss related to subsidized promoted sales?
Yeah. I can take that take that one. What's happening and the reason you don't see a promotional lift in terms of sales is there's a couple of off that You know, one is, if you look at the dollar spend, for promo on soup, for example, it is down double digits in the first quarter. But what's happening is we're spending back a little bit on broth. We're spending back a little bit on both the prego business and on VA.
And the other reason you don't see it as much as with soup volumes being down as part of mostly related to that inventory issue, we calculate trade rate on a rate basis. So the volume decline is muting, right, the promotional rate a little bit. But but I think the better indicator is on a dollar basis, our trade is down significantly on soup.
Okay. Thank you for that. And then the second question, I think comes back to a lot of the questions you've gotten today, the all sort of tether back to the believability of your ability to get the acceleration you're talking about in the back half. Denise, I think you you kind of vaguely implied that maybe soup could you're expecting it to grow in the back half? And, Steve asked a question about gross margin.
I mean, a minimum, it sounds like your guidance supplies a 150 basis points of expansion, minimum, in the back half of the year. Can you give us a little more teeth or a little more meat on the bone in terms of the drivers of those dynamics, to help restore some credibility in that path of acceleration?
Yes,
I we said in timber and continue to believe that, that we will have a weaker first half than second half in soup. Based on what we know at this point. And, you know, in terms of the gross margin, Anthony, do you want to handle that one?
Yes, I would say, typically, our cost productivity program is more kind of, I would say back end weighted as opposed to front end given the seasonality of the business and our ability to get into some of the plants when there's some some, some downtime. So that's, you know, certainly more back half than front half. The other thing is, you know, this, you know, this mix issue up soup in the first quarter, in effect should turn as we go through the balance of the year. So that's a positive And the 3rd, you know, as I said before, you know, on our, you know, cost savings program, which is in addition to the productivity program, about a lot of that, you know, should be coming in the back half, you know, as well. So we do expect to see, improved gross margin performance in in the in the back half.
Yes. In the back half, we have a greater mix in our global biscuits and snacks business in Campbell Fresh.
Yes. Okay. Thank you guys very much. I'll pass it on.
Thank you.
Thank you. And our final question comes from the line of Michael Lavery of Piper Jaffray. Your line is now open.
I just want to understand this Anthony, something you just said is, if I'm hearing you right, it sounds like you're expecting the 7 points of lost inventory build to come back over the course of the year? And if that's correct, can you explain why you think that's the case?
Yes, I'll go back to someone I said earlier, it's it's you need to understand the seasonality of the soup business and what happens to retailer inventory levels. I think the easiest way to explain it is that our fiscal year is essentially the lowest point of retailer inventory. And then they they built, and we're talking about significant build in the 1st and second quarters, right? So where you strike that line on that inventory build between Q1 and Q2 just introduces volatility amongst the quarters. By the time we get to the end of the fiscal year, those inventory levels would will come out, right?
So any kind of lower seasonal build here means less of a seasonal decline on the back half. So it kind of kind of net itself out a little bit. Tim.
The main focus on is the, is the consumption in the quarter, soup consumption was down 2.3%.
Can you help me understand a little bit of the dynamics with this promotional change? Because I think that's how you've typically characterized it, but It also sounds like if it simply were a question of spending more money and adding promotional dollars and that would benefit you, then you would have probably simply just done it. So how many pieces of the puzzle are there beyond that? Because it sounds like there's potentially or maybe even probably some shelf space changes, is that a fair assumption? And if so, then wouldn't that perhaps have a lasting impact on the inventory level through the course of the year?
I would say we really haven't seen any shelf space changes. When we deal with our customers, we agree around a promotional program. That includes new items. It includes merchandising, amongst other things, and promotional, pro programming. So it isn't just, you know, dollars and cents kind, kind of, thing.
I think the thing that impacts, you know, the inventory build is, you know, what is the merchandising program on a go forward basis. And that's why I said earlier that, you know, this, you know, lower retailer, inventory build, you know, could be a indication of what's going to happen to consumption and say, for example, the 2nd quarter.
Okay, thanks. And just one last unrelated one. You touched on significant growth on your e commerce business. Can you just give a sense across your portfolio of what types of products lend itself to performance online. I would assume it probably varies a bit.
Are there some that tend to do much better than others? And what would those be?
Yes, we have a couple of things going on there. And, you know, our e commerce business is still small, and for the industry, it's still small. But we're focused on, building capabilities in terms of really understanding the consumer's path to purchase in that space we are working predominantly with pure play, e tailers and also Omni. And we're we're working, with Chef on meal kits in that space. So we're trying some different things.
We're working literally across all of our brands and bundling brands based on what the customer wants to do in that space. So, I think we're trying a lot of things. One of the things that's very encouraging though is we've brought in some top talent. And we believe that as more consumers shift to e commerce, whether it's order online, pick up at store or order online and deliver to home, will be well poised to participate and lead in that space.
Thank you. And that concludes our question and answer session for today. I'd like to turn the conference back over to Ken Gosnell for any closing remarks.
Thank you, Candace. We thank everyone for joining our first quarter earnings call and webcast. A full replay will be available about 2 hours after our call. By going online or calling 1-404-537-3406. The access code is 669-2642.
You will have until December 5th at midnight, at which point we move our earnings calls directly to the website, investor. Campbellsoupcompany.com under news and events. Just clicked on recent webcasts and presentations. If you have any further questions, please call me at 856-342-6081. If you are a reporter with questions, please call Thomas Sushan, associate director communications at 856-342 5227.
Thanks, everyone. Happy Thanksgiving.
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.