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. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I 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 2nd quarter earnings call for Campbell Soup's fiscal 2017. With me here in New Jersey are Denise Morrison, President and CEO and Anthony D'Silvestra, 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. Campbellstocompany.com. This call is open to the media who participate in listen only mode. Today, we'll make forward looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk.
Please refer to slide 2 or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in forward looking statements. Because we use non GAAP measures, we have provided a reconciliation of these measures to the most directly comparable GAAP measure, which is included in our appendix. One final item. Before we begin our discussion of the quarter, I'd like to cordially invite our interested shareholders, investors and 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 22nd at 10:30 am from Boca Raton. A replay of the video and copies of the materials be a Campbell sponsored luncheon immediately after our presentation.
And with that, let me turn it over to Denise.
Thank you, Ken. Good morning, everyone, and welcome to our second quarter earnings call. Today, I'll share my perspective on our performance in the quarter and provide my view on our Let's be real. I am not satisfied with our overall sales performance in the quarter Organic sales declined 2% with the most prominent declines in Campbell Fresh and VH shelf stable beverages. Additionally, in the Campbell Fresh segment, Carrot and Carrot ingredient and Garden Fresh Score may reporting units.
Anthony will walk you through additional details during his comments. There were some bright spots in the quarter, such as growth in U. S. Soup, simple meals, Pepperidge Farm Snacks and fresh soup. Our adjusted gross margin increased 70 basis points, all of which was achieved by America's simple meals and beverages.
Another positive result was the We now expect to achieve and the identification of additional savings opportunities, we're raising our cost savings target from $300,000,000 by the end of fiscal 20 $18,000,000 to $450,000,000 by the end of fiscal 2020. Looking at the first half, Organic sales declined 1%, adjusted EBIT was comparable to a year ago and adjusted earnings per share increased 5%. With the the year, we reaffirmed our full year guidance this morning. Now, let me Let's start with the Campbell Fresh division. The CPG segment of C Fresh includes Bolthouse Farms Beverages and salad dressings, Garden Fresh Gourmet salsa, hummus, dips and chips and fresh soups.
The farms portion of the portfolio includes carrots and carrot ingredients, The division's performance was below our expectations this quarter. C Fresh is an important strategic business for Campbell, and we remain confident in the growth potential of the packaged fresh category. As consumer preferences continue to shift towards fresher and healthier foods. In fact, nearly 80% of consumers, including younger ones, are trying to eat more fresh foods. These consumers not only believe that fresh foods are cleaner, healthier and less processed, but that they also taste better.
We acquired 2 Packaged Fresh Businesses, Bolthouse Farms And Garden Fresh Gourmet with brands that resonate with consumers as a way the perimeter categories in which we compete are still growing significantly faster than the traditional center store. While category growth rates have slowed somewhat, we still believe we can build a profitable growth business leveraging these brands capabilities and our scale. However, The reasons vary by business, which I'll explain in more detail in a minute. We've made a number of changes to address this. Most notably, we replaced the leadership team and appointed a longtime Campbell executive, Ed Carolin, as the President of C Fresh in November.
I'm confident in this new season leadership team, which includes Campbell Executives, some newcomers to the company and key members of the Bolthouse Farms team who possess CPG and agriculture experience as well as insight It's taking longer than we originally expected to regain Carrot customers following last year's quality and customer service issues. And to rebuild C Fresh to grow this fiscal year. Over the last quarter, our new team has conducted an extensive strategic review to assess the potential of this business going forward. Based on the we've lowered our expectations for both long term sales and earnings. We've learned some tough lessons over the last several quarters, and we're applying them.
As a first step, we started to integrate the supply chain to reengineer the fresh operating model. We're building a stronger foundation under the Campbell Fresh business, leveraging Campbell's scale and expertise, realizing synergies and building capacity and capabilities in order to return it to profitable growth. Let me now take each piece of the business individually and explain. Let's start with farms and specifically the carrot business. After experiencing quality issues last year due to execution and poor weather conditions in California, we've restored our carrot quality.
We've demonstrated this improved quality to customers and are working hard to earn back the lost business over time. Our previous assumptions were too aggressive and regaining share is turning out to be more difficult than planned. In the current quarter, In California, rainfall in December January was significantly higher than normal. This hampered our ability to harvest fields and lowered our yields on the carrots we did harvest. This negatively impacted both sales and earnings in the quarter.
Now let's turn to beverages. Last June, we voluntarily recalled our protein plus beverages for quality reasons At that time, we had The good news is that consumers are seeking As previously discussed, we implemented enhanced processes to improve the quality standards, resulting in fabulous product quality albeit at reduced run times. Since then, we've steadily improved, but have not returned to pre recall production levels. We've added an additional beverage line in our Bakersfield plant that we expect to be fully operational in April. As we discussed last quarter, we're seeking additional ways to increase capacity.
We've had challenges in finding co packers that meet our quality standards. But we've recently qualified a co packer and expect to be significantly expanding our capacity by the summer. We're able to in velocity each period as we regain distribution. While we're selling everything we make, we have insufficient capacity to fulfill merchandising demand across the full range of our beverages. Our plan is to relaunch protein plus merchandising in the fourth quarter of fiscal 2017 when we expect to have sufficient supply.
Due to our continued capacity constraints, we don't expect our beverage business to return to growth until the fourth quarter. Meanwhile, we remain focused on driving innovation across the Bolthouse Farms CPG range, including dressings, spreads and super premium and ultra premium beverages. We recently extended our salad dressing line with a range of 4 new organic varieties. We also launched a test of Bolthouse Farms Mayo, a new line of refrigerated yogurt based spreads, made with clean ingredients and fewer calories than mayonnaise. Later this year, we plan to expand our line of 1915 by Bolthouse Farms organic cold pressed juice and launch Bolthouse Farms, plant protein milk, a higher protein alternative to common milk.
Customer response to this new As a reminder, the business has 4 product groups: salsa, which is over half of the business Hummus, dips and chips, and fresh soup. The business offers a combination of branded and private label products. The traits that made Garden Fresh Gourmet an attractive acquisition target, a small authentic brand with a compelling story, have also presented some obstacles. When we acquired it in June 2015, Garden Fresh Gourmet was a small operation with approximately $100,000,000 in revenue and very little infrastructure. The integration into the Bolthouse Farms Fresh Platform proved to be challenging.
The truth is we expected more information technology and supply chain integration, as well as increased marketplace distribution. Let me explain the issues we've encountered and what we're doing to fix them. Garden Fresh Gourmet branded salsa is growing strongly in consumption and we've regained a major customer beginning January 2017. Private label salsa is below expectations due to lost distribution with 2 customers. We've recently regained one of these customers and active negotiations are underway with the second.
Throughout its short history, Garden Fresh Gourmet salsa was largely a Midwestern brand. Our plan called for in the country. We Gourmet salsa in new packaging with new regional recipes. We're focused on key distribution and velocity building initiatives For example, in January, we gained national distribution for new branded organic salsa with a major customer. Today, our ACV distribution of the 70% ACV levels of our other C Fresh CPG brands.
We're optimistic that we can get there with delicious high quality ingredients product and packaging innovation, improved marketing and sales support, and expansion into organic and regional flavors. I do want to soup business, which continues to grow at high single digits, driven by both private label and branded soup. We recently introduced a new garden fresh gourmet Soup, which has been well received by customers, and initial velocity is encouraging. We're also testing simplicity, a new artisanal cold pressed soup. We continue to expect to grow the Garden Fresh Gourmet business profitably but it will take longer than we originally planned.
Overall, we've learned several important lessons from these 2 package fresh acquisitions. And we're applying them going forward. 1st, establishing a leadership team with diverse skills and experience early on is critical. Our new team combines the talents and capabilities and taking advantage of our Fresh food is more perishable and therefore more fragile. At Campbell, we're obsessed with safety and quality.
We put safety above all else because we don't nothing else matters. Meating Campbell's quality standards in C Fresh required significant investment the right resources. 3rd, there's no roof over the carrot fields. We've experienced everything from severe drought to record rainfall. This business has been much more volatile than expected.
We set up more diversified growing regions but we have activity improvement and optimization. We believe we can and will drive margin improvement in these businesses over time. Finally, we have both the ability and the desire To recap, we're facing some challenges in C Fresh beyond what we originally realized. Our new leadership team is making progress in addressing them. To be clear, we remain committed Now let's turn to Global Biscuits and Snacks.
As a reminder, this division includes our Pepperidge Farm, Arnott's and Kelton businesses. The organic sales decline in the division forego some less profitable business with a large US customer. Additionally, the depreciation of the Chinese RMB negatively impacted our sales in China. Stepping back and looking at the underlying trends in Kelton China we feel We've been working to expand our distribution capabilities in China and we've been adding new sub distributors to extend our reach. Our sell in for Chinese New Year went according to plan and promotion displays were consistently strong across both store formats.
We're still awaiting consumer takeaway. Turning to the U. S. Pepperidge Farm delivered modest sales growth behind the continued strong performance Goldfish Growth benefited from channel gains, leveraging multiple pack sizes and innovative new products. Goldfish made with organic wheat is also attracting new millennial families to the brand.
However, our fresh bakery sales declined as a result of intensified competitive activity, especially in the sandwich bread category. As a reminder, we're cycling double digit operating earnings growth this quarter and we expect a strong back half as this division delivers both sales and margin in cookies, especially the upcoming launch of our new farmhouse line in April. These cookies leverage Pepperidge Farm's baking heritage and deliver against our real food philosophy with great taste and simple ingredients. We'll also continue to build the national rollout of Tim tam Biscuits in the U. S.
Following its recent launch division, America's Simple Meals And Beverages. I'm encouraged by the sales gains in soup and Simple Meals. However, this was offset by the lackluster performance of VH shelf stable beverages. I continue to be pleased with the Americas gross margin expansion driven by the performance of our by chain team. Once again, the division delivered strong operating earnings growth of +8 percent.
Our U. S. Soup business grew in the quarter. I'm especially pleased with our ready to serve brands. Sales increased double digits in ready to serve.
Chunky continue to lead the way behind our improved execution and strong integrated marketing that fully leverage which hit shelves in December. Retailer acceptance has been exceptional with ACV already around 75% and most customers taking all 9 varieties. We activated our marketing plans in January, and initial consumer response has been positive. It's early days, but we feel good about our overall execution and how we got out of the starting blocks with this brand. Sales declines in our broth business were the result of increased competitive activity, mainly from private label offerings.
As discussed last quarter, we had strong holiday merchandising plans for our broth business, and we were pleased with the execution of that program. However, did not achieve the consumer takeaway that we expected as a result of an extremely competitive holiday period. In the short term, we will be sharpening our promotional activity while we continue to develop longer term plans Looking ahead on U. S. Soup, we have robust marketing plans in the third quarter, and we continue to expect to deliver modest growth in soup this fiscal year.
The shelf stable beverage category remains sluggish and our portfolio continues to be challenged. As I previously stated, V8 will not grow this year. Let me reframe the conversation to provide a little more context. In the quarter, consumption grew in 2 thirds of our business, V Eight 100 percent vegetable juice, veggie blends and our V Eight plus energy franchise. All of in V Eight 100 percent vegetable juice following our increased marketing support.
The remaining 1 third of the portfolio consisting of V Eight V Fusion and V Eight Splas is declining, partly due to category wide consumer concerns about sugar. Despite the overall sales declines, the business continues to focus on productivity initiatives which continues to stress again that I am not satisfied with our overall sales results this quarter. I own it, and we have plans in place to improve our performance It's really important to keep sight of the long term progress we've made in transforming this company in a difficult operating environment. Our continued gross margin expansion, how we've strengthened our core business while expanding into faster growing spaces, the investments we're making in real food as a result of our purpose, how we've diversified our portfolio with innovation and acquisitions, and the leaner, more agile and more cost effective company we've become as a result of our successful cost savings initiative. I look forward to seeing many of you Now, let me turn the call over to our Chief Financial Officer, Anthony DiSilvestro.
Thanks, Denise, and good morning. Before reviewing our results, I wanted to give you my declines in C Fresh and V Eight were the primary drivers. On the positive side, we grew U. S. Soup sales and Pepperidge Farm Snacks had a strong quarter.
Sales results were below our expectations, primarily due to C Fresh, as the recovery on beverages and carrots is taking longer than previously anticipated, with the additional impact of heavy rains in the quarter. Which had a 40 basis point negative impact on adjusted gross margin. Sales and earnings in Garden Fresh Gourmet also declined. And as Denise mentioned, we recorded non cash impairment charges, totaling $0.58 per share in our GAAP results related to our Campbell Fresh segment. Despite the negative impact from C Fresh, I'm pleased with our overall adjusted gross margin performance, which was up 70 basis points.
Increasing our cost savings estimate for 2017 to $85,000,000, which will put us at our targeted $300,000,000 by the end of and the identification of additional savings opportunities, we are increasing our cost savings target to $450,000,000 by the end of fiscal 2020. While adjusted EPS increased to $0.91 in the quarter, we recognize that the increase is due to a decline in our adjusted tax rate. We're also wrapping a very strong second quarter last year, in which adjusted EPS increased 23%. Lastly, with increased cost savings and lower cost inflation off setting incremental marketing investments and lower earnings DC Fresh, we are reaffirming our fiscal 2017 guidance. Now I'll review our results in more detail.
For the second quarter, net sales on an as reported basis declined by 1 percent to $2,171,000,000. Excluding the favorable impact of currency translation Organic net sales declined 2% driven by lower volume and higher promotional spending. And as I said earlier, The majority of this decline is driven by lower volumes in Campbell Fresh and our VA Juice business. Adjusted EBIT declined 1 percent to $417,000,000, reflecting the impact of lower sales and higher marketing and selling expenses. Partly offset by a higher adjusted gross margin percentage.
Benefiting from a lower tax rate, adjusted EPS increased 5% or $0.04 to $0.91 per share. For the first half, as reported in organic net sales, both declined by 1% compared to the prior year. Adjusted EBIT was comparable to prior Breaking down our sales performance for the quarter. Organic sales declined 2%, driven by a 1 point decline from volume and mix, driven primarily by Campbell Fresh and a one point decline from higher promotional spending. In Americas, Simple Meals And Beverages, we promotional spending rates were up on swanson broth, VA and in Canada to hold promoted prices following our list price increase.
Promotional spending is also up in our Arnott's business in the Asia Pacific region. Although it rounds to 0 on the chart, we did have a slightly positive impact from currency translation, principally the Australian dollar bringing the change in our as reported sales to minus 1%. Our adjusted gross margin increased 70 basis points in the quarter. First, cost inflation and other factors had a negative impact of 80 and in Campbell Fresh, increased costs reflect the impact of heavy rains on carrot yields, lower beverage operating efficiencies, and the overall impact of lower volumes. These negative drivers were partly offset by the benefits from our cost savings initiatives.
Increased promotional spending had a negative impact of 60 basis points, reflecting the drivers I previously discussed. List price increases had a slightly positive impact of 10 basis points, driven primarily by list price actions taken by our retail business in Canada. Mix was slightly favorable, adding 20 basis points, reflecting the sales decline in our lower margin C Fresh segment. Lastly, our supply productivity programs, which are incremental to our cost savings program, contributed 180 basis points of margin improvement in the quarter. All in, our gross margin percentage increased 70 basis points to 38%.
Adjusted marketing and selling expenses increased 5% in the quarter, primarily due to higher advertising and consumer promotion expenses as we reinvest in our brand. The increase in advertising was primarily driven by our and higher levels of support on VA juices and Parego pasta sauce. Adjusted administrative expenses declined 3% reflecting lower incentive compensation compared to the year ago quarter, partly offset by higher benefit related costs and investment in long term innovation. For additional perspective on our performance, This chart breaks down our EPS change between our operating performance and below the line items. Adjusted EPS increased $4 from $0.87 in the prior year quarter to $0.91 per share in the current quarter.
On a currency neutral basis, decreases in adjusted EBIT had a $0.02 impact on the EPS. Shared repurchases lowered our share count adding a penny benefit. Our adjusted tax rate for We benefited from a favorable timing impact related to the impairment charge. This will reverse in the second half and bring us to our forecasted full to prior year as the impact of higher rates was offset by a lower debt level. Currency translation also had no impact on EPS completing the bridge to $0.91 per share.
In America's Simple Meals And Beverages, organic sales fell 1 percent to $1,231,000,000 as declines in V Eight Beverages were mostly offset by gains in soup, prego pasta sauces, and plum products. Sales of U. S. Soup increased 1%, reflecting double digit gains in ready to serve soups, driven by growth in chunky and the launch of Welles, mostly offset by declines in broth and condensed soups. The strong performance in chunky reflects our improved execution including better advertising and successful new items.
The launch of Welles is progressing well with strong customer acceptance and supported with a robust marketing plan. Operating earnings increased 8%, driven by higher gross margin percentage which benefited from supply chain productivity improvement partly offset by increased advertising and consumer promotion expenses. Here's a look at U. S. Wetsuit category performance and our share results as measured by IRI.
For the 52 week period ending January 29, 2017, the category as a whole declined 1.2%. Our sales in measured channels declined 1%. Campbell had a 58.8% market share for the 52 week period, with a share gain of 10 basis points. Private label grew share by 70 basis points finishing at 13.5%. All other branded players collectively had a share of about 28% declining 80 basis points.
In Global Biscuits and Snacks, organic sales decreased 1%, driven by declines in Kelton in the U. S. And Arnott's biscuits, partly offset by gains in Pepperidge Farm. Pepperidge Farm sales increased as growth in crackers, primarily Goldfish, and cookies was partly offset by declines in fresh bakery and frozen products. Operating earnings declined 4% to $135,000,000, reflecting a lower gross margin percentage as higher promotional spending and supply chain costs were partly offset by productivity improvements.
In the Campbell Fresh segment, Organic sales declined 8%, driven by lower sales of carrots, Bolthouse Farms Beverages and garden fresh gourmet, partly offset by gains in refrigerated soups. Operating earnings declined by $24,000,000 to a loss of 3,000,000 reflecting higher carat and beverage production costs as well as from lower sales volumes. As Denise mentioned, the recovery from both the market share losses on carats and the beverage capacity constraints will take longer than originally anticipated. The performance of Garden Fresh Gourmet is also short of expectations. We now expect that for the full year segment sales and earnings will decline in 2017.
The performance of Campbell Fresh is below our previous expectations. We have a new management team in place and then undertook a strategic review, which informed our future plans and expectations for growth. Based on current performance and lower forecasted sales and earnings growth, we recognized non cash impairment charges of $0.45 per share on the carrot and ingredients business and $0.13 per share on Garden Fresh Gourmet. The other 2 reporting units in this segment, Bolthouse Farms CPG, which includes beverages and salad dressings, and the fresh $67,000,000 compared to $754,000,000 generated in the first half of last year. The lower level of cash flow generated reflect higher working capital requirements, primarily driven by changes in accrued liabilities related to taxes and incentive compensation.
Capital expenditures declined 34,000,000 to 119,000,000. We have lowered our CapEx forecast by $25,000,000 to approximately $325,000,000 for fiscal 2017. The reduction is primarily related to the timing of projects global biscuits and snacks. We paid dividends totaling $207,000,000, reflecting our increased quarterly dividend rate of $0.35 per share. In aggregate we repurchased $234,000,000 of shares $200,000,000 of which were under our strategic share repurchase program as we've increased our level of share repurchases.
The balance was made to offset dilution from equity based compensation. Net debt declined by $357,000,000 compared to year ago level as cash from operations over the last four quarters was well in excess of capital expenditures, dividends and share repurchases. We are very pleased With our new forecast for incremental savings of $85,000,000 in 2017, we now expect to reach our $300,000,000 target by the end of this fiscal year. We have generated savings by reducing layers of management and increasing spans of control. We have changed our operating model by creating an integrated global services organization, and we're implementing a comprehensive 0 based budgeting process which is delivering savings across of $300,000,000 in savings, we believe there are additional areas of opportunity, which in aggregate will get play chain network, primarily in North America.
2nd, we will continue to evolve our operating model to drive efficiencies and focus resources on our most significant growth opportunities. To generate cost synergies and improve Now I'll review our 2017 guidance, which remains unchanged from what we first announced last September. We expect sales to grow by 0 to 1%, adjusted EBIT to grow by 1% to 4%, and adjusted EPS to grow by 2% to 5%. This guidance assumes based on current exchange rates that the impact from currency translation of approximately $85,000,000 compared to and lower than expected cost inflation about 1.5% compared to the prior forecast of about 2% are offsetting incremental investments in marketing and the softness in Campbell Fresh. We expect our adjusted gross margin percentage Our EPS guidance reflects an effective tax rate of approximately and the favorable impact of anticipated share repurchases over the course of the year.
In terms of timing we expect the majority of our
Okay. 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. Okay, Candice.
And our first question comes from Ken Goldman of JP Morgan. Your line is now open.
Hi. And thanks for the question. One of your competitors in biscuits obviously made a fairly major announcement last week. Does that announcement in any way in terms of distribution make you rethink your distribution or is it sort of full steam ahead, beverage has an incredible obviously, a DSD system set up. Just curious if that made you guys go back rethink things in any way or if it's too early to tell, any help there would be, it would be very appreciated.
Yes. I'll take that 1. Thanks, Ken. We're very pleased with the performance of Pepperidge Farm, had particularly in the Snacks business, some really good growth. And our distribution system, DSD distribution system is different in that it is a network of independent contractors.
So, that's really how we've assessed it.
Right. So is the takeaway then that because it's different and because you're pleased with it, we on the outside should interpret it as it's unlikely to see major changes at any point in the near term?
Yes, yes. I mean, we're continuing to run our play.
Great. Thanks Denise.
Thank you. And our next question comes from Chris Growe of Stifel. Your line is now open.
Hi, good morning. Hi. I just wanted to ask you in relation to the soup business, you had the well yes Soup product looks to be doing quite well and you had some pipeline fill in the quarter. Would that have an effect on soup sales in the quarter? And if I can ask related to that, with the well yes launch, did we see marketing spending go up in relation to that product in the quarter and should we expect that going forward in the second half of the year?
Yes, a couple of things. So, it's a good question. So, the impact of well, yes, on soup sales in the quarter was about two points, so it did have a a benefit to our net sales number. And as you can imagine, you know, most of that is obviously in in retail inventory. Some did pull through, but not not a lot.
But as we look at the total inventory on soup, there has been some reduction in other areas. So when you put it all together, changes in retailer inventories and soup did not have an impact on our overall soup sales results in the quarter, but there was some puts and takes in there.
We're very happy with the introduction of well, yes. There were great retail support 75% ACV distribution displays everywhere, but we won't get a read on the consumer takeaway really until this quarter.
Your second, question, you know, this is going to be supported with a fairly comprehensive and robust marketing program. So you can expect a obviously an increase in marketing behind this in the third quarter.
Thank you. And our next question comes from Brian Spillane of Bank of America.
I guess just a question about the perspective cost savings going forward. And I guess as you were thinking about balancing how much reinvestment versus how much you'll use to support earnings growth. Not trying to get you to be specific in terms of earnings targets and the out year, but just can you sort of maybe give us some color in terms of you might be thinking about that balance going forward with this new savings versus maybe the way you approach the $300,000,000 that you've achieved so far?
Yes, I think, Brian, the way to think about it is against the incremental $150,000,000, probably about half we'll go back and turn to reinvestment. So we've talked about this support before. We need to increase the support behind some of our key brands we need to continue to support new product launches like we're doing with Well Yes and Pregos Farmers Market tin temps in the U. S. And Goldfish with an organic wheat.
So we need to continue to do that. We'll continue to invest behind our real food initiative removing artificial colors and ingredients, removing BBA for our can liners. We'll also continue to invest longer term innovation, things like Habit and the acre and vendor fund. And we'll look to, you know, make investments to improve our capabilities in areas like digital and e commerce. So we have a fairly well balanced plan in terms of what to do with those cost savings.
Okay, great. Thank you.
Thank you. And our next question comes from Andrew Lazar of Barclays. Your line is now open.
Good morning, everybody. Hi. Quick question on C Fresh. I guess your commentary was that it seems you're going to be sort of further integrating, that division to take advantage, I guess, of the broader scale and scope and capabilities of the larger Campbell organization. And I guess my question is, we've all seen, I think, a lot of examples over time, whether it be the cashews of the world where the larger companies sort of brings the smaller more entrepreneurial growth of your entity sort of in a bigger way into the sort of the more of the mainstream organization.
And guess that we've seen a number of examples where that's led maybe those more entrepreneurial businesses to maybe lose some of that sort of progressive nutrition swagger or some of what made them special in growth here in the first place. So I mean, I guess I'm just trying to get a sense. It's a little broad, I guess, how do you guard against taking advantage of what the organization can bring to that? And not lose what it is that you bought in those businesses to begin with?
Andrew, it is the key question. And when I talk about getting the best of small and the best of big. I'm really serious about what we have done is really delineated those parts of the business that really need to be separate and differentiated for the consumer and the customer And that's all of the marketing and the R and D and insights. And, we have this model that we've used very successfully with our Plum Organic Baby Food business, by keeping those parts of the business separate that maintains that entrepreneurial culture. However, being able to leverage the scale of Campbell's particularly in areas of the supply chain, and in operations where we have resources that can be used to to make them much more effective and efficient and even more important achieve scale, because these are typically smaller companies that need the chassis to increase scale in the marketplace.
So we've done this very successfully with Plumba and Kelson, we have not done it with the Campbell Fresh business. And so, the situation that we found ourselves in in the last year, we've been able to insert Campbell Executives on the leadership team working in conjunction with Bothhouse Farms Executives. To maintain that best of small and best of big. So we're really optimistic, and we're finding some really great opportunities to put a stronger foundation under the business. Great.
Okay. Thanks for that and look forward to seeing you next week.
Thank you. And our next question comes from Robert Moskow of Credit Suisse.
Hi. I noticed on the opening remarks that you mentioned, competitive pressure more often than usual. I would it was definitely in fresh bakery and in broth. And my view going into this year was that the food companies would cut costs and focus on price realization and try to avoid deep discounting. Do you see any of that kind of price discipline changing around you in your categories?
Or do you think it's just kind of a pretty typical year in terms of promotional activity?
Yes. I think the activity definitely varies by category. And And what we've seen in the fresh bakery business is competition in, the area of sandwich bread and swaddle bread, we've recently, reformulated our swaddle bread and we're out there now with a much improved product. So that was a very specific situation. In the baked in fresh bakery business, our Buns and rolls business continues to rock.
So we believe we are all over the issue there. And then in broth, it was really more of a proliferate of private label during the holiday and, that produced more price competition. And we have responded with increased marketing and actual trade spending, to hold our own in that category. So those were 2 very specific things that we faced.
As a
follow-up, to Ken Goldman's question, actually. I think what he was kind of getting at is, have you ever considered a model where you go to direct to customer shipment? Through warehouses rather than DSD, not so much using whether you use independent routes. Is that a big savings or is it even possible in Pepperidge Farm?
Yes. We've been pleased with the them on the independent contractors, what they bring to the business in terms of selling and merchandising and delivery. It's a quality product. It's perishable. So, breakage could be an issue.
I think when you consider all of it, we're pleased with our DSD system.
Thank you. And our next question comes from David Driscoll of Citi.
Good morning. This is Cornell Burnett and we'll proceed with your questions for David. Just wanted to start off here with ready to serve soup in one of your major competitors, maybe announcement that they would be reducing capacity. What to get your outlook on what that meant to the category kind of over the long term. And specifically, does that give you an opportunity perhaps the margin up and be maybe less aggressive with promotions and move prices in a higher direction?
We're very focused on our soup business. We're particularly pleased with the performance of ready to serve soup whether that be chunky or the introduction of new well, yes. I think you need to ask the other guy.
Okay. And then on the C Fresh business, just I know you gave a number of puts and takes of kind of what's going on there. This year and some of the things that you're trying to do to get the business back on track. Will some of these headwinds, especially in carrots and issues surrounding the harvest kind of linger into perhaps F18 as well?
Yes. So, we've talked about the issues facing us in 17 and the expectations that the business will decline. We do expect it to turn a bit in the fourth quarter. And as we look ahead, to F 'eighteen, we expect to return to growth on this business, both top and bottom line.
Okay. Thank you.
Thank you. And our next question comes from Alexia Howard of Bernstein. Your line is now open.
Hi there. I guess, quick question on the commodity cost outlook here. Is you have a slightly different mix of input costs. How are things looking? And if the commodity cost environment is getting a little tougher, do you think you were able to pause that all in pricing?
Yes. So I can comment on the commodity cost environment. So as we look at the full year, we originally thought cost inflation would be around 2% And now we're thinking it's closer to 1.5. So we've seen some favorability relative to our expectations and a couple of areas that are causing that one is weak. Dairy, resins related to plastic packaging as well as poultry.
So overall, we see a bit of a benefit versus our original expectations. But we are seeing a swing, first half to back half. It was fairly benign when you look at the core ingredients packaging and energy. And that's starting to tick up in the second half. And there's a couple of areas in particular that we're seeing.
1 is dairy. The first half of the year, we were wrapping the Avian flu thing. So that's going to go back more to our normal situation. Vegetable oil is kicking up in the second half and we're beginning to see increases in steel cans as well. I don't know if you follow the steel market, but prices are up fairly significantly on steel.
So we've got an overall year, which will be okay, but we're seeing increasing headwinds in the back half. In terms of pricing, I would say we're not ready to talk about any specific pricing actions, but we're right in the mid, but starting to formulate our plans for next year. And I'm sure we'll take this into account.
Thank you very much. I'll pass it on.
Thank you. And our next question comes from Michael Lavery of CLSA. Your line is now open.
Good morning.
Hi, Michael. Good morning.
Just back on C Fresh, you said you had a strategic review and obviously that's had some changes in your outlook and everything else. Did that also include a review of just your interest in that business long term, are you evaluating potential alternatives in terms of whether you might even still be interested in having an agricultural business or is that a given? And then just on the branding, you said you'd want to step up those efforts. Could you give a little bit better color on some of what that might be?
Sure. The strategic review that the new team undertook, looked at once again, the potential for this business. And we verified the consumer trends towards fresh and health and well-being the fact that these categories are still growing significantly faster than center store categories, particularly in the categories that we compete in. So we feel really good about this space strategically. We've had some execution issues this year.
And some weather issues in the agricultural part, that's been unfortunate, but that does not sway us from our long term strategic vision to really build a fresh food platform for Campbell's. And I think the role of the carrots in the business is the authenticity. It's the, it's on trend with consumer's desire for fresh produce. Kerats have had a tough go with drought and with heavy rains. And some execution issues in the last year.
But I do think that that's an important part It's also the distribution system and scale in produce for us that makes us more important to the retailer. So I know I'm very committed to the business and we expect big things from it going forward.
Okay. Thanks. And just any thoughts on the branding you said you wanted to step that up. I know you talked about some of the packaging changes But the Garden Fresh, for example, I think it may be the new packaging you're showing that the is that some of what you're anticipating or is it beyond of the packaging changes? What's some of the initiatives there?
I think over time, we have an opportunity to build two very strong brands here with Bolthouse Farms And Garden First Gourmet. We're continuing to invest in digital marketing. As you point out some new packaging and definitely new product innovation. So it we will continue to support these businesses in the marketplace.
And our next question comes from Rob Dickerson Deutsche Bank. Your line is now open.
Thank you very much. Hello. Just a question around increased brand building, potentially over the next, I'd call it 3 to 12 months. In light of, let's say, a competitor who is stepping away from DSD which could cause some transitional pressure there for them that they've acknowledged upfront. And then also another competitor who seems to be stepping off a bit promotional activity in the soup category and you're showing some near term gains there.
So I'm just curious, do you you're obviously aware of what's happening in each of your core categories and you're aware of what your competitors are doing. Could could you foresee the next 12 months potentially being a period of time in which you might have, you might have opportunities actually increased your investment to try to capture share in kind of a period of instability, so to speak, which I think you actually did fairly well with at one point in time in the bread category? Thanks.
Well, as you can see from the quarter, we're continuing to invest in marketing and brand building. And Anthony pointed out that as we navigate through our cost savings initiative, which we just increased, we will be spending growth. And I fundamentally believe that's going to come from investing in the brands and, engaging with the consumer. So we will continue on that
Okay, great. Thanks a lot. We'll see you next week.
Thank you.
Thank you. And that concludes question and answer session for today. I'd like to turn the conference back over to Ken Gosnell for closing remarks.
Sure. Thanks, Kenneth. Thank you everyone for joining 2nd quarter earnings call and webcast. A full replay will be available about 2 hours after this call by going online or calling 1-four 0four-five 30 seven 3406. The access code is 40985838.
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