Good day ladies and gentlemen and welcome to the Campbell Soup Company First Quarter Fiscal 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. Being recorded. I will now turn the call over to your host, Ken Gosnell.
Please go ahead.
Thank you, Stephanie. Good morning, everyone. Welcome to the 1st quarter earnings call for Campbell Soup's fiscal 2017. With me here in New Jersey are Denise Morrison, President and CEO Anthony D. Silvestro, CFO.
As usual, we created slides to accompany our earnings presentation. You will find the slides posted on our website this morning at investor. Campbellsoupcompany.com. This call is open to the media who participate in a listen only mode. Today, we will make forward looking statements, which reflect our current expectations.
These statements rely on assumptions and estimates which could be inaccurate and actual results to vary materially from those anticipated in forward looking statements. Because we use non GAAP measures, have provided a reconciliation of these measures to the most directly comparable GAAP measure, which is included in our appendix. With that
2017 earnings call. I look forward to reviewing and discussing our results with you this morning. I'll start with a high level overview and then provide my perspective Let me start with some context about the external environment. In the United States, the length and tenure of the presidential campaign was unprecedented. There are many important issues the new administration will address that will impact the food industry including tax policy, regulation, trade agreements, new leadership of the USDA and FDA as well as the upcoming Farm Bill.
Meanwhile, the seismic shifts that I've outlined in our previous discussions continue to impact changing consumer preferences for food with an emphasis on health and well-being and the continued evolution of digital media and e commerce channels. Across the industry, top line growth remains sluggish, particularly in center store categories. Simultaneously, food deflation is pressuring both top and bottom lines and limiting pricing opportunities. This is driving a hyper competitive environment for market along with a continued focus Many food companies have reported flat to declining organic sales in their most recent quarters, and that pressure is not limited to manufacturers. Retailers too are taking actions to reposition themselves for growth through consolidation, management changes, and increased investments in e Commerce.
With that as context, let me turn to our first quarter results. Relative to our expectations, I'm encouraged by our overall performance were executing against the plans we described in September. We expanded gross margin and delivered adjusted EBIT and EPS growth, cycling a strong year ago quarter. Organic sales decreased 1% in the quarter, driven by declines in our Campbell Fresh business, which we expected and which we communicated in early September. Additionally We remain on track to achieve our $300,000,000 Importantly, we're reinvesting across the business to drive top line growth including increased advertising support chunky soup and Pepperidge Farm Goldfish Crackers, expanding our digital and e commerce capabilities and funding long term innovation initiatives.
Given our start and our expectations for the remainder of the year, we reaffirmed our full year guidance this morning. Let's start with America's Simple Mills And Beverages, our largest division. As a reminder, this division's portfolio role is to deliver moderate growth, consistent with the categories in which we operate and to expand margins. Our sales were mixed this quarter. However, the division delivered strong operating earnings and I continue to I'm optimistic about the start to which reflects an improvement in Campbell's consumption outpaced the category, largely driven by the performance of the RTS portfolio.
Chunky led the way as we dramatically improved our execution. We have corrected the labeling misstep from last year, began airing a new integrated NFL themed campaign and introduced new stackable cans that are driving increased merchandising opportunities that we're cycling net price realization gains that have held in the marketplace. All of this is resulting in improved performance. Looking ahead on soup, we continue to expect to deliver modest growth for the full year behind improved performance in chunky, strong holiday plans for both condensed soups and broth, and the upcoming launch of our well yes RTS soup line. This new clean label soup is made with nutritious, recognizable and desirable ingredients and will begin shipping in December.
Integrated marketing plan to fuel we drove double digit sales gains in plum with growth in the core pouch portfolio as well as the introduction of plum organic infant formula. However, our shelf stable beverage portfolio remains challenged, specifically V8 V Fusion and V8 splash. On the positive side, V8 plus energy continues to perform well, and we're seeing improving trends in V Eight Red following our decision to increase advertising support. As we previously stated, We do I'm encouraged by the start to The America Simple Meals And Beverage division continues to deliver against its portfolio role. Now let's turn to Global Biscuits and Snacks.
As a reminder, this division includes our Pepperidge Farm, Arnott's and Kelson businesses, and its portfolio role is to expand in developed and developing markets, while improving market margins. Sales growth in the quarter was driven by gains in Pepperidge Farm Operating earnings decreased 2% as we invested in increased advertising. In the U S, the team delivered sales and share gains in both Goldfish Crackers and Milano cookies. Goldfish benefited from increased advertising investment channel gains, leveraging multiple pack sizes and innovative new products. Our efforts to expand our health and well-being offerings are performing well.
Both multi grain Goldfish and Goldfish made with organic wheat contributed to the sales gains. At Investor Day, we shared our plans to focus on building brand equity and increasing our marketing investments in our cookie portfolio. And we're beginning to see results. Effective new advertising and flavor innovation drove sales and consumption gains for Molano Cookies. Sales in fresh bakery declined in the quarter in the face of intensified competitive activity and we have taken steps to Looking ahead in the U.
S, we're focused on driving growth in Goldfish, increased innovation in cookies including the re launch of our Pepperidge Farm American Classic cookie line and the new Fresh Fakery quality improvements to take hold in remain top priorities. Turning to other parts of the world. In Southeast Asia, we maintained our momentum in Malaysia behind strong sales of sauces, but sales in Indonesia were negatively impacted by aggressive competitive activities in the general trade. In Australia, we delivered sales growth in biscuits, driven by strong performance in our chocolate biscuit portfolio despite declines in Shapes crackers. We've taken action to address Shapes performance and we're beginning to see signs of improvement.
Looking ahead, we're focused on delivering consumer driven product innovation in Tim Tam Chocolate Biscuits with a new range of seasonal varieties, We also expect our Shafe's performance to accelerate behind our new marketing campaign, highlighting both new and original recipes Finally, I'll discuss our Campbell Fresh division. The CPG portion of C Fresh includes Bolthouse Farms, Beverages and salad dressings, garden fresh gourmet salsa, hummus and chips, and our refrigerated soups. The farm's portion of the portfolio includes carrot and natural ingredients. As a reminder, C Fresh is a strategically important business to Campbell. It addresses a key consumer trend towards fresh foods and health and well-being.
And its brands resonate with millennial consumers. The business performed as expected to the start of the year, as we're continuing to execute the recovery and the carrot quality and execution issues we experienced in fiscal 2016. As we discussed on Campbell Fresh Supply Chain. There have been other changes since then. As previously announced, Jeff Dunn left the company in October, and we named Ed Carolyn, President of Campbell Fresh.
Ed has been with Campbell since 2001 in a variety of leadership roles, including the president of U. S. Retail soup sauce and beverages. Most recently, he was president of Integrated Global Services, where he created and implemented a business model to build new capabilities are focused on returning Now let's take a closer look at what drove the declines and the carrot quality and execution issues. 1st, beverages.
As we discussed in the fourth quarter, We identified and corrected the primary cause of last year's protein plus recall and implemented enhanced processes to improve quality standards. Will be negatively impacted through through a combination of improved run rates, increased in house capacity and adding copackers. Following the recall, we have been steadily increasing production capacity, while also working hard to improve our customer service levels. We've made solid progress in the first quarter in improving our run times. To increase capacity, we're in the process of installing a new beverage line in our Bakersfield plant, which we expect will be commissioned by the end of the calendar year.
Performance was mixed in other parts of the Campbell Fresh CPG portfolio. In the Ultra Premium Cat Gori, sales growth of 1915 by Bolthouse Farms cold pressed juice was driven by increased distribution and share gains. Sales of Volt House Farms salad dressing also continued to grow. Turning to Garden Fresh Gourmet, Sales of hummus and salsa declined in the quarter. The team is focused on further product differentiation through regional flavors as we continue to execute our plans to expand Garden Fresh Gourmet beyond the Midwest.
Another bright spot was the performance with the introduction of new Now turning to the Farms business. We are stabilizing our current operations and improved quality. The team remains focused on We expect the recovery to While we're making progress we clearly have more work ahead to get this division back to performing in line with its portfolio role of full force growth. For the full year, we continue to expect Campbell Fresh sales to grow in the low single digits Before closing, I want to touch upon our efforts to create new models to define the future of real food and drive growth in new ways for Campbell. As I discussed with you in the past New models continue to emerge and new startup companies are being fueled by an influx of venture capital.
Campbell is now more fully participating in venture opportunities through Acre Venture Partners and independently manage $125,000,000 venture fund, where Campbell is the sole limited partner. Food and food related companies. At the end of the first quarter of fiscal 2017, we funded $41,000,000 out of our $125,000,000 commitment. Another example of how we're investing our cost savings into long term innovation is a new startup company called Habit, a business backed by Campbell and led by Neil Grimmer, the co founder of Plumb. Positioned at the intersection of health and well-being, technology and food, Habit will leverage individualized data to create personalized nutrition and meal plans for people who want to harness Stay tuned, we will be sharing additional details Finally, we continue to forms of health and well-being and snacking.
And we're also continuing to pursue smart external development to diversify our portfolio We're satisfied with our performance to start the year and confident in our plans for fiscal 2017. We continue to take action to strengthen our core business while also driving growth for the long term through our purpose, growth agenda and strategic imperatives. 1, real food transparency and sustainability 2, digital and e Commerce 3, health and well-being and 4, snacking, all while continuing to build a high performance organization focused on talent and culture and transforming the way we work. In summary, These unpredictable and uncertain times in which we live are marked At Campbell, we're guided by our purpose, real food that matters for life's moments and focus on meeting the needs of our consumers helping our customers grow Financial Officer, Anthony DiSilvestro, for an overview of our financial results.
Thanks, Denise, and good morning. Forward reviewing our results, I wanted to give you my perspective on the quarter and outlook for the balance of the year. As Denise stated, organic sales, while down, were in line with our expectations. We anticipated our 1st quarter sales to be under some pressure as we begin to recover from the capacity constraints on Bolthouse farm beverages and stabilize the carrot business. Overall, U.
S. Soup sales were flat and we were pleased with the performance of Chunky, which is responding well to our marketing programs. Our adjusted gross margin expanded 120 basis points as our supply chain performed well and delivered significant productivity improvements while cost inflation remained moderate. We continue to make strong progress against our cost savings target $300,000,000 by the end of fiscal 2018, delivering about $35,000,000 of incremental savings in the first quarter, bringing the program to date total to $250,000,000. We adopted that impacts the recognition of excess tax benefits on stock based compensation.
The tax rate for the quarter reflected a $6,000,000 tax benefit related to the change. We are pleased with our first quarter start and are reaffirming our fiscal 2017 guidance that we announced in September. Now I'll review our results in more detail. On an as reported basis, net sales of $2,202,000,000 were comparable to the prior year. Excluding the favorable impact of currency translation, organic ganic net sales declined 1%, driven by declines in Campbell Fresh, partly offset by gains in global biscuits and snacks.
Adjusted EBIT increased 1 percent to $486,000,000 as the benefits of a higher adjusted gross margin percentage and lower administrative expenses were partly offset by increased marketing and selling expenses. Adjusted EPS increased 5 breaking down our sales performance for the quarter. Organic sales declined 1%, driven by a 1 point decline from volume and mix. Net price realization, both pricing and promotion, was stable for the quarter compared to last year. Offsetting the organic sales decline was a 1 point favorable impact from currency translation, principally the Australian dollar resulting in net sales being comparable Our adjusted gross margin increased 120 basis points in the quarter first, cost inflation and other factors had a negative impact of 70 basis points.
Cost inflation on a rate basis increased by about 1.5%. In addition, cost of products sold reflect higher costs in our C Fresh division. These negative drivers were partly offset by the benefits from our cost savings initiatives. Reflecting the increased promotional spending in Pepperidge Farm to support Goldfish and Fresh Bakery, and in Indonesia to remain competitive, promotional spending had a 20 basis point negative impact, which was offset by list pricing gains of 20 basis points, primarily from our retail business in Canada. Mix was slightly favorable, adding 20 basis points reflecting the sales decline in our lower margin Seafress segment.
Lastly, our supply chain productivity programs which are incremental to our $300,000,000 cost savings program contributed 170 basis points All in, our gross margin percentage increased 120 basis points to 39.1 percent. Adjusted marketing and selling expenses increased 11% in the quarter, primarily due to higher advertising expenses as we reinvest in our key The increase in advertising was primarily driven by increased support on chunky soup behind the new advertising campaign and on Pepperidge Farm Goldfish Crackers. Adjusted administrative expenses declined 4%, reflecting the benefits of our cost savings initiative partly offset by inflation and investments 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 $0.05 from $0.95 in the prior year to $1 per share in the current quarter. On a currency neutral basis, increases in adjusted EBIT had a share repurchases lowered our share count, also adding a penny benefit.
Our adjusted tax rate for the quarter decreased by two points to 32.1 percent. The decrease in the tax rate contributed $0.03 to EPS growth, including the benefit from the change in accounting for stock based compensation. Interest was comparable to the prior year as the impact of was offset by a lower debt completing the bridge to $1 per share. Now turning to our segment results In America's Simple Meals And Beverages, organic sales were comparable to the prior year at $1,297,000,000, as double digit gains in plum products were offset by declines in V Eight Beverages. Sales of U.
S. Soup were comparable to the prior year as gains in ready to serve soups, primarily chunky benefiting from increased marketing support and in broth were offset by modest declines in condensed soups. Delivering against its portfolio role, operating earnings increased 6% reflecting a higher gross margin and percentage driven primarily by productivity improvements, partly offset by increased marketing and selling expenses. Here's a look at U. S.
West Duke category performance and our share results as measured by IRI. For the 52 week period ending October 30, 2016, the category as a whole declined by 2.3%. Our sales and measured channels declined 2.7%, primarily driven by weakness in ready to serve perly offset by strength in broad. Campbell had a 59% market share for the 52 week period, declining 20 basis points. Private label grew share by 30 basis points finishing at 13%.
All other branded players collectively had a share of 28% down ten basis points. In Global Biscuits And Snacks, organic sales increased 1% driven by gains in Pepperidge Farm on strong growth in Goldfish Crackers, which benefited from increased advertising and promotional activity, as well as new items. Operating earnings declined 2 percent to $112,000,000 driven primarily by higher advertising expenses partly offset by the favorable impact of currency translation. This segment gross margin percentage was comparable to last year, as the impact of cost inflation and increased promotional spending was partly offset by productivity improvements. In the Campbell Fresh segment, as expected, organic sales declined 6%, reflecting declines in Bolthouse Farms Beverages due to capacity constraint following the recall of protein plus drinks in June 2016 as well as declines in carrots, and softness in garden fresh gourmet, partly offset by gains in refrigerated soups.
Lower carat sales reflect the market share impact of quality and execution issues from last fiscal year. Operating earnings declined by $17,000,000 reflecting higher care costs, which were associated with lower volumes and improved quality, the cost impact of lower beverage operating efficiencies, and the impact of lower sales. As we previously stated, we expect a return to growth in C Fresh starting in the second half of the fiscal year. Cash flow from operations was $221,000,000, $23,000,000 lower than the prior year. The decline reflects lower cash earning and higher working capital requirements.
Capital expenditures declined 23,000,000 to $48,000,000. We continue to forecast CapEx of approximately $350,000,000 for fiscal 2017. We paid dividends totaling $100,000,000, reflecting a quarterly dividend rate of $0.32 per share. In September, we announced an increase in the quarterly dividend rate In aggregate, we repurchased $112,000,000 of shares, 100,000,000 of which were under our strategic share repurchase program as we've increased our level of share repurchases. The balance of the repurchases were made to offset dilution from equity based compensation.
Net debt declined by $522,000,000 compared to year ago levels as cash from operations over the last four quarters was well in excess of capital expenditures, dividends and share repurchases. Now I'll review our 2017 guidance, which remains unchanged from what we announced in September. The company expects sales to grow by 0% to 1%, adjusted EBIT to grow by 1% to 4% and adjusted EPS to grow by 2 percent to 5 percent or $3 to $3.09 per share. This guidance assumes based on current exchange rates that the impact from currency translation will be nominal. We expect gross margin to improve slightly for the year While inflation on core ingredients and packaging has moderated, we expect inflation and cost of products sold of approximately 2%.
On our cost savings program, we are ahead of our expectations having generated $35,000,000 in the 1st quarter against our full year estimate We'd like to see how our cost savings develop in the second quarter, assess the performance of the business, especially C Fresh, and evaluate potential reinvestment opportunities. Our EPS guidance reflects an effective tax rate of approximately 32%. Which includes the change in accounting and from the favorable impact of anticipated share repurchases over the course of the year. That concludes my remarks. And now I'll turn it back to Ken for Q And A.
Thanks, Anthony. We will now start our Q And A session we have limited time out of fairness to the other callers, please ask only one question at a time, okay?
Thank Our first question comes from Andrew Lazar with Barclays. Your line is open.
Hi. A quick question on gross margin, which I think did come in quite a bit better than at least we had forecast in the quarter. I'm still looking for moderate gross margin expansion for the full year. Given the rate of expansion you saw in 1Q, Anthony, I guess what like this stage would cause that rate of expansion in the next couple of quarters to moderate a bit on a year over year basis Or did the P and L impact of the, of the incremental cost saves split out among cost of products and SG and A roughly evenly as I think you may have mentioned previously? Thank you.
Andrew, I could take a couple a point. Of the $35,000,000, the majority of those cost savings in Q1 were within the supply chain. Therefore, they're on the cost of products sold. Line and the balance, I would say, is primarily within administrative expenses. We are certainly pleased with the gross margin in the quarter.
We're a little bit ahead of our expectations. And there's a couple of things we see unfolding in the balance of the year. We are benefiting on our core ingredients and packaging items, a little bit of deflation in the first quarter. And we see that swing to more neutral to slightly positive in the back half. And the category to think about are there's primarily 3 big ones.
1 is steel can The other is dairy products. We're currently wrapping the impact of baby and flu and wheat prices, which are currently in deflation and we expect that to also to be more neutral. So we see a little bit of a swing front half to back half. The other thing we anticipate as we unfold some of our real food investments, we are removing artificial colors and ingredients. We are removing BPA from our can lighters liners.
And those costs are going to accelerate as we go through the second half of the year relative to the first relative to the first half. So we see a couple of headwinds ahead. Again, we feel good about our first quarter. We'll see how the second quarter unfolds and make an assessment then.
Thank you so much.
Sure. Our next question comes from Matthew Grainger with Morgan Stanley. Your line is open.
Hi, thanks, everyone. Hi, thanksgiving. Denise, I guess I wanted to come back to global biscuits and ask a little bit more specifically about the performance of Pepperidge in the U. S, which based on scanner data seems to be carrying some pretty significant momentum at the moment. Could you just elaborate a little bit on how that business performed in the quarter relative to the overall segment growth?
And just tactically what's going on that's enabling you to gain so much market share at the moment, how sustainable that is and the way you're facing investment against those products at the moment?
Yes. We definitely invested in Pepperidge Farm this quarter, particularly in Goldfish and Milano cookies. And both of them have had, really nice consumption gains relative to the category. And we're going to continue to invest in Pepperidge Farm. One of the places where we have where we have momentum brewing is in the American Classic cookie.
We're going to be relaunching, a new product there. So we believe that on top of the Milano momentum, we can fuel it with American Classic. The one place where we are, experiencing declines is in fresh bakery as the competitive environment has heated up, but we will be, we're we've introduced a new improved swirl bread and we'll be investing against that. So Only other two things are the expansion of Tim Tam in the United States, which we're really excited about. And that campaign starts in January.
We're building distribution as we speak. And then moving, after the successful expansion of our bakery business in the Arizona market, we're expanding into a couple other West markets. So there's lots of activity on Pepperidge Farm.
Okay. And just from a phasing perspective, as some of the A and C investment shifts into well, yes. And and maybe a bit over toward Simple Meals in Q2. Should we see the balance shift a bit between the segments? Is this more of a kind of a concentrated spike in some of the reinvestment going against the Pepperidge business?
Yes. I would say that we're being very consistent with our plans and we definitely prioritized our investments. I think where you'll see a shift is more off of smaller niche brands and back, more on to the core brands of which we include, we're including the launch of well key RTS initiative as well as the investment in Pepperidge Farm.
Our next question comes from Brian Spillane with Bank of America. Your line is open.
Just a question about the U. S. Soups business. And just want in the quarter, sales were comparable. And I think in the Nielsen data, at least it looks like in the 12 week period sales were down.
So Is there anything any mismatch in terms of timing of shipments versus consumption? And then I guess related to that, as we're thinking about 2Q, will well yes ship in 2Q or does it ship in 3Q?
Okay. I'll take the first part. We I guess the best way to explain it is We started our marketing this year in October. So on U. S.
Soups, we definitely saw a tick up in consumption and in sales at the latter part of the quarter and expect that momentum to continue. Inventory this quarter was very comparable to a year ago. And although retailers are still tight on inventory, it wasn't a meaningful, for material shift. So, I think the main issues with U. S.
Soup are we saw a chunky rebound, particularly towards the latter part of the quarter against the marketing effort We've been able to hold our price realization on chunky. And again, we're cycling some poor execution issues in the prior prior year. So we're very happy to see the response of chunky. Broth has been under a little bit of pressure, but we have big holiday plans. And so we're very confident in our holiday plans on broad.
So I think it's shaping up to be a season very much as we expected. Well, yes, start shipping in December. And so we have a huge the customer acceptance has been great. And so we have a huge Campbell launch on this one. So very excited about that.
Okay. So it sounds like there isn't a meaningful assuming that you get consumer pull through in 2Q, there's no meaningful sort of discrepancy between takeaway and shipments as we're modeling forward.
That is correct.
Our next question comes from Ken Goldman with JP Morgan. Your line is open.
Anthony, I just wanted to follow-up on the guidance for cost savings for the year. Correct me if I'm wrong. I think the guidance was $50,000,000 and you did $35,000,000 in the first quarter. I know it's early. I know you want to see how the year progresses.
But I'm curious what would hold the savings back from passing that $50,000,000. You mentioned reinvestments. I thought the $50,000,000 was a gross number prior to reinvestments, but again, just trying to get a little bit of color there and see maybe where some headwinds are that I'm not maybe visualizing
right now?
No, I think you've got it right. I mean, again, the $50,000,000 was a growth target. Perhaps we were a little conservative as we did achieve $35,000,000 of that in the first quarter. So we do want to see another quarter unfold making sure it's not just timing, but we feel really good about what we are. And if all goes well, we could have a little more savings available to us.
The other thing we want some time is to see how the other businesses progress. We've got a big turnaround in C Fresh that we're forecasting. And also, we've identified some additional reinvestment opportunities. So before making any decisions about, Hey, we've got more cost savings. It's going to drop to the bottom line.
We do really want to evaluate other opportunities that we have for reinvestment and we just need a little more time to do that.
Our next question comes from Chris Growe with Stifel. Your line is open.
And my happy Thanksgiving to you and your families as well. Just a question for you in relation to C Fresh. So with the soft first half that we've expected and you showed, started that here in the first quarter, that business needs to grow, call it, 5% across the remainder of the year. So I just want your expectations for that business? And is it about getting back on shelf for protein plus as well as gaining care of customers back?
So Is there one of those that's more the main driver here that could lead you to low single digit growth for that division for the year?
I mean, you have it correct. We expect to be down in the first half and return to growth in the second half. Our shelf is building now for protein plus. And our service levels have gotten quite better, although we still have more to do, I think the main other driver is the fact that because we've been on allocation, and we're basically supplying the shelf staff. We have not been merchandising.
And in some cases, retailers are not merchandising the whole line. So we think that's affected both our performance and also the category performance. But when we get to the 2nd half, we should be in a position where we're not only supplying the shelf stock, but we're also able to supply merchandising stock. We're literally selling everything we make.
Okay. And just to understand opportunity around regaining caret customers. Are those expected to come back in the second half of the year? Is it that quick or is it something that happens over time?
That absolutely happens over time. The good news is that our quality is improving. And we believe that as customers see us sustain that quality, we will gain that business back, but we're going to have to earn it.
Okay. Thank you for the time.
Our next question comes from Rob Moskow with Credit Suisse.
Hi, Jason, in your opening remarks, you mentioned the competitive environment getting tougher, the retailers becoming more aggressive in promoting to be competitive with each other. Have you seen anything dramatically different over the past 3 months compared to maybe 3 months ago, or are you specifically kind of talking about one category fresh bread because I would argue in your soup business, it didn't seem like you needed to be, particularly promotional And I would argue that a lot of your competitors in shelf stable food have been trying to reduce the promotional intensity has something changed in that regard?
I think that your observation in some of our categories is correct. We're finding that our categories, are pretty stable when it comes to food deflation. But we are seeing, some refrigerated food and beverages categories experiencing food deflation, up about 3.4% in the last 13 weeks, driven predominantly by dairy. And refrigerated meats. And although our categories are relatively stable, you're still dealing with a center store that's growing about 0% to 1% and therefore growth is hard won and it becomes a market share gain.
So it's those are just observations I'm sharing. That doesn't necessarily mean it's driving crazy behavior, but it is definitely a dynamic that we're dealing with.
So just to add, Denise, it's common. I would say in Italian sauce, we're seeing an increased level of competitive activity. And also within soup on broth, we're seeing increased activity on private label. Specifically around price competition there.
Okay. Does that sound transitory to you, Anthony? Or or do you think that's going to be throughout the year? I guess you don't know because it's competition.
Yes, I think our seasonal plans on broth are just hitting the mark now or have hit the market. So we do expect to obviously be more competitive on broth and as well as on Pregaux given the competitive situation.
Thank you.
Our next question comes from Alexia Howard with Bernstein Research. Your line is open.
Hi there.
Maybe I'll stick with the cost cutting question. After the $300,000,000 is done, you've obviously got the underlying productivity improvements this quarter of 170 basis points. But does that mean that once the $300,000,000 is done, that's really the end of the heavy or the big opportunity on cost cutting. I'm just trying to get a sense for this year, your overall EBIT growth is fairly modest even with all that cost coming out. Once that evaporates, what's the next lever that's going to propel the earnings growth from here?
Thank you. And I'll pass it on.
Yes. So Certainly, we feel really good about where we are against the $300,000,000 program. We're $215,000,000 into it $50,000,000 left to go. So obviously we're very focused on delivering that. And if I step back I will say that it's never over.
I mean, cost savings are always going to be part of our long term algorithm. We've got our annual 3% of cost productivity program. In addition to that, as we finish this program, we are looking for additional opportunities. Don't have any news to share with you today. But again, it's something that we're looking at.
We'll finish this program and then figure out where we go from
Thank you very much. I'll pass it on. Happy Thanksgiving.
Our next question comes from John Baumgartner with Wells Fargo. Your line is open.
Denise, I'd like to ask about the soup category in that overall volumes are still pretty weak after 2 years, I guess back in 2013 2014, when ready to serve came back to growth. So as you step back and look at the broader Simple Meals universe in which you compete, how much has the competitive intensity increased more recently, whether it's from formulations or innovation? And what do you think gets the category back to at least flattish volumes on a sustainable basis?
I think in the recent past, what we experienced last year was some execution issues in our RTS soup. Condense was largely stable and broth has been increasing nicely for several years. But we experienced, declines on our chunky brand that were quite severe due to a labeling misstep we took a very robust price realization, which has the good news is it is stuck And, but we did do that and that caused us some volume. We thought that was really necessary for the price spectrum of soup from value to premium that we are providing now to the consumer. And we didn't advertise chunky.
We literally did not have a consumer advertising campaign. We have remedied that this year, and that's why I believe that if we can continue to keep the stability on condensed soup, continue to grow broth and have a good comeback on RTS, with Chunky and New Well, yes, I believe that is a stronger plan going forward.
So it sounds like over the past 2 years,
it's more self inflicted as opposed to anything from other simple meals categories then?
Well, we are the largest player in the category. So I believe it's our responsibility to grow the category too.
Great. Thanks, Denise.
Our next question comes from David Driscoll with Citi.
Great. Thank you and good morning.
Hey, David. Good morning.
So I wanted to ask about the gross margins a little bit more here in the expansion that we saw in margins in Simple Meals, was anything here just a continuation from last year or how sustainable is the margin expansion? And Anthony, we've seen that in Q1 and Q2 that the company can have really large swings in margins depending on the timing of shipments and how you to plant efficiencies and things like that that might inform us a little bit more on how gross margins will move throughout the next few quarters. But can you just kind of It's a big question there. So could you kind of peel that thing apart and give us a little help?
Yes. I mean, as you've seen, the primary contributor to gross margin expansion, came out of our American Simple Meals And Beverage, segment. And it's driven by a couple of things. One is, our supply chain is just running really well. And that is definitely a sustainable.
There's no reason that should fall back as we go throughout the year here. They're also out of the gate, pretty, pretty well on productivity improvement. So let me give you a couple of examples. We recently expanded one of our warehouses at our major thermal plant. So we brought in some of the storage that was on third party sites.
So that saved us some money. We've added capacity in product lines like our prego white soft additional capacity in aseptic bra. So we've repatriated some co pack volume on those two products. And that obviously is sustainable. I think the things that are generating the savings in the first quarter are definitely sustainable.
The things that we see kind of moving against us, as we look ahead, One is on cost inflation. We are, and particularly within Americas benefiting from some deflation in a couple of key categories things like steel can and dairy, which I don't think is sustainable. And based on our forecast, that's going to move from more deflation to more, I'd say, flattish in the back half. And the third thing, which I mentioned earlier, we are making investments in the cost line against our real food initiatives, the cost of removing artificial colors and ingredients costs associated with moving BPA from our can liners. That's going to hit more as we progress throughout the year.
So again, I think the supply chain is running well. And we've got a couple of things that are going to turn a little bit we go through the year.
And then just a follow-up on this. How does net price realization play into Simple Meals And then big picture, how does all these changes affect your quarterly EPS layout for the remaining portion of the year noting last quarter, you indicated that the year was going to be back half weighted?
Net price realization in this environment, I think we've talked about this before, where some categories of deflationary, some categories are extremely competitive. We don't expect a lot of gains on net price realization this year. So that should be fairly stable. Throughout the year. In terms of front head back half, I think we continue to see the majority of our growth, coming in the back half compared to the first half.
Thanks so much. Happy Thanksgiving.
Thank you.
Our next question comes from David Palmer with RBC Capital Markets. Your line is open. Hi, David.
Thanks. Good morning. Hey, Denise. From the measured channel data, it looks like your volume lift from to soup, specifically from promotions improved in the quarter. I'm remembering the labeling issue from last year, but perhaps there's more insight about stronger performance from your Supermotions this year and how we should look at that those that year over year lift from promotions going forward?
Any color would be helpful. Thanks.
So I can take a crack at that. As we look back over the first quarter, it's relatively early. I think in terms of our promotional, program, last year was the year which we saw significant change in some of our EDLP in our promoted price points. This year, it's going to be more stable year on year in a price point. And I think we're seeing the benefit of that.
So as mid quarter, we started to put out our chunky advertising programs. And I think that more stable pricing in environment enabled these other things to kind of work together and to work well. We've got some new varieties on chunky. We definitely have new and better advertising. We're spending more behind the brand.
So I would say it's not that you can point to one thing on Chunky. I think as all those demand drivers working together that are enabling us to see better performance on chunky.
Yes. I also will add that the launch of well, yes, although it's midyear will be big. And it's hitting and shipping during that key January wellness month from a consumer standpoint. So we expect that the promotional and merchandising support on that brand will be great.
Our next question comes from Michael Lavery with CLSA. Your line is open.
Hi, Michael.
I was
wondering if you could just touch on your Kelson business in China. I know you had reconfigured some of your distribution there. How is that progressing? And specifically with, say, Golden Week or Singles Day have you seen better execution and performance
Sure. We are expanding Kelson in China. Last last year, we made a distribution change and went from a distributor that we literally inherited when we bought the business to a different distribution network. That has actually worked out very well. The litmus test was the Autumn Festival where we increased consumption and gain share in an expanded footprint.
And we're going to continue to work that but we believe that that bodes well for, Chinese New Year, which is really the big event for Kelson. The first quarter is not usually a large quarter for us on that business, but second quarter is.
Okay. That's helpful. And then just lastly, on a housekeeping item on the tax rate, any change we should be aware of? I mean, is there any impact on the rest of the year from the change to the stock based compensation, how should we think about that full year tax rate?
Yes. So there's been a couple of puts and takes, but we continue to estimate that our full year rate to be around 30 2%, which is where that forecast has been.
Our final question
comes from John Fini with Consumer Edge Research. Your line is open.
Got it.
So I was also having these questions about competitive landscape and it seems to me like your biggest competitor only want to speak of and ready to serve too has not only communicated to the world that it's now a foundation brand, not a growth brand for them, but has announced their closing, the original facility that's the headquarters of that and their largest single place. So I guess my as you look at manufacturing center. So if you look at ready to serve going forward, it would strike me the big risk here is only really that it loses shelf space with the retailers, because it must be, I mean, there must be some pretty good momentum in, in Chunky, as you are presumably putting more resources behind us. And so my questions would be, Our retailers recognizing the difference. Are they aware of this change in relative sort of commitment to this category?
I know you've gotten net price realization there. And what sort of expectations do you have over the not only the next year, but the next couple of years as capacity changes in that industry, that, you'll be able to hold share or ready to serve as a whole as you presumably play a bigger role of that? Thanks very much.
We are committed to helping our retail customers grow their business and the center store needs more innovation. To that point, we are increasing our investment in RTS Soup this year. Again, on chunky with a full court press and full integrated marketing campaign as well as the well yes introduction. And I just believe in this environment, that brings news to the cans. It doesn't sound that big, but it is big to them because it enables them to merchandise and and with operations, efficiency and effectiveness.
So I believe it'll be a good season for RTS.
Okay. Thanks very much.
Thanks, gentlemen.
That concludes the Q And A session. I'll now turn the call back over to Ken Gosnell for closing remarks.
Thanks, Stephanie. From all of us at Campbell, happy Thanksgiving, everyone. We thank you for joining our first quarter earnings call and webcast. A full replay will be available about 2 hours after this call by going online or calling 1703-925-2533. The access code is 1677070.
You have until December 6, at which point we move the earnings call strictly to our website at investor. Kem dotcom under News And Events. If you have any further questions, please call me at 856-342-6081. If you are recorded with questions, please call Carl Abiragato, Director of External Communications at 856-342-3737. That concludes today's program.
Thanks everybody.
Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect. Everyone have a great day.