Good day ladies and gentlemen, and welcome to the Campbell Soup Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr.
Ken Gosnell, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Candace. Morning, everyone. Welcome to the 3rd quarter earnings call for Campbell Soup's fiscal 2016. With me here in New Jersey are Denise Morrison, President and CEO Anthony D'Silvestro, CFO and Blake Mackman, Senior Manager of Investor Relations. As usual, we've created slides to accompany our earnings presentation.
You will find the slides posted on our website this morning at investor. Campbellsoupcompany.com. This call is open to the media who participates in a listen only mode. Today, we will make forward looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk.
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 get our discussion of the quarter, I'd like to incurred choir, all others are invited to join by webcast. This year's event will be held the afternoon of Wednesday, July 20. We will include updates on our plans and key initiatives for the 3 operating divisions.
We will also have time for interacting with our management team. More details to follow on this. With that, let me turn it over
Today I'll share my perspective on our performance in the quarter year to date. As many of you are aware, the consumer environment continues to be challenging in many of the markets where we have operations. In the U S, consumer spending remains cautious. Shoppers are making more frequent trips than a year ago, but they're purchasing less per trip. As a result, consumer takeaway of total food and beverage has softened compared to both short and longer term comparisons.
This has exerted top line pressure on both retailers and manufacturers. In other parts of the world, economic conditions remained volatile. In the 3rd quarter, our organic sales declined 2% which was below our expectations. Key factors that led to the decline include softer than expected soup category performance, weakness in VA beverages and product shortages in our Bolthouse Farms Carrot business. I continue to be despite the negative impact of the weather were adversely impacted by the poor growing conditions in reduced carrot yields across the industry.
The decreased crop yield had a significant impact on our gross margin performance in the quarter. Both Anthony and I will discuss this later but was better than we expected reflecting improved gross margin performance. The decline in adjusted EBIT was due to higher levels of planned spending, including the increased marketing investments as well as higher incentive compensation costs and investments in long term innovation. We expected that our adjusted EBIT performance would taper in the second half As we realized the benefits of our cost savings earlier, cycled improved gross margin from a year ago, and implemented our plans Let me share my view on As a reminder, we're managing this division for moderate growth, consistent with the categories in which we operate and for margin expansion. Organic sales declined by 2% in the quarter, predominantly driven by U.
S. Soup and V Eight beverages. Our ready to serve soup business was challenged by a number of the same factors we discussed last quarter. The mild winter weather, which affected the entire category, the volume impact of our pricing actions and marketing execution on soup season. Namely, we intend to do a better job of driving demand, particularly for chunky ready to serve soups.
We'll have a more robust marketing plan that fully leverages our NFL sponsorship. We also recognize that we need to bring more to the category and we have new on trend product innovations planned for fiscal 2017. We'll discuss these plans in greater detail at our Investor Day in July. There were several bright spots within soup and simple meals. Sales of Swanson Broad, Slow kettle and Campbell's organic soup all grew.
Also Campbell's condensed soup gained share. Beyond suit, Praygo continues to perform well, driven by strong merchandising and growth in white sauces. We also began shipping Prego Farmers Market, our new premium Italian sauce with a clean label. Additionally, we drove double digit sales gains in Plumb. V Eight Beverages continued to struggle with sales declines in V Eight red, V Fusion and V Eight splash.
There was, however, some good news, particularly in the performance of V Eight veggie blends and V Eight plus energy. In the short term, we've taken steps to address the performance In the past, we've We're also building on the successful launch of V Eight veggie blends with new varieties and expanding our V Eight plus energy carbonated beverages into the grocery channel. That said, VA is a great brand, and we believe we have a solid platform to build upon going forward. We're in the process of finalizing our strategy and we'll discuss our longer term plans to get this business Overall, we feel good about especially its continued margin expansion. Clearly, we have some work to do in several key categories to generate demand for This division unifies our Pepperidge Farm, Arnus and Kelson businesses, and its portfolio role is to manage growth while improving margins in both developed and developing markets.
Pepperidge Farm delivered modest sales growth, while we experienced some challenges in our Australia and China businesses. The 2 main drivers of the sales decline were Kelton in China and Arnott's sweet biscuits in Australia. 1st, China. Despite strong merchandising support and our improved marketing efforts heading into Chinese New Year's, sales were below expectations. We experienced short term distribution challenges and faced strong competitive activity.
Let me explain. At the beginning of the fiscal year, we made changes to our business model adding salespeople and changing distributors. This new go to market model is designed to improve execution while enabling us to increase distribution our new distribution system did not have the same reach as in the past. In spite of the challenges we faced, Kelton consumer takeaway and share increase in our priority markets. Going forward, we'll need to supplement and expand our distributor network to increase our geographic reach.
We're confident that we'll get there and continue to believe in the long term prospects for Kelson in this important market. In Asia Pacific, excluding currency, Sales of Arnx Biscuits were comparable to the prior year, with growth in Indonesia, offset by declines in Australia and New Zealand. In Australia, we faced competitive pressure in the sweet biscuit category and experienced lower consumer takeaway on special varieties of Tim Tam Biscuits, which had a negative impact on sales. On the plus side, our savory biscuit business performed well, and we're encouraged by the launch of our our developing markets in Southeast Asia performed well. Excluding the impact of currency, we grew sales in both Indonesia and Malaysia double digits.
As expected, the economic situation in Indonesia started to improve in the quarter. Turning to North America, Pepperidge Farm cookies and crackers continued to perform well, driven mainly by Goldfish crackers, Sales declined slightly in our Fresh Bakery business as we faced increased competition in the quarter. Moving on to Campbell Fresh. C Fresh is anchored by Bolthouse Farms and also includes Garden Fresh Gourmet and our refrigerated soup business. This division's portfolio role is to accelerate sales growth and expand into new package fresh categories.
The CPG portion of this business is the full force growth engine of the division. Reported segment sales increased 6% in the quarter. Excluding the impact of the Garden Fresh Gourmet acquisition, sales declined 4%. In the quarter, Bolthouse Farms was a tale of 2 cities. Solid performance in our CPG premium juice and salad dressing business was more than offset by significant declines in our farm business which consists of carrots and carrot ingredients.
As I mentioned earlier, the carrot supply across the industry was negatively impacted by the adverse weather in as we were unable to meet market demand. As a result, our carat sales were down double digits in the quarter This weather pattern is irregular. 2010 to 2011. Since then, we've significantly diversified our winter crop into multiple growing regions in California Arizona and Georgia. Today, we're much better equipped to respond and have reduced our recovery time.
We're currently back in full supply with customers and don't anticipate any material sales impact going forward. As we're now in the prime growing season in California. Turning to the CPG side of Bolthouse Farms We're pleased with the 8% sales growth we delivered in the quarter. As expected, this growth was driven by distribution gains and our spring innovation. We added 14 new items across Ultra And Super Premium Beverages as well as salad dressings, which increased double digits.
We're also pleased with the performance of 1915 by Bolthouse Farms, our Ultra Premium cold press organic juice line. We achieved 50% ACV in less than 12 months enabled by our investment in expanded capacity. Due to the success of our spring innovation sell in, we're well positioned for the fourth quarter as we look ahead to From an integration standpoint, we continue to make progress on bringing the business into the Bolthouse Farms operations platform and we've expanded fresh salt and distribution. We remain very optimistic about the potential of this brand. Before wrapping up, I'd like to share my Year to date, organic sales are down slightly 1% and what continues to be a very challenging consumer environment.
We're clear eyed about the factors impacting our top line and the actions we need to take to address them. We can and we must do better on driving profitable net sales growth. Looking ahead to the fourth quarter and next fiscal year, we expect to reflects our improved gross margin performance including our move to 0 based budgeting. As we focus on finishing the fiscal year, I feel good about the progress we're making how we've performed year to date and our outlook for the full year. This is reflected in our updated guidance which Anthony will discuss shortly.
We've made many important changes to Campbell, completely redesigning our organization setting up the company by category versus geography and assigning each division a clear portfolio role. We continue to remain focused on strengthening as we unleash the power We're now better positioned to execute our strategies, invest in the areas of our business that hold the greatest profitable growth potential and increase shareholder value. Now, I'll turn the call over to our Chief Financial Officer, Anthony DiSilvestro.
Thanks, Denise, and good morning. Before getting into the details, I wanted to give you my perspective on the third quarter. Organic sales in the quarter were below our expectations reflecting softness in U. S. Soup, V Eight Beverages, and the weather related crop yield issue, which negatively impacted our Carriage sales and earnings.
We continue to make progress on adjusted gross margin. It improved by 40 basis points better than expected benefiting from our supply chain performance and moderating cost inflation despite the weather related yield issue on carats. The carrot issue negatively impacted sales by approximately $14,000,000 and our adjusted gross margin by approximately 50 basis points or $0.02 per share. We continue to make good progress on our cost savings initiatives, which delivered approximately $30,000,000 of savings in the 3rd quarter, with these savings impacting multiple P and L lines, bringing the year to date total to 110,000,000 Program to date, we are now at $195,000,000 in cost savings. With 1 quarter to go, we are updating our guidance.
We are holding the sales range, narrowing the adjusted EBIT range and raising the adjusted EPS range to reflect our current outlook for adjusted For the third quarter, net sales on an as reported basis declined 2% to 1,870,000,000. Excluding currency and the impact of the Garden Fresh Gourmet acquisition, organic net sales also declined 2%. Driven by lower volume. Net price realization was comparable to the prior year with higher selling prices offset by increased trade promotions. Adjusted EBIT decreased 5 percent to $312,000,000, reflecting higher advertising and consumer promotion expenses higher administrative expenses and lower volume partly offset by a higher gross margin percentage.
Adjusted EPS decreased 2% to $0.65. For the 9 month period, net sales on an as reported basis were down 2% while organic sales decreased 1% compared to the prior year. Adjusted EBIT of $1,214,000,000 and adjusted EPS of $2.48, both increased by 15%. Year to date earnings growth is being driven by our improved gross margin performance and benefits from our cost savings initiatives. Breaking down our sales performance for the quarter, reported net sales and organic sales both declined 2%.
As the 1 point negative impact of currency translation was offset by the 1 point benefit from the acquisition of Garden Fresh Gourmet. Within organic sales, volume and mix attracted two points, which was primarily driven by declines in V Eight Beverages and soup, within the Americas Simple Meals And Beverages segment, as well as the lost carrot sales in Campbell Fresh. Higher selling prices contributed one point of sales growth, while higher promotional spending subtracted one point. Our adjusted gross margin percentage increased by 40 basis points to 37%, exceeding our expectations on overall supply chain performance despite the weather related carrot issue. Cost, inflation and other factors had a negative margin impact of 1.6 points, driven primarily by cost inflation, which as a rate increased by approximately 1% and the increase in carat costs previously discussed.
In aggregate, our net price realization reduced adjusted gross margin by 20 basis points as higher promotional spending in the quarter to support U. S. Soup, global biscuits and snacks and Bolthouse Farms Beverages was mostly offset by list pricing actions previously taken across several businesses. Mix was slightly favorable adding 10 basis points. Lastly, our supply chain productivity programs, which are points of margin improvement in the quarter.
Adjusted marketing and selling expenses increased 5% in the quarter primarily due to higher advertising and consumer promotion expense. Advertising and consumer promotion expense increased 8% in the quarter, driven primarily by increases in Pepperidge Farm And V Eight Beverages. Adjusted administrative expenses increased 4% primarily due to higher incentive compensation costs, inflation, increased costs to support long term innovation, and the acquisition of Garden Fresh Gourmet, partly offset by the benefits from cost savings initiatives. For additional perspective on our performance this chart breaks down our EPS change between our operating performance and below the line items. As you can see, adjusted EPS decreased $0.01 compared with the prior year from $0.66 to $0.65 per share.
On a currency neutral basis, declines in adjusted EBIT had a 0 point 0 $3 negative impact on EPS. The impact from share repurchases under our strategic share repurchase program reduced our share count slightly, but had no impact on EPS for the quarter. And net interest expense was comparable to prior year levels. Our adjusted tax rate for the quarter was 28.5 percent, down 3.1 points versus the prior year, primarily due to lower than expected taxes on foreign earnings, probably offset by the probably offset by the geographic mix of our earning with a higher proportion of income in the U. S.
The lower tax rate benefited EPS by $0.03. Currency had a $0.01 negative impact on EPS in the quarter, completing the
bridge to $0.65 per share.
Now turning to our segment results. In America's Simple Mills And Beverages, Organic sales decreased 2% to $999,000,000, driven by declines in soup and V Eight Beverages. Barley offset by gains in prego pasta sauces and plum products. Operating earnings increased 1%, reflecting a higher gross margin percentage driven by productivity improvement, partly offset by lower volumes and increased advertising expenses. In total, U.
S. Soup sales declined 5% driven by category declines which, as Denise mentioned, were primarily impacted by warmer weather compared to the year ago quarter. The impact from our pricing actions and marketing execution issues on Chunky. Although our pricing actions had a negative impact on volumes, they have contributed to improved profitability. Within U.
S. Soup, RTS declined 13% and condensed declined 4%, partly offset by 10% gain in swans and bra. Estimated changes in retailer inventory levels did not meaningfully impact sales in the quarter. As we previously stated, We will not be providing this subcategory sales performance beyond this fiscal year. Here's a look at U.
S. Wet suits category performance and our share results as measured by IRI. For the 52 week period ending May 1, 2016, the category as a whole declined 2.4%. Our sales and measured channels declined 3.5%, with weakness in ready to serve and condemned soups, partly offset by strength in broth. Campbell had a 59% market share a decline of 70 basis points.
Private label grew share by 20 basis points finishing at 13%. All other branded players collectively had a share of 29 percent, up 50 basis points, reflecting share gains by smaller brands. In Global Fiscuits And Snacks, organic sales decreased 1% with declines in Kelson, partly offset by gains in Pepperidge Farm Goldfish crackers and soups and beverages in Australia. Excluding the negative impact of currency translation, Sales from R Naught Fiscuits were comparable to the prior year with gains in Indonesia, offset by declines in sweet biscuit varieties in Australia. Operating earnings decreased 8%, primarily driven by higher incentive compensation costs and the negative impact of currency translation.
In the Campbell Fresh segment, organic sales decreased 4% with declines in Carrot, partly offset by gains in Bolthouse Farms Premium Refrigerated Beverages and salad dressings. Not included in organic results is our recent acquisition Garden Fresh Gourmet, which contributed 10 points of sales growth to the segment. Operating earnings declined 28% driven by the higher care costs, Excluding the negative impact from the carrot issue and the acquisition, operating earnings for C Fresh in the quarter would have increased significantly compared to the prior year. Despite the negative impact in the quarter, year to date operating margins in C Fresh have increased by one percentage point. We had strong cash flow performance for the 1st 9 months.
Gas from operations increased by $212,000,000 to 1,183,000,000 driven by higher cash earning and lower working capital requirements especially in the area of inventory. Capital expenditures decreased $17,000,000 to $225,000,000. We continue to forecast CapEx of approximately $350,000,000 for fiscal 2016. We paid dividends totaling $294,000,000 reflecting our current quarterly dividend rate shares in the 1st 9 months, 75,000,000 of which were under our strategic share repurchase program. The balance of the repurchases were made to offset dilution from equity based compensation.
Net debt declined by approximately $250,000,000 as positive net cash flow generated by the business more than offset the impact of the $232,000,000 acquisition of Garden Fresh Gourmet in the fourth quarter of 2015. Now I'll review our 2016 outlook. Our sales guidance remains unchanged at minus 1% to 0 0%, including a 1 point benefit from the acquisition of Garden Fresh Gourmet and a 2 point negative impact from currency translation We're narrowing the range for adjusted EBIT, which we now expect to grow 11% to 13%. The year over year growth reflects the benefit of improved gross margin performance and the benefits from our cost savings initiatives. We expect adjusted gross margin for the year to expand by approximately 175 to 200 basis points.
We're increasing the adjusted EPS growth range to 11% to 13% or $2.93 to $3 per share, in line with tax rate to be approximately 32%. Against our cost savings program and consistent with our prior forecast, We expect to deliver incremental savings in the range of $120,000,000 to $140,000,000 in 2016. Our 2018 annual savings target remains unchanged at $300,000,000. That concludes my remarks, and now I'll turn it back to Ken for the Q and A. Thanks Anthony.
We will now start our Q
and A session. Since we have a limited time and out of fairness to other callers, please ask only one question at a time. Okay, Candice.
And our first question comes from the line of David Driscoll of Citi.
I just wanted to ask a question about the cost savings program. And, I think the original expectation was to take half of the savings from the program and reinvest back in the business.
And I
think you guys have said a number of times that the savings has just kind of come in faster than you originally anticipated. So maybe you're not at the pacing of putting a full half in. So is it right to think kind of going forward that like the bulk of the 2017 savings should get reinvested back into the business, Denise, And this would, number 1, give you the fuel to reinvigorate the top line. And then number 2, we just kind of marry up to that big picture comment about 50% reinvestment. Is that can you just comment on that?
Yes, the Yes. The cost savings program is giving us the financial flexibility to reinvest back in the business to jumpstart top line growth. We're being very choiceful about these investments and they're predominantly going after new product launches such as, you started to see in the third quarter, our C Fresh Innovation new shapes in Australia, Prairie Boat Farmers Market, and we're introducing a plum organic baby formula. And we'll continue to support those new products into next year and announce more at our Investor Day. A lot of the money is going to make sure that we have support of our key brands in line with the portfolio roles in each division.
One thing that is new is we are channeling some of the these dollars into longer term innovation so that we make sure we have a robust pipeline in a state of readiness. And then finally, we're reinvesting it to build capabilities in things that we see coming into the industry such as digital and advanced analytics. So, our intention is definitely to reinvest some of this money to drive top line growth.
And just one follow-up. Did the pacing of the cost savings change at all, Anthony? Is it still, is your forecast for the year still the same?
Yes, Tim. So in the last quarter, we talked about $120,000,000 to $140,000,000 incremental for that for this year. We're at about $110,000,000 year to date, so I got a little bit to go. But we are certainly well ahead of our initial expectations, both in the total amount and the timing. And I think if I can get to the essence of your earlier question, with the target going up to $300,000,000 and a significant amount of savings still to be achieved in fiscal 2017 2018, we will work and continue to target our long term targets in terms of sales, EBIT and EPS growth in fiscal 2017.
Thank you very much.
Thank you. And our next question comes from Andrew Lazar of Barclays. Your line is now open.
Hi. I think the gross margin guidance for the year was, I think, up 175 basis points as of last quarter. And Anthony said now 175 to 200 for the year. So I'm just trying to get a sense of what the key sort of change there was. I know volume in the quarter It wasn't necessarily where you wanted it.
So I'm trying to get a sense of what's driving that upside. Thank you.
Sure. Andrew, it is primarily coming out of our supply chain, which just continues to operate extremely well. If we look across the number of metrics there, I mean, all of our plant efficiencies are up. The plants are running more effectively than they did last year. And we continue to see significant savings in the area of transportation and warehousing.
And just to give you a couple of KPIs our inner plant shipments are down versus a year ago. The amount of times we reach into the spot market for freight purchases is basically at 0 compared to a significant amount last year. Our truck weights are up this year versus last year. Our miles traveled or down versus year ago. And all of these things are just yielding really good results coming out of supply chain and continue to exceed our expectations.
And our next question comes from Brian Spillane of Bank of America. Your line is now open.
Good morning. It's actually Evan on for Brian. Just following on, David's question, just about reinvesting back. I guess I'm still struggling here. So promotional promotion spending was up in
the quarter, marketing was up
in the quarter, where the organic sales were down. I guess, Denise, you started out your prepared comments talking about the challenging operating environment. So I guess I'm still unsure how just the planned reinvestment is going to drive the top line and I guess starting in 4Q. So if you can just, I guess, within the context of the operating environment, Well, I guess the question is why should we expect sales to return and how, I guess, starting as early as the fourth quarter?
Yes. It seems like it's an equation, but it isn't, because the places where we experience the sales decline, we're not necessarily the places where we invested the A and C and the T. So let me explain. I talked about the sales decline being due to 3 factors: 1, being predominantly RTS soup, the second being VA beverages. And the third, the unfortunate situation we had in carrots with the shortage of organic carrots.
The investment that we made was on different things. So we invested A and C advertising and consumer in our Global Biscuits and Snacks business against, shapes in Australia, which worked Tim Tams in Australia, which didn't work, and, our cookies and bakery business and Goldfish and Pepperidge Farm, which did work. We invested advertising consumer in VA, but we focused it on the veggie blends. And that works, but what we realized is that we had to put more emphasis going forward on V Eight Red, and we're, of course, correcting there. We also spent predominantly promotion spending on our Campbell Fresh new product launches.
And that is going incredibly well. And then finally, we spent money against Pregaux and Simple Meals, which also had a very good quarter. So we do believe in the investment of, A and C in this business. And with trade spending, it was up against the Arnott's business that I just talked about Goldfish and C Fresh new products on a year to date basis, trade spending is down 5% and about 0.3. It's down 0.3 points versus year ago on a rate basis.
So just to add to that, I mean, there's a couple of issues that we believe are temporal in the quarter. And a bit unusual, one is certainly the impact of the carrot yield issue, which was impacted our sales by almost a point negatively. And also the category declines in soup, as Denise mentioned earlier, impacted by the warmer weather, exclude those 2 items, sales would have been flat compared to a year ago. So we think a couple of things happening this quarter are not going to repeat themselves.
Okay. No, that's helpful. So it sounds like some of the things were more planned or category specific. And as you're thinking about the challenging operating environment in the U. S, are you seeing just broader levels of promotional activity?
Do you expect that going forward? Or again, is this really where you're spending is really more category specific behind some of these brands. They need a little help.
Yes. We're I mean, we are in a situation in the industry particularly in center store categories where, growth is hard won and it's very competitive. And we expect that to continue.
Okay. Alright. Thank you.
Thank you. And our next question comes from Rob Moskow of Credit Suisse. Your line is now open.
Hi, thank you very much.
One question is on the 4th quarter implied guidance. It's a very wide range Anthony, wants to know why so wide? What are the factors that could go either way? 2nd, are you giving fiscal 20172018 guidance today, I thought I heard you say that you expect to be on your long term algorithm. Maybe I misunderstood.
Yes. So just to clarify that, I said we aspire to achieve our long term targets in fiscal 2017. We'll give it more specific guidance when we get to our fourth quarter call. In terms of the implied range, it does obviously have a $0.07 delta in the fourth quarter. I think for perspective and we've had been a challenge forecasting part year as you know, it's taken the guidance up a couple of times already.
We've just gone through massive change here at the company, probably the largest transformational change in the company's history in terms of reorganizing into 3 divisions addressing spans and layers and voluntary headcount reduction, involuntary headcount reduction, the adoption of 0 base budgeting and changing many of the policies we have at the company, changing our operating model and forming an integrated global services function And given the amount of change, it's just been really difficult or more difficult than usual to forecast. So we're just giving ourselves a little bit of latitude here in the fourth quarter in terms of where we're going to come out. Some of the variability will likely be in gross margin. That 25 basis point range can take you from the top of the EPS range to the bottom cost savings could be a little bit variable. We feel pretty confident.
We'll see some organic growth at the top line. Thank you.
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 a question in relation to the market share declines in soup, but I know we've talked about soup generally and you've talked about soup generally and and some of the challenges, particularly in ready to serve, but condensed was down as well. And that's the part that
I was surprised by.
And I guess in relation to that, just trying to understand when you think about the incremental marketing and, for example, in this quarter in promotional spending. And as you look ahead, Is it designed to try and narrow that market share gap in soup? Is that something you're trying to work against here in the short run? And we could see some in early next 2 season?
Yes. As I look at it, you for the quarter, condensed was down, but on a year to date basis, condensed is actually up in share. Broth is up 10% for the quarter, and, pretty flat, but the gain in consumption and gaining share. Our issue really is RTS. And I look at myself in the mirror on this one.
It was bad execution on Trunky. I mean, we had lack of compelling advertising. We didn't leverage our partnership well with the NFL. We had a label issue in the first quarter, which, cost us sales. And, but these, the good news is that these are all execution issues within our control and we are actively addressing them.
So, I believe that if we keep supporting this core business and we get our act together on chunky, we'll be in pretty good shape going forward.
Just to add to that, one of the things we did in RTS is we made a pretty significant move on our promoted price point, which we haven't done in over a decade we felt it was really important for the category and for our profitability to make that move. We knew it would have a negative impact on buying. We're seeing that come through. And we knew it would have a negative impact on our share performance. And again, we're seeing that come through as well.
I think also too, you'll start to see more of a steady stream of innovation in the core soup category.
Okay. And just on that point, Anthony, in terms of the raising perimeter price points, is that something you can sustain or is competition not allowing for that in ready to serve?
We intend to sustain that.
And our next
question comes from Ken Goldman of JPMorgan
Anthony, you said that excluding, I guess, the tariff and weather generated soup issue sales would have been flat this quarter. I get it. That makes sense. It still implies like a sort of a 2 year stack number of minus 1%. So I guess when I'm looking at your 4th quarter guidance, are you looking for and just confirm.
And if you said this already, I apologize, but just to confirm, are you looking for, it seems to me like at least positive 2 percentage roughly on an organic basis, against what will
be kind of a positive comp.
So I'm just curious, A is my math right on that. And B, just to go back on some of the questions that people have asked already, doesn't that sort of imply
a little bit of a
sequential improvement in sort of run rate organic growth, excluding some of
the items you talked about?
Sure. Let me gives a little more detail on the facts. So before I get to the organic, just building up to the sales in the fourth quarter. So year to date, current currency has been minus two points in the fourth quarter. It's going to be more modest, likely a minus 1.
The other thing is the impact of Garden Freshs Gourmet in our 4th quarter, which is seasonally low, it'll probably have closer to a 2 point positive impact and a 1 point positive impact So net net, that's a positive one. And if you know, if we can do plus 1 in organics, that gets you to a plus 2. So that's kind of what we're thinking about. So it doesn't have to be a 2 organic. It has to be a 1 to get to the bottom end of that range.
And
we have the benefit of some new products that we just started shipping in the quarter.
And our next question comes from Jason English of Goldman Sachs. Your line is now open.
Real quick clarification question, Denise, I think you said trade spend is down around 5% year to
date, but when we look at
the promotional line, in terms of sales drivers, it's neutral year to date. So what else is driving the offset to trade spend reductions?
Yes. I don't remember me saying that. I think in dollar terms, trade spend is fairly comparable to prior year. And I think on a rate basis. Let me look that up real quick here.
Relatively flat on a total company on a rate basis. Okay.
Then let's delve a little bit deeper in there. I know you guys set up a revenue management team early this year. Probably still early innings, but there was no objective coming in to be able to find some opportunities, some efficiencies there and reverse what's been sort of a long term trend of promotions being a drag on sales. Where do we stand? You sort of had progress out of the gates.
We've kind launch some of that progress. Have you found some of your efforts on that front to be futile or as we think forward, is there still opportunity and can we expect to see start to bear fruit as we go into next year?
Yes. We look at, trade as part of net price realization And to that end, with our creation of the integrated global services, we have beefed up our revenue management group, and then are working on advancing our analytics to be able to do a couple things. 1st of all, make sure that we are optimizing our pricing. 2nd, make sure that we are maximizing the return on our trade as we continue to work through programs on our brands with customers. If we do see opportunities to be more effective and efficient, we will do so.
I am as much for working with the numerator as the denominator.
Yes. Let me
just add to that. We are seeing benefits from our revenue management initiative. It led to the pricing actions we took on soup last year. It led to the changes in Promoted price points has led to the pricing on Prego. It led to some of the pricing and some of our other businesses around the world.
And we'll continue to focus on it going forward. I think just one more comment in terms of the quarter a lot of what you're seeing in the quarter is a result of timing. A lot of the cost savings came in the 1st half and we had refaced some of the marketing out of the first half and into the, you know, the second half. So I think, you know, it's probably appropriate to judge us on our year to date results, which we feel really good about.
Thank you. And our next question comes from John Von Gardner of Wells Fargo. Your line is now open.
Good morning. Thanks for the question. Denise, I'd like to ask about promo spend in baking and snacking. It's been a segment where you have reduced promo during the first half of the year and it looks as though your reversed course this quarter much of this is really just a comparison issue against the pacing of last year versus maybe relative to a deeper change of course going forward?
Well, I think that promotion spend is really important. In the baking and snacking area, we've been in the United States, we've been really focused on a couple brands, one being Goldfish, which has performed very well and the other being Milano. I do think that there is there'll be a cadence that's worked throughout the year, but promotion is an important part of the mix for particular business for impulse sales.
Okay. And then just
in terms of the volume prospects there, I mean, you're lapping some pretty hard comps earlier. They should you think about the base Pepperage business going to fiscal 2017 and kind of on the competitor front as well?
I'm not sure I understand the question.
Could you Could you clarify?
Yes. In terms of the volume prospects for the segment going forward, I think you would lapse in pretty hard comps. In the first half of this year was depressed volumes. But as you get into easier comps back half of this year, some of the innovation rolling out in Goldfish, how are you feeling about the volume prospects in the business as you move into fiscal teens.
And you're talking specifically about baking and snacking?
Yes. Pepperidge Farm.
I think that you'll get a glimpse of their plans in July, but it's shaping up to be a pretty strong plan. And we'll continue to work on, like I said, on Goldfish and also on on the cookie business as well. I don't know what else I can say about that at this point.
Thank you.
Thank you. And our next question comes from Michael Lavery of CLSA.
Just was hoping to get a little more color on the top line and some of your outlook there. You mentioned just in general the cautious consumer spending and soft trends, but can you dissect that a little bit? Because certainly there's categories and companies that have very strong top line growth and there's minimum wage increases and low end wages that are on the upswing. And so is that a is that more big food or center store specific or do you think that's a macro issue And then related to that on pricing, obviously Walmart had very strong numbers driven by price investments and, presumably they're funding a good bit of that, but are you seeing pushback on pricing from the trade and are you able to get pricing through or how do you see the outlook there?
Yes. What we're seeing in terms of, of performance in the marketplace, the shelf stable businesses, we're tracking them the shelf stable businesses are pretty mixed with more robust sales growth in the Simple Meals area And then there are a number of categories who are below the average. And so refrigerated is doing a lot better. So the fresh business and frozen, more categories are down than up. And so, we have done an analysis on trips.
And like I said, there's more frequent trips, being made versus year ago, but, shoppers are buying less overall units. And that seems to be across all of the categories. And so, we are noticing that behavior. We don't really talk about specific customers. But I think in general, we've been able to execute our pricing in the marketplace.
Well, and yes, I didn't expect color on Walmart in particular, but just pushback from the trade in general, you're seeing that that pricing outlook environment looks constant?
Well, it's just been such a long time since we've increased prices on our products, that we were able to establish them in the marketplace and, we're still promoting the products and working with the customer on their plans.
And when you say across categories, are you referring to grocery specifically or do you get a read through things like channel shifting, say, even to Amazon or other nontraditional channels?
Yes, we track about, about 38 categories in, simple meals and across the center store refrigerated and also, in frozen so that we can get an idea for the cadence of the industry and how we're performing within that cadence.
That's where in grocery?
Yes. Well, it would be, Mulo. Okay.
Thanks a lot. Thanks, Michael.
Thank you. And our next question comes from Alexia Howard of Bernstein. Can I ask,
I guess, just a question? It seems to me that there are some smaller Challenger brands are doing quite well in suits at the moment, if I think about imagine, obviously, from a much smaller base or even in the refrigerated section Panero Chelsea. How is that informing your innovation pipeline? And also, how is that affecting your relationship with the retailer where you've mentioned analytics a couple of times improving. Is there a sense that the retailers might be starting to tone down the traction role in favor of just using, analytical algorithms to set the shelf space now that these smaller brands do seem to be where the growth is?
Thank you. Yes. No, it's absolutely true. And I think it's absolutely true in a lot categories that smaller challenger brands are growing faster off of a smaller base. And in the soup category, there are a couple that are growing faster again, but they're much smaller.
We also have some smaller parts of the soup business that are growing faster. So for example, slow kettle, was up 9% in the quarter and is up 50% year to date in consumption. And also Campbell Organic is up 41% in the quarter. And then a relatively new brand to the category. Those would be two examples.
And there's a couple others as well, and our refrigerated soup continues to perform as expected up 2%. So, we are seeing it and we believe that we need to participate in that.
And then on the Catholic captain role?
I'm sorry, I didn't understand what you mean by the role.
So the idea that the traditional category captain role that you've obviously played in suit, might be being replaced by just more analysis of the standard data particularly in, by the retailers, I mean. And so maybe the retailers are less dependent on you. How is that playing out?
Yes. I mean, we have just about 59% market share in the soup category. We believe that we have to play in all segments and we are doing so. And we were working with retailers on the best way to manage the whole category. So that has not changed.
Okay. Thank you very much. I'll pass it on.
Thank you. And our next question comes from Matthew Granger of Morgan Stanley. Your line is now open.
Hi, Matt. Hi, good morning, everybody. Denise and Anthony, I just wanted to ask about the M and A landscape. I know this comes up a lot, but you've always talked about being open to acquisitions, but approaching it just generally with strategic and financial discipline. So I guess with that as the starting point, you just give us an update on the scale of opportunities that you're thinking about, whether the focus is more on bolt ons and higher growth adjacencies or whether you'd be open to larger, more transformational things that allow you to more aggressively use the balance sheet now that you've de levered a bit?
Yes, Matt, I mean, as we've said before, we have a very disciplined approach to M and A and anything we do obviously needs to be strategically compelling and has to be financially, attractive. And I'd say we're open to both, both the idea of smaller bolt on acquisitions that build upon our platform, for example, in Campbell Fresh or to expand geographically in and biscuits and snacks. The overall list is relatively short. We continue to work in develop relationships with companies around the world and in the U. S.
On the other hand, we do have the financial flexibility to do something a bit larger. So I think it depends more on the attractiveness of the opportunity 1st and foremost from a strategic and a financial perspective. And again, open to varying sizes.
Okay. And are there any constraints that we should keep in mind just in terms of leverage or willingness to use equity
You don't have a specific limit in mind. I think the Bolthouse Farms acquisition is a good example where we took the debt to EBITDA up between a little over 3.5 times. And paid that down pretty quick. So again, we have a we have quite a bit of financial flexibility and would use it for the right opportunity.
All right. Thank you, Anthony.
Thank you. And our next question comes from Jonathan Feeney of Atmos Research. Your line is now open.
Thanks very much. I just had a question on the interplay between pricing and volume in America's Simple Meals. When you looked over the past 2 years, like pricing is up about 2.5 points, while volumes down about 7.5. That's on a just for this third quarter, just back the past 2 years. And I'm wondering, I know costs are down a fair amount in that time.
And so I understand you've done a great job holding share in those categories. We're mainly talk Soup here. But does what role do you think higher pricing across the categories having in sort of hurting the volumes in soup. I mean, I know you maybe had some weather, but on a 2 year basis, that's not really been the case, some weather this year. And going forward now that costs are rising a little bit more, is that going to change your philosophy in thinking about how you balance price and volume in America's Simple Meals?
Thanks very much.
I'll start here. I'd say on the cost side, you said they're rising a little bit more. We're seeing moderating cost inflation, at least in the back half of this year and probably into next year. And that takes a little bit of pressure off the pricing algorithm. I mean, our objective is to expand gross margins through a combination of net pricing and productivity, in excess cost inflation.
So as cost inflation moderates, that gives us a little more flexibility. There's no question that if you look back over the last couple of years, we have moved up some of our net pricing, both list and promoted in an effort to improve the profitability of the soup business. And in fact, we've done that quite successfully. Now that does have a short term impact on volume, you know, longer term, you know, we'd like to think that the in a broad basket of things that will drive consumer demand, things like product quality and innovation and robust marketing are all part of that that algorithm to drive volume growth over the long term.
Okay. Just to clarify that, you're saying costs are up over the past 2 years in America's Simple Mills?
Looking backwards or looking forward?
Looking backwards versus 20 fiscal 2014, you're looking right now, you're saying costs on say input costs are up over that period of time for you?
Yes.
Okay. I'll follow-up offline about that. Thank you. Sure.
Thank you. And this concludes our question and answer session for today. I'd like turn the conference back over to Mr. Kosnell for closing remarks.
Thanks, Kenneth. We thank everyone for joining our 3rd quarter earnings call and webcast. A full replay will be available about 2 hours After the call concludes, by going online or calling 1703-925-2533. The access code is 167 0608. You have until June 3rd midnight, at which point we move our earnings call strictly to the website, investor.
Kenbleshootcompany.com under news and events. If you have any further questions, please call me. Kim Guggenel, 856-342-6081. If you are a reporter with questions, please call Carla Virgato, Director of External Communications at 856-342-3737. This concludes today's program.
Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.