Good day, ladies and gentlemen, and welcome to the Campbell Soup Second 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, this conference is 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 2nd quarter earnings call for Campbell Soup's fiscal 2016. With me here in New Jersey are Denise Morrison, President and CEO Anthony DeSalvestro, 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 participate in a listen only mode. Today, we'll make forward looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk. Please refer to Slide 2 or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in forward looking statements.
Because we use non GAAP measures, we have provided a reconciliation of these measures to
Thank you, Ken. Good morning, everyone, and welcome to our second quarter earnings call. Today, I'll share my perspective on our performance in the quarter and our progress on the strategic changes we've implemented at Campbell over the past year. Overall, I'm pleased with our We delivered outstanding adjusted improved execution from our supply chain team and the progress we've made on our cost savings initiative Organic sales for the quarter as our categories and geographies continue conditions are challenging in many In other parts of the world, financial capitals are grappling with the weakening economies and increased volatility. We recognize that sales growth in many of our center store categories has been a key challenge for camp having profitable net sales growth remains an area of focus We've now delivered 4 consecutive quarters of improved supply chain performance dating back to the third quarter of fiscal 2015.
As we head will begin cycling our improved operations and the rate of improvement will likely come at a more modest pace. I'm also extremely pleased with the over delivery through a combination of our organization redesign, the creation of our integrated global services group headcount reductions, more stringent policies and the implementation of 0 based budgeting, Campbell is becoming a leaner, more effective cultural change as employees treat sets of our cost savings efforts ahead of our expectations, and we continue to identify additional savings opportunities As a result, we increased we set when we introduced the program 1 year ago. We'll continue to invest a portion of these savings into our businesses based on their portfolio roles For instance, we plan to make several investments in the second half of the year in the areas of new product development and support for several of As announced last week, expect adjusted EBIT to We continue to expect The improved outlook for and the better than expected benefits of our cost savings initiative. Now I'd like to share my perspective As a reminder, we're managing this division for moderate growth consistent with the categories in which we operate and for margin expansion.
As we previously outlined, we're focused on increasing net price realization including optimizing promotion spending we've made against all three of them. Organic sales declined by 1% in the quarter predominantly driven by a decline in US soup sales. As context, the entire wet soup category declined 3% for the 13 weeks ended January 31st. Our soup sales down 4% were below our expectations, although we had some bright spots. Our condensed soup business was up for the quarter and our broth business grew nicely.
However, declines in ready to serve soup more than offset those gains. Let me explain price realization through a combination of pricing actions and implementing more balanced promotion plans to support our business. As anticipated, these price realization activities had a negative impact on volume, but it was a necessary step to address the suit portfolio. Another factor was the timing of our marketing plans. As we discussed in the first quarter, our marketing and merchandising support was planned for later in the year across the end of the 2nd quarter and into 3rd quarter.
We also experienced some execution issues related to an on label promotion on our chunky brand Finally, weather is not something we control, and it's certainly not the main reason for the decline in our soup business. But we believe the unusually warm winter had a negative impact on the entire category In January, we grew soup sales in the high single digits as we began to address our execution issues in Chunky ramped up marketing activities, implemented more effective promotions and benefited from more seasonal weather. Our plans will continue into the third quarter. Despite these headwinds, we're taking steps to improve the performance of our U. S.
Soup business. Our pricing actions are taking hold. We've implemented more impactful promotion programs and our new advertising campaign is resonating with consumers. Beyond soup, our Simple Meals business performed well in the quarter with solid sales growth in Prego, PACE and especially Plumb. We told you last July that In request to ramp up innovation, we recognize that some things will work and others will not.
The key is to recognize it On the plus side, Campbell's dinner sauces platform and slow kettle soups continue to grow and are over indexing with millennials. Campbell's organic soup line is meeting expectations and helping us expand our health and well-being options in the center store. In our beverage plum portfolio is robust as this brand continues to build loyalty with millennial parents. Now, Let's look at what's not working are performing below expectations and we're taking steps to evaluate the root cause and course correct. Additionally, we've discontinued the VA protein line.
Our key learning was that these shakes and bars were not differentiated enough to succeed in a crowded and competitive as our new Chief Marketing And Commercial Officer for the Americas division. With his extensive experience, we expect He will lead accelerated marketing innovation and sharpen our focus on fewer bigger initiatives. We're excited to welcome Greg to the team in early March. A 22% increase in operating earnings. A major improvement this quarter was our supply chain performance.
In addition to our ongoing productivity programs, we improved and warehousing. We also benefited from the benign inflationary environment Overall, our America's Simple Meals And Beverages division continues to make progress in delivering against its portfolio role. Moving on, our Global Biscuits And Snacks division performed well in the quarter, delivering organic sales growth and driving significant profit. This division unifies our Pepperidge Farm, Arnott's and Kelson businesses and its portfolio role is to manage growth while improving margins in both developed and developing markets. Our core developed markets of Australia and the United States continued to deliver positive results.
I'm pleased with the performance bakery, frozen, and cookies. Looking ahead, we have solid innovation plans in place in our core developed markets with new in the US such as the launch of artisan rolls and the introduction of Goldfish Crackers with organic wheat. In Australia, we're restaging our shaped product line to increase the flavor of these popular snacks. Turning to developing markets, excluding the impact of currency, sales growth in Malaysia was offset by the declines in Indonesia where economic conditions remain challenging. While we're expecting the Indonesian economy to improve in the second half of the year, we don't expect We've made many changes to improve this At the end of fiscal 2015, we changed distributors and we had a solid sell in for the Chinese New Year, our biggest and most important season and our new distributors delivered strong execution including merchandising supported by our new integrated marketing campaign.
As I discussed last week at CAGNY, we believe it's important for Campbell to become more geographically diverse despite short term volatility in developing markets. Turning now to Campbell Fresh, C Fresh includes Bothhouse Farms 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. Reported segment sales increased 10% in the quarter. Excluding the impact of the Garden Fresh Gourmet acquisition sales were comparable to a year ago.
In Bolthouse Farms, we delivered mid single digit sales growth in beverages and double digit gains in refrigerated salad dressings. Carat sales were down slightly, As a reminder, one of the key roles of our market leading carat business is to provide the refrigerated logistics system and scale in the perimeter that we can leverage with a significant decline in expected, the rate of decline moderated We're happy capacity enabling us to increase We've increased our supply chain productivity and we've managed SG And A. However, C Fresh's portfolio role is full force growth, and Looking ahead, we expect stronger performance in the CPG business and moderating declines in carrot ingredients. We have one of the strongest spring innovation efforts in several years. We'll add 14 new items across beverages and salad dressings, including 6 new varieties of 1915 by Volt House Farms, our Ultra Premium cold pressed organic juice line.
With to 50% this year largely in line with the category. And our retail perimeter soup business into C Fresh is progressing well. Sales of retail super up modestly in the quarter and Garden Fresh Gourmet is tracking to deliver the sales we expected through increased distribution and increased market penetration. We've accomplished a great deal over the last 12 months as we've aligned our enterprise structure with our strategy. Created 3 new divisions with strong leadership, defined clear portfolio roles and implemented a major cost savings initiative We're now better positioned to execute our strategies and to invest in the areas of our business that hold the greatest growth potential including several investments in the second half Our enterprise redesign and cost savings efforts are folio roles.
But we remain unsatisfied with our top line growth, and I know we can do better. We expect to improve profitable net sales growth. 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 second quarter. At the top line, organic sales which were comparable to last year were below our expectations, reflecting the sales performance of We made outstanding progress on gross margins, up four percentage points on an adjusted basis, benefiting from our price realization actions in and supply chain performance. Our cost savings initiatives are delivering significant benefits, $50,000,000 in the 2nd quarter And as we shared at CAGNY last week, we've raised our 3 year savings target to $300,000,000 with these savings impacting multiple P and L lines. Based on our gross margin performance and incremental cost savings, we also raised our full year earnings guidance last week and I'll provide For the second quarter, net sales on an as reported basis declined 1% to 2,200,000,000 primarily due to the negative impact organic net sales were comparable to the prior year as gains in global biscuits and snacks were offset by declines in America's Simple Metals And Beverages.
Reflecting a 4 point increase in operating margin, adjusted EBIT increased 26 percent to $423,000,000 benefiting from a higher gross margin percentage and savings from our cost reduction initiatives. These positive drivers were partly offset by higher incentive compensation costs, currency translation, which had a 3 point negative impact and lower volumes. Adjusted EPS increased 23 percent to $0.87. For the first half, net sales on an as reported basis were down 2% while organic sales were comparable to and adjusted EPS of $1.82 was up 21%. Breaking down our sales performance for the quarter, reported sales declined 1% with organic sales comparable to the prior year.
Within organic sales, volume and mix attracted two point was was primarily driven by U. S. Soup within the America Simple Meals And Beverages segment. Higher selling prices contributed one point, while lower promotional spending also added a point, both driven by our net price realization efforts in simple meals and beverages and in global biscuits and snacks. Currency translation had an average impact of two points on the top line, as our 2 primary foreign currencies, the Australian dollar and the Canadian dollar weakened against the U.
S. Dollar. To complete the bridge, the acquisition of Garden Fresh Gourmet contributed one point to net sales in the quarter. Our adjusted gross margin percentage increased by 4 points to 37.3 percent, exceeding our expectations on lower than anticipated cost of and better than anticipated supply chain performance. Compared to the year ago period within inflation and other, we experienced improved supply chain performance, primarily from transportation cost savings initiatives as well as lower losses on open commodity contracts.
In aggregate, inflation on input costs was close to 0. Mix was slightly favorable adding 20 basis points Our net price realization actions contributed 1.4 points of margin expansion with 50 basis points from reduced promotional spending principally trade reductions in U. S. Soup and beverage farms and 90 basis points from higher selling prices. Lastly, our supply chain productivity programs which are incremental to our 3 year cost savings program contributed 180 basis points to margin improvement in quarter.
Recent capacity additions in Bolthouse Farms And U. S. Broth is well as contributing to these productivity gains. Excluding items impacting comparability, adjusted marketing and selling expenses declined 5% in the quarter primarily due to reductions in non working marketing from our cost savings initiatives, partly offset by higher advertising and consumer promotion expense driven by increases in Kelson, Pepperidge Farm And U. S.
Soup. Adjusted administrative expenses increased 6% primarily due to higher incentive compensation costs compared to a year ago, probably offset by benefits from our 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, in aggregate adjusted EPS increased $0.16 compared with the prior year from $0.71 $8.7 per share. On a currency neutral basis, growth in adjusted EBIT expansion and benefits from our cost savings initiatives contributed $0.22 to EPS growth.
The impact from share repurchase under our strategic share repurchase program reduced our share count slightly, but had no impact on EPS for the quarter. And while net interest expense increased $2,000,000 as we extended the maturity on the debt portfolio in fiscal 2015, This also had no impact on EPS for the up 2.8 points versus the prior year, primarily due to lapping the favorable resolution of an intercompany pricing agreement, which negatively impacted EPS by $0.04. Currency had a $0.03 negative impact on EPS in the quarter, completing the bridge to $0.87 per share. Now turning to our segment results. In America's Simple Mills And Beverages, organic sales decreased 1% to $1,200,000,000.
U. S. Soup sales decreased 4%, driven by declines in partly offset by gains in broth and condensed soup. Sales of other U. S.
Simple meals increased, driven by gains in plum, prazo pasta sauces and paste Mexican sauces. Sales of U. S. Beverages declined primarily due to weakness in V. A.
D. Fusion beverages. Excluding the negative impact of currency translation, sales in Canada decreased, driven by declines in soup. Operating earnings increased 22%, reflecting a higher gross margin percentage, which benefited from net price realization productivity gains and improved supply chain performance. Reflecting declines in ready to search suit total U.
S. Soup sales declined 4% driven by category declines from warmer weather. The volume impact from our pricing actions the timing of our marketing programs and then issue with an on label promotion on chunky, which has since been corrected. Within U. S.
2, RTS declined 20%, which was probably offset by a 7% gain in Swanson Broad and a 2% gain in condensed. We began quarter, we do not believe subcategory sales performance is a meaningful disclosure. In 2017. Here's a look at U. S.
Wet suit category performance and Rshare results as measured by IRI. For the 52 week period ending January 31, 2016, the category as a whole declined 1.9%. Our sales in measured channels declined 2.8% with weakness in ready to serve in condensed soups, partly offset by strength in broth. Campbell had a 59% market share, a decline of 50 basis points. Private label grew share by 20 basis points finishing at 13% All other branded players collectively had a share of 28 percent, up 30 basis points, reflecting share gains by smaller brands.
In Global Biscuits and Snacks, organic sales increased 2% with growth in Pepperidge Farm and the Asia Pacific region. Sales gains in Pepperidge Farm were driven by fresh bakery, frozen products and cookies. Sales of Goldridge crackers were up slightly for the quarter with modest share gains for the first half of the fiscal year. In the Asia Pacific region, Excluding the impact of currency translation, growth in Australia driven by Arnott's Tim TAN Biscuits was partly offset by declines in Indonesia, as that market continues to face economic challenges. Operating earnings increased 23%, primarily driven by a higher gross margin percentage, which benefited from net price realization and productivity gains partly offset by the negative impact of currency translation In the Campbell Fresh segment, organic sales were comparable to the prior year, with gains in Bolthouse Farms premium refrigerated beverages and salad dressings, which on a combined basis grew mid single digit offset by declines in carrot ingredient export sales and declines in retail carriers despite gaining share.
Not included in organic results is our recent acquisition, Garden Fresh Gourmet, which contributed 10 points of sales growth to the segment. Operating earnings grew 62 percent to $21,000,000, driven by a higher gross margin percentage which benefited from improved supply chain performance, productivity improvements and the favorable mix impact from growth in the higher margin refrigerated redo beverages. This performance resulted in a 2 point improvement in operating margin for the segment compared to a year ago. We had strong cash flow performance in the first half. Cash from operations increased by $143,000,000 $727,000,000, driven by higher cash earnings and lower working capital requirements.
Capital expenditures increased $10,000,000 to $153,000,000. We continue to forecast CapEx of approximately $350,000,000 for fiscal 20 18. We paid dividends totaling $197,000,000, reflecting our current quarterly dividend rate of $0.32 per share. In aggregate, we repurchased $86,000,000 of shares in the first half, $50,000,000 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 150,000,000 as positive net cash flow generated by the business more than offset the impact of the $232,000,000 acquisition of Garden Trace Gourmet. Now I'll review our 2016 guidance, which is consistent with our news release on February 16. We expect sales to change by minus 1% to 0%, including a 1 point benefit from the acquisition of Garden Fresh Gourmet and a 2 point negative impact on currency translation as compared to the previous estimated currency impact of three points. This sales guidance implies a reduction in organic sales compared to our previous guidance reflecting the performance of U. S.
Soup. Benefiting from gross margin performance and incremental cost savings, we expect adjusted EBIT to grow by 10% to 13% and adjusted EPS to grow by 9% to 12%. Our full year This reflects investments we are making in new product launches, higher marketing spending and headwinds from higher incentive compensation, the adjusted gross margin to expand by approximately 175 basis points, driven primarily by our first half performance. In the back half, we anticipate headwinds from increased promotional spending the negative impact of currency on the input costs of our international businesses and from modest cost inflation. Offsetting these headwinds, Gross margin will benefit from our cost savings initiatives and productivity gains, but we will be wrapping much of the pricing and improve supply chain performance we experienced in the 1st in the range of 120,000,000 As announced last week, we have increased our 2018 annual savings target from $250,000,000 to $300,000,000.
Also we expect 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 limited time out of fairness, if you went to other as please ask only one question at
Our first question comes from Ken Goldman with JP Morgan. Your line is open.
Hi, good morning.
Hi,
Ken.
Via M and A.
And I think the phrase you used to describe the EM situation was and correct me if I'm wrong, short term volatility. I guess my question is how do we know? How are we confident that the issues are not permanent slowdowns over there? Because I'm trying to get a sense of Campbell's willingness maybe the spend on an asset in a geography less attractive than it once was versus your other M and A goal, which is faster growing domestic assets, right? I mean, some of these that have been sold lately, vega, I think, is one of them I would have a candle might have been very interested in.
We expect that, our that
the emerging markets that
we currently have footholds in and that as China and in Southeast Asia, we'll continue to be viable markets for our business, particularly our global biscuits and snacks business, which is growing despite the fact that their overall growth rates are down, particularly in China. We do think that even though growth rates have slowed, they're still growing faster than the domestic market. So and we also know that our 70% of the growth in the food industry is going to come from emerging markets over the next decade. So we believe we need to continue in a smart way to expand our geographic footprint. That said, we'll continue to look for smart M and A both in emerging markets and also domestically in sync with our strategy.
Okay.
Our next question comes from Chris Growe with Stifel. Your line is open.
Hi, Chris.
Hi, good morning. I just want to ask a question if I could. In relation to, you've got a heavy degree of cost savings coming through and really influencing your gross I guess maybe 2 questions related to that. 1 is, do you have, if I missed it, excuse me, a gross margin guidance for the year now? It looks like that's really running well ahead of your expectations.
And then in relation to that, you talked about increasing your marketing investments in the second half of the year. I had planned for you to do that anyway. Are you stepping those up? Are we seeing the investment levels increase from this from what you'd assumed initially for the year.
Okay. So I'll take that one. I'll comment first on the on the gross margin comment. Yes, we are giving guidance on gross margin and we expect 175 basis points of gross margin improvement for the year. So that implies about a flattish back half, but let me try to give you some more context on this one.
I think you go back to last fiscal year 2015, it really is a story of 2 halves. In the first half of last year, gross margin was down about two points And in the second half of last year, gross margin was up 1.4 points as we took some pricing and improved our supply chain performance in the back half. So if you look at it on a 2 year basis, both the first and second half of this year are each up just over a point versus 2 years ago. And the reason we're flat in the back half is a couple of things. There's a couple of headwinds.
1 is higher promotional spending to support some new product launches and some key brands. And as I mentioned in my comments, the negative impact of currency on costs. So both our Australian business and Canadian business have a significant portion of their inputs are denominated in U. S. Dollars.
And we were hedged for a while but we're closer to market now on those currency impacts. So that's having an increasing impact. And we still have a little bit of cost in place although it's more moderate than certainly we had initially expected. And we believe we'll be able to offset all of that impact with continuing productivity gain and the benefits of our cost savings program.
And Chris, I'll take the second part of that question. We're fall. And, and it's across all three of our divisions. So in C Fresh, we're going to be supporting our gronvest innovation effort in several years with 14 new products, including 6 new varieties of 19 team. Global Banking And Snacking, we're investing in Goldfish with the launch of organic wheat Goldfish we're investing in Tim Tam and the relaunch of Shapes in Australia.
And then in the Americas, we still have marketing activity that remember we staged later in the year to support our soup and our beverage businesses, as well as product launches across Simple Meals and a robust pipeline for Plumbing Organics. So we have a lot of activity planned in the second half, and this does reflect an acceleration.
Okay. That's very helpful. Thanks for your time.
Our next question comes from Robert Moskow with Credit Suisse. Your line is open.
Hi, thank you. Hey, I wanted to ask about the declines in ready to serve the first half of the year where they were pretty steep. And it's been like that for a couple of years now. And I wanted to know, Denise, how are you going to balance the portfolio strategy kind of mandate to run soup for and to hold share And also recognize that you might need to put more investment into ready to serve to kind of stem those declines do you need to fix the product or do you need to, change something on the promotional strategy, which ended up causing elasticities that were bigger than you thought. What do you think?
Yes. Well, first of all, when you step back, the entire wet suit category was down 3% and we were down 4% and we were up and condensed by 2% and up and brought by 7%. In RTS, particularly in chunky is where we experienced our issue. And recall we did take net price realization. So that's a combination of pricing actions and also, promotion actions.
And that's not an easy one because you've got a marketplace where some of the marketplace is at high low on promotions and some of it is the EDLP. So finding that right rhythm is an important idea. The other thing is, the competitive landscape, we have to take that into consideration as well. In the case of Chunky, we actually had a promotion on pack label that cause consumer confusion. And we are largely out of that right now, so that one behind us.
And then finally, we launched a portfolio campaign, which really helped our condensed soup but it did not do the job on brand chunky. And so it wasn't until later in the quarter that we came in with dedicated advertising and that continue into quarter 3. And again, to last year, a much warmer winter. So, we really expect soup to grow modestly consistent with other centers to our categories We are continuing to invest in the soup business and we are continuing to invest in the quality of the products. So it's not any one silver bullet.
It's a combination of things.
Can I ask a follow-up to that? Did you have a different promotional strategy for condensed than you did for ready to serve or maybe more aggressive promotions uncondensed?
We are each segment of the soup business, we have a different promotion strategy and we work in joint business planning with retailers on the right execution to get the best return for the investment.
What we had on chunky was moving up on the promoted price points, more so than the other categories inside the soup.
What I was looking for. Thank you, Anthony.
Our next question comes from Jason English with Goldman Sachs. Your line is open.
Hey, good morning folks.
Good morning.
Thank you for the question. Congratulations again on the solid, the solid first half.
Thank you.
You spent a fair amount of time, Denise, in your prepared remarks, talking about some of the challenges in terms of finding growth in this portfolio. Is the innovation and you talked a little bit about M and A. Can you delve a little bit deeper in terms of your appetite for M and A in your efforts to transform this portfolio. Is there an increased sense of urgency given the organic challenges? And what are you seeing out there in the landscape in terms of quality assets at reasonable prices?
Yes. I'll start and then see where we go here. Mike, I think that the first point to make is that we are confident that the portfolio today can deliver long term sales in that 1% to 3% range on a currency neutral basis. And I think if you think about the portfolio roles that we've assigned to each of our divisions, America's simple meals and beverages, moderate growth in line with the categories. We have a very good portfolio in Global Piscuits, and snacks, that should certainly hamilton to grow towards the high end of that range.
And then C Fresh, the performance of late has not been that great and there's some reasons for that and then we're going to lap some of those reasons. So we do expect much better top line growth at a Campbell Fresh and then we've seen to date. So I think But just think about the portfolio that we have, we do expect that to grow. On the other hand, and we pointed this out at CAGNY, we've made some good progress diversifying diversifying the portfolio and getting into higher growth spaces. We've done 4 acquisitions.
As you know, over the last few years. And we will continue to look for opportunities to push further into higher growth spaces. That being said, we continue to be disciplined at how we approach M And A. Dealers have to be strategically compelling They have to be financially attractive and they have to be able to create shareholder value for us. So We'll continue to do that and see how we go.
Thanks. Any comments on the M and A environment?
No, I think it's still pretty rich. The multiples are still pretty high. That being said, like I said, we have a pretty diligent effort in the area and group of people looking at it. We have a pipeline. It's not a long, long list of opportunities.
It's fairly, fairly tight. We continue to build relationships with companies that are perhaps family owned or private, and we'll just continue to work it.
A lot guys. I'll pass it on.
Our next question comes from David Jiscoll with Citigroup. Your line is open.
Hi, Dave.
Thank you. Good morning. Hi, Dave.
Wanted to follow-up, I think a couple of people have asked this question a little bit, but I want to try it slightly differently. America simple meals, just kind of the volume outlook. I mean, clearly you talked about the warm weather in the quarter. And then there's a much bigger picture issue here of just how you've segmented the company and I want to call it kind of managed for cash, meaning that pricing is going to trump volume trends But I was hoping you could kind of just talk about how over the course of time the volumes should trend within this segment And just what's the strength of this concept that the company would accept better profits and maybe incur some negative volumes. I mean, kind of what's the tolerance to accept an outcome like that that the margin performance in the quarter an incredible in that segment and obviously you're being rewarded for it in the market today, but just like to hear your thoughts longer term.
Yes. I think I think longer term, we expect to strike the right balance of net price realization and volume and we'd like to grow soup and simple meals modestly over time. That's in line with the expectations for those categories. So, that poor folio role was thought through very carefully. And what we've learned over the years is when we expect the categories to grow beyond what their portfolio momentum can do, we wind up spending efficiently to get there.
And so it's really an important idea to make sure that we are investing appropriately to be competitive in those categories and, and drive modest growth while we keep an eye on our margin expansion.
The one follow-up on this on this point, Denise, is simply that I think you said yourself that pricing in the category and the soup category especially in RTS has just not been there for I think you said a decade or some really long period of time. Why would it be natural to assume that the volume growth should be like the rest of the store if in fact this category should be taking pricing to kind of catch up relative to what it hasn't done in this previous decade?
Well, I mean, each segment of the category has its competitive set. And we run the suit business as a portfolio and so when you think about the pricing spectrum in the portfolio, it's all the way from value condensed through higher end slow kettle and even into higher than that end refrigerated loop and then, mainstream pricing in between. And so actually, we think that the, price realization on RTS was an important idea in the portfolio management of the category and we saw positive results on the condensed soup line this quarter.
Our next question comes from John Baumgartner with Wells Fargo. Your line is open.
Morning. Thanks for the question. Denise, I'd like to come back to the ready to serve topic. You called out some of the elasticity impact there in the quarter, but your price gap relative to your largest brands competitor. I think the widest it's been in a couple of years now, I mean, how impactful do you think that gap on the shelf has been to your volumes And might this be a situation where an increase in promo may end up being necessary if they have a lot of things?
Thanks.
I do think that, that when we planned our net price realization for the year. We did not expect competition necessarily to follow However, we did notice more of a gap, particularly on promotions than we had planned for. So we are of course correcting accordingly.
I mean, it is a situation that we should think that it continues to live volume in the back half of the year as well.
Actually, we have a pretty robust plan starting in the latter part of quarter 2 in January and all through quarter 3. And we were very pleased with the results in January.
Our next question comes from Alexia Howard with Bernstein. Your line is open.
Good morning, everyone. Okay. Can I ask about the sales investment? I think looking at the press release, it looks as though there might have been some cutback on the selling side of things if marketing spending was up a bit. What are you doing there?
I know that a few years ago, you source merchandising to a posture. Do you have people in the source merchandising? What is your strategy? Are you cloning that where are you heading? And maybe also just generally on the promotional spending, I know it's already come up, but are you in general trying to pull back on the trade promotion spending, where it's inefficient and where is that likely to head over time?
Thank you.
Okay. We did have a higher advertising spending in the quarter and we continue to invest in advertising and brand building and you'll see that continue into the second half. In terms of trade investment, again, we focus on net price which is the combination of pricing actions and promotion spending. We created a revenue management group, which is working with advanced analytics to improve our effectiveness and make sure we take into consideration those programs that are working and not repeat those that aren't. So that's a change for us And finally, we always are looking to invest our promotion investment with customers for a better return.
So a better return for them and a better return for us. So we are focused more on how we increase the quality of our spending. And, and basically it's the combination of ACT that we expect to be between 24% 25% of sales. That hasn't changed.
Yes. And the first part of your question on selling expense side, incentives is down. And we went through a pretty significant reorganization as we redesigned the divisions, we also reduced some of the staffing levels in some of our sales organizations, which is coming through as well.
Thank you very much. I'll pass it on.
Our next question comes from Matthew Granger with Morgan Stanley.
I wanted to follow-up on the gross margin expansion, just from a sort of bigger picture standpoint. Given how significantly the magnitude of the upside has exceeded your original expectations this year, is it possible to talk a little bit more broadly about where you think gross margin can go over the next 2 to 3 years given the continued flow through of cost savings and the mix impact between the segments and is this accelerated growth in 2016 in any way a pull forward of some of the gross margin expansion or I guess, reset that you'd hope to achieve over a multi year period?
Yes, I can take that one. I mean, certainly we are very pleased with the cost savings we've been able to achieve and our gross margin performance. And I think one way to look at that is we are planning to invest some of those savings and we're going to start to see that in the second half. And in new product launches and key brands and longer term innovation ideas, capability building in areas like digital and e commerce. That being said, we raised our savings target.
So, we think there's more savings capture that should benefit gross margin as well as our overhead costs. And I think that together with the the role of America Simple Meals and Beverage targeting margin expansion. So we think there's enough funding there to do a couple of things. One is to to make these investments in the business and to continue to target achieving our long term growth objectives. 1 to 3 sales, 4 to 6 EBIT and 5% to 7% EPS.
So I think we feel good about where we are and continue to grow from plan to grow from there.
Okay. And then can I ask one follow-up, I guess, just with respect to the long term targets, the you're now targeting 10% to 13% EBIT growth this year? Given all the investments that you're planning to make, I'm just curious why perhaps you didn't choose to reinvest more aggressively during the second half to facilitate even higher visibility toward those targets over the next year or 2? Is that just an issue of near term constraints and how quickly you can implement the types of things you'd like to do?
Yes, that's exactly right. And we have a pretty disciplined process for making these types of investments. And I mean, as the cost savings came in than we expected. And we couldn't turn on a dime that quickly to reinvest. So we're starting to see some of it in the back half and we'll continue to see that into fiscal 2017.
But it really is those it's just difficult to move that quickly on the inside.
All right. Thanks, Anthony.
Our next question comes from Jonathan Feeney with Atlas Research. Your line is open.
Hi, good morning. Thanks for the question. Just to clarify on the pacing of these cost savings. Can you can you repeat where we are year to date against the 110 to 120 targets? What sort of run rate you think you're on right now as far as achieving as far as achieving those the second half of the year.
And I also would detail around that if you wouldn't mind. Could you give me a sense how those split between cost of goods sold and what marketing and selling and G and A and other expenses? Thanks.
I'll take that one. So against the now $300,000,000 target, we did $85,000,000 last year. We did $30,000,000 in the first quarter and we did $50,000,000 in the second quarter. So year to date, first half were at $80,000,000. Against our incremental savings target this year of now $120,000,000 to $140,000,000.
So we're kind of 2 thirds of the way into that. That $80,000,000 comes from a combination of headcount and non headcount. That splits about evenly. In terms of P and L, it's about a third cost, 2 thirds non costs. And within the non headcount, it's couple of examples of some of the big drivers would be travel and entertainment, nonworking marketing, And on the cost side, some of our transportation cost savings initiatives, we kind of redid our entire freight lane structure and at the end of last year, we're seeing better rates.
We're seeing Almost no usage of the spot market. We're seeing better truck weights. We're seeing less miles. We're seeing less interplant shipments. So we're really seeing a lot of nice benefit on the transportation and warehousing side coming through too.
Would you say that was the biggest area that came in ahead of your plant?
No, it's across the board. Each area is well ahead of what we initially previously thought.
Okay. Thanks very much.
Our next question comes from Dave Palma with RBC Capital Markets. Your line is open.
Hi. A follow-up on the issue of reinvestment, you heard surprise in kudos on the cost reduction at CAGNY. And there's also some curiosity in the crowd about what a reinvestment would work longer term today, you're talking about marketing tactics with chunky and the ramp up in marketing and promotion spending into the second half of the year. But as you think long term, what are the things that you think will what areas of reinvestment do you think you'll make in the core to change the trajectory of
tend to spend back a portion of the cost savings that we're realizing for the long term health of the business. Let me give you some examples. In the Americas, even though we're managing Americas for modest growth and margin expansion, the Americas still has some pockets of full force growth businesses and we will continue to invest 1st of all in the quality of our products and making sure that we're looking at ingredients and the quality against our purpose of real food that matters for life's moments. 2nd of all, we continue to, invest in our sauces business, which is really healthy in our broth business. And then finally, having made the acquisition of Plumb organics, we're incredibly pleased with the performance of that business and see a lot of runway in the innovation pipeline to make smart investments and continue to cultivate relationship with millennial parents.
And the global biscuits and snacks front, we are very committed to expanding the health and business in China and beyond. We are we have plans for increasing our footprint of TIMTAM brands. And, as I mentioned, we are continuously working on product quality. We're making back in our shapes business. We are, in the United States continuing to work on, our Goldfish brand.
And we believe there is more growth in that brand, particularly as we move into products in the health well-being space. And then finally, you know, C Fresh is our full force growth and we've been very pleased with the portfolio of brands and categories in the produce area and in the deli part of this perimeter, inclusive of our refrigerated soup, that between the beverages, the salad dressings, the hummus, the sauces, and the soup, we have a lot to work with and we have capabilities in each one of those categories in shelf stable that we can actually bring into the fresh space. And we have a very energized team across all three of these divisions, to do so. So I think, you know, based on 5 years ago, we have a lot more to work with. And so, making sure that we make smart investments and have a discipline about it is important, but we have a lot of places where we can put our dollars.
Very helpful. Thank you.
Question comes from Michael
just help me understand some of the cost savings breakdown a little bit further. You have your administrative expenses actually up 6% in the quarter and marketing down 5% R and D, it looks like down about 9%. I would have thought it with the BBB, maybe you would see something closer to the reverse. And so what's the right way to think about that? And then how do you also reconcile the savings on the cost of goods sold side, how much of that is coming from input costs versus cost savings?
So first on the ad admin expense, the primary driver of the increase is incentive compensation costs, year below target this year above target. Exact, the admin would be down as a result of our cost savings initiative that's what you see on the P and L. Inside of costs, the inflation on input costs was about flat compared to a year ago. So it was neither a help nor a hindrance on gross margin, but it's certainly been more modest than it's been. And then, costs, what you're seeing is a few different things coming out of the supply chain.
Kind of break them down into 3 chunks. 1 is it's just better supply chain performance. And what we mean by that is that the plants are operating at a higher efficiency levels. Our customer service levels are back above our targets. And as a result, we see lower interplant shipments.
We see fewer less than truckload shipments so we have better weights. We actually have less miles. So that's all kind of within how we're operating. And then we have a portion of our cost savings initiative that's coming through. And this is primarily in the area of transportation and the fact that we reworked our own higher transportation network last year.
So we re contracted it. We have decreased the committed carrier capacity. At the same time, we've achieved lower rates. And as a result of our service levels being where they are, we've really had almost zero use of the spot market. So that's a premium cost we had last year.
We don't have a don't have this year. And the 3rd bucket is what we call productivity, where we have specific action supply chain is taken to generate cost savings. And a couple of examples within that would be the capacity additions in Bolthouse Farms and in our U. S. Broth business.
Have allowed us to repatriate production from co packers. So we're seeing that benefit come through. The other one is our soup common platform initiative, which we're also seeing benefit on the P and L. And lastly, warehousing capacity, we've made some investments in our own internal warehousing So we've reduced several lines on 3rd party warehouses and some of those cost reductions are coming through as well.
No, that's helpful. Thanks. And then just a quick follow-up on the marketing and R and D, how much of the change is pacing versus how much is driven by headcount or more permanent reductions?
Well, I don't have that number off the top my head here. I mean, certainly, we are seeing fairly significant savings in non working marketing coming through that line. And, you know, as Denise said, advertising consumer spending is actually up in the quarter, but you see marketing expense on the P and L and we don't see it's within selling and marketing is is down. And that's primarily driven by all the work we've done on the cost savings side, both headcount and some of our other non working marketing expenses.
Yes. And on the subject of R And D, because we continue to emphasize improving our innovation, we have brought in a strong leadership. We in our redesign, our product development is embedded in the us to to be
Our final question comes from Aaron Lies with Morningstar. Your line is open.
Was hoping you could just provide a little bit more detail surrounding, you know, the relationship with retailers and how those conversations are going as you're working to improve the efficiency of your trade in marketing spending. Obviously, retailers are dependent on leading brands to drive store traffic. And so And obviously, you've highlighted the competitive dynamics being extremely intense over the course of the call. So I was just kind of wondering how that those discussions are kind of progressing and trending.
Right. We engage with our retailers on joint business planning where, we will work with them on understanding their goals and working on plans that deliver on their goals and our goals and then set expectations and the appropriate spending to achieve those expectations. And then there's a very rigorous process along the way to engage them with what's working and what isn't working. So there's course correcting, etcetera. So we are really positive about the relationships that we have in order to, plan and execute the business.
We're very, engaged with retailers on revitalizing the center store. It has been sluggish. It is a major source of profit for retailers. And we believe that we've got the portfolio that not only can jazz the center store, but it also toggles into the perimeter as well because many of our brands in the center store are using conjunction with products that consumers will buy in the perimeter as well.
We'll
by good planning with retailers.
Quarter earnings call and webcast. The full replay will be available about 2 hours after the call concludes by going online or calling 1703-925 2533. The access code is 1668326. You have until March 10th at midnight, at which point we move our earnings call so strictly to the website, investor. Campbellsoupcompany.com under news and events.
Just click on the webcast. If you have further questions, please call me. Ken at 856-342 6081. If you are a reporter with questions, please call Carla Borigado, Director of External Communications at 856-342 3737. This concludes today's program.
Thank you.
Conclude today's conference. You may all disconnect and everyone have a great day.