Ladies and gentlemen, thank you for standing by and welcome to the Campbell Soup First Quarter 2020 Earnings Conference Call. At this time, Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Ken Gosnell, Vice President, Finance Strategy And Investor Relations. Sir, you may begin.
Thank you. Good morning, everyone. Welcome to Campbell first quarter 2020 earnings call. As usual, we created slides to accompany our earnings presentation. You'll find these 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. Turning to Slide 3. Today, we will make forward looking statements, which reflect our current expectations. These statements rely on assumptions and estimates which could be inaccurate and are subject to risk.
Please refer to Slide 3 or our SEC filings a list of factors that could cause our actual results to vary materially from those anticipated and 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 the appendix of this presentation. On Slide 4, you can see what we plan to cover today. With us on the call today are Mark Clouse, Campbell's President and CEO, and our new Chief Financial Officer, Mick Bakeauson. Mark will share his thoughts on our performance in the quarter, and then Mick will walk through the financial details and our updated guidance for fiscal 2020.
With that, let me turn the call over to Mark.
Before I get to our performance, I want to acknowledge that Ken has decided to retire from Campbell. And this should be his last earnings call as Vice President, of Investor Relations. Ken, thank you for your contributions to the company through the years, and we wish you the best in your retirement. Our results to start the year were largely consistent with our expectations. As we discussed during our fourth quarter call, fiscal 2020 will be a year of stabilization for the company as we invest in the business, optimize the portfolio, and fully implement our areas building upon the foundation we put in place in fiscal 2019.
Looking at
our results, organic sales were slightly below year ago, just under 1%. Performance reflected continued strength in the Snacks segment where sales increased 2% with contributions across the business. This was more than offset by a 3% sales decline in meals and beverage, in large part due to the timing of U. S. Soup shipments related to the Thanksgiving holiday.
Although this timing shift resulted in a headwind in Q1, I fully expect that In fact, in measured channels, our total company in market consumption grew more than 1%. Our brands grew or held share in categories, representing more than 80% of our total business and finally, in 10 of our stated 13 priority categories. This was led on the other key elements of our strategic plan, including a 30 basis point gross margin expansion supported by productivity improvements and cost savings We delivered $45,000,000 in cost savings in the quarter, inclusive of our multi year enterprise program and the synergies from our Snacks integration. Adjusted EBIT was better than we expected, although the majority of the upside was timing resulting in double digit adjusted EPS growth. Turning to a discussion of our I indicated we had a This includes optimization of 2% in the division in Q1, including a 15% increase on our U.
S. Soup brands behind earlier in season advertising while overall TDPs in the division were down around 6%. The net of this is improving consumption only down about 1% and share in market positive. But clearly, we have not yet achieved our overall goal of stabilization. This will take some time, but I am happy with the progress.
As previously mentioned, the difference in our net sales and consumption was primarily holiday timing of shipments which we expect to recover in Q2 and some proactive decisions that we have made to optimize certain lower profit food service volume. Turning specifically to U. S. Soup, while the impact of timing of Thanksgiving shipments was most pronounced on soup, where our condensed varieties in broth play a sizable role in many holiday recipes, we are making encouraging progress in market on the business. We are injecting much needed investment and continuing to strengthen important retailer relationships while also rationalizing the portfolio.
As we've discussed before, time in ten quarters that Campbell gained overall soup share. In fact, we grew or maintained share across the condensed ready to serve and broth categories. This is one of the early indicators of progress on our 3 year journey to revitalize U. S. Soup.
On Slide 9, while soup sales declined 3% in the quarter, consumption only declined about 1%. Improved velocities in soup were essentially offset by TDP losses in the quarter. And I'll unpack that more on the next slide. As you can see the 2 point gap between net sales and consumption is due entirely to the timing of Thanksgiving. Turning to Slide 10, we are investing more in the category, both on condensed and ready to serve, with advertising dollars up.
We started our advertising earlier a month sooner this fiscal year. And while it's early days, the response to our initial investments is encouraging. For example, our new tomato soup advertising went on air September 30, and we saw positive lifts immediately. Through the start of the second quarter, we've improved on those lifts, which are now up 7%. We have also increased our promotional frequency across the portfolio.
Which is a product of as we mentioned back in August, we've experienced distribution headwinds due to historic lack of support and some of our own choices to optimize our soup portfolio. Approximately 80% of these TDP losses are what I would characterize as non regrettable, meaning that they were lower velocity SKUs, coming from the tail of our condensed and ready to serve segments. However, about 20% are SKUs that should remain And with the
but what
for the sustainment In summary, I feel good about the direction in which we are headed on soup including the improvements we're seeing on Pacific. Which we expect to return As I've emphasized from day 1, change won't happen overnight. Looking ahead to fact that our net sales profile in the U. S. Soup business will continue to improve.
In other parts of the division, I'm pleased with the performance Turning to V Eight, the shelf stable juice category remained challenged as we continued to optimize our portfolio, primarily on splash. We are reshaping the portfolio around the plant based positioning of V Eight RED, the V Eight plus energy product, which is outperforming the category, and our overall single serve platform. Our new campaign focuses on a master brand story for V Eight as the original Plant Power drink. We believe with our expectations. It's early days in our efforts to stabilize our meals and beverages business, but I feel good about our progress thus far, and I have confidence in the team to This was another very good quarter offset by the 1% headwind for partner brands that we discussed last quarter.
While also making steady progress on our our investments and our team. Operating profit was comparable to the prior year as we front loaded marketing investment in the first quarter. We expect our profit performance to improve as the year unfolds. Once again, 8 of our 9 power snack brands grew or held share the quarter. The snacks business is maintaining momentum behind our proven growth model, which we are now deploying across the full portfolio.
Marketing investments are up significantly across our 9 power brands with select trade investments to maintain price gaps. These investments continued to pay off. Total Snacks consumption grew nearly 4% in measured channels, while our power brands grew 6%. We are seeing nearly 2 times the consumption growth on our power brands versus the rest of the snacks portfolio, as we focus The Pepperidge Farm portfolio continued to lead the way with its 20th consecutive quarter of organic sales growth. Goldfish continued to perform well with increases on the core business.
Our bakery business continued its growth behind buns and rolls sandwich bread, and swirl. Marketplace performance was also strong on our salty snacks brands, where we drove double digit growth on late July, While Cape Cod, Kettle and Snyder's pretzels continued to respond well to our increased marketing investments with both consumption and share growth. As discussed last quarter, the partner brands in our portfolio are performing in line with expectations, impacting our snack sales by 1%. We expect are on Slide 14. I remain satisfied with the pace of our progress.
In the first quarter, we continued to deliver additional savings across the three key areas: synergies in procurement around packaging, the consolidation of sales headquarters and related operations and driving operational efficiency in our manufacturing. And we're off to a strong start. Looking to the back half, we expect initiatives around manufacturing and logistics to begin to contribute to I continue to view it as and the best of both capabilities of after serving as CFO at Chobani for the past 3 years, where he helped improve the company's capital structure and supported its growth and expansion. He brings significant experience in debt reduction and cash flow generation, both of which are key priorities at Campbell. Mixed diverse experience will be a tremendous asset as we continue to reposition Campbell for sustainable profitable growth.
Now let me turn it over to Mick. Thanks, Mark. Before reviewing our results, I wanted to
give you my perspective on the quarter and outlook for the balance of the year. As Mark stated, sales were slightly down, but were largely in line with our expectations. Within meals and beverages, Soup shipments were down three points, of which approximately 2 thirds reflects the timing of shipments with the later Thanksgiving holiday. Consumption remains solid and shared trends continued to improve. And Snacks delivered 2% growth, which included a 1 point headwind from partner brands.
We are pleased with improving trends in our gross margin, as we benefited primarily from productivity improvements, cost savings and pricing, partially offset by cost inflation and trade investments. We continue to make strong progress against our cost savings target of $850,000,000 by the end of fiscal 2022, delivering $45,000,000 of incremental savings in the first quarter, bringing the program to date total for continuing operations to $605,000,000. Year over year adjusted EBIT increased 6%, slightly better than expected, benefiting from some timing on the cost side. The sale of the European Chips business completed in October and the remaining portion of Campbell International expected to close before the end of our second quarter. Proceeds received to date along with positive cash flow from the business have enabled us to reduce debt levels by approximately one $500,000,000 over the past 12 months.
Lastly, we are updating our fiscal 2020 sales guidance to reflect the sale of the European Chips business. Which was not included in our guidance previously provided in August. Our underlying outlook for organic sales as well as adjusted EBIT and adjusted EPS remains unchanged. Overall we had a solid quarter and we are currently on combined with increased marketing support in with our full year I'll now review our results in more detail. To approximately $2,200,000,000 as gains in snacks were more than offset by declines in meals and beverages.
Adjusted EBIT increased 6 percent to $392,000,000 as sales declines were more than offset by lower adjusted administrative expenses, higher adjusted other income and improved gross margin performance. Adjusted EPS from continuing operations increased by 10% or0.07 dollars to $0.78 per share due to our adjusted EBIT performance and lower interest expense. Breaking down our net sales performance for the quarter, organic net sales were down 1%. Overall volumes were stable as declines in meals and beverages were offset by increases in snacks with gains across much of the portfolio. Sales benefited by slightly less than one point from pricing actions, primarily within meals and beverages.
Taken in fiscal 2019. Promotional spending investments within both snacks and meals and beverages negatively impacted net sales by a little over a point. The impact from currency translation in the quarter was neutral, as we refocus our portfolio on North America we would continue to expect currency translation impacts to be minimal. All in, our reported and organic net sales were down just under 1%. Our adjusted gross margin percentage increased by 30 basis points in the quarter to 33.8%.
Cost inflation and other factors had a negative impact of 170 basis points. On a rate basis, overall input prices increased by approximately 3%, reflecting higher prices on steel cans as well as areas such as vegetables and flour. Net pricing led to a 30 basis point decline in adjusted gross margin as the benefits from list pricing actions. Were more than offset by increased promotional spending. Going the other way, our ongoing supply chain productivity program contributed 130 basis points, and our cost savings program also added 90 basis points to gross margin expansion.
Mix was favorable by 10 basis points, bringing the gross margin percentage to 33.8%. We are pleased with these gross margin results as we continued to achieve improvement in performance. Moving on to other operating items. Adjusted marketing and selling expenses decreased 1% in the quarter to $206,000,000, as increased investments in advertising and consumer promotion were more than offset by the benefits of cost saving initiatives. Adjusted administrative expenses decreased 7 percent to $126,000,000, primarily reflecting the benefits of cost savings initiatives.
And while not shown on the chart adjusted other income was $8,000,000 compared to 0 in the prior year period. The year over year impact of $8,000,000 contributing to our EBIT performance in the quarter reflects lower losses on investments and higher pension and post retirement benefit income. Going to the next slide, we have continued to successfully deliver against our multiyear enterprise cost savings program. This quarter, we achieved $45,000,000 in savings, inclusive of Snyder's Lance synergies. To date that brings our savings for the overall program to $605,000,000.
We expect incremental cost savings in the range of $140,000,000 to $150,000,000 for the full year and continue to track to our cumulative savings target of $850,000,000 by the end of fiscal 2022. For additional perspective on our performance, the next chart breaks down our adjusted EPS change between our operating performance and below the line items. Adjusted EPS increased $0.07 from $0.71 in the prior year quarter to $0.78 per share. Adjusted EBIT had a positive 0 point 0 $5 impact on EPS. Net interest expense declined year over year by $10,000,000, delivering a 0 point 0 $3 positive impact to EPS.
As we have used proceeds from completed divestitures and our strong cash our adjusted effective tax rate of 24 percent, while slightly higher than prior year, runs to no impact. Completing the bridge to $0.78 per share. Now turning to our segments results. In meals and beverages, sales decreased 3% to $1,200,000,000, primarily reflecting declines in U. S.
Soup as well as food service. Which were partially offset by gains in Prego pasta sauces. Sales of U. S. Soup decreased 3% with shipments lagging in market consumption by two points, which were negatively impacted by movements in retailer inventory levels in both broth and condensed soups related to the timing of the Thanksgiving holiday.
Sales of ready to serve soups were comparable to the prior year. As mentioned, Segment operating earnings declined 3 percent to $282,000,000. The decline was driven primarily by cost inflation and sales declines, offset partially by the benefits of cost savings initiatives and supply chain productivity programs. In Snacks, sales in the quarter increased 2% to approximately $1,000,000,000. This performance was driven by gains in Goldfish Crackers as well as gains in fresh bakery products.
Pepperidge Farm cookies, and Cape Cod And Cattle Brand potato Chips, offset partially by declines in the partner brands. As we discussed with you last quarter, we're continuing our planned prioritization of select partners to reduce complexity and improve execution. And as Mark mentioned, 8 of our 9 snack power brands grew or held market share in the quarter. Segment operating earnings of $125,000,000 were comparable to the prior year, as the benefits of cost savings initiatives and supply chain productivity programs were offset by cost inflation and increased marketing support. Cash from operations for Q1 fiscal 2020 decreased year over year by $1,000,000 to $182,000,000, primarily related to the year over year increased payout of incentive compensation.
We continued to make progress regarding our working capital management efforts. And while cash flow for the year will benefit from these efforts, we expect the impact to be at a lower level of improvement than what we achieved in fiscal 2019. Cash from investing activities increased by $369,000,000 to $269,000,000, primarily related to the net proceeds from the sale of Kelson and the European Chips business. The cash outflow for capital expenditures was $98,000,000, $13,000,000 lower than the prior year. We've continued to forecast CapEx of approximately $350,000,000 for fiscal 2020.
Cash outflows for financing activities were $453,000,000 compared to $148,000,000 a year ago. The year over year incremental cash flow reflects the use of divestiture proceeds to pay down debt levels. Dividends paid in the amount of $107,000,000 were comparable to the prior year, reflecting our current quarterly dividend of $0.35 per share. Overall, we continue to make progress declined by approximately $1,500,000,000 compared to the prior year as proceeds from the completed divestitures, along with positive cash flow generated by the business were used to reduce debt. We expect to complete the remaining divestiture of R Naught and certain other international businesses in the second quarter of fiscal 2020, and we will use the net proceeds to further reduce our debt level.
With our current outlook, we expect our net debt to adjusted EBITDA ratio to be well below 4 times by the end of fiscal 2020. Now I'll review our updated guidance for continuing operations for 2020. The only thing that has changed is that we are updating our guidance for the sale of the European Chips business, which we completed in October. The impact from this divestiture was not included in the guidance previously provided on August 30. Unlike other recent divestitures, primarily given its size, it is not treated as a discontinued operation and has been through the date of sale included as part of continuing operations.
This divestiture will have about a negative 2 percentage point impact on sales. For the balance of the is a 53 week year, resulting in an additional week, which we believe to have about a 2 percentage point impact across net sales, adjusted EBIT and adjusted EPS. As a result, we expect reported and organic net sales of minus 1% to plus 1%, adjusted EBIT of plus 2% to plus 4% and adjusted EPS of +9 percent to +11 percent or $2.50 to $2.55 per share. And for clarity, our outlook for organic sales excludes the negative 2 point impact from the sale of the European Chips business as well as a 2 point contribution from the 53rd week. Overall, I'm excited to be part of the team I'm pleased with the results of my first quarter with Campbell's.
I will now turn it back over to Mark. Thanks, Mick. Before taking your questions, I wanted to
parenty and clear milestones are important to track the progress of our turnaround. You may remember this page from June, which I believe continues to serve as full year. While we have more work to do in terms of stabilizing the top line, we are slightly ahead of schedule on margins and EBIT. And I'm very pleased with our and how we are With that, let's
Thank our first question comes from Andrew Lazar from Barclays. Your line is open.
Good morning everybody and thanks for all your help over the year. Ken, and welcome to you, Mick.
Go ahead, Andrew.
Two questions, from me. I guess, first, Mark, In thinking about SUCCAT at this point, on the one hand, shipments were down this quarter against an easier comp. But on the other, there was the negative impact from Elite Thanksgiving that you talked about, some of which should reverse. And also Campbell gained share, obviously, first time in ten quarters, I think you said. So perhaps you can put these results maybe in broader context with where you are in the overall suite turnaround plan for starters?
And then second, maybe for Mick, just the cost savings and synergies, obviously, came in strongly at $45,000,000 in the first quarter well ahead of, I guess, what would have been implied by your goal of $140,000,000 to $150,000,000 for the full year? So with such a strong first quarter performance included in the original plans for the year, if not, like what drove the upside in maybe how do we think about the cadence of savings and synergies for the remainder of the year? Thank you.
Great. All right. So why don't I hit the soup question first, Mick? And then we'll talk about the phasing of the savings. I think it's how I would categorize soup for the first quarter is essentially very much in line with what we kind of described in the fourth quarter.
If we set aside the timing of the Thanksgiving shipments where you had an overall soup business that was, essentially down about 1%. And the balancing act here is let's start with the things that we're feeling very good about. And then in all honesty, a couple of these areas were better than I expected for where we are in the journey. And I think it starts with share as we've said all really what we want to do as a first step is kind of slow down or stop the share loss that we've been experiencing over the last several years and to have done that in condensed ready to serve and in broth in the same quarter I think was a very important milestone in continuing to move us forward. And if you think about why and how that happened, I think the part that probably has me the most excited is the response that we're seeing in market to the investments we're making.
And if you think about this, as a continuum through the year of investing or at least through the 1st 2 quarters of investing in different parts of the business, the first investments we made we're coming back on air with our chunky advertising, bringing mom back into the picture. I'm sure you've seen the ads as well as the advertising that we have on the condensed businesses where we focus on the eating soup. So primarily tomato and chicken noodle. And in both cases, the response to that has been very, very strong. And if you look at the more recent weeks, that are going to fall into Q2, you'd see that momentum accelerating even further.
In fact, ready to serve businesses in the latest 4 weeks are up about 7% and our condensed eating soups are up almost double digit. And so and with both having very strong share performances as well. And I think a big part of it is we're tackling head on some of the challenges that the business had. So our condensed ads are focused on driving the quality perception. If you see how the ad construct that we're actually embracing the can and really connecting it to the quality of the food inside, whether that's no added preservatives, on chicken noodle or whether that's 6 tomatoes or romancing it in the occasion of the, of grilled cheese sandwich and tomato soup which we haven't advertised in a long time.
And I think, those are all very, very strong. And what we're going to see now in the weeks ahead is condensed on the cooking side and our broth business, which are both areas that really didn't start until Q2. I also feel good about how our price gap management and our differentiation strategies are going as it relates to private label. We've seen a major turnaround in the share relationship on condensed as it relates to private label and although I am still a little wary on the broth side. I'll talk about that in a second.
I am happy to see the recovery of share on condensed that we had lost over several years. And no doubt underlying that, too, is this improvement, I would say, in our retail partnerships where people are embracing the fact that we're coming back to the table with a vision and a direction. And I think as this continues to build momentum, we could see velocities, which were up 4% in Q1. I think we could see those accelerate as we go forward. And as we said, in the next iterations, adding innovation, seeing the full impact of advertising over time, I would say on balance, I feel really good about where we are right now.
I think the headwind as we talked about in the fourth quarter primarily the distribution side. And again, if I'm honest here, I think 80% of this is what I would call non regrettables. I described in my remarks, And about 20% of it, I think are things that should be in there. And I think as we continue to build the case on velocity, we're going hard and getting those back in. And I think we'll experience success, if we're able to maintain this in market momentum, that we've seen.
I mean, the fact of the matter is we're living a little bit with the history of not having supported the category in the businesses. And a lot of these decisions on the category and the resets were made on a historical set of performance factors that honestly warranted some rationalization. As I said, I think the name of the game right now is keep month in, month out, building our case for the category and showing the demonstrated improvement and the impact of focusing on the right areas. And then the other two areas that I think are working as headwinds. 1 is Pacific, But we're seeing steady increase.
In fact, if you look at the latest 4 weeks on Pacific, you're actually seeing a decline in market just over 1%, which is a significant improvement from where we've been. And I do expect that to swing into positive territory as the year unfolds. So still a headwind, but I think significantly improved from the double digit declines we experienced. And then broth is a little bit of a wild card. I'm anxious to see these next 2 weeks, which were the key weeks of Thanksgiving to really see if both the advertising and some of the price gap management we're doing is going to be enough to balance what is an aggressive growth trajectory that private labels had.
But I do think with the support specific, which obviously plays an important role in broth for us, kind of having support for the first time in a lot of years, where I would say cautiously optimistic of how that looks. So that reality of where we are, if you think about this going forward, I think the drivers are not going to change materially in Q2. Obviously, we're going to get the benefit of the timing I think more of the underlying variables are going to be roughly the same. But again, I wouldn't be surprised if we continue to build some momentum in a few areas well. So net net, I kind of feel like we're right where we wanted to be in Q1 and some green shoots and some areas that we still need to work on.
Great. And then any negative comments on the cost savings?
Yes. So with regard to the cost savings, it's it's a good question. I spent quite a bit of time in it since joining the company, particularly obviously the cost saving programs and as well as to focus on the synergies with regard to Snyder's Lance. And, going, looking at the first quarter, generate about $45,000,000 of cost savings. We're off to a good start.
I feel good about it. I feel good where we are. That being said, it's still early in the year. And, all that kind of looking at the details, I do feel very good about the target of 140,000,000 to 150,000,000 dollars for the full year. Yes.
I mean,
I think the reality, Andrew, is that, that we are a little bit ahead of where we expected as it relates to EBIT. And some of that is the reflection of cost savings coming a little faster. We don't necessarily see them to be incremental on the year, but but we we're always happy when we can get to savings a little faster. But I would suggest that the the upside in Q1 is a little bit of timing, that I would expect to smooth out over Q2. And as we as Mick said in his comments, we're kind of expecting to exit the first half pretty much right down the center of the Fairway as it relates, to where our 52 week guidance sits.
Relative to both kind of top and bottom line. And maybe a little bit of opportunity, if continue to see some of that momentum on soup and continue to move forward on savings. But for where we are right now, we see a little bit more of it as the timing factor. Great.
Thanks so much, everyone.
Thank you. Our next question comes from Ken Goldman from JP Morgan. Your line is open.
Hi, good morning.
2 for me.
Hey, first question, you talked about shipments trailing consumption, obviously, thanks to the Thanksgiving shift. Mark, as we think about the first, I guess, few weeks so far in the second quarter, have you seen shipments out pace consumption as this shift reverses. So that would be my first question. And then my second one is, on the 20% of distribution reduction that was, I guess, regrettable word. Some of your peers, some of your customers have talked lately about how retailers are shifting their shelf sets, maybe simplifying them to reduce them out of stocks.
Are you seeing any impact on that, on your business as far as you can tell? I'm just trying to get a sense of how where the sort of distribution losses are coming from that you're not necessarily hoping for? Thank you.
Yes. No, it's a great question. First, on the phasing. So what I would tell you is, let me kind of hit it both on the shipment and the consumption side. So On the shipment side, I would say, we see a fair amount of the 1st month of the quarter.
And it's building very strong confidence that this idea of thing from Q1 to Q2 will in fact occur. I think on the consumption side, we also continue to be very encouraged by what we're seeing in the latest 4 week numbers. There's some of the better, performance on like I said, the places that have in the majority of the advertising. However, what I will say is the next 2 weeks of consumption that we don't have will be inclusive of the key weeks of the holiday. So, I would tell you in a couple of weeks from now, I'll have a very good feel for how we, fared through Thanksgiving, which, of course, is a pretty quick turn from that one into Christmas.
And the December holiday period. So, we'll have a little bit of foreshadowing there. But like I said, all the indicators I see right now are for the most part, either very much in line or in some cases a little bit ahead and more positive than I might have expected at this point. And then let me talk about the distribution. It's, I do think that there is a reality of retailers really rationalizing their space, and understanding where the value creation is happening in the store.
And in some cases, that may be reducing assortment to create greater slots for or paces. And I think that we are seeing a little bit of that within the world of soup. And in our mind, that's okay, right? That's where a lot of the non regrettable rationalizations happening. If you take the last ten items within our condensed soup business, it's in the 3rd 4th quartile as it relates to velocity, those aren't our most efficient SKUs anyway.
And so the idea that we get to a little bit more focused tighter set and especially given some of the early successes we're having on supporting the core. I would say we feel pretty good about that and kind of are managing it and expecting it. I think the 20% in some ways has to do with the fact that I would describe it a little bit as collateral damage as retailers may have kind of cut a bigger piece given a backward look at the performance of the category and our business And I think that is a risk that we certainly identified and understood. And I think we'll reverse that. I don't think it's The key that I think people should be focused on is do we think it's systemic and going to continue?
And the answer is, I do not believe that happen. I think we're getting to a very good set now where the foundation of the distribution, I need to get that 20% back which I think we're building some good cases to do it, and then build smart innovation on the top of that, things like our convenience platforms. Where over time we're going to see a range of options that include 7 ounce, that include our 11 ounce sipping, going up all the way to 12 ounce, which is a little bit more of a meal replacement size. This combination of bringing more relevant formats into the aisle, that's what we're making some room for. And I think that we're going to have a very strong, story going forward.
So I think your insight is right. I think we're certainly experiencing it here, but I also feel good that we're turning the tide. And even as we're having conversations with customers. We already have agreement in certain areas where we're going to bring stuff back or that the acceptance of our innovation so far has been very, very
Thanks so much.
Thank you. Our next question comes from Brian Spillane from Bank of America. Your line is open.
Hey, good morning, everyone. Couple of quick ones for me. First, I'm not sure that I don't know if I missed it or not, but did you give an outlook for capital spending for the year?
Yes, we did. $350,000,000. It hasn't changed. It's basically in line with what we previously provided.
Okay. And then second, there's been a lot of discussion about shipments versus consumption in soup. And so I guess just for the full year, should we expect that your shipments would be in line with consumption? Or is there anything that would cause the 2 not to sort of converge for the full year?
No, I think you should expect over the course of the year for them to be pretty close. It's always a little there's always a little bit of choppiness as you think about timing. So, I would, as you look forward, really think about where the key holidays hit we'll have Easter here ahead of us in the quarters ahead. But I think the full year should be pretty close where consumption and shipment should be aligned. We see no reason to expect a material step down in further inventory levels, and or any other causal factor that would change it beyond, what we're going to experience a little bit from quarter to quarter.
Okay.
And then just last one, I made some comments, commentary about expecting that debt to EBITDA would be meaningfully below four times by year end. And so I guess maybe, Mark, if you could just philosophically, if you're getting at that point where there's some flexibility with free cash flow, just how you think about capital allocation, share repurchases, raising dividends, investing back in the business, just how we may think about just how you're thinking about that if you're starting to sit on a pile of money?
Yes. So, as we sit here today, the capital priorities would be consistent with what we previously, communicated where essentially it's about supporting the growth of the business. Reducing our debt and paying our dividends. Right. That's kind of been the, the framework of what we've been living into.
I do think, and I don't think this day is necessarily fairly today. And for the most part, probably won't be within this year. But as we get ourselves back closer to that three times level. I do think we're open to that conversation. Of course, we'll continue to maintain kind of that those top 2 of our top 3 of investing in growth, of course, managing that debt level down and paying our dividend But then at that point, I think it's right to have the conversation on what we look at other tuck in, M and A that might fill in some holes within our portfolio, or be, valued, combinations with some of the businesses we have today.
I would not expect us, to be heading into transformational and bigger M and A don't think that's where we are right now in the journey, but I could imagine that as we get into a reasonable debt level that we might look at some smaller contributions as well as, of course, always, although not approved today, I think there's always room for conversation around share repurchasing or increasing dividend depending on the circumstances and kind of how we view the outlook going forward. So I think that conversation happens kind of as we're exiting this year into next year.
Our next question comes from Nik Modi from RBC. Your line is open.
Thanks. Good morning, everyone. Mark, maybe you can just Hey, good morning. Maybe you could just provide some consumer diagnostics. I mean, clearly the category or at least Campbell Soup business has been improving.
You help us kind of understand what's going on at the consumer level? Are you bringing lapsed consumers back? Are these new consumers? Are you just share shifting? Any context around that would be helpful.
Yes. So I think there's a couple of dynamics that are happening at the consumer level. I think I'll put it into kind of 3 buckets. The biggest bucket I do see us influencing as last users, which is our primary initial objective. And this is we know that the primary barrier to that is the perception of the product.
And so as we have gone aggressively, after quality and kind of context, right? When you think about the wholesomeness of tomato soup and grilled cheese, which I think all of us here are a little bit, I guess pleasantly surprised at how well consumers have responded to that to that message as well as the understanding, that giving people a bit more permission with our chicken noodle soup with no added preservatives is making a big difference is targeting right there. In fact, we've seen slight ticks up in penetration, which is something that I don't I don't know that we can determine when the last time we saw that occur. So that I think that's one area. 2, I think the other thing that is really helping us consumer level is this idea of new consumers entering into cooking.
So a lot of discussion around millennials over the years and The reality is that as millennials age, we are finding them participating more and more in home preparation. We call it quick scratch cooking which is essentially assembling several components to make a meal. And of course, our broth business, both Swanson and Pacific, as well as our condensed cooking soups like cream of mushroom and cream of chicken are very, very easy, convenient. And again, as we reinforce the message of more fresh cream, no added preservatives, for that millennial audience, we're beginning to find a role within their lifestyle. And that relevance is really important for us, as you imagine, our ability to turn the category over time.
And then I think the 3rd area that were although early days that I continue to be very encouraged by is the performance of our sipping soups, which allows us to kind of move into a more snacking occasion. And We're doing that with the well, yes, platform right now. But as the year unfolds, we'll be rolling out the bone broth, which is a big protein nutritional play, which we know is very relevant, along with some continued expansion of different flavors. All 3 of those dynamics. And that's why this is not a simple turnaround and it takes some time.
All three of those areas are places where we're influencing consumers positively. And the good news in all of it is, as we think about those actions that we're taking, They also help us differentiate within the category. And that differentiation is why I'm happy to see the share improvement because again, I think our opportunity to improve, it's a little bit of a heavier lift to really get the category fully moving. But if we can at least ensure that we're winning the fight within the category and growing share and all the actions I just described are helping us do that that's what we're kind of looking for. Does that help, Nick?
Yes, very helpful. I'll pass it on. Thank you.
Our next question comes from Jason English from Goldman Sachs. Your line is open.
Hey, good morning folks. Thanks for stopping me in. Very much appreciate it. Ken, we'll miss working with you and good luck on the next chapter. And Mick, welcome on board.
Forward to getting to know you more. A couple of quick questions. First, sort of housekeeping, I think you mentioned a couple of times EBIT's already ahead of schedule because of some timing impact. And I noticed in the press release, you referenced some things like gains on open commodity contracts and some pension income. Can you quantify what these sort of tailwinds were and when you expect them to online to reverse the other way?
Sure. Yes. Let me take that then, Mark, you know, we can add on the back end, but just if I look at kind of I tend to look at probably a little bit more across the P and L. And if it then look at kind of Q1 EBIT, and break down the different components, that's probably the easiest way to look at it. You see that basically there was a slight top line decline, which was then basically offset by some gross margin improvements.
Then within sales and marketing, we had savings from our selling expenses slightly more than set our increased marketing investments. And then if you look at the admin expenses, those were primarily driven by savings from the restructuring of our operating model And then finally, within particularly other income, there were some one time items that I described more in detail, if you know, in my prepared remarks. Yes.
So I think part of it, Jason, is the one time items are just going to give a little bit of a bump into Q1 that that was contemplated in the year, but certainly shows Q1 up a little bit. That obviously we expected. I do think some of the underlying improvement on the cost side is what we were pleasantly surprised with a little bit earlier, both on the operating model within this admin costs and SG and A side as well as a little bit of some of the cost savings that sit within the selling and marketing number. One of the numbers that's really important to think about is our marketing and selling was down about 4%. But that was driven primarily by about a 9% decline on the selling, which had to do with a little bit of what we've done through the reorganization.
Our marketing was up about 4%, but even more importantly within that ARAC was up 12% in the quarter. And snacks was up 23 meals and beverage was up 2, but soup was up 15. So I think what happened was we got a little bit better, inflow of those savings in Q1. I would expect that most of that should smooth out in Q2. It's not like we pulled 4th quarter savings into Q1.
I think it was more kind of months of timing than it was full year. So as I said, I think if I'm looking at the first half, I'm kind of expecting the half total to look very consistent with what our full year outlook or guidance is.
That's helpful. Thank you. And I think you partially answered my second question, which was, the margin profile of Snacks given the over delivery on savings, it was surprising for me to to see margins sequentially go lower into this. And even from a year on year, they look to look softer than what we would have expected. The 23% jump on marketing in Snacks, how much of can you quantify the drag on margins just so we can get a slightly cleaner read what's happening with the underlying margin profile for that business?
Sure. Yes, happy to do that. Yes, I think if you look at kind of the, the building blocks as you went through it. Our cost savings and our productivity that was in there was about the same amount as the investment. And that's why you're seeing a relatively flat bottom line.
And the way to think about the year on Snacks, this might help give you perspective, is if you remember, we kind of started this investment model on Snacks in Q3. And so if you imagine that the synergies being relatively stable across the four quarters, your first couple of quarters are going to have material steps up in the marketing and advertising as well as some investment in trade that we're still working on to get those price points right primarily on the Snyder's Lance businesses. As you go through the year, the incrementality of what spending from a marketing standpoint will drop and more of those cost savings will come through. So I think as you look at subsequent quarters, I would expect the margin to improve in each quarter and by the time you get to the end of the year, I think it's probably going to be much, much closer to what you might have modeled for the year with all of the puts and takes we've given you.
Thank you. And our next question comes from Chris Growe from Stifel. Your line is open.
Hi, good morning. Hi, Chris. Hi, Chris. Hi, and welcome, Mick, and Ken, we wish you all the best. Just to follow on your answer there.
Mark, you mostly answered it to Jason's question, but obviously, some of the timing differential has a negative effect on the second quarter. At the same time, you have shipments that hopefully will benefit the second quarter. So I was just trying to get my head around, are you provided any color around Q2 EPS just given all the moving pieces in that quarter?
Yes, you know, Chris, I always try to avoid giving direct quarterly guidance, but I do think the best way I can give it to you is in the context of kind of what we expect for the first half. And if you kind of plot out what I'm essentially saying, your absolute your variables are absolutely right. So a little bit of opportunity on the top line, but again, remembering that it's off the base and relative to what we would have experience perhaps on the downside in Q1 to kind of be right where we are guiding for the first half in totality. And I think for EBIT will be roughly in that same bucket as what we're guiding for the year on the 52 week number on the EBIT side. And I do think that will flow through to EPS, although remember the big driver for the year as we look at the delta between EBIT and EPS is obviously the interest.
And as we expect to complete the divestiture process in Q2, that then will be the unlock for kind of accelerating EPS a little further. So take that into mind as you're thinking about how building those, all those pieces back into get to a Q2.
That's great. That was good color.
That's fine. Hopefully that's helpful.
I understand that was helpful. Yes. Thank you. Just one quick follow-up then on the gross margin. I just want to understand the is the inflation more front end loaded through the year?
How do you expect the gross margin to perform through the year? And I just want to overlay on that. Some of the promotional spending, does that kick up seeing Q2 and Q3? We should have a little bit more of incremental drag on the gross margin as I think about how you're investing back in the business here?
Yes, again, I think call it over the years of doing this. I'm always a little hesitant to direct the gross margin, but I do think I do think the way I would expect the building blocks to work is we do think inflation is a bit front loaded. We do expect that have some moderating effect over the balance of the year. The investment profile doesn't really have a major spike in any of the quarters. I mean, I think if there was a little bit more, it would be around this holiday period, which kind of sits a bit in Q1 and Q2.
So there's a little bit of an uptick there as I talk about some of the investment in snacks in particular. So that might be a little bit of a distortion early on. But I think for the most part, we expect this kind of profile of a, inflation rate that's a little higher than our base productivity, offset by cost savings of which half will go to the business. And again, that half part is in gross margin, part of it's in admin costs, then of course, the other half of that cost savings is going into the investment. So that $140,000,000 to $150,000,000, half of it is going to the bottom line.
Spread between margin and below margin and the other half goes to fund the investment uptick that we're making. That's kind of the way the year looks. And for the most part, I think on the gross margin side, you'll see pretty steady pacing through the year.
Okay, again, very good color. Thanks so much for your help there.
Thank you.
And that does conclude our question and answer session for today's conference. Ladies and gentlemen, this now concludes today's call. Thank you for your participation and you may now disconnect. Everyone, have a wonderful day.