Good day, ladies and gentlemen, and welcome to the Campbell Soup First Quarter 20 16 Earnings Call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I will now turn the call over to your King Gosnell, Vice President, Finance Strategy, Investor Relations at Campbell Soup.
Please go ahead.
Thank you, Stephanie. Good morning, everyone. Welcome to the 1st 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 McMahon, 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. The call is open to the media who participate in a listen only mode. Today, we will make forward looking statements which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risks.
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 and forward looking statements. As we said in this morning's news release, in fiscal 2016, company incurred mark to market losses associated with the interim remeasurement of certain U. S. Pension plans. The impact on EPS was $0.26 per share.
The company also incurred restructuring charges, implementation costs and other related costs associated with the new organizational structure and cost savings initiatives. The impact on EPS was $0.07 per share. Our comparisons of fiscal 2016 with fiscal 2015 will exclude these items for comparability. Because we use non GAAP measures, we have provided a reconciliation of these measures to the most directly comparable GAAP measure which is included in our appendix. With that, let me turn
quarter earnings call. Today, I'll share my perspective on the overall operating environments that we've outlined in previous meetings continue to impact the food into which remains under pressure from new global economic realities, major demographic shifts changing consumer preferences for food with an emphasis on health and well-being and the continued growth of digital marketing and e commerce channels. Looking at the operating environment, conditions remain challenging. In the United States, the economic situation is mixed Unemployment continues to improve, but consumers remain very cautious. We're continuing to see Americans save more and spend less amid the uncertain economic operations including Canada, China and Indonesia.
Generating growth in this environment has been and remains difficult. As a result, cutting programs and other measures to improve operational efficiency. Meanwhile, food retailers continue to respond by reconfiguring existing abilities. Several years ago, we recognized the early signs of many of the trends that the industry is currently facing and we started taking steps While we've made progress through fiscal 2015, our actions haven't been sufficient. That's why last year, we put a bolder plan in place to reshape Campbell.
We began fiscal 2016 after successfully implementing significant changes to align We began implementing a 3 year $250,000,000 cost savings initiative that is delivering earlier than expected benefits. We created a new integrated global services organization to provide services to our divisions more efficiently and effectively. We initiated the 1st phase of 0 based budgeting to instill greater cost discipline and create an ownership mindset among employees. We added another growth engine in garden fresh gourmet to bolster our Campbell Fresh division and extend our presence and scale beyond produce into the deli section of the store perimeter. As a result of these actions, we entered fiscal 2016 better positioned to execute against our strategic imperatives.
With that as to start the year. Organic sales in the quarter were comparable to a year ago and consistent with our expectations given that we're cycling an increase of 5%. I'm particularly pleased with our 3rd consecutive and the improvements we've made in our As you saw this morning, we revised our annual guidance, while we lowered sales guidance to reflect increased currency headwinds, Our new reportable segments align with our 3 new divisions. Anthony will discuss our revised guidance and provide a detailed review of our segment results a moment, but I wanted to offer my perspective on several notable items within each of our 3 new divisions. Let's start with our largest division, America's Simple Mills And Beverages.
As a reminder, we're managing this division for moderate growth consistent with the categories on increasing price realization, optimizing promotional spending While we have more work to do in its early days, I'm encouraged by the progress As a result of our Consumption was soft in tizing. Build around the strategic insights we've shared with you about the changing mosaic of the American family This campaign represents a major departure for Campbell and depicts how our real food fits into real people's lives in an authentic and relatable way. Digital media is playing a larger role in this campaign than in previous efforts. Looking ahead, we expect improved sales performance in the second quarter as our marketing spending increases and the campaign gains momentum. As we talked about in July, we're focused on fewer bigger innovations in the Americas division.
While our new Swanson bottled broth is off to a slower start than anticipated, both Campbell's fresh brewed soups and K Cups and Campbell's organic soups are meeting expectations. The highlight in this division was the significant gross margin expansion. A major improvement this quarter was our supply chain performance as evidenced by better customer service level recycling significant supply chain challenges, especially in transportation and warehousing. Were also benefiting from the mild inflationary environment this quarter. That said, the supply chain team has driven results ahead of expectations.
Overall, the new America Simple Meals And Beverage division is off to a promising start in delivering against its portfolio role. Our Global Biscuits and Snacks division unifies our Pepperidge Farm, Arnitz and Kelson businesses and its portfolio role is to expand in developed and developing markets, while improving margins. This division too is off to a promising start in fulfilling its portfolio sales growth, improved gross margins and strong earnings. I'm especially encouraged by our sales performance in our core markets the U. S.
And Australia. In U. S. Biscuits and bakery, our Pepperidge Farm Brands performed very well driven by strong growth in crackers and fresh bakery, partly offset by declines in cookies. Our Goldfish business had a particularly strong quarter with double digit sales growth.
Turning to developing markets, we drove organic sales growth in Malaysia but we're continuing to As we stated at that time, we believe it's important for Campbell to become more geographically diverse despite short term economic pressure in developing markets. Our 3rd division is Campbell's Fresh, which includes Bolthouse Farms Garden Fresh Gourmet and our refrigerated soup business. Here, we're focused on accelerating sales growth in expanding into new package fresh CPG categories. Reported segment sales increased 8% in the quarter. It excluding the impact of Gordon Fresh Gourmet acquisition, sales declined 3%.
Let's take a closer look at what drove the decline. In Bolthouse Farms, we delivered mid single digit sales growth in the CPG business behind premium beverages and refrigerated salad dressings as we cycled double digit growth in the prior year. However, carrots business where we're the market leader and our ingredients business. Sales were down in carats, although we grew share. As a reminder, carats are an important business in that they provide both scale and produce and an effective refrigerated logistics system for our CPG business.
The main culprit of the sales decline was the ingredients business, As we discussed at our Investor Day in July, the Carrot concentrate business began softening last year due to weak demand in Japan. That softness accelerated in the first quarter. We expect the rate of decline in ingredients to moderate essentially in the back half of the year. While this is not the growth profile we expect from this division, we remain enthusiastic about C Fresh and especially the CPG business. We have compelling brands, delicious products, a steady stream of on trend innovation, investments to expand juice and salad dressing capacity and a strong team leading the business.
We expect 1915, our cold press ultra premium juice line and the strong spring innovation suite for super premium beverages and salad dressings. Now a word on garden fresh gourmet. The integration into C Fresh is on track there have been no major surprises. As we outlined in July at our Investor Day meeting, we're focused on driving distribution and increasing market penetration beyond its Midwest stronghold. Before wrapping up I want to spend a where employees treat every dollar as if it were their own.
Our streamlined organization, our ZB efforts and our integrated global services organization are all having a positive impact on both our cost and our culture. I'm very pleased with our cost savings and building new capabilities. But IGS is about more than efficiency and effectiveness. Beyond the cost savings and capability building underway, IGS is helping to spur significant cultural change by fundamentally altering the way work is performed at Campbell. Looking at our 3 It's still early days and we have more work ahead of us to fully unlock the potential of our redesigned enterprise structure, but we're off to a solid start.
Today we're better positioned to execute against the 4 strategic imperatives we outlined in July First, we're leveraging our purpose, real food that matters for life's moments as a filter for strategic decision. For example, we've made about the ingredients we use and the rationale behind our decisions as we strive to set the standard for transparency in the food industry. 2nd, we're shifting more of our marketing budget to digital channels and remain committed to growing our commerce capabilities. 3rd, we're advancing our health and well-being imperative across our company. Our new 1915 Ultra Premium juices are meeting our expectations, and we've had other recent successes, including Campbell Organic soups and the distribution of carrot snacks into the New York City School lunch pro room.
And finally, we remain focused on expanding and developing markets, particularly in Southeast Asia with an emphasis on Malaysia and Indonesia. In China, we've added resources to expand Kelton in anticipation of a positive Chinese New Year. In summary, these are unprecedented times of change marked by challenging economic conditions. In the food world consolidation and intensified competition are disrupting and altering the landscape. At Campbell, we remain customers and dedicated to delivering against our and strengthen our growth trajectory over time.
I look forward to answering your questions, but now let me turn the call over to our Chief Financial Officer, Anthony D'Silvestro.
Thanks, Denise, and good morning. Before reviewing our results and updated guidance, I wanted to give you my perspective on the quarter and outlook for the balance of the year. As Denise mentioned, organic sales were in line with our expectations after lapping a solid year ago quarter. We made good progress on gross margin, which increased 2.60 basis points on an adjusted basis, benefiting from net price realization and supply chain performance, while cost inflation moderated. I'm very pleased with the progress we're making against our cost reduction initiatives.
Delivering $30,000,000 of savings in the first quarter ahead of our expectations and as I'll share later, allowing us to raise our 26 teen savings target. Our improved outlook for cost inflation and additional cost savings will enable us to both fund investments in longer term innovation and raise our full year guidance for adjusted EBIT and adjusted EPS. And since we last updated you, we are experiencing an additional one point of headwind from currency translation across the P and L as the U. S. Dollar continues to strengthen.
Lastly, as we indicated on our fourth quarter call, we have changed our reporting segments to align with our 3 new divisions, and change our method of accounting for pension and post retirement benefits, both of which I will cover in my comments. I'll begin with the benefit accounting change and then discuss our results and updated we are changing our method of accounting for pension and post retirement benefits. Previously, actuarial gains and losses were deferred and amortized into earnings over several years. In our case, we had been amortizing significant actuarial losses, which arose over time primarily from declining interest rates. Under the new mark to market method, which has been applied to all prior periods, actuarial gains and losses will be recognized immediately into earnings rather than amortize.
We will identify the mark to market adjustment as an item impacting comparability and exclude it from our adjusted results. Mark to market adjustments are recognized on re measurement dates, typically year end. What's shown on this chart is the impact on our fiscal 2015 full year and first quarter adjusted results from removing the actuarial loss amortization, recasting our full year 2015 results increases adjusted gross margin by 70 basis points, adjusted EBIT by $97,000,000 and adjusted EPS by $0.19. For the first quarter of 2015, the impact is an increase of 60 basis points on gross margin $21,000,000 of EBIT or $0.04 per share. It is important to note that the benefit accounting change has no impact on cash flow.
In the presentation of our first quarter 2016 results and guidance, all comparisons to 2015 are against this recasted 2015 adjusted base. Unrelated to the change in benefit accounting method I just described, we are required to re measure certain U. S. Pension plans quarterly during 2016 as a result of This remeasurement led to a mark to market loss of $0.26 per share in the first quarter. For the first quarter, net sales on an as reported basis declined to the negative impact of currency translation.
As excluding currency and the impact of the Garden Fresh Gourmet acquisition, organic net sales were comparable to the prior year as net price realization from both higher list prices and lower promotional spending was offset by lower volumes, reflecting a 4 40 basis point increase in margin, adjusted EBIT increased 23 percent to 479,000,000 benefiting from a higher gross margin percentage, savings from our cost reduction initiatives and lower advertising reflecting a shift in spending a 4 point negative impact on EBIT, the equivalent of $0.03 per share. Adjusted EPS increased 22% to $0.95. Just to be clear, EPS growth on an adjusted basis is not impacted by the accounting change, but reflects improved operating performance of the business. Breaking down our sales performance for the quarter, reported net sales declined 2% with organic sales comparable to the prior year. Within organic sales, volume and mix attracted two points, which was primarily driven by U.
S. Soup within American Simple Meals And Beverages and the carrot Ingredients business within Campbell Fresh. Higher selling prices soup, prego pasta sauce, and food service in the U. S. And across the Canadian portfolio.
Lower promotionalist in global biscuits and snacks also added a point to sales growth. Currency translation had an adverse impact of three points on the top line. Our 2 primary foreign currencies, the Australian dollar and Canadian dollar both declined against the U. S. Dollar.
To complete the bridge, our most recent acquisition, Garden Fresh Gourmet contributed one point to net sales in the quarter. Our adjusted gross margin percentage increased by 260 basis paid to cost inflation and improved supply chain performance. Within inflation and other, which negatively impacted margin by 20 basis points, comps inflation of approximately 1% was mostly offset by improved supply chain performance, primarily in the areas of transportation and warehousing. Mix was slightly negative reflecting a small negative impact from the acquisition. In Abigail, our price realization actions contributed 1.3 points of margin expansion with 40 basis points from reduced promotional spending, principally trade reductions in Pepperidge Farm And U S Soup and ninety basis points from higher selling prices.
Lastly, we're off to a strong start on our supply chain productivity programs which contributed 160 basis points of margin improvement in the quarter. Excluding items impacting comparability, marketing and selling expenses declined 15% in the quarter primarily due to lower advertising Flexis shifts in the timing of our spending principally in U. S. Soup to later in the year. Adjusted administrative expenses decreased 8% primarily due to savings from For additional the prior year.
Increasing from $0.78 to $0.95 per share. On a currency neutral basis, growth in adjusted EBIT mostly from the gross margin expansion contributed $0.23 to EPS growth. The impact from share repurchases under our strategic share repurchase program reduced our share count and added a penny. Going the other way, net interest expense increased $3,000,000 about $0.01 per share as we extended the on the debt portfolio. Our adjusted tax rate for the quarter was 34.1 percent up 2.2 points versus the prior year primarily due to our geographic mix and higher U.
S. State taxes in 2016, which negatively impacted EPS by $0.03 Currency had a $0.03 negative impact on EPS in the quarter, completing the bridge to $0.95 per share. Beginning in 2016, we are aligning our reporting segments with our new division structure. We are now reporting our results in 3 segments: America's Simple Meals And Beverages, Global Biscuits And Snacks and Campbell Fresh. In connection with our change in benefit accounting we have modified our method of allocating pension and post retirement benefit costs to the segment.
In 2016, only the service costs representing the value of the retirement benefit earned in the period is allocated to segments. The other elements of expense, including interest costs on the liability, expected return on assets and actuarial gains and losses are reflected in unallocated corporate expense. As previously mentioned, We will identify the mark to market adjustments as an item impacting comparability and exclude them from our adjusted results. We have adjusted our historical results to reflect these changes with fiscal 2015 sales operating earnings and margin by segment shown on this chart. Immediately following the filing of our first quarter 10 Q, we will also provide recasted historical annual and quarterly results, including quarterly results for our segments.
Reflecting the benefit accounting changes. In America's simple meals and beverages, Organic sales decreased 1% to $1,300,000,000. U. S. Soup sales decreased 3% reflecting declines in ready to serve soups and broth, probably on segment gains in condensed soup, impacted by our list price actions and changes to our promotional programs, of U.
S. Beverages declined slightly, primarily due to declines in VA infusion beverages, partly offset by gains in VA splas. Sales of other U. S. Simple meals increased driven by prego pasta sauces, Campbell dinner sauces, and our new prego and pace ready meals.
Excluding the negative impact of currency translation, sales in Canada increased, driven by gains in soup. Offering earnings increased 19%, reflecting a higher gross margin percentage, which benefited from net price realization and improved supply chain performance, particularly in the areas of transportation and warehousing and also from lower marketing and selling expenses. Our advertising expenditures were down in the quarter as we've shifted the timing of our activity to later in the fiscal year. Within U. S.
Soup, the 3% sales decline was driven by a 10% decline in ready to serve soup and a 9 percent decline in swanson broth, offset by a 2% gain on condensed. Sales of our fresh brewed soup for Keurig which are not part of the wet soup category contributed 50 basis points of growth to total U. S. Soup in the quarter. We began and ended the quarter with With the formation of the American Simple Meals And Beverages segment and our efforts to diversify the portfolio beyond soup, We do not believe subcategory sales performance in soup is as meaningful a disclosure.
We will continue to provide this information for the balance of the year before discontinuing in category performance and our share results as measured by IRI. For the 52 week period ending November 1, 20 15, the category as a whole declined 1.3%. Our sales and measured channels declined 1.7% With weakness in ready to serve and condensed soups, partly offset by strength in broth. Campbell had a 59% market share a decline of 20 basis points. Private label grew share by 20 basis points finishing at 13%.
All other branded players collectively had a share of 28% unchanged versus the prior year. 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 Goldfish Crackers, fresh bakery and frozen products, partly offset by a decline in cookies. In the Asia Pacific region, excluding the impact of currency translation, growth in Australia biscuits from savory and sweet varieties were offset by declines in Indonesia biscuits as that market is facing some economic challenges. Operating earnings increased 16%, primarily driven by a higher gross margin percentage, volume gains and lower selling expenses probably offset by the negative impact of currency translation.
In the Campbell Fresh segment, consistent with our expectations, organic sales decreased 3% due to anticipated declines in current ingredient export sales, and category declines in retail not included in organic results is our recent acquisition, Garden Fresh Gourmet, which contributed 11 points of sales growth to the Including the acquisition, the integration of which is going well, reported segment sales increased by 8%. Operating earnings doubled to $18,000,000, driven by a higher gross margin percentage and the impact of acquiring Garden Fresh Gourmet. The improvement in gross margin reflects lower carat costs and the favorable mix impact of the growth in the higher margin beverages and salad dressing business relative to the balance of Cash from operations increased by $30,000,000 to $218,000,000, driven by higher cash earnings. Capital expenditures increased $9,000,000 to $71,000,000. Of $0.32 per share.
In aggregate, we repurchased $32,000,000 of shares in the 1st quarter $25,000,000 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 was equal to the prior year at $3,800,000,000 as positive net cash flow generated by the business offset the impact of the $232,000,000 acquisition of Garden Fresh Gourmet Now I'll review our revised 2016 guidance. We are now lower than anticipated cost inflation outlook of 2% to 3%. We now expect inflation and cost of products sold to be approximately 2% and for our gross margin $60,000,000.
We now expect to deliver savings in the range of $80,000,000 to $100,000,000 in fiscal 20 16. Our cumulative cost savings target of $250,000,000 through fiscal 2018 remains unchanged. Going in the other direction, we are experiencing some headwinds on the tax line and now expect an adjusted tax rate of approximately 32%. And as I mentioned earlier, we also expect the negative impact of currency translation to increase to three points as the U. S.
Dollar continues to strengthen. This revised earnings guidance reflects additional investments in innovation as well as our current expectations for the performance of our business for the remainder Relative to our previous growth by 2 to 3 points on a currency neutral basis with an offset to sales EBIT and EPS of one point due to the increased negative impact of currency translation. From the recasted 2015 base, and including a 3 point negative impact from currency, we now expect sales to change from minus 1% to 0%, adjusted EBIT adjusted EPS to both increase 4% to 7%. The guidance also includes the impact of the Garden Fresh acquisition which adds Given that there have been significant changes to our guidance, including the impact of the change in benefit accounting, We thought it would be helpful and this is an instance to bridge our EPS guidance in September to the revised guidance we issued today. Starting with the original guidance of $2.53 to $2.58, we've added $0.19 for the benefit accounting change and deducted the incremental currency translation headwind, which is worth $0.03 per share.
With the upside from lower than anticipated inflation and incremental cost savings, we have taken the opportunity to fund additional investments in longer term innovation. The improved operating performance net of the additional investments is adding $0.06 to the guidance. Relative to our first quarter EPS comes from marketing time which we anticipate will be spent back in the year to go period. That concludes my remarks. I'll now turn it back to Ken for the Q And A.
Thanks, Anthony. We will now start our Q and session. Since we own limited time out of fairness to others to other callers, please ask only one question at a time. Okay, Stephanie.
Questions. Our first question comes from Eric Katzman with Deutsche Bank. Your line is open.
Hi, good morning everybody.
Hi, Eric.
Hi, Eric. Happy holidays to all of you.
Thank you. You too.
I guess with respect to the one question, I guess, Denise and Anthony, what struck me this quarter most was how high the margins are in the Simple Meals area the cost savings program versus kind of how low the margins are in Campbell Fresh division, with obviously most of the growth expected to come in the ladder, I mean, is that kind of low, the single digit kind of margin, what we should assume is reasonable long term for the fresh division? And is it a little term basis, is it going to be how you balance the 2 to get to the consolidated goals? I'll pass it on Thanks.
Yes, I think the one thing to point out within Campbell Fresh is you need to parse apart the components of that business. So half the business is the CPG side, which is the beverages and salad dressing. The other half is the farm's business, which includes the carrot business. Ingredient export business. The margin structure within Campbell Fresh is very diverse.
So the CPG businesses carry a much higher margin than the carrots and natural ingredients business And in fact, that's where all the growth is. Because of the higher growth on the higher margin beverages and salad dressing. So if you think about the algorithm, you need to think about not just the Campbell Fresh margin, but the faster growing CPG margin within that. The other thing that happens to Campbell Fresh because of the Bolthouse acquisition carriers are pretty high load of depreciation and amortization. The EBITDA margin is about two times the operating margin you see on the chart.
So that's another thing to keep in mind. But we think the algorithm works. Thank you.
Our next question comes from Matthew Granger with Morgan Stanley. Your line is open.
Denise, you've talked a lot in recent quarters about the benchmark historically of 24% or 25% of sales in advertising consumer and trade. And it seems, I know some of this is phasing, but, just through the year, but it does seem like you're pulling back and rationalizing where you see on productive spending across the board on all of these areas of the P and L. So I guess, are we any closer at this point to where you might see an opportunity to shift that benchmark down slightly or is that still the right way to think about the degree of marketing reinvestment you need in the business to drive the top on goals.
Yes. I mean, we still believe that, ACT at about 24% of sales is a competitive rate. This quarter, we actually spent ACT at 23% of sales There's a number of things going on there. First of all, in the U. S.
Soup business, we shifted our advertising back to later in the year and started the new campaign in October versus prior years. So you're seeing the results of that In addition, we're shifting our spend overall to about 40% of our spend in digital. And that is creating a different dynamic between working and nonworking media. And with our cost savings efforts, we're trying to be as responsible and efficient as possible in the area of non working media And when you shift to digital, you're spending a lot of time and expense on content, but TV is just a a different dynamic. And so, and then within trade, we have been increasing trade on a couple of businesses biscuits and Campbell Fresh.
And we actually, took pricing in our Soup business. So, we'll be working our merchandising and promotion programs with more, acceleration in the second and third quarter.
Our next question comes from David Driscoll with Citigroup. Your line is open.
I'd say I'd like to wish happy holidays to you all as well. Wanted to just ask some kind of one question on soup and the first question comes from the line of Michael Majer with Credit Suisse. Please go ahead. Hi, I know you hate talking about weather, but does it matter at all about kind of the temperatures that we saw in the quarter? Would that give us any explanation here And then, and then the second part of this question on soup is, is the performance here kind of indicative of maybe maybe not this negative on some pieces of it, but just that you're going to really manage this soup business for cash and this is really almost the philosophies of 0 based budget and kind of coming through where we're going to get some really nice answers on the profit line, but maybe the sales line just fundamentally going to see some weakness as you rationalize unprofitable promotions, etcetera.
So those two pieces, if you will.
Okay. I'll take that 1. First of all, does the soup business decline 2% after wrapping 6% increases in that was as expected by the way was the pricing increases that we took, which predominantly affected the RTS business. The fact that promotions have been shifted to later in the year and the fact that advertising started labor later in October. The consumption was down in line with our expectations.
I would say to you that RTS is a bit worse condensed a bit better and broth was pretty flat. But the category was down 4%. And although I'm not a weather person, I do think that that was a factor, but I believe that all these other dynamics going on were equal factors one. And then of course, our fresh brewed soup is not captured in our consumption that's in dry soup. Inventories were comparable We saw a little bit of a difference in broth because we carried some extra inventory into the year as we transition to a new screw cap on the aseptic broth.
We still expect soup to grow modestly and that's basically how we're looking at it.
Our next question comes from Robert Moskow with Credit Suisse. Your line is open.
Hi, thank you.
Hi, Rob.
Hi, Rob.
Hi. Obviously, the gross margin performance was a lot higher than what anyone had expected. The guidance is for 100 basis points for the year, though. I think you're up 300 versus year ago already. So, why not hire, Anthony?
Is it a function of the promo spending is going to start increasing in 2nd quarter? Or is it a function of by 4th quarter, I think you start lapping some of the supply chain in improvements. Why not hire?
Yes, I guess there's a couple of comments, and I'm sure you guys will do the math, but following a two succeed basis point improvement in the first quarter, driven by primarily net price realization and our productivity gains, getting to a full point on the year would imply for the last three quarters about 40 basis points of expansion. And there's a couple of points I would make. I made him, I said in my comments that COPS inflation was 1% in the quarter, we expect that to be closer to 2% by the time we finished the year. And that includes this negative currency impact on the input costs of some of our international businesses, primarily the Canadian business and the Australian business. So that that headwind is out there.
You made the comment about some of the marketing timing, the favorability in the first quarter. That'll come back in the last three quarters. The 2nd quarter comp is not too difficult, but it will start to lap some of the gross margin gains we had last year in the back half. So all those things taken together would dampen that growth in the year to go period.
Our next question comes from Jason English with Goldman Sachs. Your line is open.
Hey, good morning, folks. Good
morning, Jason.
Thank you for squeezing me in. I wanted back to some of the trade budget optimization questions and some of the comments you made. As we look at the data, TBO seems to be a very big opportunity for you in in soup and some of your other Simple Meals categories. Yet, it's been a source of leakage for you for a number of years. And I heard a reference to maybe a little bit less trade this quarter on soup, but I also thought I heard reference to, to actually increasing those funds to mitigate some of the price increases you had going forward.
So, A, is that right, that you are going to ramp more trade to deal back some of the price increases. B, do you concur with the broader observation that there seems to be a big opportunity to pull some of those inefficient dollars out in and see what's the obstacle? What's the hang up for getting this going in the right direction for you?
I believe that we have an opportunity as a company to get a better return on our trade dollars invested And I like to think of it that way. We, as part of our restructure within our integrated global services, are building our revenue management capabilities, not only in the Americas business, but across all three. And we have different dynamics, competitive dynamics that we're dealing with. I think the second goal is we are getting better net price realization that has come from not only list price increases, but also working with promoted pricing. These are still early days, and we want to make sure that the consumer response to them, well, they've been accepted by customers.
And, we're trying to find win win solutions for ourselves and our customers with our trade program. So that's basically where we are right now, and we will definitely keep a close eye on it.
Thank you. Good luck.
Our next question comes from Jonathan Feeney with Atlas Research. Your line is open.
Denise. Thanks very much for the question. I wanted to ask a little bit bigger picture question in light of your comments today, see some strong gross margin here. And I think a lot of the questions are, we're sort of grasping at how much revenue management versus growth is, is your focus as a company? And specifically your comment today that you want to set Campbell apart I think you said some other food companies.
How and strengthen your growth trajectory? I think you said, what metrics do you want to set Campbell a part on. I mean, what should we be judging you on over the next William on what metric did you mean that Campbell would be set apart? Is it gross margin improvement? Is it operating income segment income?
And what would you say to that?
Yes, we I mean, we've been on a, a mission to generate better profitable sales growth. And also at the same time, unlock the potential of our purpose to be and set a standard for a new standard for transparency in the industry, which we believe will be will help us in achieving that trajectory of profitable net sales growth. That hasn't really changed, but it has been refined in the fact that we now have sign the portfolio roles to the divisions. And we believe that in composite, it better divers size our portfolio, to gain that. I mean, I think we've guided with our long term targets as to what we believe we can achieve in the next several years.
And we're still working our way into those. We believe that organic growth will be an important part of this, but also we continue to look and be very disciplined about making strategic acquisitions.
So pretty so I guess relative to other I guess so it's pretty much just a long term you're talking about that sort of commentary, just maybe setting Campbell apart from the other food companies doesn't relate directly to the sort of financial metrics, maybe the transparency you're providing or other things?
I'm not sure.
Well, I guess what I'm saying, Denise, is the long term guidance you have is pretty similar to what a lot of other companies have. And I hear you have some strong today. And I think you've been very, you know, some interesting things going on in the portfolio. And I guess I'm trying to, you know, if I'm trying to see if there's something new here or just maybe a new level of steps behind what you've talked about for some time?
No, I think our strategy has been pretty consistent. I mean, we're establishing a real beachhead in fresh food, bringing Campbell's suite of capabilities to that faster growing part of the food business. We are being really transparent about our products, with our new website, what's in my food dot com, we talking to consumers about what's in our food and the ingredients we use and how it's made. And these are just steps that really distinguish us and are very true to activating our purpose with the consumer. And from all our research, whether it be with millennials or even baby boomers now, consumers are going to purchase alone the products that from companies that align with their values and we believe we have a very strong statement out there.
I see what you're saying. Thanks very much. It's very helpful. Happy holidays.
Thank you. You too.
Our next question comes from Chris Growe with Stifel. Your line is open.
Hi, good morning.
Hi, Chris.
Hi, Chris. Happy holidays as well to you. Just had a quick question for you here. I want to understand on in the soup business, would you so inventory levels were in line with the prior year. If I heard you correctly there, Anthony, does that mean that they are up a little bit from where they were at the end of Q4?
I'm just trying to get a sense of where they stand today and how to expect that to move going forward. And then when I look within the performances of condensed ready to serve in broth, consensus is the one that seems to stand out a bit versus what like the measure channel data indicated. So is that the one where was it a little inventory increase in the quarter is also part of the question?
So to the first part of the question, we always build retail inventories in the first quarter. So we always come into the quarter relatively low. We're getting into the season and we always build the question then becomes Did you build more than you did the year ago period? The answer to that in aggregate is no. The retailer inventories on a case basis, we came into the quarter and end of the quarter about the same.
And then if you look underneath that by subcategory, I would say that condensed and RTS got a little bit of benefit and broth saw a little bit of a negative in terms of the impact of shifts within the portfolio. But I think where we ended the quarter is kind of a normal place for us relative the seasonal build we typically see in the business.
Yes, another just another build on what Anthony said. Our sales on broth in the quarter were down 9% and we were cycling comps of plus 17% a year ago. And our consumption in the quarter was flat. So that also was a factor to evaluate performance.
And so in the context of your promotional spending plans, usually a promotional spending is working down, as I think it did this quarter a bit. You tend to see inventories come out of system. Is that what you'd expect for the year then? Or if you can you go that far to speak to that?
Yes, but timely cycle the full year. Let me get to the end of the fourth quarter. Our low point in the cycle. So all this stuff that happens as we build into the season, come out of the season, work that works is generally works its way out. By the time we get to the end of the fourth quarter.
Okay. That's very helpful. Thank you.
Our next question comes from Alexia Howard with Bernstein. Your line is open.
So can I ask about, some other parts of the business, specifically VH cookies and then spaghettios, which I know is fairly small? But in each of those, it's a similar pattern to what we're seeing in you seem to be trading off market share in exchange for better EBIT and better price realization Should we expect those trends to continue or are you scrambling to try to turn it around? I'm just trying to get an idea of the strategy there. And then just some comments on spaghettio that it looks though even before the recall, the sales were really coming down quite heavily. Is that something you're kind of pulling away from?
Let me tackle beverages first. The category continues to remain challenged, although we have seen some signs of improvement our consumption and share were down slightly in quarter 1. We have a couple of puts and a couple of takes, VA splash V 8 plus energy continued to perform well and we're very encouraged by our V 8 veggie blends launch. And we've had a bit of decline on our VA Red Juice as I think that's due to consumers trying some different types of will juice now in the veggie blend line. And our VA infusion business continues to be a challenge.
And we've had couple quarters of good growth in immediate consumption. And we had some trade timing issues in the quarter. So that was down about 1%, but our equivalent volume in that channel was up 8%. So you know, we continue to be encouraged about the new network we've set up there and we know that's an opportunity for us. And we launched our veggies for all campaign, and we really like what that's doing for the brand in terms of the equity.
So we're still very, committed to the VA program. We think it's a timely on trend, brand for the health conscious consumer that offers a lower calorie option, and less sugar option, in this world of juice. Cookies, we just we saw no pun intended. We saw a softness on our cookies predominantly in the classic line. However, we did have a really, really good quarter on Goldfish Crackers up 10%.
So we still have some more work to do on cookies. And, SpaghettiOs,
The premise of the question I would disagree with a little bit. I mean, the price realization on soup is relatively unique to soup. We haven't done a lot of price realization on VA cookies or spaghettios. Spaghetti sales are relatively flat in the quarter. V8 down, it's primarily V8 infusion issue.
And as Denise mentioned, Chung cookies are a particular issue within the Pepperidge Farm portfolio that that we're addressing, but we haven't made a strategic decision in those businesses to go for price realization and better EBIT in exchange for market share.
Okay. Thank you very much. I'll pass it on.
Our next question comes from David Palmer with RBC Capital Markets. Your line is
Hi, David. Thanks and happy Thanksgiving.
You too.
A follow-up there on your Crackers business and particularly, you mentioned Goldfish being strong. That's been a tough the healthy snacking area, what's perhaps going right there for you and how confident are you keep that going. And then on cookies, that's become tougher for a variety of players there. And it seems like sweet snacks in general has been tough what is the plan for that segment?
Yes. We, we definitely have been very focused on keeping our Goldfish program in strong. I think that that business is hitting on all cylinders with good advertising a good promotional program and the right proposition for, millennial parents and their children. So We continue to be pretty excited about our Goldfish business. And, I think that that mothers still feel like that is a very positive snacking for their children.
I think we need we have more work to do on cookies and we're working on that as we speak. We do have new leadership right now in the Pepperidge Farm business. And, and that team is really coming together and focusing on the next wave of innovation ideas. And I'm not sure there's anything more to add to that.
Okay. Thank you.
Our next question comes from Priya Ori Gupta with Barclays. Your line is open.
Thank you for taking the question. I was hoping you would talk a little bit about your view on the current rate environment. Specifically you had $1,500,000,000 in short term borrowings. Do you expect to continue rolling the CTC market or refinance this?
Yes. So as I mentioned, we did term out some of the debt portfolio, in the recent path, taking advantage of relatively low fixed rates. We have a sizable backstop credit facility against the commercial paper program. And we're fairly comfortable with the level of CP we have in the marketplace today. I mean, clearly what's happening in the credit markets, we continue to look at that and evaluate alternatives, what are the term outs, some of that CP or what are the use of the derivatives market to convert some of that floating exposures and fixed, but that's kind of an ongoing thing that we continue to assess here.
And I'm showing no further questions. I will now turn the call back over to management for closing remarks.
All right. Thank you, Stephanie. From all of us again, we're happy. Thanksgiving everyone. Thanks for joining our call.
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Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and everyone have a great day.