Good day, ladies and gentlemen, and welcome to the Campbell Soup Third Quarter 2015 Earnings Call. At this time, As a reminder, today's conference call is being recorded. Would now like to turn the conference over to Jennifer Driscoll, Vice President, Investor Relations. Please go ahead.
Thank you, Candace, and good morning, everyone. Welcome to the 3rd quarter earnings call for Campbell Soup's fiscal 2015. With me here in New Jersey are Denise Morrison, President and CEO, Anthony DiSilvestro, CFO and Anna Choi, Senior Manager of Investor Relations. As usual, we've created slides to accompany our earnings presentation. You'll find the slides posted on our website this morning at investor.
Campbellsoupcompany.com. Calls open to the media who participate in listen only mode. Today, we'll be making forward looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk. Please refer to slide 2 in our presentation, or to our SEC filings for a list of the factors that could cause our actual results to vary materially from those anticipated in any forward looking statements.
In the third quarter, the company incurred charges associated with our recently announced initiatives to implement a new enterprise design that better aligns with our strategy reduces costs and streamlines organizational structure. Referring $9,000,000 in administrative expenses related to the implementation of these initiatives. The aggregate after tax impact of the restructuring charges and implementation costs was $11,000,000 ability. Because we use non GAAP measures, we've provided a reconciliation of these measures to the most directly comparable GAAP measure, which is included in our appendix. Before we begin our discussion of the quarter, I'd like to cordially invite our sell side analysts and institutional investors to our annual investor day at Campbell's World Headquarters.
RSVPs are required. Campbell Vendors and all others are invited to join by the webcast. This year's event will be held the afternoon of Wednesday, July 22nd. We plan to make it a very informative day for you featuring presentations by Denise Morrison, ANzi D'Silvestro, and our 3 divisional presidents. We'll include updates on our plans for the company, the 3 divisions, and a cost saving program and will also allow plenty of time for interacting with management.
So with that, let me turn the call over to Denise Morrison.
Thank you, Jennifer. Good morning, everyone, and thanks for joining our third quarter call. A great deal has transpired since we last spoke in February. Both at Campbell and in the marketplace. So I believe it's worthwhile to spend time on both topics today.
I will share my perspective on the third quarter and then comment on the broader state of the consumer and events in the food industry since our last earnings call. I'll also provide an update on Overall, I am pleased declined in the quarter this was primarily due to unfavorable currency and the impact of retailer inventory movements on our US Soup business. Organic net sales declined by 1%. Importantly, gross margin improved as we took several actions to address the declines in the first half and adjusted EBIT and EPS were better than expected. In US Simple Meals, US soup sales were below our expectations declining 10%.
Consumption and market share remained relatively stable. The gap between consumption and sales performance was primarily due to significant unfavorable inventory movements by retailers. Our analysis suggests that this was largely a result of our reduction in trade promotions did not generate the anticipated lifts. Therefore, reducing our spending was the right thing to do. In doing so, We expected consumption and shipments to be down with retailer inventories relatively stable.
In fact, consumption was actually better than we expected, but retailer inventory declines exceeded our expectations and are now below prior year levels. Consequently, sales were below expectations. Within our soup portfolio, we are encouraged the performance of achieve solid distribution gains. Soups for easy cooking are below expectation. Looking ahead, we will begin shipping Campbell's fresh brewed soup and k cups in the fourth quarter.
In our other simple meals business, Prairiego continued to perform well, led by increases in white sauces and distinctive varieties. Consumption of Campbell's dinner sauces remains strong, and we will be adding new grilling sauces to the platform. Plumb sales increased double digits in the quarter, with both share and distribution gains. Plum is now the clear market share leader in organic baby food in the United States. Our shelf stable US beverage business performed within our expectations.
While this business remains challenged, The early read patients. Most importantly, depth of repeat is strong. VA protein bars and shakes are performing below expectations. In Global Banking And Snacking, excluding currency, sales rose with solid volume gains in Australia and Indonesia. We feel very good about the progress we've made in Asia Pacific under the new leadership team in that market In the U.
S, our Pepperidge Farm business delivered sales gains in fresh bakery, cookies and cracker Notably, Oakfish sales increased 5% in the quarter, and marketing increased across our biscuit and snacks business. I'm particularly pleased that this segment's operating earnings increased 18%. Bolthouse Farms Beverages and salad dressings grew slightly. In our premium fresh beverage business, we were cycling inefficient promotions from a year ago which we did not and the introduction of fewer new items to reduce complexity. Our decision to optimize promotional spending contributed to much stronger operating earnings for cold pressed Ultra Premium beverage line, 1915 by Bolthouse Farms, and the initial read has been positive, setting the stage for better sales margin improvement was expense.
We benefited from moderating inflation and other factors and delivered an adjusted gross margin increase of 70 basis points mitigating declines in the first and EPS of $0.62 were ahead of what we expected. We are improving our EBIT and EPS guidance to the favorable end Turning now to the industry dynamics. This is a tumultuous time in the food industry We all recognize that the consumer landscape has changed dramatically, driven by a number of seismic shifts. The great recessions impact on consumer purchasing behavior, global demographic changes, profound shifts in consumer preferences to food and the disruptive impact of digital technologies. All of these are contributing to mounting consumer demand for greater transparency about where and how their food is made.
These shifts are converging to create a new normal They produced a persistently challenging environment with significant volume pressure on mainstream food products, particularly center store categories. At the consequence of this new normal, industry participants have initiated a series of strategic actions, including spin offs, consolidation, acquisitions of small purpose driven brands, and aggressive cost cutting measures. The broad adoption of 0 based budgeting has set a new bar for cost management in the industry and the re consolidation only intensifies the situation, placing even greater focus on cost management. Campbell is focused on creating shareholder value by strengthening our core business and expanding into faster growing spaces. Areas emphasis include health and well-being, particularly fresh and organic foods, and biscuits and snacks in both developed and developing markets, with a Oomers in line with our purpose, real food that matters for life's moments.
We are doing all of this while instilling an ownership mindset that will help us aggressively manage our costs. And strongly believe a strategy the savings in the area of our business with the greatest potential is the best way to create shareholder value over the long term. With that as context, let me update you on our strategic enterprise redesign. Anthony D'Silvestro will update you on our
to
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expand into faster growing spaces. These changes are absolutely essential and will enable us to fully leverage the reorganization of our business operations into 3 principle divisions. 1st, America Simple Meals And Beverages which we will manage for moderate growth and higher profit. 2nd, global biscuits and snacks, which will help us leverage the scale of our combined Pepperidge Farm, Arnott's and Kelson businesses across developed and developing markets. And finally, our Package Fresh division, where we will make focused investments to accelerate our growth in the Package Fresh category.
We appointed the leadership teams for both America simple meals and beverages and the global biscuits and snacks division in the third quarter. Additionally, and Carolyn has been named to the Campbell leadership team for our new integrated Global Services group, which will include elements of finance, information technology, marketing services, procurement, and human resources. This group will be a key step in our efforts to reduce costs and elevate operational excellence through shared services and capability building across the enterprise. We believe our strategic enterprise redesign, inclusive of our cost reduction efforts will be game changing for our company and for our culture. As we pursue our dual mandate, guided by our purpose and growth agenda.
This victory and maximizing value for our shareholders. In closing, it has been a very eventful quarter for Campbell. Amidst all the organization changes underway at the company, the team remains focused on driving our performance. It's important to remember that while our industry navigates this volatile landscape, we continue with clear eyes and a clear plan to make the necessary changes at Campbell's to improve our performance. I look forward sharing more of our strategic
on our results, expectations declining slightly, which was primarily the result of movements in retailer inventory levels in the U. S. Impacting our U. S. Soup business.
Our gross margin percentage increased in the quarter, helping to recover Gross margin is benefiting from reductions in trade promotion spending across a number of our businesses. List price increases we've taken in the marketplace, at a moderating level of cost inflation and improved performance relative to the first half in the area of freight and distribution. With 1 quarter remaining in reduction efforts and a reduction in expected incentive compensation costs are pushing us to the adjusted EPS. As we've discussed, over the next 3 years, we plan to reduce costs by at least $200,000,000 or 2% to 3% of annual sales. Leveraging a 0 based approach, we will streamline our and target expense reductions across the number of cost categories.
In connection with our organization efforts in the quarter, for certain US based employees nearing retirement, we offered a voluntary employee separation program under which most of the eligible employees who elected to participate will exit by the end of the fiscal year. Additionally, as we begin to implement a 0 based budgeting approach, we are beginning to realize savings in a number of categories. Now, I'll review our results in more detail. For the third quarter, net sales on an as reported basis declined by 4% to one $900,000,000, primarily due to the negative impact of currency translation. Excluding currency, organic net sales decreased 1 percent as declines in U.
S. Simple Meals, driven by the adverse impact of retailer inventory movements on U. S. Soup sales, were probably offset by organic sales gains in our Global Banking And Snacking And International segments. Adjusted EBIT in the quarter fell 2% due to due to unfavorable currency translation and increased marketing spending on a constant currency basis, partly offset by improved gross margin performance.
Reflecting a lower share count from our strategic share repurchase program, adjusted earnings per share of $0.62 was comparable to the prior year quarter. For the 9 month year to date period ending April, reported sales were comparable to the prior year, with organic sales gaining 1% led by our performance in global baking and snacking. Adjusted EBIT declined 4% as the negative of a lower gross margin percentage and currency translation were probably offset by volume gains and lower marketing and administrative expenses. EPS of $2.02 is down 1%. Ecomposing our sales performance Organic sales declined by 1% while currency translation reduced sales by 3 points.
Our 2 primary foreign currencies, the Australian dollar and Canadian dollar both weakened against the U. S. Dollar. Within organic sales, biome mix contributed 3 points to sale decline. The decline was primarily related to our U.
S. Simple Meals segment. Higher selling prices primarily in U. S. Simple Meals And Global Baking And Snacking added one point contributed one point to sales growth.
The most significant reductions were in U. S. Soup, Pepperidge Farm, and Bolthouse Farms and reflects our efforts to improve price realization across the portfolio. As you'll see on the next chart, these price realization efforts, both on list price and trade promotions, are contributing improved gross margin performance in First, cost inflation and other factors had a negative margin impact of 2.4 points. For the quarter, cost inflation as a rate increased by approximately 2%.
In addition, cost of products sold reflect the adverse impact of a stronger U. S. Dollar on the input costs of our international businesses, and while we have made progress in our performance throughout the quarter, particularly in the area of freight and distribution, supply chain costs are above the prior year. Due primarily to the sales decline in U. S.
Soup, we experienced 30 basis points of negative mix. In aggregate, our price realization actions have contributed 1.6 points of margin expansion 90 basis points from lower promotional spending across 4 of our 5 reporting segments. Lastly, we continue to drive meaningful productivity gains in our Marketing and selling expenses decreased 2% in the quarter due to the impact of currency, and lower which increased by 8%. Increased levels of advertising in global baking and snacking were partly offset by reductions in U. S.
Simple meals, and U. S. Beverages. Adjusted administrative expenses were down 1% as spending reductions the impact of currency were mostly offset by higher incentive compensation costs compared to the year ago quarter. Across both of these expense line, we are For additional perspective on our performance, this chart breaks down our EPS changes between our operating performance and below the line items.
Excluding the impact of currency, growth in adjusted EBIT contributed a penny of EPS growth. Net interest expense declined $2,000,000 versus a year ago as we reduced our debt level. Our adjusted tax rate for the quarter was 30.3%, down 40 basis points versus the prior year adjusted rate. With rounding, neither interest expense or taxes had an EPS impact for the quarter. Under our strategic share repurchase program, we have repurchased $150,000,000 year to date, this has added $0.01 to EPS in the quarter.
Currency had a $0.02 negative impact on EPS in the quarter. We continue to estimate that currency will have $2.05 per share negative impact for the full year. Now turning to our segment results. In U. S.
Simple Meals, sales declined 6%, driven by a 10% decline in U. S. Soup sales. While dollar consumption of soup and measured channels declined by just compared to the prior year, drove most of the sales decline in the quarter. The decline in soup sales reflects lower volumes all the offset by a reduction in promotional spending and higher selling prices.
Sales and other Simple Meals increased 2%, driven by Prague Asasoft and Plumb organics. Operating earnings for U. S. Simple meals declined 16%, reflecting the lower sales and a lower gross margin percentage, partly offset by lower marketing. The lower gross margin percentage includes cost inflation, which was above the company average and the impact of unfavorable product mix.
Global Banking And Snacking had a strong quarter as 5% organic sales growth was driven by Sales gains in Pepperidge Farm were driven by growth in Goldfish Crackers And Fresh Bakery, partly offset by declines in sales of Ephage Farm Frozen Products. Galveston also grew sales in the quarter. Operating earnings increased 18% driven by gains in both Pepperidge Farm And Arnott, reflecting improved gross margin performance and sales growth. In the Bolthouse and Foodservice segment, organic sales decreased 1% with sales declines in Bolthouse, carrot, and natural ingredients. Partly offset by growth in Bolthouse Farm Beverages And Salad Dressings And North America Food Service.
Operating earnings increased 35 percent of lower promotional spending in Bolthouse Farms Beverages and productivity improvement. U. S. Beverage sales fell 2%. Benefiting from lower marketing spending, operating earnings increased by 17%.
International Simple Meals And Beverages, organic sales improved 6% on gains in both the Asia Pacific region and in Canada. Operating earnings were comparable to the prior year as the benefit of higher organic sales was offset by the negative impact of currency translation. For U. S. Soup, sales declined by 10% in the quarter with condensed down 4% RTS down 18% and broth declining 13%.
Movement driven by the reduction in channels for the comparable 13 week period ending May 3 declined 1% in dollars. Year to date, as shown at the bottom of the chart, soup sales declined 3% versus the prior year as a 3% decline condensed and a 5% decline comparable 39 quarter with retailer inventory positions below prior year levels. Here's a look at US Wedsuit category performance and our share results as measured by IRI. For the 52 week period ending May 3, 2015, The category as a whole declined 1.1%. Our sales in measured channels declined 1.4% with weakness in ready to serve soups, notably homestyle, partly offset by gains in bra.
Our share declined just 20 basis points in the last 52 weeks, and has been relatively stable for 3 years. Other branded players in aggregate had a share of 28% Also declining 20 basis points, while private label with a 13% share gained 40 basis points, reflecting recent gains in raw We had strong cash increased by $208,000,000 to $971,000,000 due to lower working capital requirements, wrapping the taxes paid in 2014 on the divestiture of the European Simple Meals business and lower pension contributions. We continue to forecast that cash from operations for the full year will reach 1,100,000,000 capital expenditures increased to $242,000,000. We continue to expect capital expenditures of about $400,000,000 for the year as we increased capacity quarterly dividend rate of $31.2 per share. In aggregate, we repurchased $192,000,000 of shares in the 1st 9 months $150,000,000 of which were under our strategic share repurchase program.
Compensation. Net debt declined by approximately $130,000,000 to 3,600,000,000. Now, I'll review our 2015 guidance. As a reminder, this guidance is based off a 52 week 2014, as shown on the chart. Our guidance ranges also include an estimated negative impact of currency translation of two point across sales, EBIT, and EPS.
As we announced earlier this morning, given we just have 1 quarter remaining, We are narrowing our fiscal 2015 guidance. For sales, we expect to be closer to the low end of our minus 1% to plus 1% range. For both adjusted EBIT and adjusted percent to minus 5% for adjusted EBIT and minus 5% to minus 3% for adjusted EPS. The outlook in both from our previously announced $200,000,000 cost reduction initiative, as well as a reduction in expected incentive compensation costs. At the end of the second quarter, we said that incentive compensation represented a $0.06 per share headwind for 2015.
Based on our current outlook, we are now forecasting that this impact will be approximately $0.04 per share, most of which will impact our 4 quarter performance. For the full year, we continue to forecast that our gross margin percentage will decline by approximately one point The tax rate will be in and now turn it back to Jennifer for Q And A.
Thanks, Anthony. And Denise will now start our Q And A session. Since we have a limited time out of fairness to other callers.
And our first question comes from Rob Moscow of Credit Suisse. Your line is now open.
Hi, thank you. I had
a question about, good morning. Question about the promotional spending cuts. Do you think that that could extend into fiscal fiscal 16 as well. How much additional discipline do you expect to use in the soup franchise and others. And then just a quick one on global snacking.
Denisse, you've talked about global looking for a while. But R Nott's and Pepperidge Farm, you know, they're different brand names. The packaging is different. There's not a lot of crossover that I see anyway in terms of products that are similar. Is there additional kinds of, synergies that you could see between the the the region that they haven't been capturing yet.
Thanks.
Okay. Let me take the first one on the trade spending. I want to go back, in particularly to U. S. Soup.
And I'm going to go back to, the year 2013 where we actually increased our, rate, and we had a 14% lift in sales. In 2014, we increased that by about 3 sent, and our sales were flat. So our analytics suggested that that was not a good spend. And there were many promotions out there that weren't doing the retailer any good or us any good. So we course corrected that in 2015 in the quarter.
And went back to the same rate we were spending in 2013. We are still within the of 25%, which is our goal. And that strategy really hasn't changed. But that said, we continue to be much more disciplined getting for that. And that will continue into the future.
On Arnison Pepperidge Farm, They definitely are in Indonesia and also in Asia, in Hong Kong. Pepperidge Farm has been expanding more into Canada. And where we are seeing the synergies is in R And D. There's a lot of sharing going on, in that area. But by putting the the Pepperidge Farm Arnus and calcium brands together in one division, we expect that part of that will be a global brands team that will start to look at now that we have platforms in these countries, how can we expand with the brands that we have to take advantage of that scale?
So more to come on that, but that's the plan.
Rob, I'll just add to Denise's comments on the first part. We're not going to comment too specifically on 20 16, but we are very focused on improving our gross margin over time. And we recognize part of that program has to come from net price realization. And to meet our 3 areas we'll be looking at. 1 is, we'll continue to look for opportunities to improve our price realization.
We'll continue to drive our analytics to improve the efficiency of our trade spend, whether that's removing unprofitable deals or improving the profitability of others. And we'll also look for strategic opportunities to move up our promoted price points over time. So those 3 things, collectively, will contribute to price realization, which will hopefully contribute to gross margin expansion. Next
question.
Thank you. And our next question comes from Andrew Lazaro of Barclays. Your line is now open. Everybody. Hello, Andrew.
Hi. I realized you, with respect to gross margin, I guess you kept the gross margin guidance for the full year that's same as previously, even though the fiscal 3Q gross margin came in, had expected. So I'm just trying to get a sense of is there something that you see in the 4th quarter, albeit a seasonally small quarter that would would suggest gross margin steps back a bit or something doesn't come through quite as significantly or is it just it's a small quarter and, see how it plays out.
Andrew, I would say, relative to our own expectation, gross margin was only slightly better than we expected in the third quarter and that's kind of flown through to the change in guidance. At the end of the second quarter, we did anticipate and did expect to improve gross margin percentage in both the 3rd quarter and the 4th quarter. So we do continue to anticipate a modest improvement in gross margin percentage in the 4th quarter as well. To get back to that close to that minus one point forecast that we gave you guys.
Got it. And Anthony, is our inventories at a point where they're sort of artificially low such that shipments outpaced consumption going forward into next fiscal year? Or are we just at a a new ongoing level of inventory that now maintains from here?
Yes, that's a really challenging question. To answer, obviously, we don't control the level of retailer inventory levels. We do see that they're down, relative to last year. And I would say if, you know, if they follow their typical pattern and get close to where they were at the end of the fourth quarter last year, that would imply some tailwind for us on soup sale in the fourth quarter. But again, that one is really hard for us to project.
Understood. Thank you.
Thank you. Our next question comes from Chris Growe of Stifel. Your line is now open.
For you. A bit of a follow on to Rob question if I could, which is, and I use it for a lot of people keeping total spending, marketing promotion
in that Yeah. Chris I'm sorry, Chris. You're really cutting out. Do you have a handset you could use?
I'm on the handset. So, maybe I'll make you Is there any better?
It still sounds. You're in you're in and out. Yeah. Could you call back in and we'll put you back in maybe after the next one?
Perfect. Thank you.
Operator, can you make sure that happens?
Yes. Thank you. And our next question will come from Matthew Granger of Morgan Stanley. Your line is now open.
Hi. Good morning, everyone. Hello, Matt. Hi. I'll apologize in advance to Chris if I front run his question.
That was my intention. But I wanted to ask about promotion too. I guess Anthony and Denise, I appreciate some of the progress you made during the quarter on gross margin, but it also feels like we've gone from one extreme to the other extreme with gross margins stronger on lower promotion and higher pricing, but also unwinding a lot of the progress that it felt like you were making on volumes and inciting some inventory reductions by retailers. So I guess, I think you touched on elasticity being roughly in line, but is this really the type of volume response you expected to these promotional changes And if so, do you feel that this is the right balance going forward?
Matt, I think that what we've been paying very close attention to is consumption and market share. And, to give you some idea that our consumption was down 1% for the quarter. Condense was down 1. RTS was down 2. RTS premium was up 28.
Slow kettle was up 50. And so, you know, we we're continuing to see stability in the category and in our performance in the category, So so that's what we've been paying attention to as opposed to, excess inventory driven by promotion spending or the latter effect.
Okay. So there's nothing nothing in the reaction to the promotional changes here in Q3 that you feel a need to sort of change tweak strategy in the short term?
No, I'd say on Sue that, you know, the the the consumption has actually held up a little bit better than we had anticipated given the reduction in in in trade promotion.
Okay. And then just a quick follow-up on inventories. Clearly, a big part of that was a reaction to the changes in promotional support, but there's also been some press reports pointing to individual retailers actively shifting the balance of merchandising activity away from some of the center of store categories. So just curious whether you think some of what we saw here in Q3 was more sort of broad programmatic changes at major retailers as opposed to a specific reaction to your behavior?
No, we think it's more about what happened last year. And what happened in the third quarter last year, we increased quite significantly the amount of trade promotion in U. S. Soup. And quite frankly, it did not, you know, result in the lifts we had expected and it resulted, therefore, in higher inventory levels that retail.
And all we're doing is kind of wrapping that. So this is more about what happened last year than what's happening this year.
Yeah. And this year, we actually gained 4 feet of else base for premium soup.
Okay. Alright. Thanks. Thanks, both.
Have we got Chris back?
And we do have Chris Growe. Your line is your line is now open.
Okay. How does this sound?
Much better. Thank you.
I wish I could say I was calling from a beach somewhere, but I'm unfortunately in my office here. So I just had a quick question. It was a bit of a follow on to Rob's question earlier and forgive me answered this, and I missed it. But, you know, as you've reduced promotional spending, but kept your overall, marketing and promotional spending, that pressure on the consumer that it would imply that more money is going behind advertising. Is that right?
Or should that overall kind of 25% of sales start to come down as you get more efficient with your
is about the average NCPG. So we keep that as a guardrail, but we are, you know, the divisions will work with all the drivers of demand to figure the right mix for the brands that they are responsible for. In this quarter, we actually did have an increase in advertising by about 8% with 11% in constant currency dollars. But that mostly went toward the biscuit and Snacks business in both the United States and in Australia. There was a reduction in, advertising and consumer in the Simple Meals business.
Okay. Is that advertising increased? And that more than make up for the decline in trade spending?
No, we were total marketing advertising consumer and trade is down a bit in aggregate compared to last
year.
Okay. If I could ask one other follow-up as well just in relation to the new product contribution, I know you're focused more on sort of fewer, bigger, better, if you can use term. I'm just curious, if you had a lot of new product activities this year in 2015, has that been contributing strongly to revenue for the year. Is there any metrics you can look at like how much your revenue has come from new products this year?
I don't
know if you've got that figure. I
don't have that figure in front of me.
Yeah, I don't either. I think that I can address the fewer bigger, though, because we have still had, a disproportionate amount of line extensions that things like soup for easy cooking that just haven't contributed meaningfully. So and it's created some complexity in our supply chain. So what we've been doing is really focusing on a fewer bigger platforms like the dinner sauces, like the organic food, like the slow kettle that we can build and will have a meaningful contribution. We're going to try some things that aren't going to work.
The trick is to catch them early and move on.
Okay. Thank you for the time.
Thank you. And our next question comes from Bryan Spillane of Bank of America. Your line is now open.
Hi, good morning, everyone. Question about U. S. Beverages. In this quarter, sales were only down modestly, I guess, year over year.
And you had pretty good profit contribution. And I understand, I guess, part of that is just the marketing expense was lower. But are we closer to the point now where you feel like you've got that business stabilized? Or is that just too much of a read into into this quarter?
Yeah. I mean, I call them green shoots, not waving the victory flag yet. We are, again, seeing really positive signs from the new VA veggie blends and the impact that's having on our vegetable juice are splash business is strong. Our single serve business did pretty well in the quarter, where we've been hit is the VAV Fusion and, and we're just dealing with that one.
Thank you. And then just one follow-up, maybe I'm not following this correctly, but it sounds like retailers didn't buy as much soup as you thought they would have, yet the takeaway was a little bit better. Even in response to the promotional level. So did retailers not buy enough soup? Like, would you have sold more soup if retailers had bought more or is that not the right way to read it?
No, I wouldn't read it that way. I think your first part of your question, was right is that the consumption has held up better than we expected, but the change in retailer inventory level was more than we expected. Okay. Thank you. Have a great holiday.
You too.
Thank you. And our question comes from Eric Katzman of Deutsche Bank. Your line is now open.
Hi, good morning everybody. I have a maybe a little bit of a longer term question than a short term question. Why don't we deal with the latter? First, the short term, Anthony, the corporate expense line was a lot lower than we had expected. Is that a function of entirely of the incentive comp or is there other stuff going on there?
When you say the corporate line to unallocated corporate?
Yes, exactly. Within the segment,
Yeah, I think, you know, what we're seeing is, you know, a relatively big benefit from our cost management efforts But earlier in the year, we had put some restrictions on hiring. We had put some restrictions on discretionary spending. And then later in the year, we started our $200,000,000 cost reduction initiative, and we're seeing some early benefit from that. But I think you put those 2 things together and we're doing a bit better on the cost management side. A lot of that's coming through the G and A line.
Some of it's coming through, marketing overhead. And we're just seeing a little bit doing a little bit better on the cost side than we had had it had originally anticipated.
Okay. And then, Denise, the, again, the longer term question is, at CAGNY, you told us that in simple meals, you're going to more of a you know, relative top line approach and in listening to your explanations today and certainly over the last couple of years, you know, been, you know, new product efforts and promotion, and sometimes it's worked, and sometimes it hasn't. And and that's kind of swung things around both from a sales to gross margin, to profit standpoint. And so as you implement kind of more of the simple meals, or relative top line approach and, you know, combined with ZBB, do you basically anticipate that division sales kind of being flat to the down and profit up as promotion is just less volatile and arguably less, you know, less of a a negative. Maybe you can give us some initial thoughts there, and I'll pass it on.
Thanks.
I think it's fair to say that the, a couple of years ago, the Simple Meals business was in a hole. And we've gotten to the point where we've gotten stability in consumption and market share over the past 2 years. Now we've got to get to profitable growth. That said, that's going to be moderate. Based on where that category is and where it plays today.
As well. So that's the portfolio role that America Simple Meals And Beverages will play.
Alright. Thanks. Have a good weekend.
You too.
Thank you. And our next question comes from John Baumgartner of Wells Fargo. Your line is now open.
Thanks. Good morning. Just wanted to come back to the beverages side for a minute. You've been out for some time now with the independent distributor model for the instant consumables. Just wondering how that's evolving for you in terms of distributed performance opportunities that you rationalize or consolidate some distributors and just what you're seeing in terms of the returns there overall?
Are you talking about the immediate consumption business? Yes. Okay. Yeah, we we when we, moved away from the coke distribution system, we created a network of distributors that could cover the United States that was largely DSD. Some of that worked and some of it didn't.
We course corrected and, added some broad line distributors to that network, and that's working much better today. In addition, we had, our food service sales force responsible for managing those distributors we have since moved, the sales effort to our retail sales force to not only motivate the distributors from a supply standpoint but also to have end user customer coverage to create demand. And we've also supplemented that with some broker support for store work. So we believe with this more push pull model, we have we set ourselves up for better results. Finally, we are introducing more products in the range that distributors have to work with.
In the past, they had VA red juice. They had a couple SKUs of splash, and a little bit of V Eight V Fusion. Today, they have that plus the V Eight veggie blends and single serve V Eight energy and we have a pipeline of new products as well. So we're very committed to immediate consumption. It's only 10 of our business today.
And we know in a lot of beverage companies, it's 50% and very profitable. So this is worth building and being patient and doing it the right way.
Thank you. And our next question comes from Akshay Jagdale of KeyBanc. Your line is now open.
Hi. My question is on your recent acquisitions, Bolthouse and Plumb organics. If you just take a step back and I would love to get an update on where those businesses are relative to when you bought them and what your expectations were, on club organics, kroger, at a recent conference was raving about it. I know it's relatively small as a percentage of the overall sales, but seems like that one after some initial issues has really taken off. So if you could give us an update on both of those, greatly appreciate it.
Thank you.
Yes. I think overall, we're very pleased with our acquisitions of Bolthouse Farms And Plumb Organics. We bought bought of them to drive growth and they are delivering the growth. Bolthouse Farms get us into the package fresh category where we can continue to build build and bring new capabilities to that space. They have a great team.
And Plumb organics also a great team is a window to millennial parents and, has taught us a lot about organic food and, and really different ways of connecting with the next generation of consumers. So from a strategic standpoint and a performance standpoint, we're very pleased with both of these acquisitions.
Yeah, if I can just add
to that to give a slightly the other side of is we've seen a little bit of margin pressure in some of these business and are taking actions, as you can see, in Bolthouse Farms, there's been a little more trade pressure. And this quarter, we did dial back on trade to improve the profitability. So it's been a little bit of pressure on the margin there. In Plumb, we're going through a more extensive integration of some of the back and front office operations to improve the profitability of that business going forward as well.
Thank you. I'll pass it on.
Thank you. And our next question comes from Alexia Howard of Bernstein. Your line is now open.
Good morning, everyone.
Hi, Alex. Good
morning. Just one quick sort of data question and then, another one. You mentioned that the shelf space allocated to premium products had gone up by about 4 feet. I'm assuming that's some sort of weighted average distribution metric. Is some of the inventory reduction a reduction in shelf space on your more mainstream brands?
And if so, how much is that reduction? And then just on the promotions, there's been a lot of discussion on this call. Do you have a view as to why the promotional spending has become less effective over the last few quarters or so. Thank you very much, and I'll pass it on.
The, we have not had reports of reduction of shelf space on our mainstream brands. We really believe that the inventory movements that we've talked about were movements in warehouse inventory due to buying less cases because of a reduction in promotion spending. And then on the, the second part of the question one of the things we experienced in the quarter was we were cycling, the relaunch of Campbell's home style RTS, where we had a, a huge ACT spend against that brand. And obviously, we did not repeat those levels of spending this time around.
I think it's important on the promotional spending. Maybe step back mean, in in aggregate, you know, we spend somewhere around $1,500,000,000 on trade promotion in the year. Overall, we we feel that, you know, that we'll get it as an effective spending that we're getting return. When we talk about the changes, we're talking about $50,000,000 reduction against $1,500,000,000. So we're at edges of it and we continue to try and, you know, improve the effectiveness of that spend.
We drive our analytics to look for opportunities to reduce unprofitable trade deals. We look opportunities to increase the effectiveness of trade deals. We look for opportunities to increase the promoted prices over time. So I think, you know, we're talking about, you know, relatively minor refinements to the overall, you know, bigger program.
Yeah, year to date, our, our trade spend is down a point.
Great. Thank you very much. I'll pass it on.
Thank you. And our next question comes from Jason English of Goldman Sachs. Your line is now open.
Hi. Good morning. Hi, guys. Thank you for letting me ask a question. I wanted to follow-up on Alexia's question because your answer surprised me.
You said you haven't lost shelf space on your legacy products, but you've gained 4 feet on premium soups. Have you really gained 4 feet on average of shelf space for soup at retail?
That's what our figures show us. I mean, we've cracked this very, very closely, and that's the feedback.
What we're seeing in terms of retail data is pretty sharp velocity declines on a sales per TDP or gross distribution point metrics, sort of high single digit, low double digit, how sticky do you think that shelves cases.
Yeah. I'm not sure what data you're looking at.
Nielsen data.
Okay. I I guess I
could follow-up with Jennifer on on that just to get sort of clarity on on the data. Why don't I move on to one more then? And it's back sort of Billy An oxy's question about M And A and it's more about the portfolio overall over the last couple of years East, you've embarked on a bit of a portfolio reconfiguration effort with some of the M and A. Are you happy with where the portfolio is today? Do you think it's it's it's it's portfolio that will allow you to get back to your long term algorithms?
Or should we expect M and A to remain in the forefront of your strategy as you continue to sort of rebalance the portfolio. And if so, can you give us an update in terms of what you're thinking in terms of fit, size, timing, etcetera?
Yes. I think we've made, good progress in terms of the reshaping of our portfolio and pushing into faster growing spaces with the 3 acquisitions that we made and with the divestiture of the Europe Simple Meals business. I do believe that we need more M disciplined in our approach there.
All right. Thank you very much. I'll pass it on.
We'll take one more question. We're coming up on our.
One more comment on the on the shelf space and stickiness question. I mean, as Denise mentioned, you know, most of that gains has to do with our, you know, extension of our premium offering and our, you know, our slow kettle business is growing well above double digit in the marketplace. So we feel really good about you know, the velocities we're seeing on on that business. And as you know, we've just launched, you know, a line of organic soups into that, you know, premium section as well. It's still early days on the organic organic thing, but, you know, we feel really good about the ACV distribution and shelving we've achieved to date on that one.
So we feel really good about our premium offering in soup on shelf.
Thank you. And our last question will come from David Driscoll of Citi Research. Your line is now open.
Hi, David.
Hi, good morning and thanks for squeezing me in. Just a few loose ends Anthony, can you quantify how much of the $200,000,000 in cost savings are to be realized this year And then also for you, can you quantify for us what you expect the incentive compensation headwind to be for F Sixteen?
Yes. So let me take those, one at a time. I can't quantify specifically on the $200,000,000. It gets a bit But what I I can tell you, that, you know, between the, you know, the cost containment efforts that we had in place before, the $200,000,000 initiative and inclusive of the $200,000,000 initiative, we probably saved somewhere around $15,000,000 in the quarter. Now when we get to Analyst Day, we'll try to parse that apart because we're still going through the analysis now, figure out, well, how much is due to the change in travel policy, for example, or consultant policy relative to the restrictions we had in place already on discretionary spending in head account.
So it gets a bit difficult to to do that. And we'll try to do that for you when we get to Analyst Day. We'll try to give you an outlook, you know, looking ahead across the 3 years at what rate do we expect to realize the $200,000,000. On the incentive comp, just to give you kind of order of magnitude, if I take you all the way back to the beginning of the year, we said that incentive compensation would be a $0.09 headwind. Now we're saying it's a 4 percent headwind.
That nickel is still hanging out there for next year. It's probably a way to think about it.
Okay. And then just following up on the 4th quarter expectations, what drives EPS down so much given your expectation for gross margin improvement and what sounds like pretty clearly additional cost savings?
Yes, you had a couple of components. I think should help you. The one thing to remember is that last year has the extra week, right? So if you go back the $0.49 that we reported on adjusted basis. There's $0.08 in there that we've quantified out of the actual week.
The other thing we've said is $0.04 compensation headwind all sits in the 4th quarter. And there's probably another penny of currency. So there's $0.13 that declined for you year on year.
Okay. I appreciate the help. Thank you, everyone, and have a great holiday weekend.
Thanks, David, and thanks, everyone, for joining our third quarter earnings call and webcast. A full replay will be available for you about 2 hours after the call concludes. You can go online to see that or call 17039252533. The access code is 16543 51. You have until June 5, 2015, at midnight, at which point we'll move our earnings call strictly to the website.
Investor.campbellsoupcompany.com under news and favorites, market and your favorites. Just click on recent webcasts and presentations. If you have further questions, please call me, Jennifer Driscoll at 856-342-6081. Recorded with questions, please call Carla Bericatto, Director of External Communications at 8563423737. We hope to see many of you at our Investor Day, July 22.
That concludes today's program, and you may now disconnect.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.