Good day, ladies and gentlemen, and welcome to the Campbell Soup First Quarter 2015 Earnings Call. At this time all participants are in a listen only mode. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Jennifer Derskol, Vice President, Investor Relations. Please go ahead.
Thanks, Kate.
Good morning, everyone, Welcome to the 1st quarter earnings call for Campbell Soup's fiscal 2015. With me here in New Jersey today are Denise Morrison, President and CEO. Anthony Diesel Vestro, Chief Financial Officer and Anna Choi, Senior Manager of Investor Relations. We'll start with a few housekeeping items, Then Denise will offer her perspective on the quarter and our progress with our F-fifteen objectives. Anthony will discuss our financial results for the quarter before elaborating on our as usual, we've created slides to accompany our presentation.
You find the slides posted on our website this morning at investor.campbellshoopcompany.com. Our call is open to the media who are participating in listen only mode. You probably noticed this morning that we reformatted our earnings release in an effort to enhance readability. We made the changes based on feedback from you, our investors and analysts We hope you'll agree that the new earnings format as well as the enhancements we made to our earnings call will make it easier for you to understand the business and to find the key points. Thanks for those of you who offered input and let us know if you have feedback on our changes.
Today, we'll make forward looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk. Please refer to slide 4 or to our SEC filings for a list of the factors that could cause our actual results to vary materially from those anticipated in our forward looking statements. While in the 14 will exclude previously announced items. Because we use non GAAP measures we provided in our appendix, a reconciliation of these measures to the most directly comparable GAAP measure.
With that let me turn the call over to Denise Morrison.
Thank you, Jennifer, and good morning, everyone. Today, I'm going to share my perspective on our first quarter 2015 performance. I will review the key drivers of our results, including our positive organic sales performance across most of our core and acquired businesses Then I'll discuss the challenges we are facing and the actions we are taking. Our challenges include our gross margin performance and the impact of currency headwinds, which Anthony will review in greater detail in his presentation. As a reminder, we said on September 8th that we don't expect our growth in fiscal 2015 to be evenly distributed across quarters.
As a result, we believe that evaluating Let's start by examining the key growth drivers in our core business in the quarter. I was with higher sales in our US soup portfolio. Our US soup performance benefited from a stronger seasonal sell in and the our presence in the We made good progress as we launched new slow kettle varieties in the quarter to drive the brand's double digit sales growth. Many of our retail customers have created dedicated shelf space for our premium soups where we have gained additional linear feet. The next step in our plan this January.
Another key driver in U. S. Simple Meals was our strong performance in sauces, including prego, pace, and Campbell's dinner sauces as we introduce new products and leverage merchandising. We expanded our dinner sauces platform beyond skillet and slow cooker pouches with the launch of oven sauces in the quarter, which has quickly achieved 52% ACV. Overall, Campbell Diner Sauces now have over 80% ACV with dedicated sections that are becoming a customer markets.
We're moving in the right direction to stabilize the business in Australia where we drove our and marketing and promotion behind core brands and driving innovation, including new TimTan varieties and light and crispy Arnott Shapes. I was also pleased with the continued to savory crackers with the introduction of Arnott's shapes. Now let's look at the performance of the trio of growth engines that we acquired in the last 2 years. Bolthouse Farms, Plumberganics and Kelton. Strategically, we acquired these businesses to expand into faster growing space and respond to the seismic shifts Together, these businesses contributed one point of organic sales growth to our company in the quarter.
We were encouraged by Bolthouse Farms' strong top line growth. We continue to expand distribution in package fresh super premium beverages and fresh salad dressings. Bolthouse Farms has strengthened its number one share position in premium beverages over the last year, while simplifying and streamlining its beverage portfolio, increasing space for higher velocity offering and reducing out of stocks. During the quarter, we also launched Bolthouse Farms Kids, the brand's first line of healthy beverages and veggie snackers for children. We're merchandising Bolthouse Farms kids with a dedicated shelf set in the fresh produce section to further expand our category.
Plumberganics delivered double digit sales growth after facing challenges a year ago, as the number one brand in the organic segment in simple meals and snacks. We're continuing to integrate Plumb to leverage Campbell's scale and amp up its expansion while maintaining its entrepreneurial spirit. Kelson, which we acquired early in last year's first quarter, to expand Global Snacks business delivered higher sales as it continued to meet our expectations. We're focused on expanding distribution in key cities in China. The second quarter historically marks these are often exchanged by friends and families in China as gifts for holidays and festive occasions, including Chinese New Year's.
Now let's take a look at some of our challenges and how we are addressing them. I'm going to focus my remarks on two businesses that underperform Pepperidge Farm And U. S. Beverages. But before I get to those, let me say that our gross margin performance in the quarter did not meet our expectations.
Some of the pressure and transportation costs. Anthony will describe these issues in greater detail in a few moments, We are taking action to manage costs aggressively and working all the levers to mitigate the unexpected pressure on gross margin. Turning to the businesses. Pepperidge Farms performance in the quarter was mixed. I was pleased with our growth in cookies, driven by Milano and crispy Pepperidge Farm varieties.
We also drove strong results in fresh bakery, which continued to outperform the market consumption and share gains. Fresh bakery benefited from our focus on seasonal offerings and quality improvements. Our main challenge in this business is to restore growth in crackers. It's important to examine the total cracker category. For the past 2 years, dollar consumption growth trends have slowed in the category and were flat to declining in the quarter.
We see several crucial drivers About half of cracker consumers are buying crackers and other snacks less frequently. And when they do, They're shifting in some cases to snacks that are better for you or on the opposite end of the spectrum, more indulgent snacks. 2nd, approximately 3 quarters of the losses in the total category have been in sandwich crackers where we don't compete. 3rd, total advertising in the category has declined more than 20% in the last year, impacting velocities, as price and distribution held. And finally, there's been a decline in the number of new products introduced in the category resulting in less excitement from innovation in the cracker aisle.
In this environment, some major brands have continued to outpace the category one of those brands is Goldfish, which has consistently outperformed the category over the last 3 years. In the the launch of Goldfish Pups. We're not satisfied with this performance given the brand's steady track record of growth over many years. We continue programs, increased advertising and consumer promotion, and improved in store merchandising. Going forward, we are increasing advertising by about innovation, including new flavors of Goldfish And Goldfish Puffs.
Turning now to U. S. Beverages. Although we grew operating earnings, sales of V Eight V Fusion And V Eight Vegetable Juice decline as Shell Stable category remained under pressure. Our plans to revitalize our VA platform are underway.
The next step is the January launch of V Eight veggie blends. We are optimistic about this launch as we plan to tap into the juicing trend
by
V8 brand to a new category with the launch of V8 protein shakes and bars to expand into adult on the go nutrition a multibillion dollar category. This is another example of our focus on driving breakthrough innovation to expand into faster growing spaces. So looking ahead, although we face more challenging comparisons, we are confident about our plans for which moved in the right direction in the first quarter restoring growth in Goldfish Crackers and improving Pepperidge Farms top line performance revitalizing V Eight to bring news to the shelf stable juice category, and delivering strong performance in Bolthouse Farms, Plumberganics, and Kelson. Across our portfolio, we are responding to the consumer shift to health and well-being with new on trend products ranging from Campbell's organic soups and V Eight veggie blends in the center of the store to Bolthouse Farms kids in the fresh perimeter and VA protein shakes and bars in the health and beauty aisle. Finally, we are taking action to mitigate gross margin pressure in the remainder of the with stronger performances in U.
S. Simple Meals And Global Baking And Snacking. We have more work ahead and challenges to overcome this year but we remain focused on our strategy to strengthen our core business and expand into faster growing spaces to reshape our portfolio for a more profitable growth trajectory. I look forward to answering questions in a few minutes Now let me turn the call over to Anthony for a detailed review of our financial performance.
Good morning, and thanks, Denise. Before getting into the details, I wanted to give some perspective on our results and guidance. As Denise said, we are encouraged with our top line performance we start the fiscal inflation and supply chain related costs. And significant strength of the U S dollar against most major foreign currencies, we are seeing a negative impact that we did not forecast. Based on this headwind and volatility from currency translation, we have reduced the low end of our guidance ranges.
Importantly, our currency neutral expectations have not changed. Now I'll review our results. 1st quarter net sales increased 4 percent to percent with volume and organic sales gains in 4 of our 5 reportable segments. Sales quarter benefited from movements in retailer inventory levels from a stronger seasonal sell in and the later timing of quarter relative to the Thanksgiving holiday. In aggregate, the movements in retailer inventories represent about half of our organic sales gains in the quarter.
We are encouraged by the sales performance in Australia and from the performance of our recent acquisitions as Bolthouse Farms, Plumb, and Kelson contributed one point of total company organic growth in the quarter. Adjusted EBIT increased 9% reflects the higher sales, the benefit of lapping the prior which were partly offset by the decline in our gross margin percentage. Adjusted earnings per share increased 12% to 0 point 7 $4. Decomposing our sales performance, favorable volume mix was the main driver of the increase primarily in the U. S.
Simple Meals And Global Baking And Snacking segment. Overall, increased promotional spending was negatively impacted sales by one point. While our promotional rate was stable in our largest segment, U. S. Simple Meals, the increase was driven by higher rates of spending in the Global Banking And Snacking segment.
Currency also negatively impacted sales by one point as our 2 primary foreign currencies, the Australian dollar and Canadian dollar both weakened against the U. S. Dollar. We are disappointed with our gross margin performance, which did not meet our expectations. Highlights the factors impacting our performance.
First, cost inflation and other factors had a negative impact of 3.40 basis points. Most of this was cost inflation, which as a rate increased by almost 4%. Recent and unanticipated increases in dairy, beef and aluminum have added to the overall inflation impact Also, with pressure For the full fiscal year, we In our North American supply chain, we experienced higher than expected manufacturing and freight costs from significant volume demand early in the quarter. As a result, we ran production more weekends, increased the use of co packers and incurred higher freight costs in the spot market. Promotional spending negatively impacted gross margin by 70 basis points, primarily impacted by higher spending Moving to the right.
Point gain. Lastly, we continue to drive meaningful productivity gains in our supply chain, which contributed 1 40 basis points of improvement. Looking ahead, reflecting our revised inflation outlook and first quarter performance, we now expect our gross margin percentage for the full year to decline 50 to 100 basis points due largely to the residual cost inflation and cost to maintain our customer service levels as we recover from the early spike in demand. Longer term, our investments in suit common platform and broad capacity will increase our flexibility to respond to volatility in demand. Importantly, we will manage the balance of the P and L to mitigate the negative impact including our overhead and supply chain costs and our marketing programs and also expenses decreased 5%.
As you may recall, Tau's Farms. Marketing reductions in the current quarter reflect lower advertising spending in U. S. Simple Meals, primarily advertising production costs and a shift in advertising in U. S.
Beverages to the back half of the year to support the launch of our new V Eight veggie blends form. Administrative expenses were down and cost savings related to prior year restructuring initiatives. Given that our annual cycle for long term incentive compensation is at the end of the first quarter, we had favorability through this quarter. And as we've discussed previously, expect a significant headwind for the balance of the year. For additional perspective on our performance, this chart breaks down our EPS growth between our operating performance and below the line items.
As you can see, we $7 of which is attributable to the growth in EBIT. Net interest expense declined $5,000,000 versus a year ago, as we reduced our debt level using the proceeds of the European Simple MealyF divestiture. And this contributed a penny to EPS growth in the quarter. Tax rate remained relatively flat declining 40 basis points to 31.8%. We resumed repurchases under our strategic share repurchase program in the quarter, repurchasing $50,000,000 under this program.
However, given the timing, there was no impact on EPS growth in the quarter. While currency had a 1 point impact on sales it did not impact EPS in the quarter. For the full year and based on current exchange rates, we estimate currency will have a $0.03 per share negative impact. As this was not anticipated, we've adjusted the lower end of our guidance range to reflect the impact Now turning to our segment results. Sales growth in U.
S. Simple Meals was 8% driven by strong volume gains. U. S. Soup sales increased 6% benefiting from selling and the later timing of our quarter end relative to the Thanksgiving holiday.
Sales of other simple meals increased 14%, driven by growth in plum, Prego benefiting from white sauces, and in our dinner sauce platform, which now includes oven sauces. Operating earnings for U. S. Simple Meals increased 15% with 8 points of the growth due to cycling the plum recall in the prior year. In Global Banking And Snacking, we achieved 3% organic sales growth, driven by the improved performance of Arnott's.
We're pleased with our consumption and share gains Within Pepperidge Farm, fresh bakery and cookie sales grew. Goldfish Crackers had line. Sales of frozen products were 18% of which 10 points was due to wrapping the negative impact of purchase accounting on the Kelson acquisition in the prior year. In the Bolthouse and Foodservice segment, growth continued to be driven by sales gains in Bolthouse premium beverages and salad dressings. Decline in operating earnings was primarily driven by a lower gross International Simple Meals And Beverages grew organic sales by 5%.
Strong sales gains in Canada were driven by innovation and higher levels of promotional activity declines in operating earnings reflect the impact of increased marketing support. U. S. Beverage sales fell 3% on declines in the immediate consumption channel as we continue to implement our new route to market Across the portfolio, sales declines in VH infusion and V Eight vegetable juice more than offset gains in VH splash. Operating earnings improved as we shift the timing of our marketing programs to the back half to support the launch of the veggie blends platform.
Within U. S. Soup, the 6% sales growth was driven by gains in condensed and swanson broth. Condensed eating and cooking varieties rose. Swanson broth continues to perform well in the marketplace led by a septic drop, which benefited from earlier holiday shipments.
Sales of ready to serve soup were comparable to the prior year as the lines and volume were poorly offset by lower promotional spending as activity was shifted to the second quarter of this year. While our soup sales increased 6%, consumer takeaway and measured channels for the comparable 13 week period ending November 2 to decline by 2%. Here's a look at U. S. Wet soup category performance and our share results as measured by IRI.
For the 52 week period ending November 2 2014, the category as a whole to declined 0.5%. Our sales in measured channels declined 1.6% with weakness in condensed and ready to serve soups partly offset by strength in broth. Campbell had a 59% market share, a decrease of 70 basis points. All other branded players collectively had a share of 28% with gains driven by smaller players. Private label also grew share finishing at 13%.
We had strong cash flow performance as cash from operations increased from $38,000,000 to $188,000,000, reflecting lower working capital requirements, lower pension contributions, and reduced payments related to hedging activities. Capital expenditures increased slightly to 62,000,000 We continue to expect capital expenditures of about $400,000,000 for the year as we increase capacity to support growth in our faster growing businesses. We paid dividends totaling $101,000,000, reflecting our current quarterly dividend rate of $0.32 per share. In aggregate, we repurchased 73,000,000 of shares in the quarter, 50,000,000 of which were under our strategic repurchase program. The balance of the repurchases were made to offset dilution from equity based compensation.
Based on our current investment plans, we can anticipate making strategic share repurchases at this pace on average for the balance of the year. Net debt declined almost 700,000,000 to $3,800,000,000, including the proceeds from the European Simple Meals divestiture. Approximately 22% of our sales are denominated in currencies other than the U. S. Dollar, with the Australian dollar and Canadian dollar making up the majority of our non US sales.
Since September, both of these currencies have declined in value relative to the US dollar And while not a material impact to our first quarter, if the current rates hold for the balance of the year, we will see a more meaningful impact. At current exchange rates, we estimated to negatively impact our full year performance by 1 percentage point of sales EBIT and EPS and is the reason we're adjusting down the lower end of our guidance ranges as illustrated on the next chart. As we announced earlier this morning, we've adjusted our fiscal 2015 guidance as shown. Our currency neutral expectations percentage, we have plans in place to mitigate the impact. EBIT from minus 1% to plus 2% and adjusted EPS from minus 1% to plus 2% or $2.42 to $2.50 per share.
As we said previously, we anticipated stronger 1st quarter performance. Because we are cycling a more robust second quarter last year, we expect a first half that's more consistent with our full year guidance. Thank you. Now I'll turn it back to Jennifer.
Thanks, Anthony. We will now start our Q and A session. Since we have limited time out of fairness to other callers, please ask only one
Our first question comes from the line of Alexia Howard with Sanford Bernstein. Your line is open.
Good morning, everyone.
Hi, Alexia. Good morning.
Denise, you mentioned one for twice the fast growing perimeter of the store. From what you've seen, the retailers expanding fridge space, at at the moment, and and what does this mean for the shelf space in the center of the store? Obviously, it's great for for both house might be more difficult in the ambient products? Thank you.
Thank you, Alexia. We have seen over the past several years a expansion and a build out of the perimeter of stores. Within the produce section, however, the additional space that we are getting for the Bolthouse Kids launch is largely a reconfiguration of existing space. So pulling from other things in produce, and carving out a section for Bolthouse Kids. And that's been largely the way the, the premium beverage and the salad dressing sections have been expanded as well.
So, I think it's more, yes, perimeter space continues to expand. And then within the produce section, there is has been a larger dedication of space to CPG items.
I would add to that. I mean, if you look at the center of the store and in our soup business, I mean, given the level of innovation we're bringing to the market, with the premium expansion and soon the organic soup launch, we're expecting to gain shelf space in our soup category.
Thank you very much. I'll pass it on.
Our next question comes from the line of David Driscoll with Citi. Your line is open.
Thank you. Excuse me. Thank you and good morning.
Hi,
David. Good morning.
Wanted just to prove a little bit more on this gross margin issue. I mean, this looks to be a fairly significant issue. I think, Anthony, you said now down 50 basis points to down 100 basis points for the full year. And previously, the expectation, correct me if I'm wrong, but it was up modestly was the prior expectation. Is that correct?
I think we said it was expected to be stable. So versus stable, yes, we're down now looking to be down 50 to 100 basis the points. And to just dimensionalize that, we did not anticipate that recent increases in dairy beep and aluminum and also what freight costs are doing. And that's the majority of that 50 to 100 basis point decline. The other piece of it is higher than anticipated supply chain costs related to that early spike in demand that we had to deal with.
May I say that, I always thought that you had a pretty good visibility on the protein side because of your relationships with your suppliers you know, that these things didn't kind of just suddenly come up. And I thought the entire purpose of that was that gaining pricing in soup during soup season is like all but impossible So, maybe, you know, is my recollection of history correct? And kind of why is it different this time?
Yes, I think we have a pretty broad array of input causing it. And certainly on proteins, it's a significant part of and we do have good relationships obviously with our suppliers, but the markets have been extremely volatile. And I don't think we're the only ones that are seeing this type of activity. There's been issues on the supply side related to the drought. Has it been issues on the hand side related to foreign buyers.
And this just created a lot of volatility that frankly, we we didn't anticipate.
And the way you offset this is by, number 1, it's going to be lowering marketing spending and then number 2, lower overhead spending. Do I have that in the right order?
I've switched the order of that. And I'd also add that we're evaluating price realization opportunities and also pushing on our supply chain to one fix the problem and to contribute to those cost savings.
Super. Thank you. I'll pass it along.
Our next question comes the line of Chris Growe with Stifel. Your line is open.
Hi, good morning.
Hi, Chris.
Hi, just had a quick question for you if I could. If you look at this quarter, you're getting the what seems to be increasing contribution from the sauces business within U. S. Simple Meals in particular as well as premium. So I wanted give a little color around how those two products benefited, the sales for that for that division in the quarter.
And maybe related to that, ready to serve as a little weaker than I thought against the relatively easy comp, premium suits would fall on a rate of I presume, I want to make sure that was clear and then understand why that was a little weaker than I thought.
Okay. First of all, we have had for the past several years a very good run with our base sauce businesses, particularly in the prego line. Recall, part of our innovation plan, was the successful launch of Prego white sauces, which has done incredibly well. We've increased our advertising to brand building that's gone on in our base sauce businesses. And PACE also had a very good quarter.
One of the things that is also impacting our sauce business is the building of the dinner sauce platform. And although it started small with one initiative in skillet, as we've built from skillet to slow cooker and now introduce oven as we've gained an additional section in the store to house these sauces and create a consumer destination, we really believe that that has added, seriously to our sauce performance. And of course, this is a very good margin business for us as well.
Yeah. The only thing I would add to that is, plum is reported inside of Simple Meals and it had a significant increase in sales, in part due to wrapping the recall and in part due to expanded distribution.
So within ready to serve, presumably, premium to screw. Was that that was a contributor to growth in the quarter? Was there any was one element of ready to serve that was weak, whether that would be chunky or home style? Or
Yeah. There was a very good reason for that. Our ready to serve business was typically flat. And that comes mostly from promotional timing move to the second quarter out of the out of the first quarter relative to last year.
Okay. Thank you.
Our next question comes from line of Ken Goldman is JP Morgan. Your line is open.
Hey, good morning, everyone.
I can.
Denny, as you've spoken in the recent past, I think about core correcting your deals a little bit, a deal back for it, going deeper in terms of discount, but maybe a little bit less broadly. I'm just curious this is still the plan because as we look at Nielsen data, we are seeing deeper levels of price discount and you're doing what you said, but we're not really seeing a change in the percent lift from promotions. So I'm just curious how you think about that, I guess, Brett versus debt decision going forward here?
Well, we do expect our total marketing to be in the range of 24 to 25 percent of total list sales. So and within that, the mix will be different by category. And we do recognize as we're very, diligent about going back and looking at productivity of our trade spending. And we recognize that some of the spending last year, particularly in Pepperidge Farm and in soup, did not achieve the anticipated lifts and predominantly came from increasing the frequency of promotion. So we do expect our overall, trade rate trends to improve in the second half as we've course corrected in this area.
Great. Thank you.
Our next question comes from the line of Robert Moskow with Credit Suisse. Your line is open.
Hi, thank you. Good morning. So I guess I would wondering about this unexpected spike in demand. If we look at the sales in the quarter, it didn't come in that different from what we had modeled. And I don't it came in that different from what you had modeled.
So was this a specific customer making a last minute decision that you felt like had to react to? And then secondly, gross margin being down 130 bps despite volume being up, Anthony, was there any kind of, overhead absorption benefit from all this volume And if so, if not, you know, why not?
Yeah. Let me start with the last part of that question. No. There wasn't an absorption benefit because we still to make the same full year production. So it's just moving fixed costs with those cases between the quarters.
So I want to on a rate per case basis, nothing's really changed. In terms of the volume spike, what you don't see when you look at the quarter is the monthly variations. And we had very strong volume demands early in the quarter, so August, September. So in order and it's not a particular customer. It has to do with just our overall programming and the timing of which customers place orders.
So in order to meet customer service requirements, we had to run some more over time. We had to run some more weekends. And obviously that costs a bit more. And we also had to get into the freight market on a spot basis. So that's obviously a little more expensive.
So it's going to take us a little while here to catch up with that requirement. But we would foresee improvements when we get to the second half of the year.
Okay. Was it on the specific line of products or not?
It's mostly in our soup and sauce business in the U. S.
Okay. Thank you very much.
Our next question comes from the line of Eric Casson with Deutsche Bank. Your line is open.
Hi. Good morning. Happy holidays to you and your family. I want to follow-up on Rob's question, because I think it goes to the point. I mean, what kind of mean, obviously, we knew the timing of Thanksgiving, and you, you kind of said that the shipments were well ahead of consumption.
So the first part is what are we looking for from sales in the second quarter given how much there it seems like there was over shipment versus consumption.
Yes. I think that's a good point. We, as you know, benefited from the retailer inventory movements last year's first quarter relative to this year's first quarter. And when you look at where we ended this quarter, it's within the kind of the Oracle ranges, but we're a bit higher than where we were last year. So it's hard to predict exactly when that will come out, but it could put some be a little bit of a headwind for us on 2nd quarter top line.
And as we've said, also said, we did expect stronger first quarter and a relatively softer second quarter and to finish the half with results more in line with our full year guidance. So this is not unexpected. But again, the thing that didn't, we didn't expect was within the first quarter, the acceleration to the earlier month or 2?
Yes. We actually had a stronger sell in against back to school. And as predicted, had our holiday shipments, some of our holiday shipments ship in October. And about in the soup business, at least, about 75% of our consumption actually occurs in the second and the third quarters.
Okay. And then, Anthony, I don't understand your answers Rob's question about the volume lift and the absorption. So are you saying that you basically just regard of quarterly volume, you basically, spread the fixed cost over the entire year, on a, just on a, on some kind of basis as opposed to, you know, kind of counting it more specifically, within the quarter?
So it actually goes with the volume. So you figure out a fixed cost per case and you recognize those fixed cost as you sell them. So it doesn't it's not a straight line. It moves with the volume.
Right. So with the volume so strong in the arguably the highest margin products that you have, I guess you just must have paid extraordinary cost on the the freight market? And I would assume, you know, Pepperidge Farm And Goldfish is a very high margin product. Was that also an offset? Because otherwise, my guess is most investors
are saying that this would have been a much bigger margin quarter. Yes. I think you referenced a mix benefit and we do see that. And you saw it on the gross margin bridge that I reviewed. So we are seeing that mix benefit.
But as I said, on a fixed cost per case basis, we don't necessarily see that. But we do it in the mix line. So I think there's 30 or 40 basis points of mix benefit given the performance of Stoop and some of our higher margin business relative to the balance. But that being said, the inflation impact on dairy, beef and aluminum and freight is about half of that gross margin miss. And the other half is the supply chain related costs, which aren't insignificant, and did hurt our gross margin performance in the first quarter.
All right. I'll respect the time. I'll pass it on. He will follow-up on this. Thanks.
It was 40 basis points, mix benefit.
Our next question comes from the line of David Palmer with RBC Capital Markets. Your line is open.
Hello, David.
Good morning. Hi. A big picture question about Campbell improving towards this long term algorithm. I'm imagining this year that Plum, Old House, VA, those are going to be areas of improvement this year and perhaps you can comment on that but thinking longer term, one issue, and I think Chris was hinting at this on his question. Campbell's been improving, somewhat in the meal helpers, the sauces, the cooking soups, essentially helping the millennials and others prepare meals and participating that in that in importantly in a higher margin way when these platforms, again, higher margin platforms for Campbell could start to sort of carry the P and L, contribute on revenue in a way that isn't one where you're fighting the gross margins of the products that you're growing with.
Can you comment on that and perhaps when you could see a tipping point like that?
Well, first of all, I don't think I could have articulated the strategy any clearer than you did. So thank you for that. I think that it you know, as opposed to a tipping point, I think we're starting to see the impact of of some mix change as these particular faster growing businesses come into portfolio and are now captured in our organic sales. And I, you know, I liken it to what we did with aseptic broth you know, once upon a time, broth was a canned business. And over time, we introduced the aseptic cartons and the cans gradually declined the aseptic cartons of broth increased at a very significant margin.
So we were pretty excited about that. And then I think it's these, these other businesses will come into the portfolio and mix accordingly. But that said, we are still putting, you know, a very concerted effort on our our core businesses to strengthen them as well.
I guess my major the big question, the $1,000,000 question is whether this these sauces and helpers, essentially, can and some sometimes it's hard for us to tease that out of your general soup numbers because some of these cooking soups, when those will, again, carry that line item in a margin accretive way. I guess, it'll be for us to just wait and watch.
Yeah. I mean I think that's right. One of the things we do know is that these types of products are attracting a more affluent and younger consumer into our franchise and we're very encouraged by that.
Our next question Our next question comes from the line of Matthew Greinger with Morgan Stanley. Your line is open.
Hi, good morning, everyone. Hi, Matt. Just to drill down on one of one of these newer business lines. I was surprised to see profitability down pretty sharply in the both and food service segment and granted 1 quarter, but you're obviously generating strong top line growth on both house. Food service seems to be in a more stable position.
So is the margin contraction here during the quarter a function of the timing of investments in new products, or should we think about there perhaps being Old house specific cost pressures that could persist over the course of the year or are there other factors that play just here during the quarter?
Matt, there's a couple of things within, Bolthouse, the CPG Businesses, so beverages and salad assets grew both top and bottom line. The issue within carrots and within both assets has been carrots. So there's been some significant inflation in there. It's partly due to the drought. So we've had higher water extraction costs and higher land costs.
We also had higher freight costs. We were growing up in Washington State and trucking down to California. And since the first quarter, that productions moved to Central California. So that should help a bit. The other impact is on the food service business, so not in Bolthouse.
Significant cost in place in the food service products and also some investments we're making to expand our retail fresh business. So it's a combination of those things. Okay. So it's fair to say
it may not be the same magnitude, but some of these things directionally could continue to pressure operating profit for the few quarters? No, I
would expect things to get better.
Yes, we expect improvement.
Thank you.
Just wanted to ask a question about, M and A. And, Denise, we're now a couple of years into this current strategy and you've been very articulate and clear about, where the M and A targets are, but At the same time, there's been, there's 2 things that have probably shifted more in the last 3 years. One has been this the trend towards or the size of the impact on health and wellness has become, I guess, more pronounced and larger in the U. S. And then also international, especially developing an emerging market, at least right now slowed.
And I think there's a lot of mixed opinions in terms of when it turns and how it turns and where it turns. So Can you just talk a little bit about how you've looked at, that those dynamics changing and if at all, it begins to have you kind of refocus or adjust at all your lens for where you're looking to do Yes.
Yeah. So so we've said previously that some acquisition may be required to further diversify our portfolio and we still believe that to be the case. But that said, we've also said and and still are very tight with this. We have a very disciplined approach, to how we evaluate acquisitions and the strategic fit of acquisitions into our program here. That said, we do have the financial ability to make a meaningful acquisition if we can find one that is a good fit and, gives us the returns that we would expect to create value over time.
So, we still are active
in this space, but we're being very disciplined about our approach to it. Has there been any change in how focus areas or areas we're looking just because the global economy is slow. Things are slower in developing emerging markets. And there seems to be an increase, certainly appetite and investment community, but also just broadly as health and wellness related products and categories begin to expand. Does that all change the areas where you're looking, or is it still sort of the same basket team, proportions in terms
of where you were looking?
Yes. Well, if you think about the acquisitions that we've made, Plum Organics And Bothhouse Farms in Package Fresh have both been, we believe are very very solid plays in health and wellness. And, the Kelson business, was a good ad for us for international expansion, particularly with 40% of its sales in China and Hong Kong. We'll continue to look for target similar to those kinds of acquisitions.
And then just one last one related to this. Just in terms of investment, so rather than M and A, is there any more broad thoughts to just changing making investments organically in your own business to adjust towards, simpler ingredients or more health and wellness above and beyond what you've already done. So something that might maybe change production processes or change ingredients? Is that at all part of the, sort of, what you're looking at in terms of your investment dollars? Thank you.
Yeah. I think, you know, if you really look at the, the platforms for growth, in in addition to what we just discussed, you know, we're we've got a concerted effort on breakthrough innovation and one of the platforms and breakthrough innovation is health and well-being because we've got the veggie blends coming, the protein bars in shakes, shakes, we've got advances in innovation in Bolthouse Farms in Plum and we have the new Campbell Organic soups coming to market. So we're very active in innovation in health and well-being space package fresh we just talked about. And then also increasing our availability we've got an enormous opportunity in, in other channels outside of grocery, particularly in immediate consumption channels that we aren't we're in the process of building out that network. We put a sales team in place and we still have a lot more work to do there, but that's a great expansion space for us.
All right. Thank you very much. You're welcome.
Our next question comes from the line of Akshay Jagdale with KeyBanc. Your line is open.
My question is on freight costs. Can you talk a little bit more broadly about freight costs? A lot of companies have been mentioning that in the food space as being a headwind. It seems like a general industry trend, that sort of snuck up on us. Is that the case?
What's your read on that? And is it sort of a transitory issue? And perhaps, how long might that last? Yeah, I think it really stems from the carrier capacity situation and they're just significantly more demand than there is availability, especially on the spot market. So it hit us two ways this quarter.
1 is just a general increase in freight rates. The other, because of our volume demand, we had to access the spot market. And a higher proportion than we've done in the past. And what we're doing about it is we're trying to get more committed carrier capacity in our highest volume freight lanes. And that'll protect us from coming to the spot market.
You may have to pay a little bit more but it gives us some protection. And our supply chain group is in the process of doing it right now. So it will be a negative impact that it should moderate as we go through the year here a bit.
Thank you. I'll pass it on.
Last question, please.
Our final question comes from the line of Alexia Howard with Sanford Bernstein. Your line is open.
Thank you for the follow-up question. Can I just ask about the shift into digital on both the advertising and promotional front? A number of companies have been saying that that promotional spending particularly has been getting less effective of late. I'm just wondering how quickly you're shifting into digital on both advertising and promotion and how you can be confident that that's giving you, I guess, better effectiveness as you make that shift. Thank you.
Yes. Yes. And we have been experiencing and encouraging the same shift into digital. We're up to about 20% of our spending in digital. And what happens is it is the production costs of digital are less, but you need to produce more content.
So there is a bit of an offset there. So so, yes, you could see, nonworking come down because of the the price of producing in digital. But then again, it's a different kind of production and making sure that content is fresh and works on multiple screen sizes. But we do believe that this shift will continue. This is the way to connect with the next generation of consumers.
We still do have a significant portion of our spend in TV because of our large baby boomer population that still watches TV as their major media.
Thank you very much. I'll pass it on.
Thanks, Alexia, and thanks to all of our callers for those questions. Happy Thanksgiving from all of us at Campbell. And thank you for joining our first quarter earnings call. A full replay will be available about 2 hours after the call concludes. Go online to get it or call 70 39252533.
The access code is 1647199. You have until December 9th midnight, point will move our earnings calls strictly to the website, investor.campbellsoupcompany.com under news and events, then click on recent events recent webcasts and presentations. Our next earnings call is February 25th, the week following the Consumer Analyst Group of New York Event, our CAGNY presentation and luncheon is confirmed for Wednesday, 18th February. If you have further questions, call me, Jennifer Driscoll at 85634260 81. If you're a reporter who has questions, please call Carla Bergato, director of External Communications, at 856-342-3737.
We now conclude today's program. You may