Exclude Deleted Blocks option enabled, but entire VM still being backed up

We have the option to Exclude Deleted Blocks enabled, however, the backup size appears to still be the entire size of the vm.

The nbdeployutil traditional report indicates that the backup size of the VM is 3.1TB.  However, remoting into the VM, I see that only about 150GB of the 3TB partition is in use, the rest is black space.

I thought the exclude deleted blocks option ensured that unused blocks wouldn't take up space in the backup.