Camden / NJ. (csc) Campbell Soup Company reported its first-quarter results for fiscal 2019 ended October 28, 2018 (versus Q1/2018 ended October 29, 2017).
| (USD in millions, except per share) | Q1/2019 | Q1/2018 | Change | |||||||
| Net Sales | ||||||||||
| As Reported (GAAP) | USD 2,694 | USD 2,161 | 25% | |||||||
| Organic | (3)% | |||||||||
| Earnings Before Interest and Taxes (Ebit) | ||||||||||
| As Reported (GAAP) | USD 350 | USD 412 | (15)% | |||||||
| Adjusted | USD 410 | USD 417 | (2)% | |||||||
| Diluted Earnings Per Share | ||||||||||
| As Reported (GAAP) | USD 0.64 | USD 0.91 | (30)% | |||||||
| Adjusted | USD 0.79 | USD 0.92 | (14)% |
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CEO Comments
Keith McLoughlin, Campbell’s interim President and CEO stated, «We are on track with our plans and are encouraged by the progress we are making against the significant actions we announced on August 30th to simplify, focus and optimize our portfolio. Through considerable cross-functional efforts in October, we were able to overcome the supply chain challenges that we faced early in the quarter and deliver results that enabled us to reaffirm our fiscal 2019 guidance.
«As we focus Campbell on our Snacks and Meals and Beverages businesses in our core North American market, we are driving increased operating discipline across the company. During the quarter we started to see improved trends in U.S. soup, a return to sales growth in our V8 business, and continued solid performance in Campbell Snacks. Additionally, we are delivering targeted cost savings and synergies, as well as driving higher cash flow through improvements in working capital. In line with the key priorities of our strategic review, we also launched the processes to divest Campbell International and Campbell Fresh, both of which have garnered strong interest from a range of potential buyers.
«We continue to expect fiscal 2019 to be a transition year as we fully operationalize our plans to turn around Campbell. We remain focused on executing our strategic initiatives and confident that our go-forward plan will drive long-term organic growth and profitability that maximizes value for all shareholders.»
Items Impacting Comparability
The table below presents a summary of items impacting comparability in each period. Diluted EPS:
| Q1/2019 | Q1/2018 | ||||||
| As Reported (GAAP) | USD 0.64 | USD 0.91 | |||||
| Impairment charge related to U.S. refrigerated soup plant assets | USD 0.04 | – | |||||
| Restructuring charges, implementation costs and other related costs associated with cost savings initiatives | USD 0.12 | USD 0.04 | |||||
| Pension and postretirement benefit mark-to-market adjustments | – | (USD 0.03) | |||||
| Adjusted | USD 0.79* | USD 0.92 |
*Numbers do not add due to rounding.
First-Quarter Results
Sales increased 25 percent to USD 2.7 billion reflecting a 29-point benefit from the recent acquisitions of Snyder’s-Lance and Pacific Foods. Organic sales declined 3 percent driven primarily by higher promotional spending, including a 1-point negative impact from the adoption of new accounting guidance for revenue recognition, as well as lower volume. In the first quarter of fiscal 2019, Campbell adopted new accounting guidance for revenue recognition which impacts the timing of expense related to promotional programs. The impact from the adoption of this guidance is not expected to be material on an annual basis.
Gross margin decreased from 36.2 percent to 30.6 percent. Excluding items impacting comparability, adjusted gross margin decreased 4.9 percentage points to 31.6 percent, including a 190-basis-point negative impact from the recent acquisitions. The remaining decline in adjusted gross margin was driven primarily by cost inflation and higher supply chain costs, as well as higher promotional spending including the impact from the change in revenue recognition, offset partly by productivity improvements and the benefits from cost savings initiatives. The increase in supply chain costs was driven primarily by higher than expected distribution costs associated with the start-up of a new distribution facility in Findlay, Ohio, operated by a third-party logistics service provider.
Marketing and selling expenses increased 13 percent to USD 248 million reflecting a 28-point increase from the inclusion of the recent acquisitions. Excluding items impacting comparability in the current year and the impact of the recent acquisitions, adjusted marketing and selling expenses decreased driven primarily by lower advertising and consumer promotion expenses within Meals and Beverages. Administrative expenses increased 18 percent to USD 176 million reflecting a 15-point increase from the inclusion of the recent acquisitions. Excluding items impacting comparability and the impact of the recent acquisitions, adjusted administrative expenses increased slightly, reflecting costs associated with the proxy contest in the current year.
Other expenses were USD 4 million in the current quarter as compared to other income of USD 29 million in the prior-year quarter. Excluding items impacting comparability in the prior year, other expenses increased driven primarily by amortization of intangible assets associated with recent acquisitions.
As reported Ebit decreased 15 percent to USD 350 million. Excluding items impacting comparability, adjusted Ebit of USD 410 million decreased 2 percent inclusive of a negative 4-point impact from the change in revenue recognition. The remaining change in adjusted Ebit reflects incremental earnings from recent acquisitions, offset partly by declines in the base business.
Net interest expense was USD 93 million compared to USD 30 million in the prior year reflecting higher levels of debt associated with the recent acquisitions and higher average interest rates on the debt portfolio. The tax rate was 24.5 percent as compared to 28.0 percent in the prior year. Excluding items impacting comparability, the adjusted tax rate decreased 3.9 percentage points to 24.3 percent due primarily to the lower U.S. federal tax rate, offset partly by the favorable settlement of certain U.S. state tax matters in the prior-year quarter.
The company reported EPS of USD 0.64. Excluding items impacting comparability, adjusted EPS decreased 14 percent to USD 0.79 per share reflecting adjusted Ebit declines on the base business, inclusive of a negative USD 0.04 per share impact from the change in revenue recognition, offset partly by a lower adjusted tax rate. In aggregate, the acquisitions of Snyder’s-Lance and Pacific Foods were neutral to adjusted EPS in the quarter.
Cash flow from operations increased to USD 231 million from USD 188 million a year ago primarily due to lower working capital requirements and lower payments on hedging activities, offset partly by lower cash earnings. In line with the company’s commitment to returning value to shareholders, during the first quarter of fiscal 2019, the company paid USD 107 million of cash dividends, or the equivalent of USD 0.35 per share, to common stock shareholders.
Campbell Reaffirms Fiscal 2019 Guidance
Following first-quarter results, Campbell continues to expect full-year performance to be consistent with guidance provided on Aug. 30, 2018. As previously announced, given the strategy to pursue divestitures, the company has provided an outlook for fiscal 2019 based on the company’s existing portfolio of businesses, as well as on a pro forma basis assuming the planned divestitures are completed as of the beginning of fiscal 2019. This fiscal 2019 guidance and pro forma, as shown in the table below, include the impact of the Snyder’s-Lance and Pacific Foods acquisitions and assumes the impact from currency translation will be nominal.
| (USD in millions, except per share) | 2018 Results | 2019 Guidance Pre-Divestitures | 2019 Pro Forma Assuming Divestitures | ||||||||
| Net Sales | USD 8,685 | USD 9,975 to USD 10,100 | USD 7,925 to USD 8,050 | ||||||||
| Incremental Net Sales from Snyder’s-Lance and Pacific Foods | USD 1,500 to USD 1,550 | USD 1,500 to USD 1,550 | |||||||||
| Adjusted Ebit | USD 1,408* | USD 1,370 to USD 1,410 | USD 1,230 to USD 1,270 | ||||||||
| Adjusted EPS | USD 2.87* | USD 2.45 to USD 2.53 | USD 2.40 to USD 2.50 | ||||||||
Note: A non-GAAP reconciliation is not provided for 2019 guidance or 2019 pro forma since certain items are not estimable, such as pension and post-retirement mark-to-market adjustments, and these items are not considered to reflect the company’s ongoing business results. The pro forma scenario is provided for illustrative purposes to provide approximate impact of potential divestitures as if they occurred at the beginning of fiscal 2019 and is based on the use of estimated sales proceeds.
Cost Savings Program
In the first quarter of fiscal 2019, Campbell achieved USD 45 million in savings under its multi-year cost savings program, inclusive of Snyder’s-Lance synergies, bringing total program-to-date savings to USD 500 million. As previously announced, the company expects to deliver cumulative annualized savings of USD 945 million by the end of fiscal 2022.
Segment Operating Review Q1/2019
An analysis of net sales and operating earnings by reportable segment in Q1/2019 follows:
| (USD in millions) | Meals and Beverages* | Global Biscuits and Snacks* | Campbell Fresh | Total | |||||||||
| Net Sales, as Reported | USD 1,244 | USD 1,218 | USD 232 | USD 2,694 | |||||||||
| Volume and Mix | (2)% | (1)% | (1)% | (1)% | |||||||||
| Price and Sales Allowances | -% | 1% | -% | -% | |||||||||
| Promotional Spending | (3)% | (1)% | -% | (2)% | |||||||||
| Organic Net Sales | (5)% | (1)% | (1)% | (3)% | |||||||||
| Currency | -% | (2)% | -% | (1)% | |||||||||
| Acquisitions | 6% | 81% | -% | 29% | |||||||||
| Change versus Prior Year | -% | 77% | (1)% | 25% | |||||||||
| Segment Operating Earnings | USD 294 | USD 154 | (USD 3) | ||||||||||
| Change versus Prior Year | (11)% | 32% | n/m |
n/m = not meaningful – * Numbers do not add due to rounding.
Meals and Beverages
Sales of USD 1.2 billion were comparable to the prior year. Organic sales decreased 5 percent driven primarily by declines in U.S. soup, Prego pasta sauces and Canada, offset partly by gains in beverages. Excluding the benefit from the acquisition of Pacific Foods and the impact from the change in revenue recognition, sales of U.S. soup decreased 6 percent driven by declines in ready-to-serve soups and condensed soups, offset partly by gains in broth. The sales decline in U.S. soup was driven primarily by continued competitive pressure across the market and increased promotional spending. Segment operating earnings decreased 11 percent to USD 294 million. The decrease was driven primarily by a lower gross margin percentage offset partly by lower advertising expenses. The lower gross margin performance reflects the impact of higher levels of cost inflation, increased promotional spending including the change in revenue recognition, and higher distribution costs associated with the start-up of a new distribution facility in Findlay, Ohio, operated by a third-party logistics service provider.
Global Biscuits and Snacks
Sales in the quarter increased 77 percent to USD 1.2 billion. Excluding the benefit from the acquisition of Snyder’s-Lance and the negative impact of currency translation, organic sales decreased 1 percent driven primarily by declines in Kelsen cookies in the U.S. Sales of Goldfish crackers increased slightly. As expected, sales of Goldfish crackers were negatively impacted by the voluntary product recall in July 2018. Segment operating earnings increased 32 percent to USD 154 million, reflecting a 45-point benefit from the acquisition of Snyder’s-Lance. Excluding the impact of the acquisition, segment operating earnings declined due primarily to a lower gross margin percentage reflecting higher levels of cost inflation.
Campbell Fresh
Sales in the quarter decreased 1 percent to USD 232 million driven by declines in refrigerated soup, as well as declines in Garden Fresh Gourmet and Bolthouse Farms refrigerated beverages, offset partly by gains in carrots. Segment operating loss was USD 3 million compared to a loss of USD 6 million in the prior year. The USD 3 million year-over-year improvement reflects improved operational efficiency on beverages offset partly by the decline in refrigerated soup volume.
Corporate
Corporate in the first quarter of fiscal 2019 included charges related to cost savings initiatives of USD 27 million and a non-cash impairment charge of USD 14 million related to U.S. refrigerated soup plant assets. Corporate in the first quarter of fiscal 2018 included pension and postretirement mark-to-market gains of USD 14 million and charges related to cost savings initiatives of USD 17 million. The remaining increase in expenses primarily reflects lower pension and postretirement benefit income as well as costs associated with the proxy contest in the current year.
