Camden / NJ. (csc) Campbell Soup Company reported its financial results for the first quarter of fiscal 2018. Summary:
Results for the three months ended …
| (USD in millions, except per share) | 2017-10-29 | 2016-10-30 | % Change |
| Net Sales | |||
| As Reported (GAAP) | USD 2,161 | USD 2,202 | (2)% |
| Organic | (2)% | ||
| Earnings Before Interest and Taxes | |||
| As Reported (GAAP) | USD 412 | USD 457 | (10)% |
| Adjusted | USD 417 | USD 486 | (14)% |
| Diluted Earnings Per Share | |||
| As Reported (GAAP) | USD 0.91 | USD 0.94 | (3)% |
| Adjusted | USD 0.92 | USD 1.00 | (8)% |
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CEO Comments
Denise Morrison, Campbell’s President and Chief Executive Officer, said, «This was a difficult quarter, particularly for our U.S. soup business. The operating environment remains volatile with a rapidly evolving retailer landscape and competitive activity pressuring the top line. Our bottom line performance was negatively impacted by a lower adjusted gross margin rate due in part to cost inflation, higher carrot costs and escalating transportation and logistics costs following the hurricane season.
«The two percent decline in organic sales was largely due to the performance of our Americas Simple Meals and Beverages division, where U.S. soup sales declined by 9 percent. Consumer takeaway decreased 2 percent in U.S. soup while significantly lower retailer inventory accounted for the remaining decline. The sales decline was the result of one key customer’s different promotional approach to the soup category for fiscal 2018, as we described last quarter. Importantly, our soup program was well received in most of our other key customers, where consumer takeaway of our soup was up slightly.
«In Global Biscuits and Snacks, we continued to drive momentum with increased sales and operating earnings. Pepperidge Farm delivered another quarter of solid performance in the snacks business behind Goldfish crackers and a cookie portfolio rejuvenated by the launch of the Farmhouse brand and restaging of our American Classic Collection.
«Campbell Fresh sales were comparable to a year ago. We are encouraged that sales of products in our CPG portfolio increased for the second consecutive quarter behind Garden Fresh Gourmet and Bolthouse Farms salad dressing. Our carrot sales were negatively impacted by unfavorable weather, which led to customer allocations. The C-Fresh team is managing this situation while maintaining its focus on carrot quality and returning the beverage products to growth».
Morrison concluded, «In this challenging climate, we are focused on sharpening our plans for the remainder of the year while continuing to position Campbell for growth through investments to differentiate our brands, drive innovation and accelerate our e-commerce capabilities».
Items Impacting Comparability
Items impacting comparability in the quarter are as follows:
- The current quarter included pre-tax pension and postretirement mark-to-market gains of USD 14 million, or USD 0.03 per share, as compared to pre-tax pension and postretirement mark-to-market losses of USD 20 million, or USD 0.04 per share, in the prior-year quarter.
- The current quarter included pre-tax charges related to cost savings initiatives of USD 19 million, or USD 0.04 per share, as compared to USD 9 million, or USD 0.02 per share, in the prior-year quarter.
Change in Presentation of Net Periodic Pension Cost and Net Postretirement Benefit Cost
In the first quarter of fiscal 2018, Campbell adopted new accounting guidance that changes the presentation of net periodic pension cost and net periodic postretirement benefit cost. Under the new guidance, the service cost component of net periodic benefit cost is classified in the same line item as other compensation costs of employees. All other components of net periodic benefit cost are classified in other expenses / (income). Certain amounts in the prior year were reclassified to conform to the current-year presentation. The reclassifications did not impact Ebit.
Change in Reportable Segments
Beginning in fiscal 2018, the business in Latin America is managed as part of the Global Biscuits and Snacks segment. Prior to fiscal 2018, the business in Latin America was managed as part of the Americas Simple Meals and Beverages segment. Prior-period segment results have been adjusted retrospectively to reflect this change.
First-Quarter Results
Sales decreased 2 percent to USD 2.161 billion driven by a 2 percent decline in organic sales, reflecting lower volume.
Gross margin decreased from 38.6 percent to 36.2 percent. Excluding items impacting comparability in the current year, adjusted gross margin decreased 2.1 percentage points to 36.5 percent. The decrease in adjusted gross margin was primarily driven by cost inflation and higher supply chain costs, as well as unfavorable mix, partly offset by productivity improvements and the benefits from cost savings initiatives.
Marketing and selling expenses decreased 5 percent to USD 219 million primarily due to lower advertising and consumer promotion expenses, as well as the benefits from cost savings initiatives. Administrative expenses increased 19 percent to USD 149 million. Excluding items impacting comparability, adjusted administrative expenses increased 17 percent primarily due to an increase in information technology costs, costs associated with the pending acquisition of Pacific Foods of Oregon, the impact of inflation, and investments in long-term innovation.
Other income was USD 29 million in the current quarter as compared to other expenses of USD 11 million in the prior-year quarter. Excluding the impact of pension and postretirement mark-to-market adjustments, adjusted other income increased to USD 15 million from USD 9 million a year ago primarily due to higher pension and postretirement benefit income, partly offset by losses on investments.
Ebit decreased 10 percent to USD 412 million. Excluding items impacting comparability, adjusted Ebit decreased 14 percent to USD 417 million, reflecting a lower adjusted gross margin, lower sales and higher adjusted administrative expenses, partly offset by lower marketing and selling expenses.
Net interest expense increased 7 percent to USD 30 million reflecting higher average interest rates on the debt portfolio. The tax rate was 28.0 percent as compared to 31.9 percent in the prior year. Excluding items impacting comparability, the adjusted tax rate decreased 3.9 percentage points to 28.2 percent driven by the favorable settlement of certain U.S. state tax matters.
EPS decreased 3 percent to USD 0.91 per share. Excluding items impacting comparability, adjusted EPS decreased 8 percent to USD 0.92 per share, reflecting declines in adjusted Ebit, partly offset by a lower adjusted tax rate and the benefit of share repurchases.
Cash flow from operations decreased to USD 188 million from USD 221 million a year ago primarily due to higher payments on hedging activities and higher working capital requirements, partly offset by higher cash earnings.
Fiscal 2018 Guidance
For the full fiscal year, Campbell still expects the year-over-year change in net sales to be -2 to 0 percent. Campbell has lowered its earnings outlook and now expects adjusted Ebit to change by -4 to -2 percent (previously -1 to 1 percent) and adjusted EPS to change by -3 to -1 percent (previously 0 to 2 percent), or USD 2.95 to USD 3.02 per share. The change in guidance for adjusted Ebit and adjusted EPS is due primarily to Campbell’s gross margin performance in the first-quarter and revised outlook for the balance of the fiscal year. This guidance assumes the impact from currency translation will be nominal. A non-GAAP reconciliation is not provided for 2018 guidance since certain items are not estimable, such as pension and postretirement mark-to-market adjustments, and these items are not considered to reflect the company’s ongoing operating results.
Segment Operating Review
An analysis of net sales and operating earnings by reportable segment for the three months ended October 29, 2017:
| (USD in millions) | Americas Simple Meals and Beverages | Global Biscuits and Snacks | Campbell Fresh | Total |
| Net Sales, as Reported | USD 1,218 | USD 709 | USD 234 | USD 2,161 |
| Volume and Mix | (5)% | 2% | (1)% | (2)% |
| Promotional Spending | -% | -% | 1% | -% |
| Organic Net Sales | (5)% | 2% | -% | (2)% |
| Currency | -% | 1% | -% | -% |
| % Change versus Prior Year | (5)% | 3% | -% | (2)% |
| Segment Operating Earnings | USD 328 | USD 120 | USD (6) | |
| % Change versus Prior Year | (14)% | 4% | n/m |
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Americas Simple Meals and Beverages
Sales decreased 5 percent to USD 1.218 billion driven primarily by declines in soup and V8 beverages, partly offset by gains in Prego pasta sauces. Sales of U.S. soup decreased 9 percent driven by declines in condensed soups, broth and ready-to-serve soups, reflecting a 7-point decrease due to a lower seasonal inventory build compared to a year ago. As previously announced, Campbell has not been able to reach an agreement with a key customer on a promotional approach for soup in fiscal 2018.
Segment operating earnings decreased 14 percent to USD 328 million. The decrease was primarily driven by lower sales volume and a lower gross margin percentage, partly offset by lower marketing and selling expenses.
Global Biscuits and Snacks
Sales increased 3 percent to USD 709 million. Excluding the favorable impact of currency translation, segment sales increased 2 percent primarily driven by gains in Pepperidge Farm snacks, reflecting growth in Goldfish crackers and Pepperidge Farm cookies.
Segment operating earnings increased 4 percent to USD 120 million. The increase was primarily driven by higher sales volume.
Campbell Fresh
Sales in the quarter were comparable to the prior year at USD 234 million as sales gains in carrot ingredients, Garden Fresh Gourmet and Bolthouse Farms salad dressings were offset by declines in carrots. Sales of Bolthouse Farms refrigerated beverages were comparable to the prior year.
Segment operating earnings in the quarter decreased from USD 1 million to a loss of USD 6 million, reflecting a lower gross margin percentage driven primarily by higher carrot costs.
Corporate
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. Corporate in the first quarter of fiscal 2017 included pension and postretirement mark-to-market losses of USD 20 million and charges related to cost savings initiatives of USD 8 million. The remaining increase in expenses primarily reflects losses on investments, higher administrative expenses and losses on open commodity hedges as compared to gains in the year-ago quarter, partly offset by higher pension and postretirement benefit income.
