Camden / NJ. (csc) Campbell Soup Company reported its third quarter 2018 financial results for the three months ended 29 April (Q3/2018). Net sales increased 15 percent reflecting impact of recently completed acquisition of Snyder’s-Lance; organic sales are comparable to prior year. Earnings before interest and taxes (Ebit) show a loss of 475 million USD that includes impairment charges of 619 million USD related to Campbell fresh segment; adjusted Ebit increased 1 percent. Earnings per share (EPS) show a loss of USD 1.31; adjusted EPS increased 19 percent to USD 0.70.
| Third Quarter Financial Results | Three Months Ended | Nine Months Ended | ||||||||||||||||
| (USD in millions, except per share) | April 29, | April 30, | % | April 29, | April 30, | % | ||||||||||||
| 2018 | 2017 | Change | 2018 | 2017 | Change | |||||||||||||
| Net Sales | ||||||||||||||||||
| As Reported (GAAP) | USD | 2,125 | USD | 1,853 | 15 | % | USD | 6,466 | USD | 6,226 | 4 | % | ||||||
| Organic | – | % | (1 | )% | ||||||||||||||
| Earnings (Loss) Before Interest and Taxes | ||||||||||||||||||
| As Reported (GAAP) | USD | (475)* | USD | 298 | n/m | USD | 180 | USD | 960 | (81 | )% | |||||||
| Adjusted | USD | 308 | USD | 305 | 1 | % | USD | 1,127 | USD | 1,210 | (7 | )% | ||||||
| Diluted Earnings Per Share | ||||||||||||||||||
| As Reported (GAAP) | USD | (1.31)* | USD | 0.58 | n/m | USD | 0.55 | USD | 1.85 | (70 | )% | |||||||
| Adjusted | USD | 0.70 | USD | 0.59 | 19 | % | USD | 2.62 | USD | 2.51 | 4 | % | ||||||
n/m – not meaningful
* The current quarter included pre-tax impairment charges of USD 619 million, or USD 1.65 per share, related to the Campbell Fresh segment.
CFO Comments
Campbell’s Chief Financial Officer Anthony DiSilvestro said, «While our organic sales in the quarter were stable in this difficult environment, our gross margin performance was below our expectations. Based on our third-quarter results and outlook for the balance of the year, we are lowering our fiscal 2018 earnings guidance.
«In the third quarter, we made some progress against our key priorities. We completed the Snyder’s-Lance acquisition, substantially expanding our portfolio in the faster growing snacking categories, and we made some progress in stabilizing sales in U.S. soup. However, we are not satisfied with our financial results. Our performance has been impacted by both execution-related and external challenges. We are addressing these challenges with renewed urgency. Looking ahead, we will be reviewing all aspects of our strategic plans and portfolio composition. We anticipate that our review, which will take several months to complete, will lead to changes designed to improve our operating performance and create long-term shareholder value. We plan to discuss the outcome of this review when we report fourth-quarter and full-year results in late August».
Items Impacting Comparability
The table below presents a summary of items impacting comparability in each period.
| Diluted Earnings Per Share | Three Months Ended | Nine Months Ended | ||||||
| April 29, | April 30, | April 29, | April 30, | |||||
| 2018 | 2017 | 2018 | 2017 | |||||
| As Reported (GAAP) | (USD 1.31) | USD 0.58 | USD 0.55 | USD 1.85 | ||||
| Impairment charges related to the Campbell Fresh segment | USD 1.65 | – | USD 1.89 | USD 0.58 | ||||
| Restructuring charges, implementation costs and other related costs associated with cost savings initiatives | USD 0.15 | USD 0.01 | USD 0.34 | USD 0.04 | ||||
| Transaction and integration costs related to the acquisition of Snyder’s-Lance | USD 0.15 | – | USD 0.22 | – | ||||
| Claim settlement | USD 0.05 | – | USD 0.05 | – | ||||
| Pension and postretirement benefit mark-to-market adjustments | – | – | (USD 0.03) | USD 0.04 | ||||
| Nonrecurring net tax benefit related to U.S. Tax Reform | – | – | (USD 0.40) | – | ||||
| Adjusted | USD 0.70* | USD 0.59 | USD 2.62 | USD 2.51 | ||||
*Numbers do not add due to rounding.
Third-Quarter Results
Sales increased 15 percent to USD 2.125 billion driven by a 14-point benefit from the recent acquisitions of Snyder’s-Lance and Pacific Foods and a 1-point favorable impact from currency translation. Organic sales were comparable to the prior year as gains in Global Biscuits and Snacks and Campbell Fresh were offset by declines in Americas Simple Meals and Beverages.
Gross margin decreased from 35.9 percent to 29.1 percent. Excluding items impacting comparability in the current year, adjusted gross margin decreased 3.9 percentage points to 32.0 percent. The decrease in adjusted gross margin was primarily driven by cost inflation and higher supply chain costs, as well as the dilutive impact of recent acquisitions and higher promotional spending, partly offset by productivity improvements and the benefits from cost savings initiatives.
Marketing and selling expenses increased 9 percent to USD 232 million. Excluding items impacting comparability in the current year, adjusted marketing and selling expenses increased 8 percent primarily due to the impact of recent acquisitions, partly offset by the benefits from cost savings initiatives. Administrative expenses increased 15 percent to USD 163 million. Excluding items impacting comparability, adjusted administrative expenses decreased 6 percent primarily due to lower incentive compensation and benefit costs, partly offset by the impact of recent acquisitions.
Other expenses of USD 647 million were primarily due to the impairment charges related to the Campbell Fresh segment. Excluding items impacting comparability in the current year, adjusted other income decreased USD 3 million to USD 12 million.
As reported Ebit was a loss of USD 475 million. Excluding items impacting comparability, adjusted Ebit increased 1 percent to USD 308 million. Excluding the impact of the recent acquisitions of Snyder’s-Lance and Pacific Foods, adjusted Ebit declined primarily due to lower gross margin performance, partly offset by lower adjusted administrative expenses and lower adjusted marketing and selling expenses.
Net interest expense increased USD 14 million to USD 42 million. Excluding items impacting comparability in the current year, net adjusted interest expense increased USD 32 million to USD 60 million due to debt associated with the acquisition of Snyder’s-Lance and higher average interest rates on the debt portfolio. The tax rate was 24.0 percent as compared to 34.8 percent in the prior year. Excluding items impacting comparability, the adjusted tax rate decreased 19.7 percentage points to 15.3 percent as the timing of tax expense on an adjusted basis was impacted by the impairment charges.
The company reported a loss of USD 1.31 per share. Excluding items impacting comparability, adjusted EPS increased 19 percent to USD 0.70 per share, reflecting a lower adjusted tax rate, partly offset by higher adjusted net interest expense.
Nine-Month Results
Sales increased 4 percent to USD 6.466 billion driven by a 5-point benefit from the recent acquisitions of Snyder’s-Lance and Pacific Foods and a 1-point favorable impact from currency translation, partly offset by a 1-percent decline in organic sales. Declines in organic sales were primarily driven by decreases in Americas Simple Meals and Beverages, partly offset by gains in Global Biscuits and Snacks.
As reported Ebit was USD 180 million. Excluding items impacting comparability, adjusted Ebit decreased 7 percent to USD 1.127 billion reflecting lower gross margin performance, including the impact of organic sales declines, partly offset by an increase in adjusted other income.
Net interest expense increased USD 20 million to USD 104 million. Excluding items impacting comparability in the current year, net adjusted interest expense increased USD 38 million to USD 122 million due to debt associated with the acquisition of Snyder’s-Lance and higher average interest rates on the debt portfolio. Tax expense decreased from USD 307 million in the prior year to a tax benefit of USD 91 million. Excluding items impacting comparability, the adjusted tax rate decreased 10.0 percentage points to 21.3 percent primarily due to the lower U.S. federal tax rate and the timing of tax expense on an adjusted basis related to the impairment charges.
The company reported EPS of USD 0.55. Excluding items impacting comparability, adjusted EPS increased 4 percent to USD 2.62 per share, reflecting a lower adjusted tax rate and the benefit of lower weighted average shares outstanding, partly offset by lower adjusted Ebit and higher adjusted net interest expense.
Cash flow from operations increased to USD 1.024 billion from USD 1.011 billion a year ago reflecting higher cash earnings, partly offset by an increase in working capital requirements.
Fiscal 2018 Guidance
Based on the company’s current outlook for fiscal 2018, including the impact of the Snyder’s-Lance acquisition, Campbell has revised its fiscal 2018 guidance as shown in the table below. This guidance assumes the impact from currency translation will be nominal.
| (USD in millions, except per share) | 2017 | Revised 2018 Guidance | Snyder’s-Lance | Revised | ||||
| Results | Before Snyder’s-Lance | Acquisition | 2018 Guidance | |||||
| Net Sales | USD | 7,890 | 0 to +1% | +9 to +10 pts | +10 to +11% | |||
| (Previously -1 to +1%) | ||||||||
| Adjusted Ebit | USD | 1,492* | -11 to -9% | +3 pts | -8 to -6% | |||
| (Previously -7 to -5%) | ||||||||
| Adjusted EPS | USD | 3.04* | -3 to -1% | -3 pts | -6 to -5% | |||
| (Previously +2 to +4%) | USD -0.10 | USD 2.85 to USD 2.90 |
* Adjusted
Note: 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
Americas Simple Meals and Beverages: Sales in the quarter increased 5 percent to USD 1.010 billion reflecting a 6-point benefit from the acquisition of Pacific Foods. Organic sales decreased 2 percent primarily driven by declines in V8 beverages, Plum products and U.S. soup. Excluding the benefit from the acquisition of Pacific Foods, sales of U.S. soup decreased 1 percent driven by declines in condensed soups, partly offset by gains in broth and ready-to-serve soups.
Segment operating earnings decreased 3 percent to USD 217 million. The decrease was primarily driven by a lower gross margin percentage, partly offset by lower administrative expenses and lower marketing and selling expenses.
Global Biscuits and Snacks: Sales in the quarter increased 35 percent to USD 862 million. Excluding the benefit from the acquisition of Snyder’s-Lance and the favorable impact of currency translation, organic sales increased 1 percent primarily driven by gains in Pepperidge Farm snacks, reflecting continued growth in Goldfish crackers and Pepperidge Farm cookies.
Segment operating earnings increased 23 percent to USD 123 million. The increase was primarily driven by the benefit from the acquisition of Snyder’s-Lance.
Campbell Fresh: Sales in the quarter increased 1 percent to USD 251 million primarily driven by gains in refrigerated soup. Sales of Bolthouse Farms refrigerated beverages were comparable to the prior year.
Segment operating loss was USD 19 million in the quarter compared to earnings of USD 1 million in the prior year. The earnings decline was primarily driven by a lower gross margin percentage reflecting higher supply chain costs and cost inflation including higher transportation and logistics costs.
Corporate
Corporate in the third quarter of fiscal 2018 included non-cash impairment charges of USD 619 million related to the Campbell Fresh segment, transaction and integration costs of USD 72 million related to the acquisition of Snyder’s-Lance, charges related to cost savings initiatives of USD 46 million, and a charge of USD 22 million related to the settlement of a legal claim. Corporate in the third quarter of fiscal 2017 included charges related to cost savings initiatives of USD 7 million. The remaining decrease in expenses primarily reflects the benefit of higher pension and postretirement income.
