Campbell Company: Reports Q2-2019 Results

Camden / NJ. (csc)Campbell Soup Company reported its second-quarter results for fiscal 2019.

Three Months Ended Six Months Ended
(USD in millions, except per share) Jan. 27, 2019 Jan. 28, 2018 % Change Jan. 27, 2019 Jan. 28, 2018 % Change
Net Sales
As Reported (GAAP) USD 2,713 USD 2,180 24% USD 5,407 USD 4,341 25%
Organic -% (2)%
Earnings Before Interest and Taxes (Ebit)
As Reported (GAAP) USD 19* USD 243 n/m USD 369 USD 655 (44)%
Adjusted USD 399 USD 402 (1)% USD 811 USD 819 (1)%
Diluted Earnings Per Share
As Reported (GAAP) (USD 0.20)* USD 0.95 n/m USD 0.45 USD 1.85 n/m
Adjusted USD 0.77 USD 1.00 (23)% USD 1.57 USD 1.91 (18)%

n/m – not meaningful
* The current quarter included pre-tax impairment charges of USD 346 million, or USD 0.88 per share, related to the Campbell Fresh segment.

CEO Comments

Mark Clouse, Campbell’s President and CEO stated, «I am pleased that, for the second consecutive quarter, we delivered sales and earnings performance in line with our expectations, enabling us to reaffirm our full-year guidance for fiscal 2019.

«During the quarter, we continued to make progress against key strategic initiatives. Our efforts to stabilize our core business, integrate Snyder’s-Lance, deliver our cost savings agenda and focus and optimize the portfolio are all on track. Over time, these actions will enable us to increase investments in our core businesses while significantly reducing debt and creating meaningful value for shareholders. While we have made steady progress, there is much more work to be done to fully unlock the potential of our business.

«Since joining the team and immersing myself in Campbell’s business, I am confident in the plans in place to address our near-in challenges and opportunities, with the commitment to set a clear strategic roadmap for the future. I am excited by the opportunities to build upon the company’s solid foundation of iconic brands, talented employees, engaged customers and loyal consumers. It is upon these strengths that we will continue to create a compelling plan that delivers profitable and sustainable growth, supported by a reenergized culture focused on accountability, performance and consumer-driven marketing and innovation.»

Items Impacting Comparability

The table below presents a summary of items impacting comparability in each period.

Diluted Earnings Per Share
Three Months Ended Six Months Ended
Jan. 27, 2019 Jan. 28, 2018 Jan. 27, 2019 Jan. 28, 2018
As Reported (GAAP) (USD 0.20 ) USD 0.95 USD 0.45 USD 1.85
Impairment charges related to the Campbell Fresh segment USD 0.88 USD 0.25 USD 0.91 USD 0.25
Related costs associated with cost savings initiatives USD 0.06 USD 0.15 USD 0.18 USD 0.19
Costs associated with planned divestitures USD 0.03 USD 0.03
Transaction costs related to the acquisition of Snyder’s-Lance, Inc. USD 0.06 USD 0.06
Pension and postretirement benefit mark-to-market adjustments (USD 0.03 )
Nonrecurring net tax benefit related to U.S. Tax Reform USD 0.01 (USD 0.41 ) USD 0.01 (USD 0.41 )
Adjusted USD 0.77* USD 1.00 USD 1.57* USD 1.91
* Numbers do not add due to rounding.

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Second-Quarter Results

Sales increased 24 percent to USD 2.7 billion reflecting a 26-point benefit from the recent acquisitions of Snyder’s-Lance and Pacific Foods. Organic sales, which exclude the negative impact of currency translation, were comparable to the prior year as gains in Global Biscuits and Snacks were offset by declines in Campbell Fresh and Meals and Beverages. Sales in the quarter benefited by approximately 50 basis points from the change in revenue recognition adopted in fiscal 2019, which impacts the timing of expense related to promotional programs. The annual impact is not expected to be material.

Gross margin decreased from 35.1 percent to 26.3 percent. Excluding items impacting comparability, adjusted gross margin decreased 4.3 percentage points to 30.9 percent, including a 200-basis-point dilutive mix 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 investment, offset partly by productivity improvements and the benefits from cost savings initiatives. The increase in supply chain costs was driven primarily by higher warehousing and transportation costs, the majority of which were principally one-time in nature.

Marketing and selling expenses increased 16 percent to USD 264 million reflecting a 22-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 marketing overhead and selling expenses, including the benefits from cost savings initiatives. Administrative expenses increased 9 percent to USD 180 million. Excluding items impacting comparability, adjusted administrative expenses increased 15 percent to USD 160 million primarily due to the inclusion of the recent acquisitions.

Other expenses were USD 226 million as compared to USD 70 million in the prior year. Excluding items impacting comparability, other income decreased from USD 29 million in the prior year to USD 5 million reflecting amortization of intangible assets associated with recent acquisitions and lower gains on investments.

As reported Ebit was USD 19 million. Excluding items impacting comparability, adjusted Ebit decreased 1 percent to USD 399 million driven by declines in the base business, offset mostly by incremental earnings from our recent acquisitions. The change in revenue recognition had a favorable 3-point impact in the quarter.

Net interest expense was USD 92 million compared to USD 32 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 19.2 percent as compared to a negative 35.1 percent in the prior year. Excluding items impacting comparability, the adjusted tax rate increased 5.2 percentage points from 18.9 percent to 24.1 percent. The adjusted tax rate in the prior-year quarter benefited from a year-to-date true-up to reflect the lower U.S. federal tax rate as part of the Tax Cuts and Jobs Act enacted in December 2017.

The company reported a loss of USD 0.20 per share. Excluding items impacting comparability, adjusted EPS decreased 23 percent to USD 0.77 per share reflecting Ebit declines in the base business, a higher adjusted tax rate, and the expected dilutive impact from the acquisitions of Snyder’s-Lance and Pacific Foods. The change in revenue recognition had a favorable USD 0.03 per share impact in the quarter.

First-Half Results

Sales increased 25 percent to USD 5.4 billion reflecting a 27-point benefit from the recent acquisitions of Snyder’s-Lance and Pacific Foods. Organic sales declined 2 percent.

As reported Ebit decreased 44 percent to USD 369 million. Excluding items impacting comparability, adjusted Ebit decreased 1 percent to USD 811 million reflecting declines in the base business offset mostly by incremental earnings from recent acquisitions.

Net interest expense was USD 185 million compared to USD 62 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 increased from 5.6 percent to 26.6 percent. Excluding items impacting comparability, the adjusted tax rate increased 0.5 percentage points from 23.8 percent to 24.3 percent.

The company reported EPS of USD 0.45. Excluding items impacting comparability, adjusted EPS decreased 18 percent to USD 1.57 per share primarily reflecting adjusted Ebit declines in the base business.

Cash flow from operations increased to USD 846 million from USD 660 million a year ago reflecting significant improvements from the company’s working capital management efforts and wrapping payments last year on hedges associated with an anticipated debt issuance, offset partly by lower cash earnings. In line with the company’s commitment to returning value to shareholders, during the first half of fiscal 2019, the company paid USD 212 million of cash dividends reflecting the quarterly dividend rate of USD 0.35 per share.

Campbell Reaffirms Fiscal 2019 Guidance

Following second-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 an estimated 1 percentage-point negative impact from currency translation.

(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

* Adjusted – refer to the detailed reconciliation of the reported (GAAP) financial information to the adjusted financial information at the end of this news release.
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 postretirement 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 second quarter of fiscal 2019, Campbell achieved USD 50 million in savings under its multi-year cost savings program, inclusive of Snyder’s-Lance synergies, bringing total program-to-date savings to USD 550 million. Year-to-date savings of USD 95 million through the first half of fiscal 2019 are pacing slightly ahead of schedule, helping to offset other cost pressures. As previously announced, the company expects to deliver cumulative annualized savings of USD 945 million by the end of fiscal 2022.

Segment Operating Review

An analysis of net sales and operating earnings by reportable segment follows:

Three Months Ended Jan. 27, 2019 (USD in millions)
Meals and Beverages Global Biscuits and Snacks Campbell Fresh Total*
Net Sales, as Reported USD 1,230 USD 1,243 USD 239 USD 2,713**
Volume and Mix -% 3% (7)% -%
Price and Sales Allowances -% 1% -% -%
Promotional Spending (1)% (1)% -% (1)%
Organic Net Sales (1)% 3% (7)% -%
Currency (1)% (2)% -% (1)%
Acquisitions 3% 75% -% 26%
% Change versus Prior Year 1% 76% (7)% 24%
Segment Operating Earnings USD 255 USD 185 (USD 14)
% Change versus Prior Year (10)% 35% n/m

n/m – not meaningful
* Numbers do not add due to rounding.
** Includes Corporate

Six Months Ended Jan. 27, 2019 (USD in millions)
Meals and Beverages Global Biscuits and Snacks* Campbell Fresh Total*
Net Sales, as Reported USD 2,474 USD 2,461 USD 471 USD 5,407**
Volume and Mix (1)% 1% (4)% (1)%
Price and Sales Allowances -% 1% -% -%
Promotional Spending (2)% (1)% -% (1)%
Organic Net Sales (3)% 1% (4)% (2)%
Currency -% (2)% -% (1)%
Acquisitions 4% 78% -% 27%
% Change versus Prior Year 1% 76% (4)% 25%
Segment Operating Earnings USD 549 USD 339 (USD 17)
% Change versus Prior Year (11)% 33% -%

* Numbers do not add due to rounding.
** Includes Corporate

Meals and Beverages

Sales in the quarter increased 1 percent to USD 1.230 billion. Organic sales decreased 1 percent reflecting mixed results, as increases in beverages behind consumption gains in V8 vegetable juice and V8 Energy were more than offset by declines in Plum, Canada and Prego pasta sauces. Excluding the benefit from the acquisition of Pacific Foods, sales of U.S. soup were comparable to the prior year with gains in ready-to-serve soups and broth, offset by declines in condensed soups.

Segment operating earnings decreased 10 percent to USD 255 million. The decrease was driven primarily by higher levels of cost inflation and higher warehousing and transportation costs, which began to moderate in January, as well as higher promotional spending, offset partly by lower marketing and selling expenses.

Global Biscuits and Snacks

Sales in the quarter increased 76 percent to USD 1.243 billion. Excluding the benefit from the acquisition of Snyder’s-Lance and the negative impact of currency translation, organic sales increased 3 percent. This performance reflects continued growth in Pepperidge Farm, driven by solid consumption gains in Pepperidge Farm fresh bakery products and Goldfish crackers, as well as growth in Arnott’s biscuits, fuelled by innovation. Sales of Pepperidge Farm have now grown in 17 consecutive quarters.

Segment operating earnings increased 35 percent to USD 185 million, reflecting a 34-point benefit from the acquisition of Snyder’s-Lance. Excluding the impact of the acquisition, segment operating earnings increased slightly driven primarily by volume gains, offset partly by higher levels of cost inflation.

Campbell Fresh

Overall performance for the Campbell Fresh segment was consistent with expectations. Sales in the quarter decreased 7 percent to USD 239 million driven by expected declines in refrigerated soup, reflecting the previously announced plans of certain major private label customers to insource production in 2019, as well as declines in Bolthouse Farms refrigerated beverages and Garden Fresh Gourmet, offset partly by gains in carrots.

Segment operating loss was USD 14 million compared to a loss of USD 11 million in the prior year. The USD 3 million year-over-year decrease was primarily due to the decline in refrigerated soup volume, offset partly by improved operational efficiency in the Bolthouse Farms business.

Corporate

Corporate in the second quarter of fiscal 2019 included non-cash impairment charges of USD 346 million related to the Campbell Fresh segment, charges related to cost savings initiatives of USD 22 million, and costs associated with planned divestitures of USD 10 million. Corporate in the second quarter of fiscal 2018 included a non-cash impairment charge of USD 75 million related to the Campbell Fresh segment, charges related to cost savings initiatives of USD 27 million, and acquisition transaction costs of USD 24 million. The remaining increase in expenses primarily reflects the wrapping of gains on investments in the prior-year quarter and higher administrative expenses.

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