Camden / NJ. (csc) Campbell Soup Company reported its first-quarter results for fiscal 2016.
- Sales Decreased two Percent, Organic Sales Comparable to the Prior Year
- Adjusted EPS of 0.95 USD Increased 22 Percent
- Campbell Raises Outlook for Adjusted Ebit and EPS; Sales Guidance Lowered to Reflect Impact from Currency Translation
| (USD in millions, except per share) | Three Months Ended | Three Months Ended | |||||||
| 2015-11-01 | 2014-11-02 | Change | |||||||
| Net Sales | |||||||||
| As Reported (GAAP) | 2’203 | 2’255 | (2) % | ||||||
| Organic | – % | ||||||||
| Earnings Before Interest and Taxes | |||||||||
| As Reported (GAAP) | 315 | 389 | (19) % | ||||||
| Adjusted | 479 | 389 | 23 % | ||||||
| Diluted Earnings Per Share | |||||||||
| As Reported (GAAP) | 0.62 | 0.78 | (21) % | ||||||
| Adjusted | 0.95 | 0.78 | 22 % |
Change in Method of Accounting for Pension and Postretirement Benefits
In fiscal 2016, Campbell elected to change its method of accounting for its defined benefit pension and postretirement plans in order to provide greater transparency into financial results. This change has no impact on cash flow. Under the new method, actuarial gains and losses will be recognized immediately in the Consolidated Statements of Earnings following a measurement date rather than amortized over several years. The change in accounting method has been retrospectively applied to prior periods. The periodic mark-to-market adjustment will be reflected as an item impacting comparability and excluded from adjusted results.
Items Impacting Comparability
At the end of the news release is a detailed reconciliation of the
reported financial information to the adjusted information including the
impact on earnings from the mark-to-market pension losses and cost
savings initiatives described below.
In fiscal 2016, the company incurred mark-to-market losses associated with the interim remeasurement of certain U.S. pension plans. The remeasurement was required due to a high level of lump sum payments to certain vested plan participants arising primarily out of a limited-time offer to accept a single lump sum in lieu of future annuity payments. The impact on EPS was 0.26 USD per share. There was no impact on the company’s cash flow.
In fiscal 2016, the company incurred restructuring charges, implementation costs and other related costs associated with the new organizational structure and cost savings initiatives. The impact on EPS was 0.07 USD per share.
CEO Comments
Denise Morrison, Campbell’s President and Chief Executive Officer, said, “We’re encouraged by our first-quarter performance. While organic sales for the quarter were comparable to a solid prior year, we recognize that we have more work ahead to improve our growth trajectory. I am particularly pleased that we delivered a third consecutive quarter of adjusted gross margin expansion with improved execution in our supply chain. We drove strong adjusted Ebit and EPS performance across the company. Given an improved margin outlook for the year, we raised guidance for adjusted Ebit and EPS, while we lowered sales guidance to reflect increased currency headwinds.
“We began fiscal 2016 after successfully implementing a number of changes to align our enterprise structure with our strategy. Most significant among those changes were the formation of three new divisions with clear portfolio roles and the roll-out of a major cost savings initiative that included streamlining our organization, the launch of an Integrated Global Services organization and initiating zero-based budgeting. In addition, we have revised our reporting segments to reflect our new structure. We have made clear and meaningful progress and commence the new fiscal year better positioned to execute against our strategic imperatives.”
First-Quarter Results
Sales decreased two percent to 2.203 billion USD primarily due to the adverse impact of currency translation. Organic sales were comparable to the prior year as higher selling prices and a reduction in promotional spending were offset by volume declines.
Gross margin decreased from 35.3 percent to 34.3 percent. Excluding items impacting comparability in the current year, adjusted gross margin improved 2.6 percentage points. The increase in adjusted gross margin was driven by productivity improvements, higher selling prices, improved supply chain performance and lower promotional spending, partly offset by cost inflation.
Marketing and selling expenses decreased seven percent to 226 million USD. Excluding items impacting comparability in the current year, adjusted marketing and selling expenses decreased 15 percent to 206 million USD primarily due to lower advertising, reflecting a shift in spending to later in the fiscal year, as well as benefits from cost savings initiatives and the impact of currency translation. Administrative expenses increased 19 percent to 156 million USD. Excluding items impacting comparability in the current year, adjusted administrative expenses decreased eight percent to 120 million USD primarily due to benefits from cost savings initiatives and the impact of currency translation.
Ebit decreased 19 percent to 315 million USD. The first-quarter results were negatively impacted by the mark-to-market losses and charges incurred related to cost savings initiatives. Excluding items impacting comparability in the current year, adjusted Ebit increased 23 percent to 479 million USD reflecting a higher adjusted gross margin percentage, lower adjusted marketing and selling expenses and lower adjusted administrative expenses, partly offset by the adverse impact of currency translation.
Net interest expense increased three million USD to 28 million USD reflecting higher average interest rates on the debt portfolio. The tax rate increased 0.5 percentage points to 32.4 percent. Excluding items impacting comparability in the current year, the adjusted tax rate increased 2.2 percentage points to 34.1 percent primarily due to the geographic mix of earnings and higher U.S. state taxes in 2016.
Cash flow from operations was 218 million USD compared to 188 million USD a year ago, primarily due to higher cash earnings, partially offset by higher working capital requirements.
Revised Fiscal 2016 Guidance
Reflecting an improved outlook for margin performance and the increased negative impact of currency translation, Campbell has revised its fiscal 2016 guidance. This revised guidance is now based off recasted 2015 results for adjusted Ebit and adjusted EPS due to the previously discussed change in accounting for pension and postretirement benefits.
Sales are now expected to change by -1 to 0 percent (previously 0 to +1 percent), adjusted Ebit to grow by four to seven percent (previously three to five percent) and adjusted EPS to grow by four to seven percent (previously three to five percent), or 2.75 USD to 2.83 USD per share.
This guidance includes the impact of currency translation, which is now estimated to have a three percentage point negative impact (previously negative two percentage points), as well as the impact of the Garden Fresh Gourmet acquisition.
New Reportable Segments
Beginning in fiscal 2016, Campbell is reporting operating results in the following segments: Americas Simple Meals and Beverages, Global Biscuits and Snacks and Campbell Fresh. A detailed description of the segments is included at the end of the news release.
In fiscal 2016, Campbell also modified its method of allocating pension and postretirement benefit costs to its reportable segments. Through fiscal 2015, the company included all components of benefit expense in measuring segment performance. In fiscal 2016, only the service cost associated with the plans is allocated to segments. All other components of expense, including interest cost, expected return on assets, and recognized actuarial gains and losses, are reflected in Unallocated corporate expenses and not included in segment operating results.
Prior period segment results have been adjusted retrospectively to reflect these revisions. Following the filing of its first quarter Form 10-Q, Campbell intends to provide recasted historical financial information reflecting the new reportable segments and the previously discussed changes in accounting for pension and postretirement benefits.
Segment Operating Review
Americas Simple Meals and Beverages: Sales decreased two percent to 1.302 billion USD. Excluding the negative impact of currency translation, segment sales decreased one percent. U.S. soup sales decreased three percent driven by declines in ready-to-serve soups and broth, partly offset by gains in condensed soup. Sales of U.S. beverages decreased primarily due to declines in V8 V-Fusion beverages, partly offset by gains in V8 Splash beverages. Sales of other U.S. simple meals increased driven by gains in Prego pasta sauces, Campbell’s dinner sauces and the new Prego and Pace ready meals. Excluding the negative impact of currency translation, sales in Canada increased driven by gains in soup.
Segment operating earnings increased 19 percent to 363 million USD. The increase was primarily driven by a higher gross margin percentage, benefiting from increased price realization and improved supply chain performance compared to the prior-year quarter, as well as lower marketing and selling expenses.
Global Biscuits and Snacks: Sales decreased six percent to 652 million USD. Excluding the negative impact of currency translation, segment sales increased two percent. Sales of Pepperidge Farm products increased as gains in Goldfish crackers, fresh bakery and frozen products were partly offset by declines in cookies. In Asia Pacific, excluding the negative impact of currency translation, Arnott’s sales gains in Australia from savory and sweet varieties were offset by declines in Indonesia.
Segment operating earnings increased 16 percent to 114 million USD. The increase was primarily driven by a higher gross margin percentage, volume gains and lower selling expenses, partly offset by the negative impact of currency translation.
Global Biscuits and Snacks includes the segments Pepperidge Farm cookies, crackers, bakery and frozen products in U.S. retail; Arnott’s biscuits in Australia and Asia Pacific; and Kelsen cookies globally. The segment also includes the simple meals and shelf-stable beverages business in Australia and Asia Pacific.
Campbell Fresh: Sales increased eight percent to 249 million USD. Excluding the impact from the acquisition of Garden Fresh Gourmet, segment sales decreased three percent reflecting declines in carrot ingredients, fresh carrots and refrigerated soup, partly offset by gains in Bolthouse Farms premium refrigerated beverages and salad dressings. Segment operating earnings increased from nine million USD to 18 million USD reflecting a higher gross margin percentage and the impact of the acquisition.
Cost Savings Initiatives
In the first quarter, the company incurred charges associated with its initiatives to implement a new enterprise design that better aligns with its strategy, to reduce costs and to streamline its organizational structure. The company recorded pre-tax restructuring charges of 21 million USD related to these initiatives. The company also incurred pre-tax charges of 15 million USD recorded in Administrative expenses related to the implementation of the new organizational structure and cost savings initiatives. The aggregate after-tax impact of the restructuring charges, implementation costs and other related costs was 23 million USD, or 0.07 USD per share.
Unallocated Corporate Expenses
Unallocated corporate expenses for the quarter were 159 million USD compared to 23 million USD in the prior year. The current quarter included 128 million USD of pre-tax charges related to the pension and postretirement benefit mark-to-market adjustment. The current quarter also included 15 million USD of pre-tax charges related to the implementation of the new organizational structure and cost savings initiatives. The remaining change was primarily due to lower losses on open commodity hedges in the current year.
