The FINANCIAL -- Campbell Soup Company on August 31 reported its fourth-quarter and full-year results for fiscal 2017.
Denise Morrison, Campbell’s President and Chief Executive Officer, said, “The operating environment for the packaged foods industry remains challenging due to shifting demographics, changing consumer preferences for food, the adoption of new shopping behaviors and the dynamic retailer landscape. In these times, sales growth remains a challenge. Despite multiple headwinds, we finished the year within our guidance and delivered another year of growth in adjusted EBIT and adjusted EPS.
“In the fourth quarter, Global Biscuits and Snacks was soft on the top line but generated a solid double-digit earnings increase versus the year-ago quarter. Americas Simple Meals and Beverages continued to deliver against its portfolio role, with sales performance in line with the categories in which we compete and margin expansion. While Campbell Fresh sales increased slightly and the bottom line was disappointing, we expect to return to profitable growth going forward.
“In fiscal 2017, we have made progress in several key areas, including increasing our successful multi-year cost savings initiative to $450 million by the end of fiscal 2020. The pending acquisition of Pacific Foods will add a purpose-driven, real food brand with a solid track record of growth to our portfolio. Additionally, our new Campbell Fresh leadership team has taken steps to enhance our quality processes and address capacity constraints toward our objective of returning the division to growth.”
Morrison concluded, “Looking ahead to fiscal 2018, we expect the operating environment to remain difficult. We will continue to position Campbell for long-term growth by managing costs aggressively and re-investing a portion of those savings back in the business with a focus on our strategic imperatives of real food, digital and e-commerce, health and well-being, and snacking.”
Fiscal 2018 Guidance
Campbell expects sales to change by -2 to 0 percent, adjusted earnings before interest and taxes (EBIT) to change by -1 to 1 percent, and adjusted EPS to change by 0 to 2 percent, or $3.04 to $3.11 per share. 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 be part of the company's ongoing business results.
Items Impacting Comparability in the Quarter
Items impacting comparability in the quarter are as follows:
The current quarter included pre-tax pension and postretirement mark-to-market gains of $198 million, or $0.42 per share, as compared to pre-tax pension and postretirement mark-to-market losses of $138 million, or $0.29 per share, in the prior-year quarter.
The current quarter included pre-tax charges related to cost savings initiatives of $40 million, or $0.09 per share, as compared to $11 million, or $0.02 per share, in the prior-year quarter.
The current-quarter earnings included a tax benefit of $52 million primarily related to the sale of intercompany notes receivable to a financial institution, which resulted in the recognition of foreign exchange losses on the notes for tax purposes. In addition, the company recorded a $6 million reduction to interest expense ($4 million after tax) related to premiums and fees received on the sale of the notes. The aggregate impact was an after-tax gain of $56 million, or $0.18 per share.
The prior-year quarter included a pre-tax non-cash impairment charge of $141 million, or $0.41 per share, to reduce the carrying value of the intangible assets of the Bolthouse Farms carrot and carrot ingredients reporting unit.
Sales decreased 1 percent to $1.664 billion driven by a 1 percent decline in organic sales, reflecting lower volume.
Gross margin increased from 32.4 percent to 43.0 percent. Excluding items impacting comparability, adjusted gross margin increased 0.8 percentage points from 36.1 percent to 36.9 percent. The increase in adjusted gross margin was primarily driven by productivity improvements and the benefits from cost savings initiatives, partly offset by cost inflation and higher supply chain costs.
Marketing and selling expenses decreased 34 percent to $143 million. Excluding items impacting comparability, adjusted marketing and selling expenses decreased 12 percent primarily due to lower advertising and consumer promotion expenses lapping marketing levels above historical levels in the prior-year quarter and the benefits from cost savings initiatives. Administrative expenses decreased 54 percent to $86 million. Excluding items impacting comparability, adjusted administrative expenses decreased 5 percent primarily due to the benefits from cost savings initiatives.
The company reported EBIT of $440 million as compared to a loss of $37 million in the prior-year quarter. Excluding items impacting comparability, adjusted EBIT increased 11 percent to $282 million, reflecting lower adjusted marketing and selling expenses, as well as a higher adjusted gross margin percentage, partly offset by lower sales.
Net interest expense decreased 18 percent to $23 million. Excluding items impacting comparability in the current year, adjusted net interest expense increased $1 million to $29 million, reflecting higher average interest rates on the debt portfolio, partly offset by lower average levels of debt. The tax rate was 23.7 percent as compared to 24.6 percent in the prior year. Excluding items impacting comparability, the adjusted tax rate increased 0.8 percentage points to 37.2 percent, according to Campbell Soup Company.
The company reported EPS of $1.04 in the quarter. Excluding items impacting comparability in both periods, adjusted EPS increased 13 percent to $0.52 per share, compared with $0.46 per share in the year-ago quarter.
Sales decreased 1 percent to $7.890 billion driven by a 1 percent decline in organic sales, reflecting lower volume and higher promotional spending.
EBIT increased from $960 million to $1.400 billion. Excluding items impacting comparability, adjusted EBIT increased 2 percent to $1.492 billion, reflecting a higher adjusted gross margin percentage and lower adjusted administrative expenses, due in part to lower incentive compensation costs, partly offset by lower sales volume.
Net interest expense decreased 4 percent to $107 million. Excluding items impacting comparability in the current year, adjusted net interest expense increased $2 million to $113 million, reflecting higher average interest rates on the debt portfolio, partly offset by lower average levels of debt. The tax rate decreased 2.3 percentage points to 31.4 percent. Excluding items impacting comparability, the adjusted tax rate decreased 0.2 percentage points to 32.4 percent.
The company reported EPS of $2.89. Excluding items impacting comparability in both years, adjusted EPS increased 3 percent to $3.04 per share, compared with $2.94 per share a year ago.
Cash flow from operations was $1.291 billion as compared to $1.491 billion a year ago. The year-over-year decline was primarily due to lapping significant working capital reductions in the prior year, as well as lower cash earnings and lower receipts from hedging activities in the current year.
Americas Simple Meals and Beverages
Sales in the quarter decreased 3 percent to $815 million driven primarily by declines in soup and V8 beverages. Sales of U.S. soup decreased 4 percent driven by declines in condensed soups, broth and ready-to-serve soups, reflecting a reduction in retailer inventory levels while consumer takeaway in measured channels was comparable to the prior-year quarter. For the fiscal year, sales of U.S. soup decreased 1 percent.
Segment operating earnings in the quarter increased 4 percent to $198 million. The increase was primarily driven by lower advertising and consumer promotion expenses and lower administrative expenses, partly offset by lower sales volume and a lower gross margin percentage.
Global Biscuits and Snacks
Sales in the quarter were comparable to the prior year at $624 million, as gains in Pepperidge Farm snacks, reflecting continued growth in Goldfish crackers, as well as gains in Arnott’s biscuits in Australia, were offset by declines in Indonesia.
Segment operating earnings increased 35 percent to $109 million. The increase was primarily driven by a higher gross margin percentage, lower advertising and consumer promotion expenses and lower administrative expenses.
Sales in the quarter increased 1 percent to $225 million driven primarily by higher sales of Garden Fresh Gourmet, carrots and carrot ingredients. Sales of Bolthouse Farms refrigerated beverages declined slightly, reflecting supply constraints.
Segment operating earnings in the quarter decreased from $8 million to a loss of $8 million, reflecting higher administrative expenses, higher carrot costs and the continued cost impact of enhanced quality processes and related beverage capacity constraints.
Segment operating earnings for the year decreased from $60 million to a loss of $9 million, reflecting lower sales volume and unfavorable mix, higher carrot costs, and the full year cost impact of enhanced quality processes and related beverage capacity constraints, as well as higher administrative expenses.
Corporate in the fourth quarter of fiscal 2017 included pension and postretirement mark-to-market gains of $198 million and charges related to cost savings initiatives of $22 million. Corporate in the fourth quarter of fiscal 2016 included a non-cash impairment charge of $141 million, pension and postretirement mark-to-market losses of $138 million and charges related to cost savings initiatives of $12 million. The remaining decrease in expenses primarily reflects gains on open commodity hedges.