The FINANCIAL -- Campbell Soup Company on Febuary 16 reported its second-quarter results for fiscal 2018.
Denise Morrison, Campbell’s President and Chief Executive Officer, said, “This was a disappointing quarter, driven by continued challenges in U.S. soup and Campbell Fresh. The decline in organic sales was largely due to the performance of Americas Simple Meals and Beverages, where U.S. soup sales decreased by 7 percent based on the key customer issue we discussed last quarter. We are making progress with this customer and expect sales declines in soup to moderate in the second half.
“Campbell Fresh did not meet expectations. Sales did not recover as anticipated due in part to headwinds in the super premium juice category. Looking ahead to the spring, we expect our beverage innovation plans to drive improved beverage performance in the second half. We are committed to returning this business to profitable growth.
“Bright spots in the quarter included the sales performance of Global Biscuits and Snacks, particularly Pepperidge Farm and Kelsen, as well as our multi-year cost savings initiative. We have identified additional savings opportunities and are increasing our savings target to $500 million by the end of fiscal 2020.
Morrison concluded, “Despite challenges, we have made significant progress toward our long-term strategy to transform Campbell’s portfolio. In the quarter, we completed the acquisition of Pacific Foods to bolster our presence in the organic soup and broth market and announced plans to acquire Snyder’s-Lance, which will greatly expand our snacking business. These acquisitions will provide Campbell with greater access to faster-growing categories and channels, and I am confident will help deliver improved performance.”
Sales of $2.180 billion were comparable to the prior year as a 1-point benefit from the acquisition of Pacific Foods and a 1-point favorable impact of currency translation were offset by a 2-percent decline in organic sales driven primarily by lower volumes.
Gross margin decreased from 37.4 percent to 35.1 percent. Excluding items impacting comparability in the current year, adjusted gross margin decreased 2.2 percentage points to 35.2 percent. The decrease in adjusted gross margin was driven primarily 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 $228 million primarily due to lower advertising and consumer promotion expenses, as well as the benefits from cost savings initiatives, partly offset by investments in e-commerce. Administrative expenses increased 17 percent to $165 million. Excluding items impacting comparability in the current year, adjusted administrative expenses decreased 1 percent.
Other expenses were $70 million in the current quarter as compared to $201 million in the prior-year quarter. Excluding items impacting comparability, adjusted other income increased from $11 million to $29 million primarily due to gains on investments and higher pension and postretirement benefit income.
EBIT increased 19 percent to $243 million. Excluding items impacting comparability, adjusted EBIT decreased 4 percent to $402 million primarily reflecting a lower adjusted gross margin percentage, partly offset by an increase in adjusted other income and lower marketing and selling expenses.
Net interest expense increased 14 percent to $32 million reflecting higher average interest rates on the debt portfolio and higher levels of debt. The Tax Cuts and Jobs Act, enacted in December 2017, will have a favorable impact on both the reported and adjusted effective rates in fiscal 2018. In the current-year quarter, the tax rate decreased from 42.9 percent to a negative 35.1 percent reflecting the one-time favorable net tax benefit recorded as part of the Act. Excluding items impacting comparability, the adjusted tax rate decreased 8.9 percentage points from 27.8 percent to 18.9 percent primarily due to the ongoing benefit of the lower U.S. federal tax rate. Campbell now expects a full-year adjusted effective tax rate of approximately 26 percent.
EPS was $0.95 per share in the quarter compared to $0.33 per share in the prior year. Excluding items impacting comparability, adjusted EPS increased 10 percent to $1.00 per share, primarily due to a lower adjusted tax rate, partly offset by declines in adjusted EBIT.
Sales decreased 1 percent to $4.341 billion driven by a 2-percent decline in organic sales, partly offset by a 1-point benefit from the acquisition of Pacific Foods and a 1-point favorable impact of currency translation. Declines in organic sales were driven primarily by lower volumes.
EBIT decreased 1 percent to $655 million. Excluding items impacting comparability, adjusted EBIT decreased 10 percent to $819 million reflecting a lower adjusted gross margin percentage, lower sales and higher adjusted administrative expenses, partly offset by lower marketing and selling expenses and an increase in adjusted other income.
Net interest expense increased 11 percent to $62 million reflecting higher average interest rates on the debt portfolio. The tax rate decreased from 35.1 percent to 5.6 percent. Excluding items impacting comparability, the adjusted tax rate decreased 6.4 percentage points from 30.2 percent to 23.8 percent, primarily due to the lower U.S. federal tax rate.
The company reported EPS of $1.85. Excluding items impacting comparability, adjusted EPS decreased 1 percent to $1.91 per share, compared with $1.92 per share a year ago.
Cash flow from operations decreased to $660 million from $667 million a year ago, primarily due to higher net payments of hedging activities, partly offset by improvements in working capital.
Cost Savings Program
In the second quarter of fiscal 2018, Campbell achieved $20 million in savings under its multi-year cost savings program, bringing total program-to-date savings to $365 million. Based on the success of the program to date and the identification of additional savings opportunities, Campbell has increased the annualized savings target from $450 million to $500 million by the end of fiscal 2020.
Fiscal 2018 Guidance
Based on the company’s current outlook for fiscal 2018, including the impact of the Pacific Foods acquisition and the Tax Cuts and Jobs Act, Campbell has revised its fiscal 2018 guidance. As shown in the table below, sales are now expected to change by -1 to +1 percent, adjusted EBIT to decline by -7 to -5 percent, and adjusted EPS to increase by +2 to +4 percent, or $3.10 to $3.17 per share. This guidance assumes the impact from currency translation will be nominal.
Americas Simple Meals and Beverages
Sales in the quarter decreased 2 percent to $1.196 billion. Organic sales decreased 4 percent driven primarily by declines in U.S. soup and V8 Beverages, partly offset by gains in the retail business in Canada. Excluding the benefit from the acquisition of Pacific Foods, sales of U.S. soup decreased 7 percent driven by declines in ready-to-serve and condensed soups, while sales of broth were comparable to the prior year. The sales decline in U.S. soup was primarily the result of the previously disclosed key customer issue.
Segment operating earnings decreased 9 percent to $282 million driven primarily by a lower gross margin percentage and lower sales volume, partly offset by lower marketing and selling expenses.
Global Biscuits and Snacks
Sales in the quarter increased 4 percent to $726 million. Excluding the favorable impact of currency translation, organic sales increased 3 percent driven primarily by gains in Pepperidge Farm snacks, reflecting growth in Goldfish crackers and in cookies, as well as gains of Kelsen cookies in China. Excluding the favorable impact of currency translation, sales of Arnott’s biscuits were comparable to the prior year.
Segment operating earnings increased 1 percent to $139 million. Excluding the favorable impact of currency translation, operating earnings were comparable to the prior year with lower advertising and consumer promotion expenses offset by a lower gross margin percentage.
Sales in the quarter decreased 1 percent to $257 million driven primarily by sales declines in Bolthouse Farms refrigerated beverages.
Segment operating earnings declined from a loss of $3 million to a loss of $11 million, reflecting a lower gross margin percentage driven primarily by an increase in supply chain costs as well as higher carrot costs.
Corporate in the second quarter of fiscal 2018 included charges related to cost savings initiatives of $27 million, transaction costs of $24 million related to the pending acquisition of Snyder’s-Lance and a non-cash impairment charge of $75 million related to the Bolthouse Farms carrot and carrot ingredients reporting unit. Corporate in the second quarter of fiscal 2017 included non-cash impairment charges of $212 million related to the Campbell Fresh segment. The remaining decrease in expenses primarily reflects gains on investments and higher pension and postretirement income.
Campbell Soup Company earnings results are reported for the following segments:
Americas Simple Meals and Beverages includes the retail and food service businesses in the U.S. and Canada. The segment includes the following products: Campbell’s condensed and ready-to-serve soups; Swanson broth and stocks; Pacific soups, broth, stocks, non-dairy beverages and simple meals; Prego pasta sauces; Pace Mexican sauces; Campbell’s gravies, pasta, beans and dinner sauces; Swanson canned poultry; Plum food and snacks; V8 juices and beverages; and Campbell’s tomato juice.
Global Biscuits and Snacks includes 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, Latin America and Asia Pacific.
Campbell Fresh includes Bolthouse Farms fresh carrots, carrot ingredients, refrigerated beverages and refrigerated salad dressings; Garden Fresh Gourmet salsa, hummus, dips and tortilla chips; and the U.S. refrigerated soup business.