The FINANCIAL — Campbell Soup Company on February 25 reported its second-quarter results for fiscal 2016.
CEO Comments
Denise Morrison, Campbell’s President and Chief Executive Officer, said, “We’re pleased with our results this quarter, especially our strong profit performance across all three segments. The highlight of the quarter was our continued gross margin expansion, which reflects improvements in productivity, net price realization and improved supply chain execution. Our three-year cost savings program is also performing better than anticipated, and we have raised our 2018 target to $300 million.
“Organic sales for the quarter were comparable to prior year, a bit below our expectation. While our Global Biscuits and Snacks division stands out for delivering both organic sales growth and strong profit growth in the quarter, we’re making investments in all the divisions toward our objective of accelerating sales growth over time.
“Over the last 12 months, we’ve implemented significant changes to the company, including aligning our enterprise structure with our strategy, creating clear portfolio roles for our divisions and undertaking our major cost savings initiative. I feel very good about the progress we’ve made, however, we are aware that we have more work to do. We’re now better positioned to execute our strategies and to invest in the areas of our business that hold the greatest potential.”
Second-Quarter Results
Sales decreased 1 percent to $2.201 billion driven by lower volume and the adverse impact of currency translation, partly offset by higher selling prices, the benefit from the acquisition of Garden Fresh Gourmet and lower promotional spending. Organic sales were comparable to the prior year with gains in Global Biscuits and Snacks offset by declines in Americas Simple Meals and Beverages.
Gross margin increased from 33.3 percent to 37.2 percent. Excluding items impacting comparability in the current year, adjusted gross margin improved 4 percentage points. The increase in adjusted gross margin was primarily driven by productivity improvements, higher selling prices, lower promotional spending and improved supply chain performance.
Marketing and selling expenses decreased 7 percent to $223 million. Excluding items impacting comparability in the current year, adjusted marketing and selling expenses decreased 5 percent to $226 million primarily due to the benefits from cost savings initiatives, partly offset by higher advertising and consumer promotion expenses. Administrative expenses increased 8 percent to $146 million. Excluding items impacting comparability in the current year, adjusted administrative expenses increased 6 percent to $143 million primarily due to higher incentive compensation costs compared to the prior year, partly offset by the benefits from cost savings initiatives.
EBIT increased 23 percent to $414 million. Excluding items impacting comparability in the current year, adjusted EBIT increased 26 percent to $423 million reflecting a higher adjusted gross margin percentage and the benefits from cost savings initiatives, partly offset by higher incentive compensation costs, the adverse impact of currency translation and volume declines.
Net interest expense increased $2 million to $27 million reflecting higher average interest rates on the debt portfolio. The tax rate increased 2.7 percentage points to 31.5 percent. Excluding items impacting comparability in the current year, the adjusted tax rate increased 2.8 percentage points to 31.6 percent primarily due to lapping the favorable resolution of an intercompany pricing agreement between the U.S. and Canada in the prior year, according to Campbell Soup Company.
First-Half Results
Sales decreased 2 percent to $4.404 billion driven by the adverse impact of currency translation and lower volume, partly offset by higher selling prices, the benefit from the acquisition of Garden Fresh Gourmet and lower promotional spending. Organic sales were comparable to the prior year with gains in Global Biscuits and Snacks offset by declines in Americas Simple Meals and Beverages and Campbell Fresh.
EBIT of $729 million was comparable to the prior year. The first-half results were negatively impacted by mark-to-market losses associated with the interim remeasurement of certain U.S. pension plans as well as charges incurred related to cost savings initiatives. Excluding items impacting comparability in the current year, adjusted EBIT increased 24 percent to $902 million reflecting a higher adjusted gross margin percentage, the benefits from cost savings initiatives and lower advertising and consumer promotion expenses, partly offset by the adverse impact of currency translation, higher incentive compensation costs and volume declines.
Net interest expense increased $5 million to $55 million reflecting higher average interest rates on the debt portfolio. The tax rate increased 1.4 percentage points to 31.9 percent. Excluding items impacting comparability in the current year, the adjusted tax rate increased 2.4 percentage points to 32.9 percent.
Cash flow from operations increased to $727 million from $584 million a year ago, primarily due to higher cash earnings and lower working capital requirements.
Fiscal 2016 Guidance
As previously announced and shown in the table below, Campbell expects a year-over-year change of -1 to 0 percent in sales; +10 to +13 percent in adjusted EBIT; and +9 to +12 percent in adjusted EPS, or $2.88 to $2.96 per share. This guidance includes an estimated 2 percentage-point negative impact from currency translation, as well as the impact of the Garden Fresh Gourmet acquisition.
Americas Simple Meals and Beverages
Sales decreased 3 percent in the quarter to $1.237 billion. Excluding the negative impact of currency translation, segment sales decreased 1 percent. U.S. soup sales decreased 4 percent driven by declines in ready-to-serve soups, partly offset by gains in broth and condensed soup. Sales of U.S. beverages decreased primarily due to declines in V8 V-Fusion beverages. Sales of other U.S. simple meals increased driven by gains in Plum, Prego pasta sauces and Pace Mexican sauces. Excluding the negative impact of currency translation, sales in Canada decreased driven by declines in soup.
Segment operating earnings increased 22 percent to $290 million. The increase was primarily driven by a higher gross margin percentage, benefiting from increased net price realization, productivity improvements and improved supply chain performance compared to the prior-year quarter.
Global Biscuits and Snacks
Sales decreased 3 percent in the quarter to $682 million. Excluding the negative impact of currency translation, segment sales increased 2 percent. Sales of Pepperidge Farm products increased with gains in fresh bakery, frozen products and cookies. In Asia Pacific, excluding the negative impact of currency translation, Arnott’s sales gains in Australia from Tim Tam biscuits were partly offset by declines in Indonesia.
Segment operating earnings increased 23 percent to $141 million. The increase was primarily driven by a higher gross margin percentage, benefiting from increased net price realization and productivity improvements, partly offset by the negative impact of currency translation and higher marketing expense.
Campbell Fresh
Sales increased 10 percent in the quarter to $282 million. Excluding the impact from the acquisition of Garden Fresh Gourmet, segment sales were comparable to the prior year reflecting gains in Bolthouse Farms premium refrigerated beverages and salad dressings offset by declines in carrot ingredients.
Segment operating earnings increased 62 percent to $21 million, resulting in a 2 percentage-point increase in operating margin. The increase in operating earnings was primarily driven by a higher gross margin percentage, benefiting from improved supply chain performance, productivity improvements and the favorable mix impact from growth in higher-margin refrigerated beverages.
Unallocated Corporate Expenses
Unallocated corporate expenses for the quarter were $29 million compared to $28 million in the prior year. The current quarter included $7 million of pre-tax charges associated with Campbell’s initiatives to implement a new enterprise design, to reduce costs and to streamline its organizational structure. The current quarter also included a $7 million pre-tax gain related to a pension benefit mark-to-market adjustment.
